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Value and Distribution

A CRITICAL AND CONSTRUCTIVE

STUDY

By
HERBERT JOSEPH DAVENPORT

Asaodate Profenor of Political Economy
The Unlrerrity of Chicago

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CHICAGO
THE UNIVERSITY OF CHICAGO PRESS

1908

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CopnoGHT X907 Bt
Thb UimrB&siTV op Chicago

Poblisbed Februafy t^

1077 50

CompoMd and Piteted By
TIm UnlTMslty of Chlctco
Chkaffo, nUnote, U. 8. A.

To /. Laurence Laughlin:

In a field so controversial as this of value doctrine,
identity of interest is no pledge of agreement ; much, there-
fore, in the following pages must fail to command your
acquiescence. Nevertheless, I venture to hold you in some
sort responsible for the existence of this book, by virtue of
the very fact that it has been only through the freedom
of thought and of teaching which you have fostered that it

has been made possible.

The Author

PREFACE

Were it ever important to decide in what degree, if at
all, a writer may claim priority in the development of doc-
trine, the task would be a peculiarly difficult one in the case
of the present book. The truth, however, rather than any
personal ascription of it being the important matter, it
becomes worth while to reflect that for several decades and,
indeed, in the main since the time of Adam Smith, economic
theory has been in possession of doctrines enough for a
reasonably complete, consistent, and logical system of
thought — if only these doctrines had been, with a wise
eclecticism, properly combined and articulated.

The emphasis in the present volume upon the entre-
preneur point of view in the computation of costs and in
the analysis of the process by which distributive shares are
assigned, has nothing new in it ; it was necessary only that
the point of view be clearly distinguished, consistently held,
and fully developed.

The present writer has emphasized opportunity cost;
but this doctrine is everywhere implied in economic dis-
cussion; the marvel is that it has been there only uncon-
sciously or half consciously. As far as the present writer is
informed, D. I. Green was the first to formulate the doc-
trine in entire definiteness — the present writer the first to
give it systematic application.

To making precise the concept of profit and to elucidat-
ing the relations of profit to cost some contribution has
perhaps been made in the present book.

The insistence that rent is a part of cost of production,
in full parallel with other outlays, follows necessarily from
the acceptance of the entrepreneur point of view ; the doc-
trine is as old as entrepreneurship. Nor is it new in
economic discussion; political economy began there, but

vU

vm PREFACE

wandered afield in search of labor determinants of value
and of labor standards of value measurement. Cannan has
perhaps best led in the return to the better way.

The cancellation of the distinction between value-deter-
mined and value-determining costs was inevitable when
once this return was accomplished.

Likewise there is little in the marginal analysis that can
be offered as new; Ricardo applied it fractionally; the
moderns have merely extended the application^ : it only
remained to point out some aspects and limitations of its
service.

Precisely so of utility and of its modem refinements;
but the relativity of utility on the demand side, and of cost
on the supply side, of the market equation, has seemed in
especial need of emphasis. But on the demand side all this
was fully worked out by Marshall twenty years since.

The competitive entrepreneur rendering x)f the capital
concept was fairly well held as far back as the work of
Say and of Malthus: Qark, Fisher, and Fetter have con-
tributed greatly to the widening of the concept of capital
socially considered: Cannan and Veblen to the individualis-
tic emphasis : the elaboration of the loan- fund doctrine was
perhaps left still to be done.

Interest theory, in that formulation which, by title of
adequate recognition, systematization, and development.
Fetter has rightly made his own, is traceable at least as far
back as Say ; was adequately formulated — but the result of
it unseen — by Wieser and by Clark, and was by the latter
valiantly battled for. But, as it seems to the present writer,
the relations of concrete productivity to time discount are
impossible of explanation otherwise than with the accept-
ance of the competitive rendering of the capital concept,
and with the recognition of the loan-fund subdivision of
axnpetitive capital.

Something also has perhaps been accomplished in these
pages toward the elucidation, for working purposes, of the
distinction between the primar}" and the secondary dis*

PREFACE IX

tributive processes and of their interactions; nothing very
serious appears to be the matter with present society from
the point of view purely of the traditional production dis-
tribution; the difficulties mostiy relate to the secondary
process.

Evidentiy, then, if an3rthing worth the doing has been
accomplished here, any implication of which the author
would disclaim further than is inevitably implied in getting
oneself published, this cannot be so much in any contribu-
tion of new doctrine as in the selection, delimitation, and
articulation of the old. To this end the necessary thing
has, in. the main, seemed to be to rid the science of doctrines
that do not belong in it, e. g., labor-time, labor-pain, utility,
and marginal-utility determinants or measures of value;
real costs; marginal fixation of price or of distributive
shares; price-determined and price-determining costs or
distributive shares; instrument margins; margfinal-produc-
tivfty distribution; price measures of utility; the social
orgmsm; fundings of productive agents; the tripartite
classification of productive factors.

And if all, or any considerable part of this, has really
^n accomplished, it is enough.

Chicago, August lo, 1907

TABLE OF CONTENTS

CHAPTEm PAOB

I. Vasioxts Cost Concepts x

n. Adam Smith 8

m. RiCASDO 29

IV. Senior 44

V. John Stuart Mnx S3

VI. Cairnes 6a

Vn. Further Cost Doctrines 84

Vm. PROTir Defined: Profit and Risk as Related to

Cost 94

IX. Early Utility Theory: Say 107

X. The Capital Concept lai

XI. Capital as a Competitive Concept .... 141
Xn. Competitive Savings and Social Capital: Loan

Fund and Abstract Capital 157

Xm. The Standard of Deferred Payments ... 175

XIV. Interest 189

XV. Interest — Concluded 217

XVI. Rent and Cost— Marginal Cost — ^Relative Cost 262

XVn. The Modern Movement 296

XVm. Classical vs. Modern 334

XIX. The Positive Theory and Natural Value ... 353

XX. The Attempt at Reconciliation: Marshall 372

XXI. The Attempt at Reconstruction: Hobson . 405

XXn. Distribution by Value Productivity: Clark 439

XXm. The Laws of Return 480

XXIV. The Dynamics of Value and Distribution . 512

XXV. The Adjustment of Price 533

XXVI. Distribution 554

XXVn. Summary of Doctrine 569

Index 577

CHAPTER I

VARIOUS COST CONCEPTS

The scientific development of economic theory began
with the attempt to solve the value problem. Almost all
early doctrine was cost doctrine in some one or other of its
protean aspects. With the earlier writers of the classical
school, cost was prevailingly interpreted in terms of labor;
but in the detailed working-out of the value problem and
of its further development, the notion of cost came to be
presented in practically all of its different and conflicting
senses. A brief analysis of the various ways in which the
cost concept was employed in classical discussion will, then,
afford a serviceable introduction to the value problem. The
work of Adam Smith will be found surpassingly well
adapted to the purposes of this analysis.

Labor-purchase cost, — ^The doctrine of the earlier
economists that labor is the original source of value con-
tained, even at that time, nothing especially novel or
recondite ; so much had been announced long aforetime and
upon very excellent authority : "In the sweat of thy brow
shalt thou eat bread." He that will not work neither shall
he eat. Labor and the hire of labor appear both ideally
and practically to have an intimate association. What one
gains at fishing or hunting depends mostly or largely on the
quality and zeal of the quest. Give Crusoe his island, and
what he will get from it will depend upon the sort of
person that Crusoe is — his industry and intelligence, in
short, the quality of his work. Set a group of colonists
upon its newly found island or continent ; what gets accom-
plished there, the results achieved, the well-being attained,
will depend upon the more or less of productive effort
applied. Product is readily thought ef as so much commod-
ity purchased at the price of effort, a primitive transaction

2 VALUE AND DISTRIBUTION

in exchange — in the long run also, a method espe-
cially satisfactory in character and naive in its simplicity of
justice, where deserving and receiving tend to fall out in
strict proportion. At any rate, such is the gist of the doc-
trine stated by Adam Smith: "The annual labor of every
nation is the fund which originally supplies it with all the
necessaries and conveniences of life." Therefore, accord-
ingly as this output "bears a greater or smaller proportion
to those who are to consume it," is the nation better or
worse oflF.*

Labor was the first price, the original purchase money, that
was paid for all things. It was not by gold or by silver, but by
labor that all the wealth of the world was originally purchased;
and its value to those who possess it and who want to exchange
it for someone's production is precisely equal to the quantity of
labor which it can enable them to purchase or command'

It must be noted, however, that his view of the case may
be taken to express merely a social or collective aspect of
the labor-value doctrine, the national income being regarded
as the return upon the national productive energies applied
as a unit to the national environment. The terms of pro-
curement, the purchase outlays, are the efforts applied.
This reasoning is equally applicable to a Crusoe economy;
the income, the wage, tihe remuneration, is obtained as a
result of the labor put forth; nothing need be implied,
possibly nothing can safely be deduced, as to the exchange
relations to be established between different portions of Ae
product obtained; but conceiving this product as a unit
total, the labor stands as the cost with the product as the
produced value. This may be termed the labor-purchase
concept of cost.

Labor-time cost. — But if a basic measurement of value
and a method of comparison of different value items be
sought, and if it be asked by what method, in this sense, is
labor to be taken as cost, other notions emerge. Measure-
ment by the hour or by the day lies most readily at
hand. The isolated producer would find time the most

^Wealth of Nations, "Introduction."
* Ibid,, chap. iy.

VARIOUS COST CONCEPTS 3

simple and practicable common denominator of costs. So a
coUectivist community, especially were it of a democratic
habit of thought, would incline to apply the labor power at
its disposal, and to distribute the product, according to
units of time.

Labor-pain cost. — But whether or not a coUectivist
society could practically do better than this, and whether
for ordinary purposes Crusoe would attempt anything
further, it is certain that in exceptional cases the isolated
producer would add some modifications; the crude time
reckoning would be amended to allow for considerations of
especial hazard or severity or irksomeness. Combinations
of the hazardous with the pleasant, e. g., the hunt as against
the safe but tedious processes of agriculture, would inevi-
tably present themselves. For, after all, the essential fact of
time cost is not the time aspect pure and simple, but the
burdensomeness involved or the disinclination overcome.
As soon, therefore, as the concept of cost receives a more
careful analysis, pain cost will, at least in the individual
computation, be found fundamental to time cost

Put in other form, the form which, as we shall see,
Ricardo would have especially chosen, the notion would run
something as follows : the purpose of productive activity is
the attainment of the means of pleasure ; pain is the cost of
getting pleasure and may . therefore serve adequately to
express the relative values of these pleasures obtained or of
the facts or media through which the pleasures are
obtained. And it is thus that Ricardo came to distinguish
so sharply between riches and value; with riches the
emphasis is upon utility ; with value it is upon cost.*

'"Value depends .... on the difficulty or facility of production.
The labor of a million men in manufactures will always produce the

same value, but will not always produce the same riches A

million of men may produce double or treble the amount of riches, of
'"neceftsaries, conveniences and amusements/' in one state of society
that they could produce in another, but they will not on that account

add anything to value Riches do not depend on value." —

Ricardo, Political Economy (Conner), chap. xx.

7

4 VALUE AND DISTRIBUTION

Labor-value cost. — But inasmuch as labor involves, or
at all events commonly implies, some degree of pain, is it
not logical to conceive of the attendant pain as the neces-
sary condition to the existence of labor — ^the purchase
price on terms of which one comes into possession of his
own labor power? Just as, in getting control of the
services of others' labor, one makes a sacrifice of ptu-chasing
power — good or money — ^precisely so one may be conceived
to hire or buy his own labor effectiveness on the terms and
at the charge of the pain attendant upon labor. Based,
therefore, upon its cost, it has been found possible to
ascribe a value to labor itself irrespective of the value of the
product, which basic value may be conceived as carried over
to the commodity produced, and as incorporated as a cost
therein, the value of the product being the incorporated
labor value consumed in the process of production. Obvi-
ously this view goes further than the labor-pain-cost
theory: the labor-value-cost theory explains value not
merely by the pain of labor but by ascribing to the labor
itself, because of the pain, a value fundamental as cost to
the value of the thing produced.

Closely related to the foregoing, and with difficulty dis-
tinguishable from it, is another concept of labor value:
Life being essentially activity in conjimction with con-
sciousness, and economic products being the concrete and
objective resultant of this activity with its associated and
attendant pain, labor appears to take on value by virtue of
the fact that labor is the very expression and incorporation
of life itself. Value in products is thus conceived as tracing
back, through the value of labor as cost, to the thought
of draft against life and of expenditure of life; product
thereby bears value as the simplest case under the doctrine
of costs.

All of these computations of cost are, however, open to
the objection that they are over-simple in the conditions

VARIOUS COST CONCEPTS 5

assumed: no provision is made for production under the
capitalistic wage system ; on the contrary, each case is taken
as one of independent production, of self -employment. A
new classification of costs is therefore to be miide, accord-
ingly as the case is one of employer cost or of employee
cost. The concept of labor-pain cost does not readily find
place for itself under the system of entrepreneur produc-
tion. Typically and at its simplest, employer cost is outlay
cost; employee cost, on the other hand, must, if it apply
at all, resolve itself into some one or other of the aspects of
labor cost

But even for cases of independent production, the fore-
going analysis fails of adequacy in omitting to take account
of capital-use and instrument-use costs and of other
charges not necessarily included under the head of outlays.
What disposition shall, for instance, be made of the item of
compensation for the time use of that part of the entre-
preneur's circulating or floating capital employed as wage
fund in the hiring of laborers ? Here, then, we have also a
capital-use cost, whether this be regarded as risk cost or as
interest cost or as a composite of both.

But if, outside of risk and upkeep, a compensation is to
be computed for the owner of saved wealth, upon what basis
shall this computation be made? If the capitalist entrepre-
neur is, so far as his capital is concerned, to be remunerated
for the restraint implied in non-consumption, for the saving
involved in capitalization, we arrive at the notion of absti-
nence cost. If, however, the rewards are better figured
upon the basis of what the capital might have earned if lent
out, we must take account of a loan-interest-displacement
or an investment-opportunity cost.

And if, on the other hand, the capital charge, in the
given employment, is to be rated at what the capitalist
entrepreneur could have made the capital yield him in some

6 VALUE AND DISTRIBUTION

alternative productive use, we must make room for capital"
product-opportunity cost.

And bearing in mind that the entrepreneur might as
employee have applied his personal powers on terms of
salary or wages, or might under self -employment have
applied himself to some other line of production, we are
compelled to catalogue, as possible cost concepts, these
further cases of personal-wage-displacement and personal'
product-displacement (opportunity) costs.

And now under the general head of employer costs are
to be catalogued some further concepts acceptable accord-
ingly as cost notions have received modification through
various theories regarding the determination of wages,
rent, and interest.

Wealth having been conceived as the product of labor,
and capital as stored-up wealth devoted to further produc-
tion, interest has sometimes been regarded as the indirect
payment of wages ; and the diflFerent notions of labor cost
— ^time, pain, and value — ^have been employed as the ulti-
mate explanation of interest, thus reducing it to the com-
mon denominator of pain.

But evidently there must cut across this line of analysis
the distinction between employer cost and employee cost —
that is, between cost to the borrower and cost to the lender.
If interest is indeed wages in disguise, that which is time or
pain or value cost to the producer of the capital must be
outlay or investment-opportunity or product-opportunity
cost to the borrower.

In this last sense, also, there is room for argument for
the establishment of an investment-opportunity or product-
opportunity cost with reference to rent outlays; more than
mere mention of this notion is, however, impracticable at
this point in the discussion.

So far as outlays in wages are concerned, it may be
forcibly urged that cost-of-production influences underlie

VARIOUS COST CONCEPTS 7

and determine the wage level : to the extent, therefore, that
labor is directly or indirectly the source of value, this view
would make the subsistence-cost value of labor the deter-
minant both of the labor value to the laborer and of the
wage outlay to the employer. Under this head of subsist-
ence-value cost would fall the two doctrines of standard-
of'lkHng-wage cost and minimum'Of'existence-wage cost.

Without venturing to assume that no other cost con-
cepts can be recognized in classical discussion, it may be
confidently asserted that all of the foregoing concepts are
to be found therein. Nor is it at present attempted to make
the catalogue of cost concepts and cost distinctions exhaust-
ive. But it is especially necessary to call attention at this
point to the distinction between individual (competitive)
and social (collective) costs, as of fundamental and far-
reaching significance. These concepts, while not readily
presented at this time, will come in later for a deal of
discussion.

CHAPTER II
ADAM SMITH

After making it clear in his introductory chapter that
the population of a country is better or worse off accord-
ingly as the total product "bears a greater or smaller pro-
portion to those who are to consume it," Adam Smith goes
on to assert that, for the most part, the average share of
consumers must depend upon the skill and dexterity of the
labor, but also, in some part, "on the proportion between
the number of those employed in useful labor and of those
who are not so employed. Whatever be the soil, climate,
etc., the abundance or scarcity of its annual supply must, in
that particular situation, depend upon these two ciromi-
stances." And so, with any particular situation given or
assumed, the labor of a nation "is the fund which originally
supplies it with all the necessaries and the conveniences of
life." This we have termed the labor-purchase doctrine of
cost.

But it is fair to say that Adam Smith does not, at this
particular point, make much of this doctrine, or attempt to
apply it as an explanation of the value relations between
goods. But in chapter v the step is fully taken :

Labor was the first price, the original purchase money that
was paid for all things. It was .... by labor that all the wealth
of the world was originally purchased; and its value to those . . . .
who want to exchange it for some new productions, is precisely
equal to the quantity of labor which it can enable them to purchase
or command.

It is, however, to be noted that the reasoning according
to which labor is the first purchase price holds only when the
"particular situation" is assumed ; so much as this must be
taken for granted as somehow given in the reckoning, a con-
tinent, or island, or country, in which the labor is put forth ;
and only such degree of "originality" in production can be
imputed to the labor as may be worked out by regarding
the situation, the habitati as a passive rather than as an

8

^^^^■^ ADAM SMITH 9

active fact — as opportunity rather than as productive
power. For whatever value there is in the distinction
between condition and cause, the environment must, in this
view, stand as the condition and labor as the cause. But
none the less must the productive output differ with differ-
ences in environmental opportunity ; the temis of the
exchange between man and nature must vary with the
varying opportunities for production, labor having a greater
or less producing power with the varying bounty or nig-
gardliness of the environment. And so, while, socially
speaking, the labor- fund-purchase idea is a cost doctrine
of the labor sort, it is such by the very fact that it is social
in character and treats the whole product as a unit pur-
chased by the whole of the labor applied. But evidently,
so far as the product is taken as a whole, as a unit, and as
set over against the total of labor producing it, no key is
^ven to the exchange relations between different portions
of this product. Even for the Crusoe case, his
different units of effort could be represented in
products of equal utility, only upon the assumption
of absolute uniformity of advantages in the conditions
of production, that is, upon the assumption of no extensive
or intensive land differentials, and so of no law of diminish-
ing returns of any sort. And likewise also, Crusoe himself
must always remain at one level of vigor, alertness, and
intelligence. That is to say, not merely homogeneity in
environmental conditions, but absolute homogeneity in
labor quality must be assumed, in order that either for an
individual or for society the labor-fund-purchase doctrine
could, as a cost doctrine, be adapted for service either as a
measure or as a determinant of exchange relations. And it
may be remarked in passing and as awaiting a more exhaust-
ive discussion later, that precisely the same defects inhere
in all applications of labor time, labor pain, or labor value,
as cost measures or as cost determinants, unless possibly as
somehow worked out from the point of view of the employer
rather than of the isolated or self-employed producer.

And precisely this change in point of view is to be
remarked in the chapter immediately following upon Smith's
introduction. This is the chapter containing the famous
pin illustration of the advantages of division of labor: per-
haps, it is said, the larger application of this principle to
manufactures explains the higher productivity of these as

VALUE AND DISTRIBtrnON

against agriculture, and the greater opulence of advanced
and manufacturing peoples as against backward and agri-
cultural peoples.

The most opulent nations, indeed, generally excel all their
neighbors in agriculture as well as in manufacturing; but they are
CODiBionly more distinguished by their superiority in the latter
thati in the former. Their lands are in general better cultivated
and, having more labor and expense bestowed on them, produce
more in proportion to the extent and natural fertility of the
ground.

But oddly enough, Smith remarks, the products are not
cheaper with these better methods and time-saving devices ;
despite the fact that com lands are better cultivated in
England than in France, and in France than in Poland,
corn in Poland is as cheap as in France, and in France as
in England: "This superiority of produce is seldom more
than in proportion to the superiority of labor and expense."
But note the phrase, "labor and expense." Does Smith
mean more labor in point of time, or merely more expensive
labor, labor paid on a higher wage level? Surely — ques-
tions of density of population aside — it cannot be more
labor in point of time. In fact, in view of the especially
marked productiveness of manufacturing industries, it is
only the choicer grades of land or of land power that can
profitably be utilized; the return per unit of labor should
thereby be of still more marked superiority. Thus, on any
basis of labor cost in terms of time or of pain, lower rather
than higher values must obtain. There is nothing for it
but to shift the point of view to that of employer's outlay, —
as Smith does, — to labor-value cost under competitive pro-
duction, where labor value appears under the guise of wage
payments commanded by labor as a productive fact. But
note that, in this view, labor-value cost is not a pain or a
life value, imposing as cost its value upon the product, but
is merely the market value of labor as an agent of produc-
tion. The case is more nearly one where the product is
reflecting value back upon the labor agent.

ADAM SMITH II

And yet, if such is the case, it must be difficult, as Smith
sees, to explain the undoubted fact that agricultural prod-
ucts bear often the higher price in the opulent country.
The high value of the labor when employed in agriculture
must find its explanation not merely in the high value of
the agricuhural product, but in the high productiveness of
labor employed in manufactures.

The labor of the rich coimlry .... is never as much more
productive (in agriculture) as it commonly is in manufac-
tures The com of the rich country, therefore. wi!l not

always come cheaper to market than that of the poor.

The uhimate reasoning for all this is as follows: The
high value productivity in manufactures necessitates that
such agriculture as is followed should also be highly value
productive; this high alternative productiveness imposes
upon the employer a high wage outlay. Thus, in terms of
employers' outlay, the higher "labor and expense" bestowetl
in the more opulent country affect the greater product to
such a degree that the prices are often the higher in the
opulent country.

That Smith worked out fully all the steps of the argu-
ment, or was conscious of all the implicatiuns of the situa-
tion as he outlined it, is obviously not to be asserted ; but it is
clear that he is within the field of competitive costs and of
exchange values as distinguished from collective cost and
social income. More than half consciously he is employing
the notion of outlay cost; impliedly, but not consciously, he
is making use of the principle of displacement-opportunity
cost, in one of its most typical forms. He has. in truth,
outlined a situation in which, as a question of labor invest-
ment, or of social and collective effort, labor-purchase cost,
com is cheap instead of dear, but where as a question of
competitive cost it is, because of the displacement condi-
tions, high in cost and dear in price and in exchange value.

It is doubtless on some such basis as this that, after
mentioning use value, he distinguishes between value in
exchange and real value; by real value is meant labor-
burden value as the norm of value, that value which traces
back to the ultimate cost — the real price, the nalural price —

12 VALUE AND DISTRIBUTION

a concept which seems to waver between the labor-purchase
idea of cost and the labor-value idea.

But later, in chapter v, there is a distinct enunciation of
labor-pain cost, expressed as a value quantity, as the deter-
minant of the real value of labor. Whatever difficulties
market values may offer, Smith takes it as clear that, in the
isolated economy, equal volumes of labor must always be of
equal value to the laborer, because, possible variations in his
personal equation aside, "he must always lay down the
same portion of his ease, his liberty, and his happiness."
One might suppose that with the assumption of a necessary
uniformity of labor pain attendant upon equal quantities
of labor, there is assumed a uniformity in opportunity and
in product; such, however, is not the thought; no matter
how great the volume of product in a day, the aggregate
value will be invariable ; it is the commodity units that must
do the varying, since "it is their value which varies, and
not that of the labor which produced them." Labor is their
real price and having in itself a value, it carries this value
over to the product. Here there is a distinct announcement
of the labor-value-cost doctrine, and an implied and uncon-
scious, but equally distinct, repudiation of the doctrine of
opportunity cost; that is to say, the real value of the
product, being irrespective of the volume of it, must the
more clearly be uninfluenced by any question of possible
alternative product.

In this fifth chapter, there is also some foreshadowing
of the distinction between riches and value later made so
prominent by Ricardo. Smith says that "every man is
rich or poor according to the degree in which he can afford
the necessaries, conveniences, and amusements of human
life." Possibly he would himself have been puzzled to say
whether the term "afford" implied the concept of fund or of
flow, possessions or income ; but in any case, the thought of
riches rests upon enjoyment utilities as the test How-
ever, he believes that inasmuch as under division of labor
each man produces but the smallest part of what he con-

ADAM SMITH 13

sumes, obtaifiing through exchange the results of others'
labor, one "must be rich or poor according to the quantity
of labor which he can command." That is to say, the
amount of necessaries, conveniences, and amusements is,
after all, reducible to terms of command of labor — a labor-
purchase rather than labor-origin basis for value. So the
value of any commodity that one has produced to sell "is
equal to the quantity of labor which it will enable him to
purchase or command. Labor, therefore, is the real meas-
ure of the exchange value of all commodities."
QNoting carefully that we are now arrived at a doctrine
of exchange value and not of real value, the perplexity pre-
sented by the very first line of the next paragraph will dis-
appear ;the thought here reverts to the primary, the real-value
concept: "The real price of everything, what every-
thing really costs the man who wants to acquire it, is the
toil and trouble of acquiring it" — ^labor cost of some sort:
but "what everything is really worth to the man who has
acquired it is the toil and trouble which it can save to him-
self and which it can impose upon other people."

Here is a definite enunciation of his antithesis of real
price to exchange value. Real value is the labor it took;
but when once you have the thing and are estimating the
quantum of it as riches, its wealth to you as a salable thing,
its utility in exchange, you look simply to the toil and
trouble which you can make it shield you from by imposing
this toil and trouble on someone else. When you command
from another his money or his goods, you are, in final
analysis, levying on his labor. "What is bought with money
or with goods is purchased by labor, as much as what we

acquire by the toil of our body These things contain

the value of a certain quantity of labor which we exchange
for what is supposed .... to contain the value of an
equal quantity."

Thus, so far as all this may be made consistent, it means
that real price or real value is always the labor of attain-
ment; but whether this labor is conceived as in itself a

14 VALUE AND DISTRIBUTION

value, or merely as burden, is not so clear. Exchange value
is the labor that a thing will by sale protect the owner from,
or that in purchase it will cost the buyer, in inducing him to
let go of a product produced by his own labor. And thus
exchange value seems to have a real and ultimate basis in
real valueT)

Sometimes also Smith seems to talk of a fourth sort of
value, a value which covers the temporary disturbances and
variations from exchange value. And it is added that
"though labor be the real measure of exchangeable value of
all commodities, it is not that by which their value is com-
monly estimated." Labor is so different in intensity, skill,
and direction, that it is not easy to find any accurate meas-
. ure; but a sort of rough equality in kind is worked out
through the higgling and bargaining of the market. Popu-
lar thought, however, does not make any recourse to labor
as the measure, at least no conscious recourse ; most people
can understand commodities, concrete palpable objects, but
labor is "an abstract notion which, though it can be made
sufficiently intelligible, is not altogether so natural and
obvious."

All of which seems to mean that, rightly understood, it
is possible to reduce labor to a homogeneous fund. Of
time? Evidently not. Of pain? This also will not serve
Of value? But if this be a value dependent upon the
product, and derived from the product, it is clear enough
that homogeneity is attainable and is actually attained, but
homogeneity only in terms of the very value that it is sum-
moned to explain, a view which would, in the last analysis,
conceive labor as receiving value rather than as determin-
ing it. And upon the basis that labor derives its value from
the value of the product, labor is not competent to give
value, unless possibly through some opportunity-cost
analysis, later to receive attention.

And now we are called upon to note that Smith uses his
labor doctrine or doctrines for three different purposes,
purposes essentially distinct in nature, though almost hope-
lessly confused in the course of his discussion. At one time

ADAM SMITH 15

labor is treated as the determinant source of all value, pre-
cisely as, in the mechanical sense, it is the creative source
of some commodity products. At another time attention
is directed primarily or exclusively to the discovery of a
medium of measure, a mode of expression, a common
denominator, into which values may be resolved and by
which they may be made homogeneous and comparable, a
standard of value expression. Or, finally, the investiga-
tion directs itself toward the discovery of a standard of
deferred payments, a medium of comparison over wide
intervals of time.

Selecting the third of these aspects as first in the order
of discussion, it would perhaps be fair that not much be
expected from a writer of the .eighteenth century, in view
of the confusion of tongues lasting without amelioration
well over into the twentieth.

Proceeding from the general point of view of the doc-
trine that labor is the source and the measure of value in
ordinary relations, Smith declares for labor as the ideal
standard of deferred payments. But since some concrete
and tangible fact, in terms of which payment can readily
be made, is regarded as desirable. Smith inclines to advise,
for long-time purposes, corn, and, for short-time purposes.
silver, as the standard commodity.

Equal quantities of labor will at distant limes be purchased
more nearly with equal quatitities of corn, the subsistence of the
laborer, than with equal quantities of gold and silver, or perhaps
with any other commodity. Equal quantities of corn, therefore,
will, at different times, be more nearly of the same value, or enable
the possessor to purchase or eomniand more nearly the same
quantity of the labor of other people.'

It is, indeed, true "that equal quantities of corn will not
do it exactly," for standards of consumption vary; other
commodities, however, hold command over labor by virtue

'Adam Sraitfa, Wtallh of Nations, chap, v.

i6 VALUE AND DISTRIBUTION

solely of their command over the subsistence of labor and
in proportion thereto. Thus

a rent reserved in com is liable only to the variations in the
quantity of labor which a certain quantity of corn can purchase.
But a rent reserved in any other commodity is liable, not only to
the variations in the quantity of labor which any particular quan-
tity of com can purchase, but to the variations in the quantity of
corn which can be purchased by any particular quantity of that
commodity;*

the dangers of departure from the labor standard are there-
fore squared.

Evidently this might do, if only it were safely to be
assumed not only that all that laborers earn they spend in
subsistence, but also that corn is the only subsistence com-
modity ; it would then be true that other commodities could
command labor only in the measure that they were exchange-
able for corn ; corn would, then, fall short of an ideal labor
standard only in the degree that the laborer's dole of com
were a varying one.

At any rate, as Smith believes, since com spells sub-
sistence, com must approximate more closely to the labor
standard than would any other commodity.

Nothing is made here of a doctrine of some currency
later, that wages in terms of money must rise or fall with
every rise or fall in the price of corn, to the result that the
laborer's corn wages must remain a practicably unvarying
quantity. It is, indeed, held that in short-time relations real
wages in terms of command over subsistence necessities
vary widely. "The subsistence of the laborer, or the real
price of labor, as I shall endeavor to show hereafter, is
very different upon different occasions ;" and so, while "the
real value of a com rent" — its labor significance — "varies
much more from year to year" than that of a money rent,

it varies much less from century to century But the value

of silver, though it varies greatly from century to century, seldom
varies much from year to year, but frequently continues the same,
or very nearly the same, for half a century or a century
together. .... In the meantime the temporary and occasional

'Adam Smith, op, cit,, chap. v.

ADAM SMITH I7

price of com may frequently be double, one year, of what it had
been the year before.

Thus, in general purchasing power, as tested by the labor
standard, "from year to year silver is a better measure than
corn," while "from century to century corn is a better
measure than silver." *

But the attempt to find in labor a common denominator
of value had this much at least in its favor — that if labor
would not serve for the purpose, nothing else was at hand

'Ibid,, cliap. V,

Tbis is not the place for an adequate discuMioa of Che Keueral
problem of the standard of deferred paymcnta ; little more, indeed,
can be Btlempted here than to put in the interrogalion points. It is,
however, evident thai Smith's reasoning' assumes the long-time tend-
ency of wages to approximate either to tbe subsistence-minimum
requirement, or lo the standard -of-living requirement. His a^gu-
Bienl rests u]>oa the assumption that, over long periods of time, com
varies little in its command over labor. Presumably this stability of
relation is due to the assumed connection between population increase
and the necessities of subsistence or the established requirements of
exislenee, ThiHV while by improvements either in technique or in the
conditions of environment. labor might for a considerable period be
more generously rewarded in products, this condition, it is thought, is,
after all, certain lo be a temporary one. population tendencies being
safely to be relied upon to take up tbe slack, whether that slack be
reckoned as a differentia! above the absolute requirements for living,
or above some standard of consumption below which laborers will
refuse to reproduce themselves.

There may be reasons enough to condemn tbis attempted justiG-
cation of the com standard by the labor standard, consistently with
retaining faith in the labor standard itSelf; it therefore remains to
inquire lo what extent Smith's acceptance of the labor standard was
justifiable in (he light of tbe theoretical equipment of his time, and to
what extent and with what modilications it may serve for the purpose*
of more modem theory.

There was for Smith, at all events, this much of justification for
the acceptance of tbe labor standard — that, in his view, to refuse it
would be abandon all hope of any standard, while the acceptance of
it would assimilate the standard of deferred payments to the standard
of value for current exchanges — a consummation still (though per-
haps for no very evident reason) devoutly desired by many monetary
theorists. To Smith, as to moat economists of later years, the prob-
lem of deferred payments presenled itself as a value problem. Con-
ceived as such, the degree of development of theory in Smith's time
could possibly have afforded nothing belter or other than this labor
ctandard ; nor. indeed, has later theory achieved anything more, so far
Bs. for deferred-payment problems, cost and value solutions have been
the object of search. For it is clear that value conceived merely as a
ratio of exchange affords no clue lo a defer red -payment standard. Only
when, as the essence or significance or determinant of value, some

i8

VALUE AND DISTRIBUTION

that would. It may not yet be clear on precisely what
grounds this common denominator was so pronouncedly a
desideratum ; but, for whatever it was worth, the labor
measure was the only thing possible for the time. And it
may fairly be questioned whether later thought, in its
endeavor to substitute utility for labor cost as a value deter-
minant, thus stating the payment problem in terms of utility
truly, but only of utility as working itself out in terms of
value expression, has been able to do more upon the utility
side than to repeat the error made upon the cost side, that,
namely, of seeking to compare things which in their funda-
mental nature offer no basis of comparison; with value

underlying principle is discovered, is it possible to adopt as a deferred-
payment basis a vatue standard. Whether or not the multiple standanl
or some variable subsistence or standard-of -lining alardard may not
now be regarded as preferable, it is perhaps sufficient for present pur-
poses to point out thai these are standards of utility, rather than of
cost or of value, and therefore do not. in strictness, coacem tliii
atagc of the discussion.

But it may none the less be possible to justify the labor standard
as held by Smith without appeal to value categories.

It is evident that the labor and the staadaid-oWving standards
must in the long run come lo coincide, or at all events must always be
in process of approaching coincidence. The total consumption of
wealth depends upon the total productive efficiency of society ; average
consumption is the derivative of average production. Standards of
living express the general or average efficiency in production, a«
reflected in the habits and customs of consumption. It ia, no doubt,
true that if the increase in the pcr-capita output of wealth is rapid, the
felt necessities of adequate living may somewhat lag behind the oppor-
tooily afforded by the level of production ; but it remains tnie that the
new level of production is all the while in process of becoming fixed
as a new level of requirement. In the meantime, however, as the
history of the last hundred years abundantly shows, there is, because
of this phenomenon of lagging — this slack between the lately acquired
power and the earlier established need — room for some shortening of
the labor day. None the less a commodity standard of payment which
should coincide with the labor standard must be a standard expressive
of the changes taking place in labor productiveness ; not however,
productiveness in terms of corn alone, but productiveness in terms of
those commodities, whether com or other, for which incomes are
exiiended— that is, productiveness expressed in terms of the derived
consumption.

What bearing has all this upon the proposal that the money pay-
ment should be adjusted at that sum of money affording a command
over commodities equal to that of the money- loaned— (bat is to say,
the acceptance of the principle of the multiple standard ?

Recalling once more the fact that this computation is entirely out-
side the value field, that (he proposed payment is in terms a ittijity
standard, it is obvious that if. between loan and payment, time enough
has elapsed for an appreciable change ia the standard of living, in the

I
I
I

ADAM SMITH 19

conceived as a mere ratio of exchange, the assertion of
equality or of inequality between two values can have, for
the purposes in hand, no possible meaning, unless and until
some basis of homogeneity between the quantities in the
respective value ratios has been established. Thus, in last
analysis, equality for deferred-payment purposes will have
to be worked out by somehow appealing lo concepts of
quantity ratlKr than always to mere ratios between quan-
tities.

So much, for the time being, for the deferred-payment
problem ; there remain for discussion Smith's concepts of

felt necessities of CDnsumptioa, payment in an equal command over
comtnodities cannot be a full equivalent for the benefits received, or an
adequate indemnity for the benefits foregone. The want-Batisfying
quality of objective units of goods has fallen; something must he
allowed here not onl]' for changes in the direct service, the want-satis-
fying power, afforded hy similar items of goods, but more, also, for
changes of service consequent upon the rising level of requirement
for the maimenance of social position and relative well-being. I( is
here distinctly to be recogniced that in large measure consumption is
itself a competitive thing.

Neither in tb%ory, therefore, as a value computation, nor in ita
ptactical working out as a utility compulation, does Smith's labor
standard afford an entirely satisfactory basis for the aolution of the
deferred-payment problem. "Ultimately speaking, things are not useful
because they cost effort, but the effort is put forth because the things
are useful. It was usefulness and not effort that the debtor borrowed,
it was the product of his effort and not effort that the creditor loaned.
It is, then, in terms of usefulness that payment should be made. Labor
is the producer of utility and not the substance of it.

"But it must be remembered that by this very measure of useful-
ness, payment must be made in something more than an equivalent
command over commodities. The increased effectiveness of labor has
brought about a higher level of consumption, a raised standard of
comfort and of life. This is a gain to such members of society as are
able to aiuin to this new level ; it is the reverse lo those who fall
Itoo far) short of it A new need plus the ability to satisfy the need
is an advance in well-being : without the ability the need is a mis-
fortune. The line then of compensalion — of equality in sacrifice —
must be found somewhere above equality in purchasing power, some-
where below equality in command over human effort Something must
be added to payment on account of the greater necessities of tbe lender ;
something also on account of greater requirements tor the maintenance
of social position and relatii(e well-being. The point of fair adjustment *"
is to be found where the direct gain from larger satisfactions is offset
by tbe disadvantage of increased requirements and decreased com-
mand over social distinction." — Davenport, Ovilines of Economic
Theory, p. 219.

More extended discussion of this problem must be postponed to a.
later chapter. See pages 175 to iSS.

90 VALUE AND DISTRIBUTION ^M

labor, (i) as determinant of value, and (2) as measure or
denominator of coexisting values.

( I ) That things are valuable more or less in proportion
to the labor required in their production is matter of com-
mon observation ; the Crusoe analysis sets this truth forth
in simple form. But the principle is equally manifest in
more complex conditions; the more the labor required for
the production of any commodity the higher the wage
outlay.

Not merely this; but for the simpler aspects of produc-
tion, and in large measure for production generally, it may
be said that products trace their origin to human labor;
labor is, technologically speaking, a cause, and, in careless
thinking, is prone to be taken as the sole technological
cause of the existence of things possessing value. The con-
clusion thus lies readily at hand that the quantity of labor
content is the determinant of exchange value. Labor is in
this view conceived not merely as the mechanical cause
of product, but as the quantitative cause of value, just as, in
later thought, the utility doctrine has been applied to eluci-
date the causal sequence : utility being conceived as neces-
sary condition to value, there is constant temptation to
explain the quantity of value by the quantity of utility. But
in either case, or in any event with labor, the necessity
presents itself of arriving at some basis of homogeneity;
and to serve as explanation of value this homogeneity
must be something other than a homogeneity derived from
the value product.

Nevertheless, the affairs of ordinary business life, the
commonplace facts of the wage relation, make it sufficiently
evident that labor has a value, and that in many cases, if not
in all, the value of the product is somehow concerned with
the value of the labor agents required in its bringing forth.
The labor- value-cost doctrine is unquestionably true in the
sense that the value of labor takes some part as a determi-
nant, whether intermediate or ultimate, of value relations.
But precisely here was and is the problem ; is this labor
value ultimate and self-sufficing, or is it merely an inter-
mediate term in some longer chain of causal sequence?
So far as Smith formulated any answer to this question, it
was to ascribe to labor a non-derivative homogeneity and
a n on -derivative value, and to make this value serve as the
explanation, in terms of causation, of exchange relations.

And so in chapter vi it is argued that if among a nation,

ADAM SMITH

say, of hunters, it usually costs twice the labor to kill a
beaver that it costs to kilt a deer, one beaver will naturally
exchange for — will be worth — two deer. It seems,
indeed, to go almost without saying that what is usually the
product of two days' or two hours' labor should be worth
the double of that which is the product of one day's or one
hour's labor.

But the further discussion makes it fairly evident that
the hunter case was chosen by Smith as one of approximate
homogeneity of labor power, a nation of hunters, and also,
be it remarked, as a case of the relatively minor importance
of capital or land considerations. And upon this assump-
tion of the approximate or complete homogeneity of pro-
ductive agents the doctrine sums up in a statement of
proportionality: as quantity of labor is to quantity of labor,
so is value of product to value of product; labor: labor:
value: value. And neither in Smith's nor at any later
time has this been open to question, upon the assumptions
made. But the truth admittedly contained in the proposi-
tion does not of necessity impose the labor-value explana-
tion. The non-mathematical statement of the case is equally
exhaustive: unless the hunter could get as much out of his
labor with one sort of game as with the other, lie would
trap for only one sort, and all of this irrespective of any
question of whether hunting be a pleasure or a hardship,
or whether labor has or has not in itself a value by its own
right- In point of fact this doctrine of proportion is
nothing more or less than an example of opportunity cost
applied under the assumption of homogeneous agents of
production.

In the next paragraph, however, it is said:

If tlie one species of labor should be more severe ihan the

other, some allowance will naturally be made for the superior

hardship; and the produce of one hour'a labor in the one may very

frequently exchange for Ihal of two hours' labor in the other;

all of which is correct as matter of everyday fact; but
note that in just so far does the proportion doctrine fail;
and at the same time there disappears the last vestige of
time cost. Indeed, there appears some suggestion of pain
cost. And yet, by the sentence next following pain cost is
excluded :

Or if the one species of labor require an uncommon degree of
dexterity and ingenuity, the esteem which we have for such talents

22 VALUE AND DISTRIBUTION

will naturally give a value to their produce superior to what would
be due to the time employed about it —

the old labor-cost doctrine, but supplemented by a new and
non-cost explanation for tfie evident and perplexing incre-
ment of value, the esteem in which talents are held. But in
the succeeding sentence the pain-value doctrine is rehabili-
tated:

Such talents can seldom be acquired but in consequence of long
application, and the superior value of the produce may frequently
be [no?] more than a reasonable compensation for the time and
labor which must be spent in acquiring them. In the advanced
state of society allowance of this kind for superior hardship and
superior skill are commonly met in the wages of labor.

That is to say, the greater wage must at least counter-
balance, for the individual worker, the greater hardship of
the work or the greater expense of preparation, else the
occupation will not be undertaken or will be abandcmed.
But evidently this gives no explanation for the superior
wages of native skill. The discussion continues: "Over
and above what might be sufficient to pay for the price of
the materials and the wages of the workmen"— employer's
outlay cost — "something must be given for the profits of
the undertaker of the work who hazards his stock in the
venture." Risk cost? "The value which the workmen add
to the materials, therefore, resolves itself, in this case, into
two parts, of which one pays their wages, the other the
profits of the employer." But that, in Smith's thought,
this profit includes something more than risk profit is not
open to doubt: though there is not yet any necessary sug-
gestion of wages of superintendence : "two parts, of whidi
the one," etc.,

the other the profits of the employer upon the whole stock of
materials and labor which he advanced. He could have no interest
to supply them unless he expected from the sale of their work some-
thing more than what was sufficient to replace his stock to him,
and he could have no interest to employ a great stock rather than a
small one, unless his profits were to bear some proportion to the
extent of his stock.

This might well be justified as a doctrine of opportunity
cost, but such seems not to be Smith's thought ; he appears
to have in mind merely abstinence cost, as a quantity addi-
tional to risk cost.

ADAM SMITH 23

In every great work almost the whole labor .... is committed
to some principal clerk. The owner of the capital, though he is
thus discharged of almost all labor, still expects that bis profits
should be a regular proportion to bis capital. In the price of
commodities, therefore, the profits of stock constitute a compo-
nent part altogether different from the wages of labor and regu-
lated by different principles.'

Here Smith, perhaps with good justification, argues
that abstinence cost cannot, at all events proportionately, be
explained or defended as pain cost. But later this position
was abandoned ; and it is clear enough, if the case is looked
at from the point of view of the employer — whether as
outlay cost to the borrowing entrepreneur, or as either
investment-opportunity or production-opportunity cost to
the capitalist employer — that interest and wages must be
regarded as upon the same footing.

And as we have seen, this is not infrequently the point
of view of cost adopted by Smith. For example, in chap-
ter vii he sets forth natural price (normal exchange
value) as the general average of "what it really costs the
person who brings it to market." But at the same time this
price must cover the profit which the producer could else-
where have made; "If he sells at a price which does not
allow him the ordinary rate of profit in his neighborhood,
he is evidently a loser by the trade ; since by employing his
stock in some other way he might have made that profit ;" —
opportunity cost'

His profit, besides, is his revenue, the proper fund of his sub-
sistence. As, while he is preparing and bringing the goods to
market, he advances to his workmen their wages, or their subsist-
ence; so he advances to himself, in the same manner, his own
subsistence Unless they yield him this profit, therefore, they

'Adam Smith, 0p. cil., chap. vi.

'While there is no doubt tbat Smith in i
never in teinis repudiates — tbis eotiepreiieur-i
equall]r clear that at other times he as definilely accepts and emphasizea
the labor-pain and the tabor-value doctrines. Whillaker certainly goes
mucb loo far in the following: "As a theory of value .... Adam
Smith left us an early form of the law of entrepreneur's coat and a
labor-command measure of value. But he disowns what is naturally
thought of as the genuine classical theory of value, that labor cost
regulates market value. This theory was RIcardo's and really his
alone." — Albert C Whittaker, History and Crilicijm of Ike Labor
Theory of Value m EngtUh Folilieal Economy, Vol. XIX, No. a, of
"Colombia University Studies," p. 31.

/ places adopts — and

24 VALUE AND DISTRIBUTION

do not repay him for what they may very properly be said to have
cost him.

The natural price must, then, also recoup him for these
expenses of living — an employer's subsistence or standard-
of -living cost. True, he may not get this price, but this is
the lowest price "at which he is likely to sell — for any con-
siderable time."

But this subsistence-cost doctrine does not, after all,
appear to Smith quite to suffice; the price is set forth as
safely to be assumed as the lowest long-time price only
upon the assumption that there is freedom of changing
occupations. But where such freedom exists, it is really the
principle of displacement that is being appealed to; these
possible alternatives of employment offer a typical example
of opportunity cost.

In this chapter vii consistent account first begins to be
taken of the fact that capital and land are important agents
in the productive process. Henceforward, the talk of
homogeneity in productive powers ceases; henceforward,
the discussion mostly goes on the basis of employer's cost
as against pain or time cost; the doctrine, so far as con-
sciously formulated, is that of outlay cost, and in the main,
impliedly as well as consciously, is outlay cost as against
opportunity cost.

And so, in addition to the claims of the capitalists, "as

soon as the land of any country has all become private

property, the landlords .... demand a rent even for the

natural produce. The laborer .... must then give up to

his landlord a portion of what his labor either collects or

produces." .

Now here, again, the land is conceived as passive oppor-
txmity rather than as productive agent ; the laborer is repre-
sented as giving up a part of what in its entirety his own
labor has produced. "This portion, or what comes to the
same thing, the price of this portion, constitutes the rent of
the land, and in the price of the greater part of commodities
makes a third component part" So, from the point of view
of outlay cost and of exchange value, rent, like interest,
disturbs the labor-cost principle as a causal and determi-

w

ADAM SMITH

as

nant fact for exchange relations, unless, indeed, it be pos-
sible to regard land and capital as substitutes for labor and
as, so far, making labor unnecessary to be done or to be
paid for. Formally, this would, perhaps, implx no lack of
loyalty to the labor standard, loyalty, however, not to labor
in terms of pain, but solely to labor in terms of pain or of
something instead of pain ; nor, indeed, is it, in last analysis,
an insistence upon labor in any aspect, but only upon some-
thing, production- wise, a substitute for labor. And if thia
interchange between labor and substitutes is accepted as
possible, it should be equally open to reverse the process and
to regard labor as the substitute for land or capital services,
thus reducing all costs to equivalents in rent or interest.
But this comes perilously near to surrendering the whole
labor-cost position, and to adopting in its entirety the out-
lay-cost point of view,

But^ — and now we come to an example of Smith's treat-
ment of labor as value standard or measure — nothing of all
this necessarily bears to disturb labor as the best and per-
haps the only medium of expression and common denomi-
nator of real value.

The real value of all the different component parts of price, it
must be observed, is measured by the quantity of labor which they
can, each of them, purchase or command. Labor measures the
value, not only of thai part of price which resolves itself into
labor, bal of that pari which resolves itself into rent, and of that
part which resolves itself into profit.

Here evidently, the thought is simply and purely one of
measure — of standard^ — ^and not of cause. But a shift in
concepts has nevertheless taken place — a shift later to be
exploited at the full by Malthus — from labor as the basis of
value by virtue of the labor-pain investment, to labor as
basis in terms of pain-purchasing power or of pain-avoid-
ing power — ultimately, therefore, of service-rendering
power.'

•Thus the following stales onlj' one of the two positions held by
Smith with regard to the labor standard : "To Smith, labor is the
great, boniogeneous, undifferentiated common denominator to the
wDnderfully diverse mass of goods which come

36 VALUE AND DISTRIBUTION

In chapter vii it is written that,
when the price of any commodity is neither more nor less than
what is sufficient to pay the rent of the land, the wages of the
labor, and the profits of the stock employed in raising, preparing,
and bringing it to market, according to their natural rates, the
commodity is then sold for what may be called its natural price.

There is here no attempt to explain these natural rates,
either as costs to the employer or as incomes to the owners ;
they are simply normal or natural rates, and the produced
commodities incorporate tliese rates into the natural cost,
with the result that the corresponding price is the natural
price. There is here, however, unconsciously but neces-
sarily implied an opportunity-cost analysis, as the explana-
tion of these existing rates of compensation to which, as
costs, the production of every particular commodity is
subject. And this opportunity doctrine is, in fact, recog-
nized, so far as the employers' profits are concerned :

Though in common language what is called the prime cost of
any commodity docs not comprehend the profit of the person who is
to sell it again, yet if he sells it at a price which does not allow
him the ordinary rate of prolit .... he is evidently a loser by
the trade; since by employing his stock in some other way be might
have made this profit.

But in the paragraph next following appeal is made,
as we have already seen, to the doctrine of subsistence cost;

While he is preparing and bringing the goods to market he
advances to the workmen their wages, or their subsistence; so he
advances to himself in the same manner his own subsistence which
is generally suitable (o the profit which he may reasonably expect
from the sale of his goods.

It is now to be remarked that here the standard is one
not of necessary subsistence, nor accurately one of permanent
and established standard of living, but a sort of short-time
standard based upon the expected profit : but the stand-
ard serves for the purposes in hand as does the laborer's
wage ; it is the amount necessarily paid, or at all events the
amount actually paid to one of the producing agents — out-
lay cost. However, Smith is not faithful to this concept;
nor can he well be so, for evidently one is not held to con-
sume all of his profits ; and whether he does or does not
consume tliem all, and whether they are great or small, it is

I^^^^gr ADAM SMITH If

probable that he will take them if they are the best that he
can get

If at any time it (the supply] CKceed? l!ip effectual demand,
some of the component parts of the price must be paid below the
natural rate. If it is rent, the interests of the landlords will
immediately prompt them to withdraw a part of their land; if it
is wages or profits, the interests of the laborers in the one case
and of their employers in the other, will prompt them to withdraw
3 part of their labor or capital from this employment.'

This is opportunity cost so extended as to include all
forms of outlay of productive goods or for productive goods,
rent included ; and the same argument is applied in reverse
order to higher prices. Smith proceeds : "The natural
price is, as it were, the central price, to which the prices
of all commodities are naturally gravitating."

However, Smith's ideas as to the relation of rent to cost
and to price were especially and notoriously vague and
vacillating. In chapter ix, the rent of land, these notions
of outlay cost and opportunity cost get, so far as rent out-
lays are concerned, a serious back-set :

Rent enters into the composition of the price of commodities
in a different way from wages and profit. High or low rent is
the effect of it. It is because high or low wages or profit must be
paid in order to bring a particular commodity to market that its
price is high or low ; but it is because its price is high or low, a
great deal more or a little more or no more than what is sufficient
to pay the wages and profits, that it affords a high rent or low

This distinction between rent outlays and other outlays
can evidently not greatly signify from the point of view of
outlay cost. But there is another point of view from which
the distinction is important. Rent arises only as a question
of individual and competitive cost. Socialized production
would meet with land diflferentials, but the aggregate prod-
uct would stand as the aggregate remuneration for the
total social outlay and effort: some of the product would, it
is true, have required less outlay than other ; but if any sys-
tem of exchanging, by barter or otherwise, existed, these
differences in land quality could have no significance for
the terms of the exchanges; nor could they figure as addi-
tions to cost; at the most, as differentials, they would only

* Adam Smith, op, eit., chap. vit.

28 VALUE AND DISTRIBUTION

•

be differentials of saved cost. But in a competitive society
these differentials of productivity have to be paid for under
the guise of outlays made for the privilege of enjoying
them. So again, but for a different purpose, we return to
the distinction between competitive and collective cost.
Every improvement in production, whether of developing
technique, or of better land, or of more abundant land, or
of better capital or more abundant capital, is, from the
social point of view, the occasion and cause of diminished
labor cost — a larger product for a given total of production
burden.'

"Note, however, that this discussion of collectivist labor cost
has in view only such productivity differentials as concern only one
line of products. But commonly, of course, differentials of quality for,
say, wheat production are accompanied by differentials for other lines
of product. In such cases another cost computation requires attention
in the collectivist reckoning. Displacement cost— opportunity cost —
is really the leading and almost the exclusive form of cost for
collectivist economics. Labor cost is, in fact, of extremely small
significance, excepting in this aspect of alternative applications. All
that the text intends to assert is that instrumenal differentials of
productivity for any one line of production can have no significance
in collectivist computations.

CHAPTER III

RICARDO

At the present day it is a task neither of great difficulty
nor of great merit to convict Adam Smith of inconsistency
and even of direct contradiction. Were the purposes here
in view essentially those of criticism, it would thereby be
the more necessary to keep in mind that the strength of
Adam Smith lay in his breadth of information, his accuracy
of observation, his suggestiveness of comment, and his
catholicity of doctrine. He was not in his time, and could
hardly have been in any time, a close worker in systematic
theory: He failed to see the town for the houses, the
forest for the trees ; but he knew wondrous well the houses
and the trees. His habit of mind was concrete and prac-
tical. Despite, however, this consistent practicality, almost
every theoretical aspect of every question struck him at one
time or another. In economic doctrine, as has been said of
Shakespeare in observation of life, the ocean of his sympathy
lapped all the isles of thought. For the present purposes,
therefore, which are, in the main, expository and analytic
rather than historical or critical, Adam Smith offers an
incomparable field for profitable discussion and illustration.

Not precisely so with Ricardo or with his contem-
poraries, Malthus, James Mill, and MacCuUoch. Ricardo
was in purpose and method a systematizer, with a theorem
to expound and a theory to establish ; consistency and logi-
cal coherence were parts of the task to which, despite slight
equipment in style and in expository skill, he had set him-
self; and in this purpose, so far as consistency and logical
unity were concerned, he was, on the whole, surprisingly
successful. His defects of exposition, however, render the
task of interpretation especially difficult: it may thus be
possible that one more attempt at restatement and reinter-

39

30 VALUE AND DISTRIBUTION

pretation of his doctrine may be serviceable, even after the
sympathetic and masterly and, in the main, definitive study
of Mr. E. C. K. Conner.^

Very confusing in Ricardo's discussion is the fact that
there are two senses for each of the terms value and T/cUue
of labor; value meaning (i) real value, in the sense of
labor-investment value — concreted pain cost; (2) power
in exchange. Value of labor sometimes means (i) mere
exchange power, market value of labor; (2) labor as a
ratio to profit, a distributive fraction, a relative share in a
product the absolute value of which is irrelevant to the
concept.

And thus with regard to the famous proposition that
neither wages nor profits can rise or fall unless to the
corresponding loss or gain of the other factor, James Mill
makes it clear that this is never asserted by Ricardo except
in the sense of relative shares:

If a change in the amount of commodities is meant, it will
not be true, in that sense, that profits so depend upon wages as to
fall when wages rise, and rise when wages fall; for both may fall
and both may rise together. And this is a proposition which no
political economist has ever callec^ in question.'

But note that in the sense neither of exchange power nor
of ratio shares does Ricardo commit himself to the doctrine
that the value of the labor is derived from the value of the

^ All references are to Conner's edition of Ricardo.

'James Mill, Elements of Political Economy (3d ed., London,
1844), chap, ii, sec. 3.

"Ricardo never asserts or imagines that wages and profits cannot
increase together, so far as the amount of commodities that measure

them is concerned What he denies is that one can obtain a

larger share of the total value without the other experiencing a
diminution in its share." — Conner (Ricardo) : "Introductory Essay,"
sec. 15.

"Each commodity represents a certain amoimt of force, and thus
the. total quantity produced represents the total force of the country.
Should invention facilitate production .... each commodity subject
to the invention must cease to represent as great an amount of
force; .... in other words, its real value would be less." — Ibid,,
sec 9.

RICARDO 31

product His is consistently a cost-of-production view.
But he equally carefully avoids making the exchange value
of the labor the cause, through costs, of the exchange rela-
tions of the products. He does not deny that labor has
value ; this is as clear as that land has value : but with
land he denies, and with labor he declines to assert, any
cost-causal relation. To grasp this point is crucial to any
right understanding of Ricardo. He has no explanaticm
for the value of labor excepting by the necessities of living
according to the established standard, a sort of cost doc-
trine for labor. He terms labor the "foundation of
exchange value;" it is the very essence and significance of
real value. Exchange values are merely proportional to
real values. "The connection between exchange value and
so-called real value is simple. On the degree to which a
commodity as compared with other commodities is pos-
sessed of the latter, depends its position in the ratio of
exchange." '

Labor is conceived by Ricardo as a leveler of exchange
value, and this solely through the efforts of holders of it or
of purchasers of it to apply it at the maximum of advan-
tage. It is true that the working-out of this by entrepre-
neurs is in terms of cost to them but, according to Ricardo,
their computations do not express the ultimate fact; cost
is not decisive excepting in this sense of proportionment ;
production costs in the ordinary sense depend upon real
costs, that is, upon the quantity of labor applied; and so
the doctrine formulates, value : value :: cost (^abor) :
cost (^labor). And it thus comes about that labor, the
basis and essence of real value, may serve as a standard and
conunon denominator of exchange value. In final analysis,
labor does not determine value through its own value, but
merely determines, by the proportion of it incorporated in
different commodities, the relations of exchange value
between these commodities. Labor might halve or double
in productive power, and yet no effect be felt in the ratios

•Ibid., see. g.

32 VALUE AND DISTRIBUTION

of exchange. So wages might vary indefinitely in rise or

fall without modifying these maiicet relations :

No alteration in the wages of labor could produce any altera-
tion in the relative value of these commodities The same

reasons which should make the hunters and fishers endeavor to
raise the value of their game and fish would cause the owner of the

mines to raise the value of his gold The relative situation

being the same before and after the rise of wages, the rela-
tive .... value would remain unaltered*

But if the labor quantities change relatively, changes
will follow in value.

Every improvement in machinery, in tools, in buildings, in rais-
ing the raw material, saves labor and enables us to produce the
commodity to which the improvement is applied, with more facility,
and consequently its value alters.*

In what direction Ricardo would look for the explana-
tion of all this may not be clear; but it is certain that he
does not find it in any invariability in the value of labor.
Labor does vary both in ratio value, its share relative to
profit, and in commodity-purchasing power, its exchange
value :

Therefore it cannot be correct to say with Adam Smith "that
as labor may sometimes purchase a greater and sometimes a
•mailer quantity of goods, it is their value that varies," — but it is
correct to say that the proportion between the quantities of labor
necessary for acquiring different objects seems to be the only cir-
cumstance which can afford any rule for exchanging them for one
another.*

Nor would Ricardo have concurred in the assertion of
an invariable real value in labor; but only of invariability
in the exchange relations of things invariable in their rela-
tive labor content. Labor value as reality in contra-distinc-
tion to labor value as an exchange fact, Ricardo did not
recognize, or, for that matter, deny ; he had no need for the
distinction. For any purpose of his the value of labor is

^RicardOp Political Economy, chap, i, sec 3, par. 16.

*Ibid„ chap, iv, par. 18.

* Ibid,, chap, i, sec. i, par. 10.

RICARDO 33

•

variable ; "being not only aflFected as other things are by the

proportion between supply and demand . . . , but also by

the varying prices of food and other necessaries on which

the wages of labor are expended."^

But how does this proportion doctrine, this function of

labor as a leveler of values, come to be in any sense a cost
doctrine, or justify the repute of Ricardo as the great cost-
of-production theorist? As generally interpreted, and by
his own express assertion, he holds that the value of any
given article depends upon its cost of production; but the
connection between labor cost and cost of production in
the sense of outlay cost comes about through the entrepre-
neur working-out of the proportion principle. As regards
the value of any one commodity, its cost, its selling-price,
the mere outlay investigation would be an adequate solu-
tion ; with wages so much, materials so much, etc., the price
would have to be so much. But Ricardo was attempting
to see the value problem whole, not merely as a question of
this commodity or that, considered separately — a purely
individualist-entrepreneur standpoint — ^but of all commodi-
ties taken together in their interrelations of exchange. For
this purpose the various cost outlays would not serve as a
basis of explanation, but would themselves be simply so
many more items of fact awaiting each its separate explana-
tion.

Summarizing, therefore, the case as thus far stated, we
may say that Ricardo makes labor important only as the
basis and inner meaning of real value. The doctrine of

^ Ibid., chap, i, sec i, par. 9.

In view of Ricardo's distinction between value and riches, as set
forth in chapter xx, it must be admitted that the above interpretation
might fairly be questioned. But in a letter to Say, dated January 2, 1820,
Ricardo writes: "You seem to me to have misunderstood one of my
propositions. I do not say that it is the value of labor that determines
the value of the product ; this is a view which I am trying with all my
power to refute. I say that it is the comparative quantity of labor
necessary to production which determines the relative value of prod-
ucts." [This is translated from the French ; I have not been able to
place my hand upon the original, which I take to have been in
English.]

34 VALUE AND DISTRIBUTION

real value is still everywhere a cost doctrine of the labor

sort; the purpose of activity is to secure pleasure or to

avoid pain ; in either case, pain is the method and the price

of attainment, the cost, and thereby an expression of the

value of the thing or fact attained, or of the external agent

or implement aflFording it. Thus it comes about that

Ricardo distinguishes sharply between riches and real

value; with riches the emphasis is upon quantity of utility,

of weal ; with value, upon cost.

All of this, as we have seen, falls under the head of

real value. But for exchange value he recognizes that,

even in the simplest cases, labor gives only a method of

arriving at relations between commodities, their exchange

ratios ; it is a measure in this sense only, and comes to serve

as such only through the leveling influence of costs, by

virtue of the constant tendency on the part of producers to

apply labor at its greatest advantage. Pain cost has here

nothing to do with the case, excepting as pain may have

something to do with the sums which must be paid for

labor in order to get it. Neither labor, nor pain as in

some way implied in labor, has any significance for

exchange value otherwise than as standard or measure or

common denominator. An indirect significance is worked

out only through the leveling or proportioning mechanism.*

In point of fact, with all the Ricardian group, as with
Smith, the desideratum in the exchange-value prob-
lem was to get at a measure; the real-value doctrine was

*In the light of the foregoing, sharp dissent must be expressed
from the view of Ricardo held by Whittaker: "Ricardo contributed
very little to the advancement .of the empirical, that is, the entre-
preneur account as such. The direct line of descent of this doctrine is
traceable from Smith's Wealth of Nations through the Principles of
Malthus and J. S. Mill to Marshall Neither Ricardo nor Cairnes can

be considered to stand in the line Ricardo never stated a law

of entrepreneurs* cost plainly, formally, as such, though he gave it an
obscure recognition as a source of difficulty to the pure labor theory

of value" XW^'***^^» ^' ^*'«' PP« '4i is).

The following appears to be by much the more accurate state-
ment: "Ricardo's real conception of normal value is this: the total
cost of a commodity determines the total wages charges that must be
paid by the entrepreneur, or series of entrepreneurs, producing it**
(ibid,, p. 51).

RICARDO

35

sufficient for more fundamental consideration of causes,
and as bottoming economics upon some final, definitive, and
underlying substratum of reality. If land, the Physiocratic
basis, was discarded, what else could serve, if it were not
labor? In view of the comparative utility of water and
wine, or of corn and gold, and in the absence of any notion
of marginal utility, utility could not serve for the case —
whether or not we shall now say that the required homo-
geneity has later come with the marginal notion. And even
if utility could have been made to apply, this was not that
bed-rock of reality which was in quest. And so much the
more this search for the ultimate could not content itself
with simple exchange ratios. Ratios of what? Determined
by what? A mere ratio of exchange was as if a man should
stand firmly, resting neither on one leg nor on the other,
but held upright by the mutual support of the two. Possibly
the situation was of this sort for the moving equilibrium of
the heavenly bodies — tied to nothing and upheld by nothing
—but if so it was admittedly not greatly to their credit.
The only exit from the dilemma appeared to be by the
way of labor, as definitive and real, causal and determi-
native.

But for exchange value, nothing of the sort was claimed
for labor, but only that it was adapted to serve in the
second of Adam Smith's roles, that of value denominator.'

It must now be admitted that Ricardo's essential posi-
tion that commodities rise or fall in exchange value in

* MallhuB concurring in this notion thai a cotnmDn mtasure for
value must be discovered, and thai inbor ofFered the only hope, was yel
disponed to disagree with Ricardo and to adopt not the common
denominator of labor in the cost aspect — by test of what had been
done, a system of byegones — -but by the forward-looking tnelhod of
what the product, once produced, would command in labor or in the
products of labor.

For clearly, said Mallhus. if a manufacturer really makes a
profit, be must get hack for hia product the power to control more
productive energies tban he put into his commodity. If the less labor
of today will now do the work of the more of yesterday, an equal con-
trol of labor must imply a profit. It is the purchasing power of any
product that really signifies (o the producer of it, and if tabor is agreed
to be the measure-medium, it should be so in the sense of labor -
purchase rather than of lab or- investment. True, these quantities may
commonly coincide, but if the coincidence fails, the preference should
be accorded to purchasinfr power. — T. R. Malthus, Political Economy,

Possibly so ; but it is sulTjcienl, for our present purposes, to point
out that Mattbui is here vaguely feeling toward the utility measure of
v^oe; that is to say. his doctrine is fundamentally not a cost doctrine.

36 VALUE AND DISTRIBUTION

proportion to the rise or fall ip the labor requirement in
their production would hold, if (i) labor could be reduced
to homogeneity excepting in terms of value productivity,
and if (2) the doctrine could be made to account adequately
for the roles of land and of capital in production.

As to land, Ricardo felt no considerable difficulty. He
ruled rent out of the problem, by a course of reasoning
familiar to all economists and still commonly accepted. It
is unnecessary to inquire here whether modem theory has
done well in accepting this Ricardian doctrine as to the
relation between rent costs and values — ^there is much wait-
ing to be said in this regard, — ^but it is certain that Ricarck)
did not do well in attempting to fit this doctrine into his
general system. His doctrine of cost was one of competitive
and not of collectivist cost; it was worked out in terms of
entrepreneur competitions by the sheer necessity of its
character as competitive7 the doctrine of the prdportion-
ment of value to labor, the leveling doctrine, finds its basis
in the principle that each entrepreneur will use his costs, as
a total, in the way to get from them the greatest total of
exchange power. In short, Ricardo's doctrine of propor-
tion was worked out through the entrepreneur mechanism
and was nothing more or less than competitive opportunity
cost ; and had he only furnished the doctrine forth with an
apparatus of margins and of producers' differentials, and
had he disposed of rent, as well as of interest, by frankly
and freely making room for both within his formula, much
in modern value theory might have been other — and better
— than it is today.*®

However, there would of course have remained the old
difficulty about the homogeneity of labor; and a new diffi-
culty would forthwith have arisen — how to make land costs
homogeneous with labor costs, otherwise than on the seem-
ingly question-begging value basis. And then, again,

^ Malthus' view was more consistently in line with the entre-
preneur-cost concept: "It appears to me essential .... to say thai
the cost of producing any commodity is made up of all the wages, all
the profits, and all the rents which .... are necessary to bring thai
particular commodity to market in the quantity required" (Malthus,
op, cit,, I St ed., pp. 102, 103).

"Malthus proceeds to a thorough criticism of Ricardo*s law of

labor cost There are (i) the temporary alterations of prices

too rapid to be met by changing the volume of production ; (2)
monopoly in the product itself, or some raw product used in its
making; (3) seasonal fluctuations in all products of the soil . . . . ;
(4) the different proportions of fixed capital employed, the different

RICARDO 37

finally, the same questions would immediately have pre-
sented themselves with regard to capital.

But they presented themselves as it was. Ricardo was
perfectly well aware that, in getting rid of rent, he had
merely postponed his difficulty, and that in point of fact,
this difficulty was insurmountable. But he had done his
best; and then, with his customary candor, a candor which
would have done credit to a trained scientist, admitted that
this best was not well.

Not so with his disciples, MacCulloch and James Mill.
Ricardo's argument appealed to them as wholly satisfac-
tory; they were unable to appreciate the difficulty which
Ricardo himself felt with it. For is it not clear that mid-
way between man and environment, labor and land, there
are those modifications in environment — new items of
environment — due to the activity which men have exerted
in their traffic with the original endowment? Genetically
speaking, capital is mere stored-up labor, and that part of
the entire productive output of society that is due to capital
is, in last analysis, it was said, rightly to be ascribed to
labor; interest is therefore indirect wages.

Taking the hunter illustration, Ricardo had formulated
the argument as follows :

Value is regulated not solely by the time and labor [directly]
necessary, .... but also by the time and labor necessary for pro-
viding the hunter's capital, the weapons ; [so if] the weapon neces-
sary to kill the beaver was constructed with .... more labor

than, etc., the beaver would be of more value than two deer

The same principle would hold true, that the exchangeable
value of the commodities produced would be in proportion to the
labor bestowed on their production; not on their immediate pro-

quickness of the returns of the circulating capital ; (5) the quantity
of foreign commodities used in manufactures ; (6) the acknowledged
effects of taxation; (7) and the almost universal prevalence of rent
in the actual state of all improved countries ; . . . . it is certainly not
the quantity of labor which has been employed in the production of
each particular commodity which determines their relative values in
exchange, at the same time and at the same place (MalthUs, op. cit„
pp. 104, 105). Ricardo acknowledged all this, but the claim that
rent," etc- — Whittaker, op, cit,, p. 85.

38 VALUE AND DISTRIBUTION

duction only, but on all those implements or machines required to
give effect to the particular labor to which they were applied;"

and he enumerates as among these other applications of
labor,

a portion of the labor bestowed on building the ship in which it
[the cotton— taking the stocking industry as an example] is con-
veyed, .... a portion of the labor of the engineer, smith, and
carpenter who erected the buildings and machinery, .... and
of many others whom it is unnecessary further to particularize.
The aggregate sum of these various kinds of labor determines the
quantity of other things for which these stockings will exchange,
while the same consideration of the various quantities of labor,
which have been bestowed on these other things, will equally
govern the portion of them which will be given for stockings."

And to show that these same conclusions apply to the com-
modities exchanged against the stockings, he inquires what
effect would be felt upon prices, if any of the labor
processes were shortened.

But in paragraph 17 of the same section he finds it
necessary to take account of the influence of time; he
recognizes that where the capitals applied are not of equal
durability or of similar sorts, changes will be worked in
exchange ratios — as, for example, by differences in propor-
tions of fixed as against circulating capital, subsistence
goods, etc., where time becomes an important element in
fixing profits on stock. And he points out that if diflFerent
commodities require different proportions of labor and
capital in their production, changes in the value of labor
must affect one commodity more than another.

But note that while this might appear to regard labor
not only as an equalizer and leveler of exchange values,
but also as somehow independent and as possessing in its
own right a value in such wise as to make it definitely and
ultimately a cost, this would not be a fair interpretation of
Ricardo's position. He is reasoning merely that as sheer
matter of time and of the corresponding interest charges, or

" O^. cit,, chap, i, sec. 3, pars. 14, 15.
^Ibid,, par. 15.

RICARDO 39

as a question of some departure— due perhaps to changing
conditicHis with lapsing time— of the fixed capital from the
value level of its labor cost, which departure he does not
attempt to explain, or through changes in wage require-
ments, due, we will say, to subsistence influences, — com-
modities may differ in exchange value, because of the larger
or smaller share of fixed-capital outlays as compared with
wage outlays, or of fixed-capital outlays as compared with
circulating-capital outlays. And labor, as he often says,
may vary both in exchange and in ratio value. But this
variability, as Ricardo thought of it, is especially of the
ratio sort; but in any event this variation in the relative
share in the productive output must be allowed for by
employers in combining labor and capital as productive
agents, precisely because a difference in cost must obtain
with different combinations of these agents. And thus it
appears that labor and capital, while they may have been
shown to be hcxnogeneous in origin, are not necessarily
under this argument reducible to labor homogeneity for
purposes of cost computations.

It is worthy of remark that Ricardo does not at this
point very closely distinguish how much of his difficulty is
due to time, as it expresses itself in interest charges, as
against time as offering opportunity for changes in the
exchange value of labor or in the exchange value of the
capital goods — machines, buildings, etc. — or in the ratio
vahie of labor and capital — ^wages and profits.

James Mill, however, approached the problem without
misgiving and left it in entire contentment : This reduction
of capital and labor to homogeneity may, he "says, be
attempted either (i) by the method of reducing labor to
terms of capital, or (2) by reducing capital to terms of labor.
The first method is declared impracticable; true, the capi-
talist pays the wages of labor and reckons the wage pay-
ment as a capital outlay ; but this is only to say that laborers
and capitalists in co-operation have produced the com-

40 VALUE AND DISTRXBimON

modity in question [as technologically they have, but as
cost-wise they have not], and that the product should
belong to them both, except for the fact that one partner
has bought out the other before the returns are in; this,
however, it is said, does not transform the case into a
production by capital alone.

The second method of arriving at homogeneity is
accepted upon the line of argument falteringly and dubi-
ously worked out by Ricardo. But how about the diffi-
culty as to time interest? Interest, Mill replies, is merely
the slow payment for the wearing-out of capital; all the
partial payments will equal the whole value of the stored-
up labor. But even so, Mill asks, what shall be said of the
increase which comes with time to the value, say, of wine?
Where is the labor in this? There is no more capital by
which to explain the increase. "It is no solution to say that
profit must be paid, because this only brings us to the ques-
tion, why must profit be paid?" This must be because the
capital applied elsewhere, e.g., upon the land, would
during the same time have earned a profit, and so must
have a profit here. The wine which works is like a
machine which works without superintendence, and pay-
ment for the work of the machine is really payment for
the work which made it.^'

And so, having said nothing of why the capital would,
in agriculture, have had any better right to command inter-
est, he dallies sentence-long with the principle of oppor-
tunity cost, and finally, having reduced the working of
wine, and logically as well the energy of all the winds and
tides, and, indeed, of every labor of the whole universe
groaning and travailing in pain together, to terms of
human labor, goes on his way unafraid and rejoicing.
And so with MacCuUoch, though not quite so humorously so.

But with Ricardo the petrified-labor interpretation of
capital was not completely satisfactory. In his corre-

' James Mill, BUmenU of Political Economy, chapu iii, tec s.

RICARDO 41

spondence with MacCulIoch/* he regretfully admits, but
none the less stoutly argues, that exceptions must be recog-
nized to the general doctrine of proportionality between
exchange value and labor cost ; but

all the exceptions to the general rule come under the one of time —
I sometimes think that if I were to write the chapter on value again
which is in my book, I should acknowledge that the relative value
of commodities was regulated by two causes instead of one,
namely by the relative quantity of labor necessary to produce the
commodities in question, and by the rate of profit for the time

that the capital remained dormant I am not satisfied, as I

have often told you, with the account I have given of value,
because I do not know exactly where to fix my standard."

[He is] sure that the general idea is right, [but] I cannot get
over the difficulty of the wine which is kept in the cellar for
three or four years, or that of the ash tree which perhaps originally
had not 2s. expended upon it in the way of labor, and yet comes to

be worth £100 There is no difficulty in measuring all this in

a standard such as ours, but the difficulty is in showing why we
fix on that measure, and in proving it to be, what a measure of
value must be, itself invariable."

And on August 2, 1823, Ricardo wrote to Malthus:

As far as I have yet been able to reflect upon MacCulloch's and
Mill's suggestion, I am not satisfied with it. They make the best
defense for my measure, but do not really get rid of all the objec-
tions. I believe, however, that though not without fault, it is
the best (ibid., p. 160) .

That is to say, Ricardo believed that the variations due
to capital influences are, in short-time adjustments, rela-
tively unimportant, labor thereby remaining "for many
commodities a fairly good standard, and with many more
an excellent standard."

And now, very briefly, attention must be called, not to
the confusion of cost concepts involved in including inter-
est in cost while excluding rent, for this has already occu-
pied us overlong, and will later call for still more of time

^Publications of the American ^ Economic Association (J. H. Hol-
lander), VoL X, Nos. s, 6, pp. 70, 71, 177, 178.

" Ibid,, p. 96.

** Ibid,, p. 153.

VALUE AND DISTRIBUTION

and attention, but to the confusion of capita! concepts
necessarily associated with this cost discussion. How much
of truth is there, for example, in James Mill's notion that
labor cost cannot be translated into capital terms, since,
despite the fact that the employer must reckon his wage
payments as capital outlays, it remains true that both capi-
tal and labor have cooperated to produce the value in
question, capital having simply bought out the laborer
before the goods are marketed? And if it is true that the
production was not by capital alone, but by capital and
labor in co-operation, is this equivalent to asserting that in
poini of cost the production process was shared? And if
so, in what sense are these co-operating costs commensu-
rable and homogeneous ? The employer has incurred outlay
and abstinence costs, and possibly, also, as Mil! blunders
into recognizing, opportunity costs. As for the wage-
earner, he has undergone his labor burden, and having
received his wages therefor, would appear to have disap-
peared, for the purposes in hand, from the cost reckoning.
His wages, while costs to his employer, are not cost, but
compensation to himself. To the employer they are not
pain quantities, but outlays, and as such enter for hint into
the cost reckoning solely under the capital denominator.
And his are the only costs which have to do with the sale
aspect of the goods. The truth is that, under competitive
production, costs are mostly outlay costs, and, whether out-
lay or other, are mostly or entirely reduced to the capital
denominator."

This is the sense in which Ricardo and Mill were, for
the time being, using the term capital, viz., in the com-
mercial, competitive, acquisitive sense, inclusive of moneys,
credits, supplies, in short all forms of labor -employing or
gain-acquiring funds. But this is not at all the sense in
which the capital notion must sound, if anything is to be
done with the proposition that capital is stored-up labor in
such wise that interest may thereby be conceived as redu-
cible to wages. For in the competitive-acquisitive sense,
capita], so far at least as it is of the circulating sort, is
something that is constantly changing its form ; it is merely
basis for expenditure, and may be invested in labor or in
materials, or as the hire of capital goods, or as interest on

" But oullay co!ls themselves express in turn one aspect o£
opportunity cost, or may do so, viz., tbe value of the agentl in hand
for their best alternative application ; but all this must wait its time.

RICARDO 43

credit loans, or as rent of land, or for that matter in pretty
much an3rthing else; that is to say, it is a form of capital
not at all corresponding to capital taken in the techno-
logical sense, as one of the three primary categories of
socially productive factors, but is a form now labor, now
land, now materials, now machinery, now subsistence
goods, everything by turns and nothing long, with only
one unifying and constant characteristic, that it is all the
while a basis of charge in the individual computation of
co3ts, thereby a competitive category of the purest quality.
And, indeed, it may as well be noted in passing, that this
tripsutite division of productive agents is ( i ) purely social,
(2) purely technological. Competitive society has entirely
different categories. But the various concepts of capital
must await their turn for discussion ; see chapter xi.

CHAPTER IV

SENIOR

Any other cause limiting supply is just as cflficient a cause of
value in an article as the necessity of labor in its production. And,
in fact, if all the commodilies used by man were supplied by nature
without any intervention whatever of human labor, but were sup-
plied in precisely the same quantities that they now are, there is no
reason to suppose cither that they would cease to be valuable, or
would exchange in any other than the present proportions.^

No writer of the cost school is fairly to be charged
with overlooking the fact that utility is a fundamental
condition to the existence of value; utility and the market
demand resting upon it are merely assumed — ^taken for
granted — as reasonably going without saying. But water
and wine, iron and gold, etc., are taken as cases demon-
strating that the fixation of value — ^all the while inside the
limits set by utility — must be found on the cost side of the
value investigation. True, there are goods of a distinctly
scarcity sort, but these Ricardo and his associates left out
of the reckoning, as exceptional in quality and relatively
unimportant in volume; the investigation confined itself
mostly or entirely to cases of freely reproducible goods.

But Senior has something to add here; he puts the
causes of value as utility and scarcity. Ricardo, less accu-
rately, had said: "Possessing utility, commodities acquire
value from two causes, labor and scarcity." *

But evidently the truth was with Senior; the necessity
for the labor is in the scarcity ; labor and scarcity point to
one and the same fact. If goods were supplied gratui-
tously but in precisely the same quantities as now, the
exchange relations would be in no wise affected; the labor
requirement is purely an influence affecting the supply side
of the value equation.

^ Senior, Political Economy, 6th ed. (London), p. 24.
'Op, cit,, chap, i, sec. x, par. 3.

44

SENIOR 45

Ricardo had regarded labor cost, in the pain aspect, as
the essence and ultimate significance of real value, but had
regarded exchange value not as a question of labor content
but only of proportion to labor content. And he had
found infinite difficulty in getting interest costs into this
formulation — ^to say nothing of rent. Senior purports to
find a solution for this perplexity. Homogeneity between
capital cost and labor cost can, to his thinking, be worked
out through his discovery of abstinence pain as the condi-
tion to which the existence of capital is subjected. There-
by labor and saving are conceived to be reducible to a
common denominator of pain.

Just how much this doctrine would have profited
Ricardo is not altogether clear. It is to be remembered
that Ricardo employed pain cost only as, in terms of
ultimate content, the explanation of real value; and so far
as real value was concerned, he was not conscious of
needing more for the further strengthening of his doc-
trine. Exchange values were not, in his view, a question
of pain cost in any other sense than that, through wage-
cost outlays, exchange values become proportional to
labor pains. But could he not have made exchange value
a proportion resting upon the combined pain of labor and
of abstinence?

Recalling, however, that Ricardo worked out his doc-
trine only through the medium of outlay cost, as a question
of employers' wage expenditures, and was able to formu-
late his proportion only upon the assumption of such
homogeneity in labor as would require employers to pay
wages for it in precise proportion to its quality of burden,
it becomes evident that capital-saving, pain of abstinence,
can be fitted into the proportion only upon the twofold
assumption, (i) that saving is homogeneous in pain qual-
ity so that interest payments can be safely regarded as pro-
portionate to savings pains, and (2) that savings pain and
labor pain are in such wise homogeneous that labor pain
and savings pain command equal remuneration per unit of
pain. But whether or not, in close analysis, all this would
have turned out to be thoroughly practicable, it is certain
that Senior himself did not attempt the necessary analysis;
nor is it clear that he adopted Ricardo's distinction between
real value and exchange value.

46 VALUE AND DISTRIBUTION

Senior makes labor and natural agents the primary
factors of production; abstinence, while not primar>% is
none the less important:

The power of labor and of the other instruments which
produce may be indefinitely increased by nsing their products as the
means of further production. .... By the word abstinence we
seek to e^^ress that agent, distinct from labor and the agency of
nature, the concurrence of which is necessary to the existence of
capital, and which stands in the same relation to profit [interest]
as labor does to wages."

And plainly enough, from the point of view of laborer
and saver — in purpose and possibly in moral deserving —
interest is the reward of abstinence as wages are the reward
of labor. But equally plainly, from the point of view of
borrowers and employers, this identity of relation does not
hold; wages are paid for the services of labor as a pro-
ductive agent ; interest is not paid for the services of absti-
nence as productive agent, but for the services of capital.

To the objection to calling abstinence an active agent
of any sort, Senior replies: "To abstain from the enjoy-
ment which is within our power, or to seek distant rather
than immediate results, are [sic] among the most painful
exertions of the human will." *

However, even if it be true that abstinence is painful,
this is world-wide from showing that it is productive, and
still farther from showing that remuneration according to
productiveness and remuneration according to painfulness
must lead to one and the same result. But in point of fact
it is not clear that abstinence is an independent fact of
pain. When one has produced wealth the question before
him is when and how to spend it; the wealth is a good
thing to have; whatever grief there may have been in its
getting is all past, and the time for the other side of the
account has arrived. How to take one's enjoyment, the
manner as well as the time of it, may be a puzzlesome
matter and may give occasion to a deal of doddering. And
it is true that the abstinence may involve the denial of
satisfaction to a present and pressing want; it is equally
true, however, that the choice may lie between positive

• Senior, op. cit,, p. 59.

* Senior, op. cit., p. 59. Precisely in the same sense and for the
same argumentative end. Courcelle-Seneuil uses the term travail de
tipargne.

SENIOR 47

gratifications; it would be a waste of sympathy to grieve
with one who has to choose between two pleasures, and to
call either pleasure a paki because it is conditioned on
going without the other pleasure. The term sacrifice
might be serviceable here for expressing the truth of the
case, though the cost argument, as one of pain, would
not thereby be greatly strengthened. But all of this has,
of course, nothing to say as to the proposition that, with-
out some compensation, the considerations making for
present as against deferred enjoyment might be the stronger,
and the saving fail to take place: nor is anything to be
inferred as to this or any other justification, mor-
ally speaking, for the receipt of interest. But, in itself,
abstinence is not pain, and may not remotely imply pain;
it is often only one of the different data in a choice between
pleasures. Whether or not, were it always a pain, it could
be reduced to a common denominator with labor pain is,
therefore, not a pressing problem.

Bearing in mind the sense in which Senior stands for
the proportionality of value to cost, there need be no sur-
prise in meeting his assertion that neither profits nor
wages are costs, but only abstinence and labor .^

In a sense and as bearing on the concept of real value,
Ricardo would have assented to this; and as bearing on
market value also, Ricardo would have been keen to insist
that wages and interest are not ultimate determinants of
value but only that values are proportioned to them ; but it
would have sounded strange to Ricardo to hear it denied
with reference to market value that wages and interest are
oosts. This doctrine of Senior is, in fact, a definite aban-
donment of the notion of outlay cost ;• his doctrine of pro-
portionality does not perhaps thereby of necessity fail, but
it certainly awaits the making of its case. If labor and
abstinence cannot be made homogeneous and commensu-
rable as items of pain cost — and particularly, if abstinence
(or, for that matter, labor) is not necessarily a pain cost at

'Senior, op, ciU, p. loo.

* '^ant of tlie term sacrifice, or of some equivalent expression, has

led llr. Maltbus into inaccuracy of language When he termed

profit a part of cost of production, he appears to have meant, not
profit, but that conduct which is repaid by profit; an inaccuracy pre-
ciady smilar to that committed by those who term wages a part of the
cost of production; meaning not wages, which are the result, but the
labor for which wages are the remuneration.'' — Senior, op. cit., p. loo.

48 VALUE AND DISTRIBUTION

all, and if the common denominator of market value under
the entrepreneur outlay-cost analysis is abandoned, it only
remains to wonder what the solution will be.

But after all, Senior has a proportion doctrine; he says:
When the only valuable agents employed are those which are
universally accessible and are therefore practically unlimited in
supply [that is, when there is neither capital nor land, or where
there are unlimited capital and land, and so no differentiab of
advantage], the utility of the produce, or, in other words its
power [in exchange?], must be in proportion to the sacrifice made
to produce it, ... . since no man would willingly employ a given
amount of labor or abstinence in producing one conunodity, if he
could obtain more advantage by directing them ,[it] to the produc-
tion of another.^

This is one of Senior's italicized theorems; it is to be
objected that there is no reason why the utility of products
should be proportional , to the sacrifices of production,
unless upon the assumption not only of the homogeneity
of labor pain, but also of the reduction of utility to a mar-
ginal basis. Otherwise it must merely be true that, if a
producer could, with a given sacrifice, produce something
of greater utility than the thing in hand, he would change
his direction of production.

But in essentials Senior's doctrine is really a doctrine
of opportunity cost — requiring, however, some modifica-
tion. Opportunity cost may as well lie in some alternative
between pleasures or benefits, as between pains or burdens ;
at the day's-end margin, labor may be still a pleasant thing,
and yet be abandoned, if only the attractiveness of recrea-
tion be such as to outweigh the pleasures of the labor
process taken in conjunction with the advantages of the
resulting product. Among those different possibilities of
activity in which products outweigh burden, that one will
be selected in which the ratio of product to effort is most
favorable, or, more accurately, in which the surplus of sat-
isfaction is greatest.® The opportunity cost involved in
the case would be found in the advantages of that course

^ Senior, op, cit., p. 97.

'Patten and Dark have, perhaps, best elaborated this truth. And
it may be remarked that this also is not quite accurate; we are not
necessarily committed to any homogeneity-and-quantity calculus of
pleasure. All of the requirements of the case would be mM — and
better met — by substituting the clause: in which the surplus of satis-
faction is the most desirable.

SENIOR 49

of activity between which and the selected course the prob-
lem of choice was actually presented — ^that is, in the most
attractive course among the competing and vanquished
alternatives.

But Senior makes it clear that commodities may be of
sorts that cannot be reproduced, or that can be had only at
remote and uncertain intervals; here the values "are sub-
ject to no certain rule, and depend altogether on the wealth
and taste of the community." • That is to say, the supply
term being inelastic, the value is left to be determined by
the utility, or by the demand, or, at all events, by some-
thing taken for granted and unanalyzed on the demand
side. But, for most commodities — ^the kind that we are
considering — "the obstacle to the supply .... con-
sists .... in the difficulty of finding persons ready to
submit to the labor and abstinence necessary to their pro-
duction. In other words, the supply is limited by the cost
of production."**

Here it is evident that Senior abandons the opportunity
C(Mnputation and goes back to pain cost. For with him
abstinence is not intended to carry its possible implication
of the foregoing of products alternatively producible. He
is talking about the grief and groan of saving and the
burden and backache of labor; and in this absorption he
n^lects to ask himself the very simple question why in
actual society so many men are indisposed to enter the
business of hat production. Is it really true that the dis-
comforts of the occupation are an adequate explanation of
die facts?

Senior admits that, to be accurate for short periods,
his cost doctrine must presuppose perfect mobility in capi-
tal and labor ; but it is to be noted that even this inadequacy
would disappear if his doctrine of cost really rested on the
sacrifice of alternative opportunities. But admitting these
temporary variations, he reflects:

Political Economy does not deal with particular cases, but
with general tendencies; and when we assign to cost of production

• Op, cii,, p. 97.
»/«rf., p. 97.

so VALUE AND DISTRIBUTION

the power of regulating prices in cases of equal competition, w<
mean to describe it not as a point to which price is attached, but as
a center of oscillation which it b always endeavoring to approach."

And then he goes on to show that production in which

no appropriated natural agent has been concerned is the

only case of perfectly equal competition; all others are

cases of monopoly more or less marked.

Just why, from the point of view of outlay cost — the
only tenable point of view for the proportion doctrine — ^it
should be alleged that free competition fails, so long as, on
terms of paying the maricet charge, all competitors have
equal opportunity of enjoying the advantages attending
the control of appropriated natural agents, is not dear,
though it is clear enough from the point of view of pain
cost But Senior makes full and frank admission that, in
actually existing conditions, his doctrine of pain cost leads
nowhere, so far as explaining market values is concerned;
he has arrived at the very impasse that Ricardo faced :

It is difficult to point out an article, however simple, that can
be exposed to sale without the concurrence, direct or indirect, of
many hundred, or, more frequently, of many thousand, different
producers, almost every one of whom will be found to have been
aided by some monopolized agent. There are few things of which
the price seems to consist more exclusively of wages and profits
than a watch [MacCulloch's favorite example] ; but if we trace
it from the mine to the pocket of the purchaser, we shall be
struck by the payment of rent .... at every stage of its progress.
Rent was paid for the privilege of extracting from the mines the
metals of which it is composed; for the land which afforded the
materials of the ships in which those metals were transported to
an English port; for the wharves at which they were landed, and
the warehouses where they were exposed for sale; the watch-
maker pays a rent for the land covered by his manufactories, and
the retailer for that on which his shop is situated. The miner, the
shipwright, the housebuilder, and the watchmaker, all use imple-
ments formed of materials produced by the same processes as the
materials of the watch, and subject also in their different stages to

similar payments of rent When we speak, therefore, of a

class of commodities as produced under circumstances of equal
competition, or as the result of labor and abstinence, imassisted
by any other appropriated agent, and consider their prices as equal

"O^. cit., p. 103.

SENIOR SI

to the sum of wages and profits that must be paid for their pro-
duction, we do not mean to state that any such commodities exist
but that, if they did exist, such would be the laws by which their
prices would be regulated."

All of which may fairly be described as a dissertation, by a
great labor-value authority, upon how labor does not regu-
late value. But note that by some method of swift trans-
formation the point of view has now become that of
competitive-outlay cost, and that rent as well as interest
outlays are now included in the charges that go to make up
market price.

Nevertheless, Senior in his discussion of rent implies
his acceptance of the Ricardian doctrine that rent is not a
part of value-regulating cost. Still it must be said that he
does not so declare in terms; he does, however, point out
that Ricardo, in his controversy with Say, committed the
fault of inaccuracy; Ricardo should have made his stand
for price-determining cost at the intensive margin. And
with this amendment Senior appears to acquiesce in the
Ricardian doctrine, so far as it asserts that price tends to
coincide with the cost of that part of the product pro-
duced at the greatest expense : nor does he seem to recog-
nize that, from the point of view, not of social, but of outlay
cost, there is no reason why costs on better land should
be either greater or smaller than costs on poorer or on
marginal land.

But there is possibility or misinterpreting Senior at this
point — for it is hard to see how he can regard interest as
a value-determining cost and still exclude rent. For he
makes it clear that the distinction between rent and interest
ceases to have significance, as soon as the capital has
become the property of someone to whose exertions and
abstinences it did not owe its origin. And he rightly
remarks that there is, of course, abstinence in not selling
property, of no matter what sort or origin, and in not
spending the proceeds in current enjoyment. Evidently,
however, if this were fully worked out, all rent would
become interest. And Senior finds also great difficulty in

^Op, cit,, pp. iia-14. passim.

VALUE AND DISTRIBUTION

^

1

drawing the line between wages and rent, and inclines to
regard as rent all cases of extraordinary compensation fof
unusual ability."

" "We may be asked, then, whether the improvements which form
the greater part of tbe value of the soil of every well-cultivated district
are all. and forever, to be termed capital ; whether the payments
received from hia tenants by the present owner of a Lincolnshire
estate, reclaimed by tbe Romans from (he sea, are to be termed not
rent, but profit on the capital which was expended fifteen hundred
years ago. The answer is, that for all useful purposes the disltDcdon
of profit from rent ceases as soon as the capital, from which a pveo
revenue arises, has become, whether by gift or by inheritance, the propert?
of a person to whose abstinence and exertions it did not owe its creation.
Tbe revenue arising from a dock, or a wharf, or a canal, is profit in
the bands of the originai coHtlructor. It is the reward of his absti-
nence in having employed capital for the ptirposes of production instead
of those of enjoyment. But in the hands of his heir it has all the attri-
butes of rent. It is to him the gift of fortune, not the result of a
sacrifice. It may be said, indeed, that such a revenue is the reward
for the owner's abstinence in not selling the dock or the canal and
spending its price in enjoyment. But the same remark applies to every
species of transferable properly. Every estate may be sold, and the
purchase money wasted. If the last basis of classification were
adopted, the greater part of what every Political Economist has termed
rent must he called profit."— O/i. cil., p. lag.

does not appear to experience the difficulty

preting Senior's position as to the relations of
seems impossible, upon any classical level of
t payments within pain cost : it is equally diffi'
cult to excJude rent payments from outlay costs, unless the distinction
is set up between value-determining and value-determined costs.
Whittaker writes (Whittsker, op. cil.. pp. 102-4):

"According lo Senior, land rent enters into price. So far both
'profits' of stock and rent of land exist to destroy the proportionality
of values to labor cost. This is the result to which Malthui' criti-
cism of Ricardo led. But Senior's criticism goes beyond Malthus'.
Wages, as an element in entrepreneur's cost, are not even in proportion
to the labor remunerated. That is to say, that is what Senior says,
if we keep his thought while reforming his language. He states that
the actual income, which we always call wages, is realty composed in
many cases of wages, profits, and rent. He says this because he wishes
to define wages as that remuneration which is in proportion to sacri-
fice. .... Senior's rem lo ikUl is really on exctsi of aiagei over the
amount required to be in proportion to disutility" (pp. toa, 103),

"Piecing together for ourselves what Senior says, it is his positioa
that the value of commodities must include (if the commodities are to
be produced) rent, profits, and wages ; rent and profits, being different
percentages in the whole entrepreneur's cost of different goods, make
values out of proportion to labor cost ; there is no necessity of consid-
ering profits as an element in entrepreneur's cost approximately in prO'
portion to wages ; and lastly, wages are not in proportion to I^xir,
which is disutility" (p. 104}.

CHAPTER V

JOHN STUART MILL

With John Stuart Mill the transition is approxi-
mately complete to the point of view of entrepreneur
cost.

We need delay long neither upon his doctrine of the
determination of wages — the wage-fund theory for short
periods, and the population-subsistence doctrine for long-
time tendencies — ^nor upon his determination of interest
payments according to the cost-abstinence analysis as
related to the supply of capital; no matter how these
outlays get determined, it is sufficient, for present pur-
poses, to note that, accepting them as the market gives
them. Mill treats them as items of outlay cost, and finds
market values to be fixed according to the law of costs as
formulated in the entrepreneur sense — ^but all the while
with two modifications, one of addition and one of sub-
traction: for, following Ricardo's doctrine, rent is made
no part of price, and wages of superintendence, as an
element in minimum profit, are included in price. Mini-
mum profit is defined as "that which is barely adequate,
at the given place and time, to afford an equivalent for
the abstinence, risk, and exertion implied in the employ-
ment of capital."^ After covering all outlays, and after
remunerating the capitalist owner for forbearing to con-
sume, there must be something left to recompense the
labor and skill of the person who devotes his time to the
business; but how much? The amount is variable
depending on the amount necessary to compensate the
abstinence, and still more variable to compensate the
risk. "That portion, too, of the gross profit which forms
the remuneration for the labor and skill of the dealer or

^John Stuart Mill, Principles of Political Economy, Book II, chap.
XV, sec 2,

53 -

54 VALUE AND DISTRIBUnON

producer is very different in different employments."*
Mill does not say why, but cites apothecaries as an exam-
ple of a trade where "a considerable amount of labor and
skill is required to conduct a business necessarily of limited

extent A higher than common rate of profit is

necessary to yield only the oxnmon rate of remunera-
tion After due allowance is made for the various

causes of inequality" giving greater or less wages of super-
intendence or of risk, "the rate of profit [interest] on capi-
tal in all employments tends to an equality." •

There is certainly no hint of opportunity cost here; so
far as any determinant of minimum profit is indicated, it is
one of pain or burden. But at any rate, as it is elsewhere
said, "the cause of profit is that labor produces more than
is required for its support." *

Still it is not clear whether this phrase, "required for its
support," points to a minimum-of-subsistence principle, or
to a standard-of-living principle, or whether the proposi-
tion is a mere mathematical truism. "The reason why
capital yields a profit is because food, clothing, materials,
and tools last longer than the time which men take to pro-
duce them:" so that there is a surplus to the capitadist
This might appear to look toward some subsistence doc-
trine, if only Mill had not elsewhere repudiated that doc-
trine,— at all events for short-time adjustments, — setting up,
instead, the capital limitation and wage- fund determination :
but the better interpretation seems to be merely that, prod-
ucts having exceeded outlay, there is a remainder left over
for the employer, "If the laborers of the country collect-
ively produce twenty per cent, more than their wages,
profits will be twenty per cent., whatever prices may or may
not be." " This is Ricardo's ratio idea.

Outlays for materials and implements are resolved into
wage payments : "he thus repays to a previous producer the
wages which that previous producer has paid."* True,
there is a profit with it, but had the present em-
ployer produced these supplies for himself, there would

■Mill, op, cit., sec. 3, * Ibid,, sec 5.

* Ibid,, sees. 3, 4. *Ibid,, sec. 6.

*Ibid,, sec 5.

JOHN STUART MILL 55

also have been, to be reckoned in the cost, a profit for him-
self (but how much is again not said) ; and so in the sum-
ming up, ''all the advances have consisted of nothing but
wages," excepting what have already gone for profit.
Note that profit in Mill's use here includes not only interest,
but something more than interest, something for superin-
tendence and risk.

The gains of the capitalist employer depend, then, on

the magnitude of the produce; .... secondly, the proportion of
that produce obtained by the laborers themselves; the ratio — the
raie of profit, the percentage on the capitals-depends on the
second of the two elements, the laborers' proportional share, and
not on the amount to be shared We thus arrive at the con-
clusion of Ricardo and others, that the rate of profit depends on

wages However, .... instead of saying that profits

depend on wages, let us say — ^what Ricardo really meant — ^that
they depend on the cost of labor.*

It is well to note in passing that this was not what
Ricardo meant: Mill is hesitatingly and gradually deserting
Ae doctrine of relative shares in the product — ^the ratio-
value concept — and is going over to the notion of profit,
not as fraction but as absolute residuum, — surplus above out-
lay : **What labor brings in to the laborer and what it costs
to the capitalist, are ideas quite distinct, and which it is of
Ae utmost importance to keep so." ® True, there are all
levels of wages, but if at the same time the efficiency is of a
sort to correspond, the cost of labor to the capitalist may be
no greater.

And note again that there is still nothing here about
causes; the reasoning is entirely mathematical; the prob-
lem is not treated as distributional in the sense of looking
for the ultimate forces of determination, and one is left
to wonder how, efficiency remaining the same, etc., the
wages should so rise or fall, or why the supplies which the
laborer buys with his wages become more or less costly.
If one resorts to the wage-fund doctrine for help, he is
confronted by the suspicion that this doctrine also is merely
mathematical, and as such, is a truism. Thus far, then, the
entire discussion has amounted to a descriptive treatment
of wages, interest, and profits, as elements entering into
cost of production; and so far as the exposition has yet

^Jbid., sec. 7. •/Wd., sec. 7.

56 VALUE AND DISTRIBUTION

proceeded, these remunerations stand as ultimate opaque
unyielding facts, unexplained and irreducible data, furmsh-
ing the basis for entrepreneur cost.

Turning now to Mill's formal discussion of value in
the chapter under that caption, and especially to his dis-
cussion of "Cost of Production in Its Relation to Value/**
we find it said that value, no matter under what law of
return, is always the result of demand and supply. The
minimum price must be sufficient to pay the cost and the
ordinary expectation of profit, else capitalists will not go
on producing the commodity.

Note that profit is here treated as something over and
above cost, cost being regarded as substantially the equiva-
lent of expenditure. "They will not even go on producing
at a profit less than they can live upon" — seemingly a doc-
trine of subsistence minimum for employers ; but what will
they do instead? Doubtless, as it is said, they may submit
to temporary loss in hope of better times, but, broadly, "the
cost of production together with the ordinary profit may be
called the necessary price."

And here, again, we remark there is as yet nothing to
indicate how much must be this necessary profit, or what
are the ultimate forces in its determination. But Mill
shows that by the influence of prices upon the outflow and
inflow of capital, profits are always tending toward equal-
ity; and precisely this trend toward equality is presented
as the guarantee that things will exchange against one
another in the ratio of their costs. Perhaps, af<ter all, this
may, for present purposes, be accepted as a sufficient
explanation for the determination of profits, so far as
profits are held to mean interest only; but as so under-
stood, the doctrine, fully worked out, will resolve itself into
a case of opportunity cost.

Mill's "Ultimate Analysis" ^* is most difficult of ade-
quate summary or even of fair paraphrase.

Tracing capital to its ultimate origins, Mill finds that
labor is "so much the principal cost of production as to be

* Mill, op, cit; Book III, chaps, i-iv.
" Mill, op. cit.. Book III, chap. iv.

JOHN STUART MILL 57

nearly the sole cost." And so it is approximately accurate
to resolve interest into wages; so cost, as regarded from
the employer's point of view, is a question of wage out-
lays,— ^wages, and not labor, being from this standpoint the
basis of cost But wages are cost only as modified by
considerations of efficiency, that is, only with reference to
the quality and quantity of product. In substance, the doc-
trine is that a given sum of products costs the wages
directly or indirectly paid out to produce it But, after all,
values of commodities are exchange relations of commodi-
ties with one another ; values are, then, purely relative ; and
therefore costs of production as bearing on value are not
absolute but relative quantities. So value relations are
independent of influences of cost, whether of rise or of fall,
if only the commodities under comparison are proportion-
ally affected. "Otherwise, there could be no such thing
as a real rise of wages ; for if wages could not rise without
a proportionate rise in the prices of everything, wages could
not rise at all." But if wages are higher in one industry
than in another, values will be affected through costs.

Note that these differences in wages are not explained
as due to differences in the values of the products ; it is just
the other way about. "Things .... which are made by
skilled labor exchange for the products of a much greater
quantity of unskilled labor, for no reason but because the/
latter is more highly paid." Thus there is no proportion/
of value to labor, 15ut only to entrepreneur costs ; and these
costs are presented as causal and ultimate. "So wages do
enter into value; the relative wages of the labor necessary
for producing different commodities affect the value as
much as the relative quantities of labor The abso-
lute wages paid have no effect upon value, but neither has
the absolute quantity of labor." But, in substance and
effect, values are nevertheless proportional to quantity of
labor: "In considering, however, the causes of variations
in value, quantity of labor is the thing of chief impor-
tance," for that varies now with one commodity and now

S8 VALUE AND DISTRIBUTION

with another, but variations in wages are usually general,
and thus, by the very fact of being general, have no signifi-
cance for value.

Note, however, that this proposition really goes no
farther than to say that variations in value come, not
through a rise in general wages, but through changing
methods of applying labor to production. But changes in
machinery and appliances are at least as frequent and as
radical as changes purely of the labor sort; it therefore fol-
lows that variations in values due to causes working on the
side of profits (interest) are at least equally important with
those working on the side of wages.

But all of this must allow for modification through the
bearing of profits (interest+risk-charge-f- wages of super-
intendence) on value, in so far as some industries are more
capitalistic than others in their methods of production.
But here also it is evident that not absolute profits but only
relative profits have significance for exchange relations.
And, as Mill rightly insists, profits are found to differ in
this relative way, butchers, for example, gaining higher
profits than bakers. And time, with its correlative of inter-
est, also becomes of great importance, as in the aging of
wine.

[If to] attain the desired quality, the wine requires to be k^t
five years, the producer or dealer will not keep it, unless at the
end of five years he can sell it for as much more .... as amounts
to five years* profit, accumulated at compound interest Here, then,
is a case in which the natural values .... do not conform to cost
of production alone, but to cost of production plus something else.
Unless, indeed, for the sake of generality in the expression, wc
include the profit which the wine merchant foregoes during the five
years, in the cost of production of the wine: looking upon it
as a kind of additional outlay, over and above his other advances,
for which outlay he must be indemnified at last.

Evidently Mill is not entirely clear as to the basis on
which this time charge is to be counted a cost, if, indeed, it
is to be so counted at all ; in a sort, values seem to conform
"to their costs of production plus something else. This,
however, disturbs the general consistency of the theoreti-

JOHN STUART MILL 59

0

cal formulation ;" there may, then, after all, be nothing for
it but to recognize opportunity cost in this exceptional case.

Mill does not, however, in terms commit himself abso-
lutely to this view; but "all commodities made by waiting
are assimilated, at least approximately, to the wine in the
preceding example/' And he closes with regarding these
time-charge items as, in the relative bearing, very impor-
tant influences upon values, although nothing further than
this suggestion of opportunity cost is accomplished in the
direction of telling why. At any rate, it is clear that "in
comparison with things made wholly by immediate labor,
profits enter more largely into the cost of production" of
all commodities made by machinery; whereupon there fol-
lows an excellent example of all this, under cover of which
the explanation meanwhile gets forgotten; which, by the
way, is precisely as far as Ricardo got, the only difference
being that Ricardo was perfectly aware that something
was the matter, while Mill is not. In general, Mill appears
to hold by pain or abstinence cost as the ultimate explana-
tion of interest. But if neither of these things is adequate,
perhaps, he thinks, opportunity cost may have some efficacy
for the case.**

But whatever may be the explanation, it stands for true
that, because of the differing degrees in which production
is capitalistic, "every rise or fall in general profits will
have an effect on values; not, indeed, by raising or lower-
ing them generally, but by altering the proportions in which
the values of things are affected by the unequal lengths of
time for which profits are due."

But to return to the cause underlying the values of these
cost items of outlay : In the main the explanation is found by
Mill in the fact that these items themselves depend for their
value on their respective costs of production. When, how-
ever, these are not cost but scarcity values, they are equally
and similarly carried over as costs into the value of the
product The typical case of this sort of cost is found with
limited natural agents, as water-powers and the like. But
these cases, not being marginal, have, as Mill appears to
think, no bearing upon value. And this brings us to the

**''[With Mill] the profit of capital is stated explicitly to be the
remniiermtion of abstinence, but nothing is made to depend on this.
AbstineDce is not elerated into a position logically co-ordinate with
labor, nor are th^ two conceived of together as constituting subjective
co«t% as distinguished from entrepreneur's costs, consisting in (Mrofits
and wages." — Whittaker, op, cit,, p. xo6.

6o VALUE AND DISTRIBUTION

question— does rent enter into cost? "No one can deny
Uiat rent sometimes does enter into cost of production ; if I
buy or rent a piece of land and build a cloth manufactory
on it, the ground rent forms legitimately a part of my
expenses of production which must be paid by the product."

But this does not necessarily imply that the value will
thereby be the greater, that is, that these costs are value-
determining, ^d in chapter v, on "Rent in Its Relation
to Value," Mill writes: "Rent forms no part of the cost
of production which determines the value of agriculttu'al
products" — an assertion which must stand either as setting
up an entirely indefensible distinction between agricultural
and other products, or as imposing the conclusion that not
all outlays involved in production may be ranked as value-
determining costs, but only those involved in marginal
production — which opens up questions too wide-reaching
for present discussion, viz., whether the marginal product
has any peculiar value-determining quality, and whether, if
it has, we shall find this marginal item of product to be a
marginal-man item or a marginal-land item.

Mill, however, elsewhere says: "But when land ca-
pable of yielding rent in agriculture is applied to some other
purpose, the rent which it would have yielded is an element
in the cost of production of the commodity which it is
employed to produce," *^ — a most important and much-dis-
cussed admission — still, however, leaving it possible that no
influence upon value need be inferred, if only it be defen-
sible to distinguish between different outlays in their bearing
on costs; or, if it be somehow possible to exclude these
cost rents from marginal, price-determining outlays. But
for our present purposes it is sufficient to remark that this
case of rent cost, accepted by Mill, is distinctly an illustra-
tion of the opportunity-cost principle.

In point of fact, also, all this proof that cost is impor-
tant only as relative cost is, in last analysis, merely another
opportunity-cost doctrine. The main difference in this
regard between Mill and Ricardo is that Ricardo attempted
far more than did Mill in the way of explaining the reduc-
tion of wages and interest to a basis of homogeneity,
and of tracing the proportionality of outlay cost and of
market value to the labor costs of real value. Ricardo
can hardly be said to have succeeded: Mill hardly tried.
But it is, at any rate, sufficiently evident that capital and

"Mill, op, cit,, Book III, chap, vi, prop. 9.

JOHN STUART MILL 6i

labor services, under the form of interest and wages, by
the very fact that they are producers' outlays reckoned in
terms of money, have somehow for the purposes in hand
been reduced to a common denominator of value. The
sheer obviousness of it all suffices, in Mill's view, to excuse
him irom all labor of attention or examination.

But this homogeneity being assumed as a datum, some-
thing is done by Mill toward tracing out the determination
of these costs, non-relatively, that is, as costs in the ordi-
nary sense rather than as ratios or distributive fractions.
Interest is explained as determined through abstinence as
cost, — ^wages by the proportion between capital and the
laborers employed by capital, — profit by what is left from
price after the expenses of production are covered.

Nor does the mechanism by which market value
becomes proportional to outlay cost, or, more accurately,
to entrepreneur cost as a whole — rent, however, excluded —
receive further elucidation than is contained in the doctrine
of the mobility of capital, which, by the way, is a simple
application of the principle of opportunity cost. The pro-
portionality of value to profit, so far as profit is some-
thing other than interest, is left to be explained by
"normals."

V

CHAPTER VI
CAIRNES

Cairnes's special task was the rehabilitation of the labor-
cost theory of value, after the damage visited upon it
through the half-hearted support or the semi-abandonment
of John Stuart Mill. In the Leading Principles Restated,
labor cost is set up as the value determinant — not, however,
labor cost in terms of time, but in terms of pain, burden,
irksomeness. Nor does the doctrine appear to conceive
labor as having in itself and in its own right, as an expres-
sion of pain, an independent value of its own, which value
is, as cost, carried over into the exchange value of the
commodities produced by it. Often the thought is more
like that of Ricardo, in recognizing, though not with full
consistency, the principle of proportionment of value to out-
lay cost; occasional recourse, that is to say, appears to be
made to the mechanism of entrepreneur expenditure. But
on the whole Cairnes's doctrine seems rather to be that of
labor-purchase cost

Cost means sacrifice, .... and the problem of cost of produc-
tion as bearing on the theory of value, is to ascertain how far and
in what way the payment thus made by man .... in the barter
between him and nature, determines or otherwise influences the
exchange value of the products which result.*

Under Cairnes's treatment the issue between labor-pain
cost and entrepreneur cost is for the first time in English
economics clearly drawn. Ricardo, it is true, had worked
out a doctrine of entrepreneur cost based upon labor cost
as its underlying determinant, but had too often failed both
of clarity and of strict consistency in preserving the sepa-
rateness and the antithesis. Senior had taken the pain-cost
point of view, but, scarcely attempting the reconciliation,
had over and again lapsed into entrepreneur-cost analysis.

*J. E. Cairnes, Some Leading Principles of Political Economy
Newly Expounded, chap, iii, sec. 5.

62

CAIRNES 63

Mill, while in the main an exponent of entrepreneur cost,
had, at fairly frequent intervals, made some more or less
vague appeal to labor-pain cost as basis. But, whatever
else may be said in criticism of Caimes, it must be admit-
ted that, in full consciousness of this confusion, he sets
himself earnestly at work to avoid it and to make the appli-
cations and the limitations of the labor-cost doctrine clear
and precise.

But following upon this preliminary sketch of Cairnes's
position, some detail of exposition and criticism is now
called for. It is, indeed, to be admitted that as cost items,
choice must be made between labor as against wages, and
between abstinence as against interest:

Of all ideas within the range of economic speculation, the two
most profoundly opposed to each other are cost and the reward of
cost — the sacrifice incurred by man in productive industry, and the

return made by nature to man upon that sacrifice G>st and

remuneration are the economic antitheses of each other; so com-
pletely so that a small cost and a large remuneration are exactly
equivalent expressions.'

But if, on the other hand, wages and profits are to be
accepted as the ultimate items, costs, as Caimes argues,
must increase as product increases, since wages and prod-
ucts increase with product and exhaust the product; an
increase in the general productiveness of industry would
require

that wages and profits .... as an aggregate would rise exactly
in proportion as industry had become more productive, and the cost
of producing a given commodity, measured in wages and profits,

would then remain precisely as before There would be less

labor and abstinence exerted, but this smaller exertion being more
highly remunerated, the cost, measured in the remuneration, would
suffer no change: (Und.)

all of which, it is to be remarked, is equally serious for
labor as the value determinant; costs, from any point of
view, are significant, for value purposes, only as ratios, as
purely relative facts.

'Ctimes, op, cii,, chap, iii, sec. 3.

64 VALUE AND DISTRIBUTION

But that solely in this relative sense are entrepreneur
costs conceived by Mill to be relevant to value is not appre-
ciated by Caimes ; though he later makes it quite clear that
in no other than this relative sense has labor cost any bear-
ing on the case.'

But his objection to the wages-and-profit method of
explanation goes deeper than this ; he rightly condemns the
method as fundamentally explaining nothing; wages and
profits are mere remunerations for productive services; as
later thought would term them, they are mere distributive
shares. The various distributive shares do, of course,
exhaust the value product. But to call them, or any of
them, costs, and to suppose that thereby the value of the
costs is explained, is the sheerest of circular reasoning — if,
indeed, it is not worse:

If it be true that the wages and profits received by the pro-
ducer of a commodity are the measure of its cost of production,
then it follows that all commodities whatever, it matters not under
what circumstances produced, whether of competition or of monop-
oly, exchange and cannot but exchange, in proportion to their costs
of production In truth, the principle that "cost of produc-
tion determines value" becomes, when thus understood, little more
than an assertion of an identical proposition, since it merely amounts

'This, as is well known, is emphasized by Caimes with reference
to international values and international trade, under the principle of
comparative costs. In this connection, however, the case is put by him
much more strongly than it will stand : "International values • • • • are
admittedly, or at all events arc demonstrably .... not governed by
cost of production, and we have thus normal values which are not con-
nected with cost, but come under the influence of some other prin-
ciple What, for instance, is now the grand argument with the

people of the United States for the maintenance of protection? Why
the high cost of production in that country? And what is the evi-
dence of this high cost of production? Simply the high rates of wages
which prevail. How, they ask, can we, with our high-priced labor,
compete with the pauper labor of Europe? I must frankly own that
accepting the point of view of the current theory of cost, I can find no
satisfactory reply to this question, and I am quite sure that Mr. Wells,
who implicitly adopts this point of view, has wholly failed to furnish
one" (Cairnes, op, cit., chap, iii, sec. 4). Without doubt, the doc-
trine of comparative labor cost may often, — perhaps commonly and
adequately, cover this case ; but so does the doctrine of comparative
entrepreneur cost; and so, for that matter, would the doctrine of
displacement or opportunity cost.

CAIRNES 65

to saying that values are in proportion to the aggregate of the
elements of which they are made up/

It must, of course, be held in mind that all of this dis-
cussion assumes, in conformity with the classical doctrine
and with Mill's version of it, diat rent may be and must be
excluded from the cost category. But even so, Caimes's
attack looks to be more serious than it really is ; this is in
part due to the ambiguous use of the term profit: Cairnes
is using the term as the equivalent of interest, the reward
of abstinence. But limited to this meaning, Mill would not
and could not have assented to the proposition that wages
and profits exhaust the value product; only when the
unnecessary profits as well as the necessary — ^the quasi-rent
share as well as the cost share in the remunerations of
cntrepreneurship — are accounted for, can it be said that
wages and profits exhaust the total value product. In Mill's
use of terms, cost of production commonly falls considerably
short of the full value of the product ; that is to say, there
are unnecessary profits; there are, as later thought would
put it, non-marginal producers to whom are accruing quasi-
rents of production.

But for the purposes of the present issue, the general

nature of cost, Cairnes correctly interprets Mill's position

and makes admirably clear the contrasted points of view:

Mr. Mill discloses with perfect clearness the line of thought by
which the view in question has been reached: "What the produc-
tion of a thing costs to its producer, or its series of producers, is
the labor expended in producing it. // we consider the producer
the capitalist who makes the advances, the word labor may he
replaced by wages: what the produce costs to him is the wages which
he has had to pay/' In other words the point of view is shifted
from the ground of human interests to the partial and limited
standpoint of the capitalist employer; and the cost of producing an
article, which really consists of the sacrifices required of human
beings for its production, is only considered so far forth as it is
"cost to him/' that much more important portion of the cost which
is cost to the laborer being put altogether out of view. This point
of view being once taken, the rest follows simply and naturally.
What is cost to the capitalist, that is to say, his advances, consist-
ing of the profits of previous producers as well as of the wages of
laborers, profits as well as wages, must evidently be included in
cost; and not only the profits of previous producers, but .... the

* Cairnes, op. cit., chap, iii, sec 3.

66 VALUE AND DISTRIBUTION

profits of the producer of that particular commodity whose cost
is considered— an extension of the theory which involves this
curious consequence, that among the elements of the cost of pro-
ducing a commodity is counted [part of] the profit obtaine<l on that
commodity by the producer, a profit which I need scarcely say is
not realized till after the commodity is produced. .... That the
laborer's share in the industrial sacrifice is by the current doctrine
excluded from the conception of cost of production docs not
appear to have been seen, or, if seen, to have been adequately
appreciated by its adherents. Mr. Mill's language seems to imply
that the wages advanced by the capitalist, .... though he admits
that they only represent "the cost of producing to him" may yet in
some way be taken to represent the cost to the laborers abo, for,
having dealt with this portion of the case, he leads on to the
next with the words : "Thus far of labor or wages, as an element of

cost of production There is also capital, etc" But I must

absolutely deny that wages can in any way be taken to represent
the labor element in cost of production. Wages, as Mr. Mill
observed in the passage already quoted, may be regarded as cost
to the capitalist who advances them; though it would perhaps be
more correct to say that, so far as they go, they measure his cost,
which really consists in the deprivation of immediate enjoyment
implied in the fact of the advance. But to the laborer wages are
reward, not cost ; nor can it be said that they stand in any constant
relation to that which really constitutes cost to him.*

Cairnes's affirmative position also is clearly set forth :

Cost means sacrifice, and can not, without risk -of hopelessly
confusing ideas, be identified with anything that is not sacrifice. It
represents what man parts with in the barter between him and
nature, which must be kept eternally distinct from the return made
by nature on that payment. This is the essential nature of cost:
and the problem of cost of production as bearing on the theory of
value is to ascertain how far and in what way the payment thus
made by man to nature in productive industry determines or other-
wise influences the exchange value of the products which result*

Bearing in mind, then, that labor-pain cost is here set
up as the determinant of value, it remains logically open to
Cairnes to take the position that wages and profits arc
results of value and not causes — are distributive shares
and not costs. This is, in fact, his view; product — in the
sense of value product — is the source and determinant of all

'Cairnes, op, cit., chap, iii, sec 3. *Ilnd., chap, iii, sec 4*

CAIRNES 67

remunerations. This, of course, leaves it the more neces-
sary to discover the determining causes of value. Whether
the fact that value is proportional to labor fully satisfies
this requirement must for the present be left as an open
question. At any rate, Caimes declines to admit that
wages and profits are in any sense determinants :

The value of the product resulting from industry forms ....
the source from which .... industry is remunerated. Nor is this
conclusion invalidated by the fact that .... the laborer commonly
receives his reward in the form of wages advanced by the capitalist
before the product is completed; since what he receives is subse-
quently recouped to the capitalist, the sum being drawn from the
value of the product ; so that it is still the value of the product from
which the remuneration of all concerned in the creation of that
product ultimately comes. Wages and profits in each branch of
industry are thus derived from the value of the conmiodities pro-
ceeding from that branch of industry, and, as ... . wages and
profits also absorb the whole of that value, it follows that, other
things being the same, the aggregate of wages and profits received
by any given group of producers will always vary with the aggre-
gate of the value of the commodities which they produce^

And then follows this remarkable and important passage:
Where wages and profits, therefore, in different occupations are
.in proportion to the sacrifices undergone, the value of the com-
modities proceeding from those occupations will always be in pro-
portion to the same sacrifices, that is to say, the commodities will
exchange in proportion to their [labor-pain] costs of production.

Precisely how much does this mean? Since it is prod-
uct which fixes compensations, it must follow that to assume
wages to be in proportion to the sacrifices undergone is
merely another way of asserting a proportionality of pro-
duction results to labor burdens ; and so it is, for example,
true enough that where in two different industries the value
products are equal, and the pains of production are equal,
the exchange relations will be those of equal values for
equal labor pains. This is susceptible of being interpreted
as a mere mathematical re-expression of the assumptions
made. But is there more in it? Does the thought go upon
the Ricardian principle of proportionment of entrepreneur
cost to labor-pain cost? Have we here any attempt to
explain entrepreneur costs, or to make use in any way of

^ Ibid,, chap, iii, sec 5.

68 VALUE AND DISTRIBUTION

the entrq)reneur mechanism for the purposes of the value
problem? The thought is difficult of interpretation — per-
haps impossible of interpretation — ^in this regard.

But when and how far will this proportionality between
the labor burdens invested in commodities and the exchange
relations of these commodities hold ? To the extent that the
proportionality is found to hold, and only to this extent, and
for the conditions under which it holds, and only for these
conditions, does Cairnes stand for the determination of
value by labor cost. It may, indeed, turn out that this
labor-cost determinant applies only within very narrow
limits ; but, at any rate, so far as it may be made to apply,
something will have been done toward attaining an expla-
nation of value in terms of this ultimate cost; for in
Cairnes's view there is no justification for talk of any other
kind of cost than this of labor pain. Pain is presented as
the condition on which all commodities, or, at all events, all
freely reproducible commodities, arrive at man's disposal —
it is their purchase price, their cost in the barter of labor
for product between man and nature. Mill's fallacy in calling
the entrepreneur's outlays costs of production lay, Cairnes
insists, in the patent fact that the entrepreneur is not the
producer, excepting, of course, to the extent that he is him-
self a laborer. Not the employer in the shade, Cairnes
urges, but the wage-earner sweating in the sun is the
person submitted to the pains of production. True, the
laborer gets a reward, a wage, more or kss adequate; but
this reward is not his cost; he is the producer — actually,
visibly, mechanically, technologically — and his pain is the
cost through which and on terms of which human society
obtains possession of its store of consumable goods. And
it is hopeless to attempt the justification of the entrepre-
neur notion of cost as, in terms of expenditure, a market
expression of the underlying and ultimate labor-pain reality.
Ricardo, it is true, had attempted this, or, more accurately,
had assumed it out of hand; but neither to Mill nor to
Ricardo was it open; the pains are not in any constant

CAIRNES 69

or necessary relation to the wages received, else in differ-
ent occupations and in different countries, and at different
times in the same country, wages could not vary as they are
found to vary.

If wages stood in any constant relation to that which really con-
stitutes [the laborer's] cost, .... wages in all occupations, in all
countries, and in all times would be in proportion to the severity of
the toil which they recompensed.'

' Ibid; chap, iii, sec. 3.

Ricardo had assumed without argument, that, as a general proposi-
tion and in broad averages, wages are paid in proportion to the pain-
fulness of the employment: thus the entrepreneur outlays and the
attendant market values become proportional to the pain costs of real
yalue.

In full sympathy with this general point of view, and in the full
conviction that the only definitive and really explanatory concept of
cost is the pain-cost concept, Caimes is yet conscious that wages — labor
cost to the employer-r-are in many cases far wide of proportionality to
labor pain. He therefore sets himself to Ricardo's unfinished task, that
of finding out when and why and with what necessity of supplementa-
tion, the labor-cost theory may still be regarded as tenable.

Ricardo had said that the remuneration must be proportionate to
the disutility — the pain — of labor, else the laborer would change to
other lines of production, and thereby a readjustment of supplies of
product and supplies of labor take place so as to bring the situation
back into nearer approach to the normal. That, at the best, this
doctrine could go no farther than to assert that the compensation must,
at the minimum, be proportional to the disutilities, neither Ricardo nor
Senior had ever perceived : nor by either had allowance been made
for differences in skill and productiveness relatively to the pains of
productive effort.

Caimes, however, makes this allowance. He sees plainly that the
rate of remuneration is derivative from the value product, and the
distinction is clear in his mind between mere weight-and-tale produc-
tiveness and value productiveness: "Under a system of separation of
employments, industrial rewards consist for each producer, or, more
properly, for each group of producers, employed on a g^ven work, in
the value of the commodities which result from their exertions. I say
in the value of the commodities not in the commodities themselves. ....
The value of the product resulting from industry forms thus the source
from which .... industry is remunerated. The laborer commonly
receives his reward in the form of wages advanced by the capi-
talist. .... What he receives is subsequently recouped by the capi-
talist, the sum being drawn from the value of the product ; so that it is
still the value of the product from which the remuneration ....
comes." — Cairnes, op. cit,, chap, iii, sec. 5.

But all of this being true — and all of it is in point of fact true —
what have costs, in the sense of pain, to do with the case? How can
they be determinant of value or value be proportional to them? The
labdr may be the mechanical cause of the product, but with all the
existi^ differences in skill, and with all the differences in the felt

70 VALUE AND DISTRIBUTION

But how far can the principle that values are propor-
tional to the pains of production be extended? Not far
certainly, and Cairnes did not claim it to be far :

Wages and profits will be in proportion to the sacrifices under*
gone wherever, and only so far as, competition prevails among
producers — wherever, and so far only as, laborers and capitalists
have an effective choice in selecting among the various occupations
presented to them in the industrial field.*

No perplexity need be caused by the fact that the dis-
cussion refers here only to the proportion between remun-
erations and pains, since, as Cairnes has sufficiently shown,
and as, in fact, all cost theories assume, values of products
and remunerations of agents are parallel, and indeed, sub-
stantially identical facts. But in order that the remunera-
tions be proportionate to the pains must there not also be
necessarily implied an equality of productive powers?
Otherwise it will not be true that "each competitor, aiming
at the largest reward for his sacrifices, will be drawn toward
the occupations which hai>pen at the time to be best
remunerated/' ^^ but only to the occupations in which his
remunerations arc his best, which is, by the way, precisely
the manner and the direction in which each and every man
in actual society is now drawn. True, the supply of prod-
burden of labor, how can labor be determinant or measure of value? —
that is, be that kind of cost which will express itself in exchange values
and determine them ? For this Cairnes's answer is that among men of
the same grade of skill, and under substantially similar conditions^
and only here — can it \ye said that painfulness of employment commands
wages to correspond : so only here are "wages and profits .... in pro-
portion to the sacrifices undergone," and therefore here only is it true
that "the value of the commodities proceeding from these occupations
will also be in proportion to the same sacrifices, that is to say ....
will exchange in proportion to their costs fpain costs] of production." —
Cairnes, op. cit.

But, nevertheless, Cairnes was, in point of x'iew, essentially right ;
ontrepreneur cost is at the best a superficial explanation of value, and«
as explanation of any sort, is valid only for a competitive, pecuniary,
exchange economy. Cairnes was f^ropin^ toward a general value doc-
trine which should base the supply category upon cost in terms of
charge or draught upon the life and the life values of the human race;
if, over against this life cost, on the supply side, there could be worked
out. on the demand side, a value-in-use or utility calculus expressive of
service for the life processes and life purposes of the genus homo,
value, as the point where human utility-demand forces are equated
against pain-supply resistances, could fairly present itself as ultimate
interpretation and explanation of the economic process in society.

* Ibid., chap, iii, sec. 5. ^" Ibid., chap, iii, sec. 5.

CAIRNES 71

ucts proceeding from "the better paid employments will
then be increased, and that from the less remunerative
reduced," but only upon the assumption of equal skill and
effectiveness in production will this process continue "until
supply, acting on price, corrects the inequality'* : otherwise
than upon this assumption these inequalities can never be
corrected so as to make A's reward stand to A's sacrifice
as B's reward is to B's sacrifice, that is to say, so as to
bring "remunerations into proportion with the sacrifice
undergone."

But it is further to be noted that in order to make this
pain-proportion doctrine tenable it must not only be assumed
that all men concerned in it are alike in their productive
capacity and in their aversion to productive effort, but also
that they are alike with respect to the forces of temptations
playing upon them to divert them toward non-productive
activity; and — what is still more difficult — it must be
assumed that each man taken separately is always at one
and the same level of skill, of feeling-attitude toward labor,
and of feeling-attitude toward the diverting temptations.
Free and unlimited competition is, therefore — ^but in a
much more limited sense than Caimes had in mind, and
perhaps hardly even then — "the security for the correspond-
ence of industrial remunerations with sacrifice, and also,
and because it is so, the security for the correspondence
of the value of commodities with their costs of production."**

But how far and under what conditions did Caimes
believe his principle of labor cost adapted to function as the
determinant of values?

Only under conditions of free and equal competition —
that is to say, only within certain industrial groupings
termed by him non-competitive groups — non-competitive in
the sense, that is, that this free and equal competition is
not to be found across group lines and between the differ-
ent groups, but only inside each group and between the dif-
ferent members of that group: "What we find, in effect,
is, not a whole population competing indiscriminately for
all occupations, but a series of industrial layers, within
each of which the various candidates for employment pos-
sess a real and effective power of selection, while those

^ Ibid., chap, iii, sec. 5.

•ja VALUE AND DISTRIBUTION

occupying the several strata are, for all purposes of effective
competition, practically isolated from each other," And
inside these different non -competitive groups Caimes
believes competition to be an effective fact, with the pro-
duced values and their remunerations proportionate to the
pains of production. The foregoing criticism is, therefore,
not, for the most part, to be understood as bearing upon the
doctrine of non-competitive groups, but only upon the
incompleteness and inaccuracy of the description thus far
given of the nature of the group within which the competi-
tion proportion holds. Surely, for whatever it is worth, it
must be admitted that groups of this product-and-sacrifice
equality sort could be imagined, and, indeed, may be theo-
retically constructed, in which the doctrine set up by
Cairnes might find itself illustrated.

Possibly enough, also, the proportionality of remuneration
to sacrifice might be established, were sacrifice interpreted
to include not merely the burdens and pains of pro-
duction but as well the foregoing of alternative opportuni-
ties of product or of recreation. This, however, is not
Cairnes's thought, but only that the exchange ratios must
be conformed to the direct disutilities of production, else
such a readjustment would take place in the application of
productive powers as to allow of a larger result in utility
relatively to the discomforts imposed. And, as we have
seen, there are cases in which the doctrine would, at first
sight at least, appear to hold ; and other cases also might be
admitted, if only stilt other conditions were accepted as
limitations; no serious difficulty would, for example, attach
to the doctrine when applied to the Crusoe case, if only
Crusoe's environment were homogeneous in opportunity
and Crusoe were himself, on all days and during each hour
of every day, a constant in strength, in zeal, and in need;
or the doctrine would be adequate for a coUectivist society,
if together with homogeneity of opportunity there were a
society made up of men each unchanging as an individual,
and absolutely like all of his fellows in his feeling-attitude
toward labor and toward the products of labor — or ade-
quate for a competitive society made up of precisely similar
human beings, each of whom was self-employed as an inde-

CAIRNES 73

pendent producer, in an environment affording no differ-
entials of advantage from either land or capital.

And now we inquire as to the basis upon which, in
Cairnes's view, the non-competitive group is constituted
and as to the extent to which these groups may be regarded
as actual facts in modem competitive society. For a
society of this sort to fulfil Cairnes's requirements, more is
necessary than that there exist what is commonly regarded
as freedom of competition; for both capitalists and labor-
ers not merely the legal right but the practical power must
exist of effective choice between occupations, without
obstruction of law, ignorance, or poverty, so that the pro-
ducer may pass freely from the less to the more lucrative
occupation; otherwise "there can be no security ....
that remunerations shall be brought into correspondence

with sacrifice How far does competition in this

sense prevail in this and other industrial communities?"*^
It is admitted by Cairnes that a great measure of immobility
attaches to both capital and labor — that capital, "once em-
bodied in a form suited to actual work .... is for the
most part incapable of being turned to other uses," and
that "the difficulty of transferring labor .... is even
greater, since we are here in contact with mental as well as
physical obstacles." But while all this is true, it is likewise
true that not all labor need be mobile in order to have
sufficient mobility for the case ; new laborers are all the while
maturing. So with capital; enough is mobile to make, in
conjunction with the streams of new supply, a total of
mobility sufficiently large to care in a reasonably short time
for irregularities as they arise.

And it is further admitted that this new labor is not in
nature, in intelligence, or in acquired skill, adapted to all
occupations equally ; at the best the choice is within certain
tolerably well-defined limits ; and it is as subject to these
limitations and restrictions, and by virtue of them, that non-
competitive groups are constituted; and it is only within

^Ibid,, chap, iii, sec. 5.

74 VALUE AND DISTRIBUTION

these groups that competition is eflfective and that the prin-
ciple of cost of production as a pain quantity can be traced
in the determination of value. This limitation or failure in
the cost principle does not, however, manifest itself with
capital, but only with labor.

"Thus all the products of unskilled labor will," it is said,
"exchange for each other in proportion to their costs ; as will
also all the products of ordinary artisan labor as among
themselves." " This equality may extend from one depart-
ment of production to another, e. g., from barometers to
watches, if the lines of exclusion are not applicable. It is
only within such relations of equality that cost can be a
proportioncr of value.

Cairnes has now to take account of the fact that many
commodities are the product of labor belonging to differ-
ent industrial circles or levels : What then ?

So far as the two commodities are the products of workers in
competition with each other, their values will be governed by cost
of production ; but so far as they proceed from workers not in com-
petition, they must be governed by that other principle"

yet to be expounded — demand and supply.

And here again we stop to question, not the group idea,
for this is perhaps intelligible, but the basis of the grouping
as it lay in Cairnes's mind. Is it a grouping of laborers
according to lines of occupation precisely or substantially
similar? Or is it a grouping cutting across these occupa-
tion classifications and conforming to levels of ability? And
what shall be the test of grading for ability, if not the
wages? And as to the equality of laborers inside the group
or the equality in the pain quality of their labor — the group
homogeneity — one doubts. And in view of the fact that,

the bulk of the value of each commodity follows one law — say the
law of cost, or what we shall afterward find to be the law of
reciprocal demand, while a small remaining portion is governed by
a different principle,"

the determination of value gets passably indeterminate.

" Cairnes, op. cit. " Ibid, " Ibid.

CAIRNES 75

Certainly, as Caimes explicitly admits, it cannot be that

wc are

justified in asserting that the commodities in question exchange ....

in proportion to their costs of production We can only say

that they [the values] are so mainly and in their chief ele-
ments The true conception of a law of costs is thus, not a

law governing universally the values of any class of commodities,
but that of one governing the values of certain commodities
in certain exchanges."

The pain of labor is treated by Cairnes partly as a
matter of duration; but the product must also compensate
in value for the dangerous quality of the labor required;
otherwise, one infers, the labor will change to less hazard-
ous employments. But Cairnes deliberately takes no account
of skill as value-determining: "Skill is no part of cost;
and I add that no. article is dearer than another simply in
virtue of the skill bestowed upon it." *^ But, of course,
skill may be the result of labor or of abstinence in its
acquirement, and in such case it would be an element of
cost Cost-wise, the increase in value is not in proportion
to the skill, but to the cost of acquisition of the skill. And
thus the group appears to contract yet more and to include
only those producers who, experiencing equal disutility in
labor, and reaping equal returns in product, fulfil also
the condition that their qualities and capacities were obtained
through a training— or lack of training— of precise equality
in point of pains and burdens. But, Cairnes says,

As a matter of fact the products of most kinds of skilled labor
exchange against those of unskilled in a proportion much more
favorable to the former than cost of production .... would pre-
scribe. But .... when the products of skilled labor command
these high terms of exchange, the conditions of production are not
those in which cost of production would give value."

And sometimes, it is remarked, works of high literary
and scientific excellence get lower compensations than
lower degrees of skill command.

But here as elsewhere there is no intimation of the

"/Wd. "Ibid., chap, iii, sec. 6. "/Wd.

76 VALUE AND DISTRIBUTION

manner by which abilities are rated as higher or lower.
"No more is this elevated value due to the skill which such
products represent, but to the circumstances which limit the
possession of the skill to a small number of persons as com-
pared with the demand for these services." *•

But in a note attention is called to the fact that the dis-
cussion "relates to skill of different kinds as existing in the
different departments of industry. Within the limits of the
same trade or profession, differences of skill will, in gen-
eral, be accompanied with corresponding differences of
remuneration." But here again no notice is taken of the
difficulty of measuring skill otherwise than according to
the amount of remuneration. And there seems to be entire
unconsciousness that in admitting this difference of
remuneration inside the same industry, it must follow, either
(i) that differences in skill always correspond to differ-
ences in cost of attainment, or (2) that the group contem-
plated by the doctrine is an ability-and-pain rather than an
occupation-and-pain classification. Surely, if the classifi-
cation is one of ability, remunerations will be the same, if
ability is measured according to remuneration ; but is it to
be assumed that the remuneration is proportional to costs
of attainment? And if the group is constituted by those
only whose costs correspond at the same time with their
ability and remunerations, whence shall such a g^up be
selected? But in point of fact, Cairnes appears to admit
that all cases where values remunerate forms of skill not
acquired through labor burden are cases where the labor-
pain-cost principle does not apply — that is to say, are cases
falling under the principle of "monopoly." Seemingly also,
rent remunerations fall under the monopoly principle, and
capital remunerations would do so but for the fact that the
creation of capital is presented as having a homogeneous
pain cost in the abstinence involved.

To Cairnes, as we have seen, it seems clear that the
principle of outlay based upon the market value of the pro-
ductive agents employed cannot be an ultimate basis and
explanation of the market value of the commodity product.
"Employers, we are told, cannot afford to pay any class of
workers more than their services are worth. Now what is
the standard of worth here adopted?" It cannot fairly be

**Caimc8, op, cU,

CAIRNES 77

rq)Ued that the services are worth what they command, if
this is offered as an explanation of cost, for this would be
to explain value by cost and then cost by value, — ^the old
difficulty of how to stand firmly with both feet in the air:

According to this conception of "worth" the statement that wages
are low because the services they remunerate are of little worth,
and high because the worth of the services is high, merely means
that wages are high or low because they are high or low, which
does not greatly elucidate the problem.*

Or if the standard of worth is referred to "the actual
terms of the exchange, it amounts to saying that employers
cannot afford to pay their workmen more than they actually
do pay them." It seems clear to Cairnes that the notion of
"worth as something varying with the utility embodied in
the services or ... . with the skill which is productive
of utility," " is, as an explanation of cost or of value, the
sheerest of circular reasoning ; as, indeed, it is, unless some-
thing can be done for the case from some other point of
view. And yet Cairnes applies the same notion to explain
the different wages "within the limits of the same trade,"
but refers it all to the monopoly principle working through
demand and supply, and denies that it is a question of cost
in any sense. All of which seems to mean that this principle
of pain cost is a good working principle wherever it will
apply — which is, as Senior showed, passably rare,*^ even
upon the assumption that the severity and irksomeness of
labor are not as variable in quantity and quality as are men
in industry, capacity, and feeling.

There is, however, one resource for the case still untried,
and to this Cairnes proceeds to appeal ; it is the principle of
averages, with especial reference to capital costs. Those
who deny the actuality of abstinence pain and the necessity
of its remuneration, if capital is to be had for productive
purposes, must be supposed

to regard the act of abstaining from present enjoyment as in itself
agreeable, and, coupled with the risk which always attends abstinence

•/WJ, "/Wd, "See page 50, ante.

78 VALUE AND DISTRIBUTION

when practised for industrial purposes, as constituting, in some
inscrutable way, irrespective of the gains which flow from it, its
own reward" —

as, we may remark, is sometimes the case, though clearly
not to an extent to supply the full existing amount of capi-
tal. And even assuming the saving, it does not follow,
Cairnes rightly insists, that these savings would be placed
at the disposal of industry. So self-denial is posited as the
underlying fact, whereby the furnishing of capital becomes
a cost in the pain sense of the term.

But of the fact that "the sacrifice involved in a given
act of abstinence is very different in the case of different
persons or at different times for the same persons," Cairnes
says we are to take no account: "The sacrifices ....
which govern exchange value are, not those undergone by
A, B, or C, but the average sacrifices undergone by the
class of laborers or capitalists to which the producers of
the commodity belong." ^*

But one stops here to object that in this application of the
group idea we have a sort of group-abstinence jelly, as
before we found for labor — as qualified by skill — a. group-
labor jelly:

We may therefore state broadly that differences in the sacri-
fices incident to production, whether of labor or of abstinence,
which are due to peculiarities either in the physical, mental, or
moral circumstances of individuals, are to be excluded from consid-
eration in estimating cost of production. What we have to do with
is, not individual sacrifice, but the average sacrifice of each indi-
vidual class."

But precisely how average sacrifices could assign indi-
vidual men to this or that line of activity or to this or that
industrial group, is not discussed; and why the average
sacrifice should, as a question of cost, have anything to do
with the individual remuneration is not clear. Nor evi-
dently would the case be better for Cairnes*s purposes if
the concept of margins were substituted for that of aver-
ages; the same or greater inequality of ratios between
pain and remuneration would still obtain.

"Cairnes, op, cit„ chap, iii, sec 6. *^ Ibid, ^ Ibid,

But Cairnes's answer to alt this would probably be that
within the group a more detailed and accurate distribution
lakes place; the discussion, at the point in hand, having
only to do with that cost which bears upon market value.
and the thought facing not in the direction of distribution
but of cost. In fact, all the way along in this part of the
argument, criticism is especially difficult because of diifi-
culties of interpretation; it is. as we have seen, impossible
to make out of what sort these groups are — whether con-
stituted on the basis of the class of commodities produced,
or of the pains of production, or of tlie skill applied, or of
the rate of remuneration received. If distribution inside
the group is made to depend upon relative pain, it is hard to
see how the grouping can be either by skill or by product;
and yet it is clear that the grouping cannot be by compen-
sation or by pain. So, precisely of what constitution the
labor jelly must be in order that the average of sacrifice
should govern the exchange ratios is — at all events to the
present writer — incapable of determination.

And in any case, the detail by which values come to be
proportional to sacrifices — for after all the doctrine seems
to be essentially one of pro|Kirtions — needs elucidation.
Whether we have labor as direct determinant through pain,
or as proportioner, or as common denominator measure, is
past making out with anything approaching certainty.
Sometimes there is a suggestion of opportunity cost, but
referring strictly to the lalmrer or to the abstainer as against
the employer or the borrower; that is to say, the relative
attractiveness of different industries is calculated, not
purely on the basis of burden, but in part upon the basis of
the remuneration as somehow related to the burden.

Whal at bottom mainiains the connection between value and
of production is, ii must always be remembered, the power of
choice residing in laborers and capitalists to decide between dif-
ferent occupations. Now what is it determines the cboice? No
doabi the prospects of the pursuit, the remuneratioti being com-
pared with the sacrifice. But what sacrifice? .... Each takes
t of the incidents of the course proposed, as it bears upon
himstU, and considers how it stands with others equally open to

But here it must be objected that just so far as the
; question is one of remuneration it is not one of burdens —

I

8o VALUE AND DISTRBBUTION

that is, it is not a question of cost in Caimes's sense of the
word, but at best is only for each individual a question of
the most desirable ratio between burden and remuneratioD—
this ratio of pain to compensation differing with each dif-
erence "in the physical, mental, or moral drcumstances of
individuals." And if, for the case, refuge should again
be taken in the doctrine of averages, the reply would be a
fair one that men do not choose occupations or change
occupations on this average basis.

At any rate, Cairnes puts it that "carried over into any
field of industrial competition," individuals are not remun-
erated in conformity with the sacrifice which each under-
goes; but the conformity holds

among the aggregates of those engaged in the several competing
occupations; so that the total remunerations falling to each branch
of industry shall bear the same proportion to the total
sacrifices undergone in that branch as the total remunera-
tion falling to any other in the same field ^industry? grade of
labor?] bears to the sacrifices in that other."

The total remuneration is, as we have seen, the value of

the total product; "this value, therefore, will bear the

same proportion to the sacrifices undergone in producing

it, as the value proceeding from any other industr}" within

the same field of competition bears to the sacrifices of

which it is the result." ^' So the sacrifices constituting cost,

in any field, class, or group, are average sacrifices."

But after all we are inclined to ask ourselves whether
the clue to all this is not in the fact that a group means

''Cairnes, op, cit, ^ Ibid,

" "The relation which competition establishes between cost and
value is one, not between the value of particular commodities and the
sacrifices of the individual .... but one between commodities taken

as sorts and their costs of production We cannot, for example,

assert that a particular pair of shoes will exchange against a par>
ticular coat in proportion to the sacrifices undergone respectively by
the shoemaker and the tailor in the actual case ; but we may assert
that, within a given field of competition, shoes, as one sort of com-
modity, will exchange against coats in this proportion. The costs,
therefore, to which the values of particular commodities correspond are
not the particular sacrifices undergone in producing each commodity,
but the average sacrifice undergone in producing each sort of com-
modity .... what we have to do with is, not individual sacrifice, but
the average sacrifice of each individual class." — Ibid,, chap, iii, sec. 6.

CAIRNES 8i

nothing more than those producers with whom there exists
the same ratio between sacrifices and remunerations.
Surely, for a group of this sort, values would be propor-
tionate to sacrifices.

But finally, it is to be remembered that Caimes does
not claim any very wide field for his doctrine: it holds
simply where it holds, and where it does not hold the law
of demand and supply — reciprocal demand, as Caimes terms
it — ^is adequate; perhaps also, we may add, for the cases,
if any, where it does hold.*®

If, then, this review of Cairnes is adequate,** and if this
attempt at rehabilitation of the labor-cost doctrine of value
is really the best that can be done, as it is the last important
and systematic attempt among English economists, an
impartial judgment will probably declare that the eflfort
has served merely to give the doctrine its coup de grace;
a dogma already in its last gasp has been unkindly done
to in the house of its friends.

If, however, any faith should still remain in it for any
purpose there is in reserve a seemingly final and crushing
argument against it, if once there can be established the
possibility of values and exchanges without anything

"'"The law of reciprocal demand fails completely of being a
principle co-ordinate with, and similar to, that of costs. Instead of
ruling exchange values in the same way as cost of production, only in
another field, it turns out that the force of reciprocal demand is
incapable of determining the value of any single good. .... The pur-
port of the argument of Cairnes is no more than this: the law of
reciprocal demand merely requires the general level of international
exchanges to be such that in the long run the exports of a nation just
discharge its liabilities, or, in other words, that its exports and imports
iriU be led to balance, except for the payment of interest on foreign
debts, cost of carriage to foreign ship-owners, etc. Cairnes applies the
law without changing line or point to interchange between non-
competing groups Caimes's famous doctrine merely adds

emphasis to a point already made by Senior, namely, that the wages of
skilled labor are out of proportion to the amount of labor cost
reninnerated. Though Caimes rejected the definition of cost as entre-
preneur's cost, his whole argument signifies that subjective cost, or
pain-cost, can control market value only by way of controlling the wages
and interest elements which compose entrepreneur's cost. .... The
doctrine of non-competing groups signifies that the comparative wages
cost of different commodities may fail to represent their comparative
labor costs, or specifically, that they do so fail, when we compare the
costs of commodities produced by different non-competing groups." —
Wbsttaker, op, cit„ p. 123.

** I am not, however, sure that it is adequate. I confess to a deal
of bewildermenL I can only claim to have tried to understand, but
this without much confidence in my accomplishment.

82 VALUE AND DISTRIBXniON

remotely resembling labor-pain cost in the Senior-Caimes
interpretation of the term, or in any interpretation yet con-
sistently formulated. Let us see:

In view of the fact that each independent producer has
his evening limit of labor at which more product is at the
point of indifference as against more effort, and in view of
the old-time doom that, for society as a whole, it is only
by the sweat of the brow that bread may be had, there
might appear to be, for some purposes, force in the labor-
cost doctrine. And if it is objected that work is oftentimes
pleasant, that there are countless producers happy in their
work — a veritable bliss of toil — ^it is none the less evident
that as long as the desire for product remains unsaturated,
as long as more would still be desirable, as long, that is,
as the product still retains utility to the individual pro-
ducer, so long work must be sharply distinguished from
play; so long must work be carried beyond the point to
which it would go for the mere joy of the working. And
it may thus be argued that a positive pain cost will still at
the margin bar the way against any possible pleasure
economy in the productive process.

But even so, the theory of labor cost by averages or by
any scheme of proportion between pains and values, could
derive small support from this marginal development of
the labor doctrine, so far as it should purport to serve as a
method of explaining the terms of exchanges in a com-
petitive, unhomogeneous, wage-earning society. Some-
thing, however, might be made out of the doctrine as apply-
ing to an isolated — a Crusoe — economy, or, by averages, to
a collectivist economy.

But it has bv different later writers'' been made clear
that cessation of labor is something more than surcease of
the sorrows of working — that leisure has a positive quality,
in the recreation that it offers and in the opportunity that it
presents of enjoyment through the consumption of those
goods to which labor has created the right. Thus, the
eight-hour day with its possibly lower wage will reckon, as
part offset against this possible loss, an added two hours of
leisure. So the artist may have enjoyed every hour of his
productive activity, and may leave it, not at the behest of
health or eyesight, but at the call of some greater alterna-
tive pleasure awaiting him. The choice, indeed, for man\'
workers is — ^and for all workers conceivably might be — a

" Notably by Patten, Clark, and MacFarlane.

CAIRNES 83

choice between pleasant productive activity, on the one hand,
and pleasant leisure on the other; and even at the margin,
therefore — for even the labor-cost doctrine will have to
adopt the marginal analysis — ^there is no necessity of pain
cost.

That is to say, the positive aspect of leisure, in its
significance for the cessation of commodity productivity,
serves merely to lead us to a newly discovered application
of the principle of opportunity cost. But, in truth, a new
difficulty here presents itself, though a difficulty with which
the present argument has no concern : Is not recreation to
be regarded as, in the personal estimate and reckoning, an
alternative method of utility production? Is not play pro-
ductive? And where is the true line of distinction between
work and play? (See chap, xxvi.)

CHAPTER VII

FURTHER COST DOCTRINES
Labor cost hi non-competitive production. Opportunity
cost. — Attention will later be directed to the fact that, for
the analysis of exchange value, there is obvious danger
in the identification of desire with market demand: cmly
when purchasing power attends desire can economic demand
be said to exist. But pushed back into the field of produc-
tion the difficulty vanishes; here desire and demand are
one, since the problem is merely what shall be produced;
the ability to produce attends the desire for product. True,
the disposition to produce may be wanting; but if so, the
case is one which for present purposes requires no consid-
eration. All this is corollar}' to the fundamental principle
of economic science, that for questions of production, need
and desire are fundamental, control supply and direct it.

Not merely this, but, in the isolated economy, produc-
tion includes within itself the essential phenomena of
exchange. Inasmuch as not all the things desired can be
had in the quantity desired, there must be a choice between
the things to be had and the things to be postponed or fore-
gone. Each product costs some other, and the sequence of
pr.oduction follows item by item the course of the demand-
desire curve.

Interpreted thus — in the sense of sacrificed opportunity
— the labor-pain cost doctrine of value, as applied to an
isolated economy, and applied upon the assumption that
land and other instruments are non-existent or of incon-
siderable influence, is not very seriously wide of tlie tiuth.
Whatever difTcrences in utility may possibly exist between
two products attainable by the same quantity of labor, the
more useful can have a power of displacement— of exchange
against another— only upon the basis of the equality pre-
scribed by the similar labor costs. Marginal production,

84

FURTHER COST DOQTRINES 85

ia the sense of the point of cessation from work, is reached,
when, in each line of product, more product will possess
utility not greater than the disutility attending the further
production of it, whether the disutility take the form of
pain, or of pleasure displacement, or of both. And thus,
while the value determinant may conceivably be found in
the utility quantum of the marginal product instead of in
its pain price, it is still true that this marginal quantum can
equally well be expressed, in point of significance, in either
of the two ways: (i) as a quantity of utility enjoyed —
the hither. side of the cessation margin, or (2) as a quantity
of advantage foregone — the further side of the margin,
since the two quantities are, by the terms of the analysis,
equal. And so, while the utility of Crusoe's marginal prod-
uct could not be stated in terms purely of pain — unless,
indeed, Friday were altogether a tiresome companion, the
island a savorless island, and Crusoe himself vacant of
resources for self -amusement — the utility could always be
stated in terms of marginal disadvantage, which marginal
disadvantage would serve equally well with marginal utility
as the value measure and common denominator of the
derived value relations.

But if is important to remark that this equation between
the importance of the product and the importance of the
items of resistance — whether of disutility or of foregone
utility or of both — could convey to no second person any
information as to the absolute nature or volume or quality
of the opposing and balancing items, but would speak only
of the relation between them. The value of the ratio at the
margin could be asserted as unity, but nothing could be
implied or inferred as to the importance of the terms in the
ratio. And evidently with different producers, no basis of
comparison could be found either for the utility of the
respective products, or for the burdensomeness of the
respective efforts, or for the attractiveness of the recrea-
tions respectively foregone. Abandonment of production
might, for one person, be consistent with great signifi-

86 VALUE AND DISTRIBUTION

cance of product as against great aversion to labor or
great disposition toward recreation, while with a second
person, the same hours of work and the same commodity
output might obtain, consistently with small pains of labor,
low appraisal of product, and with little or no interest in
the alternatives of pleasure. Only the ratio between the
two opposing quantities can be inferred, which ratio is
always to be expressed as, at the margin, one of equality,
whether the opposing quantities are 5 : 5 or 2 : 2 or J/i : J4.
And, in fact, not even as much as this may seem to
imply, is legitimately to be inferred. The principle of
homogeneity, precisely as it is inapplicable to the individ-
ual's entire day's activity, and is serviceable only as a
day's-end margin and measure, fails as a method of com-
parison over intervals of time. That is to say, Crusoe on
different days is. for the purposes of the present analysis,
so many different men, with different levels of zeal, vigor,
capacity for pleasure, and sensitiveness to pain. Nothing
but the equality of ratios holds.

Collectivist production would, for the most part, pro-
ceed parallel-wise with production in the isolated
individual economy. Production would of necessity accommo-
date itself to the principle of diminishing item utility with
increasing product, and of increasing resistance to produc-
tive effort with lengthening hours of labor; the day's-end
margin of cessation would be fixed where the group aver-
age and aggregate of utility from added effort should
appear to be at balance against the effort pain and recrea-
tion loss incident to further production.

But here again, not all the product obtained, and con-
ceivably none of it, would be at the cost of pain. In a loose
group way, by an estimate of some sort, a margin of effort
would be established at which the desire for more product
should be equated against the resistance to further pro-
duction ; but this resistance would be in part, and might
be in its entirety, the expression of the pull of recreation

FURTHER COST DOCTRINES 87

utility; that is to say, the retirement margin would rarely, if
ever, be entirely a weariness margin, and might be in no
measure due to weariness.

Thus, interpreted broadly enough to include not merely
labor pain but also — if the case is of the sort so to require
— all labor sacrifice reckoned in terms of displacement,
whether of pleasure or of product or of both, — 2l value
determinant, or at all events, a value denominator in terms
of cost may be found, either for the isolated or for the
collectivist economy, if and when the problem can be taken
as presented clear of instrument complications ; but equally
clearly, the denominator may also be stated in terms of the
utility product against which tha cost stands equated as the
purchase price.*

Opportunity cost and outlay cost in competitive produc-
tion.— In no case can the pains or the pleasures of produc-
tion have significance for market value otherwise than as
they bear upon supply — that is, upon the relative volumes
of goods seeking exchange against one another. All market-

^ But the labor-cost margin — in no matter what ameliorated sense —
will not, as the only margin or as the margin of chief significance, apply
where allowance must be made for the presence of productive instru-
ments.

With land instruments and capital instruments, the problem is
evidently not one of pain, but of displacement. It is even questionable
whether the weariness margin is — even for the independent producer —
comparable in degree of significance with the margin of choice between
industries. Occupations. are chosen each as an aggregate and total and
for long periods, and mostly by comparison of the totals of value
return. And during all the day, up to the marginal effort, the labor
product is affording a differential above its pain cost ; but the aggre-
gate magnitude of these quasi-rent quantities differs with different
emplojrments, and renders any comparison between industries possible
only as employment units and totals: the problem, then, even were no
instrument complications involved, could never present itself in terms
of pain, but only — if a labor-imit or labor-item question of any sort —
as a question of how most advantageously to apply the total labor outlay
in view of the aggregate results.

Nor even at the margin can the cessation problem with the inde-
pendent farmer be one solely of weariness against product: if there is
no question of the hired men, their wages and their acquiesence, there
are, in any event, to be considered the comfort and welfare of the
work-animals.

No issue is intended to be offered here as to the right of pain to
stand as one among the many different cost considerations to be over-

88 VALUE AND DISTRIBUTION

cost doctrines are supply doctrines, and explain value onl}i^

in the sense and to the degree that supply explains value ^

* that is, only upon the assumption that demand may, for the^^
purposes of the case, be taken for granted.

Taking as accepted this principle that, under the cost ^
problem, we are set to investigate exclusively those influ- ^
ences bearing upon supply to limit it, certain tj'pical doc- ^
trines of cost, and of the relations of cost to price, await "-
examination.

Let it be assumed that a manufacturer of hats faces the
following situation : per unit of product he expends $i for
wages and 50 cents for raw materials ; the capital employed
in producing a hat would elsewhere earn him 15 cents; as
employee in someone's else service, he could earn 15 cents
for each hat now produced; transferring himself and his
productive equipment to the shoe industry, he could obtain
a product of $1.85 in place of each hat now produced; he
sells his hats at $2 each: What is his cost of production
and what his profit per hat?

According to the older reasoning and the older termi-
nology, the 50 cents accruing to the employer, after the
$1 in wages and the 50 cents in materials were covered,

born by the remunerations in prospect Our wheat-producing farmer,
as we shall later more fully see, presents at the same time many differ-
ent supply margins : e. g., a rent-outlay margin, a wage-outlay marKin, an
indefinite number of seed, fertilizer, and implement margins, a corn-
displacement margin for some portions of his product, a bean-displace-
ment margin for other portions, capital-wear and land-wear margins
for some acres of his crop, and, among all the others, pity margins for
his draft cattle, his wife, and his children, a mixed decency-and-expedi-
ency margin for his employees, and, finally, a weariness margin for
himself. And all these margins may be effective at the same time to
set a limit, in different places and directions, to his production, and
might conceivably converge in influence to dictate the non-production
of any particular line of product, or of any particular item of that par-
ticular line. And at different price levels for products, and with
different producers, new and different combinations of margins would
be presented ; different supply volumes have different supply prices.

And among all these different margins, no one seems to be more
distinctly supply or price determining than any other, excepting in
degree of influence ; and in fact no one of them appears, from the
individual producer's point of view, quite so emphatically price-deter-
mining as price-determined: but more of this later.

FURTHER COST DOCTRINES 89

ivould be capitalist's profit. But what part, if any, of this
profit should be reckoned within cost of production?

Keeping closely in touch with the habit of thought of
business men, Hadley would, as the present writer under-
stands him, regard profit as that which remains over and
sibove cost of production, and would confine the cost reckon-
ing to outlays.* There is room for question as to the 15
<:ents for interest: if this were paid for borrowed capital,
the cost would certainly, in Hadley 's view, be $1.65, and
the profit 35 cents; perhaps it should be inferred that the
same result would present itself were the capital that of the
manufacturer himself.

It appears, also, to have no bearing upon the present
problem that interest outlays are, in Hadley's thinking, to
be r^^rded as mere wages of past labor and to be ranked
under the general head of wage payments.

Recurring, however, again to the principle that cost,
for the purposes of economics, whatever may be the
preferable view for purposes of bookkeeping, is important
only as the master-key to the supply problem — ^that our
quest is the determination of what the French call the prix
ie revient — ^it becomes evident that $1.50 or $1.65 bears not
the slightest relation to cost when conceived as the point

'"The excess of return above cost is known as profit. The profit
of an indiTidual is the difference between money advanced in produc-
tion and money received from the sale of the product. .... Profits
are neither more nor less than the excess of the selling price of the
products of industry above the money advanced as wages. It is true
that some of the investments of an individual capitalist are not made
in the form of wages, but in pajrments for materials and machinery
which other capitalists have made ready for use. But if we look at the
relation between capitalists as a class and laborers as a class, we
iball find that the capitalists as a body advance wages, and appro-
|»riate the difference between the price paid to the laborers and that
received from the customers." — Arthur Twining Hadley, Economics,

This appears to leave the question of interest in about the condi-
tion that James Mill left it; but the problem in hand is another prob-
lem ; were it true, however, that our present concern led us in the
direction of interest theory, it would be worth while to point out that
Hadley's definition of interest as commuted profits is open to this same
line of criticism — that it leaves the time-discount aspect of interest
tnadeqaately accounted for. — Ibid., p. 270.

90 VALUE AND DISTRIBUTION

below which the producer under consideration will dedine
to produce; he could do better than $1.65 as wage-earner
and better yet in shoe production.

Mill's view, while confused in terminology and not
fully consistent in reasoning, approaches more nearly to a
formulation of the influences affecting the producer's choice
between his different industrial openings. Profit is dis-
tributed by Mill into interest, wages of superintendence,
and compensation for risk. It is true that in one chapter
Mill speaks of profit as the excess of receipts over cost of
production,' while, in another place, he treats minimum
profit as a part of necessary price,* but as this necessary
price is the money magnitude for which we are seeking,
and as, in the general trend of his doctrine. Mill identifies
cost of production with necessary price, it is in the spirit
of his doctrine to regard minimum profit as a constituent
part of cost of production. It is in this sense that we are to
interpret his statement that the necessary price must be an
amount sufficient to cover cost and the ordinary expectation
of profit. Nothing very satisfactory is offered as to the
quantum of this ordinary profit: In one place a subsist-
ence-minimum determinant is suggested for capitalists:
**They will not even go on producing at a profit less than
they can live upon." ** But not much is made of this view.
In general, the doctrine runs:

The cost of production, together with the ordinary profit, may
be called the necessary price or value of all things made by labor
and capital.* .... The latent influence by which the values of
things are made to conform to cost of production is the variation
that would otherwise take place in the supply of the commodity.'

That is to say, Mill divides profit into the two parts,
one, a minimum or necessary profit, the other, a surplus

* Principles, Book III, chap, iii, sec. i.

* Ibid,, Book II, chap, xv, sec 2.

* Ibid,, Book III, chap, iii, sec. i.

* Ibid,, Book III, chap, iii, sec. i.
^ Ibid., Book III, chap, iii, sec 2.

FURTHER COST DOCTRINES 9^

over this necessary minimum. Some part, therefore, of the
35 cents left over after outlays and interest have been cov-
ered, is included within the necessary price, the true cost, —
enough to allow to the entrepreneur the ordinary rate of
profit. Here, it may be noted, is a distinct foreshadowing
of the concept of producer's quasi-rent. But Mill makes
nothing further of it.

Walker, on the contrary, regards these producers' dif-
ferentials as of controlling importance in the problem of
necessary price. Marginal cost of production is taken as
the determinant of price, and precisely as land rent is con-
ceived as a surplus over and above cost — a price-determined
distributive share and not a cost — so producers* differen-
tials are computed as surpluses above the price-determining
margin of production and as such are made irrelevant to
price fixation. For, in order to find the price point with
manufactured goods, we must, it is said, find the marginal
producer's cost, just as with agricultural products we are
supposed to find the cost upon marginal land — 3, point at
which there is no differential to be computed.**

Entrepreneurs are evidently of differing capacities, pre-
cisely as lands are of different grades of fertility ; thus, to
find the cost-determining production, we must, it is said,
find the marginal entrepreneur, the lowest paid among all
those producers who can afford to remain in production.
Whatever the more skilful entrepreneurs get above this mar-
gin is unnecessary, or differential, or surplus profit, or pro-
ducers* quasi-rent, accordingly as one's choice of terms
may dictate.

And thus — returning to our hat manufacturer and his
cost problem — it would seem that, in Walker's view, we
have not yet sufficient data, either for determining the cost
in the sense of the profit necessary to keep the manufac-
ture in the business of production, or for measuring his
surplus, his differential gain ; we must, it seems, first know

•Walker, Advanced Course, sees. 1 19-143, 297-299.

9^ VALUE AND DISTRIBUTION

how much his less skilful competitor is making, before we
can fix upon the lowest price at which he himself will con-
tinue to produce.

But according to the principle of opportunity cost, the
best alternative open to our hat-producer is not to lend out
his capital and to accept a salaried position ; this would give
him but 30 cents as his total of interest and personal
remuneration, whereas in the shoe industry his unit of
product would have a market value of $1.85, permitting
35 cents of return to himself and his capital holdings — that
is, 20 cents for his personal remuneration. In the hat
industry, however, he is getting $2 of market product ; his
return in the hat industry may fall to the $1.85 limit before
he will decide to change from hat to shoe production. And
it is evidently beside the point to urge that his least skilful
competitor is deriving, from this market price of $2, only —
say — 10 cents of personal remuneration. This fact, clearly,
gives no basis for arriving at the first man's occupation
differential. Nor, more important still, does it necessarily
imply that the second man is the man upon the margin of
withdrawal or nearest to it. If, getting in the hat business
only 10 cents of personal remuneration, his best alternative
were yet one cent in shoes, he would still be nine price
points distant from withdrawal, whereas another man of
very considerably higher absolute profit might be fewer
points distant. It is, in truth, entirely credible that the y
largest profit-maker in the industry should be the marginal
producer in that industry. All producers' cost differentials
are reckoned from this alternative basis, as quantities deriva-
tive from the opportunity-cost margin.

Obviously, only the most general notions and the simplest
of the applications of opportunity cost can be presented at
this time. One caution, however, appears to be immediately
called for; the doctrine of opportunity cost, rightly under-
stood, does not point fundamentally to the question of how
much could be realized of gain in some alternative occupa-

FURTHER COST DOCTRINES 93

tion or activity, but only to how much must be realized in
the occupation or activity under consideration in order to
insure its continuance. Opportunity considerations, alter-
natives, are mere data, among others, in the computation,
and may or may not be controlling — ^that is to say, questions
of taste, of health, of reputability, of strain or severity of
requirement, all may be important factors in the choice.
Again, the choice may not lie between two gainful occupa-
tions, but between some one gainful occupation and
idleness. In short, each man's cost is simply his
prix de revient, the price requirement upon which the con-
tinuance of production by him depends. And evidently his
price may differ for differing volumes of product.®

'The relations of opportunity cost to price, as presented by several
of the later writers, will best be examined in connection with the concept
of profit — and its relation to cost ; see note at close of the next chapter.

So far as the present writer is informed, David I. Greene is
entitied to the credit of first having given adequate formulation to this
doctrine of opportunity cost — see an article published by him in the
January (1894) number of the Quarterly Journal of Economics, With-
out acknowledgment of this contribution, and, indeed, in entire igno-
rance of it, an article covering very much the same ground was, by the
present writer, published in the September (1894) number of the
Journal of Political Economy, under the title of "Thfc Formula of
Sacrifice;" see also, by the present writer, the May (1902) number of
the Quarterly Journal of Economics, "Proposed Modifications in Aus-
trian Theory and Terminology;" and the November (1905) Yale
Reinew, "Doctrinal Tendencies — Fetter, Flux, Seager and Carver."

CHAPTER VIII

PROFIT DEFINED : PROFIT AND RISK AS RELATED TO

COST

Risk profit. — Mill's formulation that necessary price
must cover, among other things, compensation for risk, is
incontestable for all cases where risk is really a fact of cost ;
but when, if ever, is this the case? Is it, indeed, clear that
it is ever the case? And where, then, is the room for risk
profit ?

If the risk compensation is only sufficient to cover the
risk, there is no room for profit. The unharvested crops
form, in the long run, part of the cost of the harvested. So
the bad debts of the merchant are a part of the cost of get-
ting goods into the hands of the paying customer. Here
is evidently a class of risks that are to be included within
production costs; and the compensation, being the correla-
tive of a risk assumed and not a reward of personal skill
or effort, is, by this very fact, not a part of profit. It is
only when the risk remuneration is more than the risk
burden that profit can be derived from taking risk.

And in some cases, doubtless, profits of <this sort are
obtained, as with insurance contracts typically, and with
well-organized businesses in the speculative markets. But
what shall be said of the risk to which the wholesaler is
submitted when he buys his supplies, that prices may fall,
or of his hope that prices will rise? Is the gain, if gain
befalls, more than compensation for the risk, or is the loss
other than the equivalent of the gain which was equally in
prospect when the purchase was made?

In point of fact, analysis of risk must distinguish two
cases, (i) where the danger of loss has no correlative of
gain, and where, therefore, the question is solely as to who
shall carry the hazard, — cases which easily lend themselves
to the business of making profit off the carrying of risk;

94

PROFIT DEFINED 95

(2) where profit and loss are equally in prospect, or are
somehow in the market equated against each other.

It is probable that in this second case, utility falling per
item with increased supplies of goods, the chance of gain
must, as a computation in terms of dollars, outweigh the
appraised money equivalent of the chance of loss, else the
falling utility attaching to each dollar would leave the
balance slightly one of loss in the individual utility schedule.

But it is only in cases falling under the first class that
risk is properly to be reckoned as appreciably an item of
cost.

Risk interest, — ^The relations of risk to interest and of
risk interest to profit are perhaps not more intricate in
theory, but are even more disastrously confused in tradi-
tional economic discussion. "Viewed as the reward of absti-
nence, interest cannot include the risk share in the amount
received. Viewed as any sort of compensation to the
owner for investment opportunity foregone, risk must be
excluded. And as the difference between the present value
of goods and their future value, interest cannot cover risk ;
only as the difference between a certain present value and a
contingent future value could the risk charge be included in
interest. Adopt, however, the standpoint not of the lender
but of the borrower, and the question takes on another
aspect. Dishonest borrowing aside, interest becomes a pay-
ment for the use of wealth, or, more accurately, a payment
for the difference in desirability, to the borrower under
consideration, of present over future goods — or, more
accurately still, of present over future purchasing power as
reckoned in the prevailing standard. For the marginal
borrower the interest is the approximate equivalent of this
difference.

That is to say, the risk payment is received by the lender
in one character and is paid by the borrower in another.
It advantages the marginal lender nothing or nearly noth-
ing; the risk fact may, in truth, diminish his net or pure

96 VALUE AND DISTRIBUTION

interest, by its eflFect to retire some part of the total demand ;
it burdens the borrower as a cost; it is like a tax imposed
on the loan relation.

To whom, then, goes the gain to correspond with the
<tggregate of loss to borrowers and lenders? It does not
necessarily follow that the entire benefit of this intermediate
quantity — ^this tax — accrues to defaulting borrowers.
There is room for lenders' quasi-rents in the relation, —
that is to say, there may be, in favor of the non-marginal
lenders, diflFerentials between what it really costs to carry
the risk and the compensation which the market premium
upon risk allows.* And this is the only case of true risk
profit in the interest relation; subject to this modification,
the premium is the precise equivalent of the loss danger
accepted.

But it remains to ask what name shall be given to this
equivalent. It is commonly regarded as a portion of profit;
but as it is evidently not remuneration for the personal fac-
tor in production or in business activity of any sort — not
pay, that is, for labor of superintendence or for any other
form of effort, but only compensation for the danger
incurred of failing to get compensation — ^there is force in
the view that the special category of risk profit should be
recognized. The objection to this is that, just as when one
lends his capital he charges something extra for risk, and
calls it interest or risk interest, so when he puts his own
capital at risk in his own business, he should, it would seem,
reckon his risk gain as compensation for the hazardous
capital use — another form of risk interest. The losses of an
enterprise must ordinarily be paid out of the operator's
wealth. Profit-makers pay losses, when losses come, in the
capacity of wealth-owners and not of mere operators.

But it has still to be recognized that the thing at hazard
is not necessarily and solely the capital invested. The
operator may, indeed, be investing nothing but his time and
effort; or his hazard may be such as not to extend farther

* Cf. Carver, Quarterly Journal of Economics, March, 1891.

PROFIT DEFINED 97

than the value of the time and eflFort devoted by him to the
enterprise.

There is, then, room for a concept of risk wage; and
for this there could be no valid objection to the term risk
profit, were the term profit not already overweighted in
point of duties and overclouded with accumulated ambigui-
ties.

The question, then, whether there is any place for the
term risk profit is to be decided by the meaning intended to
be attached to the term profit itself; and in regard to the
precise meaning of this term there exists lamentable uncer-
tainty. There is, however, a general consensus of opinion
for the exclusion of interest from the concept; and some
disposition must be recognized toward the exclusion of
wages of superintendence ; and if the foregoing analysis of
risk be accepted, there is small justification for continuing
to include anything commonly indicated under the term risk
profit; and for whatever need really exists the term risk
profit and not profit recommends itself.

Risk interest should be extended to cover not merely
the hazard compensation of actual lenders but also the
hazard compensation of him who adventures his own
resources under his own management.*

The question remains whether the term profit shall serve
(i) merely for exceptional, unclassified, lawless gains —
conjuncture profits as they have sometimes been called, or
whether, on the contrary, the term should stand (2) for the
broader notion of compensation for the independently work-
ing human factor in production, or (3) for the still broader
notion of compensation for the independently gain-acquir-
ing human factor in economic activity.

For it must be noted that here as elsewhere there is
danger of confusing the technological and socially produc-

*Cf. Vcblen, Theory of Business Enterprise, pp. 120-30, as to the
difficulty of finding a time unit for the hazards and gains of high
finance.

98 VALUE AND DISTRIBirnON

tive aspects of business with the competitive and gii^'
making aspects. Number (2) would conceive profits ^
compensation for independent productive activity, a^^
would thus make no place for a large part of what f^
under the general head of conjuncture gains, but woit^
stand, rather, as an opposed and alternative notion. Nui^^'
b€r (3)> the competitive view, would harmonize (i) ai^^
(2) by including them.

It has been the writer's preference to use the ten^^
profit in this third sense, as denoting, that is, the residua-^
compensation falling to independent business activity afte^^
such apportionment as is possible has been made for rents, ^
interest, wages, and other outlays. In this sense, profit^^
stands as merely one form of the remuneration of labor and^^
is thereby a subhead under the broader interpretation of the ^
term wages.' It points to gain without the intervention ^
of an employer; it is, then, remuneration to the entrepre-
neur for entrepreneur activity as such. This profit goes,
truly, to him who takes the risk, but does not, therefore, go
as compensation for the risk or in proportion to it*

' For wages, it should he remembered, are not deriyative solely
from technological or other productive activity. I may pay my wage-
earner to destroy your property or to besmirch your reputation.

*The concept here presented is believed to be, in a general way, in
harmony with the later trend of economic thought. Taking the recenUy
published works of Professors Carver, Fetter, Flux, Seager, and Seligman,
as representative in this regard, it will be profitable to glance at their
respective usages. Thomas Nixon Carver, The Distribution of Wealth,
Macmillan, 1904; Frank A. Fetter, The Principles of Economics, The
Century Co., 1904; A. W. Flux, Economic Principles, Methuen & Co.,
1904 ; Henry Rogers Seager, Introduction to Economics, Henry Holt
& Co., 1904 ; Exiwin R. A. Seligman, Principles of Economics, Long-
mans, Green & Co., 1905.

Professor Fetter's notion of profits is more easily arrived at than
that of any one of the other writers under examination : "Profits are
the net gain of the enterpriser after counting the rent of material

agents and contract wages Profits are the income attributable

to the enterpriser's services Economic profits are not contract

wages, not being paid by agreement, but being yielded impersonally by
the industry. Profits are, however, economic wages or the earnings of

services Profits are .due, not to risk, but to superior skill

in taking risk. They are .... earned in the same sense that the
wages of skilled labor are earned." — Fetter, The Principles of Eco-
nomics, chap, xxxi, passim.

This is not, one infers, a denial that the taking of risk may be the

PROFIT DEFINED 99

characteristic and distinguishing mark of entrepreneurship, but it is a
denial that compensation for risk is profit, unless in the measure that
compensation is more than the value and burden of the risk.

This falls in with Professor Carver's view that the "profits of
insurance are a kind of risk-taker's rent. They owe their existence
to the fact that they are not the reward of risk-staking, but that they
are a surplus over and above the real risk assumed. [The entrepre-
neur's risk rent] is due not to the risk he assumes, but to the risks that
lie does not assume. .... Stated more accurately .... his net income
or profit arises from the fact that he is able to reduce his own risk
below that which others would have to bear." — Carver, Quarterly
Joufytal of Economics, May, 1901.

Professor Seager defines profits as "balances left over from the
sale of products after all of the expenses of production have been
paid," a production-category concept. — Seager, Introduction to Eco-
-munnics, p. 55.

In a state of normal equilibrium the competition of entrepreneurs
'^rould bring it about that "the profits of entrepreneurs would just cover
^vra^es of management." — Ihid,, p. 172.

It is thus evident that in arriving at the profit remainder, Seager
^rovild conceive of compensation for one's own land and capital as a form
of expense, "virtually an expense," as he puts it elsewhere ; this leaves
profit substantially as Fetter conceives it, with some doubt possible as
to the precise relation in Seager's view between risk and profit, and,
for Fetter's case, with some ambiguity as to whether profit is a pro-
clnction category or a gain category.

Professor Flux's notion of profit is more difficult to make plain:
hat it is formulated in better recognition of the latter-day forms of
business organization.

Under entrepreneur, that is, under non-corporate management,
IHTofits are seemingly regarded as in approximate parallel with wages:

"So long as the business man was in large degree owner and
manager at the same time, his remuneration naturally covered the

return to capital and to organizing effort The growing use of

capital by other than its owners required the separation of the

remuneration of the capitalist .... from that of the undertaker

Later we have seen the growth of a great system of joint stock enter-
prise. .... The replacement of the independent owner of business
enterprises by a salaried manager seems to suggest a further analysis of
profit."

But under the non-corporate form of organization, "the capable
entrepreneur reaps a reward corresponding to his superiority over the

less capable man with whom he is in competition If he gets the

use of capital on better terms, it is because of the lower risk associated
with his control than with that of the others who pay a higher
rate. .... The gains of the highly remunerated entrepreneur ....
are certainly not secured by enforcing harder terms on labor than labor

secures from rivals Whether the earnings of employers who

just maintain themselves as employers be regarded as made up wholly
oi wages .... and in no degree of profits ; whether we call the whole
of the earnings, even of these entrepreneurs, profits, the important
implication of this view of the case will be substantially the same. ....

VALUE AND DISTRIBUTION

[But] the Uter otgaoiiatioa leparalc* Ihe lemtinention of the muiSKet
from that of the owner. .... The dinributive dure known u proliu,
then, hai in practice, had tbe remanerstion of the setvicei of manage-
ment cut out of it. What is left. proBta proper, reprcaent* the thare
of ihoM who lake ritlu and ouume the retfionsibility of directing the
general lines of policjr which lUe manager i> to carry out." — Flux.
Eeonomtc Frinciplti. chap, x, potiim.

Fully worked oul, however, this more actual treatment wmld not
diverge, for (beorelicsl purpoMa. and for terminology, from the wage*
view of .profit. Doublleu different forma of personal activity are
included within the function of ordinary cnltcprenear managerihip ;
lome of ihe iheie aclivitiei are more detailed or more clerical in oatore
than otbera : but in any ca*c all arc peiHinal activity and are remuner-
ated as such. Thai a part are delegated — tbe leu ruponuble part —
to ntaricd employees, leaves the residuum of remuneration none tbc
less a remuneralion for pertoml activity, a wage impersonally received
from the market wilboul the intervention of an employer. The diri-
denda to ilockholders are. then, in part true interest, in part highe)
gains received because of tbe danger of not getting any gains or of
losing the principal, in part profit due lo differentials belween the
burdensomenesa of the riak and ita compensation, and in part reward
for the function of ultimate supervision, II is not 10 tbc point far
present purposes lo ask wbelher, a> an fthical or social problem, IheM
last are more or lesi than adequate.

Professor Carver's concept is more near
German terminology; wages of management'*:

Notwithstanding the fact thai in one plac
be expensive . . . . lo grow wheal on land '
muket gardening; tucb land is worth ti.ooo
because of the large profit that can he made
wheal would be a sacrifice of these profits"

the sense of aggregati
>tiot

rortb (i.ooo an acre for
an acre for that purpose
n tbat business : to grow
(ibiii., p. 4a) — a use of
return — bis more careful fomolk-
■t which is left over after all tbe
p. J7BI. Risk profit, by which is meant
f the risk over Ihe actual burden of it,
rcliy productive agents are "more (re-
price sMgbtly under than slightly over their

I

tlon resincii

other shares

tbe encess in Ihe pi

and sldll in bargai]

quently employed at .

marginal productivity, explain the fact that business

receive a share in addition to their net wages, rent, and interert"

(■'bid., p. i6g) ; that is to say, profits are something over and above

wages of management.

But on the whole, if these authors may be taken as representative,
there appears to be in economic usage some elearing-up of the old
indefinileness in Ihe meaning of the terra profils, together with a marked
tendency to regard profit as merely a subhead under the general principle
of wages — one form of remuneration for the personal factor in
economic activity.

Professor Seligman's general notion of profit would appear to be in
line wilb this trend :

The remuneration of the entrepreneur, oi the man who carries on tbe
, eDlerpriae. is called the profit. Among them, wages, interest or rent,
I profits exhaust the whole income. {Seligman, Frmcipltt of Beo-
tiici, p. 3S2.) Profits are ihe income from business enlerpriae.

I

PROFIT DEFDJED

{Ibid., p. JS3.) Bui dd p. 417 it is said: "Profiu - . . . ar« Uie chief |
iaducement to enterprise The anticipated gains to be derived (roni
fluctuations in value constitute the real incentive to business activity. .
and hence to modern production."

In this last it is implied, not only thai prolits cover merely such pari
of eotfcpreneur income as is due 10 value fluctuations, but also that
toodem productive enteiprisc would cease to (unction weie these con-
juncture gains eliminated — if. that is to say, "a state of normal equilib-
rium" were realised. And with profit so defined, what becomea of that
part of the entrepreneur's share not due to value fluctuations? For
we arc to remember that "wages, interest or rent, nnd profits exhaust
the whole income." This Fhare must seemingly be regarded as falling
under the head of wages of moHagtmenl.

What, according to Professor Seligman, is to be computed as
proGl in the hat-and-sboe problem (p. 88) ? "The remuneration of the
entrepreneur, or the man who carries on the enterprise, is called
profit. .... Wages, rent or interest, and profit exhaust the whole
income^" Under this formulation .15 cents per hat is profit : but
under the second formulation — "the gain to be derived from fluctua-
tions in value" — no answer is yet forthcoming.

If it may he assumed that the cost investigation is imporlanl only
■s bearing on the supply term of the value equation, and that with any
individual producer the problem of cost is the problem of how much
pay he must receive in Order not to abandon or restrict his production,
it must be clear that the hal-produccf in our assumed case will submit
lo a pri«c of (1.8s before shifting lo the shoe industry, and that the
wage opening of 15 cents has no immediate bearing on the case: $1.85
is ihe cost of production ; is cents is a producer's differential, a "tjuasi-
rtnt of production." or an "unnecessary profit" — or an excess above
minimum profit, or whatever else it may be preferred to call it.

But how about tbe following formulation ? "Profits are always
a surplus ; they are the difference between the cost of production and
the selling price" (p. 353). "The excess of price above cast of pro'
duclion constitutes profit" (p. 354). On p. 357. however, it is said that
"wages are a stipulated income, and profits a residual income"^suggest-
ing again the 3S-cent solution ; but it is immediately added ; "Wages
are part of cost; profits a surplus over cost." And likewise on p. 356
it is asserted: "Profits are the return from the conduct of business

page : "Interest is a part of cost : profit is a surplus above cost"—
probably, as it now looks, a is-cent view. But this must finally depend
upon what cost of production is held to be.

But evidently a producer must have something for hi
only this something need not be called profit : still it is, as we have
■ometinies so called. Sometimes, however, the usage falters:

"The gross earnings would suffice lo give him a bare compensation
for hia services, for otherwise he would enter some other employment
as a wage-earner. [Necessarily as wage-earner? or necessarily, if as
wage-eimcr. in some other line of employment?] Gross profit;
include inleresl and wages. But there would be no net pront, or
surplus profit, or profit in the real sense of the word" fp. 35^).

Merely noting, in passing, that the necessary wage is here made
part of cost, it becomes evident that this necessary wage
a part of "net, or surplus profits, or profits in the real sense ," profit;
are. on (he contrary, here presenled as that part of personal compensa

I02 VALUE AND DISTRIBUTION

tion above the amount required for the continoaiice of the basinese;
they are difFerential profits in the sense of that other terminology that
holds that "the remuneration of the entrepreneur, or the man who carries
on the business, is called profit'* (p. 352) ; "Profits are the income from
business enterprise'* (p. 353). This net, surplus, or real-proiit concept,
then, denotes a differential above necessary cost, and gives us 15 cents
as the solution of our problem ; and this goes logically along with the
doctrine that, "profits .... are the difference between the cost of pro-
duction and the selling price (p. 353). The excess of price over cost
constitutes profit (p. 354). At the bottom of the scale is the margiiul
producer working under the least favorable circumstances, and who
can nevertheless get no more for his goods. With him price equals cost
The excess of price over cost constitutes profits'* (p. 354).

But still another concept of profits presents itself : "Profits are the
surplus of the intra-marginal over the marginal producer" (p. 353) ; not
now, be it noted, a surplus above what one must have to keep him in
the business, but a surplus above what someone else, the marginal pro-
ducer, must have to keep the marginal producer in the business. Thisi
as will be recalled, was Walker's view ; and profit with Walker was
likewise presented as no part of cost ; what you get more than some-
body else gets is no part of your cost ; it follows that price is deter-
mined by the cost of the poorest incapable in the trade, it being irrele-
vant that he may also be so entirely worthless for any other posd)le
thing that he would not change occupations at any, no matter bow
great, fall in price ; and the profits unnecessary to hold in the trade the
master-minds of the entrepreneur world are whatever they are getting
more than this rear-guard good-for-naught.

And in line with this terminology it appears — as it consistently
ought — that this poor fellow is getting no profits ; which must mean,
according to the earlier formulation, that he is getting no differentiil
above his best alternative — which obviously may or may not be true,
and is, perhaps, as likely to be true of the most prosperous among his
competitors.

Consistently with this concept, no solution is possible for our
problem ; upon the data given, no single entrepreneur, other than this
single-footed incapable at the alleged margin, could ever by any possi-
bility determine his own or anyone's else cost of production.

Bearing in mind that "net or surplus profit, or profit in the real
sense." has been defined as surplus over cost — producer's differentia]
above necessary remuneration — we approach still another concept of
profit — a notion something like the Grerman Conjuntur-Profit, Those
compensations accruing to personal activity and management, over and
above what must be ascribed to the land and other equipment of the
entrepreneur, may undoubtedly be divided accordingly as they are or
are not due to changing conditions — to market fluctuations — tardy com-
petition— conditions which are, in any society, always in process of
coming not to be, and which in stationary conditions must in time be
canceled through the complete working of competition. That is to say,
there is one portion of the entrepreneur's income which may be said
to belong to him by a sort of permanent desert and right ; full and
complete competition would only serve to make this share more secure
and definite ; while there is another part which befalls irregularly, by
luck and hazard, and without ethical basis, or claim of any merit other
than, possibly, of farsightedness, and only through the perversities and
tangles of things. There are, we repeat, gains of this latter sort, ms

PROFIT DEFINED

103

firuly as tbere are residuals which the disappearance of these fortuiloui
3 would never reduce or menace:. Our author's present concept
■ nf profits contemplates these fortuitous quantities : "Profits are a
■ of price, not a cause of price. Producis at a lower cost create
(rofit ; competitioi] forces prices down to lower cost and eliminates
profits. Profits can be tnaintaioed only by the creation of a continually

cwcr cost-level lower than the new price (p. 357) For as soon

■ profit appeared, the entrepreneurs in other fields who were just mak-
Rg expenses would at once bid against each other to secure capital and
ibai, until they would capture their share of the market, and the
^Gts would dissipate themselves, on the one hand in the higher rate
^d for the factors of production, and, on the other hand, in the lower

^ce of the product due 10 the greater supply (p. 354) It may

Coocci'vably happen, indeed, that all the producers at a particular
n of precisely the same abilities and subject to the same
COodittoas. .... There would be only one identical cost for all tmila

'pt the supply. There could, then not be any permanent profit

ta all the producers, because prices could not permanently remain
■fcove the mere cost of producing" (p. MS).

■vident enough that, on this basis, no precise answer can be
ic inquiry as to how much of the entrepreneur's gain is due
to his own productive activity, and bow much to the gifts of fortune,
ttrough the flux and change of processes and values. Neither oar prob-
I as stated nor any other problem could present materials from
which this notion of profit could arrive at a money statement. And
^th this uncertainty as to the competitive share of the remuneration
Ikcre must go also an equal indefiniteness as to the other share — the
nlit. due. earned, just, enduring share. Thus Ibis fifth or sixth variety
of profit appears to promise greater service in ethical — or possibly
tnciological — discussion than in the field of economic analysis. It
, however, certain that something of this rightful and iiatural
•bare there must be — quantitatively and qualitatively vague doubtless.

But V

find

"Wages ditTer from profits ii

d profits a residual income. . .

(■rplus above cost The entrepr

n for his services, but whel

_etiti>rs. There is always a ci

jbll, because no work would othen

Of competitive profit depends up

t to the point where the margii

that wages are a stipulated income
. Wages are a part of cost, profits a
lucr may think that he deserves a
•I he secures one depends upon bis
lain level below which wages cannot
se be done ; but the very continuance
n the abler producer cutting down
il producer earns no profits {p. 3S7)-
the marginal producer would hardly
kaake both ends meet, but would earn nothing above his cost" (p. 346),
This last statement seems to imply that all compensation that does
pot accrue as gift of fortune is cost — that is, is necessary compensation.
I the doctrine which under stable equilibrium would deny 10 any
ucer anything above his necessary remuneration would amount to
' " f activity precisely what — and no
in his next best field, this ethicalljr
( ending in the strange perversity of measuring what one can do,
t bj what he does, but by what he would do if he did not do so

s evident enough that we are thus far all the while within the
IrM of individualistic entrepreneur cost; and in this field there Is itill
• more cost concept to be ptesenled :

r

104 V.\LUE AND DISTRIBUTION

"To the «npIoy«T c<i« mc»n» total cash outlay cxpendnl in prodnc-
lion ;■' and il is sdded : "Here the co»t i» usually less than the price,
the differeticr between cost [oih outlay] and price being profit." Thii,
however, may possibly not be fairly interpteted as a fifth — or sixth —
profit concept, since the notion of profit here held would &iall; resolrc
itself into total remuneration for entrepreneur activity.

Professor Flux's interpretation of the relations of profit to cort
is to be deduced from the following :

"The influence of cost is felt in delerminlng whether it is profitable
10 produce that supply in view of securing the price so determined.
whether the supply can be, economically speaking, maintained. ....
The term 'supply price' here used means a price adequate to induce
producers to prepare, and offer for exchange, a supply corresponding
to that price; It must therefore be a price sufficient to cover cost of
production, and, if competition be vigorous, the excess over cost of pro-
duction will not be more than sufficient to afford such profits as com-
petitors need to secure in order to continue in competition. Some
writers use the phrase 'necessary profits' to apply to the level to which
competition tends to reduce profits, and such 'necessary' profits are
often taken to be included in cost of production" (pp. 51 and 57).

Slopping merely to note that expensei of prodnclion and cosl of
production arc here used as interchangeable terms, we deduce from the
passage cited thai the amount to be fixed as Ihe cost requirement ii not
necessarily t>.Si or Ii.8o. but is a sum "not more thaa mfficient to
afford such profits as competitors need in order to continue in pro-
duction." Profits which would content other producers are the "'neces-
sary profits" for this producer, whether or nol — one takes it — he finds
himself on any other ground able to be contented-
Fetter holds that, "the value 0
related to (be psychic cosl or sacri
labor"] and therefore it cannot se
day business. Alternative cost is any good or gratification that must be
given up when any other good is choseiu In this sense each thing is ■
cosl of every other thing that might be chosen in the place of it.
Alternative cost is. therefore, manifold and indefinite. The thought is
■igniticant at the moment of choice, but is not constantly measurable
for practical purposes. Money cost is the practical cost generally
implied in the term cost of production. .... The enterpriser's cosia
determine the lowest price at which he can continue to sell, but if suc-
cessful, he may have a wider margin of profit" (p. 174).

Recalling that Fetter's definition of profit is "the income attribu-
table to the enterpriser's services," and remembering thai displacement
costs must nol be regarded, and that only the "money paid out by the
producer" is "practical cost" (1.50 or (1,65 must be Fetter's solution
of Ihe problem in hand. And yet (1,6s is dearly not "the lowest price
at which he can continue to sell ;" it is much lower than the lowesL

With Seager the distinction between cosl of produclion and riptnttt
of produelioH is significant In cost he reflects the old doctrine ot pain
cost — psychic cost, as Fetter has it — but with the addition of some
modem doctrine about displaced leisure and displaced consumptiMi-
time. "The sum of the efforts and sacrifices that are involved io

PROFIT DEFINED

105

exercise which invol'

fices the doinR

ihiogs that might ba<
(p. S3l- Jus' wlral u
of theory is not easy

the cost of production Effort, ....

some discomfort or pain .... sacri-

things thai are less pleasurable thao other

been done but free from any element of pain"

or part this land of cost has in Seager'9 syitent

but "contrasted with the costs of pro-

duclioD which are psycboloeical or subjective, are the tip eh ski of
production — advances made for materials and other things which
EO-opttite in bringing about productive results. The latter are objec-
ti»e and may be expressed as sums of money comparable with the
prices received for products" (p. 54).

Whether these costs are confined to those technological facts which
■id in bringing about productive results — a social concept of produc-
livRiess — or whether "all other things" includes expenses for patents,
royalties, franchises, privileges, good -will, legislative and municipal
favor*, etc. — that is, whether the production under consideration is
conceived private-wise and competitively, as matter of individual
■cqaiBtion, need not concern us here. At any rate, "the exfeniti of
preimctien include every item of outlay which producers ma«l
normally and regularly incur to put goods on tbe marliet and effect
their >al«. and also lucb <ompensation as producers normally and
regularly require as Ibe condition of their continuing to serve
induitrial society in the capacity of entrepreneurs. These items are
sa follows: (■) Outlay for materials, wear and (ear of buildings and
machinery, etc., which may be included under the expenses of repla-
cing capital goodj used up in production. (2) Premiiuns paid for the
iniurancc of capital goods. (3) Interest for the use of capital. (4)
Wages to laborers of all grades. (5) Rent of land and natural power
need in production. (6) Taxes. (7) Minimum profits to tbe entre-
preneur 10 remunerate bim for his own time and trouble" (p. 157.}

What then would be Seager's answer to our bat-cost problem?
How much as cost shall be allowed under (he head of minimum profits?
Seager has a displacement -cost doctrine : but wage or salary alternatives
arc the only ones admitted to consideration : "The amount thai
should be charged as wages of management or minimum prolil is what
Ihe entrepreneur could obtain for his services if he worked for wages
or for a salary for a corporation or other employer" (p. 159). One
dollar and eighty cents is then the answer. But it is nevenbeless clear
that at anything short of $1.85 he will shift to shoe production.

Now let the problem be modified somewhat : let the raw materials
and the wages aggregate fi.50 as before, but assume an interest out-
paymeot of 10 cents, the employer using his own capital to the interest
*alae of s cents. Will this modify the solutions given? Not with
SeagCT : eiprtiici arc to be understood as including interest items of
tltis tori: "The item appears whether, in the particular business, bor-
rowed capital or capital belonging to the firm is used It is

Tirtaal outlay." Precisely so : but fxpenits strikes one as a passably
poor lertn to denote tbe interest on one's own capital ; and it is outlay
of tmf sort only in the sense of s displacement fact — an opportunity

It is difficult to be certain of what Fetter would make of this case.
thooch it is fair to suppose that, by some sort of recognition of this
pfaaac of diaplacencnt cost, he would somehow arrive at a conclusioa
MsiUr to that of Seager, And for Jiim also tbe awkwardness wonid

VALUE AND DISTRIBUTION

With Flux ]ikewi»e the solution would probibly be ibe Mme.
though it does not clear!]' appear how, unleu upon Ibe ground that
other and competing producers would not be satisfied were their
capital not earning a cerlaiu specified rale, which rate the shoe manu-
facturer is thereby justified in computing aa within his ixpfKiet,

Carver's definition of profit as what is left over "after tbe other
shares are paid," these other shares including wages of su[>erintead-
ence, obviously excludes profits from Ihe case, but none tbe tesa leaves
il to be asked what relation entrepreneur activity holds to costs and to

Accepling one formulation. "The amount of effort which is neces-
sary to produce a given quantity, lay a pound, of one commodity may
be widely diRerent from that which is necessary to produce the lame

quantity of another When it requires a great deal of effort to

produce an article, no one will ordinarily be tempted to make that
elforl unless the article has a great deal of value, .... Spealdng
generally, an article must have value enough to persuade men to
make whatever effort is necessary to its production, or it will not be
made at alL .... That is to say, its value cannot be permanently
much above or below its cost of production" (p. 31) — we are far from
any answer to our problem ; the principle of value is here stated as one
of pain costs to the employed producer ; the doctrine is not an entre-
preneur money-cost doctrine in any sense; the "efforts necessary la its
production" are not employer facts. For the purposes of the problem
in hand, this is an imfaise.

But Carver has an opportunity-cost doctrine which promise*
better : "If ihere are many and taicellent opportunities for the employ-
ment of one's labor and capital, and their earnings consequently
large, much will be sacrificed in withdrawing them from those other
possible openings, and only tbe surplus above this large amount can

count aa the earnings of the land If a certain individual

with B certain amount of labor and capital at his disposal con earn
Si, 000 a year by working for other people .... a piece of land upon
which he with his capital could produce a total crop worth only
$1,000 would be worth nothing lo him. but one upon which he could pro-
duce a crop worth $1,300 would be worth spproarmately (aoo a year"
(p. 188).

Like Seager's view, this appears lo conceive the displacement cost
- as fixed by Ibe wage or salary opportunity; Si.Bo ia thervfore
Carver's solution.

i

CHAPTER IX

EARLY UTILITY THEORY: SAY
Dr. SewalP has made it clear that, in the main, early
value theory — for what there was of it — was of the labor-
cost tenor. Mercantilism, for the most part, conceived
labor as the basis of value, the notion standing, both for
labor and for product, as one of intrinsic or natural value
as an objective quality.

The Physiocrats also were pronouncedly objective in
their notion of value, identifying wealth with material
objects, and value intermediately with cost of production,
truly, — but finally and essentially, with the material land
product embodied in a commodity, and especially with the
subsistence material consumed by the artisans. And if it
be historically the fact that the wage level of French labor
left no surplus above the subsistence requirement of that
time, it must be admitted that the doctrine as held did not
seriously misinterpret the facts with which it had to do;
wages cost and subsistence cost must, under the conditions
assumed, be approximately equal.

But there were in Italy, even as early as the sixteenth
century, the beginnings of the other line of thought. Da-
vanzati (1588) recognized clearly the notion of utility as
subjective fact and as determinative of exchange value.
"A disgusting thing is a rat; but in the siege of Cesalino
one of them was sold for 200 florins, on account of the
great scarcity ; and it was not dear, for he who sold it died
and he who bought it escaped." So Turgot (France, 1775),
following Galiani (Naples, 1750), explained value,

^ Hannah Robie Sewall, Ph.D., *The Theory of Value before Adam
Smith/' Publications of American Economic Association, 1901.

107

io8 VALUE AND DISTRIBUTION

psychologically and subjectively, as the effect of condition^
acting through feeling.

But the first systematic exponent of the utility school of "5
value was J. B. Say.*

Inasmuch as the need of things must lie behind the -
labor production of them, and the need of product lie
behind the esteem accorded to instruments of production,
desire being the psychological explanation for the putting-
I forth of effort, it seemed clear to Say that the ultimate
! explanation of value must be found, not in cost, but in
utility. From the point of view of motive, consumption is
fundamental to production; thereby the process of valua-
tion must, in the last analysis, be a question of the relation
of product to consumption, and not of product to produc-
tion.

But note that, accordingly as economic affairs are dif-
ferently conceived, this may or may not involve the propo-
sition that demand precedes supply and controls it In the
collectivist or in the isolated-individual economy, desire
and demand, as we have seen, are one. And in a competi-
tive exchange-value economy, viewing society as a whole,
and regarding, for the purposes of tiie case, the existence
or non-existence of a money intermediate as irrelevant,
total supply is total demand ; demand and supply are merely
different aspects of the same aggregate of commodities.
But if, on the other hand, commodities are regarded, not as
an aggregate but as made up of separate kinds and classes,
it must be true that only effective demand, demand coupled
with purchasing power, can control and direct supply; and
this is especially and obtrusively true under a money
economy.

Say, however, saw no occasion to trouble himself with

these refinements. He accepted the obvious truth that price

cannot continuously remain beneath cost of production;

nevertheless, not the cost but the utility determines what the

purchaser may be made to pay; if the product is not useful,

no one will pay anything for it, no matter what the cost :

'Say, Traiti d'Sconomie politique; all references are to the 8th
edition, Guillaumin et Cie, Paris, 1876.

EARLY UnLITY THEORY: SAY 109

Where a receptacle is placed under a fountain, the sides of the
receptacle do not determine the flow of the water, though they do
prevent the level of the water from falling below a certain point.'

Ricardo would, however, have taken no issue here. On
August 15, 1815, he wrote to Say,

The utility of things is unquestionably the basis of their value.
But the degree of their utility cannot be the measure of their value;
the measure is in the difficulty of production.

But Say, on his part, is careful not to assert that utility
measures value, but only that value measures utility.* His
position seems to be that the utility determines the value,
causes it, and thus, under the general principle that the
quantum of cause may be inferred from the magnitude of
its effect, gets measured in it ; utility, being purely an indi-
vidual matter, cannot express or measure market value,
but, through demand, it determines the market value, which
market value is thus the sole medium of expression, the
sole common denominator, in which, whether accurately or
approximately, the social or general esteem for utility
receives its statement.

Thus interpreted, the issue between Say and Ricardo
may be formulated about as follows:

Ricardo, admitting the fundamental role of utility and
not at all denying the directive character of demand, treats
demand as practically a constant, and explains value varia-
tions through variations in the relative labor application.

Say emphasizes variations in demand as fundamental
and directive, but gives to variations in supply full account
by way of variations in entrepreneur cost :

The need of a thing causes the demand ; the expenses necessary
to produce the thing limit the supply. If to the consumer the thing
is worth its cost, the thing gets purchased.'

' Say, op, cit.. Book I, chap, i, p. 61.

^''You accuse me of saying that utility is the measure of value.
I thought I had always said that the value that men attach to a ining
is the measure of the utility that they find in it." — Letter to Ricardo,
December 2, 181 5.

*Say to Ricardo, July 19, 1821.

no VALUE AND DISTRIBUTION

Value, in Ricardo's doctrine, is proportional to labor —
through entrepreneur cost, it is true — but exclusive of land
and capital disturbances. With Say, value is proportional
to entrepreneur cost inclusive of rent and interest outlays.

Ricardo would have labor measure value, labor itself
the while receiving no measure. With Say, value measures
utility, value receiving no measure.

In answer to Ricardo's vigorous denial that the value of
the labor determines the value of the product, "a view which
I strive with all my might to refute," and his insistence that
it is only the comparative quantity of labor that rules the
relative value of products,' Say objects that there is really
no distinction, since "you cannot determine the quantity
of labor except according to the price that you pay for
it"^ — ^that is to say, labor, unless it can be shown to possess
some basis of original and fundamental homogeneity, must
be rendered into terms of value before a proportion can be
based upon it; but thereby labor must itself have received
a measure. Still, it was not fairly open to Say to condemn
this for its question-begging quality, in view of the fact,
as we shall later see^ that his own course of argument ran
as follows: having traced value upon the demand side, to
utility, he appeals upon the supply side, as does Ricardo, to
the entrepreneur mechanism and explains the values of the
products by the values of the costs ; and then, to explain the
values of the costs, reverts to the value of the products.*

•Ricardo to Say, January 15, 1820.
^ Say to Ricardo, November 2, 1820.

* It will, perhaps, be well to report the precise words of this
correspondence, in the terms of the authority from which it is taken;
Ricardo's letters, were, however, originally written in English:

Ricardo to Say, August 15, 18 15: "L'utilite des choses est incon-
testablement le fondement de leur valeur ; mais le degr6 de leur utilit6 ne
saurait etre la mesure de Icur valeur. Une marchandise d*une pro-
duction difficile sera tou jours plus chere que celle que Ton produit
ais^ment, quand meme les hommes conviendraient unanimement quelle
est plus utile que Tautre. II est bien vrai qu'il faut qu*un produit
soit utile pour avoir de la valeur ; mais la diMcuHS de sa production
est la seule mesure de sa valeur."

Say to Ricardo, December 2, 181 5: "II faut que je me sois bien
mal expliqu6, puisque vous m'accusez d'avoir dit que Tutilit^ 6tait la

EARLY UTILITY THEORY: SAY m

Ricardo in a letter to Malthus, October lo, 1820, says
of Say:

He prelends that a comniodily is valuable in proportion lo its
wlility. This would be true if buyers only regulated the prices of

commodities But the buyers have ihe least In the world

«o do with regulating Ihe price; ii is all done by the competition of
the sellers.

And again, on November 24, 1820:

I do not dispute the inHuence of demand on the price of com or
on the price of other things, but supply follows close at its heels,
and soon takes the power of regulating price into its own hands.*

It is not. however, clear that Say asserts value to be in
proportion to utility. His position is merely that value
measures utility; in ultimate analysis, also — though it is
not clear that Say recognized it — value cannot be In pro-
portion to utihty. since being a purely personal category,
utility to one man is not commensurable with utility to
another man ; only through affecting demand can utility be
relevant to market value. And the case stands the same if

mesure de ta valeur ; tandis que je croyais avoir loujours dit que la
valeur que les hommes atlachent a une cbose e9I la mESLire de I'udlitf

qn'ils troDvent en elle }e eonviens de memc, avee vous, que la

Tsleur d'un produit ne peui pas baigaer audesaoua de ce que coutent lea
diSicultcs dc sa production. Si les homme! cstimenl que son utilitf vaut
ce prix-la, ils le produisent ( s'ils estinicnt que son utility ne vaUt
pai ce prix-la. ils ne le produiseul pas."

Ricardo to Say. January ii, iSjo: "Vous me paraissez avoir mal
camprit une de mes propositions. Je ne dis pas que c'est la valeur du
travail qui regie la valeur des produili; c'est une opinion que jc
cherche, de lout mon pouvoir. a detruire. Je dis que c'est la quanlili
comparalive du travail nccessnire ii la production qui regie la valeur
relative des produits."

Say to Ricardo. March a. i8jo: "Jc vous avoue que je ne com-
prends pas trop la difference que vous ^tablissez enlre la valeur dn
travail qui ne determine pas la valeur des produits, et la quantity du
travail necessaire 4 leur production qui determine la valeur des
produits. 11 me semble que vous ne pouvei d^termiuer la quanlJId et
la qualitf du travail que par le prix que Ton paie pour I'oblenir. Celt
du moins ce que j'ai toujour! entendu par la quantity de ce service
productif que j'ai appclle service induslricL Son prix fait parlie de*
fraU de production, et vous-oieme ftablissei tres-iustement que
I'cixenible des frais de production regie la valeur du produit." —
(Euvres diversei de J, B, Say, Paris, Guiltaumin et Oe. 1S48. Vol. IV,
pp. 409-15. passim.

*Bonar. Lcllert of Ricardo to Sfallhuf, p. 173.

iia VALUE AND DISTRIBUTION

carried out to the marginal analysis; the marginal buyer
may consume at a very high rate of utility or at a very low
rate. At the margin, as elsewhere under the competitive
system, things go, not according to the highest utility, not
to those persons to whom the greatest service would accrue,
but to those whose estimate of utility is highest relatively
to other things, — ^to those persons, namely, who will forego
the largest market-value total ; the rich man buys what the
poor man goes without.

But Say is nevertheless right in asserting the value
measure of utility to be a fact, in the sense that by price
some sort of appraisal of utility is expressed in terms of a
standard, no matter how wide of strict proportionality to
utility the price may fall, or how loose and inaccurate a
measure it may be, and no matter to what man, marginal or
other, it may be a measure — and would perhaps be right in
asserting that there can be no other measure ; and he might,
perhaps, have also done well to deny — if, indeed, he did
not deny — that there can be any measure of value, except,
of course, in some conventional standard, like this of money.
Has, in truth, value any other statement than by equiva-
lency in other things of value? Will values reduce to homo-
geneous utility? Say did not assert that they would; later
writers, fortunately or otherwise, have so asserted.

The value of a thing, in Say's view, rests upon the
fact that the thing has utility ; this value indicates that "it
is esteemed as highly as a certain quantity of another indi-
cated thing." ^® But this value presents not the owner's
valuation nor that of any other individual: it is a fact of
general estimation, a question of what will be paid — seem-
ingly some sort of vague foreshadowing of the society-as-
an-organism concept.

"The price of products is established in each market at
the limit fixed by the cost of production, provided that the
utility which is ascribed to the products promotes the desire
to acquire them." " It remains, then, to seek out the causes

"Say, Traits d'Sconomie politique, Livrc II, chap, i, p, 333, 8th ed.
Paris: Guillaumin et Cie, 1876.

^Ibid,, p. 341.

EARLY UTILITY THEORY: SAY 113

^vhich determine the prices of the productive agents (fonds

Say's doctrine is that utility is primary and cost the
resistance, which cost is determined By the values borne
l>y the productive agents employed. This makes value in
the agent a cause of value in the product; but directly the
value of the product will be made the source of value in the
agent. And it is not made clear what relation the entre-
preneur's services hold to the result. Do these also give
value at the same time that they receive it?

Say admits that if production were merely a matter of
^bor, with all labor at one level of efficiency and of wage,
those products requiring equal amounts of labor would

have relative prices to correspond. But land and capital
p^wie in, and different qualities of men and of land come
^^y and products are the dearer the more and the dearer
^^^» in the aggregate, the productive energies employed in
*>iinging them to market. "The price will be the sum
'Necessary to pay the expenses indispensable to the creation
^* the commodity." "

Say has small regard for the view that all differences
^^ Wages are explained by the different costs of rearing and
^^ preparation, so that, all the data being considered, all
^^ges are equal. And if exception is made of native talent

^nd of circumstances of environment, these exceptions, he

^Shtly insists, invalidate the rule.**

It is interesting to note that Say has, nevertheless, a
^^^ctrine of real value and of real cost. In general con-
^^>rmity with the reasonings of Smith and Ricardo, real
^ue and real cost are worked out as dependent upon the
P^n conditions of production and expressive of them. So
real value may fall while exchange values are not affected
^^ clear recognition of the fact that only relative costs
^c important for exchange value.**

But to return to Say's explanation for the valuation of

^Ibid,, p, 34a.

Ponds productifs are something more, in Say's thought, than the
o«rc objective physical facts: they are valued — funded — and thereby
^I^ble of functioning as cost data.

^^bid., p, 34J^ ^Jhid., p. 343. ^ Ibid., pp. 343-S2.

I

i

114 VALUE AND DISTRIBUTION ^H

cost goods : It is interesting to note that all of this discus-
sion falls, with him, under the head of distribution. Say,
like J. S. Mill, takes value and distribution to be parts of
one problem. And if wages and interest are costs and, as
such, influence value, this conclusion seems to he inevitable :
incomes, while distributive shares to their recipients, are
costs to those who disburse them as production outlays.
There is no escape from this unless in denying that is-
tributive shares are determined by values. And this seems
to say that it is only the classical school who can separate
value and distribution ; and in the main they did not,
though it is true that subsistence cost for wages
and abstinence cost for interest were each, upon
occasion, appealed to as determinants of the com-
pensations fundamental to value. The later school can-
not logically make the separation — and yet, as we shall see,
they somehow make it. It is, however, to be said that, other-
wise than upon this separatist treatment, the position of the
later school would appear somewhat too obtrusively to
involve this circuity of explaining costs by value and value
by costs."

The current value of these productive agents {fondi) ....
is established according to the same principle as the value of other

things But the quantity demanded cannot have as motive

the saiisfaciion of consumption, A field or a factory does not
directly procure any satisfaction for its possessor. Their value
comes, then, from the value of the product which can be derived
from theni, this depending, in turn, upon the use that can be made
of the product, the satisfaction that can be derived from il."

" Nor. if scientific explanalion or intelligible exposition is tbe
end in view, ia it a sufficient disposition of tbe case lo declare tt
organic, and iherebjr lo assert or infer that circular reasoning is both
justifiable and inevitable. This is simply to throw up the hands, to
abandon tbe problem. There may. it is true, be nothing else for it,
but if this is so, let it be so said and an end made of the talking:
surely by those who assume explanation to be impossible, the offering
of further explanations is gratuitous.

In tbis connection, a note of Say's at the bottom of page 37] will
be of interest: "I have long doubled whether in the plan of this woHi
1 should develop trbat relates to value before what relates to pro-
duction, that which shows the nature of the produced fact before the
manner of its production. It has seemed to me that in order to under-
stand the foundations of value it is necessary 10 know in what the
costs of production consist, and, to that end, lo form in advance wide
and accurate notions of the agents of production and of tbe services
which may be derived from them."

" Say. op. cit., p. 3,67.

EARLY UTILITY THEORY: SAY 1 15

The foregoing would seem to deny the influence of cost
and to place the determination of value entirely with utility.
And to assert, as does Say elsewhere, that each cost has its
value as such in proportion to the value that it produces,
does not, as has already been noted, appear greatly to help
the case.

But later, this doctrine receives a supplement which

may perhaps suffice to save it ; agents of production do not

get their value directly from the product, but as agents to

be combined with entrepreneur activity, and to function

with it and under the hire of it, in the production of value ;

their remuneration, therefore, is not precisely the market

value of their product, even if, as Say believes, this be, with

accuracy, separately ascertainable, but is merely the market

value of their co-operation in value production — a quite

distinguishable thing:

Whoever controls labor or land or capital is a merchant of that

commodity which we call a productive service Entrepreneurs

[note the term] are nothing but intermediaries who, according to the
demand there is for a product, bid for the productive services
necessary for the making of it. By comparing the prices with the
costs necessary to the production of this or that product, entre-
preneurs decide to produce this or that product, and establish the
demand for all productive services, and, on the demand side,
furnish the basis for arriving at the m^ket value of these services.

The quantity of services offered is the supply basis for
this value.^'

Sympathetically interpreted, nothing quite so modern as
this is to be found in any of the modern books : no doubt,
however, this sympathetic interpretation reads into Say's
doctrine more than he himself saw in it; his explanation of
the value of the agent really errs in being over-direct — in
making the value of the agent to be in theoretically strict
proportion to the value of the product. Still, he does not
precisely say this ; according to him, the different distribu-
tive shares, however received — whether directly from pro-
duction, or as hire-paid, daily or weekly, or yearly, and
whether wages or rent or interest — ^are derived through the
entrepreneur, "but in whatever manner this revenue is

" Op. cit„ p, 37a.

ii6

VALUE AND DISTRIBUTION

received, it is always in the same right, and its source io
always a produced value:" in objection to which, or in-
amendment of which in point of possible ambiguity, it is
to be remarked that when a remuneration is received
through an entrepreneur, there is no knowing precisely
what the value product of the agent is ; and were this know-
able, there is no theoretical warrant for believing that the
remuneration will equal the product or be proportional
to it. (See below, chap, xxii.)

Say's doctrihe of rent also reads like some chapter out
of the latest of modern thought : Whether land be good
or bad, its annual revenue will be the same ratio to its total
value, — say the twentieth; this rent may be expressed as a
per cent, or as a per-acre quantity, and it is in the latter
sense only that good land may command rent a hundred
limes greater than poor land. "Comparing the value of
the product with the sale price gives the rent of the land,
and the rent of good land cannot be higher than the rent
of poor land" (in this sense of ratio)."

We must note, however, that this perfect equality of
ratio between the total value of different lands and the
term value productivity of these respective lands assumes,
not merely the distinguishability and separate appraisability
of the product, but also a perfect homogeneity in the quality
of the cultivators. Werg these all alike in preferences and

'■ Op. eil., p. 43J.

This paragraph is so important as to call for the author's precise
words: "En comparant un bon terrain avec ce qu'il coule. on pour-
lait croire qu'il ne rapportc pas plus qu'un mauvais ; el, en effet un
arpent don I on retire cent francs et qui coute d'achat trois mille
francs, ne rapport pas plus qu'un arpent dont on retire seulement dix
francs ct qui ne coule que trois cent francs. Dans I'un et I'autre cas,
la lerre rend a son praprijtaire. chaque annee, 1e trend jme de sa
valeur. Mais qui ne vojt que c'est le produil annuel qui a elevc la
vaJeur du fonds? La valeur du produit compart avec le prix d'achat
fait la rente de la teire, el la rente d'une bonne lerre peul n'elre pas
supirieure k la rente d'une lerre mediocre ; tandis que le proit
foHcier eat la valeur du produit annuel compari avec I'etendue du ter-
rain ; et c'est sous ce rapport que le profit que rend un arpet de bon

This, it will be noted, is the view in support of which Professor
Fetter has marshaled all the resources of wide historical research and
of keen theoretical analvsis. It may now be hoped that this trutb.
having so long awaited its second statement, may, in its later and mon
scholarly presentation, have tile good fortune not to be ^ain forgotten.

EARLY UTILITY THEORY: SAY 117

aptitudes and in cleverness of bargaining, or were all land
f^Vce in point of adaptation to varying methods, e.g., to
^"^t^nsive and extensive methods of cultivation, and alike
^so in adaptation to the varying preferences, tastes, aspira-
^^^Tis, and skill of the cultivators, the proportion would,
^^laly, be a constant between the market value of the agent
^^^d its value productivity. With facts as they are, this pro-
Portion can be asserted only between the market value of the
^T^i and the market value of its value productivity;
^iiis last proportion, however, means nothing for the
P»*«sent purpose, since the market value of the rent-bearer is
'^^>thing but the capitalization of the prospective rentals
^<:rcording to the current market rate for such invest-

Savings and capital applied to the land become part of it ; ... .
™^^*v lose the nature of capital and become land funds."

One part of the national capital is diminished to the
^j^^responding increase of another part. It is thus evident
*^^t Say cannot possibly concur in Ricardo's notion of the
{"^lation of rent to cost and to value. Ricardo arrived at his
I^^^Xr-proportion doctrine of value, first, by reducing capital
^^ labor and, second, by excluding rent from the computation
Z ^that is, by placing value fixation at the land margin.
^ is probable that this service to the labor-cost doctrine was
^*l or nearly all that, in Ricardo's mind, these tributary
p^^>ctrines were ever good for. Recalling, however, that the
^l)or-proportion theory was worked out by him through
^^« entrepreheur mechanism, the notion becomes untenable
^J^st as a problem in entrepreneur cost the expense of pro-
pViction is greater upon marginal land than upon other
*^nd, or that as a question of entrepreneurship — of the
t^rsonal margin as against the instrument or agent margin
^e marginal cultivator is more likely to be upon mar-
ginal than upon other land. The question is, therefore,
^timately — ^and we have finally arrived at it — whether in
^e cost investigation we are concerned with social labor-
P^chase cost as against competitive entrepreneur cost, or
^th agent and instrument margins as against that marginal
^trepreneur in whose processes of choice all ?igents and
^'istruments, marginal or other, are mere data. And finally
^ut as less difficult — there is the problem whether, upon
* value basis, marginal land or marginal capital or marginal

*0p, cii., p. 435.

I

Il8 VALUE AND DISTRIBUTION

bbor can mean anything more than valueless land, valueless
capital, or valueless labor — the equivalents of free land,
free capital, and free labor — economically, that is to say,
no land, no capital, no labor.

At any rate, it is clear that the argument that the rent
of better land does not enter into cost of production, since,
for whatever more is advanced as rent, there is a corre-
sponding increase of product, would equally well apply to
exclude wages or interest from cost.

.As we have seen, there is never, in the crucible of entre-
preneurship, any accurate correspondence between the out-
lays of differenl entrepreneurs and the addition to product;
in truth, the varying proportions in which different entre-
preneurs employ the different productive agents should
suffice as proof of this; but for the purposes in hand this
need not be insisted upon. Rent as a differential of price
paid for a differential of service is, as cost, not distinguish-
able from wages or interest.

Ricardo .... shews that the rent is not the cause but tiie
effect of the need fell for wheat; and the reasons which he addtices
will serve to prove against him that the Other expenses of pro-
duciion. notably the wages of labor, arc likewise not the cauae but
the effect of the current price of the product."

And in summary Say remarks :

The ideas of David Ricardo have been of service to me in cor-
recting several pans of this treatise, principally in what has rcte-
tion to money ; but he has supplied me with no single improvement

to introduce in that which relates lo rents (profits foncierj)."

Verily Say was a mo<lern of the moderns,

" Say, op. cil., p. 438. note.

" Ibid., p. 438.

Malthus ; Despite marked sbrewdnesi of obsemtion and great
originality of insight, Malthui' muddle-hnuled quality in theoredeal
(h inking leaves not much to be had from him for value doctrine.
Bearing in mind that Ihe purpose of the work in hand is constructive
rather than primarily historical or critical, and therefore doe* not con-
cern itself with tracing the growth of theory, or with outtittins tlie
tyBtems of thought of different writers, excepting to the extent thai —
as a method of presentation and mostly irrespective of the perMnal or
systematic interest, as such—these different positions may, iUustralirely
□r by statement and criliciim, be made (0 serve the purposes of expo-
sition, we shall decide that the views of Mahhus need not long
detain us.

As has been already noted, he was by full and frank profeaiioa,
a disciple of the labor theory of value — but all the while with Kime

I

EARLY UnLITV THEORY: SAY

119

Lusally

''"SBi'ingB and with some reservations. For even ttough,
■P«akiDK, tabor was admittedly the detcrmioant of value, yet, as a
questian of exchange power, of relations between commodities, and
as a problem of the choice of a value measure, it ai)peared to him much
tQorc relevant to ask how much a commodity will command of labor
wherewith 10 produce more commodities, than to inquire into the quantity
of labor invested some time in the past in its production. And so
Malthas stood for the labor measure of value, but (his in terms of
labor purchasable instead of labor expended, and with the emphasis
upon aervice in terms of labor spared to the purchaser or of the
>cr*ice offered through the purchased goods.

Id Malthus' controversy with James Mill as to the possibility of
a general glut, this same issue is in the background and takes a position
of conlralling importance. In that controversy Malthus restates the
■•sue as substantially whether commodities in general may be selling
*> Ims than their costs of production. His argument (Dt/inilions in
foJiricoi Economy. London, Johni Murray, 1827, pp. 44 ff.) pro-
ceeds upon distinctly entrepreneur cost lines, regards rent payments
^ (or purposes of cost, precisely like other outlays, and finds the prac-
^eol test, for that practical man who is trying to decide whether the
"urket i] overdone, to be in the equality of money intake with money
OQtgD: "The hop planter who takes a hundred bags of hops to Wig-
^<Q fair, thinks little more about the supply of hats and shoes than
™ does about the spots on the sun. What does he think about, then?
^»d what does he want to exchange bis bops for? Mr. Mill seems to be
"■ opinion that it would show great ignorance of political economy to
^T that what he wants is money ; yet .... it really is money
I ^aicli he wants and .... this money be must obtain, in the present
*'*te of society, in exchange for the great mass of what he has brought
™ narket, or be will be unable to carry on bis business as a hop-
^^ler; .... he must pay the rent of his bop ground in money

'•nil being presimibaly so fixed by agreement] He must pay

' Ut poles, his bags, his implements, etc.. in money He

J'W pay the .... laborers which he employs upon bis grounds,
"mini the course of the next year, in money, and .... ft is In
?*« alone of all the articles brought to the fair, that be can calcu-

^ ki* profits True, .... the landlords and laborers

"w ttt paid in money will finally exchange it for something else, as
'" "at enjoys money in kind except the miser : but the landlord ....
■wH bt little likely to accept from the hop-planter the articles which

■t could get at the fair in exchange for his hops And as

"^tw of fact, the laborer .... is paid in money. Foreign trade is
"" dsnbt mainly a trade of barter. But the question whether British
*°Vb» find an adequate market in the United States does not depend
■*"■ iheir purchasing the same quantity of tobacco as usual, but upon
••itlltr the tobacco, or whatever the return may be, will purchase the
°l1iih money or the British labor necessary to enable the woolen
"''OlsctureT to carry on his business successfully. If both woolen
'""Wficturers and tobacco are below the cost of production in money

^[.'■bor, both parties may be carrying on a losing trade

^'1 It th« answer to the pamphlet which Mr. M. Say addressed to me

'''•tt] yean ago The power of replacing capital will mainly

''^twi on the power of commanding labor Commodities in

^""ti, and corn most particularly, are continually rising or falling in
"''*} price .... while the money price of labor remains much

I20 VALUE AND DISTRIBirnON

more nearly the tame What are the coats of production?

They are either the amount of monty necesaaiy to pay the labor
worked up in the commodity, and in the tooli, etc . • • • with the
ordinary profit, etc .... or they mre the qoastity of labor in kind,

etc Now surely, it cannot be denied theoretscmlly.. that all

commodities produced in this country may fall in comparison with a
commodity produced in Mexico. As litde can it be denied, theo-
retically, that aU commodities produced by British labor may fall as
compared with that labor."

From another point of yiew, and for other purposes, Bialthtts*
doctrine of a general glut will later occupy us further. For the
present, the sole concern is to make clear the distinction, as it lay in
Malthus' mind, between labor as the cause of Tahie and labor as the
measure of value — and particularly to make it clear that this labor-
purchase notion, this forward- rather than backward-looking view, u a
groping effort toward utility rather than cost as the basis of value.
The value of the goods is taken to rest rather upon the service to be
obtained from the goods than upon the labor expended in their
production.

CHAPTER X

THE CAPITAL CONCEPT

Precisely why the distribuendum in society should be
to be the produce annually to be divided, as against a
^^eekly or monthly or decennial division, is not clear ; but it
*s olear that unless the distributive process is conceived as
^^^JTied on concurrently with the productive process, there is
no reason why the annual term is not as serviceable as any

AVe are not yet ready for a full consideration of the

"lotion and nature of the social dividend;^ broadly, how-

^^'^er, it may be taken to indicate the aggregate social output

^f oonsumption goods — commodities, benefits, enjoyments —

^1 things, in short, accruing to men as economic income, in

^riy given unit of time. It is, indeed, sufficiently difficult to

"^^^^Ice precise the content and limitations of this social-divi-

^^*id concept and of the distributive-income concept ; and it

*^^y be inexpedient to attempt here even to place the inter-

^'^gation points. If the textile worker makes you a suiting,

^^<i the tailor makes this into a suit, no one would question

^*^t both the making of the cloth and the making-up of it

^to a suit are services — items contributing to your real

*^come. But how if you make your own cloth? or mend

y^Ur own coat? These also are facts of income, results

^joyed, but are they thereby the subject-matter of the dis-

^nbutive process ? Are they parts of the social dividend for

^y purposes of theoretical analysis or of the practical

applications of doctrine? Are you a producer when you

cook your own food? The restaurant-keeper and the board-

*^*house mistress render utilities of a highly important

^^er; their activities are productive, and the products

^feof are parts of the great distribuendum. So the house

servant and the house cook are likewise productive

^See chap. xztL

laz

VALUE AND DISTRIBUTION

of distributed utilities — goods
ience, comfort, or show, as
palatability, and digestibility,
deny productivity to the

of attention, conven-
well as of cleanliness,
It is, then, inadmissible
housewife equally with

the bread-winner; house-bound women are something
more than supervisors and directors of the consiimplion
process ; they are producers. But, even so, does this avail
to include their products within the goods which get dis-
tributed? Or is there a line of distinction between pro-
duced goods and distributed goods, accordingly as these
goods do or do not go through the crucible of market valua-
tion? And if this be the dividing line, must not the home-
grown and home-consumed eggs and chickens and pork of
the farmer be set outside the distributive problem merely
because they never reach the market?

And this is not the only difficulty, nor is it, for theo-
retical purposes, the most perplexing difficulty. A goodly
part of each man's purchasing power is expended in the
direction of services, in the more limited sense of goods
not fixed and embodied in matter.' One pays to be cured

' No one will todny deny tbe productivity of (he preacher or
singer or actor ; nor i> today tbe distinctioD betweeo material aad
immaterial of great significance anywhere for economic science —
t|uite irrespective of Ibc long-standing but lately much -litigated prob-
lem aa to the philosophical juslificalion for any such distinction. It is
well, however, to appreciate Ihe aspect in which the question appealed
to the earlier etonomisis.

Mercantilist thought had. it is true, abandoned the cameraliiiie
point of view, according to which all economic inquiry regarded lolely
the prince's welfare in tbe administration of his private estate — the
ends propoied being simply tbe maximum possible revenue and tbe
highest level of dynastic prosperity.

But Mercantilism was none the less consistently national in itt
point of view, as distinguished from individualistic and personal ; and
it was competitively national as distinguished from »ociaI or cosmo-
politan. How. indeed, shall any people grow in economic power as
against its neighboring enemies!' by piling up wealth, by goodly occa-
mulations of munitions and money) and credits against the time of con-
flict. And how shall any man or nation become wealthy, except by tell-
ing more than is bought in, by keeping consumption under production?
And how so well extend your personal economic dominion over yotv
neighbor and over your neighbor's possessions—his desirable daughter
included — as by getting him into debt to you f Or bow so well render
yourself strong, and at the same lime your competitor nation weak, as by
getting it into debt to you, or belter yet. by getting its purchasing

THE CAPITAL CONCEPT

"3

of his ills, or of his ennui, to be passively exercised by the
masseur, to be solaced by the ministrations of the pianist,
the vocalist, and the elocutionist. Instead of our looking at
pictures, the orator or the actor paints pictures in our
minds. But suppose one plays the violin, not for another's,
but for his own enjoyment, and without monetary recom-
pense; or provides his own exercise, paints revery-wise his
own dream pictures, cures his own ills, basks in the sun to
his own great warmth and enjoyment, and. in general, has
a good time; once again, is all of this production? Or, if
not, is the basis of the distinction that these activities or
passivities fail of getting valued in the market? Or is it
rather that they are entirely internal ? Or is it that they are
free goods to be had without any sort of sacrifice, by play
rather than by work? In truth, we are again in face of the
difficulty of defining play. Is the essential characteristic of
it in its non-productivity, or rather in its non-sacrifice char-
acter, the free-goods quality of its product? In fine, what,
accurately, do we mean by production ?

Putting aside for the time being these more or less

control, througb comering

nationalistic emphasis,

oE thes

power mta youi

of exchange? And how accomplish

unless by selling your victim neighbor

yoa buy back? Thus conceived, with the

the whole question becomes not primarily one ol income.

or of aggregate satislaclious and total consumption, bul of accumula-

tjon. and especially of growth in wealth under the form of fareign

credits or other ready international purchasing power.

Proceeding from substantially the same point of view, the phyaio-
cratic school seemed to itself to have discovered a method better
yel — eccumulation truly, but accumulation rather of population than of
wealth- Artisans consumed as much wealth as they produced ; the
social cost of their product was as great as their product. Manu-
facturers were regarded as, in Dr. Franklin's phrase, "subsistence meta-
morphosed," Agricultural laborers alao consumed all that they
produced or, at all events, all [hat they received in wages, and seemingly
must always command so small a wage as to make this a permanent
fact ; whatever the product of labor and land together might be, the
excess in produce over the laborers' wage and necessary aubaislenee
most go to the landowner as the equivalent and eipression of the pro-
ductiveness of the land. So with agricultural, also, as with artisan
labor, the social coat canceled the social product • only the land was
productive of net froducl. But even bo, there was Ihia difference
between artisan labor and agricultural labor, that artisan labor did not
increase the total population maintainable in the country, gave forth no

124 VALim AND DISTRIBUTION

gratuitous difficulties, it may be said that economic com-
modities— products for economic purposes — are restricted
to those desirable things which are not free. But especially
is it to our present purposes to note that this is not quite the
same thing as a restriction to those facts produced by labor
or attainable only through labor. For there is much value
no part of which, or but a small part of which, is labor-pro-
duced; and some of it is not labor-wise obtainable. The
productivity of what is broadly called land manifests itself
in part in values of this sort based upon qualities of origfi-
nal fertility, or upon non-produced facts like scenery, loca-
tion, springs, mines, water -powers. It is the fact of limited
supply of products and of their value standing derivative
from this limitation, rather than of mere labor origin or
labor limitation, that gives any agent or instrument its
right to claim productivity for itself; environment is as
truly productive as is organism.

Utility and the necessity of sacrifice for its enjoyment
appear, then, to be the only requisites of value. All valuable

subiUlcnce product, no life material, while (be producl of agriculture
may be rcKaflcd as population, expreued tn tlie fomi of its raw
materiaL And it Kcmed clear that national lupremacy was ratber a
queiltoD of polwlation than of accrued wealth.

It follow! also that, inaimuch at the laborer received only
enough to live upon anyway, there wai imalt uie. and some barm, in
trying to tax him : ihe only man who. having a product net. a surplus.
could pay, was the landlord, the rent-gatlierer ; if Ihe laborers paid
laxei, it must be at the cKpcnse of their number. It followed from
all this, then, that the program fundamental to national greatness was
to folter Bgricutture ai a life-maintainer. the sole source of increasing
population, and to tax the land.

Adam Smith, coming into the national point of view at an inherit-
ance from earlier thought, set himself deliberately to the investigation
of the cauKs. and to the formulation of the rules, making for the
increase of the opulence of nations, and found that while manu-
factures were productive, they were not so irt Ihe tamt lenie at agri-
fHlture, while labor as mere service was not productive at alL The
shadow of physiocratic reasoning was itill over Adam Smith.

Not having arrived fully and consistently at Ihe individual point
of view in economic analysis. John Stuart Mill followed lubstantially in
the lootstepa of Adam Smith : Unproductive coniumption is cotl-
fumption that does not furnish maintenance for productive labor ;
productive labor is. in turn, thai labor which aff&rds an addition to the
aggregate accumulated wealth possessions of society ; thereby he arrivi^
at the distinction between material and immaterial. But this distinction

J

THE CAPITAL CONCEPT 125

consumption goods are products either of labor or of
environment; and the problem of distribution has ulti-
niately to do only with consumption goods.

If all consumption goods are products, it remains to ask
^f what they are the products; and how many are the
fectors of production, through which contribution is made
to the supply of things, facts, and conditions possessing
value?

It is to be kept carefully in mind that even though the

question is stated as one of the factors making for value

P^'oduct, this search for factors is none the less a search

'or the objectively existing facts, means, intermediaries,

^d instruments, conditioning the existence of the value

pJ'oduct, and standing, with reference to the product-result,

^ a physical-causal relation as the first term in the force-

^use sequence. That is to say, the point of view and

''Method of approach are, in the more inclusive sense of the

l^i^s, mechanical and technological in significance. Surely

^^ a sense, but in a quite different sense, monopolies, patents,

P^od-will, trade-marks, etc., are productive; incomes go

^'^^Wcen material and immaterial rested not at all upon considerations
^futility, of importance for consumption, in the aspect of service to
"^'o^an needs, nor finally and fundamentally upon some test of con*
^"^te reality, or of tangibility, or of materiality in any philosophical
*^sc, but solely upon the aspect of permanency. For in a general
^^y, that which is material and tangible is enduring ; at any rate, that
^*^ch is not material, which has no substantiality, is evanescent; in
^^iflg to be it ceases to be. Thus only material things can add to
^^^onal wealth. And that some forms of material wealth are them-
J^es very temporary in their existence, e. g., ice cream, leaves the
'^ between the material and the immaterial none the less an actual
line and, at the same time, a line which coincides practically with the
"^^ between the things that add to national accumulated riches and the
tluogs that do not

All of which was excellent for its purpose, and need have occa-

"**ned no perplexity or controversy, if only Mill had not fallen into

y** error of following his predecessors in their bad choice of terms;

*^the line which he was really seeking was not that between the pro-

^^'^▼e and the non-productive, or between the material and the imma-

fftl, or between the tangible and the intangible, but merely the line

^^^^een the accumulatable and the non-accumulatable. Interpreting his

^''^ productive and non-productive in this sense, no difficulty is pre-

f^ted, excepting, perhaps, with regard to the significance of the dis-

^'J^on, as seen from the point of view of a more modem analysis and

of its theoretical needs.

136 VALUE AND DISTRIBUTION

with them, they are capitalized into market values, and
sold in the investment markets ; that is, they are acquisiti'
productive for the purposes of private interests and of ii
vidual ownership; they are, in fact, differential opportu::::^--^
ties reduced to private property, and enjoyed, as is
essential fact of private property, under the rig^t of exc^^^^ ^
sion of all other claimants. These property rights, many
them purely distributive in ultimate bearing, are nev<
less not readily distinguishable, excepting upon technolo^^"^^,
cal grounds, from ownership in lands or other rentable ai^^--^^
productive instrumental goods.

But conceiving of the productive process tedinolopcall^^ ^*
what different productive categories demand recognition ^^^^*

The fundamental distinction would seem to be tha^*^
between man, as agent-laborer and producer, as over agains^^*^
the aids, auxiliaries, and instruments employed by him. Thi^ ^^
parallels the distinction between organism and environ^- ^'
ment, and corresponds accurately with the nature of incom
as received (i) by virtue of personal activities, and (2)
derivative from possessions.

Accepting, for the time being without question, this
first category, that of the human actor manifesting himself
in economic production under the aspect of human labor,
we turn to inquire whether the aggregate of productive
possessions is to be further distributed into the prevailing
land and capital categories, and, if so, whether the distinc-
tion between land and capital is to be rested solely upon
their different relations to the technology of industrial pro-
cesses, or is to be justified under some further and different
principle.

Waiving for the present the question whether, as factors
of production, any distinction other than technological is
admissible, we confine our inquiry to the validity of the dis-
tinction as based solely upon technological considerations.
For technological purposes, then, is land weath to be dis-
tinguished from other weath ?

THE CAPITAL CONCEPT 1^7

The extractive industries — the industries of raw ma-
terial, the industries primary and basic in human life —
depend upon the land, land in this sense being, of course,
taken to include seas and rivers and mines. This distinction
between extractive, or primary, and industrial, or secondary,
coincides for the most part with the distinction between
agriculture and manufactures, and is doubtless of very con-
siderable significance for certain purposes. But it evi-
dently will not serve as a basis for a distinction between
land wealth and other wealth, since not the extractive indus-
tries alone, but all industries, employ land; and since all
extractive industries make, under present conditions, use of
capital. Even as a distinction of degree it will not hold;
some of the extractive industries, mining for example, are
pronouncedly, even prevailingly, capital-using in their tech-
nique : and even the most simple and primitive of extractive
employments make appreciable use of non-land instru-
ments.

It is, however, none the less true that not merely food
and raw material, but building-sites, standing-room, air,
climate, scenery, neighborhood, etc., are markedly and em-
phatically of land character or of land origin. And it is
equally unquestionable that capital goods achieve some
"things not attainable through any possible substitute, pre-
<3Sely as other commodities are in a peculiar degree, or exclu-
sively, dependent on labor. You cannot have timber from
fabor or capital; neither land nor capital will dance you a
skirt dance; and if you desire a certain peculiar quality of
screeching, you must resort to a phonograph or to a calliope
^ against any form of land or labor.

But note once again how purely technological all of
^s is; for while it is true that labor and capital, when
^^Hied recourse to land in the non-value and purely con-
^^^tt and physical sense, will yield no timber, it is at the
*^tie time true that they will give timber plenti-
^^y enough if strictly limited in their application to
^^ueless land, that is, if confined to what, in the economic

ia8 VALUE AND DISTRIBUnON

and value sense, is no-land. And some day the technologs.**^
of timber production may make of timber a laboratoni
prixluct.

And it is all the while to be remembered that these tech-
nological differences and specializations, while of unques-
tionable actuality, are, in fact, as marked between one iten ^
of huul and another, or between one item of capital good^^
and another, or between one laborer and another, as betweecr^
capital jjikhIs and labor, labor and land, or land and capita*- -
l'\»r market purposes ag^cultural machinery is more closel^
akin to wheat land than to machinery for watch or chr^:^^
nonieter production ; cotton lands are, from the same poi*^
of view, more like sheep than like timber lands pr ir^^
lands, or wheat lands ; in point of products, violin and s^
are not more unlike than virtuoso and sailor, or than prii
donna and stoker. ^

In truth, also, if productive factors are to be distir^^
^•uished according to technological considerations, not tw"^^^
or three but couiUless categories of productive factors wi
have to he recognized.*

Unt in |H>int of degree of technological ^ specialization, i:
this threefold classification better founded? Capital is, foi

* It \\\\\%\, however. l>c admitted that this does not quite cover th
diHuulty ; wor aX this staKC of the discussion is adequate treatment o
the dilUoultv leadily piv<»ible.

l'*oi. .liter nil ia Mid. it must remain true that, technologically con-
nidcred. as* mechanical and instrumental facts, a broad and general dis-
tinction l^tween land and other production goods will require recogni-
tion. Unt it i!« the more necessary to determine the precise purposes
for which the distinction is important, and the extent and accuracy
with which the disttinction applies. To perform this service folly
nuut. however, t^e left to a later chapter. (See chap, xxiii.)

That the luw of diminishing returns applies only to land, or at all
events applicii with itome esinrcial force or in some peculiar manner to
land, is n conviction appealing strongly to careful thinkers as warrant-
ing the distinction Itetween land and other instrumental goods.

It is. for example, clear that Malthus was right in insisting that,
as long as the human race must depend upon agriculture for its food,

* Htymologically s|>eaking. there are manifest objections to this
use of the term "technological" as referring especially to capital
regarded in the mechanical and industrial sense ; but no better term
teems to be at hand.

THE CAPITAL CONCEPT 129

example, said to be mobile, not spatially alone, but in indus-
trial applications in general. In point of fact, no distinction
in this regard, other than of degree, has been anywhere
urged or attempted; and evidently any distinction along

*o long population cannot continually multiply without somewhere
^<naiiig upon the harsh pressure of the subsistence limit. And it is true
^l^o that this is due to the existing limitation upon the land supply —
^l^stic limits possibly, but none the less real and permanent. Land
^^>Uu>t be harder and harder pushed for product excepting upon terms
^^ less and less generous response.

Postponing for a moment the question of why this is, it is first to
P^ noted that the fact is not only primarily social in significance, but
** ^so a fact the significance of which is purely by forecast or
P^c^pbecy. While the private and competitive cultivation of land is
'''^'Crested solely in the value of the product, and is interested in the
TP'viiiie of the product only as bearing upon its value, this Malthusian
^'^^ciission adopts purely a social point of view, regards the food
l^'^^uct not as value but as volume, and concerns itself not with the
P*»-aiUit time, but with later centuries. That is to say, the law of
^^^itiishing returns is, for Malthusian purposes, a social law in the
''><iaiiiics of production, and a law having no concern with value
l**wblems or with any distributive problem present or future.

Doubtless, however, the botanical or zoological or agricultural facts
^P^ which Malthus based his doctrine in social dynamics may afford a
^"^cient basis for inferring other laws for present problems of com-
P^titiTe activities and of market values.

Surely there could be no such thing as land rent, were there no
dt upon the supply of land ; but this is merely to say that all value,
'^'bether for land or for machines, or for shoes, or for hats, exists only
^* dependent upon some degree of scarcity.

And surely, if, with any given piece of land, increased expenditure
^ non-land directions were not attended with a costantly falling com-
pensation both in volume and in value, there could be no land scarcity
*>^ no land value. But this is equally true of mowing machines or
^ne rakes : so, if one pound of phosphate would suffice to fertilize a
*<^oti]ient of land, phosphate would be safe from ever becoming dear in
P'ice; or if one hour of labor would do all the work to be done, labor
^ its products could manifest no rarity.

If the cultivator will apply all his outlays to land only infinitesimally
^'^^ the margin — ^that is, to land tmlimited, rentless, and valueless —
jto difficulty will be experienced in getting returns proportionate to out-
^yi ; in truth, not in the value sense here but only in the technological
!^ is land being cultivated ; as none is used, none is paid for. But
*'t with land that is valuable, only the non-land expenses of production
jf^doobled, there must result less than a doubled product: the pro-
™^o undertaking as a whole was not doubled. If this fact is all
™^t is intended to be formulated under the competitive rendering of
™^ Uw of diminishing returns, the law must be pronounced to be
^^^l^tically valid, but valid equally for capital instruments and for
'^ tgents in all their various combinations. Each case under the

I

VALUE AND DISTRIBUnt

this line must be of a most hazy sort, as applied to i
tinguish, one from another, land, capital, and labor. It i
indeed, true that capital is commonly declared to posse
a mobility far surpassing that of labor or of land ; but c
law itands as mere illuslration of the fact (hat if only a part of (lie
productive factori arc jocreased, the product will not rdpood witli the
•ame increaie aa if all the factors were doubled.

But the taw ii often formulated to assert that if Ibe application*
of expenae to the land are doubted, but not the land, the extra
returns will fail of proportion to the increased expense. And this
formulation of the taw is also valid, even if not quite axiomatic;
proper proportions of land value with other values must be maintained,
or the returns will be a disappointment ; a bad combination Eivei
bad results.

But this also all holds equally for capital goods and for \i
Too much or too Utile of any productive factor, relatively to the othi
gives bad results. So far, then, nothing has yet presented itself
field of current, competitive value production to justify any line of dis-
tinction between land capital and other capitaL And it is now to be
added that for most purposes in production, land, labor, and capital
may be used as substitutes one for another. Just as the original
itualilies of the soil may be exhausted by withholding of upkeep, so
Ihey may be replaced and renewed by capital expense ; the poorest of
land may be made into good land, if only sufficient capital expense be
applied. And precisely as machinery may take the place of labor, or
tabor of machinery, so more tabor may often l>e hired rather than
more land rented or more machinery purchased : or. again, more
capital expense may be applied to a given holding of land rather than
more labor hired or more land rented.

This is constantly illustrated in actual farming : one fanner reata
more tand or better land and thus, through his larger rent outlay,
excuses himself from correspondingly large outlays for machinery or
fertiliicra or labor : another farmer finds it to his advantage to restrict
himself In rent outlays and to extend bis investment in the direction
o( capital goods or labor.

But that at the margin this principle of substitutioti holds, and
even that transportation activity or improvements in agricultural tech-
nique may have the effect either to increase the land supply or to make
more effective the existing supply, does not prove that the principle
of lubstiCution is indefinitely applicable at no matlcr haw distant removes
from the margin of substitution : for were such the truth, there could
be nowhere any disadvantage from an increase of capital expense upon
a fixed supply of land, or any toss from twenty laborers working with
one loom, or any reason why indefinite wagons should not dispense with
the need of horses or drivers.

For it ii clear that in the main the relation between the difTi
production goods li one of complementarity and interdependence
than of the infinite possibility of substitution. More men am
machinery may make call for more land rather than for less,
the old land at a higher rate of rental. Machinery does not displace
men indefinitely, but, under stable conditions of technique, calls instead
for men to fashion or to tend ; wagons furnish demand for drivers, ships
for aailors.horses for drivers, driveri for wa8onB,and m on without lindb

with

THE CAPITAL CONCEPT

131

(al used in this connection points to something distinctly
Ot>r»-technological in nature. Some of this capital mani-
fests its quality of mobility simply because it is unspecial-
"e<3 in application; it is money, demand credits, funds in

Slapping to note, however, that there is io these facts no war-
'*■»* for the threefold division o( productive factors, since it ia
'^^.Kally true (hat bricklayers furnish a demand for bod-caniers, car-
f^--~^» »(n for masons, wagons for horses, sailors for cooks, engines for
for tics, meadow land for pasture, and both of these last for
Is. and so on indefinitely, we return to our postponed qucs-
^*^ why does the point always arrive at which nothing serves as a
le for more land, — a point, that is, at which more and more

„ ^^ ^iive cultivation gives more and tnore meager returns? To what

^^*~^rliraUr attribute of land is this to be ascribed? And, for that
^^^^*.tltr. to what quality or character! site of machinery is it due Ibat

^^*1r so many men can work with one unit of capital goods?
j^,^ The answer must be shortly given and be left lo approve itself :
^^^^ one attribute of land which finally discourages all attempts at sub-
^^5hition and assures to land its ultimate relation of complementarity,
V^pears lo be the spatial attribute, the impossibility of compressing
^«*-ri™li - -

:ricultural or biuldin

to ever-smaller compass and without

With machinery as related to lab

iportant ; but the compler

s of land utility
imit of disadvantage.
, the spatial fact seems to be
ntarity more commonly traces
le processes, for (he iaterven-
don of volition and direction.

In further enforcement of the truth that there is in this common
ajid getieral fact of complementarity no slightest support for the three-
fold division of productive factors, it may suffice lo recall that a
parallel necessity exists for supervisory and directive labor lo go with
tmskilled labor, that many dilferent occupalions occupy the comple-
mentsiry relation one to another, and that in a general way each grade
of labor is complementary lo most other grades.

Despite the consistently private- acquisitive nature of the capital
concept adopted by Professor Carver in his Diilribulion. and despite
his fundamental thesis that all agent remunerations are received upon
the basis and by the measure of their marginal value productivity, he
yet finds it possible to distinguish land from capital. The basis of bis
distinction is technological so far as it is not imposed by certain doctri-
nal exigencies on the side of costs : and yet the following is from
Carver's DulributioH:

"There are various liinds of labor, of land, and of capital. Two
diHerent kinds of labor may be performing functions which differ
almost as widely as those performed by labor and capital, or by labor
and land. The work of a bookkeeper diiTers as widely from that of a
ditch-digger, as that of a ditch -digger does from that of a steam
shovel. Therefore, the same reasons which favor the separation of
tabor and capital, in order that they be treated as distinct factors, will
also favor the separation of one kind of labor from another, or one kind
of capital from another, and of one kind of land from another"
(P- 8s)-

I
I

133

VALUE AND DISTRIBUTION

general — abstract capital in the accurate sense o( the term,
mobile, fluid, unspecialized purchasing power — a capita] cate-
gory of surpassing importance, and later to receive most
careful examination ; other of ihis capital is such by the
fact that, like stocks of goods, it is readily, speedily, and
advantageously marketable, and so, private-wise viewed, is
easily, through sale, turned into the abstract condition as an
intermediate form, and thence into whatever else the private
owner may desire.

But evidently, in this last sense of mobility all forms of
capital and all wealth of any sort are mobile in different
degrees; all — as valuable — are salable on some terms and
at some time.

But as a technological fact, capital is not characterized
beyond land or labor by mobility ; it is even questionable
whether* it is not the most specialized, the least mobile, of
the three. Some machinery — indeed, much machinery — is
serviceable for only one purpose or in only one hne of pro-
duction, and is only at great, or even at entire loss, to be
readapted to another use; and this is true, in varying
degrees, of all the different forms and conditions of capital
goods, of labor, and of land. Neither mobility nor immo-
bility can be, in this technological sense, regarded
as peculiarly a characteristic of any one class of producti'
agents.

But how about spatial mobility? There is, possibly,
distinction of degree: laborers do migrate, though so tardily
as to have given them the traditional stamp of marked
immobility. Land is, physically and spatially speaking, of
pronounced immobility ; capital is mobile in varying degrees
accordingly as it has become attached to the land or incor-
porated with it; improvements in mines or in water-powers
are prone to stay where they are originally placed; while,
on the other hand, by carting of loam and by grading, by
filling of swamps and of water fronts, to say nothing of the.
action of winds, the seeming fixity of land is apprecial
disturbed.

lea

THE CAPITAL CONCEPT 133

This seeming fact of fixity in land appears, then, to
liave little in it, otherwise than as a matter of mere extension
or superficies ; and as to this question of superficies it is fair
to say that it is in no sense the point at issue; for, in its
aspect of effectiveness for production — its technological
significance — land can be worn out, displaced, or renewed,
^ readily as capital, and sometimes much the more quickly.*

There appears to be more in the notion that land pre-
sents an especial degree of fixity, or at all events of inelas-
^city, in supply. And it must be admitted that, in any given
^tote of industrial technique, this fact of relative inelas-
^city may hold. While it is true that there is today no poor
**nd that capital will not make into good land, that moun-
*^ns may by capital expense be razed, valleys filled, dry
*^od created out of swamp, or river, or lake, or ocean, it
'^niains true that this is merely a substitution of capital for
*^^^, that it is a limited process by reason of the fact that
^^pital is at any time a limited quantity, and that, after all,
^e opportunities for the profitable application of capital to
•^d are, by the very reason of this deficiency of capital,
****uted both in quantity and in quality, and, as such, con-
^^ue to be scarce and valuable.

But in last analysis all this is merely to assert that both

*With these spatial qualities of land are more or less closely
^^>ociated certain legal, jurisdictional, and territorial aspects possess-
^ great social and institutional significance. It is, in truth, a com-
^oplace that the civil law of England, and in larg^e measure the
^^OQomic, political, and social organizations, trace their origin back to
*5*>diUsin, a system in which land ownership was the controlling and
^^'^^ng fact for almost all purposes, political and economic, theo-
retical and practical. The line of cleavage between real property and
^er^onal property runs deep through all English jurisprudence.

It would, then, be a most interesting investigation — if only one
"^ the necessary learning — to trace out the manner and degree of
^i^iicction between the legal distinction of realty from personalty and
7^ economic distinction of land from capital. That the parallelism
^ Qiore than merely fortuitous may be taken as beyond doubt.

It only remains, then, to inquire whether the common-law distinc-
T^ between real property and personal property recommends itself as
'? *B7 way essential or necessary, or can point to other than a purely
■uitoiical explanation or warrant ; Roman law and the derivative sys-
tem suffice for testimony to the contrary.

»34

VALUE AND DISTRIBUTION

land and capital are similarly limited in quantity, and are
thereby scarce and valuable, and that the device of substitu-
tion is not indefinitely applicable; if. then, any real distinc-
tion is to be established, it must be based upon tlie fact that
with the passing of time, differences of tendency with regard
to supply come to characterize land and capital respectively.
And it must be admitted that land appears likely, in the
long future, to manifest a peculiar degree of inelasticity in
supply, of which fact of inelasticity the law of diminishing
returns in its ordinary formulation will be a probable
expression, and the menace of overpopulation is a socio-
logical inference.

But it must be noted, (i) that all this is matter of
prophecy, and (2) that instead of approaching, as is ordi-
narily assumed, to moral certainty, it is not much better
than conjecture. The past three or four hundred years
appear to have presented the phenomenon of increasing
land-plenty relatively to labor and capital; with the forces
of exploration and of developing transportation, new sup-
plies of land have far outrun the increase of population;
elasticity has, indeed, in a surpassing degree — probably, it
is true, hardly again to be duplicated — characterized the
land supply. Capital meanwhile appears not to have
increased beyond the expansion of demand afforded by the
increase of land supply and the growth of population,
since interest appears to have been, in some countries of
Europe, as low one hundred and fifty years ago as today,
then, with advancing capitalistic opportunities, to have
risen, now, with the progressive exhaustion of the new
opportunities offered by increasing population and enlar-
ging land supply, to be again falling. Thus, while it seems
probable that the future will meet an especial shortage in
land supply, this is not at all certain. Food may, for aught
wc know to the contrary, one day become a laboratory prod-
uct. "It is ... . possible that chemistry may some
time solve the problem of food production without recourse
to agricnltural methods. The secret once learned, the

THE CAPITAL CONCEPT

135

nitrogen in the air of the back yard and the ton of coal in
the bin may furnish food for an ordinary family for a
year." ' And it is to be added that in the future, as in the
past, much will be accomplished by improving transportation
-to mitigate, if not to prevent, the conjectural dearth of land.

But, having, for the time being, and in a very broad and
general way, accepted, for purposes of retrospect or of
prospect, the tenability of the distinction between land and
other instrumental goods, we have thereby the more to
recognize the difficulty that expanding knowledge, — develop-
ment in the human factor of production, — or improving
transportation — development in both the human and the
capital factors— may function technologically as substitute
for land. Bettering transportation is more land ; true, geo-
graphically speaking, land is not made, but accessibility is
made, and upon an enormous scale: land sufficiency, like
land value, is in large measure positional.

But further t if, as technological facts, these probabilities
in the dynamic field are taken to justify, for purposes of
economic theory, a separate category of land wealth as
against other wealth, there is forthwith to be undertaken
an indefinitely large task of further classification or of sub-
classification ; for while grain land may be becoming seriously
scant, range lands, or champagne lands, or mines, or fish-
eries may disclose a contrary tendency. So, also, while the
provision of wooden implements is becoming increasingly
inadequate, the different sorts of machinery and tools of
metallic material may be growing progressively cheap; and
meanwhile electrical apparatus is likely to abound. And
similarly for the human factor; as one quality of man, say
the athlete or the unskilled workman, is becoming relatively
scarce, doctors of philosophy may more than generously
multiply.

Technoiogtcal classification, then, on the basis of the
supply outlook, is a hopeless undertaking. We have even

'DareDporl. Ofltints of Economie Theory, p. 324,

136 VALUE AND DISTRIBUTION

come to question whether, technologically speaking, h
labor itself is a tenable economic category.

A further argument in support of this threefold classi-
fication now requires attention — the retrospective and
genetic view, the argument from origins.

Pausing merely to question whether, as bearing upoo.
the classification of the factors of production — a techno-
logical problem — questions of origin are logically germane^
it is nevertheless to be recognized that the genetic view,
whether or not acceptable as a technological view, possesses,
for certain purposes, great importance. The only query is
whether these purposes are economic in bearing as dis-
tinguished from historical or sociological.

Not all wealth was created by man. It need not be
here disputed whether capital preceded labor, or the
other way about. It looks, truly, as if environment were
present as early, at least, as was man. -M any rate, there
exist unproduced riches; only the presence of man, his
needs or desires, and not his productive activity, is neces-
sary to the emergence of some forms of wealth. UtiU^
being a relationship between a human want and an objective
(external?) fact, it suffices that both terms of the relation-
ship be present in order that wealth come into being.

Land, then, according to this genetic view, is conceived
as the original environmental situation, capital as a human,
a labor-produced, addition. It is argued that man, in his
reactions upon his environment, has imposed some modifi-
cations upon the original situation; and it is urged that
such changes in the environment as have not been due to
environment itself are properly to be attributed to man;
capital is thus conceived as this intermediate term — this
aggregate of modifications, so far at least as these modifi-
cations have been advantageous.

There is no denying the It^cal adequacy of this point
of view; but from any other point of view than this of
logical and schematic accuracy, the distinction will not

THE CAPITAL CONCEPT

137

serve ; it leads nowhere when an attempt is made to apply
It From among all the changes of all the ages, who can
assume to tell what environmental changes have been due
to environmental processes as against human agencies?
What part, for instance, of the fertility or the infertility of
the land has been due to its treatment at the hands of man,
to his fertilizings, his exhaustings, and his denudings; what
put to fostering or wasting winds, to corals, to birds, to bugs,
toworms, to microbes? What share of the value of the house
tows back to the timber values of the natural forest, and
what part to industrial processes ? Even with the case of
"Hcliinery, the typical form of capital, human wisdom
would fall far short of distributing the final value between
Ihe oripnal ore vahie as against the labor value, the coal
'I'ue, and the timber value ; nor, for any one of these vari-
Wis shares, would it be possible to determine how far land
'Wts, as expressed in warehouse and transportation
^ges, have counted in the case. And finally, if anyone
tould succeed in this allotment of origin -credits, either for
'rie land or for the warehouse, is it to be supposed that, as
^Wes in the total hire of the machine, these remunerations
*ou!d forthwith, either in the collective or in the competi-
'"t reckoning, take on a new relation to the cost of the
pfoduct or to its value? '

'Senior was fully awate of all this— as a difficulty— *ul did not eee
||ffoi«ly what to do with it ; "It is difficult to point out an article,
•"•frer limple. thai can be eiposed to sate without the concurrence,
^ntt or indirect, of many hundred, or, more frequently, of many
uiiluund, different producers, alraosl every one of whom will be found
*" bve been aided by some mooopoliied ngent. There are few things
"1 rtich the price seems (o consist more exclusively of wages and
WoSti than a watch [MacCulloch's favorite example] ; but if we trace
■tfroni the mine (o the pocket of the purchaser, we shall be struck by
™ |«ynient of rent .... at every stage of its progress. Rent was
f^ for the privilege of extracting from the mines the metals of which
I' '< eompoied : Cor the land which afforded tbe materials of the ships
"■ •hick those metals were transported to an English port; for the
•wrrei at which they were landed, and the warehouses where they
*^ exposed for sale : (be watchmaker pays a rent for the land covered
V llii manufactories, and the retailer for that on which his shop is
"iMted, The miller, the shipwright, the housebuilder. and the watch-
"^'xr. all use imptemenrs formed of materials produced by the same
P'octun *■ the materials of the walch, and subject also in their

IjS VALUE AND DITTRIBirnON

But is there, after all. nothing for theoretic^ purposes,
in anv of these technological distinctions, as bearing upoa
tbc dasst&calioo of productive factors? What, for example, 4
does the socialist mean in his demand that all capital be4
owtKd by socict}' ? Note, howe\'cr, that be as o f ten insistM
that all rnstmments of production be socialized, and in Uria^
way of putting it denies, or at least ignores, all distinctioDM
between land wealth and other wealth. The line of .distioc--^
tion is substantially that of the traditional separaticHi oE
oonsomptiim from production goods; land and capital are
equally included within production goods and are equally
excluded from consumption goods ; they are intermediate '
instrumental goods.

It may as well be said forthwith that this distinction
between production goods and consumption goods is
terviceful for many purposes: it will be the task of later

dUfercot staco to uniiUr parmcnts of r«Dl Whea we ^eik,

tbtnloic of > cUb of commodiiwi ai produced under circuinsuncei
o( fiaai compctitian, or bs the result of labor and ahitioeace; uiu>- '
nsttd bf acr oihtr appropHaicd aaeot, and consider their price a*
equal lo the >niii of wage* and pro&ta thai must be paid for their pro-
duclioR. we do Dot mean to state thai any such commodities exist, but
Ikat. if the; did exist, tack would be Ihc laws by which their price*

would be rcgubled We may be asked, then, whether the

improvemCQls »hich fotm !bc grcalcr part of the value of the soil of
ev-r> i> l!'-i li'c. .Ill ■! ■li--ii,i> .iic ji! .iri.] !■'!■:.■. ei , tu be IcrmeJ capital;
whether the payments received from bis tenant* by the preaent owner
of > Lincolnshire estate, reclaimed by the Romans from the MA, m
to be termed not rent, but profit on the capital which waa expended
fifteen hundred year* ago. The answer is, thai for all useful ptupoie*
the distinction of profit from rent ceases a* Soon as the capital, from
which a given revenue arise*, ha* become, whether by gift Or by inherit-
ance, the property of a' person to whose abstinence and exertions it did
not owe its creation. The revenue arising from a dock, or a wharf, or
a canal, is profit in the hand* of the arigtaai conttntctor. It is the
reward of hit abstinence in having enipk>yed capital for the purpoae*
of production instead of those of enjoymenL But in the hands of hit
heir it has all the attributes of rent. It is to him the gift of fortnm^
not the result of a sacrifice. It may be said, indeed, that aich a
revenue is the reward for the owner'* abstinence in not selling the dock
or the canal and spending its price in enjoyment. But the aame
remark applies to ever; species of transferable property. Every estate
may be sold, and the purchase money wasted. If the last basil of
classification were adopted, the greater part of wbat every political
economist has termed rent must be called profit." — Senior, Politick
Economy, 6th ed. (London), pp. iia-39. faitim.

THE CAPITAL CONCEPT 139

P^es not to attack it but, through a more careful reformu-
lation of the productivity concept, to extend it. But mean-
while it is necessary again to point out that, as a
technological classification, the distinction holds only as
socially viewed. Private interests have little occasion for
ftc distinction; productivity for competitive purposes is
quite another thing from technological productivity.

But now, finally, even if it be possible, from the point of
view of origins, to establish between land wealth and other
wealth distinctions at once theoretically tangible and prac-
ticably workable — and even admitting that the techno-
logical outlook is so far clear and its problems so far
susceptible of present formulation, as to make the distinction
one of manifest relevancy to the welfare outlook and of
^nite significance for the terms of the future situation
^thin which the value and distribution problems must one
^y be worked out, — admitting, that is to say, that over long
^tervals of time, in the dynamics of value and of distribu-
«on, important tendencies are especially associated with the
^ category, is it at the same time at all to be admitted that
^ any current investigation of the process of present value
fixation — the value problem in cross-section — ^these possible
^probable outlooks, these long-time prophecies, have any
'faring to suggest that, in a competitive society, the pro-
^octivc powers of land are differently remunerated, or bear
a relation to costs and to values different from other
l*oductive powers and agents? If it were proved, or other-
^ accepted, that labor is likely to get more scarce, would
tUs suffice to exclude present-day wage outlays from
Present-day costs? Some difficult problems with regard to
the capital concept and to the basis of interest may be
avoided through holding in mind that our problem is the
^ue problem, and that the correct formulation of the
^tal concept is primarily and chiefly important as bearing
^ this problem. Laborers may get more numerous and
^'^c skilful or less skilful; capital goods may increase

140 VALUE \ND DISTRIBUTION ■

relatively to other productive agents, or possibly decrease;
land may get better or worse with climatic or other changes,
and relatively to the situation become more or less abundant
or more or less adequate ; but in each new situation there
will be nothing new but the situation and the distributive
outcome ; the value problem in its setting of new terms will
remain in principles, and in methods of analysis, the same
problem.'

'Kot only wilfa atudenls, but in economic tileratute, does thU dis-
tinction belween [he itiitic analysis and the dynamic aspects of the
conditions under which the static analysis ja to be applied. pr»ent
itself as the occasion of great perplexity. But if for no other reason,
the purely problematic (|uality of these dynamic forecasts should suf&cc
to deny them a controlling influence in value theory. Take it, indeed,
as true thai durinE the last few centuries of exploration and of develop-
ing ttanspartation. new supplies of land have far outrun the increase
of population, that claBlicily has especially chBrscteriied the land
supply : or take the contrary of all this for true : what of it, for
purposes of rent as an element then or now in the cost computation?
or how does the past trend of the interest rate, or the probable future
trend, bear upon the question as to whether interest shall or shall not
at any given time rank as an element of cost ? By virtue of wari suffi-
ciently grievous and of ptagucs sufficiently decimating, population may
turn toward decrease : would wages then become no part of coM,
though now. and for any probable future, they are accepted as properly
included? And bow. again, if the late tendencies toward ■ restricted
birth rate become alill more marked? Will then a new value doctrine
have to be recognized, or will it be merely true that the old doctrine
will remain valid for a new application under the new setting of the
ehanged conditions?

CHAPTER XI .

CAPITAL AS A COMPETITIVE CONCEPT
It is chiefly as bearing upon cost of production in its
relation to market values, that the concept of capital becomes
of surpassing concern in theoretical economics. And regarded
from this point of view, the field of investigation widens
surprisingly: What are the relations of capital hire to
market prices? Is a tenable distinction to be drawn between
these and rent outlays on the one hand, and wage outlays
on the other? Or, so far as cost and value purposes are
concerned, might not rent or wages be logically extended
to cover all forms of remuneration to any sort of produc-
tive agent or instrument? In fact, is cost of production an
everyday business concept, or is it something peculiar to
economic analysis? And if this latter, are capital outlays
to be confined only to expenditures for the use of inter-
mediate goods in the time aspect, or are they to include all
forms of burden and subtraction imposed upon the capital
reserves of the entrepreneur producer in the business pro-
cess of suppl3ring goods to the market? In sum, may we
not, for cost purposes, accept a point of view of capital
which regards it solely as the source of expenditure —
capital conceived in such fashion that interest payments are
to be regarded as paid from it rather than for the use of it,
and that rent outlays are as truly burdens upon it — and cost
elements under it — ^as were outlays ever burdens or
costs, whether under the later theory, or under the earlier
wage-fund capital notion, with its attendant wage-capital
cost outlay?

And further: having recognized hires of labor, of land
instruments,, and of all other instruments as equally cost
outlays, must we not likewise go on to recognize, as also,
of cost relevancy, the question of when these various hire

141

142

VALUE AND DISTRIBUTION

^H 143

^^H outlays have to be met, and of the time elapsing between
^^H the expenditure and their recoupment by sale?
^^^H Not at all denying that, for certain purposes, capital has
^^^H rightly been and must continue to be discussed as a social
^^^P category, as production goods, it is intended sharply to
^^^ raise the question whether this concept of capital has any
significance for the cost -of -production analysis or for any
purpose connected with the value problem— whether, also,
the social concept of capital, the purely industrial and
mechanical and non-competitive concept, is not entirely
. irrelevant to the processes of competitive society and of

^^H entrepreneur production, and to the thought and conduct 1
^^H of the actual business world. I

|l^^^ It is doubtless true that classical economics contains a

considerable number of distinct and antagonistic concepts
of cost, but it is none the less true tliat whenever the argu-
ment shifts from the Crusoe discussion to the competitive
market, and becomes definite in its analysis and tangible in
its applications, the concepts of time cost and pain cost
somehow shade off, as we have seen, into some aspect of J
labor -I'd /utr cost as the basis of employer's outlay; or, as I
especially with Ricardo, by regarding pain cost as the basts 1
and explanation of the remuneration to the wage-earner
and thereby of the wage outlay to the entrepreneur, values
I are made, through the medianism of entrepreneur costs, to

be proportional to the labor-pain investment in produc-
[ tion.

Whether or not labor was thus susceptible of reductioa 1
t to a common denominator either of pain or of time, and, 1
[ even if so, whether labor could serve as the ultimate expla- I
I nation of the very evident market reduction of it to the I
[ common denominator of money wages, and whether or not 1
[ Ricardo's marginal dt-vice for getting rent payments out of I
I the category of price-determining costs may in any view be ]
L accepted; it remains in any case clear that Ricardo's reckon- "
[ ing of costs is essentially a business man's computation as I

CAPITAL AS A COMPETTIIVE CONCEPT I43

a question of money outlays — outlays of the sort
which a business man always reckons as demands upon
business capital, outlays of the sort which the trading or
manufacturing corporation provides for through its sub-
scribed capital or through capital-borrowings upon the
market And it is in this sense, and rightly, but only in
this sense, that wages may be spoken of as paid out of
capital; but in this sense also raw materials are purchased
out of capital — office furniture purchased out of capital;
business connections, insurance, and advertising paid for out
of capital; in this sense interest and rent are paid out of
capital; and so likewise with all other business expenses

•

incurred in the process of getting goods upon the market.

This concept of capital is now to be presented as the only

^"oncept which can be articulated with the business world's

*^on of cost of production, and the only concept which, in

^4c development of economic theory or in close economic

dialysis, can be regarded as having any relevancy to those

^^-of-production considerations which have to do with

^-u inquiry into price and value. And again be it repeated

^lat it is chiefly as bearing upon the value problem that the

^^<cd exists for a re-examination of the capital concept.

Social capital and competitive capital, — ^Whatever might

*^ the accepted theory of value in a coUectivist society —

"Whether a labor theory or a utility theory, or quite as possi-

*^'y no theory at all and no need of any — it is clear that

^fferences in land as used for productive purposes would

'■^vc recognition; per item of product obtained, outlays

^Pon some land wotdd be appreciably lower than upon other

*^i It is equally clear that some of the product of this

^cty would need be saved as raw material or as tools for

ftwthcr production; but it is not clear that these saved

products would be exclusively traceable either to land or to

W)or; in fact, it is certain that some labor product would

fft embodied in the land, and that some land product would

be traceable in all or nearly all forms of coUectivist wealth,

VALUE AND DISTRIBUTION

J

whether of the production or of the consumption type.
Probably, however, in any given situation of environmental
conditions, distinctions between wealth as land product and
wealth as labor product would not, to this collectivist
society, be especially interesting. — the problem all the while
remaining one of how to get the best results out of the
various forms of wealth at hand. If, however, the society
were semi-predatory in character, and were making com-
parison of different habitats to be contested for. it might
well find itself at indifference as between one habitat of
poor original quality and of medium ameliorations, but
with great store of agricultural appliances, as against
another of great natural fertility, an inferior measure of
land amelioration, and very defective agricultural appli-
ances. So, in the application of its labor power, land at one
time, and at another time the tools and appliances of culti-
vation, might lead in the call for reinforcement. In short, a
collectivist society would not need to, and could not if it
needed, distribute its productive possessions into land and
capital categories.

As this society would be without competitive production
and without competitive markets, it would have no need for
exchange- value methods or measures. Production would
take place according to some sort of utility standard in
consumption, and productive agents would be rated in esteem
according to their efficiency in utility creation. Land agents
and capital agents would stand on a common basis of esti-
mation. The different members of the society being
regarded as substantially equal, both production and con-
sumption wonld necessarily be worked out according to
considerations of utility — marginal utility, of a vague and
average sort doubtless — instead of, as now, according to
exchange values, wherein purchasing power, and not utihty
(excepting as utility may more or less affect the purchasing
disposition), selects the consumers and determines the
direction of production.

Under such conditions, what portion of the social possi

the I

1

CAPITAL AS A COMPETITIVE CONCEPT

M5

sioDs would rank as capital, and what would be the the
essential meaning of the concept? In accurate analysis,
would it be possible to accept the technological notion of
<3pital as comprising all wealth held for purposes of further
production — all technologically intermediate products — in
the ordinary industrial sense, productive wealth, non-con-
sumption goods? Would the time element count for any-
thing, in other than this industrial -mechanical aspect? Or
must all wealth be regarded as capital? How about the ice
stored till summer; or the wine aging in the collectivist
vaults ; or the wheat stored for winter ; or the total of con-
sumption goods waiting the time of maximum service in
consumption ?

It is past question that, especially with capital socially
-viewed, the earlier notions of capital, like the later, have
not merely referred capital to productivity, but have inter-
preted productivity in the tight of technological applica-
tions, and as, on the whole or mainly, a technological
phenomenon, a category of instruments, tools, and appUances.
This test once accepted, and the attempt being at the same
time made to articulate it with the test of origins, capital
emerged as all non-land forms of instrumental goods. But
more and more the especial function of machinery was per-
ceived to be the utilization of the forces and energies of tlie
environment — of "nature." More and more Adam Smith's
naive handicraft view that "no equal quantity of labor
employed in manufactures can ever occasion as great a
reproduction as in agriculture ; in this nature does nothing,
man docs all," was seen to be misleading. A windmill is
merely wealth set where natural forces will achieve, in
co-operation with it, or will enable it to achieve, desirable
results. But precisely this is the case with the cider matur-
ing to vinegar, or with the wine acquiring age and flavor,
or with the sapling reaching up to become a tree ; whereat,
as we have seen, Ricardo was sorely puzzled, and James
Mill blundered into a great joke.

But it has now become clear enough that the techno-

146 VALUE AND DISTRIBIJTION

logical concept of capital takes account of only one aspect
of capital productivity. That the ice is melting away or the
wine falling off in point of gallon measures is not con-
clusive of the productivity problem. If the utility grows,
whether by one sheep growing into two, or one small
sheep to one large one, or one poor-mutton sheep to one of
good quality, or one superfluous sheep to a famine-time
sheep, there is, at least under a collcctivist reckoning, eco-
nomic productivity. So long as either the objective good
changes its character so as to change its utility relation
to man, or so long as man so changes in needs and desires,
or in provisioniTient, as to modify the utility relation between
goods and men, there is room for value productivity. The
collcctivist definition of capital would then run somewhat
as follows: u-eallh held for increment — wealth in lime.

However clear, then, for technological purposes, may
be the distinction between land wealth and other wealth,
the distinction remains mostly valueless for the theoretical'
economics of a collcctivist society.'

Capital in the compettlire sense. — Examining now soi
what more closely the capital concept as adapted to a coi
petitive society, we ask how far and with what modificatii
the collcctivist capital concept of weal I h as fund,
wealth in time, can be made to serve for competitive pur-
poses. There will come, at all events, this change — that we
shall be talking in terms of ex change- value denominators,
exchange-value production, exchange value of agents,
exchange- value computations of gain, rather than in terms
of average service, or of some sort of group-marpi
utility. In a general way doubtless, lechnological prodiu

' Perhapi it ihould go wilhoul saying that a colIecliTiM aodetr
would, tor Ihii purpose, have no concern with any question of abstl-
nence, otherwise tban as bearins upon the store of goodi waiting to be
natnei). Abstinence, so far as it applied al all, would apply to all
foTRis □( the society's wealth : and all of (he wealth would stand as
capital. Abslinencc would bear only upon ibe volume accumulated.
But there would, of course, remain question! enough as to the foniu
and uses into which this store of wealth should be distributed.

ticalB

omH
ion^l

inalj

ie»T ■

J

•AL AS A COMPETITIVE CONCEPT

tivity in terms of utility product will be paralleled in com-
petitive society by a technological productivity in value
product. But not everywhere; for it sometimes falls out,
*n competitive society, that the short output commands an
aggregate sale value higher than the bountiful output; that
the spices have to be sunk — mechanical destruction, but
*'alue creation — or that monopolistic combinations are
f^ormed, to the result of diminished product and higher
prices — a plus in value, but a minus in utility.

But none the less, such and so many productive agents,
technologically considered, as there are in competitive
society will, under the value denominator, rank as capital,
^"hether these be land agents or other; all consumption
K<x>ds, also, will in strict logic be so included, since all are
held because an advantage, an increment, lies with post-
poned consumption. Even with goods deteriorating or
*i*caving. as objectively considered, the advantage is on the
^de of delay ; it is not conclusive that halt the apples stored
in the cellar will rot, or that the ice in the shed will lose
»alf its weight before summer."

'Up to this point Professor FeCIer's views seem to be in the main
^Wth; of acceptance. However, his formulation of capital as malrriol
Kioii renceived in one aspect, Iheir markel value, does not quite accu-
'Vdj apply, and. indeed, was not intended lo apply, to the collectivist
*«»iotiiy : market vaJue is not a collectivist category. As applied lo
competitive society, tbe formulatloo appears to be much too narrow,
*< criticiiin centerit^g mostly upon the word "material." — See Fetter.
wrttrly Journal of Economic!. November, 1900 ; May, 1901 ; Novero-

But in hii Principles. Professor Fetter occasionally manifests amall
™lli in this requiremenl of materiality; "Capital today may be
"Saed aa economic wealth expressed in terms of the general unit of
**"*' {p, "S) ; » definition wide enough to include immaterial goods
[''Wtely owned : and on page 1 29 it is said : "Men seek lo convert into
""toable capital any increase of income in their wealth or busi-

'*'' The basis of capital value is income, and whatever be

'*• cauje. political or economic, material income can and will be capi-
""led and added to Ihe capital value of the privilege, wealth, or indus-
■T on wiich the income is conditioned."

Bnl, interpreting this defioition given on paRt 115. it is said: "By
*'<■ de6liition. capital at any given moment of time includes all eco-
^k goods in existence, when they are thought of in terms of
*«ir value. But things have different durations. .... Most capital

I of things durable in a large degree The things

■ capital are concrete things, icarce forms of wealth."

VALUE AXD DlSnUBUnON

1

Pcrbapc this t* all that need be said for capital in a onn-
pelitivc society, to far as there is occasion or justification
for a distinctly sodaJ concept for capital in a competitive
society: and doubtless there are for some purposes both
occasion and justificaHon. But for most purposes the social
concept docs not apply, simply because the activities of men
in Bocicty arc competitively and not socially organized.

But, as a computation of competitive costs, regarded
from the point of view of supply-determining influences
and as having thereby bearing upon the value adjustments
of the market, another and quite different, and even a
radically inconsistent, concept of cafrital demands atten-
tion. Actual business computations of the expenses of pro-
duction include a wide range of expenditures made out of
what, in the individual reckoning, stands as the total busi-
ness investment, and functions in the terminolc^- and
reckoning of the business world as business capital. It is,
for example, in the sense of Mill's doctrine, this sort of
capital that limits labor, this sort of capital out of which
wages arc paid.'

* Ctpilttl in ihe tech no logics I ktiw hat evident bearing upon the
waiei d1 Ubof, not indeed by determining whether or not labor iball be
employed — (or Ihii is in ordinary timei certain, whatever may be the
volume of capital — bul by determining the manner and effectiveness of
its employment, the productive equipment at its disposal, iti onlillas*-
It li in thin sense only that capital may rightly be &aid to limit labor
and lo stand in causal relation to the wages of labor. But this is not
Ihe sonss In which the term "capital" is used in the wage- fund
doctrine : It la there used in (he sense of an employment fund, a sub-
division of business capital, rather than as a technological quantity:
In this builneii aenac of capital, nibiislencc goods are properly included
only lo the extent that they are actually a part of the entrepreneurs'
holdltiKi '■ that wage outlays, whether linilly expended in subsistence or
In olhsr goods, are made out of the cash or banking credits in the
nmployer's cotilrni, proves merely that from his point of view this cash
or these credits must be regarded as capital. There is linle connection.
if any, and certainly no direct connection, between the volumes of
liuslness caplt«] or credit in society and the real wages of labor. True,
any one employer can hire more labor if he controls a larger business
eaplial, but only upon the assumption thai competing employers have
mil a like increase of capital. The old fallacy of reasoning from one to
•It Is wvll Illustrated here. And in any case, it does not follow thai
having more buaineis capital, an employer can afford to pay, or will
la* kny rMSOn p*y, a hlghtr wage rate.

CAPITAL AS A COMPETmVE CONCEPT 149

In the computation of competitive entrepreneur costs,
Aa.t is to say, interest charges are reckoned upon something
qtiite other than technological capital. Entrepreneur capital
•—capital in the guise in which the type-form of modem
business, the corporation, presents it — ^includes not merely
consumption goods in stock, but banking balances, counter
money, funds tied up in customers' accounts and in bills
receivable of many varieties, corporate stocks and securi-
ties, whether held for sale or for investment, and generally
2ill that fund of working capital, more or less unspecialized,
requisite for the successful functioning of a business. The
manufacturing entrepreneur or the corporation manager
would find it a novel and perplexing doctrine which should
restrict the capital investment to the buildings, machinery,
and raw materials of the undertaking ; the corporation really
possesses nothing that is not capital.

But it is still true that these non-technological forms of

capital deserve not so much greater recognition than they

have in the past received, as more careful analysis and

classification ; for, as has already been pointed out, classical

^^scussion, as indeed all economic discussion, early or

^^^^odOTi, is full of this entrepreneur-capital concept.

Adam Smith, for example, rarely failing somewhere to
fonnulate or to employ the correct as well as the incorrect
doctrine on almost every economic question, is now and
then entirely satisfactory in his treatment of the entrepre-
neur-capital concept. Perceiving clearly that the funda-
mental and essential characteristic of capital is found in the
acquisitive purpose, the increment purpose, of its holding,
and observing that individuals often gain by lending to
others or by employing their wealth in some socially non-
productive application — on which question of non-produc-
tiveness he was notoriously much confused — it all the while
remaining true that communities as isolated aggregates can
gain only through productive processes of some sort, he
divided acquisitive goods into the two categories, social

ISO VALUE AND DISTRIBUTION

and private. And out of this, as Boehm-Bawerk bdicve — "*
has grown up the idea that private capital is connected wil
interest and is especially a category of distribution, whi]
social capital belongs rather within the field of productioa

And doubtless such an idea has developed ; but, so far
Adam Smith had any choice between his different id<
vistas, this could hardly have been the doctrine of his prcf —
erence. For the most part he was talking of private
capital as a category of private — that is to say, of competi-
tive— ^business; not of interest-getting, but of any sort of
gain-acquiring through business activities, whether indus-
trial or merchandizing or what not

It is in this sense of entrepreneur capital that in the
Introduction he starts off the wage-fund doctrine on its
course with the remark:

The number of useful and productive laborers, it will hereafter
appear, is everywhere in proportion to the quantity of capital
stock which is employed in setting them to work, and to the
particular way in which it is employed.

So, likewise, in his comparison of com prices in England,
France, and Poland, where he explains that, despite the
greater productiveness of agriculture in the more advanced
countries, the prices are rarely lower in the more advanced
countries, since the superiority of produce commonly not
more than balances, and often does not fully balance, the
"greater labor and expense bestowed on them," he is
employing a competitive, an entrepreneur, concept of cost,
in terms of wage payments and of all outlays and disburse-
ments in general. These outiays and disbursements are
never made in terms of technological capital, and rarely in
terms of laborers' supplies— consumption goods; and for
the purposes of Smith's argument, as well as for the entre-
preneur's business computation, it does not at all matter in
what form or terms the payments are made.

And so again, in chap, vi :

Over and above what may be sufficient to pay the price of
materials and the wages of the workmen, something must be given

* Positive Theory of Capital, p. 27.

CAPITAL AS A COMPETmVE CONCEPT 151

^or the profits of the undertaker of the work who hazards his
^^«>ck in the adventure .... the profits of the employer upon the
^liok stock of labor and materials which he advanced.

N'c employer, however, can be regarded as advancing a

stock of labor in any other sense than that of advancing

Hie wages ; Adam Smith is plainly within the concepts of

^aatrepreneur cost and of entrepreneur capital. And again

in chap, viii, on "Wages," he explains that labor is rightly

treated as a commodity like any other; if capital is increas-

^g faster than population, wages get the benefit;

^loycrs fall into sharp competition:

The demand of those who live by wages, it is evident, cannot
^crease, but in proportion to the increase of the funds which are
<^«tincd for wages.

Ricardo, as we have seen, found his way over from
real value to market value through the mechanism of entre-
preneur competition, with its leveling and proportioning
^ects; all of his reasoning on market value goes upon
entrepreneur costs, and thereby, tacitly or in terms, assumes
Ae entrepreneur concept of capital :

Whilst every man is free to employ his capital where he pleases,
^ will naturally seek for it that employment which is most advan-
^Wtts; he will naturally be dissatisfied with a profit of 10 per
cent if by removing his capital he can obtain a profit of 15 per

cent It is perhaps very difficult to trace the steps by which

the diange is effected ; it is probably effected by the manufacturer
"ot absolutely changing his employment, but only lessening the

irootmt of capital he has in that employment The monied

e^ .... are engaged in no trade, but live on the interest of
"*eir money, which is employed in discounting bills or in loans to
the more industrious part of the community. The banker, too,

esnploys a large capital on the same object There is per-

'"P* no manufacturer, however rich, who limits his business to the
extent that his own funds will allow ; he has always some portion
of this floating capital. When the demand for silks increases, and
"*t for cloth diminishes, the clothier does not remove with his
capital to the silk trade, but he dismisses some of the workmen, he
^^wcootinues his demand for the loans from bankers and monied
nien (Ricardo, Political Economy, chap, iii, sec. 33).*

*If further evidence is necessary that prevailingly throughout eco-
nomic diacossiim the working concept of capital is the entrepreneur

•; AND DISTRIBUnOl

With the acceptance of this entrepreneur concept ot
capital — an acceptance not to be avoided so far as the capi-
tal category is to retain its significance for cost-of -produc-
tion purposes — there must evidently go the abandonment of
the threefold division of productive factors as essential or
important in the value analysis ; for while the technological
distinctions may and must, to a limited degree and for
certain purposes, hold their place, the services of the vari-
ous factors in value production are, in competitive business,
reduced to the common denominator of money price, stand
with regard to entrepreneur outlay in an entirely indistin-
guishable relation, and are paid for as costs out of one
common fund of resources, the capital fund of the entre-
preneur.

All things, then, that can be traded in, or valued, or
rented, or capitalized, may fall within the meaning of the
capital concept. In this sense of the term, capital includes,
in the price aspect, patents, copyrights, trade-marks, busi-
ness connections, reputation, good-will, privilege, govern-
ment favor, franchises, royalties, rights of toll and tribute,
rents, annuities, mortgage rights, personal claims ; ' and
further, it includes monopolies of no matter how various

cancEpl, the citation of authors to the required dcgTce is evideallT
impraclicable here ; it remains true, however, that economic literatuie
is full of his concept, particularly in those directions showing the
strong influence of John Stuart Mill, practically all of whoM cost
analysis is oE the entrepreneur type. But perhaps it may be suflkient
again to point out that the wage-fund doctrine would be outside the
pale of possible discussion on any other basis than this of entrepreneur
capital What force is there, on any classical plane of discussion, in
calling subsistence goods capital otherwise than from the employers'
point of view? Or what force in the distinction between fixed and
circulating capital ? Or in the doctrine as expounded that labor is
limited by capita! ? At Mill's lime if had become no longer possible
to be overlooked that society was in a regime of employer production ;
Mill accepted from the business world the business basis of reckoning —
a computation according to compeliliTe entrepreneur costs. Since
Mill's time, with the exception of Caimes's belated and reactionary
crusade, there has been practically no systematic cost doctrine that has
not sounded in terms of entrepreneur cost, with its implied recognition
of the underlying concept of entrepreneur capital.

CAPITAL AS A COMPETTTIVE CONCEPT 153

kinds and degrees, so far as they may become the subject
of invested cost in obtaining them, so far as they are
bought and sold as steps in competitive-productive invest-
ment, or are vendible upon the market as capitalized divi-
dend-paying properties. All of these are capital for our
present purposes, the value investigation, since they get into
costs in the actual competitive market production of such
CMwiodities — ^hats, wheat, machinery, stocks, etc. — as are
actually marketed. All things which, from the entrepreneur
point of view, appear to be expedient expenditure for the
purposes of creating either a commodity or a situation of
i^osaket value are outlays of capital taking rank as costs of
pnxluction. When the purchase of machinery is an advis-
^le move in business policy, capital goes into it, as at
another time into land or labor; when, in good busi-
W8s policy, a franchise must be had or a patent procured,
capital is, in either case, so directed as to accomplish the
necessary thing. When, for equally cogent business rea-
sons, I^slatures or city councils must be bought, the neces-
sary outlays are, for cost and value purposes, precisely like
^^^enditures for machinery or for the control of patented
processes ; tramway franchises and sugar-refining tariffs, as
situations business-wise obtained by the expenditure of
^pital, disclose in the current market values of the stock
^ present worth of the forecasted gains. So the expenses
^' stifling competition are capital outlays, invested as the
oosts of a monopoly to be obtained ; so also the tribute paid
to escape cut-throat competition is a capital cost of pro-
action.^

That for purposes of competitive production the only
nnportant fact for cost is the outlay, and not at all the

obviate any neceMity for distinguishing between social and private
eapital, bat the necessity still remains for doing something with this
pfupettjr — a serions matter in itself, or of excluding it from economic
eoasideratsofi — a still more serious matter.

*Ct Vd>lefl, ''Modem Business Capital/' The Theory of Business
Enterprise, chap. tL

AND DISnUBU

direction of it — technological or other — may perhaps ^
made clearer if we set ourselves to observe the differ** j
ways in which different entrepreneurs in the same line '^ ^

production go about to achieve precisely similar ends. Of'
six farmers, with substantially similar farms and inheriting
or borrowing an equal fund of purchasing power, one will
buy more land, another more machinery, a third will hire
more labor, a fourth will buy more draft cattle, a fifth wiU
increase his herds, a sixth will enlarge or improve his sheds
and barns ; but all will, in essential similarity, be devising
ways of most gainfully putting product upon the market
True, there would be room enough here, were it to the
purpose, for technological distinctions between the various
factors of production, but it is clearly not to the purpose;
no one of these productive outlays is any more or any less
a cost than any other ; and no one of them is a cost by virtue
of its labor or its pain content, or of its abstinence quality,
but only of its capital outlay.

Lest the argument seem to imply too much, or its con-
clusions to extend too far, it may be permissible again to
repeat that no abandonment of the technological concept of
capital is advocated or could be admitted to be desirable,
but only that this technological concept be accepted as such,
and that its distinctly social bearing and significance be
recognized. Nor is any attack intended upon the principle
that, from the social as well as from the individual point
of view, all wealth postponed in consumption is capital.
But it is here insistently urged that the category of private
capital must not be abandoned, but enlarged to be as wide
as the concept of competitive capital; and that this latter
concept needs not only recognition, but a markedly increased
emphasis as surpassingly important among capital concepts ;
and all this to the end that economics may preserve some
practical relation to the actual business life of a competitive
entrepreneur society.'

•This concept of capital is substantially the same as that which,
from another point of view and for entirely different purposes, is tet
forth by Profetsor Vebleo in his Theory of Businetj Enlerprii

CAPITAL AS A COMPETITIVE CONCEPT

iSS

Id certain important particulars Ibc (orcgoitig argumeot and its
conclusions are obviously at one with lie views of Professors Fetter
md Fisber. Social capital one may be eonlent to define in harmony
ritb Professor Fetter's formulation ; hul there must be sharp diaaenl
ironi the abandonment of tbe private-capital concept. Professor
Fetter's formulation, while entirely adequate from tbe social point of
•lew, and important for tbeorclical doctrines as viewed therefrom, can
•carcely be regarded as of theoretical adequacy or of practical service
vhen carried over into the field of existing facts.

Nor does it appear possible to work out anything like approximate
coincidence, as does Bochm-Bawerk, between social and private capital,
private capital beiog beld as somewhat the more inclusive concept.
Fetter and Fisher have sufficiently shown the arbitrary and illogical
eluiacter of this procedure. Private capital, if there is any such thing,
is widely different from a category collateral to and supplementary to
the jDcial-capilal concept.

But it is not so cleat whether, under Professor Fisher's reasonings,
there may not be room for tbe entrepreneur-capital concept above set
fOTth. Certainly the citations from ante-Smith usage, as well as from
liltr Dtaige. admit, if indeed they do not impose, tbe private business
"Kept; tg. :

t6r J : "La sorte principale que * quella quantiti di danari, che
tHgenii i mercalanti in sui trafficbe."

i6«; "Le sorte principal d'one dette."

Tfiii : "Wealth, worth: a stocke, a man's principal or chiefe sub-

1730: "Capital slock I in trade, etc.] is the stock or fund of a
OiJmg company, or tbe sum of money they jointly contribute to be
""ployed in trade." And so, substantially. Rider. i75i»: Dyche. 1730 I
Kidioiion. 1818.

1SJ9: "On doiuie vulgaitement ce nom & toute somme amassf, ct
pin particoliiremcnt i cellcs qui, placies ou prctees, peuvent produire
iwWt."

1M3 : "Tbe amount of money or property subscribed or employed
"> 1 jcint-stock aiMciation : the money assets invested in business by
I tiKJing firm or individual ; the net worth of a party."

The foregoing citations are all from among those collected by
Pfofosor Fisher and quoted by him in the Quarterly Journal of
^timomici. May. 1904 ; which see.

Read with the necessary bias, also. Professor Fisher's formulation
'> tide enough to admit of ^e entrepreneur concept ; a slock (of weallh
* frofrrty. or the vatue of either) eiisling at an instant of lime, as
JiflufnuAfrf from income, which ii a How Ihrotigh a period of time.
Bat inismuch as this interpretation wi>uld make the formulation do duty
fof two entirely distinct and inconsistent concepts, it is perhaps
Ml fsirly to be claimed or imputed ; Professor Fisher's point of view
I'd reuonings are prevailingly social in character. So Professor
Tonle'i notion, "surplus wealth as a possession" (Quarterly Journal of
Ee>nomiet, November, 1903), appears to be an unwarrantable joinder
•f Wdal and competitive considerations, or. perhaps better, an impos-
^He compromise between them.

!d last analysis, however, the objections to Professor Fisher's
">■ are best appreciated by following out rigorously his distinction
fcttween fund and (low, a distinction of unquestionably great value,
hit made overdecisive for the purposes in hand:

Ijfi VALUE AND DISTRIBUTION

Capital and income being niade correlative terms, all flow being
income, and the fiuid giving brigin to the flow being capital, wages
thereby become s subhead of interest, and men, or their productive
power, become capital. Fisher himself accepts this conclusion, but
recogniiet ihe awkwardness of it, and declines lo regard it as essential
to his main position. But it is none the less true that giving up this
point necessitates the abandonment of tbe fund-i'j.-tlow distinction,
at all events for the main purpose to which il is applied.

And there is really insuperable difficulty in the way of making men
capital, if tbe capital notion be taken to imply tbe reduction of the
productive good to the value denominator ; and this, it will be remem-
bered, is tbe view for which Professor Fisher has announced himself
lo stand : "Professor Fetter .... seems to think that I restrict the
meaning of capital to concrete wealth rather than the value of wealth,
and that 1 do not admit 'services' under income. But these are
both prominent theses of mine" (Quarterly loHrnol of Etonomies, May.
i()a4, p, 3S8, note). But it is, then, impossible that men become capi-
tal, inasmuch as, while each man does give off successive productive
services, which, so Ear as they are salable — and sold — in advance
of their actual rendering, may each obtain, through the process of dis-
count, a present worth, it is not possible to attach a present worth to
the whole series in block, that is to tbe man entire -. that the difficulty
of giving the successive doses of upkeep expression in present worth
is not insurmountable, is seen in the fact thai other productive agents,
subjected lo upkeep expenses, obtain a net present value. The difE-
cutly is thai, outside of slavery, no sale is possible, and that thereby
there is nobody to do tbe capitaliiing ; free tnen have no market value.
Precisely as nothing is property thai cannot be owned, so nothing is
capital thai cannot be capilaliied : thus no income can be computed
as the flow from any fund, so long as the succession of incomes can-
not be funded.

It would, indeed, be possible, as Fisher rightly ui^es, for each or
any individunl man to capitalize himself upon Ihe basis of what his
future income was expected to offer as gratification balance over and
above the stress and burden of acquiring the income. But even this
does not meet the difficulty ; for if men are to he capitatiicd in such
manner as to permit that tbe concept of flow — interest — be articulated
with Ihe concept of fund — capital — it must, upon such basis, follow
that all income, and not some share or balance of income, be taken as the
interest fact, and thereupon be subjected to the discount reduction
into terms of capital. Otherwise it will immediately become necessary
that all rents upon instrumental or other saved wealth be taken to be
capital only to the estcnt that the incomes therefrom afford a net
return over and above Ihe burdens and protests of postponement.

Resting upon this view of man as capital, debts and franchises
are by Fisher included within the capital concept, as parts of the fund,
since they are liens against men, mortgage claims, so to speak, upon Ihe
human-capilal items. But if it be not permissible to regard men as
capital, there is logically no place for ckoscs in action, unless upon the
acceptance of tbe private-capital concept— -an outcome which both
Fetter's and Fisher's views are especinlly recommended as avoiding.

CHAPTER XII

CC>:ftilPETITIVE SAVINGS AND SOCIAL CAPITAL: LOAN

FUND AND ABSTRACT CAPITAL

We have seen that the cost-of-production and the value
P^'OWem here has to do not with capital as a social concept
b^'t solely with competitive capital, capital as a fund for the
payment of the expenses of production, capital conceived in
8^oli wise that interest payments are as correctly to be
^^S^ded as paid from it as for it, capital, that is to say, as
^^ source of rent, insurance, tax, and advertising outlays,
^'^d of all other costs of production as well.

All this follows from the truth that cost of production,

^^ a cat^;ory in the investigation of market values in a

competitive society, is purely a private and competitive fact

Elsewhere it may be our task to elaborate categories of

social cost, cost as it would present itself in a coUectivist

€<^onomy, cost in terms of some sort of social labor pain

o^ of displacement of social product, — cost, that is

to say, unrelated to private capital and to competitive

^^tlay, and entirely exclusive of all the computations and

^^ detail and the organization of private initiative for

private gain.

But for competitive economics, and for cost of production
^ a step in the investigation of competitive market values,
^ concepts must be competitive in character ; capital must,
^or cost purposes, be taken as the fund out of which pro-
ductive expenditures are paid, or as the valued thing or
^tuation or agent into which these capital outlays have been
incorporated and value-wise expressed.

It follows, then, that competitive capital will comprise
^ merely machinery and tools and improvements upon
^i, but also stocks in trade, and counter money, together
^th any and all cost-obtained means and agents of private
ffain, land or other ; thus, diverging from the social concept

157

even at its broadest, competitive capital must include such
non-social forms of wealth as debts, franchises, trade-
secrets, trade-marks, copyrights, good-will, influence, legis-
lative and administrative favor.

In sum, as has been pointed out at length, the entre-
preneur-capital concept abandons, as purely technological
and mechanical and as irrelevant to the computations of
competitive production, the traditional threefold subdivision
of productive factors; it places all productive outlays as
upon the same footing relatively to cost and to value, and
forsakes all attempt to make capital a subhead under the
category of social wealth. Private capital must logically
stand as merely another aspect of private wealth.

But it is to be noted that there remains always one
fundamental likeness between social capital and competitive
capital — the test by virtue of which any good or possession
considered from either point of view is entitled to be
regarded as capital — the characteristic mark and the essen-
tial fact in the capital concept, that of postponed ultimate
service. Capital always and everywhere, be it of the soda!
or of the private sort, is a case of wealth held by the owner
thereof for the advantage accruing with time.

Saving, then, means postponed service ; always and
everywhere postponed service is the heart of the capital
concept. Privately postponed service is private capital:
socially postponed service is social capital.'

Thus while, from the social point of view, the distinc-
tion between capital goods and land goods might possibly
be rested upon either technological or genetic considera-
tions, it is clear that, from the competitive point of view,

* It may be objected — a critical friend has indeed objected — that

the idea] and unmitigated
purpose of later consumption, and with the
accumulation. This must be granted ; and it
factory disposal of the case to term it abnon
mere aberration or disease. But in reality
for the proposilion advanced, which

offered by imnicdia
power or through i

without
listinct purpose of mere
is obviously not a satis-
al, or to put it aside as
o difliculOr is presented
ly that the sntisfactioa

; conaumplion will not be foreeone excepting upon
crvice obtained by way of income due to earning
continued and prolonged enjoyment c '

SOCIAL AND ABSTRACT CAPITAL I59

all questions of derivation and origin and all questions of
probable or possible modifications of supply are equally
irrelevant as bearing upon the content of the term capital.
And likewise the distinction between production and con-
sumption goods takes on, under the private-capital con-
cept, quite a different aspect, if indeed it does not break
down altogether. All forms of merchandise must rank as
capital ; tented pleasure boats serve as basis of acquisition ;
technological and non-technological goods fall equally
within the classification ; whatever commands, for the indi-
vidual, power of disposal over present goods may be the
subject of individual saving— of postponed service.
Whether this disposal rests upon the ownership of con-
crete and tangible facts or merely of some right or privilege
or claim, is for the purposes of the individual computation
^tirdy irrelevant ; productivity for the individual reckon-
"^is in any case implied by the very fact that postponement
of service is decided upon ; productivity thereby assumes a
"^ aspect; and consumption goods, technological goods,
and immaterial goods all take on, in their time aspect, the
^'acter of capital, as in one way or another income-bear-
"?» increment-commanding items of ownership.

Viewed in the light of these considerations, some of the
^fusions, both in earlier and in current capital discus-
**^i come to be readily explicable ; the distinction between
^ social and the competitive concepts has commonly been
N vaguely felt and never consistently worked out. Capi-
W, in the sense of a wage-outlay fund, belong^ exclusively
to the competitive concept ; capital as instrumental goods

k nltiiiiate analysis the miser is not indefinitely postponing his enjoy-
Oeot; instead of this, he is immediately entering upon the preferable
ittematiTe enjoyment, the long-time utility-income method.

Likewise it is no part of the argimient to insist that the principal
tarn of an investment must some time be consumed, but only that the
iounediate total of satisfaction offered by the present utility of wealth
win be foregone only on the expectation of a larger total of service
duoagfa waiting, and that this could fail to be true only upon such
conditions as, making abstinence an indifferent thing, must make
pfodaction a motiveless thing.

^

VALUE AND DISTRIB1

falls equally well under either. Capital as distinguishe<£^
from other instrumental goods — land and natural agents — i^^
a possible social and technological concept; but from the-^^
point of view of private capital the distinction vanishes.
Credit rights, franchises, patents, good-will, privileges, have
no existence in tlie collective reckoning ; but as competitire
facts they are among the most important of acquisitive
goods. The wage-fund doctrine is nonsense from the point
of view of social reasonings; but from the private point
of view it is an entirely tenable, thougli admittedly a not
over-important or necessary, concept. Subsistence goods are
readily enough regarded as costs and as production items.
if only the private instead of the collective standpoint be
adopted.

That labor is limited by capital, taken in the sense of
technological equipment, is, if rightly interpreted, hardly
open to question; but the proposition means nothing or
worse if asserted with regard to private capital.

But, for our present purposes, the most significant of
the conclusions resulting from tliis constant and chronic
shifting in point of view is in the treatment of savings, loan
capital, and commercial credits. Under what concept are
we, indeed, proceeding, in our talk about fixed and circulat-
ing capital, the great centers of capital, great capital bor-
rowings, the growth of capital, the fluidity and mobility of
capital!" And what is really the relation between savings
and capital?

What, for example, is Ricardo talking of in the follow-
ing passage, already quoted in part?

Capital is apportioned precisely, in the requisite abundance
and no more, lo the production of the different commodities which
happen to be in demand. With the rise or fall of prices ....
capital is either encouraged lo enter into, or is warned lo depart
from, the particular employment in winch ihe variation has taken
place. Whilst every man is free to employ his capital where he
pleases, he will naturally seek for it (hat employment which is most
advantageous; he will naturally be dissatisfied with a profit of lo
per cent, if by removing his capital he can obtain a profit of

SOCIAL AND ABSTRACT CAPITAL l6i

15 per cent It is perhaps very difficult to trace the

steps by which this change is effected: it is probably effected by a
manufacturer not absolutely changing his employment, but only
lessening the quantity of capital he has in that employment. In all
rich countries there is a number of men forming what is called the
Qonied class; these men are engaged in no trade, but live on the
interest of their money, which is employed in discotmting bills, or
it loans to the more industrious part of the community. The
(cankers too employ large capital on the same objects. The capital
^ employed forms a circulating capital of a large amount, and is
^ttiployed, in larger or smaller proportions, by all the different
^T'a^les of the cotmtry. There is perhaps no manufacturer, how-
^^er rich, who limits his business to the extent that his own funds
^^1 allow: he has always some portion of this floating capital,
"Hrrcasing or diminishing according to the activity of the demand
^^«" his commodities. When the demand for silks increases, and
*^*^t for cloth diminishes, the clothier does not remove with his
capital to the silk trade; but he dismisses some of his workmen,
^ discontinues his demand for loans from bankers and monied
ni«n; while the case of the silk manufacturer is the reverse: he
to employ more workmen, and thus his motive for borrow-
is increased; he borrows more, and tKus capital is transferred
^■"otn one employment to another, without the necessity of a manu-
facturer discontinuing his usual occupation.'

Whence come these sums that Ricardo's manufacturer
is borrowing from the moneyed classes? It is a common-
place that capital comes from saving; and it is unfortu-
nately almost as much of a commonplace that savings are in
^^e same sense capital. But as we have seen, saving is
"^^ely the postponement of the consumable services of
private wealth; the people who save, the people whose
steady streams of contribution (low into the loan market,
^^^ ordinarily merely receivers of income, who, having held
^^r expenditures below their receipts, have something to
»^(i. Their decision to postpone their personal exercise of
"*^r rights of consumption is carried into effect, either by
^c method of holding their purchasing power in hand in
4e form of money or by transferring this power to other
persons by some direct or indirect method of loan. The

'Ricardo, Poiifical Economy, Conner's edition, chap, iv, sec 33.

i62 VALUE AND DISTRIBUTION

borrower, whether for purposes of consumption or for
purposes of production, desires to obtain disposal over this
purchasing power. It is only as a question of security that
it at all matters to the lender whether consumption goods
or raw material or machinery or land or labor be die
purchased fact

Whether, as the final outcome of individual saving, the
productive equipment of society — its technological outUlage
— will be increased, will depend upon the direction in which
the borrowed purchasing power is applied. Private saving,
by the very fact of non-consumption, ranks as private capi-
tal; but the salary or other income saved and lent may
never result in either social capital or social wealth ; socially
considered, the case may sum up as merely one of substi-
tuted consumption — as simply a different distribution of the
consumable products of industry, which in no way become
a part of the social technological equipment.

But by far the larger part of this loan-ftmd form of
savings capital is not thus easy of analysis ; it is, neverthe-
less, essentially of the same character of postponed ccm-
sumption seeking rental openings. Any owner of any form
of private wealth may by the sale of his wealth become the
possessor of some of this loan-fund form of capital. By
obtaining control of some form of purchasing power,
whether money or other, in which is expressed and embodied
his deferred right of service, he becomes a fact of supply in
the market for loan capital. Commpnly by deposit in a
bank, his loan-fund capital takes the form of an assign-
able demand right against the bank.

It is doubtless true that the saving and the lending
might possibly enough take place in terms of concrete
material wealth, instead of in the form of purchasing power
into which this wealth has been converted, were it not for
a lack of coincidence between demand and supply similar in
principle to that which renders barter so impracticable as a
isystem of exchange. Either the saved wealth may be in
the hands of an owner unwilling or unable to grant credit

SOCIAL AND ABSTRACT CAPITAL 163

on any terms whatever, or the credit medium oflFered may
be that of a purchaser not sufficiently well known or not
satisfactorily approved; thus, without some credit inter-
mediary or underwriter, the purchaser's medium of pay-
ment fails of the requisite degree of market-ability — ^is not
for the purposes of the case in hand a currency.

It is precisely at this point that banking methods take
on their great importance in furnishing an investment
opportunity for savings, and become also a practical neces-
sity for the converting of savings into a fluid and effective
loan fund. By the discount of the customer's note at the
hnk, there is secured for him a medium of payment accept-
^ to the seller of the property ; by the method of check
transfer the seller then becomes himself a holder
of loan-fund capital, precisely as if the sale had been
node for actual cash, and this cash thereupon deposited in
bank.

For the purpose of making all this clear and of rein-
forcing the truth that the existence and the volume of
private-savings capital have no necessary connection with
^ uses to which the borrower devotes the borrowed funds,
^<i no necessary connection with the total volume of
^^Qsting social wealth, the following illustration will be of
5^ce:

Let there be assumed an isolated community of one
tbousand farmers, nine hundred and ninety-nine of whom
possess each one thousand dollars of concrete wealth in
*^s and implements, at the same time that the thousandth
^^ has for sale $999,000 worth of cattle. If now the capi-
^ be sought wherewith to finance the building of a rail-
^^d, the project must fail; it is true that there is one
^«al4y man in the community, a man who would gladly,
^ approved security, lend $999,000 worth — of cattle.
But railroad construction cannot be financed on this basis,
^ess, indeed, to the extent that the cattle can be made to
serve as a form of currency. The difficulty is not that there

i64 VALUE AND DISTRIBUTION

is a lack of wealth in the community, but that this wealth
not in practicably lendable form.

But if now these cattle can be sold out on credit am(
these nine hundred and ninety-nine farmers, their m
taken and discounted into deposit credits ; or even if agains
these farmers there are taken contracts or due-bilk oi
acceptances or orders dischargeable on demand in labor

in produce, there will forthwith exist in this society $999»

ooo of loan-fund capital of a character suited to the needs:===^
of the enterprise in hand.

And if it be objected that this really amounts to the
same thing as lending the cattle, only that the method is
roundabout and less simple, all this must be admitted, but
with the important modification that the other way is, for
the purpose of capital-borrowing, an impracticable or even
an impossible method; debts must exist, that is, collectible
rights in money or in other forms of wealth — for money is
for many purposes only a form of credit — must exist,
before these credit rights can be lent; and nothing else can
practicably be lent.

And there is this still more important modification also:
suppose all these cattle to have been, inunediately after the
sale, swept away by disease; if the debtors are still scdvent,
the loss is theirs and not that of the capitalist ; they are in die
aggregate $999,000 poorer, but he is as well off as before,
and has not a jot less "capital" to lend. That is to say, the
volume of loan fund in a society has no direct or necessary
relation — still less, proportion — to the wealth of the society
in question. It is true that if these farmers had nothing left
to pay with, the debts might be uncollectible and thereby
fall out of the lists of capital ; but so also might they not,
if only it were still true that the laws of the society or its
business code of morality made the debts collectible in
terms either of commodities or of services. A debt
that is secured by character is as good an investment and as
truly capital as any other debt, if only it be really
as secure.

SOCIAL AND ABSTRACT CAPITAL 165

But this is not the whole doctrine ; from the theory and
the methods of discount banking, we are to make some
further deductions. It is worth noting that Bagehot, in
adopting to the full the Ricardian mix-up of the social-
with the private-capital concept, declares that capital
includes "two unlike sorts of commodities, co-operative
things which help labor, and remvmerative things which
pay for it ;" * and further still — in full conformity with
Ricardo— remarks :

Suppose the corn trade to become particularly good, there
are immediately twice the usual number of corn bills in the bill
l>fokcrs' cases; and if of the iron trades, then of iron bills. You
conld almost see the change of capital if you could look into the
Wn cases at different times.*

But note that Bagehot does not make it altogether clear
whose is the capital that is changing; but it is perhaps
^riy to be assumed that he takes it to be the capital of the
lenders.

Caimes's statement upon this point is hardly more satis-
factory; but the loan- fund variety of capital receives
equally distinct recognition :

The existence of a large amount of capital in commercial coun-
tries in disposable form, or, to speak less equivocally, in the form
®^ money or other purchasing power, capable of being turned to
^ purpose required, is a patent and undeniable fact. Nor is it
^ certain that this capital is constantly seeking the best invest-
°^*nts, and rapidly moves towards any branch of industry that
"*Ppens at the moment to offer special attractions.*

^Ecamrmic Studies, 2d ed., p. 55.
* Bagehot, op, cit., p. 45.

'Caimes, Leading Principles, p. 63.

"Everyone is aware that England has much more immediately dis-
'^^le and ready cash than any other country. But very few persons
'"^iware how much greater the ready balance — the floating loan fund,
*to can be lent to anyone for any purpose — is in England than it is
*ywhere else in the world. A very few figures will show how large
1^ London loan fund is, and how much greater it is than any other.
*« known deposits — the deposits of banks which publish their accounts
'"^rt: in London (December 31, 1872), £120,000,000; in Paris
^Febniary 27, 1873), £13,000,000; in New York (February, 1873),
^40,000,000; in German Empire (January 31, 1873), £8,000,000 ; and
the unknown deposits— deposits in banks which do not publish their

l66 VALUE AND DISTRIBUTION

But the interesting question still remains whether, when
the business man has borrowed from a deposit creditor of
a bank a share in this loan fund, this borrowed
portion becomes a part of the business man's bor-
rowed capital and constitutes an addition thereto.
Docs the creation of new capital take place with
the coming into existence of a new promise lo
pay ? It must be agreed that the new loan has worked no
deduction from the capital of the lender ; he now holds a
note or a right as valuable as was the thing or right with
which he parted. But has there been here a new creation of
capital, merely by the fact of a larger volume of cash
purchasing power? The borrower has by assignment come
to hold a demand right against the bank — a right obtained
on terms of creating against himself an offsetting uid
equivalent demand ; he has enlarged his cash bills receivable
on terms of increasing his time bills payable. If the note
signed is a liability, this deposit credit appears to rank
for liim as a new property acquired to corresiwnd ; it is U
much an asset as will be any addition to his stock of
merchandise purchased through the intermediary of this
borrowed deposit credit. In the language of the business
world, he has "borrowed capi'il" for use in his business;
the business now employs so nmch tlie larger capital total.
And yet if this deposit right is really capital, there is
necromancy somewhere ; the lender also has not diminished
his capital holdings, but has simply exchanged debtors.

Something like a similar question arises where a bank
customer has had discounted his own note with the bank;
has iie borrowed a share out of the existing loan fund? If
not, is whatever he has borrowed properly to be reckoned

accounti — are in London much grutct than )hoH in any other ol
these cities. The biokcrs' drpoails of London are tnanj' timei giulcr
than those of any other country." — Bigchol, Lombard Siretl, chap. i.
P- 4-

A well-informed estimate in iBgs placed the bank deposits of
Great Britain at £700,000.000, In the United States at preicnt the
deposit liabilities of the mtional banks alone ran upwards of four and
ODC'half billions of dollars.

SOCIAL AND ABSTRACT CAPITAL 167

coital? Has he increased his capital investment? or his
capital utilized in his business? What has really taken
iriaoe^

I' Much confusion may be avoided by getting firm grasp
[ of the truth that a bank characteristically does not — ^prac-
■ ticabljr speaking, cannot — ^lend its deposits. Not that the
oxxiey deposited might not be lent, instead of, as is the
[ more common case, being retained as part of the cash
[ Ksources of the bank. But even so much as this can be
true only where the deposit is in the form of actual money.
CoQcdving of the bank system as an aggregate, deposits
come mostly to be r^;arded as mere transfers of credit
from one branch to another; the clearing system is an
tfective demonstration of this. In any case, however,
deposits in the sense of demandable rights, as distinguished
from the thing deposited — customers' accounts, the
tiungs which total for so large a part in the aggregate bank-
ing liability — are made up of something not within the
disposal of the bank to lend, but solely within the disposal
of the depositing customer. Commonly, indeed, the
deposit liability running against the bank is the outcome of
Ittoking accommodations already given; by just so much
it is a diminution from the accommodations remaining
possible. The lending power derivative from the accom-
nwdations already granted is that of the deposit customers.
Bnt in any case, from whatever source the deposit liability
arises, not it — ^not the liability, but the deposited money,
*f there be any, is the only thing lendable by the bank,
* usable as reserve basis for further lending. And com-
monly, as we have seen, no money is deposited, but only
^ item of account against some other bank — sl right of
defense against other claims upon which the other bank,
debtor in the case in hand, is creditor.

The rationale of borrowing from a bank is, as is
familiarly known, quite other than the borrowing of money.
True enough, money may be borrowed, but this is unusual
^ incidental— or accidental — ^and, so far as it occurs, is

precisely similar to non-bank borrowing; it is no part of I
that which is peculiar to banking methods and pertinent to
banking theory. The transaction of discount and deposit
is typically not a lending of cash ; it is commonly described
as a lending by the bank of its credit, either in the guise of
deposit credit, or of bank bills. In exchange for this
demand right the customer gives his note which, whether in
'orm a demand or a time obligation, is, in fact, more or
less pronouncedly, a time relation. The case has the
appearance of a mere interchange of obligations, the eii»-

r passing over one which is not generally acceptable ss l
current purchasing power, and receiving one which is so i
rrent.

Making no question of the correctness of this view so
ar as it goes, it is nevertheless to be said that, despite all
he machinery and the terminology of the case to the con-
tran,-. all that the bank really does is to underwrite the
credit of the customer; it lends its own credit, truly, but
only in the sense of adding its guarantee to the customer'^
undertaking to pay.

It therefore follows that the naive business view of '
"bank capital" obtained through borrowing misconceive)
the facts ; the process is merely writing over into acceptabit
purchasing power the business man's own note. The result
may obviously be to place the business man in the posses-
sion of goods obtained on this underwritten credit ; and for
present purposes it possibly does not greatly matter whether
the man's personal credit is itself called the capital, or
whetlicr llie pass-book claim, or the demand note against
the bank, be regarded as the capital, or whether finally the
goods obtained through the expenditure of the purchasing
power be regarded as the capital. It remains true that in
any case the business man's total investment, in the sense
of his net "worth," is not increased.

But whatever the terminology for all this may be and
however unclear the merits of the case as matter of termi-
nology, this much comes to stand forth clearly:

SOCIAL AND ABSTRACT CAPITAL 169

Ac has or has not been increased by the process of dis-
ooontmg a note, the supply of loan funds, the media for the
taking of exchanges or for the financing of enterprises, the
krrowable and lendable and usable current purchasing
pwrer of the community, has been increased. The creation
lod issue of current purchasing power is the chief business
of banking institutions. Loan funds — it begins to look as
if for some share of these the term capital is of doubtful
propriety — are even more intangible and incorporeal than
tt?ings capital, since not all of the loan fund has even as
mdi as a previous saving behind it ; but such as they are,
bmk-niade loan funds must be recognized as intangible and
bctnporeal facts, a sheer matter of intricacy and com-
plexity in business relations — meshes of obligation — z mere
scaffolding of promises — a folding back one upon another
of successive layers of credit. And because not necessarily
npresentative of an increase of social capital or even of the
Sfiidated total of private capital, it seems necessary to
recognize the loan fund as a distinct economic category.

Some important conclusions now require attention as
to die nature of much of what is called circulating capital,
sod as to the qualities of mobility and fluidity said to be
especially characteristic of capital as against land or labor,
sod finally also as to the interpretation and the limitations
to be imposed upon the doctrine of abstract capital and of
capital as an abstract fund.

From the social point of view all technological goods and
indeed all social wealth have, in varying degrees, the quality
of fixedness. But from the private point of view all capital
^ mobile, since all wealth facts are salable, and since all
wealth is capital in the measure and degree of its market
price. From the private point of view, therefore, every
possession, whether commodity or right, may be the subject
of abstinence,* and this without reference to the degree of

'See note on Senior, p. 137.

' VALUE AND DISTRIBUTION ^^^^

its fixedness, when regarded from the point of view of its
technological adaptation, or of its quality as a consumption
good. Complete mobility for private purposes is, how-
ever, achieved only by the transformation of the vendible
item of private wealth into the form of money or of otht »■
current disposable purchasing power — that is to say, int«3
the very commercial material or medium of which the loa_»i
fund is composed,''

N
^

It should now be possible to estimate how great is &m.^
promise of service and how serious the admixture of erro^r
presented by the abstract-capital concept.

Looked at from the social point of view, there is no sucrli

'Approached in this wise, the differences between Sniilb m^
Senior, on the one side, and Ricardo and Jamei Mill upon tbe other*',
with rejard to the nature and characteristic! of circulating and K^i
fixed capital, are icen lo be mcrel]' differences in the choice of poiVl
of view. And here, as commonly, when Smith and Ricardo weV^
clearly and delimtcly at iaiue. Smith had the right of the contrDTtny-
Smitb was advocating the private-competitive point of view, wbil^
Ricardo'i fine of diitinction was prevailingly technological.

According to Smith. "Capital employed .... in lucb . . . -
things aa yield a revenue of prolit without changing masters or circu'
laling any farther .... may properly be called fixed capital. ....
Circulating capioU .... is consuntly going .... in one sfaspc
and returning .... in another, and it is only by means of such
circulation, or successive exchanges, that it can yield .... iny

profit Circulating capital is composed of four parts

First, of the money by means of which all the other three are circu-
lated and diitribuled ; .... of the slocks of provisions in the
possession of the butcher, the grazier, etc : .... of the materials
whether altogether rude or more or leas manufactured ; . ... of
the work .... made up and completed but still in the hands
of ... . the manufacturer." — Wealth of Nalioni. Book II, chap. L

So. with Smith, a tailor's needles are fixed ca[Mt9l no matter hot)
abort-lived of service. The question is how the wealth is actually
handled under the guidance of private interests with reference to the
marketing of it — a matter of change of ownership.

With Ricardo the question is one of mechanical and technologies]
durability: "According as capital is rapidly perishable, and requires to
be frequently produced, or is of slow consumption, it is classed under
the heads of circulating or of tlied capital."— Po/iMfoi Economy .
chap, i, sec. 4.

Senior sides with Smith: "Mr. Ricardo might well remark that
the line of demarcation between the two sorts of capital cannot be
accurately drawn : for what can be more vague or more void of posi-
tive meaning than such comparative terms as slow and rapid? The

liar circumstance ia that both be and Mr. [James] Hi

SOCIAL AND ABSTRACT CAPITAL 171

thing as abstract capital in any other sense than that
according to which all social wealth is subject to the value
measure and is wealth or capital under this test and measure
and expression. And neither from the social nor from any
oflier point of view is there any "spiritual essence" of
talue hovering over the material forms of capital ; nor from
the social point of view, or of necessity from the private
point of view, is it true that material things perish or wear
out, while the capital ghost of them is immortal ; there is, in
fine, no capital entity as distinct from the capital goods
themselves, though there is such a thing as the sum of the
values of existing capital goods. This value or price aspect
9f the goods is to be regarded as the attribute or character-

ktve mpposed .... that their division followed that of Adam Smith,
It 11 otmoosly a cross distinction." — Senior, Political Economy, 2d ed.,

John Stuart Mill's use of the two terms hopelessly confuses tech-
HloKictl and competitive considerations: "Of the capital engaged in
^ prndnction of any commodity, there is a part which, having been
'■ee used, exists no longer as capital ; is no longer capable of rendering
Krvice to production, or at least not the same service nor to the same

^ of production [a technological distinction] In the same

division must be placed the portion of capital which is paid as the
v*Cei» or consumed as the subsistence of laborers. That part of the
ctfittl of the cotton-spinner which he pays away to his work-people,
^ to paid, exists no longer as his capital, or as a cotton-spinner's
**pitaL [Italics the present writer's. The money never had any
Ethnological quality; the reasoning is purely competitive, bearing on
fiHite— entrepreneur— costs.] Such portion of it as the workmen
^^^umt [money ?] no longer exists as capital at all ; . . . . capital
*to in tiiis manner fulfils the whole of its office in the production in
^U it is engaged, by a single use [technological aspect and private

*9ttt mixed and confused] is called circulating capital This

Mon of capital requires to be constantly renewed by the sale of the

">iAed product, and when renewed is perpetually parted with in bujring

jNerials and paying wages ; so that it does its work, not by being kept

^ by changing hands. [Mixed concept ; rests in part upon considera-

^ of durability, in part, of changes of ownership.] Another large

Mioa of capital consists of instruments of production, of a more or

Ini permanent character, which produce their effect not by being parted

*ilh bat by being kept, and the efficiency of which is not exhausted by

* Uffle Qte." [Mixed concept ; rests in part on durability, in part on

aoo-diange of ownership.] — Mill, Principles, Book I, chap, vi, sec. i.

For proof that this same confusion between the social-technological

tad tlie private-acquisitive point of view is equally characteristic of

htt and cnrrent discussion, reference may be had to an article by the

yiCKBt writer published in the Yale Review for November, 1905, entitled

'Doctrinal Tendencies — Fetter. Flux, Seager, Carver."

»7»

VALUE AND DBTMBmON

I

I

istic by which and according to which the goods possess the
capital quality."

But from the point of view of private competition and
competitive business, the only point of view, be it repeated,
which greatly concerns economic theory in general or
which at all concerns the cost and value investigation, the
question takes on a diflferent aspect; here all capital, by
virtue of its quality of vendibility is, io a sense, unspecial-
ized, mobile, and fluid; and all stocks of materials and all
intermediate products are, as such, mobile in their varying

'From Ikit locial point of j-iev. therefore. Professor Carvct'i
analysis of the ab si rsct -capital concept leaves nothing to be said:
"The effort to distinguish between capital and cap! la I -goods kcids to
be simply an attempt to diitinguiah between a quantitative meBrarcment
for capital and the capital itself. Things are measured, of course, by
selecting a single property which they poaseis in common, such ai
number, extension, or specific gravity, and comparing tbem on the basis
of this property. When wc want to say how much there is of a certain
thing, we express it in terms of the property according to which it is
commonly measured. This is true of wealth and capital as of other
things. The primitive herdsman, if asked the amount of his wealth,
would doubtless have answered an hundred or two hundred head, as the
case might be. The primitive agnculturalist. whose wealth consisted
of wheat, might have answered in terms of cubic contents, as so many
bushels. It is conceivable, though improbable, that both might have
united upon specific gravity as the basis of measurement, and have
answered in pounds. But the change to specific gravity as the baiii
of measurement and quanlilative expression, would not have changed
one bit the nature of their wealth or their capital. Nor would it have
made either clearer or less clear the distinction between capital and
capital -goods.

"As a matter of fact, value, being the one property common to all
forms of wealth, has long since been selected as the property accord-
ing to which all wealth is to be measured, and in terms of which
quantities of wealth are always to be expressed. When asked how
much wealth they have, men will reply, so many dollars, just as (he
hcrdnnan would have enumerated his animals. Capital. I>eing a form
of wealth, is measured, and its quantity is expressed, in precisely tlie
aamc way. Does this change in the basis of measurement change in the
slightest degree the nature of capital? By no means. When asked how
much capital they have, men will express it in dollars ; but. if asked in
what their capital consists, they will enumerate the instruments. The
instruments are the capital, and the amount of value in them is not the

capital Every distinction which Professor Clark has made

between capital and c.ipital-goods can be made with eiiitat clearness and
with equal justice between the herdsman's hundred head and the
animals composing it. between the farmer's bushels and the wheat which
they contain, or between the pounds of wealth on the one hand, and the
animals and wheal on the other." — Quarterly Journal of Economics,
Vol, XV j;Auguit, 1901). p. 589.

SOCIAL AND ABSTRACT CAPITAL I73

degrees; and even so-called fixed capitals, technological
instrumental goods, are mobile in more or less retarded
nwvement, accordingly as there is or is not a ready market
for them.*

It is not, however, true that abstract capital at all coin-
cides in volume with the price expression of the aggregate
of social capital or of social wealth ; the characteristics of
ahstractness, of homogeneity, of an entire fluidity and
mobility, belong to what we have described as the loan
fund, and to it solely. Nor is the size of this fund com-
mensurate with the existing fund or total of private capital ;
tile loan fund is merely a portion or subdivision of private
capital. Nor, as we have seen, is the loan fund made up
of daims resting for their collectibility solely upon some
existing form of social wealth or capital; purely personal
elaims, if they are enforceable, are as truly capital as are
fights secured by collateral or by mortgage ; many debtors
P^ in pledge their future earning power, precisely as may a
stote its future revenues. So, also, precisely as the present
^ue of a city corner is the discounted value of the trade
.privileges which it will in the long future control, so the
pxxi-will of a business, and the market value of that good-

'The private reckoning being solely concerned with the price aspect

y the case, there is, from this point of view, in the abstract-capital

^^^oe, a residuum of truth not quite adequately recognized in Pro-

'*iior Carver's analysis as it continues: "As to the permanence of

^ital. Does capital abide while capital-goods perish, or is it only the

^titative expression for capital which remains, while capital, the

^^^ measured, perishes? Evidently, the latter. Though animals

^sh, the amount of the herdsman's wealth, measured numerically and

''{Pressed, for example, as an hundred head, may remain. Is it the

*^ wealth ? Not unless it is the same hundred head. Though wheat

Parishes, the amount of the farmer's wealth, measured in cubic contents

fod e3q>re8sed, for example, as a thousand bushels, may remain. Is

It the same wealth? Not unless it is the same thousand bushels.

Thoa^ animals and wheat perish, the wealth of both farmer and herds-

iBaa, measured on the basis of specific gravity and expressed, for

eiample, as ten thousand pounds, may remain. Is it the same

veilth? Not unless it is the same ten thousand pounds. Though goods

of all kinds perish, the amount of wealth, measured on the basis of

vihte and expressed in dollars, may remain. Again, is it the same

wealth? The things measured, whose quality is expressed in dollars,

are evidently not the same ; and it is only by confusing the measure for

the thing measured that it can be said to be the same wealth."

174 VALUE AND DISTRIBUTION

will, may rest, in large part, on the prospect of business
relations some day to be established with human beings not
yet born; the situation is none the less a present asset in
private capital. The essential and important kernel of truth
in the abstract-capital concept is, then, the obscure recogni-
tion of the loan-fund fact. Abstract capital is a subhead
under the private-capital concq>t, a competitive and not a
social fact, a share and only a share, out of the private-
capital aggregate.^'*

^That for theoretical as well as for practical purposes there is
something at issae here will be evident from the following quotation
from an address by Professor Joseph French Johnson, delivered before
the Pennsylvania Bankers' Association during the year 1905 :

"The rate of interest in the last analysis has no relation what-
ever to the quantity of gold in the country. It is the product of the
demand for and the supply of capital. This word capital is used by
the economists to mean all those forms of wealth which are used in
production of more wealth ; such for example, as machinery and raw
materials. It includes all those goods which are not consumed directly,
but which are used to produce things which people desire. Among
business men and bankers the word has a different meaning. It
denotes a loanable fund for use in business, and consists in money and
credit in various forms. It is important for us to see that the business
men and the economists both have in mind the same thing when they
use the word capital. The loanable funds in the possession of banks
are all derived from . the loanable capital in the country. When the
amotmt of loanable capital increases, the amotmt of loanable funds
increases in a corresponding degree; and there can be no increases of
loanable funds brought about in any other way. Banks create nothing.
All their lending power is the product of industry. Every deposit of
money or credit in a bank represents actual wealth or capital that has
been saved in a community. The loanable capital and the loanable
funds in a country are practically the- same thing ; the one a hetero-
geneous mass of value in the form of various goods; the other the
same mass of value made homogeneous by the universal solvent,
money,"

CHAPTER XIII

THE STANDARD OF DEFERRED PAYMENTS

TTic purpose of the isolated producer is the production
ot vitility. Precisely the same statement holds, in a com-
petitive society, for the producer under specialization of
cn^I>loyments ; but all these utility ends are, in this case,
^^X"ked out through the intermediary of market-value
adjustments; from the point of view of the final trade — ^the
consumer's point of view — ^not valuable things but useful
^l^Uigs are of ultimate importance ; gain in utility is the sole
"Motive. What one pays less for a thing than he would, if
necessary, have paid, — ^what the thing is good for more than
*t has cost, the quasi-rent of purchase, — while statable in
^oney, must yet finally resolve itself into goods obtainable
^ough money. Likewise the cost outlay is to the producer
ultimately a utility or disutility magnitude rather than a
^^lae magnitude. Producers at the margin, like traders
*^ the margin, are such by the fact that the utility in prospect
^ci the utility sacrificed are at balance, — ^are at a ratio, one to
^^ other, of unit value, — and all this irrespective of how
^^atly, for the different marginal traders respectively, the
^^^^olute magnitudes of the balancing services and sacrifices
°^y diverge — irrespective, that is to say, of whether the
"^rginal case present a ratio of 5 to 5, or of 2 to 2, or of
^ to J/^, provided all the while, of course, that even this
'^'Uch of comparability may be assumed between the feeling
^^^^gnitudes of different men. (See page 300.)

In view of this obvious fact that exchange is ultimately,
^^ individual motive, a problem of comparison between
^tematives of utility, that, for either trader in an exchange,
the case can have no other significance than this of utility,
and that market values are mere price relations — exchange
relations — ^between things of service, that is, between goods

175

176 VALUE AND DISTRIBimON

subjectively viewed, — the invitation is strong, the temptaticm
great, the promise alluring, for the resolution of market
values into a common denominator of utility, and thereby
for somehow inferring a determination of value by utility
as expressed in terms of this common denominator.

But the attempt is foredoomed to failure. It is one
thing to assert, with Say, that utility — desire, want, need — is
the basis, through individual bidding, of the whole value
phenomenon — the cause, the motive, and the explanation of
price offer ; but it is quite another and a different thing to
assert, as sometimes Say appears almost to do, that all
market values can be resolved into this general, homogene-
ous, underlying utility jelly, or utility denominator. The
impossibility of all this was clear enough to Ricardo, though
it was not clear just why. He says in a letter to Malthus :

He JSay] certainly has not a correct notion of what is meant
by value when he contends that a commodity is valuable in propor-
tion to its utility. This would be true if buyers only regulated the
price of commodities.*

But inasmuch as, in Ricardo's view, producers and not
buyers regulate price, Ricardo inclines to make value pro-
portional to labor — in the sense of labor pain — failing to see
that neither utility for different consumers, nor labor for
different producers, can be made homogeneous volumes.
But notice once again that Ricardo does not assert the
determination of the value of the product by the value of
the labor, or even that there is any primary value in labor ;
he merely asserts the proportionality of value to labor
content :

Our differences are becoming rather verbal than substantial.
Your chapter on value has, in my opinion, gained considerably.
You misrepresent me, however, on that subject when you say I
consider the value of labor to determine the value of commodities.
I hold, on the contrary, that it is not the value, but the comparative
quantity of labor necessary to production which regulates the rela-
tive value of the commodities produced.*

' Letters of David Ricardo to Thomas Robert Malthus, 1810,
J828, James Bonar, Oxford, 1887, p. 173.

'Ricardo to Say, November 9, 181 9, p. 165.

nr*

THE STANDARD OF DEFERRED PAYMENTS 177

Whether Say also may not in some passages be reason-
ably interpreted to assert more than the mere proportion-
a.lity of value to utility, and to have attempted to give to
'v^alue a measurement in some sort of homogeneous utility
rnedium, may not be clear; but he, in terms, asserts only
tiie measurement of utility by value. Thus on December
^, 1815, he writes to Ricardo:

You accuse me of saying that utility is the measure of value.
1 thought I had always said that the value that men attach to a
tiling is the measure of the utility that they find in it.

And on July 19, 1821, with regard to the use of labor
as a measure of value, a measure which^ as we have seen,
Ricardo had, with some misgiving, adopted, as the best
at hand, but yet not altogether adequate. Say writes :

There are multitudes of different qualities of labor; the quan-
tity of each of these qualities cannot be measured. I measure the
utility incorporated in the product by the different quantities of
another product which one would pay.

But this seems to measure the utility of one thing by the
utility of another, or, what is worse yet, by the mere quantity
of another, which quantity is but a mere restatement of the
sheer market fact of the relation. And Say explains the
difficulty that, with gold and iron equal in utility, or even
with iron the more useful, volume for volume, the iron has
only 1/2000 part of the value of gold, — ^by saying that
1999/2000 of the iron utility is free goods, a gratuity of
nature.

None of this helps much. But it seems fair to say that
if value and labor are somehow always in proportion, it
must follow, as Ricardo held, that labor may measure value,
as it may equally well follow that value may measure
labor, and all this irrespective of whether the labor has any
primary and non-derivative value of its own; if not, the
proposition may be correctly held; it simply awaits expla-
nation of its mystery. Ricardo left the proposition substan-
tially a mystery.*

'And the socialists mostly accept it as such, and leave it there:
"Whenever by an act of exchange we equate as values our different
Products, by that very act we also equate, as human labor, the different
kinds of labor we expended upon them. We are not aware of this;
Nevertheless we do it Value, therefore, does not stalk about with a
label describing what it is. It is value, rather, that converts every

1*78 VALUE AND DISTRIBUTION

Likewise, if value — or price — by virtue of the fact that
it is the effect of utility, may measure utility, the doctrine
ought to work the other way about.

But in point of fact, as should be already clear, neither
the labor measure or the utility measure, on the one hand,
nor the value measure of utility or of labor, on the other
hand, will work, in any other sense than that both labor
and goods get, visibly, constantly, oblrusively, a price
rendering in the market. Laborers differ in all possible
shades of feeling toward labor; labor differs in all possible
grades and directions of effectiveness ; the only homogeneity
is the homogeneity of market value in terms of price. And
as widely as men differ in their attitude toward productive
effort they differ also in their attitude toward the products

product into a social hieroglTphic Later on we cry to decipher the
hieroglyphic, to get behind the secret of our own social products; ior
to BtBiDp on object of utility ai a value ii Just ■» much a social prodnct
as language. The recent scientific discoveiy that the products of labor.
so far as they arc values, nrc but rxpreiiioni of the human labor spent
in their production, ■ ... by no means dissipates the mist througli
which the social character of the labor appears to ua to be an objective
character of the products themselves." — Carl Marx, Dot Capital
(Moore and Aveling trans.). Humboldt Publishing Co., New Yeric,

"It is not money that renders commodities commensurable. ....
It is because all commodities, as values, are realized human labor, and
therefore commensurable, thai their values can be measured by one and
the same special commodity, and the latter be converted into the com-
mon measure of their values."— /6irf.. p. 41,

"There is. of course, in present conditions, no possible meana of
arriving at a definite, concrete labor coin, so to say, which ahall
establish the value of commodities when and as they are produced.
The individual labor lime it may take to produce a commodity is. aa we
have seen, no test whatever of the length of social time necessary to
produce the same commodity.

"Nevertheless social labor time does measQre the value of ctHX-
modiliea with reference relatively to one another. How is this done?

"Take the case of weight. What is weight? To aaj

Ibat it is ponderosity doesn't help us a bit. Yet we know well enough
what weight is by itself. Moreover, we weigh things relatively to

their weigbl in other things But what the unit of weight is in

the abstract we can no more tell than before we weighed the wheal.

"In chemistry likewise. .... what was the Dailonic atom?
Nobody knew and nobody knows What is a volume in chem-
istry? It ii just as impossible to lay ai what is an atom. None the
less, though we do not know what they are — any more than we can
enpreaa in figures |/~i— volumes serve the purpose of a comn
measure of the most diverse chemical compounds. So it is with dm]
ab street, social human labor." — H. M. Hyndman, Th€ Eccnomici
Socialism. London, iSgG, pp. si-53-

I

THE STANDARD OF DEFERRED PAYMENTS 179

of labor ; the only homogeneity is that expressed in the price
offer. The only utility relation possibly to be expressed by
market price is that, for some marginal man or men, com-
peting utilities, of unstable and unknown magnitude, are
at balance.

But what has alt this to say for the standard of deferred
payments? If utilities cannot be reduced to homogeneity,
on any basis but that of price — the opaque market fact — it
would seem to follow that the problem of deferred pay-
menls must be worked out in terms of value rather than in
terms of utility. And especially would this appear to be
true, in view of the fact that equal market values are inca-
pable of expressing any equality of utility in terms of abso-
lute subjective magnitude, but only in equivalence of
control over those external objective goods which are the
bearers of utility.

But on the other hand what shall be done with the fact
that, carried over into individual interests, values have no
meaning but in terms of utility? And after all, value being
a ratio of exchange, what does it mean to say that one
thing at one time has the same value as another thing at
another time? What, indeed, would it mean to say that a
certain thing at one time has the same value as the same
thing at another time? Or finally what does it mean to say
tliat two things at any given time have the same value ?

A'alue can be expressed only objectively, in terms
of something which is, for the time being, taken as the
medium or standard of expression. Thus, to say that two
things have today the same value might mean very differ-
ent things accordingly ( i ) as different men in different bar-
gains should variously choose some one or other particular
commodity as standard for the occasion; or (2) as a
certain group or congeries of objective goods should some-
how— more or less arbitrarily — come to be chosen as a
composite standard; or (3) as equivalence should be sought
through the intermediary of some conventionally adopted
depository of unspecialized purchasing power, a money

i8o VALUE AND DISTRIBUTION

standard. It is this last case whidi actually is meant by
equivalence in value in practical affairs; and if, instead, o^
this, a group of commodities were diosen, the grc^^
would most reasonably be selected as made up of those cc^ro-
modities into which, for the broad general average ol
consumers, unspecialized purchasing power gets expend^

The possibility first mentioned is outside the pale of
consideration and the second case is a subhead under 'tf^be
first, though somewhat modified to include provision agai :*^
the probable instability attending any particular comnxxS-^^
as standard, where intervals of time intervene. "L.^^
necessity of providing for this case of time interval is, ^
it remembered, the problem of the deferred-payment star^-°'
ard.

But possible instability in what? And here we ^^J
back at our original question: In value? But this *^
meaningless, unless translated into command over use^^^
things — goods. And what goods? There is no answ^*^
but to choose some group or complex of goods selected ^^
such fashion as to represent a sort of average budg^^
That a of today equate in value against x of next year mu -^
require that a hold today to every other good the san:::^
exchange relations that x will hold next year.

And so, to say that two different things at one and th
same time have the same value is merely to assert \3niA:^^
actual equality in exchange power as referred to som^^^
selected commodity or complex of commodities — a pric^^
statement possible only by the temporary or conventional^
adoption of a standard. And to assert that a certain thing,
at one time, has the same value as the same thing at another
time, must mean an unchanged control over the same con-
geries or budget of goods, — practically the same control over
some standard of payment, some medium assumed as main-
taining— or selected as nearest approximating — an un-
changed relation toward such a budget-complex. The
same solution would have to be given to the problem of
how to compare in value one thing at one time with another

THE STANDARD OF DEFERRED PAYMENTS i8i

thing at a later time. Equality in price over intervals of
tiine is then intelligible and possible ; but equality in value —
M distinguished from price — ^between two commodities
Would require that one at one time hold precisely the same
exchange relation to every other good as that of the other
at the other time.*

*It is worthy of note that in exchange relations between goods
f ^ the same time, as distinguished from cases of deferred settlement,
^ has been urged (for example, by most of the socialists, the Marxians
especially) that the price of any commodity expresses that the value
^^ it is as much as is the value of a certain quantity of the standard ;
the Tahie of the standard and not the standard itself is thus held to be
^he essential fact in money, or at all events, the essential fact of its
^^onty function. And surely the standard itself cannot, in any other
*enae than that of its value quantity, be held adapted to serve as a
Measure of value. How much money shall be paid for a commodity
^^pcods, of course, in part upon the value of the commodity, but in
I'^xt also upon the value of the money.

The better doctrine appears, however, to be that of Laughlin
i^rmcipUs of Money, pp. 14-16) : "A standard .... is not, and

e^tinot be, synonymous with a measure of value This is not

^hat we get by the use of a standard The exchange value of

CpUl varies with the number and kind of things priced in it. By pri-
^^tig an article in gold, the value of that article in relation to other
e^^mmodities is not thereby 'measured' by gold. In such a case, gold
*^rves only as common denominator, and not as 'a measure of value,'
'^^caiise it does not ther^y state the relationship of exchange which
P^t article bears to all other exchangeable goods. All that is obtained
]* ^ exchange ratio between gold and that particular commod-
^. .... Moreover, there could, of course, be no absolute standard
f*^ 'measuring' value, since any one article, chosen as standard, would
^^*^f vary in value ; consequently the values of other goods would be
^'^*»ipared with a standard itself constantly varying. Not infrequently
[^c hears of an argument in favor of gold as a standard that it is as
^'^^ariable as a yardstick.' This statement contains the fallacy of sup-
'^^^^ng that exchange value is as absolute as linear length, when it is
^'^Jy a relation of one article to another expressed quantitatively." (But
contra. Carver, Quarterly Journal of Economics, May, 1907.)

But however all this may be, it is evident that in deferred-payment

dons, merely a given amount of money is stipulated ; the amount
**« Taloe actually to be received cannot be stipulated, but must neces-
^^^ily depend upon the amount of value which, at the time of payment,
''^y happen to be contained in the amount of money paid. The
''Measure function of money is clearly not here ; a future unknown
^^ue cannot be a value expression of the value of other thing^s.

But whether, if at all, in current exchanges, and if so in what
^^^ money may be regarded as a measure of value is a problem of
^ greater perplexity.

It has mostly gone by common acceptance that in order that goods
^^^^Ijuige against each other they must be possessed of some common
'^^tjr by virtue of which they may be related to each other for the

iSs VALUE AND DISTRIBUTION

But after all, why bother, even for theoretical purpose
with this budget matter? If the standard requires eithi
justitication or rectification by the test of the budget, whi
shall then serve to justify the budget ? There can be nothir
for this but the attempt to obtain an average ar
approximate equably of service through the constructic
of a budget made up of a widely selected and careful
proportioned variety of consumption goods. Indemnity I
the borrower for utilities parted with must be found in 3

purposes of Che exchange process : thus Man. findiag. as he thought, ih
udlily could not he this common quality, forthwith inferred th
labor cost must be the quality soughL

Recalling that only the two facts, utility and icarcily. must coac
for the emergence of value, ,ind that scarcity is essential only b«caa
solely on terms of it can all items of a stock possess utility, and reo
ing also that some articles have scarcity and value irrespective of lab
cost and independent of it. it has teemed to follow that utility ii th
common quality by virtue of which different goods come to be coi
parable in their appeal to human choice.

But that goods appeal to the individual only through their ndli
to him. does not imply the existence of some one aspect or quality
utility comtnon to all articles of value : there are, indeed, no val
facts affording equal utility to all individuals, none that are constant
all times in (heir service to any one individual, and none even that at .
times ate serviceable to the same individual in even the slight!

But it none the less remains true that for the emergence of val
the supply nf any good must icanifest some degree of scarcity relati
to the desire for il ; otherwise there can be nowhere an iadividi
with reference to whom the stock can establish a marginal signiiican
by virtue of which it may impose upon that individual a sacrifice
purchase cost or in productive outlay.

Thus the possession of marginal utility — but all the while
dependent upon this relative scarcity — is suflicient for the existence
market value. But this utility is in no sense a social or a common
an objective utility, but is in every case purely a relation between t
good in question and the desires of an individual. The only fact be
constant and objective in the market-value phenomenon is that of coi
manding a price, money or other — that is. of possessing cxchan
power.

But does this fact of exchange power, expressed as command ov
some quid pro qua. imply in any sense, in either of the articl
exchanged, the possession of the measure function?

In a certain sense, doubtless, any comparison by an individual of I
utility to him of different items of goods implies a process of meni
measurement ; and it must be admitted that a comparison of utility wi
utility is the very process and the only process through which the im
vidual trader arrives at the disposition to trade. But in this trade
barter activity there is rarely for him an equality of utility beCwe
the thing received and the thing parted with, never, indeed, an cquali

THE STANDARD OF DEFERRED PAYMENTS 183

equally important aggregate of utilities returned. Here,
*s everywhere in the individual reckoning, money is an

"ittrniediate between utility quantities and not between

"^4 He quantities.

It is possible that a change in point of view may aid in
'^e solution of this not oversimple and very important

P»»-oblem,

Suppose the only products in society to be hats and

^^cepting in fail marKinal trade or in the case oE the mar^nal trader ;
**»«l there is never in any case, marginal or other, any necessity or
'^^vasion for the measure function or calculation, otherwise than to
^*« degree and in the sense that measure is implied in the mere fact
*^f compaiison and choice, — a sort of mutual measuring of either com-
***Cidity hy the other.

Nor is the diffieully with Ifae existence of a market-value measure
^P«t utility may not be the measure of utility, if Only the Utility to
^*fferent pcrsoDS were the same utility, a common and obieclive reality.
* * is, in truth, the very essential of a measure that it possess in itself
^**« quality il is to measure in other things. Only something of length
^^Ui measure length ; only something of weight can measure weight. And
^■e choice of a measure is necessarily arbitrary ; 10 ejipress any dimen-
-^^on of any given body is possible only in terms of relativity and only
^^ reporting it as such a part or such a multiple of Ihe dimension of
^^Dme other body. So many pounds of weight is merely so many times
^^e weight of another chosen body, taken at a certain purity, under pre*
^■^ribed conditions of temperature and of altitude.

Nor, seemingly, i9 Professor Laughlin correct in insisting that the

^^ 9j chological necessities of the measure function prescribe that the

^^leamre fact be a fixed and definite and unchangeable fact, but is only

^^-ofTBCI in the implied insistence thai, so far 3a the measure falls short

^*f this test, il bo far loses its serviceability for the purposes in hand,

^ijid roust rank as a defective measure ; the quantity of titility or of

^alue fails of receiving accurate statement and definition in the pur-

C»onc<l measure. So. whatever Ibe objective fact may be with r^ard to

Xhe precise invariability of the accepted measure, it is fairly clear that,

*houehl q/ as a seriously variable measure, the measure thereby ceases

%o be ■ practicable measure. No one thing of utility or of value can.

*hen, ever, martet-rviie, by its (luanlum. service ably and adequately

TxprcM the utility or value quantum of another thing; the first thing,

the ptirported-measiire thing, has no stable quantum of its own, but is,

by [ti very nature, constantly varying; thus it is, by this very fact,

not a practicable measure.

But there is a difficulty in the case which is decisive against the
presence of any measure function, good or bad ; All measurement
r precise, is a quantitative comparison ; the standard

1 quar

nniit. then, c

which certain quality or magni
the thing to be measured. ~
ilble Ihst dtbcf item in a

io the individual, therefore, it
transaction of barter express ii

1 quality or magnitude.

be present ii

1 84 VALUE AND DISTRIBirnON

shoes, and that it somehow comes about that for eac
of either kind of goods today there are tomorro'
items of goods : what does it mean to say that value
increased and that thus there is room for the emergfc
interest ? Goods have increased, utility has increased,
having value have increased; one hat will not bu}
shoes than one hat would buy yesterday, but two ha
buy more than the one hat of yesterday would buy.

utility, more or leu accurately, the utility of the other item,
so with market value ; here nothing is asserted or implied as
general or objective utility, nor can the mere brute fact of c
parity import a parity of utility for traders in general or any
market-utility calculus or parity. Utility to whom? Markt
parities or calculations are, indeed, ex vi termini, sheer absof
The case is bad enough with any attempt to set up a mar!
or market-value measure of utility ; it is still worse with any at
the market-value measure of market value. The difficulty hert
value, in this market sense, fails in the requirement fundamenti
notion of measurement, namely, that a. measure must be qua
and must measure things of quantity. But market value is n
magnitude nor a quantity, but only a ratio. True, a ratio
restated as a fraction — J4 or ^ or H of unity — but it becomei
tative only in becoming concrete, as ^ or ^ or H of so
Thus, that the exchange ratio between hats and shoes is, say,
offers no possibility of giving quantitative expression to the «
ratios of horses and wheat to each other or to anything else. 1
the selection of a conventional price commodity avoid the diff
any other sense than that it makes possible of comparison the
horses to gold with the ratio of hats to gold — all to the conclus
while horses stand to dollars as loo to i, hats stand to dollars a
This expresses merely the two different exchange ratios held
rcspoctive commodities to gold— asserts, that is, two different
J|f coniniand over gold, and then declares that one power
nuntlrcd times as great as the other. But merely as different
RoJtl no measure is disclosed: (i) the value of gold is itself
thVr'^'''^*^'''*^" "°* ^* * ^^^^^ °^ exchange to commodities in gen
only*^ "'^ "** ^^^^ exchange possible and no ratio for its express
(-2^ Th*- °"^ ^^ another out of countless different possibh
valid to'' ^^^ ^^^^^ °^ 100 to I between horses and hats is
relative tV^^^Vf ^^^ ratios of countless other pairs of com
n^achincs «»i^° ^' ^'' pianos to kitchen tables, houses to
dignng w'ere fh" *^ ^^*^''- '^^ '"^^^^^ °^ ^^^^^'^ to one another
^^^^ all these V ^^^^ ^^^'^^^ *' *" Lilliput. The real difficulty
«re comnar-ihI#. ^7^"? *"atios to gold are mere ratios of exchaj
^fSj^'^H in *anl ?,u'''^ ^"^ ^"^y "^'^^ ^^'^ significance and as
<l«ffer« from tni#. **^ ^^'* ^^ content. In this respect 1

wJ.l'^."*'* »« to theT'*''"'"^ '■^**^» ^^ ^^*8^* «^ ^^"»*^- With w<
with IcnKth. to th^ '^"''^."t'tative objective reality of pressure or

^•««e ratio, howevlr i^*^''^ quantitative fact of extension. \

^r. there is nothing but the ratio.

THE STANDARD OF DEFERRED PAYMENTS 185

^^re, measured in shoes, the hats, having increased in num-
'^T, have more value. But this is to accept shoes as a
^^^^Jidard. Shoes likewise, since they have increased in
^c>lume, can be shown to have proportionately increased in
^'^^ue, if only hats be accepted as the standard: as why
*^<mld they not? But, on the other hand, why should they?
"e either hats or shoes invariable in any quality important
value, and, if so, in what quality? There is no quality
^^ier than utility that can have claim to consideration. But
Lth these expansions of supply, the utility quantity has
len, per item of supply. Value can in this case mean
■Nothing but the ratio of exchange between hats and shoes,
^v^d this ratio has not changed. How talk about an increase
*^^ the total of exchange ratios? By just so much as some
'^l^ings gain in value others must lose ; and those that gain,
S^ain only as stated in terms of others. It follows there-
fore that to return an equal sum of values means nothing,
"^^riess it be merely a poor way of expressing the return
oi an unchanged quantity of utility.

But equality of utility is not a relation capable of

^aq)rcssion in terms of value, either for contemporaneous

^^cdiange or for exchange over intervals of time or space.

And inasmuch as utility is purely a fact of the individual

psychology, it is not susceptible of quantitative objective

^rcssion of any sort. Thus the return of an equal sum of

utilities can be achieved only so far as this is possible — and

•

^ the sense that it is possible^through the adoption of
^e conventional standard or medium. True, price is a
'pedal case of value ; and thus to resort to price in arriving
^t equality of utility is, in this sense and so far forth, a
^uc process. But that gold, like any other commodity,
obtains its exchange standing through market- value adjust-
i^ts, and must, as exchange power, itself express a value
vtlation, proves simply that resort is being had to one sort
of value fact — and this a special and peculiar case — as
mere intermediate to the most expedient solution of
a pure utility problem. But no value equality is

i86 VALUE AND DISTRIBUTION

possible in the case, and even were one possible, it would
be irrelevant.

Appeal to the fundamental principle that all saving is
merely postponed consumption enforces the conclusion that
the payment of a loan should be made upon the principle of
indemnity, that is, should be the return of rights of con-
sumption of equal importance with those parted with, whidi
is merely another way of saying that the standard of
deferred payments is ultimately a problem in utility rather
than in value.

Or the argument may be put in another way:
All cases of mortgages, notes and bonds, bank deposits, and
credits in general are protracted instances of exchange. The whole-
saler sells his groceries at three months time. Instead of receiving
his pay immediately in commodities, or in money with which to
buy commodities, the payment side of the trade is postponed for a

term of months When you lend money you really s^

the right to things; when you are repaid, you get things in return.
Thus a loan is, in essence, a long-time barter. When you have
sold your hats, and allow X to take the money for which th^r seU,
it is the same as if you had sold X the hats, or the goods which he
buys with the money. When he pays you, he really returns to jrou
remuneration for the hats. If the payment is a fair one, the
money which he pays you must not have gained or lost in its
control over the means of satisfying human wants.*

Clearly, also, this utility indemnity can rarely, if ever,
be attained through a return of goods specifically like in
kind and volume to the earlier sum. It again becomes evi-
dent, then, that to the extent that the equality is attainable
at all, the payment will have to be required in terms of
general purchasing power, and this according to some
standard, conventional or occasional. And while the pay-
ment for earlier money by later money is the return of a
thing of value in payment for another thing of value, and, in
this sense therefore, is a transaction in values, and while it
must be admitted that any equality in utility can, in any
particular case, be only approximate, it is still true that no

• Davenport, op, cif., sec 170.

THE STANDARD OF DEFERRED PAYMENTS 187

assertion of an equality in values is in any way possible,
since the different money sums are rarely, if ever, exchanged
against the same sorts of goods; and even were they so
exchanged, the same bulk, number, weight, or other meas-
ure of concrete commodities is, with varying times, a very
^Efferent and changing fact in its aspect of service, — ^not,
^ it noted, to human needs in general — which would be a
strong enough case, but rather to the particular needs of the
specific human being under consideration.*

Thus — forestalling a little the interest problem — ^there
is, restated as a problem worked out in terms of money,
no great difficulty in explaining why, with the more goods
existing by the aid of capital, a higher price should be
obtainable therefor, and thereby a money premium be
chargeable and payable. But at what rate? And it should

'A possible difficulty here requires to be provided for — the modi-
^tions which changes in standards of living impose upon the principle
of utility indemnity, in the mere sense of objectively equivalent goods.
"With increasing effectiveness of labor, human needs have expanded,
^t which was once relative comfort has become privation — ^privation
f^Iotely in view of higher standards of desire — privation relatively
^yitw of higher levels of comfort or luxury in society. The causes
vliich have served to make greater consumption possible have them-
^es made greater consumption necessary. Payment in an equal
^OQQt of control over the objects of human desire is not an adequate
'^twn for the earlier sacrifice. If even exchange of work would be

2^^yment, even exchange of utility would be underpayment

^t the creditor receive a volume of commodities — services included
^^^ely equal to the volume lent, would be enough, were the creditor
ii^stantially the same creditor in needs and requirements — if, for
f'^ple, the advance in labor effectiveness had taken place in a night,
^mediately after the loan was made and its proceeds consumed. By
^ tery measure of usefulness, payment must be made in something
"^ than an equivalent command over commodities. The increased
^^veness of labor has brought about a higher level of consumption

"~^ raised standard of comfort and of life The line, then, of

^^Peosation — of equality in sacrifice — must be found somewhere above
''I^ty in purchasing power, somewhere below equality in command
^Hr human effort. Something must be added to payment on account
of the greater necessities of the lender ; something also on account of
^ter requirements for the maintenance of social position and rela-
^ well-being. The point of fair adjustment is to be found where the
^^tct gain from larger satisfactions is offset by the disadvantage of
Creased requirements and decreased command over social distinction."
""Davenport, op, cit,, sec 165.

=S TlLn AXD DGTUBrnON

also t§ DOC a proUem of value or
of price and of price surplus.^

of tbe gcnerml trend of

sx! of deferred pajments, to note

diiC8»ion in Tkr Fundammtal

ji.K.ndt iltogetber upon the assump-

>K echcr c&aix ooe of valne : takes this

90 proof, and derotes himself

fora or concepc of value— cort

best adapted to the needs of

diat '"that is the best money
in Tatoe." Any Tariety of
ccesMderation by the easy dictnm
to be left out of the discos-
cot. Then, having ably and
■n-i^-d from the field, and having
d of esteem value — probably
sense — he finds that
a^ords the only possible
kcv. finally, the desired equality
:t coold be ascertained or
ssade fully manifest.

CHAPTER XIV

INTEREST
While, as has already been argued, and as will later be
^^'Iher argued, interest has its basis in the advantages
*^^^ing to present goods over future goods, it is never-
^^ess to be defined, in a competitive economy, as the
^^€miufn which present purchasing power, as money or in
{^^Tw of money, commands over future purchasing power
••* terms of money.

But why does this premium exist? Is it at all due to the

5^^ological productivity which present wealth, in form of

^strumental goods, manifests with passing time? Or does

*^terest merely express the fact that some men find it to

^eir advantage, or at least to their choice, to promise,

^®ainst lOO dollars of command over present consumption

'^Shts, the payment at the end of a given term of 105

^oll^i-s of this ptirchasing power? And what bearing

^Pon the rate of premium has the common preference for

^sing purchasing power for purposes of immediate con-

^^^^ption — the common indisposition to postpone consump-

^1 — to save? And how about those people who, in their

^^^onal or irrational solicitude for the future, would save

^^11 without any money agio — ^persons to whom some

^^''ecasted change of need is a sufficient present induce-

^^nt and premium upon saving, if indeed, any premium of

^*^y sort is needed in their case?

And what is the precise relation of technological
^^oductivity to the problem? After all, is not the
^tdre interest relation one between present consump-
^^On goods, or rights to consumption goods, as over
^^inst future consumption goods, or rights to con-
sumption goods? The rate of agio, or of discount, having
"^en established in the consumption-goods market, have

189

igo VALUE AND DKTRIBirnON

these technological considerations more to do with the
than this, that sudi technological methods and processes
promise a productive agio sufficient to overbalance the
market discount to which the future product is to be sub-
jected in getting a present worth, are found practicable of
undertaking? Or put it as follows: the abstinence protest
being such in society that 105 units of purchasing power,
expressed in the conventional standard, due a year hence,
exchange today against only 100 such units for today's use
— ^has technological productivity any other relation to tfie
case than this, that such technological uses as can promise
105 a year from today on accotmt of the 100 now, are fea-
sible of undertaking? And what of the 100 that can rega-
larly and recurrently transform itself yearly into 110? Must
it not, by this very fact, be said to be not 100 but 200, if, of
course, this 10 agio is to be imputed to it rather than to the
management of it? That is to say, are not all rentals and
all rent-bearers "capitalized into a present worth upon the
basis of a discount rate which is obtained without reference
to them?

Land recurrently pays a rent ; machinery also commands
a hire : are these hires mere rents or are they time-discount
facts? If 100 of land rent is due a year from now, this rent
has a present worth of 95+. And likewise if machinery
belonging to me, or a mortgage now running in my favor,
will bring 100 a year hence, this 100 suffers a discount to
95+ in the process of getting over into a present worth. If
this 100 were itself interest upon an invested principal sum
of 2,000, shall not the 5 of interest be taken to show that this
time-discount rate is itself based upon some underlying
time-discount rate? That is to say, if all rents and hires
themselves are subject to the principle of time discount,
what becomes of these rents and hires as themselves the
explanation of the phenomenon of time discount? Can this
discount fact be taken as a mere result of the fact that all
machines and farms worth 2,000 each are earning 100 each?
Or is it not rather true that if they each earn 100 annually.

INTEREST

19T

vt therefore call them each worth 2,000? And why is this
the case ? Whence is derived this rate of 5 by which to do
this capitalizing? For if the 5 per cent, rate is derived
from the fact that the 2,cx)0 earned 100, it will not do to
invoke, in the same breath, this rate in order to explain that
the rented fact has 2,000 of value.

Proof that all instruments earn rentals for time use will
perhaps suffice to prove value productivity ; but will it also
sufiice or contribute to explain interest? Or is time dis-
counl rather a phenomenon belonging exclusively to con-
sumption goods or to purchasing power in the time aspect —
»-fiich time discount is then applied to place a present worth
upon each recurring rent payment separately, and to make
possible a capital value as the sum of the present worths of
a series of rents?

It is not uncommonly said that each productive agent,
'abor, for example, is paid according to its value produc-
tivitry. But if the laborer is paid before his product is
"larlte table, the wage received must be lower by the measure
of tlie time discount. And it is likewise said of capital that
Its remuneration is the equivalent of the value productivity
of the capital. But why is the total value of the capital
scaAcd down to correspond to the present worth of its
**itTjre returns?

Or to put the problem in still another way — for every
tK>ssib!e device must be invoked to the end of getting this
*^ost elusive of problems adequately stated: All that the
^distributive outcome of production can ever show is that,
^3ut of the aggregate production, log is to be imputed to
capital where only 100 of capital originally went in; why
was the capital that was going in, and that was to emerge
as this 105 of result, worth only 100 in the beginning?
Why not originally worth 105?

But 100 what? And 105 what? Are these anything
but dollars, or purchasing power in terms of dollars as the
standard? Is interest anything more than a standard dif-
ferential due to the rents which instrumental goods.

I

VALUE AND DISTRIBUTION ^^"

[Appraised in money, afford in money, and to premiums
'nrhich present purchasing power or present money cora-
mands, for consumption purposes, over future purchasing
power expressed in terms of the standard?

And is there, after all, any problem of surplus vaJue
with relation to interest, any more than, with the question
of the standard of deferred payments, there was found to
be a problem of equality in value? Is it possible to say,
because there is a physical net return upon instrumental
goods, that there therefore is or is not an increase of value
or a net return of value? The increased weight-and-tale
total of goods may sell for less as well as for more money ;
but even in the case of an admitted increase capable of
being established as a physical net return attributable to a
particular and isolated instrument good — a case, we will
assume, of a cow worth at the beginning of the year $ioo
and represented at the end of the year by the same cow in
equally good condition, and, togetlier with her, a net gain of
$5 worth of calf ; even in this simplest of cases is it possible
to say that there has been any increase of valueT The 105
dollars will not, ordinarily, indeed, cannot, be used to
purchase the same things; some of the goods which would
have been bought and consumed by some one or other, had
the cow been sold or killed, its price spent, and its quid pro
quo consumed, have risen in price and some have fallen,
some are no longer in the market, the while that others,
before entirely unknown, have appeared in the market ; and
in any case, the utilities attached to the same objective
goods cannot be the same utilities; men change, seasons
change, temperature changes, food requirements change,
fashions change. Is the more of the 105 an increase in
point of value, or rather is it merely and purely a question
of change in the aggregate of service, a comparison of
tiie total of utility commanded by the 105 of standard as
against the earher 100 of standard? Is interest truly a
value problem in any other sense than that, by the process
of discount, different and otherwise incomparable utility

INTEREST 193

^»^es are brought into relation for one and the same
time?!

But even if all this is satisfactorily answered, there will

'f^in the difficulty of tracing out the process of determina-

^ of this rate of discount, and of deciding precisely what

^^, relatively to each other, technological productivity

^^ psychological time preference have in the determina-

Again, have we here a problem of present goods against

'^ture goods, or rather only a problem in the field of

*ostract capital, of the loan fund, an investigation of the

'Elation of a quantum of the standard, or of purchasing

P^>wer in terms of the standard, at one time, as against a

Quantum of standard at another time — the problem of how

''^Uch of standard a year hence equates against 100 of

^ndard of today? and then, why?

If the solution is, indeed, along this last line, it is
perhaps easy to see why, with a premium offered by differ-
ent borrowers for the present standard for consumption

^Bnt we may well stop to ask what all this, when resolved, will
^'ve to do with the present status and the development of the argu-

As a cost-of -production computation, in the competitive reckoning,
*U hires of productive instruments and all interest charges of any sort
'''^ist be included in the computation. That is to say, cost includes
^^ges, rent of land, all rents of all other instruments, and also the
^t&terest-discount charge due upon the time employment of entre-
preneur capitaL

The value problem, upon the cost-of-production level of analysis,

^^>UK>t do otherwise than to accept the discount rate as a datum, an

'"'"^lerlying and definitive fact requiring no examination, precisely as

^ cost-of-production analysis accepts without question and takes for

^oted all value hires ^and value rentals upon instrumental or agent

r^ On this level we have no concern with the theory of interest ;

'^ >s only when we come to the examination of the determinants

^f entrepreneur cost — ^to the situation facts — and to a discussion of the

^i^Tnitive process, and to an examination of the fixation of the

<u<trilmtive shares, that the problem of interest is logically before us.

But practically speaking, in the exigencies of exposition, it has
Jl^ed necessary to treat the problem of interest here, in order to
^^tennine what interest payments really are, and upon what sort of
^tal they are computed, and to justify their inclusion as they are in
^sts; and then finally to get out of our path all other associated
Questions of the ultimate basis of interest and of the process of its
^determination.

»94

VALUE AND DISTRIBUTION

purposes, and other premiums offered by different entre-
preneurs for the wherewithal to acquire present instru-
mental goods, and with varying dispositions on the part of
savers to save, and of possessors of wealth to abstain from
its consumption, and with var>'ing dispositions on the part
K^ owners of wealth to exploit their own possessions, there
^bfOld result, through the value mechanism of the market,
^Hstio of exchange, a discount rate, between the standard
^1 a present fact and the standard as a future fact

But now, assuming that for the time we have questions
enough and possible solutions enough before us, it may
somewhat illuminate the problem, as well as somewhat
further the solution, the while, however, possibly raising
more questions, if we turn to examine for a little the details
of the treatment of the problem by several of those authors
who appear best to have appreciated its difficulty, and who
have most contributed to its solution.

Boehni- Rawer k's explanation of interest rests in part
upon the technological productivity of capital and in part
upon the principle of perspective in consumption — this
latter expressing the preference commonly, though not
always, felt for the present good as consumable item, over
against the future good — his definition of interest running
"a difference in value between present and future goods
in favor of the former." *

That "perspective" means merely the indisposi-
tion to postpone consumption, and is thus the same
thing, under another name, as abstinence, would per-
haps not be admitted by Boehm-Bawerk: this would sound
too much like a cost view — whether pain cost or some other
type of cost — and thus would not fit well into the demand-
utility point of view in the explanation of value. In the
main, however, Boehm-Bawerk's emphasis is upon produc-
tivity, perhaps because the "perspective" doctrine has,
under its aspect of abstinence, been already sufficiently
emphasized.

f Theory of Capital. |

d

INTEREST 19s

But, according to Bodim-Bawerk, all sorts of errors
have associated themselves with this principle of produc-
tivity. One hundred dollars' worth of capital, or one
hundred dollars' worth of labor, must be accounted produc-
tive even though productive of only fifty dollars worth of

pnxluct. Smart has thus summarized this particular aspect
of the argument :

Capital would still be productive though it produced no inter-
est, e.g., if it increased the supply of commodities the

price of which fell in inverse ratio The [productivity]

^cory .... does not explain why capital employed in produc-
tion regularly increases to a value greater than itself

^^ theory that explains interest must explain surplus

^alw Labor by no means always produces more value

5**^ it consumes. But the plausibility of the productivity theory
^ the parallelism it assumes between labor and capital, the sug-
^^e^tion that interest is wages for capital's work. But ....
^^Jue cannot come from production. Neither capital nor labor

^^^ produce it What labor does is to produce a quantity

^^ commodities, and what capital co-operating with labor usually

is to increase that quantity. [And the value may or may not

more.] How .... can it be that capital employed in pro-

not only reproduces its own value, but produces a value

eater than itself?*

Boehm-Bawerk accepts the distinction between land

**^truments and non-land instruments, and rules out these

*cwTner, together with consumption goods, from the capital

^^tegory: "Objects of immediate consumption ....

^^i land, as not produced, stand outside our conception of

^pital. It does not fall within our province to go into the

*€ory of land rent." *

Certainly the principle of "perspective" — of abstinence
"-does not apply to land instruments directly, since they are
^ consumption goods : but this would apply equally well
|o cut out most other instrumental goods. True, the non-
•^ instruments could be marketed, or worn out, and their
Pnce used for immediate consumption wants; but this is

'Engen V. Boehm-Bawerk, Capital and Interest, translated by
^Iliim Smart, Introduction, p. ii.

•/«d., p. 6.

e applied

196 VALUE AND DISTRIBUTION

equally true of land. The notion of abstinence appli
then, equally to either, unless in the sense of the originali
labor of production — an argument from origins, and not ^
technological argument — a line of distinction in no wisft
applicable for competitive purposes, because beyond the
possibility of application. No one can possibly tell what'
part of land fertility is or is not produced ; and, for pur-
poses of competitive production, or of personal abstinence
in a competitive society, no one could have the slightest
interest to inquire,

I^ut of course it may nevertheless be true that the theoiy'
of land rent in no wise concerns the theory of intercstj
possibly enough, no question of rentals of any sort and nO
question of any hire or remuneration upon any kind of pro-
ductive instruments or agents can have any bearing upoq.'
the rate of time discount ; this is. indeed, one of our diffi-'
cult problems; but if other rents and hires have this bear-
ing, so also have land rents; if others have not. land rentSj
have not. At any rate, next year's rent has to be discounted;
in order to get it into a present value, and the entire series
of future rents have to be discounted to find a preseol
market value for tlie land or other instrument; and it if
clear that land is a future good as much as is any othe<
instrument, and is paid for as are other instruments, accord^
ing to the duration of the use granted.

Before productivity can be used to explain dtscountt
explanation must be found for the division of the grosl
result of capital into original fact and surplus fact; and
this upon the face of it would not appear to be difficultJ
We started with too in value — (price?) — and come out wilt
105 ; mere inspection would seem to suffice for the discovery
of a surplus of 5. Yes, but why is it that the lOO that
would accomplish this thing was worth only 100 in the
beginning? To get the 100 of present value as the capital
residuum after the surplus is deducted, we have to make
use of this 5 as the discounted surplus ; and it does not'
then seem open to explain the existence of the 5 by deduct-
ing the loo from the gross 105.

The adherents [of ihe productivity theory) .... understand,
It as meaning Ihal, by ttie aid of capital, mart is produced; that,
capital is the cause o( a particular productive surplus result. ... J

fe

INTEREST 197

^e words "to produce more" or '*a productive surplus result"
"^^y mean one of two things. They may either mean that capital

produces more goods or more value, and these are in no way

'deod'cal

That "capital is productive" .... may signify four things:
'. Capital has the capacity of serving towards the production
of goods,

2. Capital has the power of serving towards the production
of more goods than could be produced without it.

3- Capital has the power of serving towards the production of
more vaJue than could be produced without "it.

4. Capital has the power of producing more value than it has
initscl£.»

Neither from the point of view of inadequacy nor of
irrele^vancy need Boehm-Bawerk's criticism of proposition
I det^^in us long; proposition 2 he rightly declares to be use-
ful only as subordinate to 3 and as somehow serving as the
basis of 3; and then must be confronted the difficulty of
getting 4 out of 3.

Capital does not produce alone; but it is certain that
capital and other production goods working together get a
greater total of results by weight and tale than can be had
^'thout the capital. But the first difficulty (by Boehm-
^^^erk hardly touched, but by Wieser adequately recog-
'**^ed) is to find out why, in the distributive process, capital
^^ts any part of this surplus, or does not get more or all
^^ it, and does get just what we find it getting. This, how-
^^^^er, may be regarded as a problem in distribution, and,
^^^rhaps, for the time being, may be taken, without further
^0, as solvable, and as solved; that is to say. the theory
f capital rent may possibly, for the purpose of the present
rgument, be set out of the discussion, precisely as Boehm-
werk has in fact declined to enter upon any consideration
^^f the theory of land rent. Even so, however, this other
^Nvork will have to be assumed to have been elsewhere done.
"But Boehm-Bawerk does not, so far as non-land instru-
ments are concerned, appear to have assumed this, but
rather to have taken it as part of his problem, and then to
have omitted the necessary anaylsis; but we shall sec.

But at any rate, admitting that to capital, in the co-
operative production process, more goods or better goods
can be traced and ascribed and accounted, this falls a good

*Ibid,, pp. II3-IS*

198 VALUE AND DISTRIBUTION

way short of proving that the value of this larger sum is—
greater than the value of the original holding. For (1)
how make sure that the 105 goods have the more of value=
over the 100? and (2). this explained, how then explains
that the 100 of original holding did not forthwith take on^
this 105 of value?

Docs itic fact thai capital when employed is r^ularly followed 9
by the appearance of a surplus in value, actually contain a suRident
proof that capital possesses a power lo create value? . ... Is
Ihe appearance of the snow a sufficient proof that a niagic powtr
resides in the summer snow lo force up the quicksilver? ....
Value is not produced and cannot be produced. What is produced
is never anything but form, shape, material, combirutions of
material ; therefore things, goods. These goods do not bring value
with them ready made, as something inherent that accompanies

production Value grows not out of the past of goods bat

out of the future. It conies, not out of the workshop where
goods cnmc into existence, hut out of the wants which these goods
will satisfy. Value cannot be forged like a hammer or woven like

H sheet What prmluction can do is never anything more

than to create goods, in the hope that, according to the anticipated
relations of demand and supply, they will obtain value.'

That capital does not directly pi^duce value or surplus
value, but only ihe things that have value, or that have
value in excess of the original value, must be — for what-
ever it is worth — admitted. Nor does it matter to the con-
trary that all of this insistence upon value being derived
from wants — from utility motiving demand, rather than in
any part upon the supply situation — is of most dubious
doctrinal validity. It still remains true that (i) the emer-
gence of a surplus in vahie needs more proof than the mere
existence of an increased volume of goods; and (2) this
value step lieing accomplished, the problem would then
exist of explaining why the greater value of the result was
not forthwith reflected back upon the instrument, to the
final cancellation of the surplus first established. But evi-
dently all of this discussion on the part of Boehm-Bawerk
must assume the quantitative comparability of an earh'er
with a later value. But if there is, in the nature of the case.
as has been in earlier pages argued, no such thing possible

■Boehm-Bawerk, op. cit., pp. 133, 134.

INTEREST 199

as this comparison of values, what then remain to be
compared ?

Is comparison more practicable between present goods
and future goods? This has also been shown to be
impossible, even were it not the fact that the case actually
presented by capital productivity is one of production
instruments at the beginning, and of consumption goods
at the close. This objection has been forcibly urged by
Wicser:

Do the arms, bows, and nets — ^the capital of von Thumen's
ill^sstration — really reproduce themselves in the strictest sense of
th^ term? Certainly not. They produce nothing but fish and the

s|>^>ils of the chase The return which, in the first instance,

fa. Us to be imputed to them is, consequently, a gross return in
fox-^gn things .... things with which they may possibly be

cc>»~»ipared in value but not in quantity The same argu-

"•^^iit holds for capital in the developed economy, only that here

conditions are somewhat more complicated No

ital .... directly reproduces itself; each produces first a

^Dss value in foreign things, in which, physically, its productivity

'•uiot be seen. The capital of a baker produces bread, that of a

^ller, meal, that of a peasant, grain. In order that the baker may

lace his capital again .... the gross return .... must be

changed against the gross return of other capitals, indeed,

^^'nst those returns which are attributed to land and labor, in

'^der that the capital may be replaced, and the net return physically

^gnizablc.^

Von Wieser's solution of the difficulty is, seemingly,
n appeal to the facts of distribution, to the rental remu-
neration apportioned to capital through the competition of
entrepreneurs. To the detail, the mechanism, and the
processes of this distributive imputation, Wieser especially
devotes attention. As for Boehm-Bawerk, as has been
already noted, this distributive result is taken for granted;
for us, however, the only fact of present importance is
this — that to explain rentals or to assume their explanation
is not to explain interest, although the explanation of
interest may — or, for that matter, may not — ^be somehow
hidden in the phenomenon of rentals.®

^ Friedrich von Wieser, Natural Value, edited with a preface and
analysis by William Smart, translated by Christian A. Malloch. Mac-
millan, 1893 (original, Der naturliche Wert, Prag, 1888).

•"The task of our theory is, in the last resort, to prove the value
productivity of capital ; but for this purpose it is necessary first to

300 VALtTE AND D]

Our present quarrel is, however, essentially one witSl
the explanation of capital rental as given by Boehm —
Bawerk. He insists strongly that the problem is (i) ^
value problem; (2) a surplus-value problem; the lack of
clear appreciation of this value problem is, indeed, th^
gravamen of his complaint against all preceding interest
theory. /\nd why is it necessarily a value problem ?
Otherwise there can come out of the situation analyzed ftO
surplus value. But in addition — and this receives aU
emphasis at the hands of Boehm-Bawerk — the problea*
must be fundamentally one of goods, and at the same timCr
of goods that are of comparable quality, for there could b^
no value productivity unless as based upon physical pr»^
ductivity.

Wieser's first criticism of Boehm-Bawerk"s positio*
was, then, that even with physical productivity there cookP-
result no value productivity, unless as the outcome of somff
distributional process, or processes, more or less mysterious
and more or less shrilly calling for elucidation.

prove the fact of physical productivity [gross, not net. one aMnmel]
Bs the scaffolding on which the other rests. The value prvdoctiTil;
already preiuppoiea the dcEcrmiDatioD of the value of capital, but the
value of capital can only be dctenztined when the questioa of how to
impute the physical return has been answered, because the value of
capita! rests on the share of return imputed [lugemhnfl'l to it.
Just as the rent must first be ascertained before the value of any land
can be calculated, and just as, generally speaking, the rules of imputa-
tion must be recognized before the value of production goods can be
determined, so roust also the imputation of the return to capital first
be settled before wc can take up the problem of its value." — Wieser.
op. cit., p. 136.

"The theory of interest, like that of rent, has always been dis-
cussed .... without any previous exaroioation of the general laws
of imputation. The result, however, as regards interest, has been

Immensely less satisfactory than as regards rent In the case

of interest, we have to deal with the essential fact in the problem of
imputation, while in the case of rent we have to deal mbstantiaJIy
with a detail capable of being conceived by itself, that, namely, of the
differential imputation." — Ibid., p. laS, note.

But. after all it is evident that three steps are involved in any
complete proof — (i) physical productivity, (a) net value productivity.
(3) discount. And it is as to this third step, the derivatioa of the fact
of discount upon rentals from the mere fact of rentals, if inde«d, the
derivatioa can be accomplished, that Wie»et's account of the cue
appears to be seriously lacking.

INTEREST 20I

But Boehm-Bawerk answered — not to Wieser, but to
Clark, although Wieser's criticism came earlier than that
of Qark, Wieser 1888, Qark 1893— that if a productivity
could be established such that less goods of an earlier
time could be set over against more goods of a later time,
and if an increase of this kind could be established as gen-
eral over the entire field of capital employment, a value
productivity could thereupon be inferred.

It is, then, at this point that the notable controversy
between Professor Boehm-Bawerk and Professor John B.
Clark coines so exactly to fit our need. Qark's attack,*
sside from its abstract-capital arguments and aspects which
do not at present concern us, was precisely along the line
of Wieser's criticisms as to the nature of physical pro-
activity. Clark makes it clear that it is "not the recogni-
tion of time as an element in the problem of interest" that
kc would criticize, "but the manner in which time is made
to act" In reality, "time does not put a discount upon par-
ocular goods; particular concrete goods are not, in actual
^f% subjected to comparison. It is not the driving-horse
®^ *93 that is compared with one in '94." The capitalist
^'ocs not decide, if he buys, to buy a horse, and finally con-
dude to do the buying at the end of a year. Nor, in fact,
^ the rainy-day savers — ^"quasi-capitalists" Clark calls
Aem, since they have not definitively abandoned all idea of
consumption, but are merely postponing — ^nor do these
*^iiiy-day people have in mind

S^^^ods of like kind and quantity The marked antithesis

"^tirccn that which they forego today and that which they expect
*o purchase later affords, indeed, the motive for their postponing.
^«cy do, no doubt, compare a sum of wealth [But do they? or only
^ Sum of weal — an aggregate of expected services commanded by
*^mativcs of purchasing power?] existing today with a like sum
^ be used later.

Clark attributes the error charged to Boehm-Bawerk to
^ acceptance of the notion of capital as concrete goods :

•The Genesis of Capital," Yale Review, Vol. II, p. 30a (Novem-
^» 1893).

VALUE AND DISTRIBUTION

J

For the common an<i practical conception of capital as a perma-
nent fund or amount of wealth expressible in money though not
actually embodied in money, there is substituted the conception of
concrete goods distinguishable from others by the place that they

occupy in the order of industrial phenomena.

For evidently, it is insisted, if capital at the outset and
capital in a later aspect are to be compared, there will have
to be a comparison of concrete tangible goods, or of these
gtxjds as expressed in some measure. And Clark insists
that this comparison is actually, commercially, experien-
tially, not of goods of like kind and quantity; if it is at all
a comparison of concrete goods it must be of machinery
for production with products for consumption ; failing this,
it must be of two aggregates of value — of two "sums of
wealth," or of "amounts of wealth expressible in money;"
and at this point Qark declares himself as standing for the
money expression.

But is it possible to express value under any other form,
to give it any denominator intelligible as between different
men, otherwise than in terms of some conventional stand-
ard ? In truth, when capital is expressed as a value quantity,
is there anything for it but to use the money standard?
Capital is wealth under the money denominator,
since there is no other denominator possible. For ordinary
purposes, truly, this difference between value and price is
not significant. But for purposes of comparison over
intervals of time or space, the difference is theoretically of
fundamental import. For, whatever may be the truth for
current exchanges, it is clear that for deferred-payment
relations the only possible device for comparison must he
fotmd in some conventionally adopted standard of com-
parison.

But all tliis is, to the individual, not so very different
from a value comparison ; it is, for his purposes, unlike the
ordinary non-deferred payment case only in this, that, with
the deferred payment, each of the articles compared is an
item out of an entirely different system of value exchanges
from that of the other. Prices in current exchanges are
merely and simply valtie phenomena expressed in some one
commodity intermediate, conventionally selected for the
purpose. As value phenomena, value items, two prices out

INTEREST 203

of distinct systems of exchange relations are not possible
of comparison; the equality or inequality is merely one in
terms of two bullion weights out of different value situa-
tions and systems. That the market price of a given horse
is today $100 is the expression of a value relation between
horse and metal; that the payment will be made a year
from today in $105 is simply to say that a certain promised
quantum of metal, — an aggregate of items out of a later
value system, and, from fiie point of view of the present,
of an unknowable exchange significance in that system, — is
today exchangeable against the horse or against its equiva-
lent 100 items of metal ; no equivalence in value between the
two sums of items of metal is asserted in any other sense
than as a mere repetition of the brute and opaque fact that
the 100 and the 105 are exchanging against each other.

Up to this point there is, then, nothing but commenda-
tion to be accorded to Qark's formulation. It is, however,
true — or seemingly true — that he, as well as Boehnt-
Bawerk, assumes for capital a concrete tangible material
basis, as a body of existing material things, out of which
the money or value situation proceeds, and for which it
stands ; that is to say, his concept of capital requires, as the
basis of the capital, an existing sum of industrial goods
and intermediate products, social capital, but, all the while,
subjected to a competitive, individualistic value adjust-
ment. But in point of fact, as his corporation-illustration
of capital, a favorite with him, shows, this price or value-
denominator form of capital may be invested in all the
various sorts of marketable or intermediately advantageous
facts ; there is no certainty — there is, indeed, no probability —
that the total corporate capital ever will be,— or even if it
ever is, will long remain, made up in its entirety of social
capital as distinguished from consumption goods, rights,
claims, franchises, good-will, and such other assets of
similarly non-concrete character as a going business con-
cern may find to its purpose.

Boehm-Bawerk appears to accept a goodly share of

Clark's contention, still, however, making shift somehow to

keep up with his talk of "goods."

According to my view the superiority of present over future
goods is based upon the very fact that one can, as a rule, make a
different and more advantageous use of goods now present than

TALUE AND DISTRIBUTION *

one can make of an equal quanlity [?] of goods |?] which are ^
to be at one's disposal until some future moment"

But what. Roehm-Bawerk asks, can this equal quantj — -
of goods be, if not the same quantum of the same kind c^^^
goods? What sort of equality and what guarantee ^—^h
equality can tliere otherwise be?

Acconling to my theory, the man who saves will weigh whctl^^^^
the two hundred florins will have a greater valift ( snbjecti
value? ulitily? service?] for him if consumed now as "pres^^^^
dollars," or if reserved for like use as "future dollars." . . .

Strictly speaking, the example chosen by Professor Qaric is not =

case of comparing present and future "goods" but only one
comparing present and future uses of tlie same sum of wca^^^^
Imoney? purchasing power in terms of money?]. But ...
the decisive ideas are the same."

And still insisting that he has not hereby abandon^^^-
his comparison of goods of "like kind and quantity," arc^-^
declining to admit that he has gone over to a mere eqtialiV^ J
in terms of the conventional standard, Boehm-BawerL — ^
continues :

Why do I add to my proposition that present goods are worC:*
more in the average than future goods, the further qualiiicatio -^^^
that they arc worth more than goods of like kind and quanllly ~"~*
Simply because that without the second half of the proposition"^
the first half would be neither intelligible nor complete. . . .
To cKpress clearly and correctly the superiority which differenc*'''^
of time gives presein goods over future goods one must comparts- ^
tilings of like kind, for example, dollars with dollars, and nor ^
diamonds with pebbles, and of like quantity, one thousand with ont--^

thousand, and not one thousand with two thousand. . . ,

Especially would it be inadtiiissible .... to place over agains^^^
each other like sums of value, instead of like sums o6z=^

wealth One would have to make the logically inconaistentr:^

assertion that a certain present value is greater than an equalljr^

great future value Professor Clark speaks of a "sum of

weaUh," or an "amount of wealth." .... Bui .... if Pro-
fessor Clark would force himself to a precise delinition of his
meaning, he would have lo assert either exactly what I assert, or

""The Positive Theory of Capital and Its Critics," Quar. Jour, of
EcoH,, Vol IX, p. iiB (January, 1895}-

INTEREST 205

sotn^thiiig positively false For either he would mean by

^^ amount of wealth an amount of goods, and in this sense, if he
** to demonstrate the superiority of present goods, he must neces-
sarily have reference .... to goods "of like kind and quantity,"
or lie means an amount of value, and then the assertion ....
ct>iitains the self-contradiction just criticised.'*

And this would, indeed, be a serious difficulty if, as
Boehm-Bawerk assumes, the alternatives presented offered
the only possible solutions. But there is all the while the
third possibility, that of the equality, in the present reckon-
^^Ss of a future quantum of the standard with a present
<luantum of the standard.

And all the while Boehm-Bawerk stoutly insists that he
*s abiding by his notion of capital as concrete tangible
SOods, exclusive, one still assumes, of land.

But Qark, in his rejoinder,** insisting that the very state-
'^lent of the interest problem conceives the case in terms of
* fund and of income upon this fund and not in terms of
^^^>ncrete capital goods, mercilessly forces home the "com-
parison" issue. He denies that $1,000 at one time and
$1,000 at another time can compare goods of like kind
^^d quantity, though of course admitting that these dollars
^'^e, in a sense, themselves goods of like kind and quantity :

The sum in the present will buy certain things, and a like sum
**^reafter will buy different things. Professor Boehm-Ba-
^^rk .... compares present and future goods of like kind and
'^'iinber, because he compares present dollars with future dol-

*^^s .[The possessor of present wealth] compares two dif-

'^I'ent subjective values obtainable by two different modes, of
^Pending present money

He objects to Boehm-Bawerk's fashion of bringing
'*H)ney into the discussion, and then of objecting to "sums
^^ quantities of wealth. .... The things to be com-
pared are a dollar's worth of whatever-you-please now and
^ dollar's worth of whatever-you-please hereafter."

Nothing better than this or more clarifying for the
Purposes of the present discussion could be asked, nothing

^Ibid,, pp. I as, 126,

"The Origin of Interest," Quar. lour, of Econ,, Vol. IX, p. 257
vAiJril. 1895).

XTJE AND DISTRIBUTIOV

more conclusive also, and it is hardly gracious to stop -^o
regret that Professor Oark appears to believe that what:
captlalist "really estimates is like quantities of wealth r
arable in money;" for really the measurement function if

not present. But for the purposes presently in hand ti—^W^
is mostly an irrelevant inaccuracy.

The discussion — this aspect of it — closes with Boehr^*^*^"'
Bawerk's practical admission of the entire charge ma» .^^oA^
against hint: "Professor Oark seems to assume that *t ^
have, in my last article, 'introduced into the problem for tt :* ^he

first lime' the case of money In this he is mi «r «"«"'*'

taken, etc.;" for Boehm-Bawerk asserts that he has don<r>-tine
the thing over and again in the Positive Theory — in all o I ^'
which the truth is clearly with Boehm-Bawerk — the mo» <::>«">«
so, the more unfortunately for him, for in precisely so f^^ '**
is he disloyal to the doctrine, as held by htm, of the CDr« cz^^^^n-
cretcness of capital, and even more obtrusively disloyal XS E I*'
his comparison of "like kinds and quantities of goods." '* *"

Bearing in mind that Boehm-Bawerk stands for capit^^**"'*
as concrete non-land forms of wealth, and repudiates iii • "
terms — whatever else he does impliedly — the value or pric«r>i~*""^

""Th* OriBin of Interest." Q«or. Jour, of Econ.. Vol. IX. p. j8i>^C-3'
The fact that concrete ilctni of commodity, like ice, wine, d o _^ '
wheat, often increase in value with keeping, appeals to Macfarbuiri
(Charles W. Macfarlane, "Value and Dtstnbution." Lippincoli'i, igaooo
p. igd) as "of course fatal to Ibe contention Ihiit present goods arc. a: ^
a rule, worth more than future goods."

These cases might properly be used to compel a retreat by Boehm- «**
Bawerk from his position that capital is a category of concrete eoods,^^
to the tenable ground that capital is the price aspect of the concrete^*'
goods ; but so far from being inconsistent with the doctrine that* ^
present values command an agio over future values, the wine case, at*^
least, i) an illustrative case of a capitalistic process taking place in o '
time. Boehm-Bawerk stands for the view that ten dollars' worth of ^* "
ice or wine or wheat of neit year is not worth ten dollars now. This is ^
not Inconsistent with the fact that waiting till next year may change ten **
dollars' worth of present commodities into a Ihen sum of value greater ~^
than ten dollars. The future value does not now rank as equal to a -'
present value of the same denomination, but with time a change takes
place in the volume of value, and for that reason the waiting is done.
True, as Macfarlane argues, the increase in value may arise, as in the
case of the wine or of the wheat, through changes in the demand : but
this is merely to say that a year from now the then value- will he
greater than is the now value, not that the future good is now more
valuable than the present good.

INTEREST 207

expression as an essential element in the capital concept
for the existing competitive organization of society, some
attention must now be directed to his interpretation of
roundaboutness in capitalistic production as bearing upon
interest theory. His proposition seems to be that, with a
given development of technique, only a limited volume of
^pital can be applied to production, at any given degree of
directness in productive methods; that only on terms of

*

increasing roundaboutness can a market for more capital,

^d scarcity for any capital, become possible; and that

increasing roundaboutness necessitates or implies the fact

^f diminishing returns.

We shall, in a later chapter, have occasion to question

^^ alleged necessity of diminishing return anywhere in

^c dynamic field — whether for land or capital or labor —

^cepting upon the underlying assumption that the different

Actors in production or the diflferent sorts of instru-

'nental goods are manifesting different rates of increase,

^» indeed, they commonly are. But in the actual situation

V ttiings, Boehm-Bawerk is doubtless right in his conten-

"^n that capital goods tend, at present, toward diminishing

Productivity in some sense, not altogether clear, either of

Product by weight and tale, or of product by utility meas-

J^^> or of product by value measure. There is a limit to

^^ instruments that, in any given situation of technique,

^ labor, and of land, can be absorbed without diminishing

r^Vantage. There is, however, nothing to show that this

^ct of diminishing return is due to greater technological

^ndaboutness ; there would, in truth, be this same law in

^Ore obtrusive manifestation, were the productive period

T^^t possibly to be lengthened ; and there might be increas-

^^g volumes of capital consistently with shorter periods of

X^roduction — shorter processes.

Yet surely it is true that "every extension of the pro-
ductive process leads generally to some surplus result," ^^

^The use by Boehm-Bawerk of this roundaboutness doctrine is the
'point against which Professor Fetter has directed a most searching and
destmctiTe criticism. It would be hard to separate from the discus-
sions of the present text that which is due directly to Professor Fetter
and that which belongs to the author. But, in the main, so far as the

908

VALUE AND DISTRIBUTION

and it is doubtless true also that, with a given volume of
capital, the more time, the more productivity; capital works
in time. But this is equally true of land, and is the basis
o( rent on either land or capital. And it is — or may be —
true that "production is more or less capitalistic according
to the average remoteness" at which return comes to pro-
ductive powers. But here again (he principle applies
equally to land powers, that is to say, the question is merely
one of the importance of time in getting results out of
instruments of production — no great discovery. The fact
seems to be that the more any good helps in production —
value- wise, as market-determined — the greater is it in
volume as capital ; but the farther away its product is in
point of time the less is the present worth of its product,
and thereby the less the value — the capital quantity — of
the good as capital.

Capital is — and herein lies the chief point of its productive
efficiency — an efleclive intermediate cause of the consummation of

this profitable roundabout process I say "inlennediate

cause," not "cause." Capital gives no independent impulse ; it only

present ditcuision ia not directly borrowed froni Professor Fetter, ft
ba« been mggested by him.

At the »»me time, it ii fair to say that Professor Csrk, in tbe
contTDversiBl articles lately referred to, haa. in essentials, mticipaled
Professor Fetter's criticiiras ; alt this, however, in the process of intro-
ducing or of supporting his regrettable abatracl -capital concept, and.
possibly, without entire appreciation of the full reach and import of the
objections formulated by him to the position of Boebm-Bawerk.

So far as refers to Professor Fetter's treatment of time value —
interest in the widely inclunve sense of the term — the doctrine should,
perhapi, be niher held to be that of Wieser than of Fetlei, though
here also Fetter's discussion, in its development of the principle and in
its consciousness of the signiticance and extent of tbe principle, is by
much to be preferred.

The following is from Natural Valut, p. 141 :

"Every capital value — not alone tbe value of a sum of money Imt
of every perishable productive instrument — is calculated by discounting
(compare Menger. p. ijs) : 'bat is to say, from the value of the
future expected sum of products into which tbe capital will be trans*
formed, the corresponding net return is deducted. Only that, prac-
tically, in di5C0untin(r money claims, a fbicd rale of interest. L e., a
definite relation between capital value and net return, is always
assumed, and always emerges, while we are explaining the formation
of this relation by first discovering the principle for estimating capital

No intention exists here to credit Wieser — or Uenger — with origi-
nality in this regard : I have made no attempt to tract tbe doctrine back
to Its origin : sympathetically interpreted. Say, at any rate, appear* to
contain it. See p. 116.

INTEREST 2og

^^nsmts an impulse given it by the original productive powers,
JQst as one billiard ball transmits motion to another. ....
Caintal is also the indirect cause of other profitable roundabout
^ays of production being entered upon— other, that is, than those
m the course of which it itself has come into existence. When a
people possesses much capital not only can it successfully complete
^lK>se processes in the course of which the capital presently existing
^i^s come into being, but it can also adopt other and new

"JJethods The greater the stock of capital, the larger is

*^c share taken by the productive powers of the past in providing
""^cans of consumption for the present, and the less are the new
productive powers of the present drawn on for the present."

But as ultimate cause, certainly, it is only when we con-
^^ve of subsistence goods as capital that it is possible to
""^fsird capital as in any degree explaining the roundabout-
'^ess of the industrial process; only so far as capital in
possession affects the aggregate of production may it bear
^Pon the saving possible to take place. "In this sense but
^^tily in this sense, is it possible to say that man must
^ready have capital before he can enter on roundabout
'Methods of production."*^

On sometfiing like this ground — it will .be remembered

^was Jevons led to assert that only subsistence goods are

^pital. But Boehm-Bawerk expressly dissents from this
"^ew; he denies that consumption goods are capital, even
^^nies that long-time consumption goods, e. g., a house
Occupied by its owner, are capital, and asserts that only
^'hen there comes a fore-product — an intermediate product

has capital emerged.**

All this, then, makes him appear to say that there are

^^''o distinct causes co-operating to increase the roundabout-

•^ess of production: (i) larger supplies of capital, and

(2) larger supplies of something not capital. His recon-

^liation for this apparent contradiction would probably be

tound in the view that these larger margins of goods over

P*"cssing current needs are relevant only to explain the

•^'^cr supplies of instrumental goods— capital proper — ^and

^fcroK^fc them the gfreater roundaboutness in productive

Methods.

But precisely what does this notion of roundaboutness
^^rately mean? Surely to stop fishing, in order to make

* Boehm-Bawerk, op, ciU, p. 92.
"/Wrf., p, 93.
*/Kd., p. 96.

w

I

VALUE AND DISTRIBUTION

1

a fish pole whereby later to catch more fish, is a round-
about method, since it is the interposing of a time-consum-
ing process of getting ready to do the thing finally to be
done, a submission to waiting, an abstinence. But is there
therefore any warrant for saying that when once the fisher-
man has his pole in readiness, he will require witli it a
longer time than formerly in order to catch his first fish,
and will derive his benefit only through the fact that,
undergoing a longer-time process, he obtains a more than
proportionally larger catch? Why not equally well more
fish in the same time?

After all, is there in this fact of roundaboutness any-
thing more, necessarily or characteristically, than a more-
ness of waiting as volume rather than a moreness purely as
duration? If more capital goes into steam shovels, may it
not be merely into more shovels of the old type: or, if into
those of a new type, may these not be simply more
elaborate and more expensive methods of doing the same
work in fewer days? more breadth of waiting with less
length?

But it may evidently be true that the larger capacity for
waiting derived by society from the diminishing pressure
of imperative needs upon producing power, may be ttimed
to the development of methods demanding longer periods
of time; with the sacrifice-significance of saving counting
for less, vinegar and wine may advantageously be given
longer and longer periods for the developing and ripening
of their finer but less essential qualities. And so there will
probably come many appliances demanding periods of
longer duration, but justified, under the new conditions of
waiting-burden, by the extra results achieved. But it is
hardly to be believed that all new savings will go into this
longer-time direction of change. But even of those that do
so go, not all will go into instrumental goods of the tech-
nological sort; on the contrary some of the new power will
go into better-constructed and more durable houses, long-
time provision against future needs rationally and advan-
tageously provided in the present time — that is, into future
goods subject to the discount process into present worth —
future income rendered over into a present value reckon-
ing— that is, the emergence of capital and interest, with all
the materials of the capitalization process, but with only
consumption goods in question. And other savings will be
going both into durable and into temporary improvements

INTEREST 211

upon the land; and meanwhile, under the lower stress of
present need, the original powers of the soil are coming
to be better husbanded, their destruction or impairment
avoided, their profitable future results waited for. Absti-
nence is a land fact as well as a non-land fact.

But this is not, for present purposes, the only point of
identity between consumption goods — consumable goods —
and instrumental goods, or between non-land instruments
and land instruments. Concurrently with Boehm-Bawerk's
insistence that, as a question of origin, capital is not an
independent element of production, in this respect, there-
fore, differing from land, he finds it also to his purpose to
*"^€ute the ancient doctrine that capital is merely stored-up
l^ilior, and asserts of capital, as regarded from the produc-
"^ive-efHciency point of view: "Capital .... is stored
"^p labor, but it is something more ; it is stored up valuable
'Statural power." [Italics are the present writer's.] ^*

But not only does this abandon the distinction of
T>rigin between land and capital, but it also forsakes the
concrete-capital notion for the value concept; it conceives
of capital as an intermediate fact through which the two
original facts — man and environment — exert their instru-
mentality; and thus capital now appears as something
which is not land, but yet is stored-up land product in its
price-value expression.

In the chapter next following there appears to be also
express recognition of non-instrumental forms of capital —
the loan- fund form — or what may conceivably be classed
as the abstract-capital form:

This encroaching on the moment's enjoyment need by no means
involve downright privation. With more productive labor, Cru-
soe's choice might not lie .... between bare living and com-
fortable living, but, perhaps, between comfortable and ample

living The essential thing is that the current endowment

of productive powers should not be entirely claimed for the
immediate consumption of the current period, but that a portion of
this endowment should be retained for the consumption of a

future period A saving of productive powers, be it noted;

for productive powers, and not the goods that constitute capital,
are the immediate objects of saving. This is an important point,
which must be strongly emphasized because, in the current view,
too little consideration is given to it. Man saves consumption

" Boehm-Bawerk, op, ciU, p. 99.

212 VALUE AND DISTRIBUTION

goods, his means of enjoyment; he thus saves productive powers,

and with these finally he can Reduce capital The imme(fi-

ate cause of the production of capital is production; the mediate

cause is saving It is only exceptionally that capital itself

is the immediate object of saving; it may happen in the case of
those goods which, by nature, admit of being used either for pro-
duction or for consumption, such as grain. To the extent that a
man withdraws such goods from immediate use in consumption,
his saving directly lajrs the foundation of capital.**

But whether all this can be strained to bear the loan-
fund or abstract-capital interpretation, may perhaps be best
decided by Boehm-Bawerk's analysis of the methods by
which savings work out into the existence of concrete
instrumental goods. Here, manifestly, the process is
entirely misconceived ; it is not true that
if the owner lend his wealth to others .... for consump-
tion .... the sum lent is a direct advance of subsistence to the
borrower; .... if for production .... it passes, as already
described, from the borrowing employer to the laborers, as advance
of subsistence. Thus the entire accumulated wealth of society —
with the very trifling exception of that portion which the owners
themselves consume — is really brought into the market as supply,
of advances of subsistence."

The bearing of the mere fact of perspective upon the
interest rate is admitted and indeed asserted by Boehm-
Bawerk :

There are three factors, each of which, independently of the
other, is adequate to account for a difference between present and
future goods in favor of the former. These three factors are:
The difference in the circumstances of provision between the present
and the future; the underestimate, due to perspective, of future
advantages and future goods; and finally, the greater fruitfulness
of lengthy methods of production.

The needy and careless value present goods more highly
because they urgently require them in the present or think only
about the present; the well off and the saving value them because
they can accomplish more with them in the future. And thus, in
the long run, everyone, whatever his economic position and what-
ever his economic temperament, has some ground for valuing
present goods more highly than future."

* Boehm-Bawerk, op. cit,, pp. 102, 103.
*^ Ibid., p. 321,
"Ibid., p. 277.

INTEREST 213

There is, indeed, no writer to deny the influence of per-
spective, although Wieser appears to criticize the rational
justification for the influence,** and is not entirely definite
as to its independent sufficiency for the emergence of an
interest rate.

fetter apparently ascribes the interest phenomenon
entirely to perspective, allowing to productivity only such
influence as it indirectly exercises through the effect upon
the supply of goods with which the perspective principle
concerns itself.**

Carver, insisting that were there no indisposition to
»ve, no abstinence cost for capital, there could be no limi-
totion upon the supply of capital — sl pain-cost doctrine for
the aggregate capital supply, with the implication that the
^t margin is found at the highest point of saving-pain, —
™ds the demand to be made up of requirements partly for
technological purposes and partly for consumption; the
point of adjustment between the supply and the demand is

'"At bottom the economic conflict between the needs of today
^ those of tomorrow is really of a moral nature ; it is a special
**•* of the straggle between impulse and reason." — Wieser, op. cit,, p. 1 7.

"Present and future wants coming into competition .with each
*^i are as a rule to be regarded as equal ; that is to say, the differ-
^^ is time does not necessitate any difference in valuation. To this
I'^'^Poation we hare now to add a second: that within the sphere of
P^Qction the difference in time does necessitate a difference in valua-
r^ of the goods employed in production. The two propositions are

^ perfect accord and mutually supplement one another If

^tal .... is able to yield continuously the same returns, this
''^ find expression in a valuation which ascribes to capital a higher
^^, the earlier the point of time it comes into our possession. For
pearlier the point of time, the earlier, and consequently the greater,
^ return that may be expected." — Wieser, op, cit,, p. 143.

. I confess my inability to justify, by direct quotation or by strict
^*^ necessity, this interpretation. It seems to me, however, to be
?^*«»itatcd by the general trend and direction both of Professor
etter'f critical and of his constructive work. At any rate, I am
ptally unable, otherwise than upon this interpretation, to make out
^^ relation posited by him between technological productivity and time

<"«COU||t,

214 VALUE AND DISTRIBUTION

• ^^

the interest rate:** all of which Boehm-Bawerk would

accept, with some mild protest about the word abstinence,

and with much relative insistence and emphasis upon

demand or utility, and finally with a peremptory call that

the value-surplus fact get somehow out of all this a definite

explanation. And in this call the economic world will join,

at the same time, however, probably denying that Boehm-

Bawerk has himself performed the task, as set forth by

him in the following:

The statement of how productivity of capital works into and
together with the other two grounds of the higher estimation of
present goods, I consider one of the most difficult problems of tbi
theory of interest and at the same time the one which must dedd^^
the fate of that theory."

In view of all this explicit recognition of perspective, ^^

only remains, for purposes of review and of criticism, "•^^

set forth, without extended comment, the surprising

trines both of Boehm-Bawerk and of Wieser in res^

to land rentals, and, less distinctly enunciated, the logic^^

associated doctrines for consumption loans.

In a certain sense interest on production and interest on C"
sumption have a common source. Both of them relate to a diflp
ence in the valuation of present and of future goods, only that
causes which produce this difference are distinct. (Wieser, op.

p. 155.)

If they [houses] arc to be produced, there must be the pros
that their value will include the full and permanent maintenan
of the undertaker's capital, whether this value be realized throu;

selling or through letting the property The interest of hi^^

or let must, therefore, stand at the usual amount of interest cr^
capital. It is an application of the law of costs, according to whic-^
the customary interest on capital is reckoned among costs. (Wiesc^
op. cit., p. 157.)

The value of land is calculated .... by capitalizing the rea'^

of land In order to capitalize, a given rate of interest i^

necessary; and that an interest rate may be given, we need capi-^
tal Land has not the same double function as productive

» "The Place of Abstinence in the Theory of Interest," Quar, Jaur^
of Econ,, October, 1893.

^Positive Theory, p. 277^ note.

INTEREST 215

factor and as product. It produces without being produced; and
tbns, to determine the value of land, it becomes necessary to bring
to OUT aid the standard of capitalization which we find in capital.
(Wieser, op, cit, pp. 158* IS9)

This implies either that abstinence is not sufficient as the
hasis of an interest rate, or that the individual owner of
land exercises no abstinence with regard to it, or that, in
general, there is no interest possible excepting by deriva-
tion from technological non-land productivity together with
some sort of distributive imputation.

That interest is possible independently of technological

productivity would seem to be inferable from Boehm-

fiawerk's assertion of the threefold basis; if so, however,

.^s must mean that interest is not a phenomenon appear-

''^g exclusively in connection with capital, but, on the con-

^'^, may attach to something which is not capital. And

^^ on page 49 of the Positive Theory, in discussing Knies's

^^'^cept of capital, with especial reference to interest on

'^oney loans, it is said :

lX>es the interest-bearing money belong to capital, or does it
^t? . ... If we answer in the negative .... we commit our-
r^*v^ to the strange doctrine that a thing which undoubtedly bears
^^^Crest is not capital.

»^ It is, however, in a later chapter said that interest may
^^ paid for the use of land; that land is to be regarded

a productive instrument equally with capital; like capi-
^'^> it manifests its productivity in time, and also somehow,
^ y virtue of its concrete productivity, furnishes, like capi-
^^'» the basis of value productivity.

The theoretical explanation of rent from land coincides ulti-
^^tely with the explanation of interest obtained from durable
^^^iicrete capital, and land rent is nothing but a special case of

Merest obtained from durable goods Manifestly the fact

r^^t rent of land and rent of capital have one common final cause
*^ not a sufficient reason for abolishing every distinction between
^^m. Between land and capital there are so many important dif-
ferences, both theoretical and practical, that, notwithstanding the
^^^tnmon feature just described, we are justified in adhering to the
^^sion made in a former chapter to keep land out of the concep-
tion of capital."

'Positive Theory, pp. 355-57-

It may be worth while, for purposes of a convenient summary,
^ reproduce Boehm-Bawerk's own synopsis of the reasons referred to

3l6 VALUE AND DISTRIBUTION

That the services from any durable consumption good.
a house, for example, are mainly future services, and ate
thereby subject to a discount into present worth as the
capitalized value of the house, is fully and clearly asserted
by Boehm-Bawerk ; but here again the concept of capital ii
not widened to include goods of this sort; they are rega.i-ded
as mere long-time consumption goods and not capital, c
the ground that they are not "intermediate products, des-
tined to serve toward further production." But none
less is it said :

Our theory traces back the profits which durable goods ^eld
their owner to the selfsame causes as explain interest on loins

and undertaker's profit on production Supposing thaC: tht

other kinds of interest could be explained by the productivitar of
capital, obviously this was no explanation of the interest yielded by
a durable consumption good which produced nothing, sucItk a
a dwelling-house, household furniture, a hired piano, the l»<wlw

of a lending library The true primary fact is ihe I«r3*er

value of future goods and future services."

in tupport of the diitinction under coniideralioo. The brxlrcled i-^tc-
polationfl must be pardoned in the interests of space.

"Id many esiential respects land and capital take different ^^ ^1':
(i) The former is immovable; the Utter, for Ihe m»t part, mo*'' "l"!*
[irrelevant] : <i) the former is a gift of nature ; the latter a lesu X I °f
labor [Neither aide of the antithesis is always true; and Bo«-^'"""
Bawerk has himielf admitted as much for the latter stateme(r> t-l ■
(3) the former cannot be increased ; the latter can be [untrue] ; (4V the
landowner has a social and economic position essentially diffc «^at
from that of the capitalist: property in land i* justilied on e«aeni»-^l!'
dilTerent grounds from property in moT^le* [ethics, law. or politi«i; *— "
at all events not economics] : (s) land is the special object of a kincS <>'
production which is economically distinguished by many impor*^-^*^'
peculiarities [Technology? At any rate, diminishing returns ate xi^t
peculiar to land.] ; (6) income from land, while aubject to many law^ ,*"
common with income from capital, obeys many distinct laws of a*s
own — -land rent, for instance, rising with economical devetopm*"*^ "
while interest falls." [As Bochm-Bawerfc has juit shown, capital r^=**
and land rent capitalize under precisely the same rate ; and 1
forces in economic development bear to diminish rent.] — Potit*^
Theory, p. ss-

■;wd„ pp. 346-49.

CHAPTER XV

INTEREST ^concluded)

To discuss economic problems in terms of price rather
Aan of value, to place the emphasis upon money rather
^ upon the things that money will buy, to talk of nomi-
• ^ rather than of real wages, is commonly accepted as the
''^kof superficial thinking; that price is a mere half-way
^loiise between value and value or between utility and
^ty has comie to mean that it is for most theoretical pur-
poses no house at all.

It is nevertheless important to appreciate how much of

^'^em economic life woud be different, and how much

^^ economic theory would require reformulation, were

^re no money and no money price. The problem reaches

^^n so far, indeed, as to have raised the question whether,

''^thout a money denominator, the value problem would

"^ possible ♦f solution. What would be the theoretical

**tt3ation were there no conventional standard and medium ?

It is at any rate evident that, at no matter what incon-

^^ttence, there would be barter enough in this money-

*^^s society; division and specialization of employment

^''ould obtain very much as under present conditions;

^^cognized value relations would establish themselves

■^^^tween such classes of goods as in considerable measure

^^erc exchanged against each other, and under some sort of

^^bitrage these relations would acquire a considerable

^^gree of definiteness. That is to say, value relations

"Would exist essentially as at present, but all this without

^^y price system. But would there exist no medium of

^change? No. Or, rather, there would be not one

Medium but an indefinite number of media ; for by trading

^d retrading, possessors of commodities for exchange

^^uld finally place themselves in command of commodities

exchangeable against the particular commodities desired;

ai7

30S

VALUE AND DISTRIBUTION

and it is doubtless true also tliat, with a given volume of
capital, the more time, the more productivity ; capital works
in time. But this is equally true of land, and is the basis
of rent on either land or capital. And it is — or may be —
true that "production is more or less capitalistic according
to the average remoteness" at which return comes to pro-
ductive powers. But here again the principle applies
equally to land powers, that is to say, the question is merely
one of the importance of time in getting results out of
instruments of production— no great discovery. The fact
seems to be that tlie more any good helps in production —
value- wise, as market-determined — the greater is it in
volume as capital ; but the farther away its product is in
point of time the less is the present worth of its product,
and thereby the less the value — the capital quantity — of
the good as capital.

Capital is — and herein lies the chief point of its productive
efficiency — an effective intermediate cause of the consummation of

this profitable roundabout process I say "intermediate

cause," not "cause." Capital gives no independent impulse ; it only

present discussion ia not directly borrowed from Professor Fetter, ic
has been suggested by him.

At the same time, it is fair to say that Professor Clark, in the
controversial articles lately referred to, has. in essentials, anticipatcfl.
Professor Fetter's criticisms; all this, however, in the process of inttn—
ducing or of supporting his regrettable abstract-capital concept, and,
possibly, without entire appreciation of the full reach and import of the
objections formillated by bim to the position of Boehm-Bawerlc

So far as refers to Professor Fetter's treatment of time value

interest in the widely inclusive sense of the term — the doctrine should,
perhaps, be rather held to be that of Wieser than of Fetter, though.
here also Fetter's discussion, in its development of the principle and is
its consciousness of the significance and ejttent of the principle, is by
much to be preferred.

The following is from Natural Value, p. 141 :

"Every capital value — not alone the value of a sum of money but:
of every perishable productive instrument — is calculated by discountlnfp
(compare Menger, p. 13s) : that is to say, from the value of the
future expected sum of products into which the capita! will be trans-
formed, the corresponding net return is deducted. Only that, prac'
tically, in discounting money claims, a fixed rate of interest, i. e.. m.
definite relation between capital value and net return, is always
assumed, and always emerges, while we are explaining the formation
of this relation by first discovering the principle for estimating capital

No intention exists here to credit Wieser— or Menger— with origi-
nality in this regard : I have made no attempt to trace the doctrine back
to its origin : sympathetically interpreted. Say. at any rate, appears to

INTEREST

transmits an impulse given it by the original productive powers,
j ust as one billiard ball transmits motion to another. ....
Capital is also the indirect cause of other profitable roundabout
Mfajrs of production being entered upon — other, that is, than those
in the course of which it itself has come into existence. When a
people possesses much capital not only can it successfully complete
I those processes in the course of which the capital presently existing
has come into being, but it can also adopt other and new

methods The greater the stock of capital, the larger Is

, the share taken by Che productive powers of the past in providing

sncans of consumption for the present, and the less are the new

prodactive powers of the present drawn on for the present."

' But as ultitnale cause, certainly, it is only when we con-

I e:eive of subsistence goods as capital that it is possible to

regard capital as in any degree explaining the roundabout-

1 xiess of the industrial process; only so far as capital in

possession affects the aggregate of production may it bear

■ ■rapon the saving possible to take place. "In this sense but

' only in this sense, is it possible to say that man must

l| ^rcady have capital before he can enter on roundabout

' methods of production.""

i On something like this ground — it will be remembered

— was Jevons led to assert that only subsistence goods are
«;apital. But Boehm-Bawerk expressly dissents from this
"view; he denies that consumption goods are capital, even
denies that long-time consutnplion goods, e. g., a house
occupied by its owner, are capital, and asserts that only
Tvhen there comes a fore-product — an intermediate product
— ^has capital emerged.'*

All this, then, makes him appear to say that there are
two distinct causes co-operating to increase the roundabout-
ness of production: (i) larger supplies of capital, and
(2) larger supplies of something not capital. His recon-
ciliation for this apparent contradiction would probably be
found in the view that these larger margins of goods over
pressing current needs are relevant only to explain the
larger supplies of instrumental goods — capital proper — and
through them the greater roundaboutness in productive
metliods.

But precisely what does this notion of roundaboutness
accurately mean? Surely to stop fishing, in order to make
" Boehm-Bawerk, op. cil„ p, gi,
"Ibid., p. 93.
"ibid,, p. 96.

the employment of any money-price mechanism; or {2)
that either side of the exchange relation commands as much
money now as does the other now — a price relation of the
money sort; or (3) that, because of the actually ruling dis-
count rate, 105 of promised money exchanges against 100
of present money. But what would it mean to say that the
105 of the later time will then have the same value that the
100 has Howf The 100 of today — 100 hats or 100 dollars —
is an item in a present exchange system, a present scheme
of value relations: the 105 belongs to another and a distinct
system. The only value hnk between the two systems is
this of exchange relations established between two quanti-
ties of something chosen as standard for the purpose of the
deferred -payment relation. And in this standard of
deferred payment all notion of equality in value under
some value-measure system is lacking. The situation is
simply this : By virtue of the fact tliat the selected inter-
mediate is one of wide acceptability, and offers, as is
thought, the closest possible approximation to general
purchasing power^sonie thing approaching an equality in
utility, in service, is possible; and this is all that is possible.

But the money medium is not adapted to measure the
service ; and it being true that utility relations in exchange ^
are purely personal categories always, it must follow that
if any commodity exchanged 6nds anywhere a measure of
utility, that measure will have to be the quid pro quo of each
respective act of exchange. But the fact is that to neither
of the traders can the exchanged commodities be in equi-
librium of utility, else the exchange would not have taken
place. The fact of exchange does not, then, anywhere
attest equality of utility, but only equality of value in the
sense of actual exchangeability.

And all this is merely a repetition of the doctrine that
the interest problem is one of price and of discount reck-
oned upon price, and that all value productivity, so called, is
really productivity indicated and proved and expressed
by increase in price; gains are not value gains in any other

INTEREST

sense than that they are utility gains worked out in terms
of price.

Savings and capital creation. — It was pointed out upon
an earlier page that the collectivist concept of capital would
include all technologically completed goods deferred in
consumption, but would in the main have reference to
inslmmental goods, and this without occasion for any dis-
tinction between land and other productive instruments.
Rights and credit claims of various orders could have no
place; saving, that is to say, would embody itself in con-
crete material forms; loan-fund capital could interpose no
intermediate stages between saving and social capitaliza-
tion, and no possible justification could exist for the emer-
gence of any abstract-capital concept.

It was, however, urged that social saving would have
this much in common with competitive saving, that, under
either system, saving must imply postponed consumption;
prt"vate saving, privately postponed consumption; social
^^^'"ing. a social postponement, either directly in the saving
of consumption goods, or indirectly by the diverting of
P*"<:aductive energies from product ends to instrument
"^^^ians.

But at what point, in a collectivist society, would saving
^-■•^d capitalization rationally find their limit? Surely only
^"Mch surplus as should exist over imperative present need
^^^^'^juld go to capitalization; but what would be the farther
*i»nit?

As long as a later utility of larger volume was to be had
through the postponement of a present service, so long
Slaving would be a rational process. In this computation,
Afferent individuals would have to count at an equality,
and future members of society and present members of
society be indifferently regarded.

But there would still be limitations to be recognized
upon the postponement policy. The substitution of instru-
mental goods for labor is, as we have seen.a limited process;

222 VALUE AND DISTRIBUTION

the point somewhere arrives where the indirect capital!
method gives no greater product than does
direct labor method. Precisely where this point falls is
large part a question of the development of industrial tc
nique. After the uncivilized man has provided hun
with one or two boats and a fair supply of poles and lii
he will do ill to increase his supply in these directic
So for the more skilled workman there is a limit to
numlier of shovels, plows, reapers, or looms that he •
adequately use or tend. So also the point of capital satu
tion is, in any society, in considerable measure a question
the standard of comfort, and of the development of vai
directions of consumption ; but in any given situation tli
is a limit point. Again, while, in a coUectivist society, li
ards of criminal predation would be inconsiderable, ot
hazards of loss with passing time would need to be c
sidered— dangers of fire, and of water, and of wind, and
decay. In an environment earth-shaking, like that of Jaj
the same rational preference as with the Japanese wc
exist for one-storied unsubstantial architecture. J
finally, the law of diminishing utility with expanding s
ply would have its application; and all the while the o
parison of the present with the future would proc
neither in terms of value nor of concrete product, but
units or totals of service.

Sufficiently modified, similar limitations hold for
isolated individual economy. But here, there enter c
siderations of the uncertainty of life, and of needs cl"
ging in intensity and in direction with advancing age.
the appeal of different desires and the recognition of
need for saving are greatly modified accordingly as tl
are or are not parents, wife, and offspring to be taken :
the reckoning.

Carried over into a competitive society, the necess
modifications are more profound and more far reach
Subjective changes in need are more pronounced wit
more complex life; the objective hazards of property-o'

i^g become in some directions greater, in other directions
l^ss. And more importantly still, much saving takes place
^or individtial purposes which may not at all infer a social
saving, and which may imply merely a deferred right of
consumption out of another's mortgaged production, or
ma}' be even a right of privilege, monopoly, tribute, or
pension at the charge of one's neighbors.

Thus, how much the individual may rationally save, and
the form in which individual saving may rationally take
place, have little or no reference to the social advantage or
interest And the hazards of non-employment, and the
hajards either of untimely death or of death too long
delayed, require a measure of saving which may well in the
average far outrun the average actual need for rainy-day
P^J^ses.^ Here enter all sorts of considerations of fam-
*^y pride, and of interest in the family prestige of com-
'^^tively ostentatious establishments.

How far may saving extend in a competitive society,

^'^d what shall be, in the social interest, its theoretical limit?

If any reply is possible, it cannot be given now (see p. 529,

'^^t^). For present purposes, we need merely to examine

^^ actual functioning of abstinence under competitive con-

^^ons. Is it possible here, as in a collective or a Crusoe

^^^tiomy, that saving may so far saturate the demand as to

^Hcel the interest agio? or as even to involve a negative

^^t^rest — 3L charge for safe keeping? As not rarely one

*^ys to have his traveling-bag guarded, so, under condi-

^^ns of undeveloped industrial technique, and of public

^sorder and turbulence, it is within possibility, as earlier

^nturies proved, that negative interest be sometimes

^^ected.

If, to the conditions already assumed, it be added that
iio money system exists, or that the money supply is so
small, in volxmie and in employment, as to make impos-

^ There is something here of bearing upon the question of state
UMorance and the possibly associated problem of oversaving; but there
it at present neither time nor space for the discussion.

VALUE AND DISTRIBUTION

I

the employment of any money-price mechanism; or (2)
that either side of the exchange relation commands as much
money now as does the other now — a price relation of the
money sort; or (3) that, because of the actually ruling dis-
count rate, 105 of promised money exchanges against 100
of present money. But what would it mean to say that the
105 of the later time will then have the same value that the
too has nowf The 100 of today — 100 hats or 100 dollars —
is an item in a present exchange system, a present scheme
of value relations ; the 105 belongs to another and a distinct
system. The only value link between the two systems is
this of exchange relations established between two quanti-
ties of something chosen as standard for the purpose of the
deferred-payment relation. And in this standard of
deferred payment all notion of equality in value under
some value-measure system is lacking. The situation is
simply this : By virtue of the fact that the selected inter-
mediate is one of wide acceptability, and offers, as is
thought, the closest possible approximation to general
purchasing power — something approaching an equality in
utility, in service, is possible; and this is all that is possible.

But the money medium is not adapted to measure the
service; and it being true that utility relations in exchange
are purely personal categories always, it must follow that
if any commodity exclianged finds anywhere a measure of
utility, that measure will have to be the quid pro quo of each
respective act of exchange. But the fact is that to neither
of the traders can the exchanged commodities be in equi-
librium of utility, else the exchange would not have taken
place. The fact of exchange does not, then, anywhere
attest equality of utility, but only equality of value in the
sense of actual exchangeability.

And all this is merely a repetition of the doctrine that
the interest problem is one of price and of discount reck-
oned upon price, and that all value productivity, so called, is
really productivity indicated and proved and expressed
by increase in price; gains are not value gains in any other

INTEREST 221

•

than that diey are utility gains worked out in terms
price.

Savings and capital creation. — It was pointed out upon
earlier page that the collectivist concept of capital would
^^^^^lude all technologically completed goods deferred in
p^^nsumption, but would in the main have reference to
**^strumental goods, and this without occasion for any dis-
*-^ 'Unction between land and other productive instruments.
*-^-5ghts and credit claims of various orders could have no
ace; saving, that is to say, would embody itself in con-
'ete material forms; loan- fund capital could interpose no
"^^^^^termediate stages between saving and social capitaliza-
nm, and no possible justification could exist for the emer-
gence of any abstract-capital concept

It was, however, urged that social saving would have
much in common with competitive saving, that, under
ither system, saving must imply postponed consumption;
irivate saving, privately postponed consumption; social
Lving, a social postponement, either directly in the saving
»f consumption goods, or indirectly by the diverting of
productive energies from product ends to instrument

But at what point, in a collectivist society, would saving

^uid capitalization rationally find their limit? Surely only

such surplus as should exist over imperative present need

<ould go to capitalization; but what would be the farther

limit?

As long as a later utility of larger volume was to be had
through the postponement of a present service, so long
saving would be a rational process. In this computation,
different individuals would haye to count at an equality,
and future members of society and present members of
society be indifferently regarded.

But there would still be limitations to be recognized
upon the postponement policy. The substitution of instru-
mental goods for labor is, as we have seen, a limited process;

936 VALUE AND DISTRIBUTION

ranked the present; and if the good in question were one
of concrete productivity, the same question of choice
between the present fact and the objectively greater future

entirely illcgitimBtc. Recalling that the psychology of saving is simply
that of postponed service, it becomes evident that the assumpdoQ cf
wiltingneia indefinilely to postpone consumption is tacitly to abandon
needs and desires as the bases of economic activity, to aisume a total
liek of demand for products, and thereby to make production an
abnirdily, unless, indeed, as a play activity, like Ibe mud-pie making of
children — with whom also there is raid to exist a precisely similar
disposition toward indefinite postponement of consumption.

This view forukcs ihe fundamental assumptions of the science
— that human desires arc ihe primary fact iu economics, and that all
production takes place as a mere intermediate toward constimptioD ;
it is, in truth, a doctrine parallel, in its obliviousness of the economic
center of gravity, to the earlier doctrine of unproductive CDOsumptioD,
and to the theoretical view which held laborers' subsistence supplies
to be technological capital like coal, and that regarded tnaa as a
machine for the end of turning out product, and held the maximum of
accumulation to be the economic end and test — a doctrine parallel
in morals to the insane exaggeration of the virtue of frugality, and to
the ideal □( dying rich as standard of life and measure of success,
a doctrine which, generally applied, would veto any advance in the
standard of living, and which, as partially applied in the lethargy
and chilled demand of post -panic depression, presents not merely the
bad logic and paradox but the prolonged miseries and disasters of
underconsumption.

The science of economics is free of the burden either of tustifying
the ways of God before men or the ways of men before any passible
tribunal ; but inasmuch as there is no significance in production but as
a means toward consumption, and no justification for saving but as
postponed service, it must be as rational as it is fundamental in
economic life that human nature should prefer the immediate to the
distant good, and should regard as an evil every postponed consump-
tion (hat cannot through positive advantages establish a balance of

Expectation of increment is. then, everywhere the condition on
which depends the consent to waiting. Not merely every boy. but
every man. would forthwith, after breakfast, proceed to make way with
his lunch but for the fad that a larger service is recognized as attend-
ant upon (he later consumption. True i( is, that if there were no
burden cost in waiting, the supplies of capital would be unlimited ;
but It is forthwith to be added that if men could content themselves
with postponing the services of wealth to an indefinite future, they
would never produce anything for either earlier or later service.
Unresisting postponement presupposes and assumes an absence of the
desire for goods; wealth eternally waited for is not wealth at all.
There is. as all agree, no utility — no wealth— excepting as related to a
human need or desire. A desire for a good never lo be enjoyed is a
contradiction in terms; a good of this sort is a no-good. Unprottsting
abstinence implies the lack of interest lo produce and the absence of
anything (o be saved. Thus, (o assume the general and continuous
non-burden somen ess of postponement is to cancel the possibility of atl

INTEREST

227

fan would present itself. The cow of today would, for
sample, outrank the cow and calf of next year, if the
•aiting-iime subtracted from the appraisal significance of
; limb upon

'litiiU o

pToduclio

'I is daublless aoalbenia 10 <

'"i BDdercon sumption appears like an evasive and limid way of

*Tioi die same thing. It ia commonly argued thai the desires of men

^<" vcalth are absolutely insatiable, or, if not quite this, are. at least,

■'U beyoDd any practical possibility of satiation; goods in general

^*>i>ol be in superfluity so long as the desires of any member of the

ProduclJYe group ate still unsatisfied. Mill's argument for this posi-

'■•"I looks conclusive : Goods themselves furnish the demand for

■5*''>.' money is a mere intermediate through which goods are excban-

*"% against one another. Total demand and (otal supply therefore

^'I'lyie ultimately into the same aggregate of social product ; supply

'^ Ihen increase only as demand increases; overproduction, in any

'^"'n than the purely relative sense, is Ihen an impossihilily.

This would all be clear enough if, in fact, exchanges were always
"' exiiling goods against existing goods — -if, that is, the intermediate
^^modiiy and other forms of postponed purchasing power were not
.^nora in llie problem. In truth, however, goods have to be conceived
'1 another aspect than (his solely of present goods against pre.nent
V^Vils: the case sometimes presents ilself as one of present goods
*OJnsl future goods, and for this purpose moneys and credits, as the
'Orid of quid pro quo into which existing goods are seeking exchange,
'^f at one time be receiving a much more marked emphasis than at
V^ther. When the exaggerated desirability of postponed consump-
"on obtains, the demand for ordinary commodities slackens. The
^'oWem then transforms itself into this — how shall men, in the
'^ciage. increase tbeir production and sale of goods consistenlly with
* *liiiiiaished buying and consuming of goods?

Without attempting any explanation of the causes lying behind the
l^^^^rrent phenomena of commercial crisis, and conlining our atten-
^*n solely to the post-crisis period of depression, we come upon two
^^ntrafled. though perhaps not conflicting, lines of explanation, the
^**« interpreting the situation in terms of disturbed production react-
'**S upon consumption, the other, in terms of distuitied consumption
'^A^ting upon production : the one position may be staled as follows:

"The explanation is found in ihe imprenditor system, and for ibe
^oii part in Ihe relation of employer with employee- The imprenditor
^yi raw materials and employs laborers for Ibe purpose of making
^ofili. He it a mere intermediary. If he is unable in marketing his
^rodncts to make his receipts exceed bis outlays, he withdraws from
•"oiliiclion, however social interests may therdjy s

"In I

: fall of p

I following a panic,

I all c

.moditi

1 fall

'"Ui equal rapidity.

Goods fro

0 reign

sources, for examp

e. may

•*«It or <,uile hold

their old

ev

1 of p

ces. Other produ

»tl«p. produced under condition

ess approaching mo

nopoly

^lien (gain may be

«reli suslair

ed

through speculativ

e hold

■Sit by the producer

or through

re

striction

of output. The im

prendi

1

934 VALUE AND DISTRIBUTION

Bible or impracticable any considerable saving through its
mediation, it might readily fall out that tlie investment
supply would be large enough to swamp the aggregate
borrowing demand for consumption purposes or for indus-
trial or trading purposes.

Nor, be it noted, does this reasoning assume the can-
cellation of all abstinence protest or cost : it assumes simply
that so intense is the appreciation of probable or possible
future needs, or so great the utility increment due to purely
subjective considerations, as to overbalance the actual and
the rational indisposition toward waiting.

But whether the protest against waiting would be a
rational one, were the uncertainties of life and of invest-
ment not constant factors in the problem, is not at all clear.
And whether generally among men the emphasis is not at
present too much upon the possibility of old-age penury
and suffering, and too little upon the fact that youth is the
period when pleasures are vivid and wealth is rich with
service, moralists rather than economists may profitably
discuss ; and whether, on the whole, too great — or too little
— thought is, under present conditions, devoted to making
provision for the needs of wife and children, and for the
pride and power of future generations, may also be of
interest to some one other than the economist. But it is
here sufficient to note that an affirmative advantage must
everywhere make goods its case against the fundamental
preference for immediate enjoyment, else there can be no
postiKJnement of consumption ; and changes of human
disposition in this direction may greatly vary tlie relation
between the demand for capital and its supply. Techno-
logical productivity does not, then, for all possible condi-
tions, guarantee an interest agio.*

* This fact of psycbological perspective, while accepted as ut
opaque deftnilive datum of human DBtwe — a brute fact, if one maj be
allowed the term in this conaection — has had its radonalit; put mactl
in question. Why should not the enjoyment of next year appeaJ to the
rational toind as strongly as the enjoyment of today? if it be human
frailty thai it docs not, and it is yet the fact that it doe« not,

k-

Whether Crusoe should hold a particular item of goods
<*v-«r from the present to the future would depend on
*'"heiher,in the present reckoning.the future gratification out-

'^^■Hcr bas already been quotetl (p. 313) Panlateoni also, i

^^^^aiing whether remoteness bus to do wilh Ihe presenl subjective value

2*" goods, otherwise than by virtue of the aspect of uncertainty, says;

-^. lemale pleasure or pain, if supposed to be absolutely certain, must.

***iet comlitioiis being equal, be of equal weight with a proximate

J* *^ajure or pain" (Pure Economici. Macmillan, 1898. p. a6). Panta-

^^■•oni adds that valuations made inconsistently with this principle are

^«aii-hedonistic and an ti -economic ; but that the principle of coo-

^'Xigeocy muit allow not only for the uncertainty of occurrence but also

^>r possible changes in (be individual in point of susceptibility to the

~***in or pleasure in question; but it is added: "In the majority of

^^stancei. these valuations are carried on with only approximate

^^^arrectness. This is laDlamount to saying that error is a principal

^■^Jiuce of anti-economic acts, and operates in this sense on a vast

^-*=»le But this admission, although it can and must be made.

-^a order to explain real phenomena, consisting of human actions, can
^^■«vcr be adduced as explanatory of the phenomena of pure or ralioaal
-^- -conomics, i.e., of what would occur if all men were perfect
^^edonistg." The subject of pure economics approached in this manner
^^^Dust become, one would think, mostly a mere discipline.

With some seeming skepticism as to the rationality of the per-
^^pective fact, Carver has nevertheless treated abstinence as a cost fact,
^^ arguing from what would become of the interest rate, if postponed
'Consumption were not felt as a burden — if there were no indisposition
■<o lave. ("The Place of Abstinence in the Theory of Interest," Quar.
-Jour. 0/ Econ., October, 1893.) And Sidgwick has speculated upon the
effects upon the values of productive instruments, land, for example,
if the interest rate should fall la zero — all to the conclusion that land
ralues would be infinite (but 1 am totally unable to find in my copy of
Sidgwick the discussion which I seem to myself to remember very
clearly). It should, perhaps, better have been deduced that, with
capitaJ services free, land and labor could retain exchange value only
to the extent that the principle of substitution should not apply^ — -that
is. only in those cases where the functions of labor and of land could
not be fulfilled by capital. The outcome, then, of disappearing interest
should simply be a great diminution in the volume of unfree — valu-
able— goods, with the valuation of such as remained valnable arrived at
without the aid of the discount principle — that is to say. with all uses
pretcnt and future eijually regarded as present items in one and the
same exchange system.

But however all this may be — and it is not altogether clear — it is
at any rate certain enough that, with abstinence resistance to saving
HI ti rely removed, great changes, ranging from the infinite value of
land and labor to the vanishing values of either, might be formulated
u possible ; and pretty much anything else might also take place,
nee would be at an end. For the assumption is

the employment of any money-price mechanism; or (2) '
that either side of the exchange relation commands as much 1
money now as does the other now — a price relation of the
money sort; or (3) that, because of the actually ruling dis-
count rate, 105 of promised money exchanges against 100
of present money. But what would it mean to say that the
105 of the later time will iheii have the same value that the
icx) has nowt The 100 of today — 100 hats or 100 dollars-
is an item in a present exchange system, a present scheme
of value relations; the 105 belongs to another and a distinct
system. The only value link between the two systems is
this of exchange relations established between two quanti-
ties of something chosen as standard for the purpose of the
deferred-payment relation. And in this standard of
deferred payment all notion of equality in value under
some value- measure system is lacking. The situation is
simply this: By virtue of the fact that the selected inter-
mediate is one of wide acceptability, and offers, as is
thought, the closest possible approximation to general
purchasing power— something approaching an equality in
utility, in service, is possible; and this is all that is possible.

But the money medium is not adapted to measure the
service ; and it being true that utility relations in exchange
are purely personal categories always, it must follow that
if any commodity exchanged finds anywhere a measure of
utibty, that measure will have to be the quid pro quo of each
respective act of exchange. But the fact is that to neither
of the traders can the exchanged commodities be in equi-
hbrium of utility, else the exchange would not have taken
place. The fact of exchange does not, then, anywhere
attest equality of utility, but only equality of value in the
sense of actual exchangeability.

And all this is merely a repetition of the doctrine that
the interest problem is one of price and of discount reck-
oned upon price, and that all value productivity, so called, is
really productivity indicated and proved and expressed
by increase in price ; gains are not value gains in any other

tact would present itself. The cow of today would, for
uomple, outrank the cow and calf of next year, if the
waiting-time subtracted from the appraisal significance of
t upon the hither aide the Ijmb upon

f overproduction :
ve and timid way of
that the desires of men
cjuite this, are, at least,
uon ; goods in general
of any member of tbe

II is doubtless anathema to lalli
Mid underconsumption appear! like an ev
nyini; tbe same tbing. It is commonly argui
<« wealth are absolutely insatiable, or, if ni
Itf beirond any practical possibility of «at
unwl be in superfluity so long as the desii

pndbclive group are still unsatislied. Milt's argument for tbis .
Don looks conclusive : Goods themselves furnish the demand for
loods; money is a mere inlermediale through which goods are CKchan-
!"!( leainst one another. Total demand and total supply therefore
uiirie ultimately into the same aggregate of social product ; supply
It iken increase only as demand increases ; overproduction, in any
°tber tban the purely relative sense, is then an impossibility.

This would all be clear enough if, in fact, exchanges were always
°< cdtling goods against existing goods — if, that is, the intermediate
Wmtiodiiy and other forms of postponed purchasing power were not
^tlors in the problem. In truth, however, goods have to be conceived
'" another aspect than this solely of present goods against present
Cndi: the case sometimes presents itself as one of present gnods
•ninit future goods, and for this purpose moneys and credits, as the
'mis of quid pro quo into which existing goods are seeking exchange.
"^I at one time be receiving a much more marked emphasis than at
woiber. When tbe exaggerated desirability of postponed consump-
tion obtains, the demand for ordinary commodities slackens. The
P"*lon then transforms itself into this — how shall men, in tbe
•'•^^ge. increase their production and sale of goods consistently with
* iJiininished buying and consuming of goods?

Without attempting any explanation of the causes lying behitld the
'*wrrent phenomena of commercial crisis, and confining our atlen-
"""i wlely to the post-crisis period of depre
WntTiited. though perhaps not conflicting.

?W interpreting the situation in terms of disturbed production reacl-
"t upon consumption, the other, in terms of disturbed consumption
'''cting upon production : the one position may be stated as follows:

"The explanation is found in the imprenditor system, and for the
^"n part in tbe relation of employer with employee. The imprenditor
^1 raw malerials and employs laborers for tbe purpose of makini;
^tntlL He is a mere intermediary, tf he is unable in marketing his
■"MhiCts to make his receipts exceed his outlays, he withdraws from
Itxtnction. however social interests may thereby sutler.

"In the fall of prices following a panic, not atl commodities fall
*<tb equal rapidity. Goods from foreign sources, for example, may
'>»iiy or quite hold their old level of prices. Other products are
Ptrhapi produced under conditions more or less approaching monopoly ;
°ibci9 again may be Well sustained in price through speculative bold-
"V by the producers or through restriction of output. The imprcndi-

I of explanation, the

I VALUE AHD DISTUBVnON

Ae fmmt good at a ercalcr rale than the objective pro-
ouctivi^ of Bc good coiiM aod-

Aad aew «c aah : Od wbat terms, in aa iiulividualisitc

Wigei riK
■ ■• \mt I iUblt. Eril itewly uul wiih painful Mni|-
W«n it iiiiak far pnco » fan «*eDlr all along ibt
wa0M la be lOread W fan ut CMifonnitT wiib pricu, ttc
'e «obU be aatmporuint a. ~

It mIc md tiqaidation at the
mKac leTd of fhoe^ Etch wen rhu diRkotty sToided ....
Ikcn wold M0I toaaia (j) tte taeqaaliria alrcAdr mouioiied in Ac

fall of taamoStita gaiuaOj (]) Tie diScidty of accuta(t1<r

md}n>tini watt pajimiiti to Barket price* Capital, labor.

■nd enplaret' nnut c»-«peme in produetioa. If with anf employet
lahoTcn inaUl opoa sD, or more than att, of ffac prodnct. productioii
DUHl cesK.' — DBTCDpcnt. of. ciK p. 161.

To Saj. whole Im d« Ubouckitt wai the beginning of Ibe docirine
■hat ■ (eniersl overpnidnctioii is impoanble. and whose reasoning wu
later accepted in tam b)r Jamei Mill, hj John Stuart IrlilL and b;
Calrne*, tbii dimubed-productioa explanation of depreuion would
have been enlireljF ntiifactorj. Bat ai niaal. Malthiu was a sceptic :
and io hi* innirsency against the doctrine of the impassibility of a
"general gtat,~ be contrived litully to pat himielf into conflict with
Kicarilo. Thii noteworthy controTera^ will serve us in good stead as
background for oar genera] problem ;

"According to the best authorities .... what U meant by the
glut of a particular commodity is sucb an abundant supply of it com'
pared wilb the demand ai to make its price fall below the cost of pra<
durlion: and what is meant by a generil glut is such an abundance of
a large mau of commodities of differoit Idnds, as to make them all
fall below the general price, or the ordinary costs of production, with-
ml any proportionate rise of price in any other e<iually large mass of

comtnodities Mr. Mill endesTors to show that demand and

•uppty are always equal in the aggregate; that an overaupply of some
conmoditiei muni always be balanced by an undersuppty of others;
■nd that therefore a general glut is impossible." (Rev. T. R. MaJthus,

INTEREST

339

non-money economy, should one man lend to another man
a cow? At the minimum, the payment, whether agreed to
ft made in terms of cows or in terms of other utilities,

WiiiiioiM HI Political BcOHomy, London, John Murray, 1817. chap.
K" Jimts MilL) And Mallhus rightly points out that Mill would be
wiirtly corrcci here if demand meant nothing more than the amount
conamicd : doablless the entire product may be sold and be consumed at
^Bie price, but not neceisarily at a price remunerative to the producers ;
'f nolbins more is meant by Mill than to assert that conaump-
fwn will equal produciion. "Ihia . ... it really no more than «fly-
ixc that if commodilies were produced in such abundance as to be sold
'I half their costs of production, they would still be somehow or other
'^WnuDcd — a truism equally obvioua and futile. But .... Mr.
Via .... observes, 'It is evident that whatever a man has pro-
^Dced and does not want 10 keep for his own consumption is a stock

•hich he may give in exchange for other commodilies His

demand is actually equal to the amount which be has produced and

But Mallhui insists that hats and shoes may very well be selling
^eainn each other at the old ratios and yet both be selling at less
'*>ao cost; the question is merely whether this can be true for com-
modities generally. "The hop-planter who takes a hundred bags of
•^IM to Wighill fair, thinks little more about the supply of hats and
•"Oe» than he does about the spots in the sun. What does he think
?'»«wl, then.' and what does he want to exchange bis hops for? Mr.
**»11 seems to he of opinion that it would show great ignorance of
F*^l>tical economy to say that what he wants is money; yel . . . .
■* teally is money that he wants and ... . this money he must
^^»ain . , . , in exchange for the great mass of what he has
^^~«nigbt to marker, or he will be unable to carry on his business as a
?^p-planter; .... he must pay the rent of his bop grounds in
^^*ney : .... he must pay for his poles, his bags, his implements

^^^ money He must pay the laborers .... during the

^J^qrse of the next year in money, and .... it is in money and in
;^*^(>ney alone of all the articles brought to the fair, that be can calculate
^*s profits."

^ We may stop to note that Maltbus is probably right here as to
,^*^e aclnal psychology of the case ; people do look at things in this
^»ay : and perhaps it docs not matter to the argument whether or not
^t^ey ought. But all the while, the precise question at issue is not
^^lirely clear. Malthus says it is whether commodities generally may
*>ot be being produced at a loss to the producers. "True .... the
'-Qodlord* and laborers who are paid in money wtli finally exchange it
J'oT something else, as no one enjoys money in tiiirf, except the miser ;
Vnit the landlord .... would be little inclined to accept from the
Ci)>Dter the articles which he could get a( the fair in exchange for his
%op< And as matter of fact the laborer .... is paid in

"Foreign trade is no doubt mainly a trade of barter. Bui the
«|a«lion whether British woolens find an adeiuate market in the
United States docs not depend upon their purchasing the same
quantity of tobacco as usual, but upon whether the tobacco or whatever
irn may be, will purchase the British money or the British

L

i

F

»30 VALUE AND DISTRIBUTION

would need be, to the lender, in view of all his circum-
stances, of as great significance as the present cow, whether
as immediate consumption good or as a production good tti
be kept in the possession of the owner. That is to say, the

Ubor nccesur; to enable the woolen manufacRirer to cany on ii$
business succestfull}'. If woolen and tobacco are both below (he cosutiC
maiuifacnire in moner or labor, both parties may be tVTy'mt to i

losing trade This is an aniwcr to the pamphlet wbidi li.

Say addreued to me soidc years aso. . . . The power of npUdng

capital will mainly depend on the power of commanding labor

CommoditiM in genera) .... are continually rising or (alliig to
money price .... while the money price of labor remain* noch
more nearly the same.

"The question of a glut is exclusively whether it may be gmcnl,
a* well at particular, and not whether it may be pennanent ai mO

as temporary What are the coits of production! They tK

either the amount of money necessary >o repay the labor worked df in

the commodity, and in the tools .... etc with the nrfc

oary profits, etc or tbey are the quantity of labor in IrinJ.

etc Now surely it cannot be denied IbeoreticiIIy thai lU

commodities produced in this country may fall in compariun nilli
■ commodity produced in Mexico. Ai little can it be denied theoirt-
ically that all commodities produced by British tabor may fill ia com-
parison with that labor."

Malthus makes no question that the glut will be cguiclily followtd
by reduced production, and appears to regard this as a fact of remdy
rather than a second and aggravated stage of the diseases

As Malthus has drawn the issue between himself and Mill. Uililui
is clearly enough right ; wages and raw materials and conmctall
obligations do not keep pace in change with the course of genoii
prices ; the phenomena neither of boom nor of post-panic deptessiiiii
can be understood excepting in the light of this (act. But the largtf
question whether, irrespective of eou^ and entrepreneur prolits. and oi
continuing entrepreneur activity, the production of goods may outnm
temporarily the disposition to conmme at no maltcr how low a price
is not touched by this discussion. Malthus. indeed, admits, as we haie
seen, that all the goods can and must lind consumers. In other plicei,
however, in order that entrepreneur profits t>e maintained, he recom-
mends luxurious consumption as temporary remedy ; and it was upon
this issue that Ricardo entered the lists. (See Bonar. Letltrt ol
Ricarda to Malthus, op, ciL, pp. 188-90.)

But upon the question whether present consumption may net be
too greatly limited beyond the possibility of the savings being absorbed
by social capiuliialion, and with a concurrent overemphasis upon the
securing of representatives of reserved and postponed purchasing
power — goods refusing to exchange against each other, but only
against some form of long-time intermediary — this discussion throws
no light.

The problem of the relation of more liberal credit to the demand
for goods, and of the relation of credit to speculative activity, and
thereby to the general level of prices, ia also really involved in the

INTEREST 231

^^n must offer to the lender the promise of greater service
'° him than either of the other two methods open to him —
•^nsumption and personal exploitation.

To the borrower likewise the question will present itself

According lo the usual view of the relatiotu brrtweea

"^inand and supply of products, demand and supply being regarded as
"^creiy different aspects of the same aggregate of goods, it is difficult
*** see how credit can be conceived, relatively to supply, as an
"^creased demand or as an increase in the total volume of purchasing
I*****!. In thii view of the case, expanding credit could have no bear-
ing apon prices, no matter what might or might not be the effect upon
'ntetest rates — relations between present and future — excepting aa,
trCTigh the use of credit as substitute for money, the money com-
■Oodity is in effect made greater in supply.

But if credit be regarded as expressing some modilication in tocial
Attitude toward present goods and present consumption as against the
•oturc^-an emphasis upon the present, with an enlarged disposition lo
Promise heavily against the future, in order to have in the present— the
c%sc take* on 3 new aspect. And really speculation is nothing but the
desire (o have now. on terms of promise against the future, with the
'*<>pe. it is true, that the future by its larger prices will justify, in
'*nis of price gain, the hurry of acquisition. It is, in last analysis,
?*> emphasis upon present goods, through present purchasing power
•o ternu of money, as against future money or money credits.

It is implied in all this, and needs be clearly accepted, that the
I^tvchadng power which is being offered against present goods is not at
**i)r time solely other present goods or the suspended purchasing power
'**!<? wkiek Ibey have been converted. At all times future facts are a
^*rt of the present offer, and, as credit is varying in volume, ore a
PXictoating share in the total volume of offer. The granting of credit
** really a method of making, out of putative future purchasing power,
^ present purchasing power ; the business of discount banking is
^^sentially nothing but the underwriting of these undertakings against
^4ie future. The present purchasing power thus created thereupon
^^comes a part of the present money, or money equivalent, offering
^Iself as demand against present goods. Two effects are manifest:

e of ii

D say, 1

c favorable t

¥or present purchasing power as against future purchasing power, t
*lew initiative being with the offers of future purchasing power; (3)
^nce future purchasing power Is. through its credit representatives,
Yunctioaing as currency, there comes about a modification -in the
exchange relations between the unit of currency and the commodities
against which currency is being exchanged, thai is to say, the level of
jincei is modified.

But to return 10 oui specific question — the social bearing of an
intotiully marked disposition on the part of producers and sellers (o
refuse to exchange present goods against present goods and lo demand
in excfasnge deferred rights of purchase — money-cash, credits, or well-
secured promises ; it is clear enough that a generally lower price level
mnit result : but is it Bt all clear that this change in price level must
mcceed in marketing the goods in exchange for other goods, to the

I

VALUE AND DISTRIBXJTIO

t in tenns purely of service, of utility; can he obtain suci
[ terms of interest charge as to provide, after payment of the
1 principal and its agio, a surplus of advantage

With the establishment of a money economy, the prol>-
lem remains the same in essentials; the calculus is still
of balance of utility.

And in the more complicated industrial organizatiocs
also, the entrepreneur is seeking a balance of utility foT*
himself, although it is true that here the computation hast(»
be worked out as the final summing-up and outcome of
series of market-price computations. The medium in all

resutl of temiiaatiDg the glut, and without enforcing

produclion? Or is it rather true that otherwise thaj

new price level modiliei the prevailing psychological auitude toward

consumption, Ihere must be. for a lime, an adei)uate market for oolj

those goods ministering to the more primary classe* of ne«U?

The period preceding crisis is one of extremcty high aggregate and
per-capita product! venes* of goods; all productive energies have been
fully employed, cnterpriie functioning at the extreme of pressure, Tlw
demo nitration of this is convincingly found in the prevailingly higb
level of consumption ; wiUi every wage-earner there goes the
dinner pail. Among the laborers there is taking place a higher averafa
Cinsumption of clothing, of minor comforts, and of luxuriea. 1'
only this, but the social production has been sufficiently large
permit, over and above immediate necessities, the acquisition of %
goodly amount of durable consumption goods — more and betttf
personal belongings, books, pictures, household furnishings. Mcanwhilk-
also, in the more distinctly capitalistic field, it will be found thai th*'
■ocia] productiveness has made it possible, through saving, that then'
be constructed miles and miles of new dwellings and of business blods.,
— new streets with gilding, paving, and sew era, and generally tkft
extension of all sorts of public improvement, and the development of
bU kinds of quasi-public utilities.

Of the farmer it can be said that never was his farm in betttf
cultivation, his land so expennlvely and adequately drained and fenced,
his herds so targe, his hams so capacious or in so good repair.
Ms house so spacious or so well furnished. Turning to still m
general conditions of accumulated wealth, it may be said that never
were the factories so large or to well equipped with the different
instruments and appliances of production ; and never were the ware-
houses so large to receive the outpouring volumes of product, The«e
prosperous years have, it is true, consumed largely out of their pro-
duction, but at the same time it has been possible to construct and
equip railroad systems spanning entire continenla. and to have re-
equipped all the systems earlier constructed.

And how has it all been possible? Doubtless the ultimate explana-

must be in the surpassing volume of production ; but

made possible by it, was the enormous volume of savii _

~ how. under the existing economic organization, di>es thii

INTEREST

333 <

ihe entrepreneur's computarions remains a money medium ;
he must get money gain, but this in order finally to get the
maximiini of utility gain. He borrows present money
against future money, or, more accurately, he borrows
preienl purchasing power against the obligation of later
pa_nnent according to the same standard. Hence the inter-
est problem, as it presents itself in actual affairs, is the
sale of present purchasing power, expressed in terms of the
standard, against future purchasing power, expressed in
'ike terms. As Galiani wrote a century and a half ago:

Hence arise the kindred phenomena of exchange and interest,
>ht one being an equalion between money present and money distant
'n space .... in order to equalize the iotrinsic value of the
one or the other diminished by the lesser convenience or the greater
''angef. Interest is the same equation made between money pres-
^'■' ind money distant in time, time here operating in the same
*3V as space.'

r*^in(j lake place? Usually, as we have seen, through the reMricted
^*^siiniption of some individuals oi classes in society, and the lending
^ tttts saved purchasing power — this loan fund — to others, mostly for

^ furpoees of the creation of social capital.
2^,^ It is, then. Ibe need of new railroads, new factories, new appli-
f^^K:el, and new equipment that has furnished, and that alone could
. Z^^iush. the market for new savings and the possibility that these new
( I^'^iogs could express themselves in an increasing social capitalirslion.
£^^ is indeed evident that, if savings will not capitallie into forms of
Q^^^lcnnediate social wealth, there can he no market outlet fof the
^^~^^vings unless it be in consumption loans, that is. in class indebted-
^■^is, dubiously secured, or in government wastes and aovernment wars.
^^^ We are. then, within reach of our conclusions; with the restriction
^^ f the disposition to consume, there is neither the market to absorb
^^e productive output of society, nor even the market to employ the
^^^■sting productive equipment : capitalization cannot take place ;
■Savings, in any considerable volume, become an impossibility because
^f no market for Ihem : there is nothing for the case but a sharp
restriction of the productive output of society. A temporary lowering
in the siandard of living takes place ; meanwhile some tendency is mani-
fest toward the displacement of labor through competing surplus-capital
equipment, to the extent, that is. that the e:tisting supplies of instru-
mental goods are adapted to serve in relation to labor rather as substi-
tutionary than as complementary goods. In large part, however, it is
true that the existing capital goods are rather complementsry than
substitutionary in their technological relation to labor, and that hereby
labor receives emplojrmcnt so far as the capital itself is able to tind
employment.

' Dtlla Momta, Book V, chap. i. p. 243, quoted by Pantaleoai,
op. eit., p. 36. Pantaleoni, however, appears to be wrong in interpret.

I

VALtJfi ASC "DISTRIBUTION

I

sible or impracticable any considerable saving through
mediation, it might readily fall out that the investn^^"^
supply would be large enough to swamp the a^regj;
borrowing demand for consumption purposes or for ind '^~^
trial or trading purposes.

Nor, be it noted, does this reasoning assume the c^"-^
ceUation of all abstinence protest or cost ; it assumes simg?-^
that so intense is the appreciation of probable or possit*^^
future needs, or so great the utility increment due to pureJ^^
subjective considerations, as to overbalance the actual zni0^
the rational indisposition toward waiting.

But whether the protest against waiting would be a
rational one, were the uncertainties of life and of invest-
ment not constant factors in the problem, is not at all dear.
And whether generally among men the emphasis is not at
present too much upon the possibility of old-age penurj-
and suffering, and too little upon the fact that youth is the
period when pleasures are vivid and wealth is rich with
service, moralists ratlicr than economists may profitably
discuss; and whether, on the whole, too great — or too little
— thought is, under present conditions, devoted to making
provision for the needs of wife and children, and for the
pride and power of future generalions, may also be of
interest to some one other than the economist. But it is
here sufficient to note that an affirmative advantage must
everywhere make goods its case against the fundamental
preference for immediate enjoyment, else there can be no
postponement of consumption; and changes of human
disposition in this direction may greatly vary the relation
between the demand for capital and its supply. Techno-
logical productivity does not, then, for all possible condi-
tions, guarantee an interest agio.'

' This fact of psychological pcrtpective, while accepted as an
opaque deiiiiitive datum of buman nature — a brute fact, if one may be
allowed Uie term in this connection — has bad its rationality put much
ia question. Why should not the enjoyment of next year appeal to the
rational mind as strongly as the enjoyment of today? If it be human
frailty that it does not, and it is yet the fact that i

INTEREST 235

co-operating influences bearing upon price, has been of a

sort to leave the general price level undisturbed, a general

increase in weigfat-and-tale output must attach a general

price advance to the aggregate product. If there are

exceptional industries where the aggregate price product

suffers despite the increase in the number of items pro-

<iuced, there must thereby be a still more marked price

productivity for the remaining industries in the aggregate.

I^aflure to manifest price productivity is thereby proved to

'^^ exceptional, and basis is established for the only kind

^^ value productivity which at all concerns the present

P'"oblem — ^the explanation of interest-offering under entre-

P'"eneur production.

2. But why is the increase in price product not reflected
f^^ck upon the price or value of the productive instrument
*^^elf, and expressed under the form of its increased
^^'"esent worth ?

The first answer is that it is so reflected. Even though
instrumental good may also be capable of use as con-
^^^^ption good, it cannot serve in both capacities at one
^4 the same time : the situation is one of alternatives. As
^^^oduction good the present worth is based solely upon the
^^lue of the future product, and is purely the resultant
^^reof. True, the cow may command $50 for immediate
^^nsumption as beef, or may bear a $50 value for dairy and
^^«eding purposes ; but either aspect excludes the other. In
^te aspect of productive instrjjment, then, our problem
formulates itself as follows : Why is not a fifty-dollar cow
TJow worth fifty-five dollars, if only it and its increase will at
the end of the year be worth fifty-five dollars ? And this is
merely to ask, why will not the cow now exchange for
more of other things, if at the end of a year it will so
exchange? It is, perhaps, answer enough for present pur-
poses to say that the cow has today exchange relations
against other things all of which, in their aspect of present
purchasing power, have this same potentiality of increase.
But it remains to ask, why have all present values the

aa6 VALUE AND DISTRIBUTION' ^M

ranked the present; and if the good in question were one
of concrete productivity, the same question of choice
between the present fact and the objectively greater future

entirely illeEiciniale. Recalling that tbe psycholoKy oi saving is simply
that of postponed service, it becomes evident that the assumption of
willinKness indefinitely to postpone consumption i> tacitly to abandon
needs and desires as the bases of economic activity, to aaaiunc a total
lack of demand for products, and thereby to make production an
absurdity, unless, indeni, as a play activity, like the mud-pic making of
children — with whom also there is said to exist a precisely similar
disposition toward indelinile postponement of coosumptioR.

This view forsakes the fundamental assumption) of the science
— that human desires are the primary fact in economics, and that all
production takes place as a mere intermediate toward consumption ;
it is, in truth, a doctrine parallel, in its obliviousness of the economic
center of gravity, to (he earlier doctrine of unproductive consumption,
and to the theoretical view which held laborers' subsistence supplies
to be technological capital like coal, and that regarded man as a
machine for the end of turning out product, and held tbe maximum of
accumulation to be Che economic end and test — a doctrine parallel
in morals to the insane exaggeration of the virtue of frugality, and to
the ideal of dying rich as standard of life and measure of success,
a doctrine which, generally applied, would veto any advance in the
standard of living, and which, ai partially applied in the lethargy
and chilled demand of post-panic depression, presents not merely the
bad logic and paradox but the prolonged miseries and disasters of
underconsumption.

The science of economics is free of the burden either of justifying
(he ways of Cod before men or the ways of men before any possible
tribunal : but inasmuch as there is no significance in production but «•
a means toward consumption, and no justification for saving but «■
postponed service, it musi be as rational as it is fundamental ia
economic life that human nature should prefer the immediate to the
distant good, and should regard as an evil every postponed consump-
tion thai cannot through positive advantages establish a balance of
benefit.

Expectation of increment is, then, everywhere the condition on
which depends the consent to waiting. Not merely every boy, tnit
every man. would forthwith, after breakfast, proceed to make way witk
his lunch but for the fact that a larger service is recognized as attend-
ant upon the later consumption. True i< is, that if there were no
burden cost in wailing, the supplies of capital would be unlimited ;
but it is forthwith lo be added that if men could content themselve*
vrith postponing the services of wealth to an indefinite future, (hey
would never produce anything for cither earlier or later service.
Unresisting postponement presupposes and assumes an absence of the
desire for goods ; wealth eternally waited for is not wealth at all.
There is, as all agree, no utility — no wealth — excepting as related to a
human need or desire. A desire for a good never to be enjoyed it a
contradiction in terms : a good of this sort is a no-good. Unprolteling
abstinence implies the lack of interest to produce and the absence of
anything to be saved. Thus, to assume the general and continuous
non-burdensomeness of postponement ia to cancel the possibility of lU

INTEREST 237

the precise extent that recent facts disclose? Need it

■<r stop? What influences are setting the limit?

Let it be supposed to be today possible to foresee that

ch and every item of wealth in existence today will

►morrow, by its own inner necessity and activity, be repre-

nted by two similar items. To assert that the one item of

ticxiay would have the same value or price as two items of

^oinorrow would have but one possible meaning. There is

*^C) reason why the exchange relations obtaining today

^^^tween different commodities, or between commodities

^'^d money, should be in any wise different tomorrow ; thus

^^ item of today should buy the same amount of other

*^*nis or of money as an item of tomorrow will buy tomor-

^^W ; there are merely two items tomorrow for every one of

^^<lay ; and two items of tomorrow must command of other

^^^^'timodities or of money twice as much as one item of

^^d^y will command.

Thus any question of equality of value or of price

^ween today's situation and that of tomorrow can refer

^^l^r to the exchange relations which must come to exist

^^trween the one item of today and the two of tomorrow,

^^^th being expressed in terms of the same system of

^^change values. These relations must then be stated

^^tlier (i) in terms of the present system, so that tomor-

y^^^Av's two items are discounted at the rate of 50 per cent.

^^to present price, the bank-discount manner of statement;

^^ (2) that today's items draw interest at the rate of 100

t^r cent, in taking rank in tomorrow's system of price.

In either case, items are transferred from one price
System into the other only by virtue of the principle of
^titerest agio^ time discount.

And in the case assumed, a case of no co-operating
eflFort or pain or care, and of no outside instrumental
co-operation — a case also in which all things, provisions,
lands, machines, durable goods, everything, have doubled —
the discount rate would be 50 per cent., or the interest rate
100 per cent.

220 VALUE AND DISTRIBUTION ^M

the employment of any money-price mechanism; or (2)
that ather side of the exchange relation commands as much
money now as does the other now — a price relation of the
money sort; or {3) that, because of the actually ruling dis-
count rate, 105 of promised money exchanges against 100
of present money. But what would it mean to say that the
105 of the later time will Ikcii have the same value that the
100 has nowf The 100 of today — 100 hats or 100 dollars —
is an item in a present exchange system, a present scheme
of value relations ; the 105 belongs to another and a distinct
system. The only value link between the two systems is
this of exchange relations established between two quanti-
ties of something chosen as standard for the purpose of the
deferred-payment relation. And in this standard of
deferred payment all notion of equality in value under
some value-measure system is lacking. The situation is
simply this: By virtue of the fact that the selected inter-
mediate is one of wide acceptability, and offers, as is
thought, the closest possible approximation to general
purchasing power — something approaching an equality in
utility, in service, is possible; and this is all ttiat is possible.

But the money medium is not adapted to measure the
service ; and it being true that utility relations in exchange
are purely personal categories alwajs, it must follow that
if any commodity exchanged finds anywhere a measure of
utility, that measure will have to be the quid pro quo of each
respective act of exchange. But the fact is that to neither
of the traders can the exchanged commodities be in equi-
librium of utility, else the exchange would not have taken
place. The fact of exchange does not, then, anywhere
attest equality of utility, but only equality of value io the
sense of actual exchangeability.

And all this is merely a repetition of the doctrine that
the interest problem is one of price and of discount reck-
oned upon price, and that all value productivity, so called, is
really productivity indicated and proved and expressed
by increase in price; gains are not value gains in any other

INTEREST 221

•

^^Qse than that diey are utility gains worked out in terms
^f price.

Savings (md capital creation. — It was pointed out upon
^4 earlier page that the coUectivist concept of capital would
^<^clude all technologically completed goods deferred in
Consumption, but would in the main have reference to
^x:^trumental goods, and this without occasion for any dis-
junction between land and other productive instruments.
•lights and credit claims of various orders could have no
I>]ace; saving, that is to say, would embody itself in con-
^^ete material forms; loan- fund capital could interpose no
intermediate stages between saving and social capitaliza-
tion, and no possible justification could exist for the emer-
gence of any abstract-capital concept

It was, however, urged that social saving would have
this much in common with competitive saving, that, under
either system, saving must imply postponed consumption;
private saving, privately postponed consumption; social
saving, a social postponement, either directly in the saving
of consumption goods, or indirectly by the diverting of
productive energies from product ends to instrument
means.

But at what point, in a coUectivist society, would saving
and capitalization rationally find their limit? Surely only
such surplus as should exist over imperative present need
<x>uld go to capitalization; but what would be the farther
limit?

As long as a later utility of larger volume was to be had
through the postponement of a present service, so long
saving would be a rational process. In this computation,
different individuals would haye to count at an equality,
and future members of society and present members of
society be indifferently regarded.

But there would still be limitations to be recognized
upon the postponement policy. The substitution of instru-
mental goods for labor is, as we have seen, a limited process;

344 VALUE AND DISTRIBUTION

rents promised by it, when computed into present worth
at tlie market rate of discount, equal, and thereby justify,

forward of the into me- stream, whicb leaves the iinmediatc income
nnaller than before, but coirpen»ates for this by a still greater increate

afterwards The rate of interest, for contracts connecting

the periods of scarce income with those of plentiful income, tends lo to
be high {p, 199),

"The deferred increase is eitpccled to yield a return on the
jmoiediale sactificr at a rale sometimes far greater than the rale of
interesl. But this high rale of return on sacrifice 10 the exploiter of
the newly discovered tnetbod of uliliiing capital does not by itself
fiji the rale of interest at that level. On the contrary, the valualioa
of the property is immediately adjusted 10 the new conditions"
(p. "99)-

Thus we are lo undersland Fisher to assert that the use o! any
productive process or ihe use of any sort of produclive wealth can
otert an effect upon the rate of interest only through modifying the
individual's estimate of the relative importance to him of prcsrm
goods as against future goods. How shall Ihe owner of
of production, say. a farm, employ it — for farming? tor forestry*

particular choii

"In the case of optional incom
depends upon the rate of interest 1
his farming is thus determined by the rate of inte
choice will fall on the option whose marginal rale
fice. reckoned relatively to the neighboring option.
of interest (p. 158). Those investments which i
returns are formed first, and the leas ratridly re
are snccesaively formed until the margin is reached which corre-
sponds to the rale of interest A certain decrease of present

income will be accompanied by a certain increase in future income.
The relation between the immediate decrease and Ihe future increase
will vary within a wide range, wherein Ihe choice will fall at the
point corresponding to the ruling rate of interest (p. isg). The
intensity with which he will improve and cultivate his land is deter-
mined by the current rate of itUerest" (p. 161).

That this correctly sets forth the attitude and the computations of
Ihe individual operator is past question : hut is there not at the same
time some influence exerted to modify the rate of interest — aitd. if
so. how? Does each productive instrument merely receive its value
from an interest rate elsewhere and otherwise determined?
Or do productive instntmenta ihenuelves, as an aggregate,
through the very fact of the productive opportunities which they
offer, have an effect in determining that interest rate under which
each is separately capilaliied? And do new processes, inventions,
and appliances somehow bear to affect the rate?

"All preference for present over future goods resolves itself,
in Ihe last anaysis. into a preference for early enjoyable income over
late enjoyable income (p. 90). When any other goods than enjoy-
able income are considered, their values already imply a rate of inter-
est When we say that interest is the premium on the value of a~

money, all it.

cms perform

the same

veU; gold 01

only one

0. with other

, the total

ore than Ihe v

ilility of the

final item

marginal ulili

ily) times \i.

ic number

lity is a limpl

ire of the mi

Dney service

that the

osc, entirely

unimportant

; and it

S''t>ds but of purchasing power ; and this purchasing power,
3s we have seen, is directed, under entrepreneur super-
vision and discretion, into all sorts of gainful avenues
^* cost outlay — land-labor, industrial appliances, advertis-
"ig", insurance, franchises, privileges, copyrights, patent
^Shts, good-will, cutthroat competition, bribery, monopoly
QiflFerentials of predation, etc. The competitive entre-

**»o of gold Oil commodil^ : but as
"Miction and perform it equally
""•ility and one grade of utility, i
V?il»»y of the slock is indefinitely n
''■ there ever really were a social
*■ items ; with money the total uti
. It follows also from the nature i

y***] of prices is, for this purpose.

follows likewise that, whatever the money supply, the price level must
***i»ist itself so as, in view of the volume of the money supply, to
'^^ke possible the volume of exchanges to be effected. Restated, this
*aiis that, so far as production and the degree of productive speciali-
sts on may be taken as constants, there can be no change in the
''^ttcial price level otherwise than through a change in the volume

J^ exchange media. This stalemenl could doubtless be equally well

™*iiged to read that, with the supply of media remaining coostant,
^^4iiges in the level of prices can come about only through a

'■ange in the volume of the demand for the exchange medium.

jfo detailed discussion will be needed here to show that credit as
"^bslitnte for money may be treated either as an increase in the
^^Dply of money, or as a decrease in the demand for money. With
■*■•« in mind, we are prepared for the further doctrine that a direct
•"J^portion holds between prices and the volume of exchange media ;
'••is, indeed, follows necessarily from the fact of the homogeneity of

•*e demaitd. and from the practically inflexible and inelastic nature
^f this demand. If with a change in the demand for an exchange
'*>«iium. and with an inelastic supply of the medium, there could be
"Hi adjustment by a change in the price level, the alternative would be
^4i adaptation of the commercial and industrial organization of
JKieiely. as dictated by the inadequacy of the supply of media. For it
'^ once again to be noted that the demand is none of it of a nature to
**e retired by a change in the price level ; only on terms of industrial
^isorKsnization and reorganiEation is this demand to be retired.

The quantity theory of money runs, at its crudest, that the
^oantiiy of money metal in existence — or in circulation — determines
*fce price level. This is obviously incorrect ; and it probably is also
incorrect, if the proviso "other things being equal" be added. But the
%4Dended formula would hold vere there ho use for the money melal
"Iher than the money use. The inadequacy in the quantity theory,
fta commonly stated, is in its failure to allow for the influence of
demands tor the money melal other than the money demand, or in its
Assumption that the money use has .somehow the power to dictate the
bdllion valae in the non-monetaiy market. Opponents of the quantity

I

i

S>4 VALUE AND DISTRIBUTION ™|

sible or impracticable any considerable saving through its
mediation, it might readily fall out that the investment
supply would be large enough to swamp the aggregate
borrowing demand for consumption purposes or for indus-
trial or trading purposes.

Nor, be it noted, does this reasoning assume the can-
cellation of all abstinence protest or cost ; it assumes simply
that so intense is the appreciation of probable or possible
future needs, or so great the utility increment due to purely
subjective considerations, as to overbalance the actual and
the rational indisposition toward waiting.

But whether the protest against waiting would be a
rational one, were the uncertainties of life and of invest-
ment not constant factors in the problem, is not at all dear.
And whether generally among men the emphasis is not at
present too much upon the possibility of old-age penury
and suffering, and too little upon the fact that youth is the
period when pleasures are vivid and wealth is rich with
service, moralists rather than economists may profitably
discuss; and whether, on the whole, too great — or too little
— thought is, under present conditions, devoted to making
provision for the needs of wife and children, and for the
pride and power of future generations, may also be of
interest to some one other than the economist. But it is
here sufficient to note that an affirmative advantage must
everywhere make goods its case against the fundamental
preference for immediate enjoyment, else there can be no
postponement of consumption; and changes of human
disposition in this direction may greatly vary the relation
between the demand for capital and its supply. Techno-
logical productivity does not, then, for all possible condi-
tions, guarantee an interest agio.'

■This fact of psychological perapecliTc, while accepted as an
opaque delioitive datum of human nature — a brute fact, if ooe may be
allowed the term in this connection — has bad its tationalily put much
in question. Why should not the enjoytaent of next year appeal to the
rational mind as strongly as the enjoyment of today? II it be human
frailly that it does not, and it is yet the fact that it doM not.

than the present worth of the future increased returns
which are attributable to the upkeep to be applied, will

'^■sfacT concur! in Boehm-Bawerk's assumption that comparison is
Possible in competitive gociely belweea goods in the present lod
tootis in the future. Most of Fisher's analysis proceeds upon the implied
'^^^umplion of this possibility ; "Coutd it always be assumed that tb«
"^^ Hilary sundard was invariable in value with reference to all
SOods. the rate of interest reckoned in money would be tbc same
*™ (hough it were reckoned in tenns of the goods themselves"
jS*- 78). But even were it accepted that the comparison is possible^
'^■'ofessor Oarlc long ago made it clear that in the market transactions
^ff a cotupetitive society the comparison does not actually take place.
^nd it is equally clear also that neither borrowing nor paying com-
''ionly lakes place in terms of any concrete goods— whether farms or
**>achinea or raw materials or consumables. The borrowing runs in
*^rins of present purchasing power according to the established money
Standard ; and the future settlement is agreed to be worked out in like
^Crms. The contract and atl the operations under it sound purely in
^d-ms of price, precisely as ihe gain in contemplation by the cntrC'
E>Teneur is computed as nothing else than a balance in terms of
t>Tice. And no other computation is of the slightest significance to
bim— unless, possibly, as somehow derivative from the price gain
"wrhich he is engaged in seeking. The interest problem is. then, not one
of surplus value, or of surplus consumption goods, or of surplus
future income, but only of surplus price. Only so far as surplus
Soods bring surplus price Can surplus product of any sort sland as
«^lcv3nt 10 tbe computation.

For the purposes of the interest problem, therefore, anything is
S>roductiTe which, in the actual situation of the entrepreneur, makes
<or a price-increment for him. The computation has to do solely
-vritli productivity as interpreted from tbc individual-acquisitive point
of view. The borrowing is of a fund of purchasing power. This
(nirchasing' power may, truly, be directed into machinery, (arms, or
raw materials, — into lines, that is to say, of lechnologieal and
aocia] productivity, — but so. equally well, may it not. Instead,
it may go into buying the right to levy taxes, or to enjoy a
monopoly, or otherwise to plunder society: or the borrowed fund
may be invested in bribing the city council to grant a desirable
francfaiM. — or into advertising expenditure, as a process of indoctrinating
(he public with profit-rendering Hop-Bitters or Peruna misinformation.
In any case, if the adventure promise a return in price-increment, it
will contribute to the demand for loanable funds, and, as based upon it.
(here may emerge an interest rate.

And from aspects of distributive theory mostly to he presented
later (see chap, srvil, something may now be deduced for the pur-
poses of (he interest problem. Even where the borrowed funds are
tised by the entrepreneur in the purchase or hire of instriimenls of
production, his problem remains precisely the same problem of how to
get out of the future price-result a price balance over the price outlay.
Enough of purchasing power must be advanced for labor to divert it
from ministry to other demands — whether the consumption demand
or the demand of some competitor, — enough for machines to get them

L

as6 VALUE AND DISTRIBUTION

ranked the present; and if the good in question were one
of concrete productivity, the same question of choice
between the present fact and the objectively greater future

entirely illegitimate. Recalling that the psychology at saving is simply
that of postponed service, it becomes evident thai the assumption of
willingness indefinitely lo postpone consumption is tacitly lo abandon
needs and desires as the bases of economic aclivily, to assume a total
lack of demand for products, and thereby to make production an
kbiurdity, unless, iudeed, as a play activity, like the mud-pie makiRg of
children— with whom also there is raid lo exist a precisely similar
disposition toward indefinite postponement of consumption.

This view forsakes the fundamental assumptions of the science
— that human desires are the primary fact in economics, and that all
production takes place as a mere intermediate toward consumption;
it is, in truth, a doctrine parallel, in its obliviousness of the economic
center of gravity, to (he earlier doctrine of unproductive consumption,
and to the theoretical view which held laborers' subsistence supplies
to be technological capital like coat, and that regarded man as a
machine for the end of turning out product, and held the maximum of
Bccumulation lo be the economic end and test — a doctrine parallel
in morals lo the insane exaggeration of Ihe virtue of frugality, and to
the ideal of dying rich as standard of life and measure of success,
■ doctrine which, generally applied, would veto any advance in the
standard of living, and which, as partially applied in the lethargy
and chilled demand of post-panic depression, presents not merely the
bad logic and paradox but the prolonged miseries and disasters of
underconsumption.

The science of economics is free of the burden either of justifying
the ways of God before men or the ways of men before any possible
tribunal : but inasmuch as there is no significance in production but aa
a means toward consumption, and no justification for saving but ai
postponed service, tl must be as rational as it is fundamental in
economic life that human nature should prefer the immediate lo the
distant good, and should regard as an evil every postponed consump-
tion that cannot through positive advantages establish a balance of

Expectation of increment is, then, everywhere the condition on
iriiich depends tie consent to waiting. Not merely every boy, but
every man, would forthwith, after breakfast, proceed to make way with
his lunch but for the fact that a larger service i» recognized as attend-
ant upon the later consumption. True it is, that if there were no
burden cost in waiting, the supplies of capital would be unlimited ;
but it is forthwith to be added that if men could content themsdves
with postponing the services of wealth to an indelitute fiiture, they
would never produce anything for either earlier or later service.
Unresisting postponement presupposes and assumes an absence of the
desire for goods : wealth eternally waited for is not wealth at all.
There is, as all agree, no utility — no wealth — excepting as related to a
human need or desire. A desire for a good never lo be enjoyed is a
contradiction in terms: a good of this sort is a no-good. Unprottsling
abstinence implies the lack of interest to produce and the absence of
anything to be saved. Thus, to assume the general and continuous
non-burden somen ess of poalponement is to cancel the possibility of all

I

INTEREST 245

*^^ requisite investment of present purchasing power.
^^"^d likewise, as will be readily seen, any existing instru-

*** assent house over that of a future house, we are apt to forget that

^^ Talue of each house is itself based on a rate of interest

^^th terms of the comparison involve the rate of interest

. ^t when present ultimate income is compared with future ultimate
^^^come, the case is different, for the value of ultimate income involves
**^ interest whatever (p. 91).

"The rate of interest expresses a price in the exchange between
P'^^sent and future goods. .... Time-preference is the central fact
*** the theory of interest" (p. 88).

True, "not only does a lower rate of interest tend to the choice
^^^ remoter returns, but, contrariwise, the choice of remoter returns
^^=3ids to check the fall in the rate of interest" but the reason is
?^^ted as being "that the choice of an income-stream relatively large
^'^ the future and small in the present tends to increase the relative
^^^^iiation of present as compared with future income" (p. 164).

Here, then, is the issue: Fisher does not dispute the doctrine of

-^odim-Bawerk that the newly opened lands, newly invented appli-

^^^ces, newly devised methods, have a bearing to raise the rate of

^^^^rest, but only that the productivity fact is a separate and inde-

^^^Q^ent cause of interest ; he ascribes the influence of productivity

•^Idy to its effect upon the relative importance attached to present

^^^ future goods. Larger opportunities for profitable investment

^^^ presented as having ultimate bearing upon the rate, not by using

^1^ the supplies of capital or by increasing the volume of the demand

^^ capital, but solely by limiting the present supplies of consumption

^^^Hls at the same time with increasing the supplies of future goods, —

^^^ thereby increasing the premium of present goods over future

^^HhIs:

"The lower the rate of interest, the better can the owner afford

^^ keep his carriage in repair, and the higher the state of efficiency in

^^ich it and all other instruments will be kept .... The very

^^tempt .... tends in turn to increase the rate of interest ; for

^^eiy repair means a reduction in present income for the sake of

^turc — A shifting forward in time of the income-stream — and this

^U cause a rise in the rate of interest (p. 195).

"The effect in raising interest comes merely from the shifting
forward of the income stream, which leaves the immediate income
imaller than before, but compensates for this by a greater income

afterwards The high rate of return on sacrifice to the exploiter

of the newly discovered method of utilizing capital does not by itself
fix the rate of interest at that level. On the contrary, the valuation
of the property is immediately adjusted to the new conditions
(P- 199).

"Since the invention will more than repay this cost ....
the effect will be to decrease immediate and increase remote income
for society as a whole. Borrowing and lending merely distribute the
I^ressure upon those most willing to bear it ; but the effect is .... to
cause a temporary depression followed by an ascent in the income-

VALUE AND DISTRIBUTION

ment, whether land or other, the upkeep of which costs
more in newly invested or in reinvested purchasing power

itream, sod therefore (o increaie somewhat (he rale of time-prefer-
ence and the rale of interest (p, 200).

"Societr .... directs its tabor to great engineering enter-
prises .... which cannot b« in to contribute a return in enjorable
income for many years. In contemplation, future income, during this
period, is relutivety plentiful, and in conse<]uence of these 'great
expectations,' the rate of interest will be high" (p loj).

There is. then, it will be noted, no denial made by Fisher that the
productivity of wealth has an effect upon inlereit rates — that it is
a cause — but only a denial that it is a separate and independent
cauae. The issue is. then, only as to the sense in which it is a cause,
and BS to the method of its action ; if one ihifts a weight from one
side of the scales to the other, the tipping of the scales may certainly
be *aid to be cauied by the shifting of the weight. — but it may also he
rightly asserted that this is only through the disturbance of the rela-
tion between the two weights. And by reasoning precisely paraltel
it has been said thai a new supply of any commodity has no effect
upon price, simply because — once the supply is present — the adjust-
ment becomes purely a matter of the nature and volume of the
demand,

If this, then, is really the iasue. one might stop to ask himself.
what of it — supposing il all to be true; is the issue really worth

But is it all. indeed, true? Could not the reproductive power of
wealth esublish an interest rale even "if we eliminate the otbcr
two circumstances"? After all, is "the supposed third cincumstance
non -exi stent " ? Is it true that "the imagined third circum-
ttance .... is only the first two circumstances in disguise"?

Surely, {0 the perspective underestimate of the future may
■uffice to place a premium on present goods: and surely also (a) the
relative scarcity of present goods as compared with future goodl
would also equally well suffice to bring about this premium : but how
about the reproductive power of capitalistic processes as an inde-
pendent cause?

Let il be assumed, as an extreme test case, that present need!
and desires are so far weak or so far satiated as to approach the limit of
non-existence or of disappearance,^ — a situation in which, by the very
terms of the assumption, there can be neither any "prospective under-
estimate" of the future, nor any degree of inadequacy in "present pro-
Tiaion." — (here being in fact no desire for present consumables, but
only a clear appreciation of the certainty of tomorrow's need. If now
it be dear that, for each unit of the existing wealth of today, there
may by tomorrow be derived two units for tomorrow's consumption. —
1* it not certain that there will forthwith set in a vigorous competitive
bidding for control of the present facta offering a command of
insumable goods, and that there must retuli an intereit

approximating to 100 per cent, per day?

I

Il i

Extremely difficult to decide how far and in what 1

***an the present worth of the future increased returns
^twch are attributable to the upkeep to be applied, will

''•Bher concurs in Boehm-Bawerk's assumption that comparison U

**"*»Mible fn competitive society between goods in the present and

*"**«Jdi in the future. Most of Fisher's analysis proceeds upon the implied

^^sumptioQ of this possibility: "Could it always be assumed that the

"**<int[afy standard was invariable in value with reference to alt

^SoaJi. the rate of interest reckoned in money would be the same

^*-^ tbough it were reckoned in terms of the goods Iheiasclves"

^ V- 78). But even were ii accepted that the comparison is possible,

**iotessor Clark long ago made it clear that in (he market transactions

^* C i competitive society the comparison does not actually take place.

-^^nd it is equally clear also that neither borrowing nor paying com-

■-■*Mi!y takes place in terms of any concrete goods — whether farms or

**"tliine» or raw materials or consumables. The borrowing runs in

*«^niis of present purchasing power according lo the established money

■•andard ; and the future settlement is agreed to be worked out in like

''S'lBS. The contract and all the operations under it sound purely in

**'tos of price, precisely as the gain in contemplation by the entre-

^*5^eor is computed as nothing else than a balance in terms of

^5"^*- J^tl "0 other computation is of the slightest significance to

"Jm — unless, possibly, as 5omehow derivative from the price gain

^•■ich he is engaged in seeking. The interest problem is, then, not one

^' surplus value, or of surplus consumption goods, or of surplus

^'*nre incooie. but only of surplus price. Only so far as surplus

*'**>ds bring surplus price can surplus product of any sort staitd as

^**vant to the computation.

For the purposes of the interest problem, therefore, anything is

?*'<^Joctive which, in the actual situation of the entrepreneur, makes

.•■ ■ price-increment for him. The computation has to do solely

^tfc productivity as inlerpreled from the individual -acquis! live point

* view. The borrowing is of a fund of purchasing power. This

^^t^basing power may. tnily, be directed into machinery, farms, or

, of technological and

or the borrowed fund
il to grant a desirable
process of indoctrinating
Peruna mi5in format ion.
price-increment, ft

^*f materials, — into lines, that .„

^«iaU productivity, — but so, equally

** may go into buying the right I

^(inopoly, or otherwise to plunder 90c iet;

^»)f be invested in bribing the city cou

^^ncbiie, — or into advertising expenditure, a;

^K poblic with profit-rendering Hop-Billera

'it any case, if the adventure promise a re

'*ill contribute to the demand for loanabJe funds, and. as based upon it,

'here may emerge an interest rate.

And from aspects of distributive theory mostly to be presented
'aier (see chap. iivi). something may now be deduced for the pur-
Poses of the interest problem. Even where the borrowed funds are
tiled by the entrepreneur in the purchase or hire of instruments of
ptodaetion. his problem remains precisely the same problem of how to
(et out of the future price-result a price balance over the price outlay.
Enough of purchasing power must be advanced for labor to divert it
Irom ministry to other demands — whether the consumption demand
or the demand of some competitor, — ciutugh for machines to get them

VALUE AND DISTRIBUTION ^^^^™

foil of receiving the upkeep ■." The degree of impro^-ement
depends upon the rate of interest.

And now what shall be said of the view especially
championed by Wieser, that for a complete theory of inter-

I

produced for the purpose. — snd enough for land to commanil its
service: and in connection with thii investment tbere goes tbe entrc-
oj»n activity of supervision and co-opera I ion. When the
computing the gaius upon tbe sdveolure. there is no
ly of attributing s certain rjuantum or proportion of the price rcsull
■he labor hired, or to the funds advanced for the labor, or »nj
ount to tbe machinery hired, or any third amount to
tbe land employed ; nor is it possible even to attribute any certain sum
■oductivity to Ihe aggregate of the borrowed fundb
All that the entrepreneur can know is that by employing the borrowed
funds or their proceeds in connection witb his own activity, and
very possibly olso in connection with funds or instruments of his
own. this new borrowing could be made so to signify to him in terms
of price-increment as to justify the promise to pay a price-interest
increment. The rale of time discount, therefore, is a rale iixed and
determined in the loan-fund market ; all properties — instrumental
or other — that command a hire receive a value through the applica-
tion of this interest nie to tbe computation of tbe present worth of
theae hires.

* Classical doctrine teaches that the payment of land rent does
not condition Ihe existence or the maintenance of the land as pro-
ductive instrument : the rental payment having thus no bearing upon
the supply of insirumcnis. can have no significance for the supply of
products, and thus no significance for the value of those products ;
rent is ibus held to be ■ price-determined fact — a result rather than a
cause,^ — a distributive share which is not at tbe same time a cost, in
that sense in which tbe other distributive shares are costs.

Marshall faced and accepted Ihe logically necessary inference
that no hire of any produced inslrument of production can be regarded
as a price-determining cast, excepting under a time compulation long
enough to allow a change to take place in the supply of instruments,
as the result of tbe divergence of compensation from cost ; and that
for short periods capital-goods rents must be treated as, for cost pur-
poses, exactly like land rents,

We are not just now called upon either to accept or to reject this
view, but only to examine the relaliona of land instruments and rental
outlays to problems in the shifting and incidence of taxation.

It is clear that a tax shifts only so far aa, by the imposition of the
lax. — through its effect upon the relative supply of inslruments, the
relative costs of production, and Ibe relative volumes of products
exchanging against one another.^modificalions are necessitated in ihc
exchange relations in the market: shifting is a problem in value.

If, for example, certain kinds of productive instruments are taxed,
or if capital investments in a certain line of production are taxed, a
change in the supply of these inslruments. or in the volume of capital
will be brought about ; the redistribution of capital applics-
s may be slow or may be rapid, aecotding to tbe degree of motntity

INTEREST 349 \

est there is necessitated an investigation of the distribu-
tion-imputation process under which the rate of interest,
together with all the other distributive shares accruing
under the productive process, is supposed to be determined?

>n (he particular case ; even if (he inslrumeiit or other capital .have no
^lICToative application by immediate change of use, it is certain that
-with lime, through the gradua! procesj of wear-out and deprival of
'Cjpkecp, the capital shifting is none the less inevitable ; the supply of
products must diminish with the progressive diminution in the supply

As to land, the traditionally accepted doctrine is excellently set
forth by Carver in the following ; "All goods excepting land arc
(leriahable and reproducible while land is not .... an important dis-
tinctioD. since this limits their value to something approximating their
cost of production, whereas there is no such limit to the value of
land. These distinctions are important because important conclusions

as to public policy depend upon them A tax on land, to take

a single example, has a different effect from a tax on an article which
is being produced, worn out, and reproduced by human efEort. A tax
on the latter class of articles has ibe effect of discourafong that effort
and, consequently, of reducing the supply, whereas a lax on land does
not affect (he supply in the same wa; nor (o the same degree." — Dii-
IribHlion. p. 129,

It is. however, clear enough that, if land values are subjected to a
higlier rate of tax than are other investments in productive instru-
tDCnts, a shifting of investment will lake place as soon and as far as the
nature of the case leaves it possible. The only questions are as to how
soOD and how far this possibility can manifest itself. It is clear also
that in fertility aspects the original environment is capable of exbaus-
tioa in full parallel vrfth produced instruments of production, and by
the SMne method if upkeep is withheld. Practically all agricultural
districts in New England testify to this fact ; nothing about land is
indestructible excepting its location.

It is apparent, then, that the "Single Taxers" have been grievously
misled through an uncritical acceptance of the classical rent theory.
They make shipwreck against the certainty that to subject the unearned
incTeraent to their tax program is inevitably to drive this unearned
increment out of existence, or. more accurately, to force its transfer
into a non-land form of holding — to render food and raw materials
dear through the diminution of the social equipment for the supply of
these goods.

^ But while, as applied to fertility differentials, all this appears to
he past doubt, the argument as it applies to the mere fact of location,
and 10 differentials of transportation, is not quite so Batisfaclory or so
telf-approving.

The truth is however, that unless fertility and location differentials
are separately appraised and separately burdened in point of taxation,
the tax upon location will have precisely the same effect to stimulate
the exhaustion of fertility as if the tax were directly imposed upon the
fertility. The land stands as a value aggregate of fertility and of
transportation differentials : value will continue to be substracted from

I
I

J

VALUE AND DISTRIBUTION '

Or what shall be said as to the proposition — pcrh;
commonly regarded as identical with the foregoing, and p
sibly rather intended by Wieser. — that a complete inter
theory requires an investigation and elucidation of
distribution-imputation process under which the rentals s
hires of the various classes of instrumental goods ^b-"^"
agents are determined ?

The replies must be as follows; for all co-operating —
that is, complementary — production facts, whether rm^'*-^'
chines of various sorts, laborers of various grades ^^^^^^^
kinds, lands of differing capacities and adaptations, pater"^*- '
franchises, trade secrets — all such items as enter for ^B^-*
individual advantageously into the productive proce;^^^ '
whether the product be hats, or shoes, or bonds, or sala"^^-^^^
notoriety, or marketable slander, or office, or place, or in^^
ence, or pictures, or acting, or preaching, for all of •h^^^'^^^^m
gain -producing agencies there is everywhere the prohl^^^^^^^^
of the value distribution of the joint product — a r>rnhle=^---^^j|^
too difficult to be entered upon here; but this is not t^^^^"'^,
interest problem; it is the problem of rentals, hires, an*- ^— ,
wages, whenever paid, and without necessary reference ^^^^"^
their possible reduction into a present worth. ^

Confining ourselves for the present to the observatio X* ^L
that all of these rentals facts, if not of present paymen*"*"*'
are themselves subject to the discount rendering into pres"
ent worth, we turn to what is, for immediate purposes, th^
surpassingly important fact, that all these rentings, and
hirings, and purchasings of instruments, or of labor, or of
any possible sort of cost fact, enter into the cost computa-
tion of the entrepreneur solely under the capital denomi-

the laud up to Ibe limit that the "akioning" process can be carried —
■0 long, that is, as by wear-out and refusal of upkeep, the slow market'
ing of the land by the process of exhaustion remains possible of furtber
extension. Where, as with urban values, the land difFerential is entirely
one of location, there is no serious theoretical impossibility in the
single-lax program, if only the dislinclion between ground rent and
improvement rent is faithfully observed. For precisely parallel reasons,
it is imperative with agricultural land to preserve the di
between difterential* of location and differentials of fertility.

-9

INTEREST 251

^^^tor; but they nevertheless enter in two aspects: (i) ac-
^^^rding to the quantum of direct expense; (2) according to
^« time at which the expenditure is made relatively to the
^nie of cash marketing. And this amounts to saying that
^^ far as the expenses of production are technological in
5*^racter and are to be ascribed to the mechanical factors
^'^ production, these expenses as capital charges are to be
^^tuputed not in terms of rent, interest, wages, and profits,
^t of (i) instrument hires — rentals, (2) wages, (3)
*^CDfits, and (4) time discount, interest, upon the particular
^tlays under consideration. But it is still to be kept in
^^nd that these categories of cost, like the discarded cate-
^^ries, fall far short of including all cost outlays; and
j^5>on each of these other outlays, there is, or may be, an
^^terest charge to compute as within the total of entrepre-
neur-capital cost.

For Crusoe the problem of balancing the protest against
C^stponement of consumption against the advantages
^^tainable through postponement, could offer no great
theoretical difficulty; the pressure of present desire must
^nd in varying degree its justification or explanation, ( i ) in
the prospect of relative plenty or want; (2) in the uncer-
tainty of life; (3) in the prospect of greater or less inten-
sity of life and desire, with the passing of the years; (4) in
the sheer lack of capacity adequately to appreciate in the
present the needs of the future — ^all these influences sum-
ming up to explain the relative estimate of present need to
future need. On the objective side, there are the prospects
and openings for productive employment, and the hazards
of partial loss or total loss. The limit upon saving is at the
point where advantages and disadvantages are regarded as
at equilibrium.

In competitive society, the holder of wealth or of rights
to wealth or of rights to service has not merely the three
options open to Crusoe, to exploit, to hold, to consume; he
has a fourth possibility, to lend; and from his personal

VALUE AND DISTRIBUTIOW

point of view, only the third option is to be regarded as
non-productive ; all the rest are productive ways of holding J
present wealth over for acquisitive ends. Whichever one I
of these three productive methods offers the highest induce- J
ments will be selected, provided only that it is of sufficient I
weight to overbalance the claims of immediate consum{h-l
tion.

On the side of borrowers a provision of present wealAl
or of present purchasing power may be desired either for I
purposes of consumption or of some sort of gainful employ- I
ment of the borrowed fact. But for both borrowers and I
lenders, the problem, while worked out in terms of stand- )
ard and of price, is in ultimate analysis a calculation of i
present utility against future utility: from no point of v
isit, in any other sense than this price sense, a problem of
value. The borrower, as producing entrepreneur, can pay
an increase, reckoned in the price standard, if, by the aid
of the loan, he can become able to put upon the market ;
goods salable at an increase of price over what his products
without the loan would have sold for; he cannot have thp^°»i>
present purchasing power, or present wealth in terms of^fcr i
purchasing power, unless upon terms of this payment The ^^-.c
problem as tlius restated is, then, precisely like any other— »^^
problem of market price where buyers and sellers are many ^*^J

on both sides of the market, only that in the interest prob ■*-

lem the point of price adjustment — the equilibrium point

is a rate per cent. Detailed analysis of the process by ^«-^
which this, or any other, price adjustment is reached, must -r^S
be postponed to a later chapter (see chap. xxv).

But there still remains the difficulty of formulatii^ the
precise relation of technolt^cal productivity to the interest
rate.

It has becOTiie sufficiently evident that technological pro-
ductivity would alone suffice to explain the time-discount
phenomenon; but so might also the "perspective" fact be
sufiicient, if only the demand for present consumption out-

I

f

INTEREST 253

ran the loan supplies derivative from tiie reverse per-
spective.

But, in point of fact, the saved purchasing power in
socricty goes not solely to supply the entrepreneur demand ;
it. directs itself sometimes into the immediate substituted
<^c>^sumption of the borrower; or results in the borrower's
I^^^oviding himself with increased durable consumption
; or, again, in the financing of public improvements,
K* of deficits of administration ; or, still again, in indebted-
ness for the wastes and orgies of war.

And even when the demand in question is an
entrepreneur demand for entrepreneur capital, there
5 no warrant for supposing that in any case,
or, in all cases, any of the borrowed funds
"^nust be devoted to the increase or even to the upkeep
^f instrumental goods. The quest of the entrepreneur is
purely one of private gain; his ends may, it is true, be
attained through socially productive activity, by contribu-
tion to the social dividend, but equally truly, and equally
commonly, these ends are otherwise sought. Private acqui-
sition is the only productivity involved. Merchandising of
consumption goods is clearly enough, in present society, a
socially productive activity, irrespective of all question of
the degree of the productivity or of the possibly associated
wastes ; but it is not so clear that either the production or
the underwriting or the merchandising of every sort of
corporate stocks is as socially productive as it may be
acquisitively gainful. So the uprearing of business good-
will through advertising, and the establishment of monopoly
through the outiays and the temporary losses of cutthroat
competition, are gainful investments of loan-fund capital.
So the right to levy tolls is a capitalizable fact, and may be
originally procured on terms of capital outlay. Interest
rates may be in part supported, and might be entirely so,
by the investment opportunity offered under the system of
tax-farming, or by the sale of monopolies in foreign trade.
Election contributions are often decided to be a profitable

VALUE AND DISTRIBUTION

line of investment of business capital. If by the mere
power of size attaching to great aggregations of capital,
the right of highway robbery, or of railway robbery, or of ^ ^

public-contracts robbery, could be controlled, a very consider- ^
able rate of interest agio might rule without any slightest ^
taint or alloy of socially productive service in any capital j^
use. Other distributive shares in society would doubt- — ,*,
less have to pay for it all, but the revenues accruing to «zk^
postponement would be none the less actual.

In point of fact, however, technological productivity -^j^.
has a part, and, it may be, quite the larger part, in account- — 3. ,,
ing for business gain from the use of capital. But for ~»«3r
theoretical purposes the only emphasis is upon the point J«~»it
that the question is one purely of entrepreneur gain through M-t-^
the possession of entrepreneur capital, and not at all of the^»a:ne
particular method by which the gain is achieved.

Were it possible accurately or even approximately to<:»^1o
determine in what degree the emergence of a commodity ''^:»ty

product at the end of its series of production and market i»-t-

ing processes is due to technological productivity, the rela .na-
tion of technological productivity to interest would be a ^^ ^
deal clearer than it actually is. But that all the mechanical I -^'
processes are completed leaves the commodity far from «■■«- n
having been completely "produced ;" all the various items of ^fc 'f
general- management cost, of taxation, of advertising, etc., ^. -•
remain to be computed; and under the actual conditions of ^•f
business organization, a fairly definite proportion must be -
maintained between each of these lines of expenditure and
the direct expenditure in concrete instrumental processes. ^^H
The relation between these different lines of expenditure is ^^H
that characteristic of interdependent complementary pro- ^^H
cesses, no one of which is more imperatively required than
any other ; the process is an aggregate, a complex, and the
share, which, as hire, the instrumental good derives from
the result, is the share which entrepreneur competitive bid-
ding attributes to it, in view of the effectiveness of the
instrument in point of technique, of the nature of market

^^^^^^^ INTEREST 3SS

conditions and market methods, and of the relative attract-
iveness of other than technological lines of productive
expenditure. Not far from two-thirds of the retail selling-
price of coffee today is due to the expensiveness of the
Competitive methods of marketing.

Thus, were productive processes more markedly tech-
nological, the interest rates upon any given volume of capi-
ta! employment might be higher ; but it is, perhaps, equally
true that the present volume of saving capital could hardly
l>e employed, at the present level of development in tech-
nique, id purely technological lines; the widening field of
investment in non-technoIoglcal production processes
explains in large part the elasticity and the extent of the
^demand for capital under present conditions, and explains
also the fact that the interest rate has not come under the
iiecessity of a greater fall,'

' Professor Veblcn argues (Theory of BatiHtsi Enterprise, chap, v)
that the growing empioymcDt of credit by individuals and by business
coaccms, though it increases the volume of business in terms of price,
cannol. in view of competition, increase appreciably, in the long run,
the aggregate profits of business, and cannot appreciably enhance the
aggregate industrial equipment or Ibe aggregate industrial output ; all
competitors being compelled, through competition, to extend their use
of credit, no advantage can accrue to them in the aggregate ; tbe added
funds not going appreciably to tbe provision of increased industrial
equipment, the aggcegalc social product is not expanded ; "all these
advances go to increase the 'capital' of which business men have tbe
disposal ; but for the material purposes of industry, taken in tbe

aggregate, they are purely fictitious items Funds of whatever

character are a pecuniary fact, not an industrial one : they serve the
distribution of the control of industry, not its materially productive
•rorlc" (P, 104.)

As to the tendency of Ihc forces under consideration to bring
about a progressive consolidation of enterprises, there need, seemingly,
be little doubt; but that while the number of business uniu is
decreasing there can be no appreciable increase in the per-unit profit
is not so clear. But is there really an increased aggregate of credit.
or is the fact simply that the larger organizations have merely displaced
the smaller in tbe use of a practically unchanged volume of credit?
Is there any reason to assume that the aggregate capital investment
has, thfxmgh credit, been increased, and this without corresponding
increase of entrepreneur gains, and that, on the contrary, the enlarged
employment of capital, without enlarging returns, has necessitated
an actual fall in tbe interest rale, though possibly not a fall in the
absolute quantity of interest ouUay?

But for the most part. Vebten doe* not assert a fall in tbe rate

I
1

VALUE AND DISTRIBUTlOJ?

It will now be profitable to sum up these interest condu — -
sions so far as they are of innnediate relevancy to th^^
course of the argument.

The discount rate, the interest agio, should, in analogy**^
with all otlier cases of market adjustment, coindde approxi

of inlereit, but only a decrease in the rale of profit, as computed upon^*
tbe basis of the total business transacted by ike entrepreneurs aQd_A

upon the total volume of "capital" in hajid, inclusive of credit extcn

aioni ; and he appears to account for the iarger employment of
"capita!" chiefly by the fact that the productive intermediates are- "
enhanced in price tbrougb tbe competitive bidding of tbe coinpetiliK^
enlrepreneiirs : "Loan credit .... taken in the aggregate serves-
only to widen the discrepancy between business capital and industrial
equipment. So long as times are brisk this discrepancy ordinarily goo
on widening through a progressive extension of credit. Funds obtained
on credit are applied to extend the business ; competing business men
bid up the material items of industrial equipment by the use of funds
so obtained : the value of the material items employed in induitrr
advances ; the aggrr^le of values employed in a given undertaking
increases, with or without a physical increase of the industrial
material engaged ; but since an advance of credit rests on the collateral
as expressed in terms of value, an enhanced value of the property
affords a basis for a further extension of credit, and so on."- —
/6id., pp. 104, 105.

"The nominal magnitude (value) of the earnings is not increased

in as large a ratio as that of the business capital The funds

obtained on credit are in great measure invested competitively in Ibe
same aggregate of material items that is already employed in imjustry
apart from the use of loan credit, with the result that the same range
of items of wealth are rated at a larger number of money units." —
Ibid,, pp. 108. T09.

But in any case, the rate of interest does, after all, in Vdilen's
view, appear to be pushed toward fall through an overvaluation of the
intermediate goods finally resulting from their constantly expanding
market prices: "A manifest discrepancy presently arises ....
between the aggregate nominal capital (capital plus loans) engagied in
business, on the one hand, and the actual rate of earning capacity of
. this business capital, on the other hand" (p. 107). It is "unavoidable"
that "credit expansion ia rn some degree "abnormal' or 'excessive.*
Such a use of credit does not add to the aggregate of industrially pro-
ductive equipment, nor increase i(a material output of product, and
therefore it does not add materially to the aggregate gross earnings
obtained by the body of business men engaged in industry, as counted
in material terms of wealth or of permanent values; it diminishes the
aggregate net profits .... as counted in such terms, in thai it
requires them to pay interest, to creditors outside of the industrial
process proper, on funds which, taken as an aggregate, represent no
productive goods, and have no productive etl^ect : there results an
overrating of the aggregate capital, engaged in industry, compared
with the value of the industrial equipment at the starting point, I7

INTEREST 257

'^■^^.tely with some fact of marginal sacrifice; and so
*^ does. Abstinence is here one of the items of cost in the
^^^se that the present volume of saving, or some part of it,
^^''ill take place only on terms of the present level of com-
I^^nsation. The cost of any supply item, be it remembered,
merely the money statement of the resistance to be over-
in order that the item in question shall offer itself

^^C>proximateIy the amount of the aggregate deposits and loans on
^ollateraL" — Ibid^ p. 112,

The fundamental error in all this — ^if error there be — rests in
-^'ofessor Veblen's confusion of bank credit with loan fund.

We have already seen that the banking function is merely the

^^^iderwriting of the customer's credit; banks do not lend their

^^posits ; the very existence of this deposit liability is, indeed, the fact

^^ virtue of which the bank is limited in its further underwriting

Activity. The bank does have an important influence in aiding the

I^>t>cess by which loan funds, in the form of its deposit liabilities,

^^me into existence ; but the only possible lenders of these are the

solders of them. The lending of them is a lending of suspended

I^rchasing power ; they are a part, and a very considerable part, of the

^T«at loan-ftmd supply. This aggregate loan-fund supply furnishes,

^'^ the modem business organization, the basis of the process through

"Which private savings work out into social capitalization.

Mostly by means of the* borrowing of loan-fund capital, and to
fxiall extent or not at all by appeal to bank credit, is the aggregate
^<liistrial equipment augmented. Short-time loans are not practicable
^^ this purpose. Loan-fund borrowing is the true borrowing of
^^pital" in the business and financial sense. But it must be admitted
^^t a goodly share of this typical capital flows, under entrepreneur
"^^nagement, into gainful processes— -entrepreneur-wise viewed — that
^''^ not at all gainful as socially viewed — ^flows, for example, into all
^^'^s of competitive expense for attracting trade, into extravagances
^^ location, housing, and furnishings, intQ larger investment in sales-
l^^n, advertising, variety and size of stocks, and some of it, doubtless,
!^^o the competitive bidding up of the prices of the existing volume of
"^♦ermediate goods, whether instruments or raw materials.
. Bank borrowing, on the other hand, is a mere issuance of the

^nk guarantee, its indorsement, in support of the customer's under-
dicing to pay, otherwise non-current ; this suretyship transaction is
^'"^rked out under the guise and terminology of capital and interest
^^^thods.

^ This distinction between bank guarantee and ordinary loan-fund
^^rrowing may well occasion perplexity. It is, indeed, true that the
*^nk customer may use his bank balance, acquired by discount,
^^ecisely as he uses the bank deposit credit assigned to him by the
*oan-fund capitalist. The difference is in the fact that in substance the
'^«*edit apparently advanced by the discounting bank is really advanced
'^ the person who accepts the customer's undertaking as guaranteed
^y the bank, and upon this undertaking and guarantee makes advances
^o the bank customer. Credit is, it is true, here obtained by the bor-
rowing customer, as truly as in the other type of loan, but it is a

S0 nUTB ASa DISTEISmON ^^

■pas Ae oBifax. Ths ^i^ tens of die capital luf
n^ haw ao cmc price: Mac Biiac woaM take pUce w.
om fuj; and it i» poaaie Aol some part of each nu
nvnC voold oat tlfcr pface exxxpt for tbe pay. Btami
caw. each (fiffenot ratnme of supply hu its dtfio

r ti ft bofiwit «f cafit^ fraa
hank; Idt differ* ia nB> in tbia. that the bonk-cuamitce fora
mtij Kire llw imrpom a( locial prodacliiaKU oc of 30; toif-l
(•Ikfol ippNcairan. whik ihc exact ootnrwr " the (■cl wiifa nunfi

Bat in whatcrer •v. ihiooth credit the eotrcpreDCOr ii eul
U> exHiHl hi* opnmlioos. whether la incrcasiiis hie material phil,
il PotAmIiv lUairable lulilalloa, or la eatcnding hi* good^ 1
MolMClloo)., or in ihc incrcMc of hi* hoIdinKi of markcUblt mtrcb
di*c. there is mu<h quettion as to (he ;>ropnetj' of reganfing icy

Admilting. then, thai always "under Ihe regime of competilivt b
MH .... credit expansion 11 in tome degree 'abnormal' or 'o
Btt.' " it i» to be accepted 9s inevitable that "^err results an ovem
«t the aggreeate capital engaged in induilry, compared wilh the in
trial eqtiipment at the starting point, by approximately the amouo
lh« aggregate deposili and loans on collateral?" (Ibid., p. iia.)
i* H itiie that the interest outlay for loans — bank or other — ^'dimin
the »«re(ralc net profit obtained by the buiinesi men engage
iitdvitr? . ... in that it te«iuires them to pay interest, to cret
c<iitsi<le the industtiar process proper, on funds which, taken a
agtrregale, represent no production goods and have no prodi

That much of the extended credit goes into socially non-prodi
channels Is certain enough; but it is not so certain that the proci
nan«ainfu1 in its effect upon the aggregate profits of the entrepr
cUs! as a whole ; it may— and commonly does— result in a social ■
of productive energy, and may yet be profitable to the aggregate 1

g^, jp j(,j, case the banker is paid, whether the service be ■
not sociil but piid for what ? Here again the nature of the baj
tasneu must be firmly grasped; bankers are paid for makinj
!t'» i;re<m into piwent purchasing power ; under the bank

INTEREST 259

l^^vel of compensation at below which some part of
supply would not be forthcoming. But as with
r-pain cost, so with abstinence cost — ^no reduction
a common pain denominator is possible. The re-
■^^^^neration received is no measure of the pain under-
or even of the resistance overcome. The mar-
postponement of consumption, like any other case.
* margins, is a ratio relation ; any particular item of saving
^ marginal, not because of the high significance of the
t>stinence protest, but merely because the forces making

Ltee the customer's obligation becomes cash to the vendor of the
'^^^•ired goods. For this underwriting the customer pays to the bank,
'****der the guise of interest, that which he would otherwise have had
*o pay to the vendor as real interest.

But at any rate, the mere power or opportunity or ability of the

^^^«xower to borrow is hardly to be regarded as capital, nor is the

^^«rcisc of the power accurately an increase of his capital, whether

^^ not that which is borrowed is, to the lender of it, capital goods, or

*oaii-fnnd capital, or mere guarantee.

It is, however, beyond question that the fact that one is possessed
^^^ Sood credit — the ability to borrow and upon advantageous terms
is a source of gain to the possessor; why, then, not call it capital,
^'^d the return upon it a capital rent? The reason is that the fact of
S*>od credit is really not a possession at all in the ordinary case, but a
P^»~t of the possessor — ^a purely subjective fact, as truly as any other
'^I>cct of personal power or skill or influence. True, it is an advan-
^^«ous fact, a gainful attribute, but it is an attribute of the human
'^^ivg to whom it attaches, and in close analysis must receive a com-
l^^s^sadon under the category of profit in the strict sense of the term.
But if it really becomes possible, as it sometimes does, to make a
^i*aration of the credit from its personal basis and foundation — to
^^< it an independent and external existence, and so, in some measure
*o ^ transfer it, say, to a corporation to be organized — ^this credit may, in
^«is non-attached form, become, so far as the transfer is really
I^ossible, a distinct capital fact and, like good-will and business con-
^^ction, be capitalized for whatever, in the securities market, may be
"«Id to be the present worth of its income-earning capacity. The
^^^'sonal i^emuneration for the separated ajid transferred credit-
attribute must in such case be received in block by the original
^*^«8esjor as the present worth of its putative future effectiveness for
^^; and this putative earning power then becomes an asset of the
^^^tee company, and may be as such capitalized like any other asset.
In case the credit attaches to a group of individuals, as to a partner-
'^^ip or association, and attaches to the grouping rather than to the
"^^fate individual members of the group, it would then seem prefer-
*^^« to regard the credit attribute as in its nature and origin a separate
^ objective fact, and as thtis a part of the firm or association capitaL

/

26o VALUE AND DISTRIBUTION

for present consumption, representative, it may be, of ve
great or of very limited present need, are at an approxims
equilibrium against the estimates of the advantages promis
by postponement.

But, on the level of the entrepreneur-cost analysis, no
of this cost to the lender has direct sig^ficance for px
poses of borrower's cost or for purposes of any c<
investigation leading to the determination of the va.1
of the product What the entrepreneur has to pay is c<
for him; lender's cost is relevant only from the point
view of explaining the causes of the situation under whi'
and as determined by which, entrepreneur cost has to
worked out. Just as entrepreneur cost is in no sense
employee cost of pain, but purely an entrepreneur comf
tation, so such interest costs as are relevant to the cost-^
production category are not costs of abstinence to th^
who do the saving, but are costs of expenditure to the
who do the borrowing.

This is evidently not to deny that the entrepreneur m;
himself have a postponement cost, as well as opportuni
costs of other sorts, e. g., leisure and recreation, but tl
saver's postponement cost is not also a cost item in ti
entrepreneur reckoning; so again, when a borrow
decides to consume the product of the loan rather than
use it reproductively, his choice in the direction of no:
abstinence — his refusal of the cost burden of waiting —
his own, and not that of the saving lender ; it is a new ai
distinct choice.

Thus, the "value of money" or of capital, as of lab
or machinery or land, is a market fact, a price datur
which the entrepreneur takes as he finds it, withoi
attempting any explanation, and without any call to mal
the attempt. Entrepreneur cost explains the price of tl
product only upon the bafeis and assumption of oth<
established prices for the items of cost, which cost pric<
the entrepreneur-cost analysis in question is not concemc
or competent to explain.

INTEREST 261

The discount rate also approximately coincides with
some item of marginal "demand ; there is, as we shall later
see, no very serious error in the doctrine that the interest
rate reflects the marginal productivity of capital, if only
^e capital concept be interpreted widely enough and in
the competitive, entrepreneur tenor, and if the notion of
productivity be not socially but competitively conceived
3Jid be applied in a sufficiently extended sense. (See
chap, xi.)

This interest discussion has gone far more deeply into

tte interest problem than the cost-of-production category

has need for; but this was nevertheless necessary purely

for the purpose of finding out what was really needed and

Vrliat relation interest bears to entrepreneur cost. And so

'^uch as this becomes clear from our analysis, that within

entrepreneur cost must be computed, not merely wages and

the different rents of different productive agents, but also

2i time charge for the value fund in the entrepreneur

employment, according to the length of time of this

employment. That is to say, cost of production reckons,

among other items of cost, like wages, taxes, rent on land,

^ctit on capital goods, etc., an interest charge on the

capital-fund investment.

And as will later more fully appear, interest, in the

^^^se of time discount, must be recognized as a distributive

^hare, precisely because it is a cost under the entrepreneur

System of production and distribution; cost payments by

.^^ entrepreneur are distributive shares to the payees. It

^ '^ot, however, to be inferred that every case of interest

*^ynient is a payment made as incidental to a productive

^''^ess. There are interest revenues that are not deriva-

^e from the productive process, and are not to be

^^Sarded as distributive shares out of a produced value.

"^^ny cases fall purely and solely within what we may call

^e secondary distribution, as distinguished from the

*^^imary, the production distribution. (See chap, xxvi.)

CHAPTER XVI
RENT AND COST— MARGINAL COST— RELATIVE COST

John Stuart Mill, following out the implications of
Ricardo's proportionment doctrine and recognizing that
value is essentially relative, perceived that costs of pro-
duction as bearing on value must likewise be relative, and
thus that the exchange relation between different goods can
be affected by only such causes as unequally affect the costs
of different goods; and accepting also from Ricardo, and
with approximately complete consciousness, the entrepreneur
point of view, it became clear to Mill that, for a cost-
of-production doctrine adequate and serviceable and con-
sistent from this standpoint, cost, on the labor side, must be
held to be not the labor and not the pain of the labor, but
the wages paid for the labor; and it followed also that if,
in a given line of employment, the efficiency is greater in
the same proportion that the wages are higher, the relative
wage cost is not affected.

And it thereupon followed that wages payments become
relevant to value only in so far as one commodity requires,
relatively to another, more labor or a more highly paid
variety of labor: "Things .... which are made by
skilled labor exchange for the produce of a much greater
quantity of unskilled labor, for no reason but because the
labor is more highly paid." [Mill's habit of regarding
cost items as opaque and definitive facts.] "So wages do
enter into value ; the relative wages of the labor necessary
for producing different commodities affect their value as

much as the relative quantities of labor The

absolute wages paid have no effect upon value, but neither
has the absolute quantity of labor." ^ However, since
variations in wages are usually general, it is. Mill says, by

* Principles of Political Economy, Book III, chap, iv, sec 3.

262

RENT AND COST 263

'^'^►riations in the relative quantity of labor required in pro-
duction that variations in value commonly come about.*
Similarly also with interest and profit elements in cost;
^ese charges are presented as affecting value only as they
^ter, in varying measure, into the costs of different com-
modities.

It is manifest that Mill is here treating cost consistently

from the entrepreneur point of view; labor charges are

conceived to enter the computation only as reduced to

price-value homogeneity in the entrepreneur outlay, — an

unquestionable fact which, by the way, has led some

economists to the notion that labor is an abstract fund.*

Likewise with capital the entrepreneur reckoning holds,

^nd this equally whether the question be one of interest

charges on loan-fund borrowing, or of rentals paid for

'i^a.chinery, or of interest paid as a percentage rate. upon

^e price expression of the machinery as a value fund —

^^x>m which last method it has been by some economists

^'^f erred that capital is an abstract fund.

And precisely as these items of outlay for capital goods
^t:tain the homogeneity requisite for cost computations only
^y virtue of their reduction to the common denominator of
P'^ce, so also, under the same reduction to terms of price,
^*^^re enter into the cost reckoning minimum wages or
P*"cfits of superintendence; from which fact it may some-
^*^es be inferred that profit-receivers are also an abstract
^^xnd. And forthwith, these three separate factor funds
'^^'Ving been successfully established, the logic of the case
^'^ill compel their merger into one great and inclusive fund
^^ abstract units of value productivity.

It results, then, from Mill's doctrine, that values are
'^^t proportionate to the labor applied, or to the capital
Applied; nor is the problem one of some sort of compound
^'"<>portion of these, as Ricardo seems often upon the

•For example, Marx, notoriously; sec also Macfarlane, Value and
^**9^buHon, pp. 267, 270; Garic, Distribution of Wealth, <;|iap. xi.

264 VALUE AND DISTRIBUTION

point of asserting. Instead of this, value reduces to a
simple proportion based upon the price costs incurred, or,
undoubtedly, if one prefers, to a canpound proportion in
which each and every outlay appears under the price
denominator.

But if such was really Mill's doctrine, how came it

about that rent outlays were excluded from cost? The

answer is that Mill did not exclude them; he expressly

admitted them :

No one can deny that rent does sometimes enter into cost of
production. If I buy or rent a piece of ground, and build a cloth
manufactory upon it, the ground rent forms legitimately a part of
my cost of production, which must be repaid by the product/

Mill's view was, however, that rent outlays do not com-
monly enter into the marginal cost of production; and
with Mill as with Ricardo, it was this marginal cost that
was price-determining. The doctrine applies especially —
and most clearly and most importantly — ^to agricultural
products. "Rent forms no part of the cost of production
which determines the value of agricultural products."'

This doctrine was obviously Ricardian, and needs no de-
tailed restatement at this point. Ricardo placed rent out of
connection with value, by getting it out of marginal cost.
This marginal cost he found upon marginal land, rentless
land. Nor need it especially matter if no rentless land were
found ; for there was always the intensive margin, and at this
margin it was equally possible to isolate a product in the
cost of production of which rent could have no part; this
product would therefore function as the marginal product,
a product produced, if not upon marginal land, yet upon
the rentless margin of rent-bearing land. And thus if (i)
marginal cost could be identified with cost upon marginal
land, and then (2) this marginal land could be accepted as
the price-determining influence in cost, the Ricardian case

*Mill, op. cit,. Book III, chap, iv, sec 6.
*Ibid,, chap, v, sec. 2,

RENT AND COST 265

^"^ established With rent excluded, and with capital
'^Uced to the labor denominator, value became propor-
^^^Jal to labor content

Sut these two important steps in the argument were

''^^rely taken for granted — assumed out of hand — ^perhaps

^y title of their sheer reasonableness. At all events, these

^o propositions present the problems next awaiting

5^^^mination at our hands: (i) Is the cost margin an

'^^trument margin? (2) And in what sense, if any,

'^ one item of supply more price-determining than any

^^*ier?

(i) Is the cost margin a land margin? It is significant
^I^on this point to notice that for non-agricultural indus-
^^^*^es the trend of authority appeals rather to the marginal
'^Xtrcpreneur. Mill's reasoning itself looks in this direc-
^wi, and Walker — no matter how badly his marginal
^^^trepreneur was selected — stands distinctly for the view
marginal cost is cost at the personal margin; and so
ith most other writers. And evidently there must be a
^^^tivator upon marginal land. Perhaps a sympathetic
^ '^terpretation might harmonize the old with the newer
'^^octrine, by taking Ricardo to have regarded the cultivator
^^s marginal because on marginal land. But if so, we
^^ust likewise regard as marginal that cultivator who is
^^tting on somehow with machinery, part or all of which is
^^orthless — marginal capital goods; it would perhaps be as
"promising a quest to hunt for no-interest or no-wage pro-
duction as for no-rent production. Evidently labor and
capital may be applied upon no-rent land — no land, but it
is equally true, and perhaps more common, that worthless
machinery, — ^no-interest capital goods, that is, no capital, — is
combined with land and labor, or that worthless labor,
child, pauper, invalid, or convict, is combined with capital
and land. And it has been many times pointed out that the
Ricardian doctrine must thereupon logically exclude
wages and interest from value-determining cost.

a66 VALUE AND DISTRIBUTION '

And, going over to the intensive marpn,' for a reair^^jiy
workable land margin, it should be immediately evide»-— ^^j
that capital instruments applied on marginal land, or upc:>-cz»n
any other land, are, or may be, supplied with labor to tfct;»- the
point where only the labor is remunerated in additioa^-r^- ,nal
product; whereby, by parallel argument, only wages a .i^are
left as cost. And it is evident also that every holding • of

land, if rationally handled, receives expense outlay to tf,:*- the
point where, in the circumstances of each respective cul.C^lti-
vator, no further outlay is expedient in view of the furth«— *3ier
remuneration. That is to say. the intensive margin is to " ■• be
found on all land, and with most, if not with all, capiK~2ita]
instruments.

And, finally, this land-margin view must face the dif*: 5ffi-
culty, already sufficiently elaborated, that the entreprener ^^JW I

in his borrowing does not borrow land or capital or labi i^or, I

but only purchasing power, and follows a most cathoK ■«lic '
system of interchange and substitution among the varioiw -^"■^
productive factors.

But whether or not this land-margin cost doctrine neec^*^*
abandonment forthwith, the entrepreneur margin bein_ ^.^
accepted in place of it, it is at all events clear tliat eve — ^^^
upon marginal land there must be an entrepreneur, an^- ^^
that the land is marginal only as related to him and to hi ^^

separate labor and equipment. It is not absolutely neces " "^"'
sary, indeed, that wage or implement outlays be under — — " '
taken by him; if he can get along with valueless land, he^^^ *^
may quite as reasonably do as much and as well witV^*-*""^
scrap-pile tools. But however this may be, it is certair^ -*~^
tliat no piece of land and no item of implement wealth carm -^
ever be abandoned as unproductive, or be appraised as pre —
cisely on the line between use and non-use, excepting as th^
expression of a human choice, a fact in the psychology of
some entrepreneur, his judgment as to the adaptability of a.
means of production to his needs as an independent
producer,

'Ct. Hollander, Qaartttly Journal of EcaHomki, January, 1B9J.

A

RENT AND COST 267

A further argument in defense of the Ricardian doc-
trine needs at this point to be again called to mind. It is
urged that rent outlays upon the better land ought not to
rank as cost items, since, for whatever is differentially
expended in rent, a precisely equivalent diff^erential of
advantage is obtained; the better lands are no dearer, and
no cheaper, at the higher rent than are the poorer lands at
the lower rent; the more rent payment, the more land
service, and the correspondingly larger product :

It is true that all tenant fanners and many other classes of
producers, pay rent. But .... whoever cultivates land, paying
a rent for it, gets in return for his rent an instrument of superior
power to other instruments of the same kind for which no rent is
paid. The superiority of the instrument is in exact proportion to

the rent paid for it The real expenses of production are

thus incurred on the worst land Whoever does pay rent

gets back its full value in extra advantage, and the rent which he
psLjs does not place him in a worse position than, but only in the
same position as, his fellow producer who pays no rent, but whose
instrument is one of inferior efficiency.^

It only needs be suggested that this argument really
abandons the land-margin and accepts the entrepreneur-
analysis point of view, and, so far as it is valid for any
purpose, goes to prove that the costs of production are
^ual upon all lands, and therefore that all lands are equally
marginal, — an argument reinforcing and supplementing the
point lately made that for every farm and with every
farmer there is an intensive margin.

But some still more perplexing conclusions appear to
follow from Mill's argument, if it is accepted— conclu-
sions that may well call for lengthy consideration, since,
with its acceptance, there will be rendered necessary a
fundamental revision of an entire series of important
theoretical doctrines.

If, from that sort or aspect of cost which is to be
regarded as price-determining, rent is to be excluded by

'Mill, op, cit,. Book II, chap, xvi, sec 6.

3(SS VALUE AND DISTRIBUTION ^

virtue of the fact that, for whatever increase of expense is
made by renting tlie better land, a corresponding advan-
tage of opportunity is secured and a corresponding
increase of marketable product obtained, it will directly
follow that interest paid for the control of larger capital,
or higher wages paid for a better grade of efficiency, or
for a larger force of employees, must by parallel argument
be excluded from value-determining cost.

That there is an inviting quality in tliis conclusion,
despite the seeming paradox and absurdity of it. may be in
part inferred from the fact that, as will later appear,
some of the Austrian school have, on entirely independent
reasonings, arrived at it* Mill's doctrine, outlined a few

■ The following resume of Pierson's cost dciclrinc (Dr. N. G. Pierson.
Principlei of Economics, translated from the Dutch by A. A. WoUcl.
Maimillan. ignz) will be of service as tbrcwinE some light upon ibe
later trend of cost doctrine with the Austrian school. The interests of
space must stand as excuse for the more or less chaotic fashion of
quotation and comment in the following ; when words other than those
of Pierson — as translated — are used, or when comments are inter-
polated, brackets will so indicate ;

"In the language of every day, cost price indicates the sum tolail
of the disbursements which an entrepreneur has to make in order that

he may procure a given quantity of commodities This is

the only fact that possesses interest for him when he wants to know
the cost price of his products. But the economist, when he is consider-
ing the conditions for promoting the welfare of society as a whole, has
to be careful not (o view things from the standpoint of the entrepre-
neur. Under no circumstances may he place wages on the same foot-
ing with fuel and fodder as part of the cost (p. 61). [Surely there are
here two distinct points of view, and each for its purpose is worthy of
consideration : but it has yet to be shown that, in an investigation of
value in a competitive society, we may safely abandon tls« competitive
reckoning and adopt the social point of view.] .... Let us imagine

a number of persons united in a co-operative society One

contributes capital and land ; another his knowledge : a third his muscu-
lar strength, and so on Now as to cost: many have had to

draw something on account in the course of the year Are

these disbursements part of the cost? Certainly not: they are portions
of the jointly acquired income resulting from the enterprise. The
only items that can be reckoned as costs are : com used for sowing,
live stock that has perished [etc.], [This notion that cost can in no
rase cover alternative income has this fault at least, that it gives no
notion or measure of the influences that serve as counter-inducement
against the production of the product in question. As Crusoe must
reckon a displacement cost, a disadvantage by foregoing — opportunity
cost — so must society face a precisely similar cost in the alternative

A

RENT AND COST 269

psiges back, that value is affected only by relatively
high wages, or by relatively high interest outlays, or — and
here the interpretation is less confidently made — by rela-
tively high rental burdens, has the same logical trend and
must pass for something more than a mere analog)'.

Taking note that the inquiry at its present stage
■^gages us in a quest for persona! margins, rather than
*^or instrument margins, let us ask ourselves what cost
*-**fluences are of the sort to make one producer marginal as
^^S^inst another, that is, what costs are margin-determia-
***S costs.

It is evident that a fall in demand, expressing itself in

tions of social produclivc power.} Let us now modify our hypo-
The workers .... detnand a fixed wage in lieu of wcddy
account, and the landowueTs demand a fixed real. The
_^^^xill of this is that the enterprise loses its co-operative character, as
~***i risk will, in futoie, be borne by certain members of ihc society
^***ly. Bui this does not change Ihe economic character of what the
1 '^^^rkers and the landotmers receive. That which is paid them con-

^"fc^ts still .... of products of the enterprise (p. 61). [This is the
.^|<:*^ial point of view al the extreme of sulement. The truth seems to
^^^ that, precisely because the co-opcralive character has been lost and
*^i»e enterprise has come to be conducted for individual promts,
^iaere has come to be someone to reckon these wage and rental
^^'v.itlajra as cost. True the wages and the tent are incomes derived, as
^11 incomes must be derived, from product, but that which is income to
A^borer or landlord may be none the less cost to the employer or the
Y^natit. And it is precisely for this reason that Ihe investigation of
vsosis and of their relations to vaiue, is at the same time an investiga-
tion of distribulion.]

"We see that what the entrepreneur regards as the cost price of
liis products is a very mixed sum. It certainly includes what would be
%b« cost in the narrower or social sense ; but .... generally th*

Sreater part .... consists of income and nothing else

The entrepreneur has every right to reckon all these prearranged
diitnirsements as part of his cost; but we know very well, and so doe*
he. (hat they only make up the sum which he must pay out of the
income he earns as recompense for the assistance afforded him in
earning it (p. 63). [There is surely no room for difference of opinion
here, excepting as to the question whether, in a competitive society,
the costs of competitors are the costs with which an investigation

kof value is concerned, and whether in fact Ihe other concept of cost,
tile social concept, has any relevancy to the problem in band.] The
treatest confusion of thought arises from a failure to observe the
dtstinclion between cost from the point of view of the entrepreneur
ud cost from the point of view of society as a whole (p. 63).
"We now return to the question. What is the price that mankind

I

^Jv^ VALUE AND DISTRIBUTION

the falling price of some one product, must drive som;
producers into other lines of production; but which pro-
ducers? Only such product will continue to come upontht
market as can be produced at this lower price ; the price
will still be commensurate with the costs of that producer
who now stands as marginal under the new conditioas;
but would this fall in price be selective, or be influenlial
in any d^rce. in determining which producer shoal»l
be marginal? And so with all the outlays of pro-
duction ; each producer faces the same external con-
ditions of production, the same wages and rent anil
interest levels; these burdens are common to all the com-

hai to p^r for ihe ibioK* ih't >< needa? The price consist* not oi
uttt*. bot of tabor; not of inlerctt or cipiul. tml of the usinf *>'
capiul : Dot of piofil. Inl of care of manssemeni (p. 64). IWha-t "
rcnl, or of the use of Und? Doei this go or nol go with interest or <'''
tue of capital ? And only a little while ago il appeared that ****.
co-op«aliTC Mciely had 00 costs other than the connimed material ^
■Kent*. Perhaps it i* important that I^erton ulcs bere. What ia *^^
frier — there. What wa* the coitf} Wages, interest, and profit, ipcs-^*'
ing io the *ociaI leiue, sri not part* of the cost of production; t**^ ^
■re parts of what ii produced. They are not things sacrificed, *-*"*^
thing* gained (p, 64). [But note that labor, as distinguisbed fr^^^V

**

t use* of agents are still called the prieet at prodv*^
thongh it ii perhtjM not clear whether or not tbcy are coiti.1 . . ,
If wc ynnx to ascerlain the net as distinct from the gross income *^
■odety .... we need only deduct what has been spent for t**
purpose of replacing and maintaining cootmodities which baTe be^i^
wholly or partially destroyed in the process of production itself. Bu'
in their turn these commoditica are the fruits of labor, and so ive^
■rnve at the conclusion that labor, the trouble of production, is tfae
sole price which mankind pays in order to procure such tbinga as ft
deems to be necessary. That is to say. the only poiitive price ; for
there is also a negoi"'* price, if Such an eitpression be permissible
The negative price consists in absence from present enjoymoit. ....
It is ■ ■ ■ ■ a sacrifice made by those who practice il : a pric^ a
negative price, if we must so call it. paid by man in order to obtain
the commodities which he desires to possess (p. 64). [But this, one
fancies, ia not intended to make inleretl a cost : and Ihe uses of
capital have been reckoned once as "the price which mankind has to pay
for the things it needs ;" now the sacrifice of absence in accumulating
and holding capital comes in somehow, seemingly as a new cost, bat a
cost in the negative sense. The reconciliation must be found in some
diRercnce of meaning between c/ytt and price. But all the while, what
about land and the compensation for not wearing it out — for applying
the expenses of upkeep? Abstinence certainly obtain* here if anywhere.
I* land regarded as capital and are its uses parallel to uses of capital,
wkkh latter are ranked a* part of "mankdnil's price"? At uqr rite,

pii

1

RENT AND COST a?*

P^titors in the field; why then is any producer marginal?
'^ is true that for such industries as are distinctly capital-
'StiCor distinctly land-using in their technique, or distinctly
*'3.ge-paying. there will follow, in case of changes in wage
*"" interest or rent levels, marked effects upon the relative
^■'^lumes of products, and upon the relative prices of
P^'^TKlucts. But the question again presents itself, are not
*ll competitors equally subject to these conditions? What
"ifluences select the marginal man, the price-determining
^*"*an, so called?

That one man is marginal as against another must, it
^^^ms, be due to such peculiarities in him, or in his circum-

,^ i« lo be remembered thai some of the land is not the result of labor,
Jj'"fele, as certainly, some of it is. This seems likely to make trouble for
^;^-]ie conclusion that labor is the sole price that mankind pays, etc."
^?Xjt inasmuch as the concept of price, whether il mean the same
^^^ing as cost price or not, is a social concept and therefore has, in a
^^^ampetjtive society, little, if anything, to do with value, it perhaps does
^^^»t greatly matter what relation to the ease rent and land and land
** aes may hold.]

^ "Not only do the expressions value and cost price [cost price mcan-

^ «ig labor and abstinence] differ widely in meaning, but Ihe one

^^-ctually means the reverse of the other. Nevertheless .... the

"^c^ilation between the value of things in moat cases corresponds pretty

^:^eal^y to the relation t>etween Ihe respective cost prices.

VThis sounds Rieardian, but it is not : for] How is this

'^o be explained? The reason is that everyone prefers to apply his labor

"Vo Ihe production of such things as will afford him the greatest amount

■^)t enjoyment. Value is the regulatrii. SO to speak, of labor. It deter-

-mines the direction in which the objects to which, labor shall

be applied. Speaking very broadly, every kind of labor will be con-
linned up to the point at which it becomes as remunerative as any
other kind of labor. [And one would infer that it will be continued
only so far ; bat of course this is simply awkwardness of expression.
The real significance of the principle would be better brought out, were
rl said that labor will not be continued in one direction when it
becomes less remunerative than in any other direction, that is, than
Ibe same labor in a different employment; but this would have implied
and almost imposed Ihe notion of a displacement, a sacrifice or oppor-
tunity cost. And note thai the phrase lest remunerative or as remvn-
fralivt is not quite accurate : less allraclive. all things, including
remunerations, being considered, would adequately eover the case]
As a result of this, most commodities automatically acquire s cerlaio
nlue in relation of each otber, which corresponds approximately to the
proportion between their respective costs in labor (p. 65). [This
doctrine of choice between the altemalrve applications of the productive
powers It one's disposal must logically include costs, not merely in
labor, but in capital and land.] An example may serve to make this

I

I

rZ .\yD DISTRIBUTION

^rjrj-r-. I? ^TT'ier *i:5 nflai.ti to the market situation a
•^-1,:-^ ^i:in'.T. ^j:«; :h:< is not to denv that there are
-::..- I-??;*:*-— ' i-UiL'Ci-i r: rartioilar lines of productioD
-:*■. ::.;-:: i^^v «•-"*-!-' ' suT-sc: :o change in cultivation with
.•*_:r^-.- :• -.iri-t tir*t<. But that under a particular
:.': -.-.- ::::^ iin-ir^ iTt i>p«ec:ally liable to change in
;r< ■ .s: -;s: vr t.k :er^:ar n>:e5. abilities, or situation

. -E^ ;::- t: v i: L\ ieny :hat rent, interest, aa<i
^ -^- : - - .:-n ^.^> :.cir" ■ :hey are costs; no issue i^
-. r . :. . ! :':> :'..:::. izi irx: :hey those parts of co5^'*

% '.. ! ire ::i;v-i-^ becomes marginal a
-^. :>^ ..:•..;:■-' \i"::-v:v:r raring induences — th^

'^. ■ •. -* : - -•r"'.-;: r.urr^r^ .■: r^;u:r«:s exactly the »am^^^^ ^y

•■...- ...• . . % :«^: ij. : "r»;-iire* :o produce a ton of^^ ^\

■ '. • ..•:.-: .:■= .v< ?r-'.-r .*:" wheat stands to that ^ -t

-- • -. - - •- .^ -■ -•- ?5 1 rhe exasple raises more ^^^

::»'* ;;• -.r z^'^LfT-zz y *- irtf cot now talking of ^-^

. - ..-> •. : m iM s:j.. i;:c.y bi* productive forces fc^*^

% ■ . ■ . -c _^- T -v: « i.ue 7r-.-c-^c:* :n:ght be assumed . «

«•?■..-: ..!%:.:>; .'■ jcx-.-rry lid cf aarket values; -« ^

. r -_^ ■,'■.•.>.•.■= -jftc-: -i^\ --.•ur try- wide and for ^^%

- » ■ .. ..A-'* •% .- w ru*.! x?cr 1* -ye. '^nless upon the ^ .

-c^ ^ . s. . -. .:v-'r.::. >:". :i i.?«:r and of land. — ^;

^ . . . ...-■-■ - ..- ..- .rj-rr****:. :.-• hor^ogeneous

. - - at

^- .' < x'v •. : ;-": t -'-— t-^^rj tif*:^ or is

:-.■..' -u: ■■!■?•' :av- cert labor:

. I .. ■ :-;•' iitt Tilue. [This

- '. - . •. . ..■.r:-^ r: : ::;{ supp'y. k:".1 to be

. , -r—.-y :' 1"'. '.y :r va!ue. be

-.-.«^'. ! : : -J I ix-r xrcr isi upon

... *. . • .' • i -i-r^ i.^:r-:av.v-."T pcss:b*e:

. . . . • ^ : . -.^ iv.c ■ :'f r.-rr ?f Aicrince.

_ .^ .. -.s.- •.- "':-• ' i -irr ;■ -V^Tr-.'-i:?;** :* cot

_._ . .' - "■"- ■■ ■■ ■■■ ■'■^- - '--'?■" 7"*.*OUCV.'.*S.

. -.-: . ■-;:^ 'wr : i~ re- "«: irpnred
.... . . -.-^ •. . ■ - .;'- V ij :. — iry, w*ich

^ . . . •. '. . - » ' . : T :-. - :«.-^ r.-< l:^i x'.'trr.i'.zye

■;........ ^ . •. . ..- . : ^*.^ ..'V :-■ i:>:.r :i<*-r J*."*:

1 -. ^ - * I- ■ *p« Tf-i -,• *- ■>****

• • ■ ^ ■

.••.•-. .•■.-. v.. '. . :. ' % ■: :■-• i"*=-:c-.y Liicr-cc«

n

RENT AND COST 273

decisive variants in the situation — are found in tfie ability

or lack of ability to buy closely, hire cheaply, organize

economically, sell skilfully, or in the degree of aptitude or

preference for some other line of production. That is to

say, cost as a margin determinant is purely a matter. within

Ae personal aspects of entrepreneurship, a managerial

fi-crt, a subjective phenomenon, in which all the influences

I>e3jing upon the psychology of choice between different

occrupations or between occupation and leisure have their

place.

This leads us back to the second part of our inquiry:
Qi what sig^ficance is the marginal instrument or the
•"^Xarginal producer, when once one is found? In what
-^^nse, if any, is one item of supply more price-determining
^Han any other? For, after all, all investigations on the
^ost side of the value equation are important only as bear-
ing upon the question of the supply, and all our talk of
^^argins serves only the purpose of explaining supply fluc-
'tmations. It is true that only by the close analysis of what
is characteristic in marginal relations does the ready and
sensitive response of supply and demand and value to the
hanging conditions of production become intelligible.
But it remains true that market value is the equation point
between the whole volume of supply over against the whole
volume of demand. Each and every item of supply has its
small share of influence upon the market outcome. "The
withdrawal of iron from any one of its necessary uses
would have just the same influence on its value as the
withdrawal from its marginal use." • The marginal item
whether of demand or of supply differs from any other
item only that through it, as marginal increment, a deter-
mination may be reached as to just what effect it, or any
other single item, has had upon the price adjustment, meas-
urement being made from the point at which all the other

* Marshall, Principles of Economics, 4th ed., p. 580, note.

VALUE AND DISTmBU

forces in the market would otherwise have left the price.
Not to the soldier who fires the last gun is the victory to
be accounted, nor is the smallest boy who touches off »
fire-cracker to be held responsible for the entire Fourth ofc
July hubbub. If there is accurately a producer upon th^
margin, the market price must coincide with his cost; bu^^
neither the point of adjustment nor the producer at thi^^'
point is the determinant of price. True it is that if he were '
not in the case, the price would have been other; but so is
this true of all the other producers respectively. The mar-
ginal item of supply is one among the whole number of
items and, as such, has its part in the resulting adjustment,
but it is the entire supply in equilibrium with the entire
demand that gives the market adjustment. It is true that
the added weight of the marginal item has, in strict theorj-,
moved tlic price from one point to another, but the basis
upon which this effect is worked and the situation which it
modifies are the results of thousands of other units of
supply in face of thousands of offers.

At the most, then, price is to be understood not as fixed
by marginal cost but as commensurate with marginal cost
Who shall produce or who withdraw is for the most part a
result of price, and only in the smallest degree, as putting
so to speak, a fine edge upon the price, a causal fact. To
claim for the marginal item either of demand or of supply,
or for both, the function of price determination parallels
the case of the fly in Aesop's tale who sat on the axle tree
of the chariot and said, "WTiat a dust do I raise!"

The truth of the case appears to be as follows: There
arc margins of many and various sorts, all important to the
problem of supply. Prices of agricultural products are com-
mensurate witli cost at the extensive land margin, but
equally so with cost at the capital-goods margin. So also
of the intensive margin, of the day's-end fatigue or recrea-
tion margin, and of the alternative-opportunity margin.
Each of these margins stands as a fact or an influence for

lit

RENT AND COST 275

the limitation of supply ; the refusal price, the "necessary
price," at each of these margins is the market price.**

But some of these margins are of the distinctly personal
sort, as, for example, the fatigue and the opportunity mar-
gins ; nor is there the possibility of any instriunent margin,
excepting as through the relation of the instrument to the
entrepreneur's personal activity, as an aspect of the entre-
preneur problem, and as an expression of the judgment and
choice of the entrepreneur fact in production.

Any change in price will involve a rearrangement in the

entrepreneur complex or group of productive powers, a

readjustment or realignment of his productive forces and

agents. At the intensive margin of effort, and commonly

at the intensive margin of utilization of his instru-

'^^ents and agents, each and every entrepreneur is

'^^arginal; that is to say, not all of his product is equally

'^^^^r to the margin ; he has different costs for different incre-

'^^nts of product. With falling prices any entrepreneur

ly transfer part or all of his lands to other products, or

ly sell oflF part or all of his capital goods, or reduce his

)r investment, or restrict his loan- fund borrowing; or he

5iy, leaving part or all of his investment imdisturbed,

^^"ansfer part or all of his personal activity to his next most

^-'^tractive alternative; or he may completely abandon the

^^Id line of production. In this case of abandonment also,

.e and his capital may hold together as one productive

or complex, or may scatter into various industries;

X^ith falling profits, and possibly with failing pleasure or

Xnterest in the business, or at the approach of old age or of

* In the main, of course, whether any man is marginal, or at what
point in his production he reaches a margin, is the result of the
objective conditions that he has to face. Each margin is thus rather the
effect of price than the cause of it ; the total situation is directive of
each person in it, who in turn himself helps to make the situation.
Each person must be recognized as in his measure contributing toward
the total situation. Cost has thus — and precisely at this point — to do
with price. If there is confusion in thinlcing of any particular fact as
at the same time both cause and effect, let one imagine himself as
jumping — the last person — upon a crowded raft, and sinking with it;
does one sink the others or do they sink him?

mmmitm i f ■ii.«i<«»ii ■!■ i I wiB be n
^■^1^ a JB mAmhb ■• 1m. Aatf ao aw nf aQ H
r^ltK MKC"^ *■' ■> *l^ of aB ^ <iilfcrem n

■itepB aafii^H mi » Ae eaent dot supply i$

Aft ^ OKifaaKV fnUOB, An. all oattars are d^ J
^^•< aa«; —i pmoMi fnSaeauak, npagaMaaa,m: I
^^■^^■1 of ^^mtt, aq^farinod, home ties, ntbcol I
pHgoSi^ ^olnaaiiBaB, ■*■—■'■—". good rvpute— oil ue i

^hkMi ■ oott 10 dv edort dm dirr wem to limit sopply, '
Ae <aM pnUm vAh fefacact to cacfa nan. am) therdif
1» mj imB^aem or agent ttoder his coatrol, being siii^>ly
aad aeUtf lo dfjaiiw. tbe poem at wioch supply in differ
■^ qaaaCibe* on Ik bad from tnm, and the degnx and tte '
cx>m of li» dcftidty in putxfoction with changes in pric*-
And it Li &>> (IK itnong &il the -yJiet cost iufluences, t>'*^
commonlv as the iniluence of paramount importance, tt^*
oppononiti cfst acqtiiT^t--. sicniticanre in the value proble^^*^'
Cost ii 5i-ip!\ the [ii'-tn;> cxpicssit'ii "jf iJic total oi resii^^^
ancc to the entrepreneur's production.

It is eviiient, therefore, that wages, interest, and re*^ "^
arc. from one point of \*iew, income, but to the extent th#--*^
they arc received from entrepreneurs, are costs to entr^ '"^'
preneurs. \alue and distribution are therefore, as has bet^^^^*"
said, merely difTerent aspects of the same problem.

It is. however, an easy inference, but none the less — 3
mistaken one, to conclude that costs are equal to value, tli
is, that all of the product is distributed within the c
category. All excepting the marginal items of proda
afford to entrepreneurs a surplus above cost — produce

RENT AND COST 277

quasi-rents, occupation difFerentials. Of this entrepreneur
remuneration, only a part is necessary remuneration — mini-
mum profit All of the producers' differentials, personal
quasi-rents, fall within wages of superintendence, profit in
the broader sense, but not cost elements in profit.

The problem of each independent producer — each entre-
preneur— is how through one or another combination of the
productive energies at his disposal — ^land, capital, hired
Jabor, and his own activity — ^to obtain the results most
desirable to himself. Both costs and distributive shares
stand, therefore, as entrepreneur adjustments. Each human
^ing has before him to decide, in view of his peculiar
situation and adaptation, whether he shall be an entre-
preneur, a purchaser of productive powers, a combiner
^nd adjuster of productive energies, or whether he shall sell
his own productive energy to another, shall be a hired item,
^ mere instrument, like the land or the draught horse. The
>vage-earner differs from the draught horse only by the
fact that the wage-earner may become an independent pro-
ducer or an employing entrepreneur. As wage-earner he
Sells his productive power precisely as the capital-owner or
ti\t land-owner sells the productive efficiency of the things
^i^at he controls." As far as the entrepreneur's personal

" All of this, of course, conceives cost as an entrepreneur computa-
tion. Were it here important, it would doubtless be possible to inquire
mto cost as looked at from the point of view of the wage-earner ;
***3jjr jijat this cost would not refer to the cost of the produced com-
***<Hlity, but only to the cost to the laborer of his labor pain or of the
^QiUneration for it. This cost might be one of labor pain or of dis-
***^ed recreation or both ; or if, as is more commonly the case, not
^^•Ure but another sort of work, or the same kind of work under
r^?^ther employer, were the displaced fact, the cost would be one

^^in the usual opportunity category.
,^^ For purposes of investigating the causes of the labor situation in
_^**>ch the employer is placed and in which his costs are to be com-
rj**^d, there is doubtless importance in the laborer point of view and
^^^iner of analysis. But this investigation is on the level of the explch
^*Um of entrepreneur costs ; for the entrepreneur the cost question is
**^ of how much and not why. His costs are as they are.

But it is still to be noted that the mere item of outlay may be

^^te misleading as measure of cost. Cost, it must be remembered, is

^at total which the market price must remunerate if production is to

^ maintained ; it may then well be true that for producing an output

TXUX AKD MSTUBCnOS

to tay that iff
r Ih tKfferem oatlaj'S. reuin for H
t (not aectaaarily u lur^f) as I
^■k k flSiM oatMl tivoogli wage service, wage s
«■ %e hi* ^kswainc, Aad ihos agiin wc i

oatiajrs, — rtnt. intcmt. 1
I of CO*'!, that is to q
§arm fan «f Ah idCiI far wUdi the market price n
r if Ihe pnidnctioa of the entree

8M ater al >» aid, then b still an aspect of tt^m
thai "com ts not high because i

com is high tf4

iht rr.ull

•P

,CTTV

oi

list d.J^etenl mi

inri

ns. and

impcrjii

[h.

E^

;;

of

TlOll of

ihe docli
ch w.tl, i.
itcps in '

tbc

appear!
general'

ca5ure, mjoin
irgummt.
pduct coincides reasonably accuiilely sllli
r marBin. or "-ilh the displaccmenl tithn
or aiinculiurnl i-r nf non-ajjricu'iuiat product al ihc citcnsiie mir[iii,
or mth ihc di'i>lncf mcnl cilher of agricultural or of non-a^cullural
[iniifuot al ih* mien<iive margin' and also, for each and every ost ol
each and every Rfade of land, there is — or may bt — a question of J"""
alternative use, the displaceineni of whicb would be refused "W*
price* in the first use appreciably lo falL

Here are surely marRins enough; but there are more. We mis' »
well talk of the extensive margin being an interest or a wage aUV"
as a land margin. So, at the intensive or at the alternative miriia. ™<
choice i> really whethet, under the condflions. it is as gainful m >Pf^1
mote labor or capital here as elueirtiere. Still further, in each of lhe«
problem*, »» in praclically every profalem, capital and labor come, U
regard! each other, lo an indifTenencc «f productive applicaiJons- ^'"'
lUntl]' the mtrgiiu are muItilDdt: and ti\ that we may say. from ""

RENT AND COST

of com were the effect and not the cause of 1
s would be proportionally influenced as rents
or low, and rent would be a component part of

if »i«r, is ihal any one of the agents may, through a
I coMi, become the
ecidins Ibe produc

leunta to saying that over against ihe general situation,
iltivalor does not conlrol, and the changes in which expreaa
.1 SacTuations in ihe volumes and in the vslucs of produc-
> the cultivator, whose problem is always to find (hat line
E activity the conditions of which are. relatively to him. by
% peculiar adaptations, his efficiency, his preferences, and
U of goods, most advantageous or least resisting.

then, as a whole, the aggregate human demand for goods
one another being assumed, and the aggregate human
r production in its actual environment of land and capital
for granted.^and all this in connection with a. system of
Unctioning under the direction of independent and compet-
igents. each engaged in the attempt to find for himself the
ageous line of application of the productive powers and
er hia control, — market value emerges as a point of adjust-
equilibrium for all the forces and influences engaged.
le is the point at which, if conditions remained the same,
im would be permanent : changing values are merely points,

equilibrium, reached but only temporarily held, under these
Is and realignments of productive activity, brought about
[ing conditions of demand, of processes, and of supplies of

to be conceived as the subject and the center of economic
environment of land and capital (and. for the individual,
ri) as his opportunity ; his industrial product as bis remun-
I economic activity as his attempt to produce and to
it product along the lines of least resistance (sacrificed,
e is to be conceived as the point of least resistance, not
! buyers and sellers directly engaged in any employment,
r pn)ducers in other employments seeking those lines of
srding the most satisfactory— or least unsatisfactory —
u. "Market prices are found to fluctuate in either direc-
hese normal or ideal prices, and cannot, in the competitive
of sacrifice, long or widely depart therefrom. In short,
price is thai price at which no producer can, to his own
liter employ himself in some other tine of production,
rally would stand at their normal, if no producer or con-
to his own thinking advantageously change his manner of
•tion. But, like the ocean, market values have no rest
I and wave above or below their ideal level, as desires and
noftnnilies and abilities, slowly or rapidly change in force ;
'none Ihe less .... confess Ihe controlling power of
T as do crest and trough their subjection to the ideal
— ttevenport, of. cit., p. 104,
Gmployeea arc passive facts, mere agents under the

^^^k^" Bm, «bnni^, ttcK SMiK foarlcs apply (quail;
^VH to wa^s aail iaactt. Waps are higli ab akx^ the
I prodtKtivc powen ot
pbdng a fcrig^
t Ae prodoctioa of aa)
r hw ID bee Aift iagjb wage-cost Icrd,
■■4 ■■( mmp iladf ior tese wage costs thnwgfa a.
cvmymvig level ot pnccL

It ■» cflca to of aay agkaltuial prodoct ; die supply of
I for agiicultiiral pnxhtcts in
iMigmuLiu bidtfing. tbe rent^
; Ah fcotal vafax stands as a
I of COK far Ae tKt>6ae6tm of any pordcuhr agr^-
! aMoiysi, it still sUncJAs
is not Ae lOil Att Bakes tbe prices faigV^i
rofttad.
The real and the lecurrenl <fiffimlty in all of this is th^^^^
oOfts and ifac reUiions of cost to valoe do not touch th ^^^
ultimate causes in the case. Entreprenenr computation- ^^''
lake an items of ootlay cost as data, as definitive, funda- -^^'
TDental facts, whkfa. for any other than tbe entrepreRcn^E^*-"
point of view, they indubitably are not.

AD of this, however will get dearer with a change inv^^ '"
point of view.

A colkctivist soci<t>-, having no rentals to pay, conld fc^ ^
compute none as facts of cost In case the impro^-cment ^* •'
or upkeep of land were under consideration, the sole ques- — *'
tion would be whether the energies and materials applied K-^
coald not be better applied elsewhere. The sole question *^
in the use of already existing land opportunities for any ^^
partiailar product would be whether these opportiuiities
could not belter be used for something else. The only
resistance to the current production would be — so far as

direction of maniBing producer a. and are therefore eolj potcotiatlj
dirrrtinK forcei. Tbe proMcin of produclioo uid of nuu-ginalihip ii,
*ccordiii|[l}', «a entrepreneur problem.
** RIesfdo, Folilical Bcvnct

"^■;5&a

I

RENT AND COST 201

xmcerned the land — the displacement of something else.

That is to say, the coUectivist computation of land costs

would be entirely one of opportunity cost Were the land

of a sort adapted to only one product, a cranberry swamp

as a possible example, no cost could be computed for the

land use. Of such land it might be said that its utility was

Kgh because its products were highly useful ; but land-wise

the utility product would have no cost But, with land of

alternative applications, the displaced product would stand

*s the land cost of that product actually produced. If the

<fisplaced utility were g^eat, the produced utility would also

^yt to be great or be foregone. While it would doubtless

J^ true that the utility of tfie land could be ascribed to its

Productiveness for, say, com, it would none the less remain

^*^e that the com utility, at below a certain measure,

^^ould not be permissible of acceptance, because of the high

^t:ility of the land as reflected from its adaptation to

^"^lother product — wheat, for example.

For competitive society, Ricardo's doctrine should,
^'^erefore, be revised to run something as follows: Ulti-
'^^tely, com is not high because rent is paid for corn land,
*^^t rent must be paid, because, to command the land for
^^^, a rental possible from some other product has to be
^^fused.

But, so formulated, the doctrine is, in truth, rather
^nsitional between the coUectivist and the competitive
*^ints of view than fully competitive; it retains, indeed,
^ong traces of its coUectivist origin. For, under com-
petitive conditions, not that rent barely sufficient to dis-
'^^^cc the alternative use is the land cost, but the rent really
'^id in the actual use.

Transfer the case fully into the entrepreneur competi-
tion, and aU this becomes clear. Land, being limited in
Quantity, is therefore cultivated to an extensive margin.
llic limitation upon the land supply expresses itself under
the g^iise of rent for all lands or powers of land above the
niargin. Rent is fixed by the bidding of entrepreneurs in

m

mmmm^.

view of the fact that a possessor of the better land is, bk'j
virtue of his rent outlay, excused from an approximatel!
correspondingly high outlay for labor and instruments d>t
production. Kent is thus an item in entrepreneur cost, aEr»d

is causal in llie same sense that other outlays are causal

in the sense, that is to say, that this rent is the form und-^«i
which, in competitive production, a shortage of lar-:»i
expresses itself. The rent is a necessary outlay, or, i
avoided, must be avoided at a correlative increase of outU^^
in other directions. But. ultimately speaking, prices ac=i««
not high because rent is paid, but because of the limitatio^^on
upon the supply of land which, by driving cultivation t^mi>
poorer land powers, must give, whether under collectivi^^ ^^
or under competitive production, a distinct advantage t^ii*'"
all cultivation upon non-marginal lands. But. under con^T"*^"
pctitive production, these differential advantages take th* ^n^
form of property rights for their possessors ; the lanc» ^
acquires the aspect of a competitive agent affording ss- '
valuable opportunity, by the use of which a cost of produc — ^^^^"
tion could be obtained lower, were the rent not computed»t»i
than other costs, and lower than the market value of the^^*"
product; thus the rent comes necessarily to be paid.

But. ultimately speaking, the rt'iii does not increase
the price ; by the very fact that the land is limited the high
price is unavoidable. Unquestionably, were the land sup-
ply greater, the rent would be lower, and the prices lower;
but mark, not, in last analysis, lower because the rent is
lower, but because conditions have come to exist, which,
in making the lower price possible, have made the high
rent impossible. The rent cost and the relation of it to
value are mere expressions, in terms of entrepreneur com-
petition, of causes underlying and ultimate — environmental
facts, with which production must get along as best it may.

The foregoing conclusions lead directly to the con-
clusion that, from certain points of view and for certain
purposes, it is necessary to recognize as the true cost

rf*

RENT AND COST 283

leteraiinants these environmental facts, the situation facts,
LS they will henceforth be called. What this, term means
nay possibly become clearer with a review of one of
Ricardo's comrade controversies with Malthus:

Malthus had argued that rent can arise only when land
is fertile enough to yield a surplus above the subsistence of
the laborer. For our present purposes, and for all the
purposes of Malthus' argument, and in closer conformity
with later theory, this term subsistence should better be
interpreted in the sense of wages, the doctrine then run-
ning to the effect that unless the yield will more than suffice
to pay the wages, there can be no rent collected.

But under either interpretation it is clear that were all
^>Jd sufficiently poor — and all equally poor — and yet, with
-U of its badness, unlimited in quantity, there could be no
^t Thus Malthus* position sums up as follows: Two
Editions must concur before rent can emerge, viz., that
*^re be land good enough to yield this surplus, and yet
^t there be a scarcity both of this and of better land.

These better lands — what there were of them — Malthus
'^[^ded as a source of material well-being, a social asset ;
^t is the market expression of this social good fortune,
^e, it might be objected that, with this land in the
^^session of private owners, the attendant advantages
^st accrue, not to society in general, but to these owners ;
^t, even so, the owners must be admitted to be a part of
*ciety; and more than this, not all the benefit could be
^nopolized by the owners ; as a condition to the receipt of
icir rents, the land must be utilized, with a resulting
Tger supply of products and with lower prices to con-
imers.

But Ricardo placed the emphasis differently — not upon
le "I have" aspect, but upon the "Oh, had I." The exist-
ice of rent he interpreted as an expression of the nig-
ardliness of nature, the evidence of the difficulty under
rhich society is laboring in getting a living. Out of this
ad case, progressively getting worse, the land-owner is

TB^^^ VALUE AND DISTRIBUTION

acquiring a pr<^essivcly larger deduction from wbil
others can enjoy — that is. onl of a nationaJ dividend griev-
ously restricted at the best, is acquiring not merely an
unearned increment, but an increment received out of tlic
social distress, and greater as this distress is greater.

Here, as mostly elsewhere in economics, the Ricardian
temper and mood and point of view have carried the day:
and not without justification, for Ricardo was right. Bal
so was Malthus. Given the ideal endowment of piety, with
a sufficiently ilunkful heart, one has it always at hand to
render thanks that things are no worse: "Every misef||'
we miss is a new blessing, and therefore let us be thank-
ful," spake the completely genial fisherman. And so, v^
substance, Malthus was thinking how much better thin^
were than if they had been worse; Ricardo, of how mu*^"
better they might have been if they had not been so bad.

But as a mere distribution fact, as distinguished from
production fact, Malthus* view appears to present the bene
doctrine. Hliat land tlierc is, is wealth, as clearly
capital there is. .\s a question, however, of the ethics c
institutional distribution, the problem of the unearned '■^''
increment, the right of proijcrty in the rent differential*-*'
Ricardo's view has something more to say for itself.

Bui as a problem of costs in competitive production*
(he two views need not have differed in application r^
Ricardo misapplied his doctrine."

But it is nunc the less important to rect^ize that the
land and the capital and the labor do not make the costs
and the value of the products high, but low ; the more

" Od tlie main iuue. Senior sided (or the mosl pan with Malthiu.
Ricardo had writren iPrinciplts, p. sj) : "The labor of nature it p«id,
not bccnuse ihe doc* much, but because she doei little. In proportion
as the becomes niggardly in her gifts, she ex»el« tt greater price tor her
work. Where she is muniticently beneficeni she always works BTUli*."
Senior replies: "Mr. Ricardo seems to have forgotten thai the
quality vrhich enables land lo aiforti rent, namely, the power of pro-
ducing the subsistence of more persons than are reiiuired for its
cultivation, is an advantage without which rent could not have

existed That we have in this country perhaps a million of

Kfil capable of producing, with average labor, forty busheU of com

-i

I

RENT AND COST 285

agents and instruments, relatively, especially adapted to
particular products, the greater the relative supply of these
products and iht lower the price. In fact, unless the case
be one of complete indifference, no producer employs any
particular agent or instrument, as against another, except-
ing as a saving of expense is promised thereby ; all produc-
tion goods are, for their particular products, value-
diminishing influences. It is the scant supply of land and of
capital and of adapted labor, and not their presence, which
^^lains the relative scarcity of the product, its high value,
fte relatively high hire of the productive factors, and the
^rrespondingly high capitalized value of such of them as
^n be capitalized. As a question of costs, rent, interest,
^nd wages are, therefore, not ultimate explanations of
^'^lue. The fundamental determinant is "situational," as
^^luioting the entire case on the cost side, the original
^^vironment, the volume and kinds of saved wealth, the
^^alities and adaptations of men, the degree and the direc-
5^^n of development in the sciences and arts of production.
"^^trepreneur outlay costs are the values placed by com-
titive bidding upon the various opportunities and auxil-
ries in the productive process, in view of the market
^^lues of the resulting products.

But that the market remuneration of any productive
^^ct is a derivative from its value-producing power, in
"^iew of the existing conditions of demand and of supply,
^oes not imply that this remuneration is either equal to its
Contribution or is proportional to it, or, indeed, that the
"J^recise amount of its contribution is ascertainable, or that,

^n acre, is a benefit ; that we have not more than a million such acres,

^s an eviL That the average amount of what an agricultural laborer

produces much exceeds what is absolutely necessary for the subsistence

«f an agricultural family, is a benefit. That the extent of our fertile

land, and the amount of our capital, in proportion to our population,

are not sufiicient to enable him to constmie, directly or indirectly, for

his own advantage and that of his family, a// that he produces, is an

erU. . . t . To produce rent, both the benefit and the evil must

coexist. The one occasions rent to be demanded ; but it is the other

that enables it to be paid. Mr. Ricardo's attention seems to have been

confined to the eviL'* — Senior, Political Economy, p. 138*

TJiLm AXD MTTunmoN

■Hi

tadaa lo 3117 one entrcprenex.'v,
K k a dHfcreirt one for each di rM-
!■ troth, the cott to ar^y

^RfHMBV » aid|>, if ercr, die pnctae cqaivaknt — wt
tii ^mmMH an amitMaUe cae — of Ihe value signiff
Hoe aC ^ ftm^tawt fador to faiin; othentise thci
irid te ■■ ao^^Bifp^ catnfraKtm. and no prodacer
HMCHK. Aai ci^ at Ar ^ugin the equivalence a
0%- iBvaHSir «f onUdHBcnl: oKnplete proof of thi
[ ID later aspecte of th

1 to the Rionfian doctrine as to th^ ^

, a more irnportan -^t
aly — « more deei»i»e argmnent reinatns=~ ^

to be pcaoMd: Ticrr tc ma Imad wurgim of Ike sort con -

tgrnflmltd m tke Rkwdim dottriiu.

Phidbtti^ HL'^i (rf eoondcia kinds, labor of different^ '^
gnMks of ifcil ta aH the <IMtnj< trades and subdivisions of "^ ^
trades, csptal goods of aM sorts and grades for number- — ''
less (fiffcTcnl porpoaes, laads varrh^ in dtmatic and chemi- — *'
cal aad powtirnial qaafitics, adapted to countless different ^V'^
mes and prodoets, and in all ooaditions of original or ""
acquired fertilitj and exfaaustioa. and ivith all kinds of ^^
improvement and modification throt^h capital and through ^^
labor — are one and all. through competitive bidding. •■
reduced to a certain sort of homc^eneitv. that is to say.
to the homogendty of market price. But all the differ-
ences between the different productive agents and instru-
ments still persist That all are subjected to a common
price measure, which merely means that all are bought and
sold, does not obliterate these differences or reduce all pro-
ductive facts to an abstract fund In truth, money and
loan fund, — deferred options of disposing of wealth and
services, suspended purchasing power, — are the only cases of
abstractness or of true homogeneity known to economic
We have already had some occasion, and shall

I

RENT AND COST 287

I^ter have yet more, to notice that not even in point of
vxtility do equal market values express or suggest equiva-
lence. That the same man pays $500 for a furnace, a further
;oo for a piano, and a third $500 for a back kitchen to
is house, does not point to any actual or expected equality
►f service from the different lines of expenditure ; still less
lo equal outlays by different men.

Nor even by an appeal to margins is the case for

equality made stronger. That each of these three uses is

:BTiarginal in the sense of being the last item that one would

;X)urchase at the price, may be merely derivative from the

fact that each is the last that one would purchase at any

-price; and it may still remain true that one would, if

necessary, have paid indefinitely more for each of the three

things than was actually paid.

And still clearer is it that as between different men —
simply because they are different and essentially incom-
parable in their mental states, to say nothing of differences
of wealth and poverty, sickness and health, culture and
crudity, vivid feeling and obtuse feeling — ^all utility com-
parisons fail utterly and hopelessly; there is no homo-
geneity possible here but this of purchasers* offer or of
purchasers' actual payment,— either one a mere price homo-
geneity.

And all of this holds — and this is our point of goal —
for production goods as truly as for consumption goods,
though admittedly in less marked degree. Men as pro-
ducers are dissimilar, not merely in intelligence and in
special aptitude, but in wealth, in credit, and in degree and
quality of objective material equipment. Production goods
take on a different relation to different entrepreneurs
accordingly as these entrepreneurs are different in their
aptitudes, their purchasing power, their lines of produc-
tion. Even were all goods capable of being distributed
and graded into stocks of similar items, these differences in
entrepreneur relation would still exist. But, in truth, most
goods are not so gradable ; even wheat is so only arbitrarily

AT

-.-*3- —

*.'

f"

^•S.-

-L. \ ~

>-• B.k -

»»■ * M

■ j» 4 — —

k. k . I ^fc.

_^ _ .^...iB ■

RENT AND COST 289

service may be far beyond and below the ragged, saw-
crdged, market-value line of rental pajrment

A later development of the argument will serve to show
tJiSLt precisely here must fail the productivity theory of
^distribution. The remuneration is not the expression and
^^quivalent of the value productivity, but is merely the
snarket value of the value productivity. But all this must
siwait its turn.

It thus appears that the marginal producer of any
agricultural product is as likely to be upon high-rent land
as upon rentless land. A fall in price is as likely to
direct out of agriculture and into some non-agricultural
employment the tenant upon the better land or the capital
upon the better land as the tenant or the cafHtal upon the
low-priced or rentless land.

Nor is this at all to deny that rightly understood there
is, or may be, such a thing as marginal land, land which,
to the most capable cultivator of it, is barely worth cultivat-
ing upon no-rent terms ; but it is to deny that this service-
less land and rentless land are necessarily the same land ; and
especially it is to deny that a fall in price will necessarily
send into non-use all land held without rent, or that
there is any such relation between rentless land and market
price as is indicated under the Ricardian doctrine.*'

** The effects of a price fall upon land-holding are something as

follows :

A fall in the vahie of any one agricnltnral product will set free

some land for nse in the production of other agricultural products;

and when the redistribution in the uses of land has completed itself,

its final effects will sum up: (i) in a small reduction in the prices
of an other products; (2) in the same total of effects upon land rents
in general as would follow from a small fall in the value of agricultural
products in generaL

Going more into detail, it may be said that a fall in the price, say,
of wheat, will have as result a rise in both the extensive and the
intensive margins of cultivation ; that is, there will occur some outflow
of labor and capital from all grades of wheat land into other employ-
ments, both agricultural and non-agriculturaL But it is only by land
somewhere becoming vacant that landlords are likely to lower their
rents. Non>marginal lands will, however, remain only temporarily out
of cultivation; less than the old rent is better than no rent at alL

990 VALUE AND DISTRIBUTION

We approacJi now a question which has been much
debated, but which should not, at the present stage of the
discussion, occasion great difficuhy : Does the rent which
land is worth for another crop enter into the cost of the
crop actually produced ? '•

The following propositions may perhaps now be taken
either as proved or as requiring no proof:

The rent paid for land used for wheat is a part of the
cost of production of the wheat. The method of Marshall,
Hyde, and Hollander," of appealing, for a rentless price-
But with the redistribution of holdings and of lines of production, some
cullivalors hiring abandoned agriculture, the vacated belter lands will
be re-rented to cultivator! variouily Klecleil No-rent lands — or lands
>i near to this as cultivated lands ever get — may have been in the
possession of tenants some or all of whom could afford to pay an appre-
ciable rent ; these lands and ibeir tenants may be undisturbed by the
fall in price, all the while that cultivators may have been moving off
from better lands, driven therefrom by the inflexibility of landlords in
refusing to lower (he rents, or induced therefrom by the overbalan-
cing allractiocis of non-agricultural employments.

But it is not likely — itideed. it i> not possible — that the vacated
Itnds be taken up solely by cultivators moving up from thr poorer
or Ibe poorest grades of land : as rents fall and cultivation becomes
less Intensive, cultivators will turn to (arm larger areas of land.
The final adjustment will, then, sum up at something like this ; that the
marginal cultivators— on no matter what grades of land-— will mostly
have abandoned agriculture, while all cultivators will, in some measure,
have diminished by marginal reductions their output per acre: the
margin of cultivation, both extensive and intensive, will have some-
what risen ; the methods of cultivation will have moved toward a less
intensive type, — another way of asserting some measure of capital out-
flow : the reduction in the returns of agriculture in general will have
distributed itself into lower rents for Inndlorda. tower returns upon
the capital instruments slil! remaining in production, and very slightly
lower personal remunerations for the human factor in agricultural

But the marginal costs for ditfercnl products will still be the costs
at the personal margin on no matter what grades of land.

"J. S. Mill, PriHcipUj, Book HI, chap. »i : Jevons. Theory of
Political Economy, Preface, pp. liii, liv ; Patten. Theory of Dynamic
Eeonomici, p. 7S ; Hobson, Etontnniet of Diitributien, pp. iji-is>
Macfarlane. I'aiHe anil Diilribution, pp. 130-js; and A. S. Johnson,
Rem in Modern Economic Theory, pp. 7B-B1, are among the different
supporters of the aflirmative : see Marshall, principles, for the most
authoritative exposition of the negative argument ; also. A. M. Hyde,
lournal of Polilical Economy, Vol. VI, No. 3 (Jur

" Cf. article by J. H. Hollander, Quarterly lournol of Economi
January. 1B95.

Economit^^^

RENT AND COST 39^

fixing cost, to the intensive margin where no rent is earned
or paid, is fruitless; cultivators at the intensive margin
simply substitute labor and instrument outlays for rent
outlays; there is no occasion for inequality of costs, or for
the existence of marginal costs anywhere, by reason of the
land or rent fact as presented in this view.

Conceiving all supply-limiting influences as costs, it is
evident that any reduction, through corn culture, from the
amount of land to be had for wheat-raising, must neces-
sarily express itself in a diminished volume of wheat
product, in higher prices for wheat, and in higher rents
for wheat lands. But inasmuch as this leaves such wheat
^^nts as are actually paid to function as cost items in wheat
production, no reason yet appears for counting in the
possible — and smaller— corn rents.

As a collectivist doctrine the land cost of wheat would
*^ found in the displacement of com; so, in competitive
PJ'oduction, com cultivation may be the cultivator's most
attractive alternative; and, if the case were one of indiffer-
ence between wheat production, corn production, and non-
I^roduction, he might, with equal accuracy, speak of his
^^^tlay or of the potential corn as his cost. But this again
*s to call either the wheat rent or the com possibility of
Product a cost; it is not to call the corn rent a part of the
^heat cost.

In collectivist production the cranberry patch could not
/*ord a basis of cost — having, by assumption, no alterna-
^^ use. But in competitive production other competitors
^Uld pay the cranberry rent, and would thereby impose it
a cost upon the renting tenant. In competitive produc-
^n, then, the presence or absence of alternative adapta-
^^s does not decide the cost problem. Opportunity cost
^^ the individual is in his outlays or in their alterna-
^^ applications and is not necessarily a matter of the alter-
native applications of the production goods."

^ *• There is no force — ^and for present purposes, no relevancy — ^in
^^ doctrine that, because the remission of rents would not lower price,

r

jya VALUE AND DISTRIBUTION

To Mill's dictum, "When land capable of yielding rent
in agriculture is applied to some other purpose, the rent
which it would have yielded is an element in the cost of
production of the commodity which it is employed to
produce," Jevons objects:

Here Milt edges in as an exceptional case that which fiam

(o be the rule If land which has been gettii^ £a per acre

rent as pasture be ploughed up and used for raising wheat, will not
the £2 per acre be debited against the expense of the prodticlioB
of wheal?

That Jevons has assumed a case of production by a
cultivating owner somewhat obscures the reasoning. But
it is clear that if tliis owner is computing his cost according
to an alternative product, he must make the displaced
pasture product the cost of the wheat, and not the rent;
and if he is computing his cost according to the rent, he
will find the cost in that rent which, as landlord, he could
derive from the land by renting it for its most profitable
use— the wheat use — and not according to some smalla
rent quantity possibly obtainable for the pasture use;
in neither case can the pasture rent be a cost

Jevons, however, carried his doctrine to its logical con*'
elusion: "When labor is turned from one employment to
another, the wages it would otherwise have yielded must be
debited to the expense of the new product." There is
again the same sort of confusion of thought, but this time
it is in'the failure to distinguish the wages of work from
the product of work. But as applied to competitive pro-
duction, Jevons' doctrine amounts to saying that my cost
is not in what I do pay my men, but in what I might have
paid them, had I paid them less.'*

rent is no pan of cost. This would equally well hold to exclude
intereit or wages from cost. And if it be urged, as, for example, by
Hyde, that there is a marginal subsistence wage which must be paid
in order that the laborer live, it is, perhaps, fair to reply that the land-
lord may equally need the land hire in order to live ; at any rate, the
canecjiation of the hire would, as has been already shown, Gnally
result in the exhaustion of the fertility of (he land.

* It abould be noted that Seligman in his lately pubUshed
Principltt of Beoitomiet adopts in Jta mott unmitigated form the

ialla,_

thnl

RENT AND COST 293

Patton's way of putting the case is perhaps its most
rdble expression : "If the marginal land used for gar-
ning will yield a rent for wheat, the value of the mar-
mi produce of garden products must equal the cost of
e labor employed plus the cost of the land when used for
heat"

Surely the product must at least equal in value the
bor wage and the wheat rent; but it must more than
elude the wheat rent; it must incldde the rent for the
rden use, which has, by assumption, been important
ough to displace the wheat use.

But there is nevertheless, as has already been indi-
ed, some saving grace of truth in this alternative-rent-
it doctrine; an influence important for the price of
eat, and an influence much more nearly fundamental
n mere entrepreneur outlay, is vaguely in the back-
>imd of the thought. Still, it is not the displaced com
It that makes either the prices of wheat or the rents of

^ning of Jevons: "In the cost of the wheat, therefore, must
9.JS be included the rent which the marginal, or no-wheat rent,
si would cam if employed for the next lower use" (p. 377).

And Jevons is likewise followed in his confusion of rent with
Enlaced product:

'^Furthermore, not only must the marginal rent [the displaced prod-
Pi always be included in cost, and therefore in price, but in a higher
^ae the differential rent as a permanent phenomenon is also a part of
ce. The rent of anything is its product. [True only when product
used in another connection and in quite a different sense, as dis-
wtive value share.] The greater product of the better land forms
much an element of the supply as the smaller product of the poorer
d, and price depends on the relation of the total supply to the total

Hand Price is not fixed by the marginal or maximum

t but at the marginal cost, and the margin depends upon the out-

of the better grades, receding as this increases, advancing as it
s. Every bushel of wheat, whether it comes from good or poor
i, affects the supply, the price, and the margin.*'

Now note the argument: The rent on land is a price-determining
U because the product of the land is a part of the aggregate com-
dity supply. But the objection immediately arises that in this
her sense — a view which emphatically deserves far more extensive
I more thorough development than it has yet anywhere received —
cost of any sort, but only product, has anything to do with price.
d in last analysis, truly, products are not to be explained by remun-
tions, but by supply of agents ; the supply of products, being deter-

V : .: .L- ' ::^-r '--r .; - zrst ";*:=.'i -arich r/iigrht have

-- - ■ - - ■ -: ■■:- .T.riii in* -.i>fi ::r wheat that

- >; - • : .:■ — •^- lt : v r-j.-: -it-:? 'i.zzT.tT — for precisely

.. . . . . — .^ . _..^ ^_- — ,...- _. _^ -^,^ ".:-r.:ti:: ?n -jpon the

•-L .L- :> : -r^i't. l.— .'CX T'L-.er causes, of

.*■--•— -J- ^ -^ -"i: -u-».t> "J'f ^-7?'> of wheat

■ : - .-•--■ ■-■ - :-:-- r:^«tr ir.i •-hereby again the

":••■--:-»; ■ -irtix-fi 'Jr.iz rtrr. is r.:t the ulti-

* ' ■-"- ■•■ -T-:^:-:'.- :TT-f<?-.r rf iT.e '.::r.::ed quan-

1-: " -■ :-^-i'- t --- -.-^: .-i-.^tr;. . r-i:: in principle

I. -• - ■ - ■■ .L ': v-i^;:i i-l :: ;r.:ere>: as o^sts:

■"- ■ -■ ' •■:: :" r-'irrr.-* icer.i* renders the

•*."-■;■- -:.L-:; -'.''t'-:': ih; r rices hiirh. thereby

_-..-.-■ , 2C;--* r.rr. The h:^h remun-

:'i" ■ • 7: - -- ^:--: f 1 siiTc!; -'ir^itirg fact, only

•^ "■: ■ : ' *■: i-:-"^-:-*. ffr-r^ -•« .- r-rr>— on the cc-st side

--" t . .' ' : '. T' -ii:- Lt: ■:• -l zt ■:' :>.« 7r>i-j:t m wrn
^-- - ■• :? -■-::-:-.■: - : zi lt;-*- ? i: -.i:* "5 i" en a level

.*■ ■: :' -'L v •--?--.'■:••_--: -*T ir^yKi — the :r.cre*t rjpcr-

"■ - . -■ \ -x ■: w • - :r: ; ..fi ': ; . :>.? '.ircer sifjition

■ ■- • -:■ --f--- -• : — — :":.; :i:^j:.'^> cf causal

- - " - • ^ ■'....._ .r .c... c^mj..\ Willi
-- .- ' ■ -■ ■ -.;■ . ■-' *':-;'-fr -w " :r.; tT.v.Ts ::*: CvT-.putauon.

■ • ."---:-■ -.-.:■. * -_.- : : I : ■ - r* :.:;*: :"r: 7:: the catecory

- - J --.f-.ri _-'.;-:-.* ir.i'y*:*. V-::h rent and

-' - ■■ .' -.' r- ' . -' : -.1 -f i* — fr* i-.*:r-":-j:-ve >"*ire>. "Hot

- * •- _.-.-. ,-'_-'. iT.ii — -'r.f.T 5Cir:::y; r.rt wa^:**. but the
' .: ■ ■■■- - :•- -;^: 1.- ->- .— . :^: v :'.:—; :: 7^.-.^.:c: and the
Vi .- . - .■ -: ■■- - --.j ..-.-..:. I- : T Ar.r. <: :<ar.r.jr ;r. n'.ir.d that

• 'm - m ^ ^ -— ■. •-^- :^" •-JI. •■j.^* -• •• •^-•fc ^^ ■••■'' ^ ■"'■t^t^ I'l^S-

::;■:.---:■ . .- - -. -.r-; .:■. :-•-■■ r. :: arjrc-c-.iTe the -.r.r^nite cor.iusion

" :' "':- '.-.' '. r-.". ••-:-.-■ r:* \r.i ::' ier.va::ve ar.a'.y*e5 ir.vcivcd in our
<-•:.-- -r.:—:: -.' .: : r.v:-.'.:;? :ht ::i!:j« are :he rre^ent writer's":
. r.': r-r.: • : •"-■? ' - "vr :r ftr.:-.-.er: i* the pr.-duc: cf the better instni-
rr /•-.•. :! h ".:.-:: r. '/-^ -'■■::; ">' "-^ •» T-'-^ ■"■' •*"■* tc:a'. product cT .'i-'/j/
r,-. • -• : r •:-• -"vr:: rt .irTe:: the 7r:;:e. Her.ce the rent ^t p*-^\iuct
r: ■..:■[. ::. ••rj-.-i-r.: : :r i;:::: r.. whether :t ^-e lar.d or capital or
]:;■. r .■.;■.*?. -r :: '■ e r.-:r*:r.i! rr 'd::Terer.!ial 'rur. is really an element
1:. \(.': ;r:.'v tt. t:."^ r'.r.fc thr.t. were it not for that frcduct, the price
•*•/,-. J >i },•: rli;:*^n:r.t. Land is here in precisely the same position as
otli'rr things" 'p. 379'.

RENT AND COST 295

as, under entrepreneur production, it is the result and the
expression of a relatively limited supply of agents.

And now we are in position to estimate the measure of
truth contained in the view that, the market value of agents
being fixed, and the market opportunities and burdens
being common to all entrepreneurs, and the entrepreneur's
personal equation of circumstances and ability being the
selective determinant of marginalship, entrepreneur differ-
ences must stand as the only variant in the determination
of the relative costs.

Such, indeed, would be the truth, were all industries
alike in their technological aspects; were labor, for
example, the only productive agent, or were all industries
equally capital-using and land-using and labor-using in
their methods of production. Or the proposition would
hold, if it were possible indefinitely, — as in large degree it
is possible, and as at the margin it is practically always
possible, — to substitute one agent for another, so that no
relative scarcity of any kind of productive agent could ever
obtain.

But as the case actually stands, peculiarities of adapta-
tion in productive agents, and peculiarities in entrepreneur
ability and adaptation have both to be accepted as funda-
mentally directive situation facts for the supply side of the
value equation.

- 1-- :-f.

: _ f-LTr. :r.e word
- ■.■•!•? r. :■: h :•!■], in

■_: ".::tr£:-re and
■!- >ui-. r :• :hy>e

."— ■-•.-. the

:>.t r-"i::r:a] and

z.'::.:*r. ir.iTi :> the

• • •

:. i>::r^".::?hfi and
- !-• :^::v a*:: c-n-

■ ■.A. ai*-.^'

I'

.-. . .... ^-" "^

:'-7 Tc :• r 1 : T t-A"-
'..T.: ^ :t::. :\ z -merely
^ ' ^:: " : ::r:::>: n an-l
"." :r.-.Tv :> r.-e a-.'-c-.
- - » ■■ i 'v i7t a

: t:: :■- :".ake the k>t
•. : r. e : '.'. \\ i ni^ • !i <cm^-
y Vk: tTikin a> clear that
r.^::-re'.ati«»:i.i!.

:h;- well-being of an indi-

2,6

THE MODERN MOVEMENT 297

il Objective exchange Wert is the ability to com-

■^^Ti<3 in exchange a quantity of other economic goods.*

Boehm-Bawerk regards this objective Wert as a quality
^-^tached to the good, and as without any necessary impli-
^^^tion of service to the well-being of any individual; the
concept is of a purely objective fact — the power of
purchase — Kraft. There is, in fact, said to be no possi-
bility of rendering subjective Wert over into objective
^ert; though the first may be used to explain the second,
there must be a distinct theoretical system for both. But
"that two so distinct subjects must be handled under the
one name of Wert is unquestionably a source of great
danger." *

A good may stand as more than the service ful cause —
»t may be the necessary condition — of human well-being;
herein lies the distinction between utility and worth. Worth
irnplies that

''''ith the possession or the loss of the good a satisfaction
^aiwis or falls When, with a good, an item of satisfac-
tion, well-being, pleasure, is at stake, then will the effective interest
^''^ take in our own well-being be transferred to the good which we
""^^ognize as the condition; in it we respect and prize our own
^«lfare.«

Nor is the notion of cost a necessary element in the

^^rth concept; worth might exist with goods supplied by

*^^ bountry of nature, if only the supply were limited.

^orth implies merely "that importance which a good or

^^tnplex of goods, as the recognized condition of an other-

}^^S€ absent utility, acquires for the well-being of an

^^dividual." * "The measure [das Mass] of the dependent

^^rvice is everywhere the measure [das Mass] of the worth

^* the good." »

.. ^Bugen V. Boehm-Bawerk, "Grundzuge der Theorie des wirtschaft-
Jjchcn Werts." p. 4. (Conrads Jahrhucher, 1886, neue Folge, XIII,
PP- 1-82, 477-541).

^thid., p. 7. *Ibid., p. 13.

*thid„ p, 9. * Ibid.j p. 20.

:» • *. t^y

■ « V. • *. • -

* •< • < V. tmt

.. ■■••.- -»-i",r«.»

il* * % ^ . •

.... . «^ .T.. ■ .

' • • « « f ** •

V

I « ■ • ,

THE MODERN MOVEMENT 299

<lepend in part upon the degree of the individual want, in
I>art also upon the size of the stock of goods. And here
ioUows doctrine invaluable for future purposes:

Since the relation of needs and provision may be extremely
Afferent with different individuals, it follows that one and the
s^me good may have many different degrees of subjective worth
for different persons, a fact, in the absence of which the existence
of exchange would be absolutely unthinkable. Thus, in otherwise
similar circumstances, the same quantity of goods has for poor and
rich a different worth — lower for the rich, higher for the poor.*

Now passing over for the moment, as does Boehm-
Bawerk finally, the difficulty of making utilities for differ-
ent men commensurable or even comparable, and assuming
this difference in worth for the rich man as compared
with the poor man, we stop to note that each of these
csists of worth is conceived by Boehm-Bawerk as a quan-
tity of absolute magnitude, a matter in each case of the
intensity of the need depending for its satisfaction upon
the good in question. But the difficulty remains that
solely upon the basis of these absolute magnitudes, no
exchange can ever be worked out; if otherwise, there
w^ould never be any end to the exchanging between rich and
Ppor. That they exchange, the poor man a horse, and the
'^ch man a cow, gives no evidence of the importance to
either man of either the horse or the cow, and indicates
^'^y that to one the horse is more important than the cow,
f^ the other, the cow more important than the horse; that
*^ to say, an exchange can take place only because the two
^clers differ in their estimates of the relative importance
*T*the relative marginal utility — of the items under con-
/^eration, differences not of subjective worth — these of
^^rnselves would be irrelevant — but differences in relative
^t^jective worth.

All this has, of course, nothing to say as to the impor-
^^ce or the accuracy of the Austrian concept of subjective
Yp^h, but refers only to the relation of this concept to the
*^*^^nomena of markets and of market values.

Nor, in view of occasional passages in Austrian discus-

^*On, particularly in the work of Boehm-Bawerk, is it open

^ doubt that, upon occasion, full recognition is accorded in

"^Vistrian theory to this obvious fact of doctrine. But it is

*Ibid,, p. 41.

"l * ^ * *£, *J • ^ Z^ Z.^' I f Z^ "^ 1 m

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iT. ! • •.:■.•• ! '.v»T. _r>t what

:•: "':■-•: i-'-t the e-;. ■:: .:»:i>t:
*'. • '•. a vairiie ani inac-

i!. ::: the final and u!tiin?itc

V-. k- i" :::: under your hat and

- '. "tT'.r.: :■■- each — the woman wc

•'. ::-h -A* ci! has nf»i the '».iiiic

- ;.r. : i are hut a pair f.t infinite

■, :*.:!•: r.."rv cr less near us." —

". .

THE MODERN MOVEMENT 301

psychological analysis, the more or less in these cases is
itself essentially relative ; to say that a thing pains me more
Aan it pains you is true only with the reference and with
tbe limitation of my larger or smaller capacity, my powers
of endurance and of self-control, and the intensity of my
coexisting sensations, perceptions, and emotions; that is
to say, the comparison of my pains and yours is a matter
solely of the relative importance of these quantities, each
as parts of two distinct sensational and emotional situations
and systems ; that my more is more only in the sense that it
is» as a question of proportioi^ a larger share in my emo-
tional system, — is a greater quantity as matter of proportion,
the things being compared only in this aspect of ratios
to the other facts in their respective sensational and
emotional environments.

But with the recognition that, as applied to items of
demand or to items of supply, subjective worth is an
irrelevant concept until carried oyer into a comparison of
two subjective worths — into a subjective valuation — that
is, with Austrian theory interpreted at its best, it becomes
true, and is to be regarded as one of the chief merits of the
Austrian analysis that this difficulty as to the comparability
of the mental states of different men disappears ; the ratios
of equality or of inequality can be compared, entirely
irresplective of the quantities constituting the ratios.^^

But there still remains the problem as to how the dif-
ferent feelings of the same individual, at any particular
time and in any given set of circumstances, are somehow
reduced to a common denominator and made commen-
surable; and here the discussion of Boehm-Bawerk is, in
the main, admirably convincing:

Are feelings in any wise rational facts, and, even if so,
are they susceptible of rational measurement and com-

**The difficulty disappears for value theory, in the restricted
tense; but it is not so clear that it does not persist for the theory of
interest. For, if my emotional quantities are not comparable with
yours, how comes it that my emotional quantities of today are com-
parable with those of a week or a year hence? It is, perhaps, enough
that each individual does somehow make the comparison, in a manner
satisfactory to himself, and that with what justification and with what
measure of accuracy or of error need not concern the economic inves-
tigator. Perhaps it is enough that different situations appeal with
different degrees of strength to present will and choice.

ya VALUE AND DISTRIBUTION

r

^H parison ? Can whimsies be subjected to appraisal, so as to
^H stand in mathcnatical relations of beauty, agreeabteneu,
^^^or sweetness. — this person or thing one and one-half times
^^Kh hwitifiil or as beloved as another, etc. ? Well, if, at least
^^R|t WHK cnide but effective fashion, they were not so. no
^ ——■*■■'■■- life would be possible; there could be no principle
of gnatest pleasure with least pain; if we were unable to
posit the greater here and (he less there, we should ha«
no way of deciding which desire to satisfy or to provide
against. Somehow we do the thing. The pleasure from a
cold bath is sofiiciently unhke that from a symphony con-
cert, and both from that of satisfying hunger or thirst; but
we know right well at any given time which pleasure is ihe
greatest [which opportunity most attracts us). Likewise
the toothache is a t&flerent sort of pain from a pin prick;
bat we are able to decide which is the greater matter.
Somdiow we arrive at a decision whether, with a scaat
supply of water, to nse it for drinking purposes, or for
watering the crops. That we have an economic life is the
proof that wc do find a basis of comniensurability, or at
least of appruximatc comparability. We do decide that one
pleasure is, in a general way, greater than another.

But after all, can we arrive at the conclusion that one i»
greatly better, or nnxlerately better, or, again, only incon-
siderably better or greater than another? Can we get at it
to any accurate way, even to mathematical precision,
that pleasure A may be pronounced to be, say, three timet
as great as pleasure Bf We certainly do it, and wc da<
certainly express ourselves in this precise way, althou{^
the quality of the process may not rationally justify tf*
preciscness in the statement of the result. How otherwise
should we trade? A boy is about to buy some fruit; W.
may have for his nK>ney one apple or six plums. He doe*
in fact compare the pleasures ; and in getting at a dedsioi^!
he must do more than decide that he likes apples better
than plums; he must decide whether he prefers one apptl
six plums, or six plums to one apple. Or if two boy%j

THE MODERN MOVEMENT 303

v4 and B, are trading plums for apples, shall A accept the
o8fer of three plums for one apple? Take it that he refuses
successive offers of three, four, and five, but accepts tlie
offer of six; all this is nothing e!se than a judgment on
[lis part that the pleasure from the offered good is or is not
greater than the pleasure obtainable from the quid pro quo
to be rendered.

And it is plain that if we can call an apple worth three
plums, we can call a plum worth one-lhird of an apple.
W* do arrive at matliematical statements, precise, definite
ratios; and so it is perhaps true, as von Wieser insists,
that all of these relations of greater and of less worth
finally trace back to relations of equality.

But we remark that while all this is, in the main, as
convincing as it is clear in statement, there are nevertheless
some implications in it to call for question. The dubious
spect of it all is that it all sounds in terms of pleasure and
pain, the comparison of pleasure with pleasure, or of pain
■with pain, or of pleasure against pain. It is true that this
IS not peculiar to the Austrians, — to the utihty school, so
called, in economic thought; it is characteristic of all or of
nearly all of economic discussion present and past. But it
is the more manifest that with the rapid movement in
psychological opinion toward what is termed the "volitional
on functional psychology" as distinguished from the pas-
s'Ve or associationist point of view— the newer insistence
ypKJn impulse and instinct in human activity as against
."^Iculating and reflective choice — there is becoming increas-
"*fily clear the necessity for reformulation of the funda-
"^^ntal assumptions of economic theory. The pftKess of
''^luation is distinctly a psychological phenomenon, and the
■^""oblem of value is the fundamental problem in economic
?5^*ence. It may not be too much to say that the next
'*>le of advance in economic theory will be distinctly psy-
^■^ological in character, and tiiat further progress awaits
*^ new impulse at the hands of the psychologist.

It must be admitted that in all fields of investigation,
^ther than jurisprudence and economics, utilitarianism
stands as a point of view discredited and outworn. How-
ever defensible this iaggardness may be for a science where

I

i

yH VALUE AND DISTRIBUTION

the question is merely, as in Jurisprudence, on what reason-
ings have legal precedents and legal institutions been
worked out, there can be in utilitarianism no rcsiing-place
for those sciences which. Hke economics, ask not what
opinion the doctors of the science have held concerning the
facts, but what objectively are the facts. Economics most
keep itself abreast of modem thought or, at the worst, must
more or less belatedly follow after. The preliminary step
is. then, to recognize that utilitarianism, or any form of
hedonistic theory, is a thing of the past

It is precisely from this point of view that the Austrian
school comes seriously under suspicion. Whether it be
by necessity and fundamentally, or merely through ter-
minology and gratuitously, there is overmuch flavor in it
of Benthamism, too much talk of utility in the sense of
pleasure, and too much analysis of market activities in the
aspect, not merely of egoistical and cool-headed farsighted-
ness, but also of calculations worked out under a com-
mon denominator of utility for feeling — "pleasure by the
shilling's worth."

This is. in any event, if not bad doctrine, at least ques-
tionable and unnecessary doctrine. It lacks catholicity.
There are too many thinkers who believe that men sell and
buy economic goods from impulse and habit and irreflec-
tion — that instinct and appetite and spontaneity manifest
themselves in the economic world as truly as in the world
of play or romance. There are those going even so far as
to say that primarily we do not desire things because they
give us pleasure, but that they give us pleasure because
we desire them. Just as the chicken pecks its way out
of its shell without foreknowledge of the glories of the
outside day. and, immediately upon exit, picks up a grain
or two of sand, nowise interested in the nearby gratification
from its pungent flavor or in the far-away joys to accrue
from a well-sanded digestion, just so human instincts and
tastes and impulses reach their time, and spontaneous
activities press forward to expression; rattles wane and
dolls wax, while in later succession sleds and canes and
sweethearts and homes and offspring and offices and pro-
fessorships crowd upon the stage of human activity.
Things move from indifference through gratification to
satiation, as men change in their equipment of desires and
tastes and sympathies ; and, when a thing comes to give

J

THE MODERN MOVEMENT 3^5

» pleasure, it does so merely because we have come to
kc it As one wakes in the morning according to the
oner time-lock which he set at bed-going, as the hypnotic
>atient carries out, days later, the mandate given during
his forgotten trance experience, as the idie fixe of patho-
logical mental conditions, or even of habit, guards one
against all influence of argument or appeal, as the resolve
of yesterday remains by that mere fact the cherished goal
of today, so do all of us, in a wide domain of our activities,
fnove in a half -blind trance of inherited impulses and
instincts and of acquired tendencies and aims. So much of
our action is essentially reflex that there is more question
whether any of it is altogether calculated and purposeful
ftan whether all of it is.

Boehm-Bawerk insists that we could not choose if we

could not measure exactly. Possibly so; it is, however,

"nportant for the economic life only that we choose, and

't is neither important nor clear that we choose or compute

^r compare in terms of the pleasure or the pain equivalents

^^ the goods. It may be that the desire is for the good —

f^« commodity, the fact — ^and not for the pleasure of which

'^ may be the key. Possibly enough, the pleasure is a sort

^^ by-product, an incident. So one may enjoy the process

^^ getting rich rather than the wealth when acquired. It is

^*^en more important for happiness to have a goal than to

'"^^ch it. Or, doubtless, the desire may reach out solely

^^ward the goal."

The fisherman who, when asked whether he was getting

?^y fish, replied that he was not fishing for fish, but for

*^*^^sure, certainly may have spoken the truth; doubtless

^^^e of our activity is worked out under the pleasure

^Jctilus. But it is equally certain that one may be fishing

^^ fish, and not for pleasure ; not all of our action is to be

^^clxiced to a pleasure-and-pain computation ; there is a

Spontaneous unfolding of activity — the disposition to func-

'^^ — the type of action insisted upon in the ethical theory

Ji^lled "energism." Play may be its own end and justifica-

*^^, not the pleasure of play ; many men keep up the habit

^\ living, with all its necessary and incidental activities,

^^thout attributing pleasure to the parts separately or to

. , "A student reports to me the reply of a pettilant and inconsolable
'^^Id: "I don't want nothing; I just want to want something." Later
^^^i of life know this feeling better.

jofi VALUE AND DISTRIBUTION ^

the aggregate, and even under the conviction that life is a
burden. A race of pessimists might not suffer in numbers,
as compared with the most devoted of pica sure-seeking
Epicureans. We seek things because they respond to our
wants. It is sufficient that the fact be a desired fact, an
inducing fact, a fact operative to call forth a response of
will and choice. Who knows that he desires a tiling or a
situation always with a degree of intensity proportioned to
the pleasure that the fact when attained will give, or is
expected to give? Is the martyr seeking the pleasures of
martyrdom? Now and then does not one smoke, at some
blind "I must" call of habit, and even with the full knowl-
edge that the process will not afford pleasure, and that the
result will be a headache? Are the desires of sex. or the
parental instincts and activities, sheer computations of
pleasure? And if all our rational activities could be justi-
fied under this hedonistic calculus, and yet if this be not. in
fact, the computation according to which they are under-
taken, and if many of our activities are not reasoned, but
are, instead, intuitive or habitual and, in either case, uncal-
cutated, it must follow that another and more inclusive
formula than that of the hedonist is in need of seeking. It
is enough that we choose in fine gradations and with clear
distinctions, and it does not matter whether the measure be
accurate, the process rational, or the result correct.

That most of our activity' is of the irrcflective tradi-
tional sort is. indeed, admitted by Boehm-Bawerk : "Num-
berless economic acts are performed purely automatically
or mechanically;"" and all choices might be reached in as
mechanical a way as some are — and as perhaps all really arc
— and yet the economic facts would remain practically
and theoretically much as now. We do seem to ourselves
to do some considering: we might do either more or less
and still the fact of deciding would remain — choices between
goods and choices between alternative activities would still
take place, and our economic theories would still formulate
themselves very much as they are now formulated.

I must simply insist with al! emphasis that the correctness of
our measurements does not signify, but only that we make
them Well or ill the reckoning is done in terms of corn-
men surabi lily." ~

■* Boelun-Bawerki op. cU., p. 49. "Ibid., p. 50.

THE MODERN MOVEMENT 3^7

So it does not much matter for the economic aspects of
either the older or the newer thought whether one concurs
in the anti-utilitarian protest. The later investigators, like
the earlier, appear to be grievously given over to hedon-
ism; but so have other men been to Methodism without
obvious disadvantage to their economic theories. So much
is, indeed, asserted by both Boehm-Bawerk and von Wieser ;
and one wonders mostly why, if all this hedonism is, in
fact, so unessential, one finds so much oi it.** And yet it
niay safely be asserted that there is not one single essential

^"Men strive after happiness. This is, perhaps, the most general,

^ certainly the most vague, expression for a complex of strivings,

^n of which have for the object the bringing about of such occurrences

^d conditions as we know and feel to be pleasant, and the avoiding

of those we know to be unpleasant. Instead of 'striving after happi-

'^^ss,' we may use the expression 'striving after self-preservation and

«*lf-<ievelopment,' or 'striving after the greatest furtherance of life.'

Or we may, with equal propriety, use the words 'striving after the

iQost complete possible satisfaction of wants ;' for the expressions we

^^^ so familiar with in economic terminology, 'want' and 'satisfaction

o^ want,' mean, in the last resort, nothing else than, respectively, the

'''^satisfied craving of man to be put under conditions he thinks desir-

^ble or more desirable than those he has, and the successful obtaining

*** such conditions." — Positive Theory of Capital, p. 9.

"To many of us it seems a positive hindrance to the fair fame of

'^litical economy now that its professors should talk of a 'calculus

*■ pleasures and pains,' as if that were the foundation on which all

^l^onomical theory must rest. If the economist is no longer assumed

suppose that all men act only from self-interest in the narrowest

~^|*se, why should he be supposed to measure only pleasures and

**^iOs?" — Bonar, Philosophy and Political Economy, p. 236.

The facts are simply these : Every species of wealth is of value
^s in so far as it helps us to supply some of our wants. These wants
- of an almost endless variety, and differ very greatly in the degree

tlieir importance If any of these wants remain entirely

^^*^tisfied, we are to that extent the losers ; and their loss is in pro-

S^'^on to the importance of the wants whose satisfaction is desired.

^^ each of our wants demands only a limited amount of the material

^ich is appropriate to 'its gratification ; and, when this has been

^'^tited, it demands no more. Moreover, each want can in general be

'^I^plicd in such a way as to serve its purpose moderately well with a

^^siderable less amount of material than that which would bring it up

^he limit at which the demand would absolutely cease. Hence, as

..^^Ith increases in a particular direction the increments in

_.^t direction become less and less valuable for the supply

. our wants. In all this there is no necessary reference

1^ pleasure. If the need of living continued, we should go on about as

^^orc without any connection of pleasure with the gratification of

7*^>it We have seen already wherein the plausibility of the

^^^trine consists. Our end seems plainly to be in the realization of
^^'inething which our nature wants. Such a realization brings pleasure.

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THE MODERN MOVEMENT 309

"Jcrefore, no occasion to enter into a criticism of the
Austrian terminology purely in the aspect of its philo-
^phical or ethical implications. However bad the psy-
chology of the demand school in economics may appear,

^vironment. In other words, it is his object to show that all the
characteristics of human and animal life are due entirely to environ-
"Oental influences

"From the hedonistic standpoint the fundamental characteristic
of human nature is its tendency toward passive conformity. There are
iu> specific impulses to satisfy, no specific ends to be accomplished ;
our only object is to make ourselves as comfortable as possible in view
of the existing conditions ; and provided we are comfortable, it matters
not what kind of a life we lead

*'The hedonistic theory may then be regarded as a mechanical
▼iew of conduct. The ethical theory implies immediately a mechanical
psychology, which attributes all the i^enomena of conscious life to
combinations of simple mental elements ; more remotely a mechanical
biology which translates the mental elements into physiological
elements and the law of association into a biological law ; and finally
&^ mechanical cosmology which reduces all the reality of the world to
■iniplc physical elements governed by one physical law" (chap, vii,
PP- 95-1 1 1 , passim ) ,

Thus all ethical appraisals, whether of approval or of disapproval,
come to be interpreted as a sort of brain-tissue memory established by
]^*^i experience, individual or racial, into lines of least resistance and
'^^Qate association between brain centers, in such wise that the facts
^'* activities commonly connected in experience with pleasure or pain
^'^ regarded with approval or with disapproval as the representatives
^'* ^e equivalents of the respectively associated i)leasures or pains.

Among many possible illustrations of the prevailing hedonism of
^^«*omic thought, the following are offered as typical:

- Seager: "The normal purpose of consumption is to afford

^ ^*»ure" (op. cit., p. 67). "The sum of the efforts and sacrifices that

^ involved in production constitute what is known in economics

^^. the cost of production Sacrifices the doing of

1^ ^'^s that are less pleasurable than other things that might be done
^^t free from any element of pain" (p. 53).

Seligman: "The motive that guides men in their economic life is

^times described as the economic motive. It may best be defined

tHe motive that compels every human being to satisfy his wants with

. ' smallest possible effort, or which leads him to secure the most

^«ure with the least pain Human beings are impelled by

**^r motives as well In searching for the fundamental laws

^^ economics it is convenient to exclude all motives save the

r^^nomic The so-called economic man is a complete abstrac-

, ^»U By the economic man is meant the human being dominated
^ the economic motive. Such a man does not, however, really

1."^**! Side by side with the economic life are the aesthetic

2^^> the religious life, the intellectual life It is, indeed, the

^^'^ction of economics to study that aspect of human life known as the

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THE MODERN MOVEMENT 3"

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importance for happiness" or imply any sort of "pain
or pleasure calculus." Desirability in the sense of the
capacity to be desired is inaccurate, while desiredness is at
least awkward. If, however, one revolts at the use of
utility and marginal utility, desiredness and marginal
desiredness may perhaps be acceptable.

Acquiescence in the term utility carries with it also an
acceptance of marginal utility. Entirely aside from any
question as to the dubious purposes to which this second
term has been subjected in economic discussion, it is clear
that it stands for an actual fact in individual experience.

unnecessary choices between competing presuppositions or competing
schools of ethical theory.

Pantaleoni {op. cit., p. 26), for example, discusses the question
whether pleasure is negative pain, or whether, on the contrary, pleasure
And pain are qualitatively distinct sensations, and inclines, on the
whole, to the first, the positive-and-negative view, as the better
explaining the experienced actual comparability and the patently actual
commensurability of the two.

The better opinion seems to the present writer to be that pain and

pleasure are multifarious, pain no more accurately the negative of

pleasure than is one pleasure or one pain the negative of another

P^in or another pleasure ; and that no item of pleasure is comparable

or commensurable with any other, or with any pain item, and no item

p^ pain like or unlike any other item either of pleasure or of pain,

ixa any other sense than that all, as objective facts arousing liking

^^ repugnance, must make their separate and respective claims upon

^^c will, are thus brought under a common denominator of desire, and

^*^ commensurable with respect to the strength of the appeal which

'^'^ make to choice, — ^the relative force of the competing desires to have

^v to avoid. "It is a simple psychological fact that, as we cannot know

^^nelvcs except in relation to objects from which we distinguish -

^^'^'■elvcs, so we cannot seek our own pleasure except in objects

^J^ich are distinguishable from that pleasure, and which we desire for

^^mselves. Desire always in the first instance looks outward to the

^^ject and only indirectly through the object to the self; pleasure

^^J8C8 of the realization of desire, but the desire is primarily for some-

*?''^ else than the pleasure ; and though it may gradually become

^"^^tured by the consciousness of the objective result, it can never

•"^tirely lose its objective reference. The pleasure seeker is an

^traction ; for just in proportion as we approximate to the state of

^* pure hunter for pleasure, for whom all objective interest is lost in

J*|^-ieeking, it is demonstrable by the nature of the case, and sh*own

^ experience, that for us all pleasure must cease" (Caird, He get,

. *'We can only have the highest happiness — such as goes along with
y^ a great man — by having wide thoughts, and much feeling for
** rest of the world as well as ourselves ; and this sort of happiness
^ten brings so much pain with it that we can only tell it from pain
^ its being what we would choose before everything else, because our
•^s sec it is good" (George Eliot, Rotnola, III, 290).

O-TJE AND DISTRIBlTnON

lis best illustration is found in the falling intensity of llie
desires of any individual for any given sort of commodity
at any given point of time. Successive increments of sup-
ply call forth a continually diminishing response of desire
But note that, tf the case be not conceived as one of a sac-
cession of conunodity items — if no item be regarded as
coming early or late as compared with any other, but all
as portions of a stock already in hand — it is no longer
possible to regard any one item as entitled as against uiy
other to the marginal place. Any item may stand as mar-
ginal iu the sense that the loss of it would be felt is
involving only the utility depending upon it. which ntiUty
would be equivalent to the utility of the last i(em in the
series, were the different items acquired or considered
successively.

It by no means follows, however, that each of the items
is marginal because any one of them may be so. Not all
of the items of a stock can be marginal at once. The
utility loss that will be suffered in the loss of the entire
stock is not the marginal utility times the number of
items, but the utility of the entire stock conceived as ^-"
marginal stock. No one item can be regarded as marginar
excepting on such terms of regrouping as shall impose the
non-marginal quality upon all the others.*"

It needs also to be clearly held in mind that in utility
schedules we never get beyond the individual, and thit
marginal utility is purely a matter of the individual
psychology. For different individuals there can be no

" Wieser appearj to be of the olher opinion : "The majoritjr of
theorists .... are asrent that these prices are fixed by a marginal
taw. We, however, have none still farther, and say that value genenlly
and in every form, even that of use. and even where there is no
exchange .... must obey a marginal law. J evens. Goisen, and
Walras have not gone so far as to assert this. To these writers the
utility of the separate portions or items of one supply is difFetcBl

according to the amount of use which each acttially gives I

can scarcely hope to have converted him [the reader] all at once to
BUth an unfamiliar aspect of the question" (Nalural Valut, p. 26, note.)
But in another note upon page forty-four Wieser slates the position again
in a way to raise the query whether he is not talking about value rather
than utility. In fact, in the second case he employs the word vain*
for seemingly precisely the same meaning as was in the former ease
expressed by ulilily, (he two slalemenls together being perhaps mostly
serviceable as illustrating the confusion of «(i7i(y with value character-
iitic of Auatrian discuisioo.

^0

1

THE MODERN MOVEMENT 3^3

^mparison of utilities either qualitatively or quantita-
tively. As including more than one individual schedule,
there is, therefore, no possibility of a marginal service in
the sense of the smallest service of a descending series;
there is no series. That A will pay 30 and £ 29 in no
sense implies that the utility to B is to the utility to A
as 29 : 30. One may be willing to give today for bread
double what he would have given a year ago, though only
equally as hungry today. The strength of his desire for
other things is a necessary factor. Cases are, as we have
seen, marginal, not in terms of absolute utility, but only of
relative utility. A wealth of illustrations edifying to the
point of weariness about the cigar and the loaf. Dives and
Lazarus, the starving man and the man at feast, ought
long since to have placed this truth beyond either the
right or the danger of serious discussion, but have not
<lone so. We still hear that stocks of goods in the
gr^neral market may be ranged imder one schedule with
^'^e margin of utility, and that the margin of utility both
^^ermines and is the market value for all the items of
^c market stock.

Thus, considered merely as the marginal item in an
*J^<iividual schedule, marginal utility becomes no more
^^?n vaguely quantitative — ^the assertion of a smaller
utility than any other in the series. In no degree is it a
'^^a^ure of the absolute utility or of the precise ratio in
utility which any item in the series bears to any other. To
?^y that a certain utility is the smallest of a series does not
^'^ply anything about the size of this utility. The smallest
t^t^to in the bin may be a very sizable potato.

From the very fact also that the series is a series, and
^^t the very law of satiation which it expresses requires
^^t the items of the series be unequal in utility volume,
^^re can be no term within the series capable of serving
*^^urately as the utility measure of any other.

^ Nor is it more defensible to assert that the measure of
^^ utility is to be found in money. To say that the limit
^5*5ce upon a horse for a would-be buyer is 30 means
^^tnply that at any price above 30 the bidder would prefer
.^ reserve his purchasing power for other purposes. But
^^ will not do to assert with the Austrians that this 30
^easures the utility of either the goods or the horse.
Tliere is no such thing as measuring utility in money.

^Vju VALUE AND DisnoBtmoN H

I

All that the prict limit of jo says is that, as between th*^
utilities ui two [hitigs purchasable at 30, to ga as hr ^^^
30 for the hoTK is to reach the point of indifference, .^^^f
higher than 30 tnmetJitng else is preferable. This J^^a
mark Kpeaks as to the relative utility — to the particula— ^^
individual— of horses and other things, but says nothin^^^
as to the absolute utility of the things compared Thaf^ ^
John U tallrr than Tom tells nothing of how tall either is, '
Likewise, to assert an equality of utility between two
things tells nothing as to the absolute utility of dlher,
That all the potatoes in a bin are of equal size leaves
everything in the dark as to the size of any of them.

It fdlown that the vague term vlUity gets quit of only
one diiT>cn*ion of iu vagueness in bcroming marginal.
Nor docs the strictly marginal utility — tlie lowest utility
of the Scries — do even this. It is only when a quantitative
relation of utility is asserted with reference to a commodity
outside the series — when utility becomes relative — thata
marginal utility, so called, can express itself in price lim'
or Income relevant to the i^ienorncna of exchange,"

"Tbc leneral KlitiDn o( utility lo wcaJih atid lo value may now.
petbapB. be nioclljr takm for granted.

ScRlur Ucfinn wcitth ai "alt tboic ibiogi, and those Uiiogs only,
which pre trBniferatite. are limited in fupply. and are directly or indi-
rectly productive of pleaiure or prFvenlivc of pain." Note the three
rcquidtes: (1) Iraniferability, li) liniitalioo in nippiy. (3)
ta^e In terma of pleaiure or of prerenlion of paio.

GnoUKh bat been, for present purposes. - uid of the pi
pleature implications of utility. Ai lo Irantferabilily it ii
objected that while it it CTidently an etsential condition to
exchangealiilily and thereby an important influence upon the utility of
any good to its possessor, a ihing may yet he useful withou
tranaferablr, and. if other conditions coexist, may have value
Individual. Jevona {Prinriflei of EcoHotHict, Macmiltan, 1905
puts the cose thus: "Transfcrableneit ... , is . . . . ii
cases a question of degree. There are comparatively few things whii
ihouKh useful to one petaon, are absolutely uaeteat to another.
An old family portrait may be more intere sting and useful
family than 10 oiher people ; but if its painter is of repute and stall,
it may, nevertheless, be valued by other owners. A rare edition may
be almost priceless for the hooh-col lector who wants it lo complete his
aeries, but it may be desired by other collectors with less warmth."

This Is, Iruly, an ai:curaie pantphivse of Senior (op. dl.. pp. 8-to)
who U cited by Jevoni with approval But clearly enough, (he talk
here It not of transferability in any ordinary sense : ihe difficulty it
not — so far as, in desree, there is any difficulty— that the utefulntia
cannot be a«*i)[ned, but Ibat there is none lo be assigned ; buyt
have, If, in their view, there were anything to be bad. T
than the possesior, the thing in question Uclu utility ; they do

— ina*.™
limitaf

in^ai^l

to «■

marlaf^

!y of

being
> the

nHMlfl

"1

THE MODERN MOVEMENT 3^5

The concept of marginal utility is, beyond question, of

great significance in economic analysis, though as we have

seen, and shall repeatedly have occasion to note, it is often

most disastrously confused with marginal purchaser's price,

is, with relative marginal utility, — relative subjective

ih, subjective value.

But evidently it is only the latter concept that has any
or share in the term value as a market category and
ression of purchasing power. Value in this relational
emerges only when utilities, as an individual cate-
, have been, by different individuals, conceived rela-
<ly to other utilities to be displaced. For different
jers the relative utilities of horses to other goods, when
pressed in terms of money as 30, 28, 26, etc., are purely
Tsonal estimates as to the utility of horses compared with
utility of the things which each buyer must forego in
e event that he purchases a horse ; and these are marginal
^timates, since each expresses the purchasing disposition
^^shed to the point of indifference. Each of these money
^'teitements is, therefore, an expression of subjective value —

^sirc. But the next point made by Jevons, still following Senior, is

alid : "The question, of course, is not one of mere physical trans-

«rability. There are some things, such as land, which cannot be

anded about, but can only be transferred in legal possession. Other

for instance, a beautiful voice, cannot be received or parted

ft

And just as transferability is a condition neither to utility, nor to

"^alvie in the individual schedule and in the relative sense, but is an

essential only to exchangeability, so Senior's second requirement,

limitation in supply, is accurately a condition not to the existence of

Titility but only of utility in the marginal items, or more accurately, to

utility in all of the items of the stock ; and as condition to marginal

utility, and thereby to subjective worth, and thereby to the comparison

of worths, it is finally a condition to the existence of market value.

There is, however, in the books, much confusion of utility with
marginal utility; of this the following cases — entirely outside the
Austrian sponsorship — may be cited as typical examples:

"At a fi^ven moment there is a given number of units and there
is but one marginal utility, and this is the same for each of the units.
It is quite erroneous to say that where there are 30 units, the utility of
the tenth is 36: of the twentieth 25 : of the thirteenth 19. It is equally
incorrect to say that when there are 60 units, the 'total utility' is
equal to the area between the right angle and — etc.," "while the value
is equal to the rectangle, etc." — Fetter, Principles, p. 25.

From Seligman, Principles, p. 176: "At any given time the utility
of each apple is equal to that of the last, and therefore to that of any
of them."

And Seligman, carrying out the implications of this position, adds:

3l6 VALUE AND DISTRIBUTION

not subjective worth, but subjective value, a relational fact
— money serving as mere equation sign between subjective
worths of unknown size: x=yf with no notion as to the
magnitude of either x or y. Mere marginal utility — sub-
jective zvorih, for most purposes (but see later?) — ex-
presses the utility that is lost in the loss of one item of
stock. In relative tnarginal utility, loss in terms of some-
thing else, the thought is carried over into the field of
value.

We are now ready for further additions to our equip-
ment of terms. Market value is the objective resultant —
the equilibrium point— of all the different subjective lvalues
implicated in the market. The marginal traders are those
with whose subjective valuations the market adjustment

"The marginal utility of the stock .... is always equal to tiie
marginal utility of the final unit multiplied by the number of units ;*'or
as Fetter puts the same view: "The dependence felt by men on the
group is the product of the units by the marginal^utility" (p. 25).

It is of course to be objected that the service derived from the
whole group of units, considered as an indivisible aggregate, or the
loss which would be sustained by the loss of the entire group is some-
thing indefinitely greater — possibly infinitely greater — than the product
of the marginal utility multiplied by the number of units. It is true
that, taken separately, no one item can have greater importance attached
to it than has the marginal item, since, when the items are considered
separately, substitution is possible : but all the items have not the same
utility. If it were really true that the utility of each item of a stock
falls to the level of the last item, and if it were true that the total
utility of the RToup is the product of the marginal utility multiplied by
the number of items, there could never be any utility in any single
item or in any group of items, so long as the supply were sufficient
to allow any part of it to be free goods. That is to say, the view
presented by Professor Seligman permits the emergence of utility only
as the result of scarcity : and yet scarcity alone is not sufficient for
value — else mosquitoes would be valuable in winter. What name
shall serve to denote the other essential ?

In a general way, the notion of utility is doubtless fairly clearly
held in economic thought : and not much needs here be said in this
connection. Jcvon's statement of the case is in the main admirable:

"Most persons confuse the utility with the physical qualities which
are merely the basis or requisite condition of the utility. The utility
of gold, for instance, cannot be said to consist in its beautiful yellow
color, its ductility, freedom from corrosion, and high specific gravity.
If these qualities constituted utility, then gold would be useful even to
the drowning traveler whose pockets are loaded with coin. The
water of the river in which he drowns would, moreover, be useful,
because its qualities remain the same as if it served the population of
a town for drinking and washing purposes. As Senior briefly remarks:

f THE MODERN MOVEMENT 317

ffiost nearly coincides. For all traders other than the mar-
ginal there is an appreciable advantage accruing from llie
fact of exchange. These differentials — these distances of
icl^'intage between the sacrifice which would have been
consented to. if imposed, and the sacrifice actually consented
tc> — are the traders" quasi-rents.

It is not intended — it would, indeed, be most unfair, to
imply that everywhere in Austrian discussion this aspect of
relativity fails of adequate recognition, or that it does not
oocasionally receive expression at the hands of Bochm-
Bawerk. One wishes merely that this recognition had been
consistent and firmly adhered to, especially in such authori-
tative treatises as have been translated into English. But,

•Utility denotes n
it merely expre!
msmldnd.' "

Aside fiom tbe dislinctly hedonistic tone of ibis formulation, one
could improve it only by extending its scope ; for it seems to be the
Ca^utb thai no quality or attribute — utility or other — is really intrinsic ;
jK>st aa. piyeholOKJcally considered, sound is not an aerial vibration drum-
beat! n£ upon the organs of auditory sensation — liut the subjective
effect or interpretation of the exlemat phenomenon ; and just as heat
^od light and color are psychological signilicances derived from what

sxapposedly — are objectively mere elherial waves — bo all the so-called

qix^lities are such only as repotted to the mind through a reporting
lancdianisni. and Bb modified and conditioned by the nature and limita-
Kaont of this mechanism, and as Interpreted according lo the activities
sjmI capacities of the recipient. percipient mind. The ultimate truth is,
Ijicii. Ibat. like utility, all these qualities are such only in the sense of
relations between the objective fact and the human consciousness ;
[faere is no place for "intrinsic" qualities anywhere, unless as expres-
sive of the (aith that there is somewhere a reality in itself lying behind
a^K^ upholding the reality as it appeals to us.

But in view of all this, and of the further truth that all thought
■nuit run in terms of relation, what does it mean to speak of an
absolute magnitude of feeling? There can surely be intended no denial
•bat in expressing or estimating or appraising the feeling, it must be
tboaght of as an experience, and must be understood and appreciated in
tlM light of other experieiicea : nor is it denied that, for any purposes
of thought or of action, the feeling must be considered with reference
to tt-s setting of experiences, and in relation to experience past and
*^xp^TieiM:e to come Bat by the very necessity of this relativity in
*^e nature of thought, it is all the while implied that difTcren! aome-
thiia^s in •ensation or feeling exist to be related. Before things can
t>e tanderstood. compared, related, thought of, they must first be. That
*>*fote a fedins can be decided to be greater or less than another,
ma*ic or less devraUe. similar or different. It must have been experienced

L

: AND DBTRIBUTIOS

with the accepted lemiinologj- oi the school, neither (r^-wi-
sisteocy of doctrine nor clarity of ex|K>sition was rea^djly
possible. But more of this later. Our present interest i^s in
the working-oiit by Bochm-Bawerk of the relation bctw- «en I
subjective H'ert and market ii-alue.

Price in German usage indicates merely the quid pro ^^9M 1
of exchange. When the exchanged good is money, it:
accurately to be called the money price. Careful attcnt:^
to this fact is essential, if misinterpretation is to be avoic:^
by English readers.

Fundamental to exchange are, according to Boel^
Bawcrk, three assumptions : (i ) There can be no exchan^^
except where exchange brings advantage; (2) the largei —
■eparatcly. and in ihii senK. absolutely ;
only on condition of having i
relation. One's fint experience of any ■

qtianlum of diacomfon or of satiifaclioo : it does not need (hat o
have nepped on my toe twice, in order that 1 come lo have a Bnt fv
ing experience. IE patn or pleasure could exist only willi ■ aecol
experience, neither could ever exist at alL

True, one could not appreciate the experience ai like or difleri
in relation to another, unless upon the iisunipiion of precedi _ _

experience! with which to put the current experience into Telaiio^^*^^^-lig-
but he could ae«enbe!ess have the current experience and, feeling — aav

wife, approve or disapprove of it. It is in this sense that we ma.; —

speak of an absolute maEnitude of feelinc.

^rtg

Nor is there <iue*tion that in the process of putting diese feetjn^^^^^^ — n'.

magnitudes into relation, in deciding between them, making cainpari " ^j,,

soni of them, some development or modification may take place in thCi ■"'

terms or in the completeness of the separate appraisals. It is rare thaC:^ ^* ^^
one knows precisely how much he would pay for a thing more than h<^=" ^^«t
actually does pay : he has never carried the processes of appraisal^ -^
comparison, and computation farther than to know that the eom — "~
modity in question signifies to him more than the qKid pro qho to b^ ^T

foregone. But more and more as the needs of action require, and in
the process of deciding to act. or in the process of acting, these
separate aiul absolute magnitudes of feeling acquire clearer definition,
both relatively and absolutety : and it is probable that in the proceii or
comparison, the act of thinking things into relation, there may be some
reaction of one term in the relation upon the other, to modify the
appraisal of each, not merely in point of precision, of definition, but
also qualitatively. But not the less must there be two separate
feeling magnitudes to be compared, between which a relation is to be
eilablisbed and a choice declared. These absolute magnitudes, these
to-be-related significances, arc of the general nature, the raw material,
of tnbjective worth.

THE MODERN MOVEMENT 3^9

P'"^f erred to the smaller advantage; (3) the smaller is pre-
i^>*red against no advantage.

Exchange therefore presupposes that for each trader
^^ obtained good affords a greater utility than the good
foregone, so that, "since the significance of goods for well-
f^ing expresses itself as subjective value (worth), the
obtained good possesses a greater subjective worth than the
released good." ^^

It follows that "an exchange is economically possible
l>etween persons only who appraise commodity and price

good differently — in fact, in reverse order One

iniast appraise the good higher, the other lower than the
I>rice good." ^*

Now, is it true that the good parted with and the good
r^c:eived must have^'the same value — Wert — since they
eacchange against each other? In the subjective sense, in the
puirely personal appraisal of the traders, no ; for each man
*^^ worths compared must be unequal to the degree at least
^^^ tip the scales of choice.^*

Here, it is to be remarked, is surely adequate recognition

*^* the necessity of getting two subjective worths into com-

^^^^json, into a subjective- worth ratio, that is to say, into a

Objective valuation, before either a price offer or a refusal

P^ce can be reached, and any subjective value come to exist

,^ that relational sense affording a possible key to market

^j^'ue; but in all the Austrian prodigality of terminology

M^^X"e is no term for this valuation relation between subjec-

r^^^ worths. And note that for any trader, even that one

z^^rest the margin, some quasi-rent is asserted; market

^^ee can never quite express any margrinal demand; as a

^tio^ market value is never quite coincident with the mar-

^^al purchaser's ratio between marginal utilities. Marginal

^yers and sellers are those who, at the market adjust-

r^^nt, approach nearest to indifference, — whose utility-ratios

^tween goods obtained and goods foregone are nearest to

^ing expressed by the i : i ratio: "That bidder is the

^^ongest [tauschfdhigste] who appraises his own good

^^Avest relatively to the good offered, or, what amounts to

" Bochm-Bawcrk, op. cit,, p. 480. ^ Ibid., p. 490. ^ Ibid., p. 490.

.TJE AND DISTRIBUTION

the same thing, appraises the offered good higlicsl rela-
tively to his own." '"

Ami here follows the familiar illustrative scheme— wi*
the horses — for the working-oul of the price adjustment, a
method too familiar to require attention for present p"''
poses ; but it is nevertheless worth remembering that i! "
all worke<l out in terms of money against goods."

l-'rom this analysis several principles are deduced:

Which of the bidders succeed in trading? The &«
buyers who appraise the horses highest, and the five selltt*
who appraise the horses lowest.

But here again the relativity is forgotten ; the apprsi**^
cannot be in terms of mere subjective worth, else *°.
cxchan^ could be deduced as possible. The lowest 3^^
the highest should have been expressed as relative to t_
medium of exchange, or as relative to the price commoct*:^
on the other side. Simply as an expression of margi<*^
utility, nothing is to be arrived at. ^^

The height of the market price is limited and fixed by ^'^.^
height of ihe subjective worth estimates of the two marpr^^^
pairs- ;

The unfirm grasp of the relativity principle is at thtf^^^jt-
point suggested by the vague and halting quality of th^^^
statement; worth appraisals or worth estimates (subjective .,-,
\V tftschiHz**ngttt') can rightly mean not mere recogni- ^
tions of subjective worth, but valuations of subjectiv^^
worths, comparisons made between subjective worths.

And it is further to be objected, (i) that the formula--
tioii misconcci\-es the relation of the marginal traders to the '
other traders and to the process of price adjustment; the
marginal buyer or seller shows merely the degree or extent
in which he, or any other trader, has individually affected
the market outcome; (2) not the two marginal pairs, but
one marginal pair, not four persons but two. give the
breadth of the margin interval within which the price is
indeterminate and left to higgling for its adjustment. A
point may easily be fixed between two points ; but precisely
how a point shall be fixed between four points is not readily
clear.

THE MODERN MOVEMENT 321

All of this process and the outcome of it trace back,

Soehm-Bawerk asserts, to subjective value (Wert) as the

alt:imate explanation :

The relation between commodity and price good is it [which

distinctly is not subjective worth, but a relation between subjective

worths] that decides the individual to take steps looking to an

esc change, decides as to the degree of the exchange disposition,

decides sharply up to what point the interests of each bidder will

Ica^d him to compete, and likewise the limit at which, as outbidden

and excluded bidder, he must retire from the competition; decides

ixa its further effect who, in the scale of strongest bidders, will suc-

c^eed in trading, to whom the role of marginal pair [note the

^'n^ular] will fall, and thereby also the height of the price at

^''liich the exchange shall take place."

Subjective worth does, in fact, none of these things;
even the subjective valuations do not do the last. But
tJiwith the exposition relapses into accuracy:

"We can with entire precision describe the price as the result of
ective worth appraisals of commodity and price good, as these
raisals meet each other upon the market."*

Nothing having yet been said as to the relation of
^^xnand and supply, we have now to inquire "from what
^^'•'^^^cumstances it is decided whether the worth-appraisal
^"Vel [Schdtzungsniveau] of the marginal pairs is high or

There are four forces or facts making for the deter-

^^^ination of the price: (i) the nature of the demands

^3arected upon the commodity ; (2) the height of the appraisal

^gures {Schdtzungsziffern) on the part of the buyers;

^3) the number of wares for sale; (4) the height of the

Appraisal figures on the part of the sellers:

But .... our appraisal figures are not simple magnitudes.
They are in no sense simple data as to the absolute magnitude of
the subjective Wert which the commodity has for the appraisers,
but rather they are relative quantities derived from the comparison
of two separate W^crZ-appraisals, the appraisals of commodity and
of price good. In saying that A appraises a horse at 200 florins,
we have said and implied nothing as to what absolute importance

^Ibid,, p. 503. ^Ibid,, p. 503. ^ Ibid., p. 509.

323

VALUE AND DISTRIBUTION

the possession of a horse has for A but, on Ihe contrary, we have
merely expressed ihe relation in which the M'erl of the horse
stands for A in relation to the Wert o£ the money -price."

It must be admitted that this is accurate, adequate, and
admirable; and if the terminology were adapted to the
doctrine, and the doctrine adhered to without vacillation,
and were the exposition consistent and free of confusion
both of thought and of terms, nothing better could be
asked for, so far as this aspect of value doctrine is con-
cerned. But it is equally true that so stated and inter-
preted, no Ricardian would ever put the doctrine in issue,
excepting possibly as to the importance of the conclusions
and the justification of the attendant much talking. The
Ricardian is, as we have seen, overdisposed to assume that
the demand can be taken, for granted, without analysis and
without saying.

But Boehm-Bawerk also, tmder force (3). "the number
of wares for sale," recognizes that cost influences await
investigation.

COST OF PRODUCTION

In truth, the Austrian analysis of subjective worth
not yet been fully presented. Bearing in mind that "a g«
which one already has he appraises according to the loss
{Einbusse) which he would suffer by the loss of it," " a
principle of substitution has to be recognized. The loss of
any particular good, say of an overcoat, is not commonly to
be measured according to the utility of the overcoat, but
according to the utility of the good which will have to be
foregone in order to replace the overcoat."

It is by virtue of this doctrine of substitution that goods
of highest necessity, food, clothing, and the like, command
so limited an appreciation in point of worth. But obviously
the principle does not apply when the loss, if shunted off,
would fall upon something not less but more important ;
when, in short, the lost good is itself marginal. Substitu-
tion through reproduction really falls under this general

" Boehm-Bawerk. op. cil., p. 505.

" Ibii., p. 33, note. = Ibid., p. 36.

[OOQ^

THE MODERN MOVEMENT 3^3

•

pnnciple of substitution, and furnishes the theoretical basis

'^^ the bearing of costs upon subjective Wert. The loss is

^>vays that smaller loss into which the loss in question may

^ translated."

There is no objection fairly to be made here;
the valuation process is unquestionably of the sort stated.
But it is none the less in point to note the necessary impli-
cation that, whatever may be the truth as to market value,
subjective value (Wert) is hereby made a question not of.
marginal utility but of marginal cost, marginal displace-
ment. Subjective Wert is then badly presented when, as
over and again in Austrian discussion, it is made exclu-
sively a question of marginal utility. When, for an over-
coat, for which, by virtue of its utility, one would pay if
necessary $20, one actually pays only $10, he is justified in
placing the value of the coat at $10; but not the utility; the
utility is still the twenty-dollar quantity, and the purchaser's
differential, the utility gain, the quasi-rent, is thus $10,
simply because the coat had and retains a marginal utility
of $20. And thus the strange outcome of all this discussion
appears to be that marginal utility, or, more accurately,
subjective value, as value determinant presented as unre-
lated to cost and as fundamental to cost, is itself finally
resolved into cost. But however this may be, it is clear
that, in accurate analysis, marginal utility should remain
^ne thing, and the marginal cost of the marginal utility, — its
^^f>iective value, its worth, — should remain another and a
^uite distinct thing. On any other terms all is confusion,
*^^ utility becoming marginal in a general mish-mash of
^sts. For if marginal utility and cost value are one, there
.^n be no utilities that are not marginal; all the similar
'^^'ns of a stock must be of equal marginal utility, equal
^^t^jectivc value, and equal market value; therewith disap-
^^rs all possibility of the explanation of value by margins.
And so when Wieser says that, "in Paradise nothing
^Uld have Wert but satisfactions," it is immediately to \^
^^cled that satisfactions also would not; they would have
^^*lity and relative utility, but no marginal utility and no
\^lvie, either of the subjective or of the objective sort,
^^^^ply "because there one could have anything." ^®

"/Wd., p. 39.

"Fricdrich von Wicscr, Natural Value, edited by William Smart,
^^nslated by Christian A. Malloch, Macmillan, 1893, p. 30,

334 VALUE AND DISTRIBUTION

But the Austrian doctrine of costs will best be con-
sidered in another connection. The task now at hand is
to present the concept of subjective Wert with such ade-
quacy and definiteness as the nature of the concept permits.
To this end extended reference will be necessary to the
Positive Theory."

At all events, it seems from the analysis so far as at
present carried, that even in marginal utility, strictly inter-
preted, there is nothing hut utihty, and this without any
pretense of a measure for the utihty set up. unless it be in
the utility of some non-marginal item; and all we can th«
say is that it is the less useful of the two.

Recalling that Say stood distinctly for the measure of
utility by value, rather than of value by utility, one would
like to know whether anything is made in Austrian theory
of this distinction. According to Boehm-Bawerk, "The
measure of the utility which depends on a good is, actually
and everywhere, the measure of value for that good."''

And again:

The value of a good is m«asured [Die Grosie des Werics
eincs Giitcs bemisst stch] by the importance of that concrete want
Of partial want which is least argent among the wants that are met
from the available stock of similar goods. What determines the
value of a good [ist fur seinen Wert massgebendl then, is not its
greatest ulility. not its average iiiility, but the least utility. ....

the economic marginal utility of the good The value

[Wert] of a good is determined by the amount of its marginal
utility [nach der Grijsse seines Grenznulzcns]."

Merely stopping to note that the meaning of value is
here again referred to marginal utility as distinguished
from the cost or displacement attendant upon marginal
utility, we ask ourselves what is meant by saying that
value "is determined" by the amount of the marginal utility,

" Eugen V. Boehm-Bawerk, The Potiltve Theory of Capital, tram-
lated, witb a preface and analysis, by William Smart, Macmillao. iSgi.

"Ibid., p. tjq. In the orisinal the passage readst "Das Mass des
abhingigen Nuttens ist wirklich and uberall auch das Mass fur den
Gutenwcrt." — "Capital und Capitalstns. iweite Abtheilung." PotilifA
Tkeorir des CapUals. Buch III, Abschniti III,

-Ibid,, p. 148.

THE MODERN MOVEMENT S^S

more than merely that value is marginal utility? But that
there is a diflference is to be inferred from the earlier state-
ment that the measure of the marginal utility, the trans-
formation of it into subjective worth, is to be traced to the
purely psychological and subjective feeling-state attendant
upon the existence of the want situation of the individual
relative to the good ; all of which must mean that the psy-
chological emphasis, the significance for feeling, constitutes
the subjective valuation, the non-relative worth appraisal
of the marginal utility, its expression.

So far the doctrine is parallel with that of Say, except-
ing that, with Say, the talk was purely and solely of market
value, and that, with subjective value, Wert, the notion is
rather one of the expression of value than of the measuring
of value. Subjective value, as such, implies no measure, is
not expressed in equivalents, and stands for an absolute
magnitude of feeling."

In Boehm-Bawerk's treatment of substitutionary utili-
ties, in the Positive Theory, he returns to the overcoat illus-

**It is also to be said that here, as elsewhere in Austrian discus-
sion, there is difficulty in being certain of one's justification in inter-
polating the word subjective or any sign that subjective worth is
intended, — to be sure that, after all, the statement in hand is not
intended to apply as well, or even exclusively, to market value. That
this discussion is found in the chapter on "Subjective Value" does not
guarantee that the thought may not drift into market-value waters.
Thus on page 152, after discussing the subjective value of a sack of
corn out of a farmer's stock of similar sacks, and after attaching this
value to the marginal utility of the final sack,— clearly an absolute
magnitude, — Boehm-Bawerk proceeds : "Transfer now the field of illus-
tration from the solitary in the primeval forest to the bustle of a

highly organized community The more goods there are of

one kind in the market the smaller .... is the value The

more individual goods there are available in any class, the smaller is
the marginal utility which determines the value."

That there can be no such thing as a market marginal utility, but
only a market marginal purchase price, does not need repeating, unless,
indeed, the assumption is tacitly made that all purchasers are precisely
alike in point of subjective situation and of purchasing power. But
this is merely another case of the confusion, chronic in Austrian
discussion, of marginal utility with market value and of subjective
value with objective value. If the Austrians cannot keep their
categories separate, it is idle to expect others to do so. And so Hob-
son, doing yeoman service against the straw-man doctrine that
marginal utility determines or is market value, appears to tichieve an
easy victory over Boehm-Bawerk by merely quoting from page 159 of
the Positive Theory: "The fewer and the less urgent the wants and
the more goods there are to satisfy them, the deeper down the scale

3a6 VALUE AND DISTRIBUTION ^M

tration: "I shall try to shift the incidence of the loss onto
other lines of goods," sell some of them, or drawing upon
my stock of cash, go without something that I had intended
to buy, or I shall economize in household expenses, and
only in case of extreme need go without an overcoat,
"Only in the last case is the IVerl of the overcoat deter-
mined by the immediate marginal utility of its own class.
In most cases it is determined by a substitutionary utility." ■'
But again it is to be objected that this getting to the
margin by the method of substitution is not to find the
utility of the final item of the stock in question, or the
utility of the single item imder consideration, but only the
cost of it, and thereby the subjective significance, the worth
of it. And in either case, whether away from the margin
or upon it, the worth as matter of subjective estimation
obtains no expression in terms of something else, that is to
say, receives no measurement, but is merely a statement of
the absolute magnitude of significance to the individual
well-being, and therefore is a relative quantity only in the
sense and to the extent that it has a place higher or lov^H
in the personal list of absolute feeling magnitudes. ^H

Wieser is as obtrusively hedonistic in his point of view
as is Boehm-Bawerk or as were any of the classical school;
but the validity of his doctrine is not made to stand or fall
thereby :

What is it that gives value to the satisfaeiion itself we shall
not attempt to explain. It will be enough if we give the symp-

goei the tatjsfaction and the tower falls Ibc marginal utility and the
value. It comes nearly to the same thing, only in a leas precise form.
(O say : Usefulness and scarcity are Ihe ultimate determinants of the
value of goods."

Upon which Hobson remarks (Economict of DislribulioH. p, 106) :
"Now, not only is scarcily thus fetched up from the supply side of the
equation as a determinant of value separate from utility, but it is
made Ihe determinant of marginal utility itself, for 'it is the scarcity
thai decides to what point Ihe marginal utility aclually does rise in the
conetelc ease'" {Poiilirr Thmry, p. 160). And Hobion is pardonable
for not seeing that Boehm-Bawerk is talking here about the individual
schedule and ihe purely personal bearings of wants and provision for
wanls, that is, that the discussion is not in the market-value field \
only in the subjective field.

"Boehm-Bawerk, op. cit,, p. 156.

ralue field h^^

THE MODERN MOVEMENT 32?

toms by which the degrees of vahie or importance are recognized.
It is the intensity with which the satisfaction is desired ;*

which sufficiently cuts loose from all hedonistic complica-
fioxis.

Not free goods but only economic goods can have value ;

and so Menger's definition is approved by Wieser : Value is

"the importance which concrete goods, or quantities of

g-ocxls, receive for us from the fact that we are conscious

of being dependent on our disposal over them for the

s^ tisfaction of our wants." '^

But as Wieser elsewhere remarks, "Menger has a com-
plete system of subjective value but makes no attempt to
d^^^elop objective value." '• This, therefore, is not to be
UL^x~^derstood as a definition of market value.

This definition, however, as adopted by Wieser, is found
ar to the beginning of his treatise, before any discussion
subjective value (Wert) has been attempted, and is
rmulated as a general definition of value. And so upon
ge twenty- four, as the title of chapter ix, we read,
~l rhe Valuation of Gkx)ds in Stocks. The Law of Marginal
tility the General Law of Value." And the chapter itself
iscusses collectivist valuation, in which, evidently, there is
o such thing possible as marginal utility in any accurate
^nse.'*

^Natural Value, p. 7. "Ibid., p. 21. ^ Ibid., p. 54.

** These confusions must, in the interests of space, be rather
^ nstanced than fully reported or adequately discussed.

Confusions of utility with marginal utility ; and with price :

"In a word, the value of a supply of similar goods is equal to the
sum of the items multiplied by the marginal utility."

Now while this would perhaps be true, were the question one of
market value, it is distinctly untrue, as a question either of aggre-
gate utility or of aggregate subjective worth, that is, the subjective
worth of the group conceived as a whole, a unit ; but, still within the
collectivist computation, the discussion proceeds: "A harvest consist-
ing of 1,000,000 quarters, is short .... so ... . that grain
dare not be consumed unless the act of consumption yield a satisfaction
equal to the figure 10 [10 what? At any rate a social marginal utility].
The value of the harvest will be calculated as 1,000,000X10."

"The various things that determine money value to the individual
are the following: .... the amount of money which is at his
disposal ; the nature and quantity of the goods which can be obtained

s^

VALUE AND DISTRIBUTION

On page fifty-one we read:

When wc speak generally of the value of goods we mean tne
economic rank given them by their prices Some particu-
lar designation is indispensable for the ranking of goods in economic
exchange, and it is impossible to find any other designation than

that of Wfrt The word Werl alters its original sen^e

somewhat when transferred from the subjective relation lo wants
to the objective relation to price. Subjective tferl represents a dis-
tinct feeling; that of t}eing dependent upon the possession of a
good for the satisfaction of a want^a distinct degree of personal

interest in goods Objective iVert or price is not in

the least the expression of the economic valuation of goods, even
when it is the result of economic competition, and of the individual
valuations of all the different members of the economic com-
munity. Price is a social fact, but it does not denote

under the existing market conditioiis and prices; the utility rmarpDal]
which these goads are able to give, as alao the utility already secured
by possessions olherwige acquired ; and, lastly, the urgency of demand"
(p. 46).

"In each kind of production good, taken by itself, the value of the
product is adjusted to the level of its particular marginal utility"
[intended as a collectivist computation, with a colleclivist marginal
utility; but what about displacement and cost here?] (p. 97).

Confuaions of marginal utility with subjective value, and with
demand price:

"The law of value [market value here, as the context shows]
unites the conceptions of value and of utility in a way which is
fully confirmed by the facts ; . . . . and it only remains for us now lo
combine the fact of costs with the law of mBrginal utility" (p. a6).

"The law of price is nearly related to the law of value. The value
of a stock consisting of separate items is determined as a marginal
value, according to the marginal utility of the single good." [Seem-
ingly a Bubjec live- worth compulation for one consumer ; in such case,
not the whole stock, but only any one item gets valued in the way
asserted.] "The price of a stock which is sold in separate items is also
determined as a marginal amount, according to the purefaasing power
of the marginal buyer of the single good" fp, 43). [Here there is
ctireful avoidance of making price and marginal utility equivalent : price
is marginal purchasing power ; but on page forty-seven it is said that,
whether for goods or for money, "it is demand and supply, as these
express themselves in marginal utility, that decide the exchange value."]

"The eatiraale of value [here evidently subjective worth] leads
ua back to use value, and again the law of marginal utility holds"
(p. 48).

"The rich mnn. therefore, will not value his coat according to
its utility, but according to the cost of procuring it: in his estima-
tion this cost will stand lower than the utility All household

goods, which when lost or stolen, can be replaced by purchase, are
thus valued" (p. 49),

THE MODERN MOVEMENT 3^9

ptrt upon goods by society Relations of price and of

oWective Wert do not in the least correspond with the relative
lotion of the two goods in re^rd to their economic importance
or subjective valuation. .... [But] exchange value taken by

i^f and unrelated to subjective value is unintelligible

^0 explanation, subjective value is chief in importance because only
trough it can exchange value be reached.

All this is admirable ; but turning back to page thirty-
four before there had been any talk of subjective value or
^f subjective anything, but only of value as referring to
general market transactions, we read:

Value is the form in which utility is calculated It

^ difficult indeed to estimate the utility of a stock; easy to estimate

'ts value. That is to say, the value of a stock can be expressed as

^^ single product of stock and marginal utility; it is a multiple of

"*^ marginal utility; whereas utility can be expressed only by a

^^<Ti which contains as numerous and as various amounts as the

stcHdc contains items.** The utility, for instance, of a harvest of a

"^Hion quarters can be represented only by an almost inexhaustible

"Ascription of all the benefits accruing from it The value

^^ the same harvest is easily and shortly ascertained by multiplying
^^ utility of the marginal employments by the whole amount.

But on page sixty-two better doctrine is found, doctrine
^1^0 of the highest of importance as putting the finishing
^^Ijches to our present discussion:

In natural value [ideal collectivist value] goods arc estimated
^cording to their marginal utility; in exchange value, according to
^ combination of marginal utility and purchasing power.

Passing over the objection that there can be no social
fharginal utility in any other than a rough average sort,
^t is of supreme importance to note that here is an abandon-
ment, as complete and unambiguous as that vvrith Boehm-
^werk, of marginal utility as value measure or value
determinant. No matter how frequently Wieser has
Asserted and will assert the contrary, there is no under-
standing of the real force and meaning of the Austrian

^That the value of a stock is the product of marginal utility by
the number of items can from no point of view be true unless by
interpreting marginal utility into marginal cost or marginal value, as
in fact Wieser, like Boehm-Bawerk, does; marginal utility, marginal
cost, marginal utility value, and subjective value, all appear to anfilyze
into the same thing, and exchange value also is prone to edge its
way in.

33°

VALUE AND DISTRIBUTION

I

lice.

1

doctrine without accepting this truth. The point of view
does not make for marginal utility as the gist of the value
concept or as underlying it, otherwise than as an inter-
mediate step toward arriving at the purely explanatory and
tributary concept of subjective worth. Exchange value,
estimated or expressed or fixed or worked out "according
to a combination of marginal utility and purchasing power,"
becomes not marginal utility or marginal subjective valua-
tion, but marginal relative utility, that is, marginal sacrifice,
niat^nal buyer's offer price, or marginal seller's demand,
price.*'

SUBJECTIVE EXCHANGE VALUE

Subjective exchange value is defined by Boehm-Bawt
as "The importance which a good obtains through
capacity to procure other goods by way of exchange."

In view of the non-relativity of the concept of subjec-
tive value, there is nothing further to be urged here against
the use of the term value for this new concept; and, in the

" It may Ijy tbis time be taken as eslabliahed that neilber in pain
nor in utility, whether as value determinant or as value denomiaator, ig
ttiere any place of abiding or hope of rest for ibe investigator of value.
But even were it otherwise, were il in any way possible, cause-wise or
deno minster- wile, or both, To ir solve value into a bomogeneous
medium of pain cost or of utility demand, what, ofter all. would it
all profit P

The scientific instinct for unificatiaii is undeniably strong : to il.
indeed, is traeeable the larger part of all accomplishment in tbougfat
and in reseaTch. When, if ever, the ultimate atom or electron of
matter is discovered, or. in the tentative manner of scientific general)'
ration, is credibly assumed as a working hypothcais. the fact will be one
of no simiti moment, even though everything be yet to leam as to (he
ultimate nature of this ultimate atom. So also, were it really necessary
and at the game time credibly possible and approximately intelligible lo
accept or to suppose a social pain unit or a social pleasure item, or
did it In any sort advance the case to compute some average level
of pain enperience or of pleasure experience and to conceive of this
average Itvel as homogeneous in a degree to permit of some tjrpieal
or normal or slamlard or average unit-resultant, and were there no
other method of making intelligible and manageable the phenomena
with which economic science has to deal, and were the new Itelds of
research thua thrown open for entry as attractive as the old fields
made necessary of abandonment,— ~tbc pain-jelly or the pleasure-jelly
hypothesis — it not at all mattering which — would impose itself upon
our acceptance.

But it is first to be noted that the entire marginal analysis, for
whatever it has accomplished and for whatever it promises, would
be first among the things to be abandoned : and this would involve not

THE MODERN MOVEMENT 33^

German, Wert may be the only resource for the case, if

Acre is occasion or justification of any sort for the new

concept The use of the new term seems to have been

'^sponsible for the adoption of objective exchange value;

^re being, by assumption or enactment, a subjective

exchange value, the interests of symmetry now impose a

Ic^iger and more cumbersome term in place of market

^ue, but with no added significance, other than that of

contrast with subjective exchange value.

But the fact appears to be that "subjective exchange

Value" is absolutely without serviceability in the value

investigation; it is a case of purely gratuitous distinction-

^^wing and term-making, and this in face of Boehm-

"^werk's oft-quoted confession that he "would

^^dly. exchange these pedantic and clumsy cxprcs-

^^^ns, etc.; .... but .... use value and exchange

y^liic are not suitable at all, because, as we shall see, there

'^ a subjective exchange value." **

^^Tely the loss of those contributions distinctly to be credited to the
^dem movement, but also the entire Ricardian land-rent doctrine,
together with this the complete scheme of marginal cost in its
Lation to value.

J But, finally, what is it that this labor-jelly or pain-jelly or utility-

r^Xly hypothesis can offer us? In no sense a homogeneous medium into
^^^ch all costs or all services may be resolved, but a homogeneity
^^pposedly actual and valid only for the marginal cases. The truth is.
^^en, that nowhere are the glittering promises in the way of being
^«pt ; the thing that is tendered is not the thing held out as in prospect.
■^^or is there offered any substitute for the thing promised, but rather a
^^linquishment of it; for of what service would be this mere fringe of
homogeneity at the lower edge of the wide value tract? How docs
^ny alleged general value determination by the marginal-cost item come
'^ recommend itself to be a resolution of all the non-marginnl cases
Xnto an equality in pain origin or in service offering? In its very
%erm8, this solution turns out upon examination to be a no-solution.
But if it is indeed true, — and it is no part of the present purpose to
deny it, — that for the various and different market demands to come
jointly to bear upon market value, they must find a way to get them-
selves aggregated ; and if it is true that costs as bearing upon value
must likewise become comparable and, for the purpose, homogeneous ;
and if men imperatively need in their commercial affairs some
generalized form of value expression, a language, a standard, a denomi-
nator, it is fairly to be urged that in the system of pricc-ofTer, price-
refusal terms, a money-price rendering of value, and a money standard
of deferred payments, the precise thing required is offered and is
attained. More cannot be had, and were more to be had, there would
be no need for it.

^Positive Theory, p. 130, note.

VALUE AW> DlSTRIBirnON

Bm the adoptkn of the new term is more than merely
gntatous: it is bad in lopc; it involves the absurdtt}' of
Mttrtiog that the tmlitj of the oow that yoa sell is. after all,
not dw utility of the cow, but the utility of the horse which
yoa nearc in rctnriL And doubtless this is true in a sense,
iIkmi^ k Mens to leave the cow strangely bereft of any
ntilitj whatever, anless perhaps that pre^HousIy contentedly
pOMBMcd hf ber. but now repudiated and cast off, or,
poMiblT. appropriated by tbe horse. This recalls the pro-
ccdve by which the Dtility of the o%*ercoat was suddenly
reduced from 20 to lo by the mere fact that it could be had
for 10.

Tbe truth appears to be that tbe notion of quasi-renls,
buyer's or other, is sufficient for all cases presenting this
aspect of the differential prindpte. And the conctrpt indi-
cated by the term is really needed to explain the demand
for goods, tbe forward-looking attitude toward exchange,
and the degree and kind of the pnrchase-elast icily.

Let it, for example, be taken as true that, having no coat,
one would, if necessary, par twenty dollars for a coat, but
needs pay only ten; or that, having a coat of a twent)'-
unit power of service, one fould, if he lost it. replace it at
ten. Doubtless one may say that the subjective worth is
ID, but this 10 is obviously not well adapted to serve as an
expression of the bidding disposition; 20 is still the maxi-
mum bid : to place the utility at 10 leaves it strangely stand-
ing as true that one ts willing, if necessary, to bid the price
np to twice the utility.

But this is not the worst of the bad logic. Subjective
exchange worth, tike marginal utility and subjective worth,
must justify its existence in economic teiminolog)' through
its service as tributary to the explanation of market value, —
as a term, standing for some intermediate analysis subsid-
iary to the elucidation of the problem under investigation.
On any other basis each of these terms is an impertinence,

liut unfortunately for subjective exchange value, it
an ex post facto concept, a term derivative from the
exchange trani^action, and expressing the advantages
derived from it; as such, it loses all importance as helpings
in the explanation of the terms of the exchange. It substi-
lutes the backward-looking view for the forward and
recalln little Alice of the looking-glass experience, who
used to cry before she had cut her finger, and having cut

n
M

CLASSICAL VERSUS MODERN 345

ilue of the product; and it is also true that meanwhile

^ntrq)reneur competition is placing new values on the

oost goods and bringing about a new proportion-ad just-

\ritni of values with costs, or of costs with values; and,

in. turn, upon these new costs are based new entrepreneur

^portunities, computations, and producings, and so on

indefinitely in a circle, the result of each situation becoming

ill its turn a cause for the next term in the series. The

iiltimate causation must, then, be sought elsewhere; in the

sense of finality neither cost nor value is cause, and any

attempt to fix upon either as ultimate, or even as logically

prior to the other, must inevitably lead to circuity of

'^soning or to question-begging.

As between cost and demand, Dietzel admits and agrees

^t the earlier fact in the sequence is the demand with its

possible price ; mines could not be scarce if people did not

^^nt iron ; but then comes in cost to put the later, but the

^^isive, touches to the situation. True it is that what the

*>uyers will, at the outside, pay limits what the producers

^^^y spend in costs; in this sense the demand determines

*^ cost ; but the last determination and the exact one is the

^^st. The demand gives the maximum possible price; the

^^t gives the actual price.

On the question whether labor as a productive fact

^^Tives its value from cost of production, Dietzel says that,

*^ a short-time doctrine, the value of the labor is explained

"y the fact that satisfactions depend upon it. But in the

long run wages cannot be lower than the expenses of

^ving and of rearing a family; and if higher than this, the

^^crease in numbers will finally prescribe the subsistence

tevel of wage. Precisely how this works itself out he

^^ves to be taken for granted.

Boehm-Bawerk in rejoinder, two years later, says, with
^' emphasis, that the issue is not at all upon the validity
^^ the law of costs :

The actual and essential features of the cost law, viz., that cost
^cjfulates the value of reproducible goods, that we commonly
Wraise the goods directly according to costs, that changes on the

336 VALUE AND DISTRIBUTION

pupils or disciples. Therefore, in the interests both of
effectiveness of exposition and of economy of space, it has

marKinal-utility analysis is easily foretold; market value and marginal
utilil]' become coincideDI quantities.

But it is stilt to be noted that all of tbis analysis proceeds upon
the assumption of eni sting and teiniH>rarily fixed supplies of goods,
that is of goods unsiTccted, for Ibe time being, by influences of cost.
This was also the method of Jevons. the further problem being to
analyze and formulate the cost influences in their relation lo supply.
Walras, as it seems to this writer, gets not much farther toward the
solution of the problem than a more or less inadequate formulation of
it: "In a word, it remains lo decide whether il is the price of
the productive services that determines the price of ibe product, or ralber
the price of the product, determined as we have seen through the law
of demand and supply, that detcrminea the price of the productive
services, by virtue of the law of cost of production, the prix dt revient"
[ibid., p. 176).

As for Jevons, it is further to be said that in numerous cases he
impliedly or explicitly adopts the notion of a social utility: that he
repealedly makes the feeling-quantities of different men both comparable
and commensurable : and that he repeatedly identities marginal utility
with marginal offer price : and that his general reasoning involves of
necessity each and all of these assumptions. It is nevertheless tnje
that, in more careful analyses and fomiulalions, each of these positions
is repudiated and the correct doctrine accorded adequate recognition.
A few questions must suRice imder these heads:

"In a time of scarcity the titility of barley as food might rise so
high as to exceed altogether its utility, even as regards the smallest
quantity, in producing alcoholic liquors. In a besieged town the employ-
ment of articles becomes revolulioniicd." — Theory of Political
Economy, jd ed., London. 1888, p. 61.

"We arc now in position to appreciate perfectly the difference
between the lolal ulilily of any commodity and the degree of utility of
the commodity at any point" (ibid., p, 49).

"The laws which we have to trace out are to be conceived as
theoretically true of the individual ; they can only be practically
verified as regards the aggregate transactions. productions,
and consumptions of a large body of people. But the laws
of the aggregate depend of course upon the laws applying in individual
cases" f_ibid,, p. 48).

t slock of horses were eaten.
. otber ways, as because they
certain stock of horses had,
so that the

"In Paris [in the siege of '70] a vs
not so much because they were useless i
were needed more strongly as food, A
indeed, to be retained as a necessary 3

CLASSICAL VERSUS MODERN 335

The later doctrine has been developed mostly along the
lin^es of Menger's analysis, and chiefly by his convinced

derelopment and the ^)plication of the theory peculiarly his own :

' X His half- volume was, indeed, prepared and almost entirely printed,

id I had communicated the main points of the theory herein expounded

^o the Academy of Moral and Political Sciences at Paris, when, a

:Kxs.cmth since, I made the acquaintance of a treatise upon the same

svBhject, entitled The Principles of Political Economy, published in

X873 .... by Mr. W. Stanley Jevons Like myself, this

^Yxthor applies the mathematical analysis to pure economics, and
^Kspecially to the theory of exchange; and — a truly remarkable fact —
the entire reasoning upon a fundamental formula, which he
^rms the equation of exchange, which is rigorously identical with that
"which has served me as point of departure, and which I call the
c^€9ndition of maximum satisfaction, Mr. Jevons has especially directed
Ls attention to the general and philosophical exposition of the new
lethod and to laying the foundations of its application to the theory
^' exchange and to the theories of labor, of rent, and of capital. As
for myself, I have made especial effort to make thorough exposition of
the mathematical theory of exchange. This leaves me in duty bound
^ ascribe the priority of formulation to Mr. Jevons, the while reserving

to myself some claim to several important deductions In my

^l>ioion, Mr. Jevons' work and my work, so far from antagonizing each
<>ther, confirm and complete and essentially strengthen each other." —
^-*oii Walras, Preface to Elements d*Economic Politique Pure, 4th
^p 1900.

There is, then, from the point of view of the present investigation,
'^ especial call for detailed report or criticism of either Jevons or
^^a-lnisi Their mathematical forms of statement and method of
^^estigation, if there really be a separate method, serve to make the
^^^ one as impracticable for the present writer as it would probably
^'^ out to be unserviceful to the reader.

^ ^Valras' rendering of the marginal-utility doctrine makes a dis-

**ction between extensive utility and intensive utility ; a commodity has

*^sive utility up to the point where no more of it will be consumed

^ upon terms of being offered gratis ; intensive utility is the sort of

j^/?*jty that influences the demand curve (ibid., p. 73). "We call the

j^ **ty intensive because of the fact that the commodity responds to

,^^9 more or less intense and pressing, accordingly as, with a

, y^ter or smaller number of men, these needs persist, despite the

j^^lit of the price, and persist more or less strongly with different

^ ^"^ ; because, that is to say, the importance of the sacrifice to be made

. l^rocure the commodity has more or less influence upon the quantity

^lie commodity consumed" (ibid., p. 73).
.. All of which amounts to reducing the different demands of
. ^^rent individuals to a homogeneity of utility; thence comes the
^^Tpretation of the demand-price curve as a mere intensity-of-utility

Based upon this line of reasoning, the further development of the

I
I

^

336 VALUE .\ND DISTRIBUTION

pupils or disciples. Therefore, in the interests both &
effectiveness of exposition and of economy of space, it bal

marKi Dai-ad lity anaJyiis is easily foretold ; market value and marsinq
utility become coincident guantilies.

But it is still 10 be noted that all of Iliis analysis pcoeeeds upai
tbe assumption of existing and temporality Axed supplies of gooA
thai is oC goods unafFected. tor the time being, by influences of coM
This was also the method of Jevons, the further problem being t
analyze and formulate the cost influences in their relaiicn lo suppl]
Walras. as it seems to this writer, gets not much farther toward tb
aolution of the problem than a more or less inadeiiuate formulation 9
it ^ "In a word, it remains to decide whether it is the price
Oie productive services that determines the price of the product, or r»t_
the price of the product, determined as we have seen through the !■
of demand and supply, that determines the price of the productll
services, by virtue of the law of cost of production, tbe prix de
(ibid., p, 176).

As for Jevons, it is further to be said that in numerous 1
impliedly or explicitly adopts the notion of a social utility : that I
repeatedly makes the feeling-quantities of different men both compura'
and commensurable ; and that he repeatedly identifies marginal ulil

with marginal offer price : and that his general reasoning involves I
necessity each and all of these assumptions. It is neverlbclcss tn
that, in man: careful analyses and formulations, each of these potitiol
is repudiated and the correct doctrine accorded adequate i
A few questions must suffice under these heads ;

I

"In ■ time of scarcity the utility of barley as food miEht rise |
high a* to exceed altogether in utility, even as regards the smalkl
quantity, in producing alcoholic liquors. In a beueged town (he emph^
tnent of article* becomes revolutionised." — Tkrary of Palititk
Economy. 3d ed.. London, 18S8. p. 6t. '

"We are now in position to appreciate perfectly the differa
between the loial Hlilily of any commodity and the degree of itlility
the commodity at any point" (ibid., p. 49).

"The laws which we have to trace out are to be conceived |
theoretically true of the individual: they can only be praeiieall
verified as regards the aggregate transactions. product] OM
•nd consumptions of 9 large body of people. But the 1
; upon the laws applying in indivic

TH«

"In Paris [in the siege of '70] a vast stock of horaes were et

ttot so much because they were useless in other ways, as because I

were needed more strongly as food, A certain stock of horm I

^B indeed, to be retained as a necessary aid to locomotion, so that

^L equation in the degrees of utility never wholly failed" (ibid., p. 61).

^H "Suppose that the rate of exchange is approxitnaiely that of

M'

CLASSICAL VERSUS MODERN 337

again seemed desirable not only to violate the time sequence
in the development of doctrine, but to accord scant recogni-

povinds of com for one pound of beef; then if, to the trading body

urbich possesses com, ten pounds of com are less useful than one of

^cs^rf, that body will desire to carry the exchange farther. Should the

er body possessing beef find one pound less useful than ten pounds

com, this body will also be desirous to continue the exchange.

change will thus go on until .... loss of utility would result if

re were exchanged The degrees of utility have come to

level, as it were" (ibid,, p. 96).
" .... In other words, if increments of commodity be
changed at the established ratio, their utilities will be equal for
th parties" (ibid,, p. 96).

But, "No attempt is made to compare the amount of feeling in

e mind with that in another. I see no means by which such a

mparison can be accomplished. The susceptibility of one mind may,

r what we know, be a thousand times greater than that of another.

ut, provided the susceptibility was greater in like ratio in all direc-

ons, we should never be able to discover the difference

etween A and B there is a gulf fixed. Hence the weighing of motives

ust always be confined to the bosom of the individual" (ibid,, p. 14).

The general forms of the laws of economics are the same in the

of individuals and of nations ; and, in reality, it is a law operat-

ng in the case of multitudes of individuals which gives rise to the

ggregate represented in the transactions of a nation The use

f an average, or, what is the same, an aggregate result, depends upon
high probability that accidental and disturbing causes will operate
-sn the long run .... so as to neutralize each other" (ibid,,
'WP- IS. 16).

MARGINAL UTILITY IDENTICAL WITH MARKET PRICE

"We shall seldom need to consider the degree of utility except as

regards the last increment I shall therefore commonly use

the expression final degree of utility, as meaning the degree of utility
of the last addition, or the next possible addition of a very small, or

infinitely small, quantity to the existing stock We may know

the degree of utility at any point while ignorant of the total utility"
(ibid,, p. 51).

"The value of a divisible commodity is measured not, indeed, by
its total utility, but by its final degree of utility" (ibid., p. 137).

"Value depends solely upon the final degree of utility. How can we
vary this degree of utility, etc.?" (ibid,, p. 164).

But on page 141 : "The general result of exchange is thus to
produce a certain equality of utility between different commodities, as
regards the same individual ; but between different individuals no such

equality will tend to be produced The degree of utility of

wealth to a very rich man, etc."

Marshall's well-known note (Principles, Book V, chap, xiv) admir-
ably discusses Jevons' remark (Theory, p. i) : "Repeated reflection
and inquiry have led me to the somewhat novel opinion that value
depends entirely upon utility" — saying — ^"A trading body is not a person ;

34°

VALCE AND DISTRIBUTION

the general position of the newer school, opens with th».«:^uj,
pardonable error of assuming that Boehm-Bawerk's dorz>^-,^
trine of subjective value is offered as somehow a woTk3bT^::rj,i
doctrine of market value, Dietzel, therefore, directs hi*-*" y
attack against the Austrians' peculiar ground of Cniscat^^ ^jq,
conditions and of purely personal anal>-sis, and asF.^^^^)^
whether, upon these terms, value, as a relation betwe*r^»-egp
commodities, is a question of marginal utility rather thi^-vda,,
of marginal cost.

And Dietzel makes it fairly dear that, in the Crtu^^-jmscie
economy, the only possible common denominator unc^ der
which freely reproducible goods can obtain an object^innn;

and practicable basis of comparison must be the labor-c osl

denominator. True, utilitj', may. for goods limited in

supply, stand as the best thing, because the only thi — ^is-
possible; but when the good can be reproduced by lata^"**-
labor will come to stand as the cost ; the loss of the gcrr^o^
will appeal to Crusoe only as the loss of the labor ^'

replacement, and the good, no matter how much gjeater ***
utility may be, will fall to the value rank set by its cc^^^*"
And Dietzel points out that, especially with goods not ex"^^^^* '
ing in stocks, their utility affords no basis of compariscr^^^^*^ '
all goes over to cost computations: "Assume that the ca^"^"^
can be reproduced in lo hours, the net in to. the bow in„— -^
the food supply in 5; Crusoe, if he knows anything abc:^^--^
how to fipure in economic fashion, will fix the IVeri of 1
goods at the figures 10, 10, S, 5." Suppose Crusoe to ne
per day three liters of water and ten fish, and has in stc
three days' provision of each, nine hters of water, a
thirty fish. Will he appraise the water and the fish, rel
lively, according to their respective marginal utilities?
with five hours of labor he can get nine liters of water
ten fish, he will be indifferent whether he lose his thr
days' supply of water or his one day's supply of fish.

But from all this — and there is more of it, and
most convincing sort — it is evident that there is no

11

- --ee

^

CLASSICAL VERSUS MODERN 339

justification for the prominence — ^near to exclusiveness —
given to these two writers in these pages.

Wieser had in 1884 published his Ursprung und Haupt-

g^setze des wirtschaftlichen Wertes, and had been by Hein-

lioli Dietzel somewhat scathingly reviewed. In 1885

appeared Boehm-Bawerk's Capital und Capitalzins, and in

iSfi6 the Grundsuge der Theorie des wirtschaftlichen Gu-

t^'w^^erts. In 1890, and before the publication of the Posi-

t£'z.*e Theorie, was published Dietzel's onslaught upon the

Tk^^iffer doctrine, Die klassische Werttheorie und die Theorie

tr^:^ m Grenznutsen. During the same year came Dr. Robert

Z -mjckerkandrs few pages of reply, and a short note from

^^<3ehm-Bawerk formulating certain questions which, with

t*""m.«ir answers by Dietzel, were intended to make precise

e issues to be debated. Dietzel promptly replied to the

estions as formulated, and in 1892 appeared the rejoinder

Boehm-Bawerk.*

The entire controversy, and especially that portion of it

onging to Dietzel and Boehm-Bawerk, is to our purpose

serving in peculiarly marked degree toward bringing

to intelligible statement the issues between the two points

f view.

Dietzel's review of Wieser need not detain us here,
'he later and more formal article, Dietzel's attack upon

• 1884, Wieser, Ursprung und Hauptgesetse des wirtschaftlichen
^MVertes. *

1885, Dietzel, review of Wieser's Ursprung und Hauptgesetse,
<x>nrads JahrbUcher, neue Folge, XI, 161.

1885, Boehm-Bawerk, Capital und Capitalzins,

1886, Boehm-Bawerk, Grundsuge.
1890, Dietzel, Die klassische Werttheorie und die Theorie vom

Grensnutsen, Conrads Jahrhucher, N. F., XX, 563.

1890, Zuckerkandl, Reply, Die klassische Werttheorie und die
Theorie vom Grensnutzen, ibid,, XXI, 509.

1890, Boehm-Bawerk, Ein Zwischenwort sur Werttheorie, ibid,,
XXI, 519.

1 89 1, Dietzel, Zur klassischen Wert- und Preistheorie, Conrads
JahrbUcher, dritte Folge, I, 685.

t8o2, Boehm-Bawerk, Wert, Kosten und Grensnutsen, ibid,, III,

CHAPTER XVIII

CLASSICAL VERSUS MODERN (DIETZEL VS. BOEHM

BAWERK)

It is commonly stated that in the early seventies three
different investigators, Menger, jevons, and Walras, work-
ing independently and in diiTerent languages, arrived at
practically identical positions in their reformulation of
economic doctrines. That there was practical identity in
point of view — in the emphasis on demand as against sup-
ply, and upon utility as fundamental to cost — and that the
marginal method in the analysis of market adjustments
was common to all three, must be admitted ; and this is a
degree of similarity sufficiently remarkable.

But the divergencies were important enough to influ-
ence greatly the subsequent development of the derived
lines of thought. Jevons made only slight attempt at analy-
sis of the phenomena of individual valuation, and. whether
for better or for worse, is only in the slightest degree respon-
sible for tlie beginning and the growth of the doctrine of
subjective worth. For the most part, Jevons' work was in
the field of market value, and especially of the distributive
categories derivative from the value concept. Menger 's
work is, on the other hand, mainly restricted to the field of
subjective valuation and subjective value — worth in the
individual schedule.'

'Jev

and Wilras are on tl
in method of trMtrnc
positions are, indeed, practically idi
anything of appreciable aigniticanci
of subjective worth or of subject
relative, sense. Both di
analysis, and, with out attcmpl to
the margin, employed the prii '

whole much alike both in point
; for the purposes in hand their
tical ; that is to say, neither doea
distinctly within the 6cld cither
e valuation in the accurate, the
eajwcially to the marginsl
into the precise nature of
if the aatiability of desire as

explanation of the principle of marginal utility in the demand
As against himself. Walras accords priority in time to both Gossen and
Jevons. so far as refers to the leading principles of the method
the.point of vfew, but regards himself as having made some fi

I

CLASSICAL VERSUS MODERN 335

The later doctrine has been developed mostly along the
lines of Menger's analysis^ and chiefly by his convinced

the development and the application of the theory peculiarly his own:
"This half-volume was, indeed, prepared and almost entirely printed,
and I had communicated the main points of the theory herein expounded
to the Academy of Moral and Political Sciences at Paris, when, a
month since, I made the acquaintance of a treatise upon the same
subject, entitled Th^ Principles of Political Economy, published in

1873 .... by Mr* W. Stanley Jevons Like myself, this

author applies the mathematical analysis to pure economics, and
especially to the theory of exchange; and — a truly remarkable fact —
bases the entire reasoning upon a fundamental formula, which he
terms the equation of exchange, which is rigorously identical with that
which has served me as point of departure, and which I call the
condition of maximum satisfaction, Mr. Jevons has especially directed
his attention to the general and philosophical exposition of the new
method and to lajring the foundations of its application to the theory
of exchange and to the theories of labor, of rent, and of capital. As
for myself, I have made especial effort to make thorough exposition of
the mathematical theory of exchange. This leaves me in duty bound
to ascribe the priority of formulation to Mr. Jevons, the while reserving

to myself some claim to several important deductions In my

opinion, Mr. Jevons' work and my work, so far from antagonizing each
other, confirm and complete and essentially strengthen each other." —
Leon Walras, Preface to Elements d'Economie Politique Pure, 4th
ed,, 1900.

There is, then, from the point of view of the present investigation,
no especial call for detailed report or criticism of either Jevons or
Walrasi Their mathematical forms of statement and method of
investigation, if there really be a separate method, serve to make the
task one as impracticable for the present writer as it would probably
turn out to be unserviceful to the reader.

Walras' rendering of the marginal-utility doctrine makes a dis-
tinction between extensive utility and intensive utility ; a commodity has
extensive utility up to the point where no more of it will be consumed
even upon terms of being offered gratis ; intensive utility is the sort of
utility that influences the demand curve (ifri'd., p. 73). "We call the
utility intensive because of the fact that the commodity responds to
needs more or less intense and pressing, accordingly as, with a
greater or smaller number of men, these needs persist, despite the
height of the price, and persist more or less strongly with different
men ; because, that is to say, the importance of the sacrifice to be made
to procure the commodity has more or less influence upon the quantity
of the commodity consumed" {ibid., p. 73).

All of which amounts to reducing the different demands of
different individuals to a homogeneity of utility; thence comes the
interpretation of the demand-price curve as a mere intensity-of-utility
curve.

Based upon this line of reasoning, the further development of the

336 VALCE AND DISTUBUTIOK

papib or ftwiple*. Tberdon; n dM iKMoto hoA of
effcctiTenas of expositioii and of cBUuomy of ifaoE. it has

» wda l» be M«crf Am ■■ af iIm a

tkat u of good* maaSrieiitd, tar the t

Tbi* ■» alw tbc BKibod of JnvfH. Ac fartka praUn k

uulrie ami fcmnUte tkc cott iiiltaifii

Walraj. u it pecnu K> Uu* wriier. ccU o

it: "1* a 1

Ac pradactiTC miim tfcal dctennnea tkc pricr at ikr ^mlM.1. or n
Ihe price of the prodael. drtcf tnri » «« hai« kcb Ifcram^ t~
*f JeaianJ and lOpplr. that demwnca Ihe prioc af the pev
•ervlcei; hj virtue of the U« of com of peoductioa. the frix dt n
(iWrf, PL I76>.

Aa far Jevons, it u further to be aaid that la ammttoaa a
iapliedir or eiplicittr adopu (be ooliDCi of a wcUl ntiStr : I
repeatedly makes the feeitnc-qoaiititiei of (liScrent
and conunenKir^le ; and thai he tepealedir tdcnli&ca oaarfinal
with marKinal offer price ; and that bii gowral
orcrttitj each and all of the$e auiunptioni.
that, in more careful anairsei and fonmilatioa
ii repudiated and the correct doctrine accorded adequate
A few queitioRi must suffice under tbe»e beads:

"In a time of icarcit; the otiliijr of barlejr u food migfai riae ao
bigfa ai to exceed altogether its utililjr, even ai regard* the wnalkat
<|aantitT. in producing alcoholic liquors, la a beMiged town the eoiplor-
ment of artictei becomes revolutioniicd." — Theory of Polities
Btonomy, jd *d., London, i888. p. 6i.

"We are now in position to appreciate perfectly the differctiec
between the total utility of any commodilf and (A* dtpv< of utOily of
the commodity at any point" (ibid., p. 49).

"The laws which we have to trace out arc to be conceived a>
tbeoretically true of tbe individual ; they can only be practicaUy
verified at regards the aggregate transactions, productions,
and consumptions of a large body of people^ But the Utrs
of the aggregate depend of course upon the laws applying id individual
caaea" .(<t.d., p. 48).

"In Paris [in the siege of Vol a vast slock of horses were eaten.
not so much because tbey were useless in other ways, as because they
were needed more strongly as food. A certain slock of horses bad,
indeed, to be retained as a necrssaiy nid lo locomolion, so that the
he degrees of utility never wholly failed" (ibid., p, 61).

"Suppose that tbe rale of exchange is approidmately that of ten

L-L

CXASSICAL VERSUS MODERN 345

value of the product ; and it is also true that meanwhile
entrepreneur competition is placing new values on the
cost goods and bringing about a new proportion-adjust-
ment of values with costs, or of costs with values; and,
in turn, upon these new costs are based new entrepreneur
opportunities, computations, and producings, and so on
indefinitely in a circle, the result of each situation becoming
in its turn a cause for the next term in the series. The
nltiinate causation must, then, be sought elsewhere; in the
sense of finality neither cost nor value is cause, and any
attempt to fix upon either as ultimate, or even as logically
prior to the otfier, must inevitably lead to circuity of
'"easoning or to question-begging.

As between cost and demand, Dietzel admits and agrees

^^a-t the earlier fact in the sequence is the demand with its

Pc>ssible price ; mines could not be scarce if people did not

^^nt iron ; but then comes in cost to put the later, but the

^^crisive, touches to the situation. True it is that what the

"^3^ers will, at the outside, pay limits what the producers

'^^.y spend in costs; in this sense the demand determines

"^^ cost ; but the last determination and the exact one is the

^^^^^t. The demand gives the maximum possible price; the

^t gives the actual price.

On the question whether labor as a productive fact

Tives its value from cost of production, Dietzel says that,

a short-time doctrine, the value of the labor is explained

i^ the fact that satisfactions depend upon it. But in the

^^"•ig run wages cannot be lower than the expenses of

^"Vring and of rearing a family; and if higher than this, the

^a-ease in numbers will finally prescribe the subsistence

"vel of wage. Precisely how this works itself out he

ves to be taken for granted.

Boehm-Bawerk in rejoinder, two years later, says, with
1 emphasis, that the issue is not at all upon the validity
f the law of costs:

The actual and essential features of the cost law, viz., that cost
Regulates the value of reproducible goods, that we commonly
Appraise the goods directly according to costs, that changes on the

1

L

338 VALUE AND DISTRIBUTION

tion to personal questions of priority or of originality in
progress of this doctrinal evolution. That the works of
Wieser and Boehm-Bawerk stand today as the most au-
thoritative expression of what is characteristic and domi-
nant in the unfolding of Austrian theory must serve as

it gives up thing! that rqiruent equal puTchiring power to all of it*
members, but very diflrreiil utiUtiei. it is true ihat Jevons wa» him-
self aware of all this. .... Jevons' anlaganism lo Ricardo and Mill
would have been less if he had nol himself fallen into the babil of
speaking of telalioni which (eally eitisl between demaud price and
value as though they held between mililjr and value,"

Jevons' account of the relation of cost to value needs >oia« alight
attention at this point. Does cost fix value or value cost?

"Wages are governed by the same formal laws as rents

So far as cast of production regulates the values of commodities, w>g«l
must enter into the calculation on exactly the same footing aa rent." —
Op. cil.. Preface, p. xvL

"When labor is turned from one employment to another, the
wages it would olberwise have yielded most he debited lo the expenses
of the new product. Thus (he parallelism between the theories of rent

and interest is seen to be perfect in theory Precisely the same

view may he applied, mulalit mulaHdU. lo the rent yielded by lixed
capital, and to Ihc interest of frre capitnl" (ibid., p. xlix).

"Value depends solely on the final degree of uliltly. How can we
vary this degree of utility? .... By having more or less of lie
commodity to consume. And how shall we get more or less of
it ? .... By spending more or less labor in obtaining a

supply 1 hold labor to be essentially variable, so that its

value must be determined by the value of the produce, not the value
of the produce by the value of the labor" (ibid,, pp. 164. 165),

Then, having treated the production margin as an equilibrium
between the labor pain of produclion and the pleasures attaching lo
the possession or consumplion of the product. — "labor will be carried 00
till the increment of utility .... just balances the increment of
pain," he continues : "The preceding theories lead directly to the
well-known taw, as staled in the ordinary language of economists, that
value is proportioned to the cost of production As the incre-
ment of labor considered is always the final one .... articles will
exchange in quantities inversely as the costs of production of the most
costly portions, i.e., the last portions added" {ibid., p. 186): Which
sums up in accepting all of wbal is most pernicious in the tabor-cost
doctrine, viz., the abandonment of entrepreneur cost, the adoption of
pain cost, and the jelllfication of labor. It may be here noted thai
Pantaleoni concurs in [his tabor- pa in -co si view (Maffeo Pantal«om,
Pure EcoHomici. Macmillan. [SgS, p, loz), as, for that mati«r. in most
other of Jevons' errors, e.g., in his constant and consistent hedon-
ism, and in the repeated identification of marginal utility with marginal
demand and with market value.

CLASSICAL VERSUS MODERN 339

justification for the prominence — near to exclusiveness —
pven to these two writers in these pages.

Wieser had in 1884 published his Ursprung und Haupt-
gesetze des wirtschaftlichen Wertes, and had been by Hein-
rich Dietzel somewhat scathingly reviewed. In 1885
appeared Boehm-Bawerk's Capital und Capitalzins, and in
1886 the Grundsuge der Theorie des wirtschaftlichen Gu-
terwerts. In 1890, and before the publication of the Posi-
tive Theorie, was published Dietzel's onslaught upon the
newer doctrine, Die klassische Werttheorie und die Theorie
vom Grenznutzen. During the same year came Dr. Robert
Zuckerkandrs few pages of reply, and a short note from
Boehm-Bawerk formulating certain questions which, with
their answers by Dietzel, were intended to make precise
the issues to be debated. Dietzel promptly replied to the
questions as formulated, and in 1892 appeared the rejoinder
of Boehm-Bawerk.^

The entire controversy, and especially that portion of it
belonging to Dietzel and Boehm-Bawerk, is to our purpose
as serving in peculiarly marked degree toward bringing
into intelligible statement the issues between the two points
of view.

Dietzel's review of Wieser need not detain us here.
The later and more formal article, Dietzel's attack upon

■ 1884, Wieser, Ursprung und Hauptgesetze des wirtschaftlichen
Wertes, *

1885, Dietzel, review of Wieser's Ursprung und Hauptgesetjse,
Conrads JahrbUcher, neue Folge, XI, 161.

1885, Boehm-Bawerk, Capital und Capitalzins,

1886, Boehm-Bawerk, Grundsuge,

1890, Dietzel, Die klassische Werttheorie und die Theorie vom
Grenznutsen, Conrads JahrbUcher, N. F., XX, 563.

1890, Zuckerkandl, Reply, Die klassische Werttheorie und die
Theorie vom Grenznutzen, ibid,, XXI, 509.

1890, Boehm-Bawerk, Ein Zwischenwort zur Werttheorie, ibid,,
XXI, 519.

1 89 1, Dietzel, Zur klassischen Wert- und Preistheorie, Conrads
JahrbUcher, dritte Folge, I, 685.

1892, Boehm-Bawerk, Wert, Kosten und Grenznutzen, ibid,. III,
321.

340

VALUE AND DISTRIBUTION

the general position of the newer scliool, opens with fl-z
pardonable error of assuming that Boehm-Bawerk's do«)
trine of subjective value is offered as somehow a workalfc';
doctrine of market value. Dietzel, therefore, directs hi/:
attack against the Austrians' peculiar ground of Crusoe-
conditions and of purely personal analysis, and asks
whether, upon these tenns, value, as a relation between
commodities, is a question of marginal utility rather than
of marginal cost.

And Dietzel makes it fairly clear that, in the Crusot
economy, the only possible common denominator under
which freely reproducible goods can obtain an objective
and practicable basis of comparison must be the labor-cost
denominator. True, ntility. may. for goods limited in
supply, stand as the best thing, because the only thing.
possible : but when the good can be reproduced by labor,
labor will come to stand as the cost; the loss of the good
will appeal to Crusoe only as the loss of the labor of
replacement, and the good, no matter how much greater its
utility may be. will fall to the value rank set by its cost.
And Dietzel points out that, especially with goods not exist-
ing in stocks, their utility affords no basis of comparison;
all goes over to cost computations: "Assume that the cabin
can be reproduced in lo hours, the net in lo, the bow in 8.
the food supply in 5 ; Crusoe, if he knows anything about
how to figure in economic fashion, will fix the IVerl of the
goods at the figures 10, 10, 8, 5." Suppose Crusoe to need
per day three liters of water and ten fish, and has in store
three days' provision of each, nine liters of water, and
thirty fish. Will he appraise the water and the fish, rela-
tively, according to their respective marginal utilities? If
with five hours of labor he can get nine liters of water or
ten fish, he will be indifferent whether he lose his three
days' supply of water or his one day's supply of fish.

But from all this — and there is more of it, and of a
most convincing sort — it is evident that there is no issue.

J

CLASSICAL VERSUS MODERN 34i

the Grundzuge, Boehm-Bawerk had admitted the prin-

ple of cost — of substitution — and had even gone so far as

* say that the utility of the purchased good actually was

ic utility — the subjective worth— of its cost good ; and

^Yitrt, — as is admitted is sometimes the case, though the

'Hrity of it appears to be overstated, — the method of replace-

nient is labor pain, labor pain was admitted to be the cost.

But note carefully that with Boehm-Bawerk this labor

pain as cost leads only to the establishment of subjective

^'orth; with Dietzel labor pain becomes a relational, com-

njon-denominator, medium fact. What, for example, does

ftis 10, ID. 8, 5 series of figures mean to Dietzel? Simply

relations of importance, reflecting the relative labor require-

^^t; nothing is implied by Dietzel, and nothing is cared

whether the services from possession or the pains from

P^'ocurement be little or much; he is in pursuit of a com-

'^on denominator and a basis and a cause for precise com-

^Hson. But with Boehm-Bawerk a subjective value of lo

j^'^ans a certain quantum of feeling, so much pleasure, or

uef ^nsg from so much pain, a definite feeling- volume ; and

'* the subjective value (worth) of this lo of pleasure is,

^y virtue of its cost, only five, this 5 likewise is a non-rela-

^^^al fact, a definite quantum of pleasure lost or of pain

y^^epted in order to obtain or to retain the 10 item of well-

^^ing magnitude.

r>^^ And therefore the simple fact is that there is no issue.
f ^^<tzel is talking of the relations between Crusoe's utilities,
^^^ m/^rr- valuations — to accept for the moment the Aus-
^ Xan view of the terms, while Boehm-Bawerk is within the
*^Id of absolute magnitude. Dietzel is in the field of
:change value; Boehm-Bawerk's discussion is sub-
ctive-worth discussion.

DietzeKs attack being mostly beside the point, as rais-

ig no issue, the reply contributed by Dr. Robert Zucker-

andl, at that time Privat-Dozent in the University of

lenna, could have no great significance in the discussion.

he following passage, however, deserves record:

It is an error to suppose that the later value school has seriously

^n mind the basing of market valuation upon the analysis of the

^economics of isolation. This method has been used only for

readier illustration and in order to make certain phenomena in

actual economic life more fully intelligible. Beyond this the

holaled

economic

is some

King csne

serves i

n the one

exccpiit

n- And

Crusoe

case, litil

I

VALUE AND DISTRIBUTION

:s is without interesl Actual e

rnlially different from an isolated system, and vtrbx*
■ as a rule may very readily in the other be only a*'
so, if the labor measure were taken to hold for ih^
e would follow from this for actual affairs.

Seemingly in entire ignorance of Zuckerkandl's con-"''^
tribution, Boehm-Bawerk now attempts to bring the con-"^
troversy to precise issues, and thereupon transfers the
whole discussion forthwith to the market-value field.

Does Dietzel regard the "sum of labor" in production
as synonymous with cost of production, or does he mean
by "cost" the sum of the various different costs of the
entrepreneur, in which the labor itself figures not accurately
as total but only as one value item? (That is, does Dietzel
accept entrepreneur cost as the significant cost category?)

Answer : The latter, the entrepreneur view, is accepted.

Does Dietzel regard the value of the cost good as the
cause of the value of the product, or is the product value
the cause, and the cost-good value the effect?

Answer : Each is the cause of the other.

Is the issue merely that the later school arrive at market
price out of the worth estimates of the marginal traders,
and only ronnd-about-wise out of cost, while the classical
school go directly to the cost fixation?

The answer is not quite specific, but the issue is stated
to be upon the interpretation and treatment of costs.

Does Dietzel regard labor as a valuable good falling
under the cost -of -production law, and as fixed in value by
the subsistence cost of self -maintenance and of rearing
successors ?

Answer: Yes, in the long adjustment.

Dietzel prefaces these answers with the complaint that
while he had laken the Austrians upon their own peculiar
ground, the psychological analysis of the individual eco-
nomic life, the reply is merely to transfer the discussion
to the field of competitive trading; in all of which com-
plaint Dietzel is correct enough, but for the fact that the

CLASSICAL VERSUS MODERN 343

isolated analysis is not conceiTcd by the Anstrians, itf th^r
btsl. as basis for the solution of the maricet-Talue problem.
but merely as preparation for the problem.

In fact, labor cost, as the solution of the supply side of
the value equation, can hardly be attacked in the Cr«soe
system of things, or in any system where all men are con-
nived to be precisely alike. Xot so, however, for actual
market conditions ; aJI the products of one producer may.
b)lh in cost and in marginal utility-, be the equiii-alent, in
subjectiw worth, of the day's-end item of labor applied.
and may exchange against similarly produced and meas-
ured goods of another producer. The goods purchased by
either man wilt then be obtained through this marginal,
day's-end. labor burden ; that is, labor cost will apply for
each man to limit his volume of product and to express the
importance of the purchases made through his pnxluct:
but Ihe goods produced find, for their utility or subjective
worrii. no measure or expression in the ratios at which ore
man's products exchange against the other man's
products: the quantities of time respectively devoted by
the two men, the burdens undergone, the pleasures
obtained, will have in the market-value expression no
relation to each other.

Dietzel accepts the entrepreneur notion of cost, that is.
he makes cost items enter into the computation only as
reduced to terms of value. Thus far, then, there is for
present purposes stilt no issue ; though, as we shall later
see. the Austrians do not themselves hold consistently to
'he entrepreneur analysis.

But upon the question whether market value is the
cause or is the effect of cost, the discussion moves toward
more definite positinqg ijf Hi^^jTi-^'-mgnt Dietzel does not
deny ihat cost goods derive, in a sense, their values from
(fie Values of their products;

I declare plainly thai .... both time and labor power
<ieriv« their character as goods from Ibcir u^efulnes * t

"etUal but a polential usefulness, in Ihe sense th)
■^tiitions of all satisfaction of wants and of
^tility. further, that they derive their character o

(th;

■oi>o!r.

i-t is, valuable goods] from the fact t

344 VALUE AND DISTRIBUTION

Note now that Dictzel is attempting to make Ubcr>r 3
valuable good in precise parallel with machinery or land,
and this not in the sense merely that effort must be com-
pensated in order to obtain product, and compensated i
approximately in the measure that it is attended by val* |
product, but in the sense also that labor has an objectire '
existence, as a thing separate from the putting-forth of 'iXi
seemingly as a iiof-man fact, like land or appliances.

But Boehm-Bawcrk had put his question in the alterna-
live, implying that the production good must be the cause,
with the value of the product the result, or rice versa.
This Dietzel denies: "The value of the production good
and the value of the consumption good condition eacli
other mulually," since no production good has -value if its
product is valueless, and no product has value if its
production good is valueless.

A mine derives its character as a good from the fact that it
can produce useful products; it becomes a ralyable good from the
fact of its scarcity. [Or is it from Ihe scarcity of its products?)
The product of the mine derives its value from the value of the
mine, the mine its value from the value of the producL The
Johannisbergcr vineyard is a good because of its potential [7}
importance as the condition of the satisfaction of the desire for a
particular wine; the vineyard is a valuable production good be-
cause it is a unique, or an absolutely scarce, production good. The
wine gets its value from the value of the vineyard. If the vineyard
loses its value, as, for example, by new methods of viticulture, the
wint would, so far as its value were a land-cost value, become value-
less. The vineyard, in turn, gets its value from the value of the wine.

Dietzel's objection to the alternative form of the ques-
tion would, however, better have run not so much that
either answer is correct as that neither is correct. For
certain purposes and for its particular point of view either
way of answering must indeed be admitted to be correct;
but the difficulty is that the alternative question assumes
that upon the one side or the other the ultimate causes are
to be found. It is surely true that an existing market value
is the cause of the entrepreneur consenting to make his
cost outlays ; and it is equally true that forthwith the entre-
preneur product affects, modifies, and readjusts the market

CLASSICAL VERSUS MODERN 345

value of the product; and it is also true that meanwhile
entrepreneur competition is placing new values on the
cost goods and bringing about a new proportion-adjust-
ment of values with costs, or of costs with values; and,
in turn, upon these new costs are based new entrepreneur
opportunities, computations, and producings, and so on
indefinitely in a circle, the result of each situation becoming
in its turn a cause for the next term in the series. The
ultimate causation must, then, be sought elsewhere; in the
sense of finality neither cost nor value is cause, and any
attempt to fix upon either as ultimate, or even as logically
prior to the otfier, must inevitably lead to circuity of
reasoning or to question-begging.

As between cost and demand, Dietzel admits and agrees

that the earlier fact in the sequence is the demand with its

possible price ; mines could not be scarce if people did not

want iron; but then comes in cost to put the later, but the

decisive, touches to the situation. True it is that what the

buyers will, at the outside, pay limits what the producers

may spend in costs; in this sense the demand determines

the cost ; but the last determination and the exact one is the

oost. The demand gives the maximum possible price; the

<x>st gives the actual price.

On the question whether labor as a productive fact

derives its value from cost of production, Dietzel says that,

as a short-time doctrine, the value of the labor is explained

by the fact that satisfactions depend upon it. But in the

long run wages cannot be lower than the expenses of

living and of rearing a family; and if higher than this, the

increase in numbers will finally prescribe the subsistence

level of wage. Precisely how this works itself out he

leaves to be taken for granted.

Boehm-Bawerk in rejoinder, two years later, says, with
all emphasis, that the issue is not at all upon the validity
of the law of costs:

The actual and essential features of the cost law, viz., that cost
regulates the value of reproducible goods, that we commonly
appraise the goods directly according to costs, that changes on the

1

346 VALUE AND DISTRIBUTION

side of cost cause changes in the level of value, these things the

mareinal utility theorists have never in the slightest overlooked or

denied.

The issue, he says, is merely as to whether this cost

law is final or whether, on the other hand, it rather does
I not itself need explanation. And to add the neccssarj-

f explanation involves an extension of theory, yet not an

I extension of a sort to cut across the cost law, or to mutilate

li it, but one which shall support and strengthen it.

f This then is the issue for which we have been waiting.

(Excepting in the entirely unworkable sense of labor
pain, the classical school did not, and, as has already
sufficiently appeared, do not explain costs. And it is also
^ sufficiently evident tliat costs require explanation. It is at

I all events to be set down to the credit of the later school

that this problem is fully faced by them, and a serious and
t systematic attempt made toward its solution. That there

f are serious and obvious doctrinal gaps in the Austrian

analysis of demand, that the terminology, while more than
f prodigal, is yet both illogical and insufficient, are defects

not intrinsically overserious of remedy. And in these
particular aspects, the newer position, with the necessary
modifications, would not be fundamentally at variance with
the Ricardian doctrine and point of view. The ultimate
H test must come with the newer treatment of costs. In the

conviction of the present writer, the Austrian doctrine, as

I tried by this test, makes not better than a passable showing.

II Boehm-Bawerk continues : Doubtless value as cost may be
used to explain value as product; but how explain the first

' value? If value is traced back far enough, it is almost certain

to come upon some non-reproducible good, for the value
'' of which cost will not serve as explanation, or at all events

h to come upon labor. How value this non-reproducible

I. good or this labor? Shall we, with Dietzel, value the labor

j by its production costs, by the bread and meat necessary to

maintain the laborer and his family? But these have them-
|l selves already been value-explained in terms of labor.

r The later school resorts for the solution of this diffi-

culty to the doctrine of production-related cost goods, the
doctrine, namely, that the value of a production good in

u J

CLASSICAL VERSUS MODERN 347

^V particular employment is derived from its value in
^er employments, so that the values of similar goods are
^ua] as determined by their values in their marginal use —

^ solution of the cost problem in terms ultimately of

utility rather than of pain:

And as the value [subjective worth] of each similar sack of
^orn is determined according to the utility of the sack dispensed
^ith at least sacrifice, so the value [Wert — subjective? objective?]
^* all production goods is determined generally according to the
^'^Uc of the most easily sacrificed good which will be produced out
^f the common production store, or, as we call it, according to the
"^^rginal utility of the marginal product.

And here, it is to be remarked, are summed up all the
^^ults and errors in the Austrian solution; for it must be
^j^a.t we are talking of market value, since it is Boehm-
^^werk himself who has elected to transfer the discussion
^Ut of the subjective field : ( i ) With cost as a competitive
I^'^oblem — an entrepreneur reckoning — the value of the pro-
duction good in one use is not necessarily dependent upon
*^ having an alternative industrial employment. As long
^^ there is an alternative bidder for it, competition by other
?^trepreneurs, it does not at all matter whether the good
^^s several valuable applications or only one.

Boehm-Bawerk's reasoning mixes collective with com-
^JJ^itive cost computations, a radical and all-pervasive error,
^ut how as a Crusoe or a collectivist problem? Even so,
^Vie utility, the importance, the subjective value of an agent
^oes not depend on its having another use; only the cost
Aspect of the agent, as a constituent of the production cost
^f the product, so depends; it is, in such case, the worth of
the one and sole product that gives worth to the agent;
^gcnt-wise, there is no question of cost.

(2) It is most difficult to make out what Wert stands
ior in Boehm-Bawerk's formulation. In the first use, it is
almost of necessity the subjective-value concept that is
intended. The second use cannot bear the subjective- value
meaning, else, as non-relative, it would be meaningless,
or would be worse, as introducing all of the rich-man-
poor-man perplexities. It has more the sound of some
social marginal utility, society being conceived of as, for
the purpose, an individual. But this concept any Austrian

348 VALUE AND DISTRIBUTION ^

would be quick to outlaw as nonsense. Nor logically and
justifiably can the concept be one of mar^nal market
value, or any other market-value concept, since it is market
value that is sought to be explained. But whetlier logical
or not, this last is probably the correct interpretation; it
seems, indeed, to be the only possible interpretation. And
so. assuming that there is an alternative and marginal use.
and that tliis use has a value of its own, independently of
the other and non-marginal uses, the Austrian method will
trace the value of the other productive items back to the
valu« of this marginal use. But it will still remain to
explain the value of this marginal use, and to establish for
value purposes its independence of tlie non-marginal items
or non-marginal uses. Must not this marginal-value use
be also explained by appeal to some displacement, some
cost?

But whether this newer view is or is not tenable, Djetzel,
as Boehm-Bawerk rightly points out, has himself adopted
it. Dietzel recognizes that the value of the cost good must
be explained ; and when he says, "The cabin that saves me
ten hours' labor is of equal worth to me with the products
which I need and which with this sum of labor I purchase
from nature, he may be able to see how his explanation
differs essentially from that of the marginal utiUty the-
orists; I [Boehm-Bawerk] cannot."

Boehm-Bawerk insists that Dietzel's explanation, if a
full one, must go farther and explain the value of the dis-
placed fact, the cost; this cost value must find its explana-
tion in marginal utility :

The less malerial and labor il requires to make a coat, so many
the more coats from the same goods; so much the lower down
the utility curve can satisfaction extend, so much (he lower the
marginal utility of coats. By service to marginal utility [Crtmnul-
sen] the cost goods come to be valued. Not cost, but utility, then,
is at the end of the causal series.

Here again is some of the talk that has given rise to the
identification, through cost, of marginal utility with value.
Surely marginal purchase price, whether of a consumption
good or of a cost good, is capable — all differentials aside —
of standing as the equivalent of price; but it is equally

CLASSICAL VERSUS MODERN 349

^^^r that the volume of supply items has something to say
^ to how far down upon the curve of demand the mar-
^*^al item will be found. And only one page back mar-

^^^al utility was itself stated as a result of the relation

^^tween need and provision for need.

And, as Boehm-Bawerk goes on to say, not the techno-

^"^4Bical fact — ^the good or the labor applied — is final as

t, but the value of it ; the technological aspect is merely

secondary influence in the case, as bearing upon the

^^^^jantum of the supply.

- Now this is clearly entrepreneur analysis, and as such

correct in giving precedence to the value aspects of the
reduction goods ; though it remains true that it is only as
5ised upon the technological efficiency of the production
oods, as underlying the production of things of value,
t these production goods have any value. But once
in let it be said that entrepreneur costs are themselves
ot final facts in value causation, but only the method of
xpression by which, in an entrepreneur economy, the final
acts attain manifestation. The quantity of production
as mere mechanical facts — ^technological capital —
bearing upon the quantity of the product. But quan-
^tity of product does not directly determine value; only
trough supply in its relation to demand does the quantum
of product reach a value standing; thereby the production
goods obtain, through entrepreneur bidding, their value.
If there is any one thing fundamental in all this, it is not
the value costs, but the volume of production goods. And
still the volume of production goods must in turn receive
an explanation, not only as an aggregate, but also as a
share directed to the service of any particular line of
supply. The first question, that of the aggregate supply of
production goods, goes back to the original environmental
situation, or to an account of the genesis of instrumental
goods through the intermediary of savings and capitaliza-
tion. The second problem, that of the distribution of the
instrumental goods between different lines of production,
leads over into the demand side of the value equation;
given at any time the aggregate supply of different com-
modities, how are these adjusted to one another in
exchange relations — market values? and how, in view of
their existing volumes, do production goods, through entre-

35° VALUE AND DISTRIBUTION

prcneiir bidding, receive their market values, gel dj^*^ "^
tribiited among the different industries, modify the vali^ ♦^
levels for products, and thereupon get revalued zaCf
redistributed? ^^

But, while Boehm-Bawerk regards the old school and ^
the new as at issue upon the nature of costs, he finds
Dietzel to be after all in essential agreement with the later ,
doctrine ; as against Dietzel the issue is solely as to which
of the two influences, cost and marginal utility, is cause
and which effect. Dietzel's position is that both are cause
and both effect, in some final and ultimate sense. Upon
this issue Boehm-Bawerk's argument is clear and con-
vincing to the point of brilliancy: Material causation is I
easily misunderstood and misapplied ; a tree may be the
cause of an acorn, and the acorn in turn the cause of &
tree, but not of the same tree ; poverty may cause drunken- 1
ness, and this in turn cause poverty, but not the same '
poverty. Concretely the same tilings, the same objective
facts, cannot be both cause and effect, Dietzel's position
is a logical impossibility.

Note here, however, that the question is so far only
whether utility — or marginal utility, or subjective worth —
is or is not the cause of cost ; and surely on this point there
can be no doubt as to which category in economic produc-
tion is primary — demand or supply. But upon the further i
question whether, as an entreprenevr fact, cost causes j
value, or value cost, it is not so dear which is right, or that I
either is right; neither costs of production nor values of ]
products are to be accepted as ultimate causes; rather both )
are to be regarded as effects of desires for products, as I
over against human productive powers in conjunction with ]
the environmental equipment of productive opportunity and '
productive instruments. The causal sequence runs, human
desires and needs being taken for granted, from produc-
tion goods and human productive powers, more or less I
scarce or abundant relatively to the needs, to the more or
less of products relatively to the needs, thence to the rela-
tive exchange powers of products, thence to the relative
exchange powers of the productive agents and instruments.
On the supply side, the primary term of the causal series is

CLASSICAL VERSUS MODERN 35^

™^ instrumental goods and powers — but not these goods
^^^ powers in their value aspect.

But evidently all of this reasoning is upon a level of
^^lue analysis deeper than the entrepreneur categories and
^derlying these categories, — a stratum of thought to which
"^^ cost category is irrelevant, otherwise than as mere
^^ression or manifestation of the underlying facts which.
Under the competitive management and bidding of entre-
preneurs, are making themselves effective through the
*^veling and proportioning mechanism of entrepreneur
^^sts. The entrepreneur, however, is prone to accept the
]^lues of the cost facts as opaque and ultimate causal data
^^termining the values of products by determining the
^^Pplies of them.

But Boehm-Bawerk is right in insisting that the value

^^P^ct attaches to the production goods only by way of

^^^^ivation from the value of the product. But it is equally

that the limitation of supply, whereby value arises, is

►n the products only as a derivative from the limited

^t^ply of agents. And, in fact, Boehm-Bawerk says as

^^^^ch; his argument for his aspect of the truth runs as

^^^lows: Priority of time is not the point; there is no

^^^mer till after the spring, but the spring does not cause

I^^ summer. The value of the product is explained by the

^^'^rt that the production goods are not in superfluity; put

ith this the demand, and value comes both for products

d for cost goods, — that is, the product has value by virtue

imately of the same cause that gives value to the pro-

^Xactive good. None the less the value of the product is

^^rthest back in the chain of causation; the production

^'fxxl gets its value from the value of the product. So corn

^^ not high because rent is paid, but rent is paid because

^om is high. If the art of smelting ore were lost, iron ore

\vould become valueless, but not iron; while to forget the

tnethods of using iron would render both iron and iron ore

Valueless. So a corner in brick will carry up the prices of

brick, together with the quotations upon stocks in brick

corporations; but prices of brick cannot be raised through

352 VALUE AND DISTRIBUTION

an advance in the market quotations upon brick stocks
etc. — ^al! excellent, if only it all mattered, if, in truth, tl«
causation were finally with the value of the produced gooc
But it is, at any rate, dear that it is not finally with th:
costs of the produced good.

CLASSICAL VERSUS MODERN 345

ilue of the product ; and it is also true that meanwhile

itrepreneur competition is placing new values on the

3st goods and bringing about a new proportion-ad just-

:ient of values with costs, or of costs with values; and,

n turn, upon these new costs are based new entrepreneur

opportunities, computations, and producings, and so on

indefinitely in a circle, the result of each situation becoming

^n its turn a cause for the next term in the series. The

ultimate causation must, then, be sought elsewhere; in the

sense of finality neither cost nor value is cause, and any

attempt to fix upon either as ultimate, or even as logically

prior to the otfier, must inevitably lead to circuity of

^^asoning or to question-begging.

As between cost and demand, Dietzel admits and agrees

^t the earlier fact in the sequence is the demand with its

Possible price ; mines could not be scarce if people did not

''^^nt iron ; but then comes in cost to put the later, but the

^^cisive, touches to the situation. True it is that what the

"^3^ers will, at the outside, pay limits what the producers

"^^y spend in costs; in this sense the demand determines

^^ cost ; but the last determination and the exact one is the

^^^^^t The demand gives the maximum possible price; the

^t gives the actual price.

On the question whether labor as a productive fact

rives its value from cost of production, Dietzel says that,

^^ a short-time doctrine, the value of the labor is explained

- ^^ the fact that satisfactions depend upon it. But in the

l^^ng run wages cannot be lower than the expenses of

^ ^ ^ng and of rearing a family ; and if higher than this, the

icrease in numbers will finally prescribe the subsistence

^ ^*vel of wage. Precisely how this works itself out he

^aves to be taken for granted.

Boehm-Bawerk in rejoinder, two years later, says, with
^11 emphasis, that the issue is not at all upon the validity
K)f the law of costs:

The actual and essential features of the cost law, viz., that cost
regelates the value of reproducible goods, that we commonly
appraise the goods directly according to costs, that changes on the

I

346 VALUE AND DISTRIBUTION

aide of cost cause changes in the level of value, these thiags the
marginal utility theorists have never in the slightest overlooked or

The issue, he says, is merely as to whether this cost
law is filial or whether, 011 the other hand, it rather does
not itself need explanation. And to add the necessary
explanation involves an extension of theory, yet not an
extension of a sort to cut across the cost law, or to mutilate
it, but one which shall support and strengthen it.

This then is the issue for which we have been waiting.
Excepting in the entirely unworkable sense of labor
pain, the classical school did not, and, as has already
sufficiently appeared, do not explain costs. And it is also

sumcieniiy appeared, uo not explain costs. /\nu it is aiso
I sufficiently evident that costs require explanation. It is at

all events to be set down to the credit of the later school
that this problem is fully faced by them, and a serious and
systematic attempt made toward its solution. That there
are serious and obvious doctrinal gaps in the Austrian
analysis of demand, that the terminology, while more than
prodigal, is yet both illogical and insufficient, are defects
not intrinsically overserious of remedy. And in these
particular aspects, the newer position, with the necessary
modifications, would not be fundamentally at variance with
the Ricardian doctrine and point of view. The ultimate
test must come with the newer treatment of costs. In the
conviction of the present writer, the Austrian doctrine, as
tried by this test, makes not better than a passable showing.
Boehm-Bawerk continues : Doubtless value as cost may be
used to explain value as product; but how explain the first
value? If value is traced back far enough.it is almost certain
to come upon some non-reproducible good, for the value
of which cost will not serve as explanation, or at all events
to come upon labor. How value this non-reproducible
good or this tabor? Shall we, with Dietzel, value the tabor
by its production costs, by the bread and meat necessary to
maintain the laborer and his family? But these have them-
selves already been value-explained in terms of tabor.

The later school resorts for the solution of tliis diflfi-
culty to the doctrine of product! on -tela ted cost goods, tlie
doctrine, namely, that the value of a production good in

CLASSICAL VERSUS MODERN 347

any particular employment is derived from its value in
other employments, so that the values of similar goods are
equal as determined by their values in their marginal use —
a solution of the cost problem in terms ultimately of
utility rather than of pain :

And as the value [subjective worth] of each similar sack of
corn is determined according to the utility of the sack dispensed
with at least sacrifice, so the value [Wert — subjective? objective?]
of all production goods is determined generally according to the
value of the most easily sacrificed good which will be produced out
of the common production store, or, as we call it, according to the
"marginal utility of the marginal product.

And here, it is to be remarked, are summed up all the

faults and errors in the Austrian solution ; for it must be

^t we are talking of market value, since it is Boehm-

^werk himself who has elected to transfer the discussion

^^^ of the subjective field : ( i ) With cost as a competitive

problem — ^an entrepreneur reckoning — the value of the pro-

puction good in one use is not necessarily dependent upon

^ts having an alternative industrial employment. As long

^ there is an alternative bidder for it, competition by other

f^trepreneurs, it does not at all matter whether the good

"^ several valuable applications or only one.

Boehm-Bawerk's reasoning mixes collective with com-

^itive cost computations, a radical and all-pervasive error.

^^t how as a Crusoe or a collectivist problem? Even so,

j^ utility, the importance, the subjective value of an agent

^^^s not depend on its having another use ; only the cost

^p€ct of the agent, as a constituent of the production cost

^ the product, so depends; it is, in such case, the worth of

^^ One and sole product that gives worth to the agent;

^S^nt^wise, there is no question of cost.

- (a) It is most difficult to make out what Wert stands

?*" in Boehm-Bawerk's formulation. In the first use, it is

. J^Ost of necessity the subjective-value concept that is

^nded. The second use cannot bear the subjective-value

Q ^^ing, else, as non-relative, it would be meaningless,

^^"^ould be worse, as introducing all of the rich-man-

g^l^^-man perplexities. It has more the sound of some

^ ^^1 marginal utility, society being conceived of as, for

^ purpose, an individual. But this concept any Austrian

356 VALUE AND DISTRIBUTION

ginal costs, each of these costs getting its value from its
least valuable use, would be true, so far as it goes, if only
these marginal costs were fully 3na]>-zed into an indiffer-
ence between marginal uses. But here a distinction must
be drawn between isolated or collect ivist production as
against competitive production. The displacement, as
opportunity idea, applies to competitive production only
through the individual computation. The entrepreneur is
as readily marginal through his outlay for the cranberry
patch as for some productive good having an alternative
application. To the entrepreneur there is the clearly
defined alternative by \'irtue of which he becomes marginal,
viz., whether or not to apply his capital power to the hire
of the cranberry patch. .\nd in point of fact also, the cran-
berry patch has alternative applications, in the sense that it
has different and competing relations of adaptation and of
desirability to different men; the successful bidder has not
necessarily to bid his maximum, but only to outbid his
most willing competitor. It is thereby rare that, in
market-value problems, the producer nearest to the margin
is really upon the margin, — rare, that is, that cost ever quite
equals value. That the case is not precisely the same with
Crusoe, or in collectivist production, is due to the fact that
in the isolated economy, cost resolves itself mostly or
entirely into the alternative- want aspects of production,
into the resistance pull of other demands. That Boehm-
Bawerk, despite the fact that he is citing and discussing
a market-value doctrine, is proceeding upon the group con-
cept of cost, instead of upon the competitive concept, is
shown in the following:

If we are considering what a good .... of higher immedi-
ate marginal utility is worth for us. we must say first of all. it is
worth exactly as much as the means of produclion from which we
could reproduce it at any moment. Then if we examine further
how much the means of production themselves are worth, we come
to the utility of the marginal product.'

Tt is, indeed, passing odd that the principle of displace-
ment is applied here but is not accurately applied to competi-
tive costs ; but in competitive cost the principle is tnore
difficult to apply, as complicated with questions of individual
capacity and preference. In competitive production the
costs are fixed, in part by the market prices of production

' Baehm-Bawerk, op. cit., p, 18S.

POSITIVE THEORY AND NATURAL VALUE 357

goods, and in part also by the alternative openings offered
for die personal activity of the entrepreneur ; he is not, in
any ordinary case, appreciably an influence to affect the
conditions. Yet in his small share, whether he be a mar-
ginal producer or not, he does have an effect. Labor, or
land, or capital uses, acquire their market value as produc-
tive agents through the competitions of producers bidding
for the help of these agents. The value is not the mar-
ginal-value contribution of the agent, but is the price
adjustment at the level of the marginal bid, — not the possible
but the actual bid in view of the actual value contribution,
or,— put more accurately so as to cover the interest-
discount modification, — it is the price set at the marginal
bid in view of the present worth of the expected future
value contribution. But the competition of producers is
ordinarily not drawn from one field of production alone:
the quantity of agents at the service of one line of produc-
tion is commonly, though not always, mostly a question of
the alternative pull of entrepreneurs in other industries.

Cost, from the individual point of view, is therefore truly

^ question of displacement, but sometimes of displacement

of agents from one productive use to another, sometimes

of agents from other competing hands to the producer's

hands. The higher of the two amounts functions

^ the cost quantum. So, for example, if land costing the

tenant loo rent may be made to render him 103 of service

in com or 105 in wheat, the -land cost of the wheat is not

100 but 103. That is to say : The cost of the agent under

consideration will be expressed either as the money sig-

^ficance of the agent in some alternative employment under

fhe management of the holder, or as the money outlay

*"iposed by the bidding of competing entrepreneurs; and

the true cost will be the larger of these two value quanti-

^^- Thus, while we may acquiesce in Boehm-Bawerk's

statement, "that even when the law of costs holds, costs are

^^^ the final but only the intermediate cause of value," this

?^9Uiescence must import a meaning different from that

''^tended by Boehm-Bawerk ; it cannot be admitted that

^and has anything more to do with value than has cost,

'^^ss in the ultimate sense that all economic activity traces

^*t to want, and that even competitive costs are more

'^monly than otherwise the expression of alternative

^^^lands. And we must dissent unqualifiedly from the

VALUE AND DISTRIBUTION

1

general proposition that "it is only this many-sided char-
acter of most cost goods, their capacity for being employed
in many different uses, that gives the appearance of the
contrary."' This statement is uniformly true only of the
isolated or socialized economy. But doubtless it is some-
times true of competitive production ; that is, it may, as we
have already seen, be the case that in any particular entre-
preneur's hands an agent be on the point of being turned
by him into another line of production; against the use that
he is making of an agent, the highest bid is not that of
some competitor but is his own bid for use in another line
of product

In Wieser's treatment of costs and of value, the dis-
cussion chiefly concerns that which he terms "Natural
Value,"— coUecti vis t vaUie — value arising "from the social
relation between amount of goods and utility, or value as it
would exist in the communist state." '"

That this manner of approach is for many purposes
most serviceable is not to be denied ; but to be a working
concept, it must assume that in administration all indi-
viduals are regarded not merely as entitled to equal con-
sideration, but as precisely similar in all relevant aspects;
or, if the discussion is to throw light upon exchange- value
problems, that an equal quantum of purchasing power
is assigned to the different claimants under the collectivist
distribution.

Wieser points out that, under present conditions, goods
are not distributed according to their maximum service in
consumption, but according to strength of purchasing
power; exchange value estimates luxuries high and neces-
saries low ; error, fraud, force, private propert>', and social
inequality disturb the case; "In natural value goods are
estimated simply according to their marginal utility ; in
excliange value, according to a combination of marginal
utility and purchasing power." "

■ Boehm-Bawerk. oft. ctl., p. iSq.
"Wieser. Nalural Value, p. 60.

POSITIVE THEORY AND NATURAL VALUE 359

In a certain sense, truly, all prices are costs, as terms of
sacrifice upon which all goods are obtained. But an
entirely intelligible and analyzable value situation might
obtain under conditions in which cost of production could
have no part, as, for example, under the government
supply-distribution system at an Indian agency. So Wieser
rightly remarks that the elementary theory of value con-
siders "that goods come into men's disposal without requir-
ing^ to be first produced," ^* but, as one infers, with equality
of purchasing power somehow established in the society,
or with some assumed preliminary and temporary distri-
bution of the consumption goods. In such conditions, land
^rid capital could have no value. But "if we do away with
this assumption [of non-production], we obtain the natural
la.Aws of value in production." ^*

So, under socialism, Wieser says :

There must be land rent [land differentials] In such a

^^^^te it would not form personal property, but it would be calcu-
^^•^«d separately in the total income of the community, and that on
essential grounds, namely, in order to find out what is the quota
^''Hich individual lands contribute to total return, and to judge
t««refrom what outlay may and ought to be expended to obtain this
^11 eta. In other words, the economic-technical service, that of
^^^^itrolling production, would remain, while the personal part it
^*^y8, as a source of private income, would fall away.**

Now, not at all denying the service, both expositional
^^d doctrinal, of this point of view, it is perhaps the more
^ be regretted that so often there slip in competitive con-
?^^ts and illustrations, rarely clearly distinguished, and
?^^t the point of view appears to be in perpetual flux
^^\veen collectivism and competition. In truth, here, as
J*th Boehm-Bawerk, the reader finds that the diflSculties of
rjptinguishing between subjective- and objective-value doc-
^*ies are extreme.

Seemingly upon considerations both of expositional

^^^^antage and of logical priority, Wieser takes up the

Pi^ollem of distribution as fundamental to the doctrine of

^^ts, — which, perhaps, is as well as the other way about,

'*»ce either method must tacitly involve one or the other of

^'^^ assumptions ; either that value and distribution are dis-

"/6»d., p. 61. "/W(/., p. 61. "/6td., p. 63.

*

36o VALUE AND DISTRIBUTION

Hnct problems, or that one solution may be made derivative
from the other. "The consideration that, from production
goods, one can obtain a return in goods which possess
not only utility but value, gives production goods their
vahie." " "But," as Wieser rightly says, "the proposition
that production goods obtain their value from the vahie of
their returns, suffices for the co-operation of the co-operat-
ing productive factors as a whole, not for their valuation
individually." Thus value must explain costs as an aggre-
gate, but until we find the principle of imputation, "the
valuation of production goods [separately] will remain an
enigma." "

Nor is it possible, as Menger thought, to arrive at the
contribution of any one item by assuming its loss. Three
goods, .-i. B, and C, co-operating together may give a value
of to, while any two of them together or applied in other
combinations would give a value of only 6. By Mengcr's
reasoning this would assign to each a value of 4. But 3
times 4 is more than the value of all working together,
I The advantage which a good renders is, therefore, not to
I be calculated by the loss which will come with its loss, but
by the gain which does come with its possession.^' The
actual ejuployment is the one from which computation
should be made, and not the emplovinent which might have
been resorted to, if something not as good as was done had
had to be done. The three factors in combination produce
a surplus of i over what they could produce separately or
in any other combination; it was because of this surplus
that they were put together ; to the extent of this surplus
there is something to be divided which the method of sub-
traction cannot distribute.

But will this specific productivity solution serve better?
The truth is that men bid for instruments of production to
go with their own labor or to supplement an existing stocky
because, with the new factors, the old become more \

■ Wieser, of. cit.. p. 7ft. "* Ibid., pp. jz, 78. " tUd.

POSITIVE THEORY AND NATURAL VALUE 361

ductive ; but there is no occasion for ascribing the total of
this joint and co-operative increase either to the old or to
the new factors. Market values for productive contribu-
tions can, indeed, be worked out of situations of this sort —
the market is doing it daily and hourly — but never any
measure or purported expression of the value productive-
ness.

To a hunter, rifle and cartridge together may have a
great Wert; as a necessary fact in the combination, either
may be said to have all the worth ; alone neither would have
any of it. And likewise, if there is only one artist who can
do a g^ven thing, and only one item of material on which or
with which the thing can be done, there is no theoretical way
of dividing the finished product But if either factor can
be replaced, the deadlock is broken ; and if there are differ-
ent combinations enough into which the different produc-
tion goods are entering, the market will solve, from all the
different equations, the values of the different unknown
quantities: so, from ^

x-\-y=ioo
2jr+3y==afo jij^f^^<^C^

434-5^^590
it may be deduced that x=^o, y=6o, and z==yo, "The

sum of all the productive contributions exactly exhausts the

value of the total return." ^*

But — it is to be objected — ^the entrepreneur must all the
while be here as a fourth fact, and the adjustment of
market value must take place through entrepreneur bid-
ding. There are, then, accurately no such equations as
;r+y=ioo, etc. ; the sum must be a different one with each
different entrepreneur, since each of all the different goods
must hold a different productive relation to each different
entrepreneiu". The outcome will be one ascribing to the
instrument or agent as remuneration the sum expressing
merely the highest entrepreneur bid for it by virtue of its
productivity relation to this particular entrepreneur, — that
is to say, the highest value offer.

"/«rf., p. 88.

363 VALUE AND DISTRIBUTION

But it is at any rate true, as Wiescr rightly Insists, that
the value of each productive good is in part conditioned
on the existence of goods capable of co-operating with it, —
on complementary goods. Land has greater value as capi-
tal goods increase; labor greater value as the land is
better.

According to Mciiger .... the farmer who loses his cart
horse, loses only the value of the animal, whereas .... he
suffers, beyoiiil this, some disturbance in the value of his remaining
productive wealth."

Every productive good .... has ascribed to it a grtater
cfTect than it could obtain through its own powers; .... on th«
other hand, .... a lesser effect .... than might be expected
from liie deigree of dependence in which the complementary goods

stand to it The imputation assigns in this way a medium

share Of land, capital, and labor there is nothing

said except that, together, they bring forth everything;
nothing."

But note here that just how or why the outcome is
is, cannot be made dear without the assumption of the
entrepreneur fact, with all the clifTerences in entrepreneur
capacity, iti capital equipment, and in personal preference.
Wanting this aspect, and full allowance for it, we have only
a mystery.

Noting also t]]at the foregoing passage seems to appeal
to tlic actual market, and that a part of it so appeals in
terms, so that wc arc left in our chronic doubt as to
whether and how far we are in the "natural-value" reckon-
ing, the further dewlopment of tlie argument becomes
interest- The marginal law for production goods is
to follow that for consumption goods;

In every stock of consumption goods, ever>- onit receives ics
value from the marginal utility; thus the value which the products
are expected to have is already adjusted to the marginal level.
and ibe value of the production goods, as derived from this, is
conseiiucRlly placed, from tbe Iieginnh^ on the basis of tlie
marginal mine."

aIai«H

^comes of^^H
s asserto^^H

i

But production goods may be used to create product*'

1

POSITIVE THEORY AND NATURAL VALUE 363

•
of different kinds. "In each kind, taken by itself, the

value of the product is adjusted to the level of its particular
marginal utility." ** And since these margins of utility in
the different kinds of goods are rarely, if ever, precisely
equal, "production stocks must always be employed in such
a way as to bring forward those products which will secure
the greatest possible satisfaction of want." And goods
not all having the same marginal utility, — gold for the filling
of teeth and gold for gilding not fully corresponding in
utility, — "it is quite impossible in the two kinds of employ-
ment to keep always exactly to the same marginal amount ;"
it is sufficient if no rearrangement will bring a higher
utility."

Here again, not attempting to be quite certain whether
the discussion is wholly coUectivist in reference, though
most of it surely is, and merely remarking these further
cases of mix-up between marginal utility and value, or
^ert, we are especially interested to observe that the differ-
^ce in the utility of gold for teeth as against any other
^ployment does not appear, in Wieser's thought, to
dq)end upon differences in buyers' purchasing power, but
solely upon the fact that the marginal need with reference
^ teeth may be much greater than any other need, even the
l^ighest, for gold for other purposes; but the value will
correspond to the cost — ^to the displacement — in these minor
^. This, then, definitely asserts that value is often less
"^n marginal utility, and so is one more recognition that
'^rginal utility and value are distinct concepts, and are
^^ntities not interchangeable, and that value is the cost
^^Pect of utility.

But now recurring to the doctrine that "land, capital,
^^^ labor together bring forth everything, alone nothing,"
.j^^ that "the sum of the productive contributions exhausts
jj?^ whole return," these statements, if accepted as true,
/^^st, as we have seen, be interpreted to include the entre-
^^^neur as laborer, as co-operating factor of production,
• ^td also as the director in the distribution of product. Of
^^d, capital, and labor, as compensated under rent, inter-

^Ibid,, p. 97.
*Ibid., p. 98, passim.

p

364 VALUE AND DISTRIBUTION

est, and wages, and with no account made of profits, the
proposition docs not hold. And when we are asked to
"suppose these productive elements employed on the most
rational plan possible," we seem to be assuming that all the
employed agents are precisely alike relatively to entrepre-
neurs in general, or that all are upon the market-value tasis
fully interchangeable, and that all entrepreneurs are pre-
cisely alike in all relevant aspects, — no part of which is in
any wise permissible of assumption. For competitive pro-
duction at least, these three productive agents must be taken
as somehow including the employer, tlie valuer and bidder
fact, or must assume as somehow in the background a
fourth productive element, the human director; and he is
always a different man. There is, then, no such thing as
one most rational plan or combination of productive
factors, unless this presupposes a one best entrepreneur.
And in fact, under equally skilful but different entrepre-
neurs, different combinations of productive factors must be
the best combinations. There is, therefore, for any particu-
lar production good, no such thing possible as one specific
marginal use or marginal service or marginal utility or
marginal productivity, as attributable to it in its own right
and independently, or even as dependent solel)' on the rela-
tion of the agent in question to some other production good
or goods, but only as also related to the situation and apti-
tudes and needs of a specific entrepreneur. There must.
then, be as many specific marginal productivenesses as there
are different entrepreneurs to come into relation with the
good in question. The fallacy of the "marginal contribu-
tion" of any particular productive good is parallel to that of
the marginal utility of consumption goods upon the market;
in neither case is there room for more than a marginal rela-
tivity. For market-value purposes, the marginal productive
contribution does not exist, but only the market value of
the contribution, as the outcome of competitive bidding,
based upon the significance, for individual purposes, of the
good in question, — whether stir generis or as one good out of
a stock of similar goods, — as forming a part of a particular
entrepreneur complex. The purchaser of the production
good may or may not be near to paying for it all he can ;
and while with one item out of a stock the quasi-rent fact
is probably a smaller quantity tlian in case of an isolated
good, there is no reason to suppose that it is entirely non-

POSITIVE THEORY AND NATURAL VALUE 365

existent. As applied to the inner relations of the entre-
preneur complex, the doctrine here insisted upon with so
much emphasis is, indeed, merely an application of Wieser's
general doctrine: "We only estimate it [the farm horse]
at a portion of the decrease that would ensue were the
owner obliged to farm without it." ** To value the horse
according to all of the loss is to value it at more than one
would need pay, and is at the same time to make it impossible
to pay for the other goods upon a similar basis, or even to
l)ay for them what under competitive conditions would
need be paid for them.

Wieser fails, however, to see that, in point of fact, the
accurate attribution or imputation of productiveness is
jnipossible upon the market, simply because it is impossible
inside the entrepreneur complex. The entrepreneur him-
self cannot tell how much the good in question produces
^or him, but only how much he can afford to pay for it to
60 with his other goods and his own productive powers,
^ther than to go without it.

In joint production the specific productivities of the dif-
^^rent productive agents are clearly not obtainable ; and in
^ jTith also, the productivity of any agent working in isola-
^Xon is not obtainable, simply because no good ever so
^l^orks; the entrepreneur fact, the director, is always in the
^^ckground, and the productivity is therefore a produc-
^vity relative to him ; thus the productivity must be a differ-
ent one with each different entrepreneur. But even if this
^ somehow not entirely past question, it surely is clear that
"the aggregate productiveness of agents employed in com-
l)ination is greater than the sum of their powers in isolated
production, that it is precisely for this reason that they
are placed in combination, and that the increment of product
from the very fact of combination is a joint product not
accurately to be distributed in terms of specific and dis-
tinguishable productiveness. In some slight measure, at
least, there must be in every case some question of joint
surplus product like that of the rifle-and-cartridge case,
or like the case of the unique painter and unique material.
The only practicable analysis is that of the entrepreneur
who attributes to himself as profit all that he does not have
to pay for the co-operating goods ; but it is obvious that this
analysis sacrifices accuracy to practicability.

"•Wicscr, op, ciiu p. 91.

366 VALUE AND DISTRIBUTION

This appeal to the entrepreneur computation and the
entrepreneur bid supplies the missing link in the argument
of Wieser with reference to the different equations ; some-
how, he says, the market, out of all the different equations,
arrives at a marginal-utility imputation for each productive
good. If it really does so, and so far as it does so. it is
done by the bidding of entrepreneurs :

To each single item or quantity is imputed the smallest contri-
bution which under the circumstances can be economically arrived
at by the employment temployer| of the particular item or quantity, —
the marginal contribution (the marginal employer's bid based on
contribution! .... or, looking at it from a different point of
view, the marginal product [product to the marginal employer, if
only this were accurately ascertainable].

Productive elements which admit of only one kind of employ-
ment do not share the multiplicity of conditions necessary for the
emergence of what we recogniie as costs."

This will be recalled as substantially the view adopted
by Boehm-Bawerk as the relation of monopoly goods to
cost of production, monopoly goods being understood by
Boehm-Bawerk to mean, in this connection, scarce goods.
goods not reprodticiblc at will, like land, exceptional ability.
etc. But it must be noted that Wieser's doctrine does not
exclude the goods from cost bearing on the ground of
scarcity or of non-reprodiicibility, but only because of the
want of alternative applications. And this is unquestion-
ably good cost doctrine for collectivist or for Crusoe eco-
nomics. And if it were possible to make certain that
Wieser is all the while in the collectivist analysis, there
could be no room for serious criticism, except to point out
that the application to competitive economics, if not made,
calls imperatively to be made, and to point out also that, if
made upon the basis left possible by Wieser, it can be made
only with the utmost of difficulty, — or, if readily made,
must almost certainly be erroneously made. Monopoly
goods, in the sense of land or of high abihty, are cost goods
in cither type of reckoning, to the extent, at least, of the
alternative applications. But in the competitive economy,
any production good is a cost good to the extent that it
necessitates a cost outlay to command it. In the accurate

"Wieser, of, eil,, p. 175,

J

POSITIVE THEORY AND NATURAL VALUE 3^7

sense, indeed, the displacement principle applies here; the
productive good could have served in the hands of another
entrepreneur; the expense incurred by the renting entre-
preneur might have been otherwise directed.

This is perhaps the point at which to discuss a forcible
and plausible objection against regarding as a cost the rent
paid for a good having only one productive application, the
cranberry patch, for example. It may be speciously urged
that the rent advanced by the tenant, or foregone by the
cultivating owner, while a cost charge in the individual
reckoning, and in that sense a cost, has yet no cost-causal
bearing upon market value ; the land will be used by some-
one; the rent is not a condition to the productive function-
ing of the land; it will be used by some other cultivator, if
the present cultivator refuses the rent outlay ; our cranberry
patch, being good for nothing for any other purpose, cannot
be driven, because of low rent, into other uses, and will
remain in the cranberry service, whether or not the owner
sell, or the tenant abandon to another cultivator ; the cran-
berry patch is therefore not a fact through which the supply
t^ of the value equation may evince any of that flexi-
bility whereby prices receive their modification.

But evidently thus much might be argued for capital and

^or its remunerations, with only a long-run distinction

P^sible for such lands, if there are any, as are independent

^^ upkeep and incapable of exhaustion. But there is no

^^on why cranberry land, or any other cultivated land, or

^J^y form of specialized instrumental good, may not, with

f»ne enough, be exhausted; that is to say, most instru-

'^ntal goods, however specialized, are in the long adjust-

'''^t mobile in their capital-value aspect.

But it must be admitted that goods of no alternative
'J?^ differ from other goods with respect to the effect of a
^^^inishing demand for products, that is, differ with
'^^Spect to the degree of elasticity in supply, but differ
^^'Vertheless only in degree. With falling prices, some

^^es, or what amounts to the same thing, some intensive
^^ssibilities, of the cranberry field will be abandoned, — will
I ^t it is true, go into other lines of product, but none the
^^^ will go; tfie labor and capital — the expense — go in part

^Vrhere; and if the entrepreneur departs leaving a new

368 VALUE AND DISTRIBUTION

tenant to follow him, this new tenant will fail to utilize the
land at the old degree of efficiency, at the same tension
of productive power; and the new tenant is himself not as
efficient a producer as the old, — was in fact outbid by the
earlier tenant on the earlier level of prices, this earlier
tenant now finding the cranberry enterprise at the present
level of prices not worth his while."

Supply conditions have then been somewhat disturbed.
But the degree of bearing of costs upon ^-alue is in any
case easily exaggerated, — which fact was in Mill's mind
when he argued that only relative wages and relative profits
should figure as costs. But if only those outlays not pro-
portionate to efficiency rendered are reckoned as costs, the
situation will become hopeless of analysis for cost purposes.
Because of differences in entrepreneurs, and thereby differ-
ences in the relations of efficiency to outlay, and because of
the different technological -conditions of different lines of
production, there is nothing for the case but to reckon all
outlays as costs, and for that matter, also, all tediums,
repugnances, and counter-attractions, whether absolute or
relative.

But it remains true that only differences of cost, relative
to efficiency, seriously affect the value outcome. We must,
however, view as costs all that the entrepreneur regards as
burden in arriving at his choice of occupations, all that he
charges up against the chosen occupation as a resistance
to production and as necessary to be overcome in his market-
price remuneration. All his outlays rank for him as data
in making his choice between lines of activity. It is, indeed,
only as working out through entrepreneur computations
and entrepreneur competitions, that production goods of
any sort acquire value or rental, or rank as costs, and come
thereby to have their little or much bearing on the relative
volumes of goods seeking exchange against one another.
That there is, for any purpose, a not greater relative supply
of production goods — whether of non -alternative use or of
many uses — is the reason for relatively few products, high

"* If ii. however, true Ihat cases may be imagined where no expense
or labor of upkeep is necessary. — a cranLerry patch, for example, where
the more one should disturb it the less satisfactory would be the
results. But even assuming sucb a case, the most that can be said i*
that it does not matter whether rent is or is not reckoned u a cost,
since the supply is independent of all cost influences.

POSITIVE THEORY AND NATURAL VALUE 369

prices, and a high value levd for the production goods in
question. Ultimately cost is a way of expressing that we
cannot have more of the agent unless upon more expensive
terms— perhaps not even then — and can have what we have
only upon the present terms of expense. But the explana-
tion of the actually existing limitation upon the supply of
production goods may or may not be in the diminutions and
diversions due to otfier industries; it may simply be that
there are no more agents. For the purposes of competitive
production, Wieser's and Boehm-Bawerk's view that a good
is not the basis of a cost unless the good has alternative
applications amounts practically to saying that nothing can
be a cost once that is not a cost twice. This view implies
also that some distributive shares for employed agents are
not costs at all, thus raising the question whether distribu-
tion need, on Wieser's own basis, have been treated prior
to costs.

"Practically," Wieser says, "it would seem to come to
this; that the imputation of the share due to the monopoly
foods is made after that due to the cost goods is finished.""
This appears to be Ricardo's old rent-and-cost doctrine,
albeit possibly none the worse for that But Wieser adds,
though with precisely what significance is not at all clear,
that

t is only in the individual case that such a calculation can be

^^t A sufficiently wide consideration shows that

^nopoly goods come altogether under the ordinary conditions of
^uation, and differ from other economic goods only that they

^^Play much more strikingly the character common to all

^ly the greater part, not the whole, of the "undivided residue" is
^ l>e imputed to the good in question."

Bearing in mind that, for the most part, the criticism
"^re made attaches only to the relation set up between dis-
tributive shares, and bearing in mind also that, interpreting
'^onopoly goods merely as scarcity goods, — non-reprodu-
^'We goods, — there is no very considerable objection to be
P^^de to the doctrine presented in its bearing upon present
^fsues, it yet remains to be repeated that, purely as distribu-
'^^ doctrine and subjected to the requirements of theroeti-

Wicscr, op, cit., p. no.
Ihid.f pp. no, 1x1.

37° VALUE AND DISTRIBUTION

caJ accurac>', it will not stand The entrepreneur is always
in the background to share in or to take the residue in ques-
tion; it therefore cannot all go to the hired scarcity good;
the entrepreneur is himself a monopoly good for the pur-
poses of the case ; this makes two monopoly goods.*"

As we have already seen, there is danger of confusing
with each other two different sorts of land differentials,
( I ) the entire value (fifferential measured from the rentless
margin, or, as it is sometimes viewed, from the lowest-rent
land in use; and (2) a quasi-rent form of differential
expressing valnc-wise the superiority of land for one use
over its 1^ alternative use. This second sort of land dif-
ferential, as representing no displacement, could not, in a
collectivist economy, be computed as cost. The other dif-
ferential, the ordinary rent of competitive production,
would be irrelevant to collectivist computations. For ques-
tions of cost in the competitive economy, the case is just the
other way about ; all competitive rent paid is cost ; the
qiiasi-rent differential is as cost irrelevant."

Wieser appears to confuse these two rent concepts,
though tin's can be asserted only hesitatingly, because of the
difficulty of being positive as to whether the discussion is in
the collectivist, the natural-value, field, or in the field of
competitive production. The early portion of his chapter
on "Land Rent as Cost" " seems to imply that rent as a
general differential of value productivity^ — rent measured
from the renlless land margin — is no part of cost ; which
would be meaningless for collectivist purposes, and untrue
for competitive purposes. But he asserts that "when all
lands and all powers of the land .... bear rent," the
rent must be included ; and this also, as applied to collect-
ivist production, must be untrue, irrespective of its seeming
implication that all powers of the land can ever be rent-bear-
ing. At the very close of the chapter, however, it is said:

I

.lies to the following; "The peraookl
income which iand yields is. in tbc last resort, dependent upon the fact
that the land in question yields a return mcb that, after the shares of
capital and labor are deducted, there remains a share which roust, on
natural lawi, be imputed to the land." — Wieser. op. cit., p. 114.

'And there is really another concept of rent, the superiority
particular piece of land for a particular use over th« poomt of
knd devoted to that use : but this third form does not concern tbia
particular discussion.

Wieser, op. cit.. Book V, cbap. xiii, p. 317.

POSITIVE THEORY AND NATURAL VALUE 371

"That the rent of land does not enter into cost can be legiti-
mately applied only to land devoted of necessity to one dis-
tinct use, such as mines, vineyards, and the like," — an
accurate statement if intended only as a natural-value
doctrine.

But upon the same page, in substantial conformity with
the views already discussed of Mill, Jevons, Patten, Hob-
son, and others, but still not clearly in the competitive field,
Wieser goes on to show that "if a fertile field is employed
as site for a factory, the agricultural rent which in other
circumstances might be expected from it ... . cannot
be neglected in calculating the costs of the factory's
products The differential rents which are surren-
dered take effect as cost6." This appears, on the whole, to
be competitive doctrine and as such is unacceptable : if it is
really intended as coUectivist doctrine, the talk should be of
the products possible, and not of the surrendered rents.

CHAPTER XX
THE ATTEMPT AT RECONCILIATION: MARSHALL'
Marshall's treatment of demand price is a great advance
over that of the Austrians, and is in the main firmly and
consistently held, lioth in terminolc^ and in essential
thought. Whether so much can be said for his analysis of
supply price is not so dear.

And there are some inadequacies in his discussion of the
relation between utility and price, in that, at times, he
(seems to believe that price may, after all. to the individual,
jstand as a measure of marginal utiUty.^

'The sth

edition of

Marshall's

Principles c

omes 1

10 hand as the

presenl work

ii paasint

[ through

the

press.

II has not seemed

practicable ci

ntirely to

thia

chapt<

hasty «an.ba

tion of th

as has

been

possible— would

thia appear lo

be called

for; thus.

whe

the n

ew edition the

'"The price will measure the marginal utility to each purchaser
individually ; wc cannot speak of price as measuring marginal utility in
general, because the wants and circumstances of different men arc
differenL'"— Alfred Marshall. Principles of Economics, 4th ed.. Mac-
millan, 1898, p. 174 (5th ed.. p. 99).

And in criticism of Jcvona, it is said: "He has led many of his
readers into a confusion .... by speaking without qualification of
thE price of a thing as measuring its final utility, not only to an
individual, which it can do, but also to 'a trading body' which i(
cannot do.'' — Ibid., p. 176, note (5th cd., p. loi).

"For each of (two men, one rich, one poor] the marginal
utility is measured by siipence : bul this marginal utitit; is greater in
the case of the poorer man than in that of the richer." — Ibid..
p. 170 (sth ed,. p. gs)-

In fact, however, as Marshall would probably be the lirst to admit,
the sixpence gives neither any general measure of utility nor any
measure to any particular individual. The price that one is just
willing to pay is an expression of the relation in utility of the good
under consideration to other goods purchasable with the same money,
but gives no information as to the absolute utility of any of these
different goodi.

ATTEMPT AT RECONCILIATION 373

^vibstantially, however, Marshall recognizes the real
toXMre of the demand margin :

^e clerk who is in doubt whether to ride to town, or to walk
mjA have some little extra indulgence at his lunch, is weighing
•8^t one another the (marginal) utilities of two different modes
^^ spending his money.*

On the supply side the meaning is less easy to arrive
^ ^nd the adequacy of the doctrine less clear.

In the line with the classical writers^ Marshall has a
*^ne of real cost, but in just what way, if at all, it is
^culated with his doctrine of money cost or expenses of
^oduction is not evident. It is said that with labor con-
^^ed as the only productive fact, "the price required to
^1 forth the exertion necessary for producing any given
^unt of a commodity may be called the supply price for
"^t amount." But with labor and capital in co-operation,

^ exertions of all the different kinds of labor that are directly
Or indirectly involved in making it ; together with the abstinence or
lather the waitings required for saving the capital used in making
^'f ^ these efforts and sacrifices together will be called the real cost
^ Production of the commodity. The sums of money that have to be
Wid out for these efforts and sacrifices will be called either its
**^^ cost of production, or, for shortness, its expenses of pro-
^^^um; they are the prices which have to be paid in order to call
lOfth an adequate supply of the efforts and waitings for making it ;
^» in other words, they are its supply price.*

This appears to say that real costs are the costs to the
P^ple who sell or rent their various services to the entre-
preneur; while money costs are costs from the
P^int of view of the entrepreneur. This is surely
^ valid distinction, if only, over against the danger
^' confusion through it, there are counterbalancing
advantages. But is it true that the quantum of
^ sacrifice in effort and waiting has anything to do with
the quantum of the payment? How close and how definite
Js the relation ? Is there in real costs any basis for money
*^ts ? What is the connection ? What is the reason that it

^^,, p. 193 (sth cd., p. 118).
^^», p. 418 (5th cd., p. 339).

TSIXX MSD DblKUUllON

I «if tBO lo a»ttnaiid the day's
; far the mason? Is it
1 pBtif, or las what the laborer
wt tte man ao do with it ? The iden-
n Mft Ae BEccs^u? price is admir-
_ BM «% an> these prices thus or so?
t ft a» W ■faigJ that the sototioa traces
%■&: a» a^ oac:; lat he 4ia aot aar n, aor does be attempt
» saee ^^ o^HeOML Aal IB^i^ these mao^ pay-
flOK a tja^oBriin «f tte ml costs seen ID be identified
«db *r a^i^ F^*^ A* «Bb«VR9ear cost ; this leaves, as
jmt «f an^^n- ar aHB^Bi «nt, nothing for the entre-
IKHiK. Bw 2 ^Ik HWif prke oC a cocninodit>- is the
paac m -^mM ft vfl he dJIsuul for sale" to those who
AsMndft. ABfrioe ^Bt he bor and other than mere

1 supply pfice
■^ Ae dcfke of At representative Gim, i
_« «__! — t^ — taken as Uie

interpreted to

kc««nn f^ Ami ml i
t ft« ^lM*» <PM ■ n>i» prins? 0( are (
~ ~ Airi «tal it to Wcaai •( thcw p

ATTElfFT AT RECONOUATIOH 375

I Since business ability in command of capital moves with gre^t
C horizontally from a trade which Is overcrowded to one which
i good openings for it ; and stiKC it moves with great ease
ally, ihe abler men rising to higher posts in their own trade.

Or are ve lalber loolcing for the marpnal cost of an
e firm, long or short time as the case may be?
And if. because tbere ace all sorts of ups and downs in businea*,
i-etages are to role, why ia not the average method
t valid for labor computations in (he cost problem, the value
r doctors' or lawyers' ser»ices coming to coincide with the
r salary of the average or tepresenlativc man in the occupa-
t the time of bis medium earning capacity?
And if we have in some sort to do with the average principle,
■ lake the representative linn to be simply and merely an
firm, or the long-time average of pretty much any firm, or
It long-time average of an average firm 7 And average tn what
le? In sldll of management? In good fortune? In
ahtitls? In manner of organliation ?

[ But all these problems may perhaps reach their mlulion with the

e concept: precisely what is a representative firm?

"Though in manu facta ring, at least, nearly every individual

I, M long as it is well managed. lends to become stronger the

it hai grown ; and though prima faeit we might therefore e:q)cct

t large firms driving their small rivals completely out of many

s of industry, yet they do not in fact do so" (p. 371) (5th ed.,

t. «!).

"When a man has got together a great business, his descendants
ofKfl (ail. in spite of their great advantages, lo develop the high
■bilitit) and the special turn of mind and temperament required for

curing it on with equal success For a time, indeed, all may

B> «!! By mere assiduity and caution, availing them-

Mires of the traditions of the firm, they may hold together for a long
lime. But when a full generation has passed .... the business
''noil invariably falls to pieces unless it is practically handed over to
lie rnanagemenl of new men who have meanwhile risen to partnership
™ the firm" ,(p. 379) (sth ed., p. 199).

"The superintendence of labor is but one side, and often not the

'°lst important side of business work The ideal manufac-

Itifw .... must have the power of forecasting the broad move-

'Hiits of production and consumption He must be a natural

leader of men a power of first choosing his assistants rightly

ind then trusting them fully ; of interesting them in Ihe business and

oi selling them to trust him The abilities required to make

•o ideal employer arc so great and so numerous that very few persons
can eihibit them all in a high degree" (p. 377) (sth ed.. p. 397).

"It is obvious that the son of a man already established in

business starts with very great advantages over others It

would, therefore, at first sight seem likely that business men should
tonstitule a sort of caste" (pp. 378. 379) (Slh ed., p. 198). "But we
n»y read a lesson from the young trees of the forest as they struggle
jugh the benumbing shade of their rivals. Many succumb

TALCE AND DISnUBimON

I Eatfimi ihe sHpply of hmtDcss in ccnunand of

I ftaeni nilc^ to the demand for

Finally, we may

1 of capital

ilKiTe their Deish-

tod forever

One tree will tosl

thui another : but

TWoch the aUtt ones bare •

air than tketr riTali, ther gnduallir loae

tt^ (nc place ID others, whidi. tfaou^

•■ thtir ndc the vigor of youth.

KTOWlh of

e kas it* nonul life ia which it

af tte doriaf wbicfa a basiness of an;

b7 the laws of natnre

of place and time, aod the character

(no. 3M. mXsA cA. iL Hi).

Bm Am al Aia b kotk Irair aod beamitDllr aaid leaves it itill to
ba aahid wkit it ■«>■* tsc eke poipiMc. Ccrtaialr there are all sorti
of fiiBia Bad al dtynea af ks and chance unong them : but to there
arc an mtu of wa«e-e«ts«n, of iDdcpeadcnt pTodocers, of land, of
■larhinri : and it hai iiiwitiim i been thoo^t that bjr the ver; fact
•f an lhc«e diffet«BC«^ the laariiaal analTni ia impcrativelr imposed.
Aad docA h at aD matter Is the doctrine that, more and more. <he Stm
orgailiratiow is crriBK war ■» the corponlr? Bat to conlinae :

Then U no rale of anii«r«al application ; but .... as a gen-
eral nile mbject to inqiorlaiil exceptions, an increase in the total volume
of anr branch of production KDcb to increase the average siie of the

btraiaeaica engaged in it Many .... economies depend

direetlr on the site of the indiridual eitablishnienis engaged in the

prodnctioD An increase in the aggregate scale of production

of course increases tboK economies which do not dJrecUy depend on the

Bie of individual honses of bnsineaa Cortelatcd branches of

industry .... mutually assist one another The cconomiei

arising from amh sourcei as this, which are accessible to any branch
of production, do not depend exclusively on its own growth : but yet they
are sure to grow rapidly and steadily with that growth ; and iey are
sure to dwindle in some, though not in all respects, if it decays"
(P* 396) (5th ed., p. 317).

"When we come to discuss the cause) which govern the supply
price of a commodity, we shall have to analyze carefully the normal
cost of ptoductng a commodity, relatively to a given aggregate volume
of production : and for this purpose we shall have to study Iht trpiniet

of a TtpresfHlative producer for that aggregate volume We

■hall not want to select some new producer just struggling into
nets, who works under many disadvantages, and has to be content
time with little or no profits, but wbo is satisfied with the fact that

1

ATTEMPT AT RECONCILIATION 377

i composed of three elements. The first b the supply price of
apital; the second is the supply price of business ability and energy ;
and the third is the supply price of that organization by which the
appropriate business abUity and the requisite capital are brought

ctiUiflhing a connection Nor on the other hand shall we

viiit to take a firm which by exceptionally long-sustained ability and
food fortime has got together a vast business, and huge well-ordered
vorksfaops that give it a superiority over almost all its rivals. But
Mr representative firm must -be one which has had a fairly long life,
ttd fair success, which is managed with normal ability, and which has
iKkrma] access to the economies, external and internal, which belong to
tlut aggregate volume of production" (p. 397) (5th ed., p. 318).

fiat does this mean that the price at any particular time must be
^ cost to this firm at this mid-time of its career ? It seems so :

The normal supply price of any amount of that commodity may be
f^hea to be its normal expenses of production (including gross earn-

usgi of management) by that [the representative] firm This

** the price the expectation of which will just suffice to maintain the

^^i>ting aggregate of production A price higher than this

^^oJd increase the growth of the rising firms, and slacken, though it
^'^^t not arrest, the decay of the falling firms, with the net result of an
''^crease in the aggregate production. And, on the other hand, a price
*^^er than this would hasten the decay of the falling firms, and shicken
^^ growth of the rising firms ; and on the whole diminish production"
Xp. 422) (5th ed., p. 343).

But none of this appears to involve any appeal to representative

^^ average phenomena; it is rather a typical marginal analysis; but —

"Anyone proposing to start a new business in any trade ....

^ liimself a man of normal capacity for that class of work, ....

r^y look forward ere long to his business being a representative one,

'^ ^he sense in which we have used this term, with its fair share of the

^'^^nomies of production on a large scale. If the net earnings of such a

'^^IH'esentative business seem likely to be greater than he could get t)y

*^^ilar investments in other trades to which he has access, he will

*^^>08e this trade" (p. 449) (sth ed., p. 377).

This evidently takes the representative firm to be something like

5^ average firm ; and it is here said that any average man who con-

^'^es that in the trade in question he would turn out to be an

^ '^erage man, will go into the trade if he notices that the average man

^?^ that trade is doing better than average men outside. True, as a

^^ictrine of opportunity cost ; but it docs not need the assumption of

^>crage men to be true. Any inferior or superior man will act in

precisely the way outlined, if he believes that men of his grade arc

Gilding the trade in question more remunerative than other trades to

^rhich he has access. And there is nothinx in any case to indicate

^at the cost of this average man will coincide with the price of the

'^)Toduct, or to indicate that the cost of the marginal man will not so

Coincide. Thus the quotation as it continues presents a mistaken

tieduction :

"Thus that investment in a trade, on which the price of the com-

1

378 VALUE AND DISTRIBUTION

together. We have called the price of the first of these three ele-
ments interest: we may call the price of Ihe second talcen by itself
net earnings of management, and thai of the second and third, taken
together, gross earnings of managemenl.'

In substance this is evidently an opportunity -cost analysts
of the reasons for the movement of entrepreneur ability and
entrepreneur capital from one industry to another ; it has no
necessary relevancy to the representative or to the average
firm, and depends for its correctness upon no assumption of
this sort. Accurately, however, it does imply a firm or a
situation where the wages of superintendence are only just
lai^ enough, etc.. — "the price the expectation of which will
just suffice to maintain the existing ag^egale of produc-
tion," a marginal-cost price, as it would seem. But this
appears not to be Marshall's idea, nor is it possible — to this
writer at least — to make out quite precisely what the idea
is; the notion of the representative firm appears to lack /
something in point of theoretical tangibility. /

Perhaps, however, the doctrine points to a firm which,
in the long-time adjustment, with all its ups and downs,
will pass for a marginal firm. But whether this be safely
assumed or not, Marshall's necessary price must be, on the
full showing, taken to include more than mere outlays, —
must be understood as allowing for the entrepreneur share.
But we still await information as to what determines the

modity produced by it depends in the long run, is governed by cilimates
on the one hand of the outgoings required to build up and to work ■
rcprcsenlalive firm, and on the other of the intomingi. spread o*er a
long period of time, to be got by such price" (p. 449) (jth ed., p. 377).

"The BSgregate production for a general market is the outcome of
the motives which induce individual producers to expand or contract
their production. It is just here that our device of a representative
firm comes to our aid. We imagine to ourselves at any time B firm that
has its fair ihare of those internal and external economies, which the
average scale of production in that trade will cause to acerue to such a
business" (p. 514) (sth ed., p. ag).

This last quotation puts the case as. indeed, one of an average
firiD, but not, seemingly, a firm of average siie, but 3 firm that by iti
ability or by its organiiation — whatever Ihe siic — strikes a fair average

t i. intend

be the market price. But as the same page shows, the cos

is the marginal cost of this average firm :

"This then is the mnrginal cost on which we fix oui

■ eyes;" and

: long-period

ji

•Marshall, op. cit.. p. 39a jjsth ed., p. 313).

i

d

ATTEMPT AT RECONCILIATION 379

Amount of this share. Is real cost its basis, or is there an

Opportunity-cost reckoning somewhere in the background?^

In an earlier chapter,® it is aid: "While demand is

"^secj on the desire to obtain commodities, supply depends

j^f-^^ly on the overcoming of the unwillingness to undergo

^^Commodities.' These fall generally under two heads:

j^^^^r, and the sacrifice involved in putting off consumption."

^^ "discommodity" in the labor is stated to include bodily

niental fatigue, unpleasant surroundings or unpleasant

panions, injury to health, and displacement of recrea-

Kow, while this account of demand and supply would,
/We have seen, do for the social product conceived as a
it aggregate, it clearly will not apply to explain the pur-
^^^sing dispositions with reference to different classes of
Is relatively to one another, and will not serve to formu-
the forces of resistance to the production of the various
'erent lines of supply; as a method of elucidating the
?^c>blem of the exchange relations between goods, nothing
^t confusion results from this affiliation of market costs
m real costs. Not only this ; but while this catalogue of
costs unquestionably contains some items of true pain
^^ality — costs in this real sense — ^the concept is wrongly
S^^rmitted to include the loss of recreation pleasure, which
^^ not a cost at all in the sense of pain, but only of oppor-

^^ 'On page 217 (sth cd., p. 142) of the Principles, Marshall writes:

^t is broadly true that the exertions that any set of workers will make,

^^sc or fall with a rise or fall of the remuneration that is offered

^licm ;" which may be true for each separate man under different levels

^f payment, but hardly true of different men relatively to each other,

^nd hardly true of all men as affected by a general rise of wages ; but

Marshall continues: "As the price required to attract purchasers for

^ny given amount of commodity, was called the demand price

•o the price required to call forth the exertion necessary for producing
^ny given amount of a commodity, may be called the supply price for
that amount."

Now not only is there overmuch suggestion of labor-pain cost here
but also it is difficult to make out whether Marshall at all recognizes
the importance of alternative remunerations. He does not so indicate ;
the question seems to be one of absolute exertion rather than of rela-
tiTe, and this without attention to the alternatives in results ; and yet in
his analysis of demand price he has clearly and satisfactorily recognized
the principle of competing and resisting alternatives of consumption.

'Book IV, chap, i, p. 215 (5th ed., p. 140).

VALCE AND I»STUBUT10K ^"

And on ibe sidr of capitsl costs, also, there is
panlld cnvr; ibc pttftii^-off of oooson^tioo is a sacri^^
of « prc*ail good, s resistance to be overcome, bat it is ^
m (fiffereot aiegm; fraoi pain burden ; it is merely a chof ^
hawiiui two dcsiraHc tilings ; it cannot safdy be forced ir:»fl
the paio-<net. the real-cost, dassificattoa. DemaDd pMnts ed
the ncrifioes of porduue ; cost, to all the sacrifices of i>rf>^
dactioa ; bat whose sacrifices and whose prodnclioa? Hen^
agun, however, it is diflkult to detenniDe how far, on thc^
w4iole. Mardiall is open to crJlicisni upon thU point. For,
in sebstanoc. he appears to abandon the doctrine of real
COM as having any signtficance for exchange relations.
He rcoognizcs that nnich productirc activity takes phxx
entirdy or mainly for its own sake, e. g., in literature and
in science, that much more is performed for the benefit of
othen. and that "even where a man is working for hire, be
often finds pleasure in his work : bet he generally gets so
far tired beffxe it is dene that he is glad when the hour of
stopping arrives-" • Perhaps even "he might rather work
for nothing dtan not work at all,** bnt not generally. But
if at an, idiat beoooics of the real-cost doctrine? Nor is
there great help in the iaxt that there is marginal exertion
and marginal prodnction, for even so, the margin may be
one of choice between pleasures. — nor bdp in the fact that
the work wiUii^y doae gets paid by the measure of the
rest, or, as Marshal] pots it that "the price of the whole is
governed [ ?) by the sacrifice required from him by that
part of the tabor which he gives most unwillingJy. and is on
the verge of refusing to give," '• This marginal resistance
nay stiD be wholly one of choice between pleasurable occu-
pations, a cost by displacement of recreation.

* Manfcatl. of. eH^ jn >i( (jth ed, p. 141).
•/Sii, ^ 1,4.

■ lo iW TClatioa o( rent lo price forces bim
• m the directwo of makiDg mu^n*!
Uher Ihan mere "precis! oning" fact»i
a& fer riimpif. when he tajt of tke cl»wicil doctrine, "tlut tlie
price . . . . U dtterminei bj Ibe cxpensei or money coti ....
on the iDaixiD of caliivaiion : uid tlal rem doei Dot enter into com,

Ikew Ttr»»r* are irae in tbt *eii*e in otiicli Iher were inesnl

Tkuc p«tU of the pmlun vbicb rield a mrphis will geoerall; be pr»-
dwcd nrcn if that price U not maJolaiQed ; while there U no mrptaa
jittitd br that portion of the produce the cipenKi of ptodnctiiia of
wkick do take dirnl part in eorenunf the price." — Marihsll, of. dt.,

^477.

! rent-CMt poation ii not in haurd, tlic conect

ATTEMPT AT RECONCILIATION 381

But whatever the doctrine of real cost may be taken to

^fy, it is at any rate clear that Marshall's analysis really

^^ts and adopts the point of view of entrepreneur cost :

"^ easiest as well as most practical course is to go

^^raight to production for sale in a market." "

The undertaker cares little for real cost: "He thinks

^efly of the expenses of production and seldom pays much

Attention to the efforts and sacrifices to which those pay-

^tnts more or less closely correspond," and which consti-

^^te the "real" ' cost of production. "The modem

business man commonly takes the payments which he has to

'^^e, whether for wages or raw material, as he finds

^em ; without staying to inquire how far they are an accu-

•^te measure of the eflforts and sacrifices to which they

^^rrespond." "

This should doubtless better read "to which they do not

^rrcspond;" marginal individual cost, the sundown mar-

Kin, gives no hint of the d^^ee of "real" cost, but only

^^serts Ae equality ratio between the utility of the product

^^d the forces resisting the production, whether by burden,

^^ by utility foregone, or by both. The different personal

'^^^gcs or profits are world-wide from the correspondence

^ J remunerations to pains; it is a commonplace that the

.^ixtiest and the most disagreeable occupations pay the

l^^ctrine gets its dues ; after saying on page 427 : "The remainder of
^e present volume will be chiefly occupied with interpreting and limit-
the doctrine that the value of a thing tends in the long run to
kcasure its cost of production," he calls attention to the fact that this
not precisely to say that it tends to be flxed or governed by its
,^^^st of production: "We might as reasonably dispute whether it is the
^^nder or the upper blade of a pair of scissors that cuts a piece of paper,
^^ whether value is governed by utility or cost of production."

But this is not inconsistent with the view — for the most part held

^y Marshall — ^that the two margins together determine the price.

^ttt in a note on page 580, the case is admirably and accurately put

'^s follows: "The withdrawal of iron from any one of its necessary

Tises would have just the same influence as the withdrawal from its

marginal use."

° Marshall, op, cit,, p. 476.
^Ibid,, pp. 430. 431 (sth ed., pp. 3S1, 353).

^Despite the fact that the discussion here avowedly concerns
ttidf not with the laborer's pains, discomforts, and sacrifices, but

3S> V.KLVE AN'D DISTRIBUTION ^M

Bui once again, what about the entrepreneur's services as
items of costs? "In calculating the outgoings, the head of

with the employer's ii»gt eipenditute— not with the capilsliit'i for-
bcsringi and abaHnenccs. but with the borrower's ouilay of hire. — the
temptatjon it yet almott irresistible to investigate Ibe causes of the
fMU, %» *et a&eld to explain what, to the entrepTeneur, are brute and
definitive data, Iiqi which are evidently world-distant from ultimate
resting-places for thought. Cairo es. it will be recalled, was so
impressed with tbe ultimate character of human life, in its expression
by effort and pain, w impressed also with the non-linality and non-
reality of tbe entrepreneur point of view and computation, that, breaking
with Mill, he abandoned it entirely as a significant cost category.
Ricirdo had based entrepreneur cost upon real cost, only by assuming —
perhaps as self-evident, but at any rate without any attempt at proof —
the proportionality of wage outlays to labor burdens ; and as to the pro-
portionality of interest compensations to abstinence claims he bad
greatly worried, but had on the whole believed the divergence tiot hope-
lessly wide. Marshall appears to follow Ricardo both in doctrine and in
argumentative method.

But if the costs are not fixed by the pains, how then are they fixed?
Pain and discomfort and ill repute have obviously something lo do with
the case, even admitting that they have not all. Tbe mind wilt not rest
contentedly and indefinitely at the superficial entrepreneur-cost level of
explanation : we must somewhere turn from the mere opaque how much
to ask the why of the hme much ; if we explain value by the value of
the costs, shall we not somewhere find an explanation of tbe value of
the costs? And if nothing else offers, shall we not take labor pain
as explanation? And where can we reath bottom unless in terms of
human life as expressed in human labor and in human pain?

Bui the level of explanation next underlying the mere entrepreneur
quantum is tbe level at which, mainly, opportunity cost offers its service :
but it is at this level that the rtlalivr pains and tbe relative pleasures
and remunerations of different lines of activity have chiefly to be con-
sidered. How great a supply of any agent may be had in any industry
or under any entrepreneur, and on what terms of outlay, is, no douht.
in part determined by the relative irksomeness or disagreeableneas or
ill repute of the employment in question ; but in part. also, and com-
monly in much the larger part, by the relative remunerations possible in
competing industries or under competing employers. That is to say,
the seller of labor efficiency, like the land- or the capital-owner, com-
putes his refusal price — in part or entirely — according to what may
be had in another market or under another employer in the same
market.

But it must be admitted that this opportunity-coat line of explana-
tion, even when it is camr'ete in its inclusion of all pain and pleasure
and product aspects, is not ultimate : it explains some values merely in
the light of competing values ; it resolves values of products into
values of costs. But, by going over to the supply of instruments, by the
adoption of the standpoint of the employee rather than of the employer,
it is BO far better than the mere entrepreneur point of view, in that
it doe* in some measure explain the entrepreneur situation. But are the
values of the costs finally and adequately explained throtigh this appeal

ATTEMPT AT RECONCILIATION 383

the business must reckon in the value of his own work," **
but there is no suggestion that this value has any other basis
than its real cost, its burden-pain significance. And, in
point of fact, not all of the value of the entrepreneur's
services can be computed as cost, but only that part which
represents displacement, the opportunity of gain, or a
recreation or other pleasure foregone, — the most desirable
alternative ; more accurately, the amount of money necessary,
as against any other total of resistance or inducement, to
keep him at the production in question, is the cost volume
in question. What remains over and above this necessary
compensation, the surplus called unnecessary profit or pro-
ducer's quasi-rent, is no part of cost. And it is surely bad
terminology to call one's own work, or the usance value of
one's own property, an expenditure ; but this is not a serious
matter. Doubtless, however, Marshall, like Cairnes and
like practically all other economists, appreciates that "the
business man is constantly striving so to modify his arrange-
ments as to obtain better results with a given expenditure or
equal results with a less expenditure ;" ^" and that individual
effort has to be somehow allowed for as expenditure, or in
some other way and to some extent be computed in cost."
But the application of the proposition to all the different
outlays obscures, or altogether hides, its especially impor-
tant theoretical aspects as applied to individual effort.
And, as we have already had occasion to observe, this doc-
trine, if consciously held and thoroughly worked out, is the
doctrine of opportunity cost*^

to the employees' competing value opportunities? The competing
opportunities are themselves also value-derived rather than value-
explaining. It is at this point that, as ultimate determinants, the
situation, the actually controlling conditions, the man-and-environment
general status of things, assumes its place as ultimately the causal fact.

^Marshall, op. cit,, p. 433 (sth ed., p. 354).

^Ibid., p. 433 (sth ed., p. 355).

"Flux {Economic Principles, p. 52), Seager {Introduction to
Economics, p. 157), Fetter {Principles of Economics, p. 274), and
Seligman {Principles of Economics, p. 354) all adopt this extended
sense of the word expense ; there must then, it seems, be some advan-
tage in it or excuse for it that the present writer has not appreciated.

" Fetter, Flux, Seager, Carver, and Seligman all recognize, more
or less consciously and completely, this opportunity-cost aspect of
necessary price.

Fetter: "The entrepreneur's cost determines the- lowest price at

I
I

I VALUE AND DISTRIBUTIOS

On page 449 (5th ed., p. 377) is a parag^;>h which
'looks somewhat toward the opportunity-cost doclrine.
After remarking that capital (in the sense of the enlre-
preneur concept) goes in large measure toward building
up internal organization and trade connections, and is alto-
gether lost with the cessation of the concern; and that one
who is starting a new business must reckon upon this
chance of loss. Marshall says that a man of normal (avei —
age?) capacity may fairly expect his business to bccom^
representative (average? marginal? price-determining? J
with its fair share of economies:

If the net earnings of such a representative business seem likely —
to be greater than he could gel by similar invesinients in other^
trades, he will choose this trade. Thus that investmcni of capital b

wbicb be can cootinue to kU" (p. 174). However, Fetter mlso ays:
"Alternative catt is manifold and indefinite. The thought is u^mScuil
at (he moment of choice, but is Dot cooilantly measurable for pnctiol
purposes. Money coil is the practical cost" (p. a74}-

Plux: "Supply price .... must be a price suiEcieat lo cotci
cost of production, and i( competition be vigorous, the excess over cost
□f production will not be more than sufficient lo aflord such profits
as competitors need to secure in order to continue in competition"
(p. 57) ; which says that necessary supply price is cost ; t>nl that each
man must have as part of bis necessary price something above cost,
namely, what his competitors Eind lo be a part of their necessaiy
price; and lb»t this first man's necessary excess above this necessary
price is his profit.

Seagcr: "The eipenses d£ production .... include minimtun
profits to the entrepreneur to remunerate him for his time and Iroabic"
(p- 157)- "The amount which should be charged as wages of manage-
ment or minimum profit is what the entrepreneur could obtain for hit
services if be worked for wages or for a salary for a corporation
other employer" (p. IS9)-

Seligman's view is substantially like that of Seager ;
earnings would suffice lo g've him a bare compensation for his senrii
for otherwise he would enter into some other employment "- - "-
earner" (p. 3S4)-

But why aisumc, for example, thai the next best tune that any
can play must be played upon someone's else violin?

Carver; "If a ceruin individual with a certain amo
and capital at his disposal can earn $1,000 a year by working for other
people .... a piece of land upon which he vrith bis capital can
produce a total crop worth only ti.ooo would be worth nothing to him,
but one upon which he could produce a crop worth (i.ioo would ba
worth approximately $100 a year."— Carver, Tht Diilrihulion of Wt< -'
p. 18S (sth ed., p. 377).

ATTEMPT AT RECONCILIATION 385

a trade on which the price of the commodity produced by it depends
in the long run, is governed by estimates on the one hand of the
ontgoings required to build up and to work a representative firm,
and on the other of the incomings spread over a long period of
time to be got by such a price.

This comparison is, however, of alternatives of capital

investment rather than of personal remunerations; but as

applying to capital, it may be open to the opportunity-cost

interpretation. Still, strictly interpreted, the passage seems

to say no more than this, that the long-run price depends

on the proportion between the expenses on the one side,

ag^ainst incomings on the other. But whether the passage

really covers, or is intended to cover, opportunity cost,

Marshall makes later no further use of the principle.

KENT AND COST

Marshall's treatment of the relations of rent to cost is
F^rhaps the least satisfactory portion of an admittedly
'^^Vasterly work.

He treats both extensive and intensive margins — ^when
*^th are — ^as equally rentless and equally price-determin-
^x\g, without apparent wonder that the costs should be pre-
cisely equal in the two cases, both nevertheless being
Independent causes^ and there existing no causal nexus
T)etween them : "Rent is here taken as another name for the
surplus produce which is in excess of what is required to
remunerate the cultivator for his capital and labor." "

But this statement strictly interpreted would carry to
the landlord as land rent all producer's quasi-rents, in the
sense of occupation differentials. And even though this
form of quasi-rent receives scant recognition from Marshall,
it still remains to ask what are the determinants and the
measure of the remuneration required by the cultivator for
his capital and labor.

These doctrines (that the price .... is determined by the ex-
pense or money cost .... on the margin of cultivation; and that
rent does not enter into cost) do not mean that a tenant farmer need

not take his rent into account He must count his rent in just

the same way as he does any other expense. What they do mean is

"Marshall, op, cit,, p. 477. J

TM£E AISDI

Sir* flips Mb; Ote MOii

: ior. a* Miiifcnll lanadf points out
t whdher one alall poihi

e bad "is of Uk sunt
r he staD bar a new plow, n
■ry B» p9 a ink M«e a« oc U* twciait Mode of i^wt"
"Om m Ae aHf^il fmHis viA plows; diis marginal
Hr *Vii7v aatfiv Ml la^ard Ar act tncome earned by Ok

Bh Ais m am ^am laam « kave coat to br based on
aOBCdUac «ter tea pqaiBto for iastrament servim:
ami ^m wm^t bi to Ac aoovlMoc of wages as the sole

In pniat of fact. aS ttat tlm doctrine excluding rent
traa axt uaoaaa to b. ctdicr 1 1 ) that rent applies equally
— if at an — to all tbe t&aervM casts of all the different pro-
Aacen in anjr gvrm iw* */ fr^ittctwm, and thcrcb>' has no
rdatirc imponaoce, stnee, as mod) as cost is higher or
lower in rent, it is oancspoadtsgly modified in reverse
order with rrCTr'J lo -xher expenses for father prctliictivi:
ai^'iT.t-; . T. ■2- iha; when rent i> paiJ there i* a cnrrt?-
^|)"ti'linj.'l> ^11'' C'T;;i'en>atiTigIy larger product.

' of land Ai
force more fi
lie kind as t)i
> KL-t a little

1 the poinl of vit"
as carried the cbJw-
profitably can : >^
to take in an*=»*"
whether he sfci *"''

e plough. It pays
lied by the plough"

r

ATTEMPT AT RECONCILIATION 38?

But whether under (i) or under (2), the argument
applies as only within a given line of production, and
thereby can have no significance for the exchange relations
between different lines of commodities, the only point at
which any application can have any real significance; for
the value problem is something more serious and more diffi-
cult than that of explaining the exchange relations of one
bushel of beans or of wheat with another precisely like it
And what about capital goods? Marshall points out — and
rightly — that for the short-time adjustment, capital goods
bear the same relation to price as does land; the quasi-
rents upon capital goods are no more a cost than are land
''ents, since in the short run the supply cannot modify
appreciably. But here the difficulty is that wages also will,
^pon this reasoning, fall out of the cost category, unless
^pon the assumption of a computation Jong enough, in
point of time, for population to have adapted in volume,
^d even then, all the different problems as to the relation
"^^een the supply of labor and the remunerations of labor
^oul(j present themselves.

And worked out to its logical results, this rent-cost doc-

"^'le would imply that, as a long-time doctrine, all capital

costs would finally disappear ; for each producer is taken as

^^sing and contriving how best to use his labor effective-

^^^ in view of his abilities and of the environment with its

PPoj-tunities, all conceived as means toward the productive

esm^ desired; shall it be this or that capital, or more or

.? of this or that? All costs thus resolve themselves

. '"^^Uitely into labor cost, — not labor-purchase or labor-

^^ cost, but a fragmentary sort of labor-opportunity

^*~- And thus, under this principle, no indestructible fact,

. the compensation for any indestructible fact, nor any

^'t^uctible fact for the term and the measure of its exist-

^^ without upkeep, could figure as cost. And, finally,

7^^> labor could rank as destructible fact and its wages

^eby function as cost, only under a reckoning long

j^^Vigh and at a rate of compensation low enough, if such

^1 there be, so that laborers, failing to receive those

^5^^ssary compensations, — computed according to some

^J^trtive standard of life, or according to some minimum

^^'^dard of subsistence, — should, in some measure, restrict

^■"^r total number or effectiveness.

But probably no one would, by such heroic logic, attempt

VALUE AND DISTRIBUTION

to resolve competitive costs into any such ultimate lal>cy''
opportunity cost as this. In the competitive reckonia^3
any given entrepreneur must pay to his labor enough iK^-^

merely to keep it alive, but to prevent its application, untte" i^
s appears to be as far as Marshall has thou^t it wortl^^5

some competitor, to the purposes of this competitor.

while to go. But this is an opportunity-cost analysis in the
entrepreneur computation, which, upon the chosen leveU
calls for further application : for. under this reasoning,
not merely the creation of capital, the upkeep of capital,
and the improvement of land, but also the upkeep of land
must be computed as costs, since otherwise the greater
profit must be found in selling out the land piecemeal
through the method of cropping and depriving of upkeep.

But if opportunity is in any manner or degree to be
recognized, the computation can hardly stop with problems
of displacement costs related solely to the original creation
of production goods. The goods being once in existence,
and the supply of them being — by assumption — incapable,
for a period, of modi6cation, something still depends on the
degree of their specialization; and this applies irrespective
of whether the goods in question involved, in their origin,
any labor cost of production. Land, as we have seen, is. in
a coUectivist economy, the basis of a cost to the extent of its
best alternative application ; and were it in any way legiti-
mate to carry over this computation into a competitive situa-
tion, the land use would, to this extent at least, function as
cost in the competitive reckoning. In neither type of
organization is it true that an instrument can function as a
cost basis only after it has imposed a cost in its production.
In any case, it is a cost to a coUectivist society according
to its displaced application ; if produced, it had a cost under
an earlier computation of displacement according to what
might otherwise have been produced, — or, equally well, at
the margin, a combined recreation -displacement and labor-
pain cost. Under entrepreneur-cost computations, each
productive fact is a basis of cost in any productive use
according to the measure of what it costs the entrepreneur
to use it in that particular way,— its highest displacement
for him, whether this be expressed as its hire or as somCj
outranking alternative application.

Thus, if Marshall's attempt to exclude produced a]

some^_

ATTEMPT AT RECONCILIATION 389

ances or their hire from the axnpetitive-cost reckoning
were approved, the reasoning, logically extended to apply
to labor and its hire, would result either (i) in admitting
the labor as cost only up to the point of its best alternative
of productiveness, or (2) admitting the wage as cost only
op to the point of the wages obtainable in the laborer's
next best occupation, or (3) in denying for the wage outlay
any cost significance until time should elapse for a new
generation of workers to come upon the scene.

The classical doctrine may be restated thus: (i) The amount
of produce raised, and therefore the position of the margin of culti-
vation .... are both governed by the general conditions of demand

and supply (2) But rent takes no part in controlling the

general conditions of demand and supply or their relations to one
another. It is governed by the fertility of the land, the price of
the produce, and the position of the margin; it is the excess of the
value of the total returns which capital and labor applied to the
land do obtain over those which they would have obtained under
circumstances as unfavorable as those on the margin of cultiva-
tioa"

This is in the main correct ; rents do not affect price, in
any ultimate sense; but the supply of land does, and,
through the prices of products, affects land rents and land
prices. So of wages and of interest, whether capital hire
or time discount, the compensations are the result of the
value contribution, as a question of the supply of agents
and of the resulting products, as against the demand. So
the fertility of the non-marginal lands with their quantum
of product has much to do with the location of the margin.
The conditions which make rent possible, and which affect
the place of the margin, affect price, but ultimately speak-
ing, not through affecting rents ; rent is a cause only as the
entrepreneur expression of the relatively limited supply
of land instruments: the sequence is really the other way
about. But rent is not "governed by the position of the
margin," but simply reckoned from there ; the price of the
product is the proximate cause, but is itself the result of the
whole demand for product over against the whole supply;
and this supply volume traces back to the land supply as
one of its causes. The causal sequence, in a competitive
entrepreneur economy, runs, demand being assumed, from

"Marshall, op, cit,, p. 478 (5th cd., p. 427).

r

390 VALUE AND DISTRIBUTION

supply of land powers to the products of these powers,
thence to price, thence to rents, and thence, under the time-
discount principle, to the land value. This is, indeed, the
sequence with all productive agents — supply of them, sup-
ply of products, price of products, pay of agent. Where,
then, is the justi^calion for reckoning any form of agent
remuneration as a cost? In this, that to the individual
seeking his most favorable application of his gain-making
possibilities, all marketable agents contributing to the exist-
ence of things of value are the basis of cost hires ; and
these cost liircs, to the extent that, through the necessity'
of thetn as outlays, they influence the individual's choice of
occupations, are influences bearing as costs on the relative
supply of products. It is true that, as bearing upon any
individual's productive activity, it does not greatly matter
whether he employs poor land at little rent, or better land
at high rent, excepting so far as individual capacity or
preference may play some part; but as matter of capacity
and preference it does some-chat matter. The rent pay-
ment in either case makes a part of actual cost, and thereby
forms a part of his basis of comparison of the costs upon
various qualities of lands, and likewise forms a part of the
data upon which his choice is made whether he shall produce
one or another agricultural product, or shall produce some
non -agri cultural product as against any agricultural
product. His cost of one product is, in the main, the alter-
native attractiveness of some other line of production, as
referred to the test of highest net advaTitage. It is by this
comparison that he chooses his direction of activity, and in
this comparison he includes his rent outlays, precisely as,
to arrive at the highest net advantage from competing
opportunities, he takes account of outlays in wages, capital
' hire, time discount, taxes, insurance, royalties, or blackmail.
In short, cost of production is a matter purely of the indi-
vidual psychology- — a complex of influences combining into
the one problem, a purely individual problem, of how the
individual in question shall to his best advantage direct and
apply the gain-controlling powers and agents in his control.

But all of these cost outlays trace back, for their
causation, to the conditions of supply of the respect-
ive agents in view of the opportunities for their
application, which agents receive their market values,

ATTEMPT AT RECONCILIATION 39^

their prices, through the competition of the differ-
ent producers, inclusive of the producer especially
under consideration. These market prices, socially
established, stand to the individual producer as items of
cost and as data, among other data, in view of which his
choice of gainful activity is made. That is to say, it is by
the intermediary of individual relative costs and of the
resulting choices of activity, that conditions of supply
among productive agents make themselves felt in the rela-
tive supplies of products, and thereby in the value of
products, which value is reflected back upon the agents.
Thus it is the limitation of the supply of agents — land,
for example — and not the remuneration that is, on the cost
side, the ultimate explanation of the value relations of
products. Cost of production, in the competitive sense,
applies here only to the sphere of individual activity, as
t^ng out, through the the individual's choice of activity,
the influence of the supplies of agents upon the relative
supplies of goods. As individual costs, all sorts of influ-
ences enter, including every kind of outlay, but the leading
influence, by virtue of which producers become marginal, is
^portunity cost, the attractive influence of other industries.*'

And all of this receives occasional recognition from
Marshall :

The rise of ground rents in the district will thus be an indica-
tion of the scarcity of space which, other things being equal, will
'^c the price of retail goods ; just in the same way as the rise of
^^cultural rents in any district will indicate a scarcity of land
^nich will raise the marginal expenses of production, and therefore
°^ price of any particular crop.**

*he cost of production of the marginal [agricultural] produce

J'^ ^e ascertained without reasoning in a circle. The costs of pro-

^ttaji of other parts of the produce cannot. The cost of produc-

. * ^w the margin of the profitable application of capital and labor

*^* to which the price of the whole produce tends, under the con-

^f the general conditions of demand and supply.^

f^ Of course, in the broader sense of the word, all alternatives of

^P^^^tion or of rest or of avoidance of pain could be ranged under the
^tunity-cost concept.

Marshall, op. cit,, p. 488 .(5th ed., p. 452).

Ibid,, p. 479 (5th ed., p. 428).

392 VALUE AND DISTRIBtPnON

Put in other words the argument seems to run
follows: Price is used to explain rent; therefore, if pri
is the result of cost, only that cost in which rent docs n
figure can be used to explain price. And so it should, the
follow, one infers, that if the selling-price of prodiK
explains wages, wages cannot be used as costs to expla
price. And all this would be true if land differentials '
labor remunerations were %vorked out from the isolated <■
collectivist point of view, instead of being a competJu'*"
adjustment of the value of the instrument or agent; but ^
~lhe individual the rent is a datum, a fixed, opaque fact <T
' cost, and is not a thing which he determines according to tii^
price; and precisely the same reasoning holds with r^rC
to his wage or hire or time-discount outlays; what is, for
market puiToses, for aggregate movements, a fact of ^s-
tribution. a value derivative and imputation, is to him a
fact of cost. His acts are results from the value situation
which he faces and out of which as opportunity he derives
his remunerations. That he and his costs and his decision;
and his derivative productive activities are in turn and it
their small degree reacting causes, he does not commonb
, appreciate or need to appreciate.

So far we have treated agricultural produce as a single com

modity Bui now we have to reckon for ihe compedtioi

between the different kinds of ag[ricultnral produce for the use o

fertile soils Each crop strives against others for the posses

sion of the land; if any one crop shows signs of being mor
remunerative ihan before, relatively to others, the cultivsiors wil

devote more of their land and resources to it Thus in eqtiilib

rium, oats and hops and every other crop will yield the same ne
return to that outlay of capital and labor which the cultivator i
only just induced to apply. That "marginal" application which onl;
just pays its expenses, and which therefore contributes nothing ti
rent, will yield equal net returns to the cultivator. For otherwis<
.... it would still be open to him to increase his gains by redis

tribuling his crops The margin of cultivation has now to b

described as the margin of the profitable application of capital am
labor to all land which the competition of other crops yields ti

This discussion therefore abandons cost at all but th<
intensive margin ; there is, in this sort of cases, no extensivt
*> Marshall, op. cil., pp. 480, 481 (5th ed., pp. 434, 435).

ATTEMPT AT RECONCILIATION 393

naargin ; the most unfavorable conditions of fertility chosen
for oats are, it is rightly argued, somewhat affected by the
fact that, for the land that is capable of growing oats,

tti«re is so great a demand for other purposes that it affords a

tiijifaer rent, when used for them, than when used for growing oats ;

- ... land which would yield a good rent under them, but which

yields a better rent under other crops. It is still true that rent is

not an element in those expenses of production of marginal oats,

^ which the price of the whole conforms Jevons asks

(Preface to Theory of Political Economy, p. liv), "If land which
1^ been yielding £2 per acre rent, as pasture, be ploughed up and
iised for raising wheat, must not the £2 per acre be debited against
^e expenses of production of wheat ?** The answer is in the nega-
tiVe. For there is no connection between this particular sum of £2
and the expenses of production of that wheat which only just pays

Its way When land capable of being used for raising one

^^^^nimodity is used for producing another, the price of the first is
raised by the consequent limitation of its field of production,"

but not, Marshall rightly insists, by the rent payment, — that

*s» not in the sense of ultimate cause. The cost price,

Marshall argues, is the cost at the intensive margin, and

^^s margin is at a poorer level of land because of the use

^^ the land for other things. And in any event, it is rightly

^''S'ed, the rent, if it figures as cost at all, must figure not

^y what would have been paid if less had been paid, but

y the actual amount that is paid.

^, It must be admitted that to show that rent enters into

^^ individual's computation of cost is not to prove that it

^^^rs into the cost of the marginal product ; and it is pre-

^'^ely here that Marshall takes his stand in the denial that

^t is a part of cost-determining price. But by the same

/SXiment it can be shown that no cost enters into price-

^^^rmining costs: "The amount of every item but one

r^^ be increased, and another unit of product be procured

. ^tiliout any addition to the cost of that one item" (Fetter).

/^^d, really, it is not true that the item of product raised on

J?^^t-paying land is farther away from the margin of indi-

^^iial production, costs less, than the item produced upon

/^^^-rent-paying land ; nor is it true that the item upon the

^^^nsive margin costs more than the item requiring less

"Marshallp op, cit., pp. 482, 483 (5th ed., p. 437).

VALUE AKD DISTRIBUTION ^^^^^"

expense for capital goods and for labor. And it is not true
that marginal cost controls or determines market value, or
that the marginal item has any other or greater effect upon
value than any other item. Price is fixed at mar-
ginal cost and not by marginal cost ; it is the whole demand
and the whole supply which equate at price ; and in any
case, the margin is always a personal margin, and not an
instrument margin, — or only derivatively. In the competi-
tive reckoning, the quantum of necessary remuneration for -
the entrepreneur's displacements and sacrifices is irrelevant j
to the question of whether the land is marginal or not; -
these costs arc as likely to be upon supra-marginal as upon ,a
marginal land, and away from the intensive margin as -s
upon it. It does not matter, that is, whether the land is ~s
good at high rent or poor at correspondingly low rent ; and J
this again is equally true of capital goods or of labor. ^
Nor, as a matter of individual cost — and here Marshall is —
clearly right — is it at all essential that the land have an _
alternative utility; it has, at all events, a value to other "
producers; the owner could rent it or sell it; the tenant's ■
outlay for it is for him a displacement of other production,
or, at least, of consumption; in some sense, narrower or
broader, it is then an opportunity cost.

But two or three pages farther on we find the follow-
ing:

This argiimctil docs not imply that a manufacturer when making
up the profit -and -loss act^ount of his business would not count his

rent among his expenses For he may think that the saving

in ground rent (hat he will make by moving into the country, to-
gether with other advantages of the change will more than counter-
balance its disadvantages. In a discussion as to whether it was
worth while to do so, the ground rent of his factory would be

reckoned among the expenses of his cloth It is no less true

that in making up the profit -and -loss account of the cultivation of
land, the farmer's rent must be reckoned as among his expenses. A
hop-grower, for instance, may find that on account of the high rent
that he pays for his land, the price of his hops will not cover the
expenses of their production where he is, and he may abandon hop-
growing, or seek other laud for it. [And the land may then go to
a market -gardener, who in turn hard-pressed by his rents] in his
turn makes room for, say, a building company (Marshall, op. eit.,
pp. 486, 487) (Sth ed., p. 4S0).

It is thus difficult to make out what is meant by s

ATTEMPT AT RECONCILIATION 395

that, in its effect to make the producer marginal, rent is not

as much an influence as any other cost. True, it is

really the superior pull of market-gardening which takes

the land from hops and diminishes the supply of hops;

hut precisely parallel is the case with labor or with capital

goods; this pull gets expression through the competitive

fixation of costs. The advantages of market-gardening

outrank those of hop-culture ; the rent is competitively fixed

at a level to which the cultivation of hops cannot adjust

itself.

QUASI-RENTS AND COSTS

Marshall's doctrine of quasi-rents, as indicating the

returns upon capital instruments, while important and even

epoch-making in the development of economic theory, is

especially disastrous to the other portions of his theoretical

structure. As we have seen, the doctrine is, in substance,

tliat, for short-time purposes, capital goods receive an

income of the same sort as that of land, — ^not as a cost, a

p>rice-determining fact, but as price-determined.

Obviously, this is a view of cost, perhaps not precisely
croUectivist in . standpoint, but at all events regarding cost
-£rom some other point of view than that of the entre-
X)reneur-producer of the finished commodity. Like Cairnes,
^who approached cost, not in the conviction that "the easiest
sls well as the most practical course is to go straight to pro-
duction for sale in a market," but in the conviction that not
what the employer pays for the labor, but the laborer's
own discomfort in grief and groan, is the sense in which
cost has to do with. value, Marshall now goes over for his
cost computation to the point of view of the producer of
the capital rather than that of the borrowing entrepreneur.
"- That is to say, Marshall holds that, as a long-time doctrine,
improvements upon land and capital goods conform in
their value to the law of costs ; the making of them depends
upon the prospect of the compensation to be had; in the
long run, therefore, the cost value of the instrument must
stand as a price-determining cost in its relation to the
derived consumption good; but for short periods the capi-

396 VALUE AND DISTRIBUTION ^

tal good receives compensation parallel to that of land and
is price-determined.

Perhaps one might object that it is the very gist of the
long-time doctrine that the compensation even then is price-
determined; but the long-time adjustment clearly gives time
for cost influences to make themselves effective in the
supply of instruments. The real difficulty is, however, that
Marshall has changed his point of view; he is now discuss-
ing the ultimate determinants of the costs, rather than the
costs as they present themselves to the entrepreneur; for
it is true, as Marshall himself says, that the entrepreneur
cares little for real costs; his point of view has no concern,
I as a cost computation, with the deeper and more far-reach-
/ ing questions of the processes and influences through which
I the costs have come to be as they are, — the underlying and
J directive situation facts and the past adjustment's within
this general situation. For the entrepreneur, whatever he
has to pay for a productive fact is the cost of it.

But even admitting the validity of Marshall's reasoning,
— and for certain purposes, not entrepreneur purposes, its
validity is beyond question, — we have again to ask wliether
wages are not paid upon precisely the same basis, and are
not therefore, in the short-time view, equally quasi-rents,
and equally to be excluded from value determination. And,
in view of the possibility of wearing out almost any sort of
land, the possibility also, with sufficient applications of capi-
tal, of producing almost any sort of land, and the necessity
of constant capital applications in the way of land upkeep,
does not this cost doctrine apply, in the long-time view,
equally to land?

But no one more strongly than the ultra-modem oppo-
nent of classical doctrine would insist upon this quasi-rent
principle. It applies to all agents; the seeming of price
determination by the hire of the productive fact is merely
an aspect of the entrepreneur process. And so it is true,
as Marshall points out. that, irrespective of past costs, there
may be machines barely worth using and thereby giving no
surplus of any sort, and that tlie value of other appliances
is in the nature of a differential measured from this value-
less-capital margin." But it is equally clear that there is,
in this sense, for labor a wage differential measured from

"Marihall, op. cit., p. 494.

ATTEMPT AT RECONCILIATION 397

idleness or from total inefficiency, and that all remunera-
tions are the expression of a market value in the agent just
that much greater than nothing.**

So, at all events from the point of view of the indi-

^dual, Marshall seems to admit that there is no better

reason for excluding rent than interest from cost. But

"from the point of view of spdety," he sees a difference.

"^d is a fixed stock for all time" •• while capital is within

^ntrol and is elastic. But while tfiis is true in a loose way,

"-that is, it is true that the land supply has not the same At-

P*ee of elasticity as most other capital goods, — this has no

*iffQificance for the cost doctrine of any particular situa-

^^, for the analysis of the value adjustment taken for a

^^'^ss-section of society, though it may point to changes

later to take place in some of the elements of costs, and so

"^y foretell important modifications of the terms under

'^hich at a later time the value problem will have to be

worked out

And so, while Marshall admits that "the hire of a pony
i* the excess of its value over the hire of a pony which is
so weak as to have no hiring-value at all; the hire of
ponies, like that of land, is governed by the value of the
s^i^ices they will render," ■* he regards this as only for the
^>iie; in the long run, the value of the ponies will be modi-
aed as cost influences make themselves felt through the
^^l^snging supply of ponies. Ponies as a rule will yield no
surplus above normal profits ; not so with land.

fiut note that Marshall's position is, after all, that it is
'^^t so much so with land ; for he says at the bottom of the

^"The earnings of every kind of capital goods can be brought

1?^ the form of surpluses, or differential quantities The posi-

^^ power of each bit of land to create wealth fixes the rent of it, just

^ U^e positive power of each unit of capital to create wealth fixes

J^ Value of it. The lowest grade of every instrument produces nothing,

1^ is a no-rent article. Higher grades of every instrument, land

•/^^'^ded, produce something ; and if there is any advantage in calculat-

^^ the amount of that something by saying that it is a product of the

|\^^^ instrument minus the product of the poorest one, that calculation

. ** always yield a correct result, since the product of the poorest one

^, Nothing All wages are rents of labor " (Clark,

**• Distribution of Wealth, p. 346.)

"* Marshall, op, cit,, p. 493 (5th ed., p. 430*

'^Ibid,, p. 494«

TfiuiH: jt5C zjsn

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IT

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rat m
tiban

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-irr regard ic» the
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iJBiL jr inn s ±e ^Tiricg vahc of
r n-sc- :r rossr:. iis ra^-rmts art

r-js ^ irn. --iit unsw vjsl h^ar^^a- *'-r-=r:arts as trw

2EmiSi ^»"«C5 -"J"* ■» imr. zik ■sktzticiizs ^'T winch the

1 '^iTT^EsnL ▼f-Tiiii acnnnsi*'

cciiTT sa:e oi

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i rirt T ' f i :Tii5:-rer::, and

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:r.. cr at
es sone

iciTijzv-n-

r-?-* >^ «*%. T. 5 .r .

ATTEMPT AT RECONCILIATION 399

In Book VI, chap, v, Marshall discusses the ''so-called

fent of labor/' and regards this as ''the question under

what head to class those extra incomes which are earned by

extraordinary abilities." Whether or not he is justified in

his assertion that "this analogy is valid and useful so long

as we are merely analyzing the component parts of the

wicome earned by an individual/' it is for his purposes

safe to say that "we are not at liberty to treat the excep-

"Onally high earnings of successful men as rent, without

^'laldng allowance for the low earnings of those who fail /'

for it must be remarked that he is discussing the influences

^hioh restrict or recruit the labor supply for any particular

fine of activity: "for the supply of labor in any occupation

's governed, other things being equal, by the earnings of

^Viich it holds out the prospect." With these remunera-

^^^ns in view, the youth and his parents, in selecting his

^^^cupation, "are very far from leaving out of account

^^^ fortunes of successful men. These fortunes are there-

^^re part of the price that is paid in the long run for

e supply of labor and ability that seeks the occupation ;
ey enter into the true or 'long-period* normal supply
5^'^ce of labor in it" But in the short run, these extra
^comes are rents — "do not enter directly into the marginal
xpenses of production of the goods, nor therefore into
^leir price; they are governed by that price, and there-
fore are rather to be regarded as a quasi-rent. But the
^ame is true of the special net return of acquired skill."

Doubtless wages are a rent in the sense of an efficiency
remuneration ; but in this sense, there is no justification for
taking anything but absolute inefficiency as a margin. In
Marshall's view, however, of the return upon acquired
skill, the idea is one of the investment of capital, the effi-
ciency out of which the rent arises being regarded as an
addition to the native endowment. But Marshall elsewhere
points out*that

when an artisan or a professional man has exceptional natural
abilities, which are not made by human effort, and are not the result
of sacrifices undergone for a future gain, they enable him to obtain

400

VALUE AND DISTRIBUTION

a surplus income over what ordinary persons could ejipecl from
similar exertions following on similar investments of capital and
labor in their education and start in life; a surplus whidi i£ of the
nature of a rent*'

But notice that now the idea is of a margin measured
somehow from the basis of ordinary persons, while before
it was a differentia! by addition to original power. But
why should not remuneration for any ability possessed
wiUiout cost be regarded as, in its entirety, a rent? And
what have ordinary people to do with the case? And
ordinary in what grade of people or line of occupation?
Walker, we recall, in his doctrine of entrepreneur rent,
found his marginal man in tlie same line of production,
though one does not readily see why, or why not, and denied
that the differential profits, so measured, made any i>art of
price-determining cost: "So his doctrine would appear to
mean only that that part of the employer's income which is
due to exceptional abilities or good fortune does not enter
into price ;" " in all of which Marshall appears to concur,
excepting with the reservation that cost must include tlie
blanks if it includes the prizes; "The argument, in so far
as it is valid, applies to the 'rare ability' of the earnings
of alt kinds of labor as much as of earnings of manage-
ment." '° i^m

"Marshall, op. cil., p, 704 (sth cd., p. 6aO.

"Ibid..

p. 70s. n. (S<h ed., p. 635,
p. 70s. "■ (5lh ed.. p.

n.).

Macfarlane {faliie and DtstribtitioH') acccpls the notion of quasj-
rcDts in wages, regards these quasi-renti ai price-delemiined, and
interprets them not as diRerentials of advanlage in favor of the
chosen employment as as^inst the next best alternative. l)ut as a diifer-
ential in favor of one employment as against another (p. 311). But
merely as higher remuneration for higher cfliciency there is no room
for a distinction bs far as coits arc concerned. And as Macfarlane's
acceptance of Walker's notion of entrepreneur differentials ii unfor-
tunate, so likewise must be regrened. not the unwillingness to accept
the term profit as applying to this differential, but the reason for this
unwillingness, vii.. that Walker's terminology breaks with the alleged
tradition that profit, in whatever variety of meanings, is constant in one
characteristic, that is always a pert of cost (p. 13s). But surely there
is no complete consensus of opinion here ; for example. Mill some-
times, and Hadley always, are to the other clTect ; and. as we hare seen,
the truth appears to be that ptoht distributes into cost and non-coit
elements, into necessary and unnecessary profit

ATTEMPT AT RECONCILIATION 401

fiut aside from the fact that Marshall's doctrine is wiih-
'1 the field, not of entrepreneur costs, but of
the conditions underlying and determining these costs,
'^ ^ is to be said that the whole argument miscon-
ceives the nature of marginality in choice of occupa-
tions. A man making $5,000 a year may as well be mar-
S^rial as one making barely what he could command as
^*^ge-eamer.'^

'Quasi-rentj and costs, — In view of the principle that

J^* competing producers, no matter what productive agents they may

""^t must pay for the services obtained the market value of these

*^«^ -vices, it is difficult at first thought to see even a remote justification

j^*" ^e notion that rent does not enter into the determination of price.

there 19 any distinction possible here between land on the one side

^^^ labor and capital on the other, it must be that the labor or the

maS^^ will go, not merely to another producer, if it is not paid a

£ JJ'^actory rate by the producer in question, but will go into another

^^*Uatry if not paid an adequate rate in this one. But this holds

^^^l]y with lands; most land is less specialized than most capital

p^?^s and than most forms of skilled labor. From the displacement

Q^***^ of view, therefore, whether in the competitive or the collectivist

^Putation, land is as rightly a basis of cost as is capital or labor.

1^ But in the degree that any agent, whether land, labor, or capital,

^1^ ^I^ectalized in its adaptations, there remains something to be said for

^^yJ^ I'ent-cost doctrine from the point of view of a collectivist society.

i^*^^ even in a competitive economy, may it not be true that, viewed

^ ^^e large as a question of society in the aggregate, such part of the

^^pensation of any productive agent as is more than that agent could

^1 ^5^ elsewhere, such part as is purely an employment or occupation
^ ^^rential, is a price-determined and not a price-determining charge?
^^^^"^ it is well to sec that if such is the truth, the doctrine goes dis-
^ ^^ingly far. For almost all productive agents are specialized in some
^ ^ree ; there is in most cases a differential in favor of the current and
,^^\ial employment ; the alternative use represents, as a value displace-
j^^nt, an appreciably smaller sum of value. Put in other terms, most
^^omes, regarded from the point of view of the income-receivers, are

'^tcT as incomes than as costs. These quasi-rent quantities attach

J^tth many forms of intermediate goods, with most machinery, and with

^V far the larger share of labor agents. The doctrine holds true not of

^-nd alone, but, to an even greater degree, of much capital, much labor,

^^id of almost all professional activities, and of all or nearly all

Managerial ability.

It is, indeed, fairly clear that if in costs we abandon the point of
'^iew of him who pays the costs, and go over to the question of cost
trom the point of view of the recipient of the remuneration, the income-
Collector, and attempt to distribute these incomes into cost and non-
Cost categories, we shall have, for competitive purposes, a worthless
computation applied to the solution of an unsolvable problem.

But in point of fact, the distinction between value-determined and
value-determining distributive shares is as worthless as it is unwork-

t k a fciiiiir I &■

e a it IkM Ac (

ATTEMPT AT RECONCILIATION 403

the produce; because the produce would not be raised unless it were
expected to yield those profits."

Stopping merely to query whether the share retained
by the tenant can accurately be spoken of as a part of the
income "derived from the land," it remains to object that
not all of the tenant's profit need be expected in order to
induce the production, that is, not all the profit is cost.
Some portion of this profit is commonly a personal differ-
ential, partly by virtue of peculiar adaptation to the land —
renter's quasi-rent — ^partly a peculiar adaptation to the crop
^ against any other crop, partly a peculiar adaptation to
^iculture as against any other line of occupation, — unless
^^ course, the talk is of a marginal entrepreneur, which
^, however, cannot be in Marshall's thought, since mar-
S'nal production, in his scheme of things, takes place only
f ^'J marginal land.

In summing up, it is to be said that Marshall's analysis
^f demand and of marginal utility is a great advance over

*"^ entrepreneur, or with such agents as, through their relation to the
^^^cpreneur and to his plans and circumstances, arrive in that relation
. tbis position of marginship. And to conceive of agents of production
*^ their relation to the plans and circumstances of the entrepreneur is
^ Conceive of them as members of a productive group or complex, and
*• commanding their rent or their value by virtue of their importance
^ marginal items in making up this group complex.

But there is no reason to suppose that all agents of any productive

J?^ may not command a quasi-rent of occupation or of employment

^^Hen an agent is marginal, it is so merely in the sense that its relation

^ the entrepreneur is such that he is on the point, if the price falls,

^^ rearranging his production group and of dispensing with the services

^* this agent as used; but it does not follow, and, for the purposes in

'^^^'^ it does not matter, that the agent, if relinquished, may, under

J^^^thcr entrepreneur, remain in the same line of activity, or may

^^ome in^some other line of activity a producing agent, or may go out

^* Use entirely. In any case some or all of the powers of the agent

^11 cease to be utilized if price falls ; it is sufficient that through it

**^«ne elasticity of supply obtains.

And just at this point it is worth while to repeat that the value

'^ISin of rentlessness and the margin of utilization do not of necessity,

'' ^en commonly, coincide. That an item of land or of machinery is

f^tless and valueless in the market does not imply that in the hands of

particular employing entrepreneur it is on the point of abandon-

^t ; there are possible quasi-rents of adaptation here.

And it may be remarked that for purposes of tax theory, and
''^Ccially in the field of shifting and incidence, these quasi-rent quanti-
^* arc of very great significance.

"Marshall, op, cit,, p. 716 (sth ed., p. 636).

404 VALUE AND DISTiOBirnON

that of the Austnans, and leaves little or nodiing to be
desired: bat diat his account of cost of production fafls
precisely because he does not apply here a pouaDel analysts
of margins, diat is, does not conceive of marginal cost as a
ratio-relation in which secondary and competing demands
are now of paramount and now of exclusive importaooe.
That his emphasb is upon cost rather than upon utility is
doe to the ^ct that he has failed, as have the Aostrnns,
to perceiiTc that of utility and sacrifice, demand and cost,
eadi is as truly as the other mainly an expression of ratios
of marginal utility based upon opposing demands.

That Marshall's analysis of the relations between rent
and cc«c b so unsatisfactory is due to the fact that he bs
noc appreciaced that cost as bearii^ upon supply is not a
ciSCectxvbt phoKxnenon. tat is strictly an entrqmnev
ccNcrpctatioQ. and as soch is exdusivdy widiin the s|4iereof
dse tanfiridaEa! ps^diology. and diat what, from one point
is noc cost but income, a vahie-detemiincd shuc,
c be carried avtr to the other point of view without
grq^ hs 57gnf&aiice and appearii^ as cost ; and finally
dsu wh!: cost, as an cEMfiridnal reckoning, a producer may
as nefeiSTy He rsargraaZ upon non-marginal land as npoo

i. or ssay as reafily be noo-marginal with

V. »

CHAPTER XXI

THE ATTEMPT AT RECONSTRUCTION: HOBSON

In the main, Boehm-Bawerk's scheme of market analy-
sis is followed by Hobson, to the extent of showing that
J^id outside limits are fixed for prices : "But to fix limits
for a price is not to fix a price and curiously enough
Boehm-Bawerk leaves his analysis at this interesting point."
Competition does not settle it; it is left to bargaining, and
Heaven knows how it would settle if each bargainer knew
Jiis opponent's subjective valuations : "Why should either
party give way? There is no economic method of reach-

•

'ng a price point here," though there might be a toss-up or
* splitting of the difference. "Competition stakes out a
'"ing within which bargainers fight it out by force and
craft." 1

On page 17 Hobson gives the first intimation of a view

'^ter prolific of much bad reasoning, namely, that "the

effectual buyers and sellers whose subjective price limits lie

^bove and below the limits within which a price point is

^ed, and who, therefore, take part in the bidding of the

^^rket, have no direct influence upon the price." But the

^'■ginal pair — not pairs, Hobson rightly insists — are "those

^^rnbers of the market whose subjective valuation fixes the

^^ssible limits, etc."

The difficulty is, of course, with the word "fixes," and
•^^tili the implication that the non-marginal traders have
-^^t:le or nothing to do with the case, which implication
^'t^r appears to be Hobson's real position.^

*John A. Hobson, The Economics of Distribution, Macmillan, 1900,
^ 16.

^This doctrine that there is an inter-marginal area of "forced

^iii3,'» where competition does not rule, is also emphasized by Mac-

j^ *'***ie (Value and Distribution, chap, v), and is correct for whatever it

^Orth ; no Austrian would question farther than upon this issue of

'^^^ It is true that the Austrian discussion of value, as an account

405

4o6 VALOE A\*D HST1U*0TK)N

The kNig-dmc or nomal price, at Hofawa righlfy mffa^ '
emn give no wiiiraiKC iksi ihe total gatss oj trade ijB
divide nitoDy brtwecn buyen and xOcnL If the AKf
went by chance, it tniglit be otfaerybe. bat oat so if iht
ittpeminly in b«rg%ining bdongs permocndT to ooc adt
There is oo reason for ^*\'"*n'*g Oax the Img-tnoc pne

DCb M 1

Adr vcoiMK intcnMi" (P«j>lnw 7li#«i7, p. aat) :
a perbctlx (rutJookM marlnt, d (kt« sar be accepted. ■> t |«(lr
Ikconaal and Ingical accooii of Ike cue ; bm it i«. of c««tc (an '
I ihai ibc palM rf I

appttitibli room for ■beer bafgaimm ikiD Mtd b*iT>i«iaf fMit nd
te «y|»fi»t >M of tkii advMtafc ; t«r naOj. no M« boon vc
pwdWU aUk*. a^ 'an actual bone oarfccl .... wovM nol <a far
fnirit In ibc aminiiii. iil ot an tii»tt market price for a t>*"i vlUl *l
hMVC' K«r u Ike (ain of tbe purcbaaer depenkni (oldjr opw ihf
iMiiiMiiij belwaeft Mi direct aobjKtivc valaabon and thai ti Ac

■■■I 1 1 ^ hla Bcfc cotuoner'B reoL He ii buriiv to icfl ifiio.

«ad M «»a oBljF vatD* lh« amt gcodm at ta pn ccni. more ital B
btca— be «MK9* nme Indint nr oiinafacttirins adnnUgr (obJRtJnt
■Wth mriilia bna lo pu^ what he has bouchi lo i lartri fniiuJnr
mtT (Htbwa, «f. <•>.. p. '4>- Aoin. a* to ihe Mller of bona ^
m^t^ it MM iaiaiUlr divisible : "thet* are dittinci aod faitly wide imcr-
^alt •! valsatioil belnwn the *ever»l miiti" ; bat the panhux*
MtAi^ ta tadtfiaitdjr dirinhle. wfcich ^is impair "the pncik*!
Mnfcv «( iIk wbalc nalhematical irunneal." unless with goodt 1ilw
eoe* oe eMiMk With tbeae tait. there is "• far closer and more eftW'
mm buyers on the one band and selkn on the
■all hrinf that the Umiu betsreen which ordinarr mnpMi'
Wwn are nmib narroweT" i p. jj}. And. more IniMttuit
irfcets are local nr partly isolated in charicttr. nuhn tbia
ch *tlh the w>[td-marhet, as. for example, irith t|it>>5
_ > ind aitb cb«Bp aad boilkjt aftietcs : in such cues compeiiuox
, ^gwt af^j. Aal tb«r« arc riac* and peculator*: faraiBt>

ATTEMPT AT RECONSTRUCTION 407

^^^ be a fair competitive price in the sense of excluding
"*^?aining for gain: "Average the dealings of small
'"^ney-Ienders with their clients over a term of years ; you
^^in a normal price of such loans, but that price reflects
^ 'formal advantage possessed by such money-lenders." •

For problems of price change, Hobson's way of con-
^ving demand and supply is helpful, — supply, the rate of
increase of stock,— demand, the rate of withdrawal, both
flows rather than funds, with prices rising or falling as one
flow exceeds the other. For any particular commodity the
demand flow is best expressed as money. Value is thus no
inherent quality, whether as regarded by one school as
expressive of cost or by the other school as expressive of

'^oers, and fishermen sell to middlemen under conditions of feeble or
poii-existent competition, and are more or less at the mercy of shippers,
importers, and wholesalers, or of patents, secret processes, and combina-
ttozis: "These and similar causes render the conditions of free and
fluid competition inoperative over a vast majority of the processes in
fH^ sale of goods" (p. 32). So with the renting of land or the borrow-
^'^S of capital, with the wage contract, the contracts of author with
l^^^blisher, of mistress with servant, of hotel-keeper with guest

Again, the buyer is the holder of money as against the seller of a
"Specialized commodity: "the urgency of a trade use is less than the
l*''S«icy of a personal need." True, the buyer for personal consumption
*• often in the reverse case, having to buy now from someone who is
^of obliged to sell now : "so .... venders of refreshments or books
^*^ a railway station enjoy a distinct advantage in bargaining." But
^>"<3inarily "the imcertainty of finding a purchaser at a calculable
•^'^^ .... must be accounted the weakness of the seller as com-
P*'5^ with the buyer" (p. 37). And "the scale upon which the large
^^Qess is conducted enables it to employ skilled specialists in buying
*^<i in selling" (p. 39).

«. It is worthy of note that Hobson carries his idea much farther than
/j^farlane in pointing out that the volume of commodities not suscep-
Jj^le of marginal valuation by stocks is not a minor quantity in actual
P^^^iiess but is possibly even much the more important quantity. And
.. >9 doubtless important, not merely from a practical but from a
^^Oretical point of view, that all this be recognized. But the failure
J Competition in the fixation of prices, while of vast importance prac-
P^^lly and greatly in danger of overlooking, does not appear to have
^^e theoretical significance ; Hobson's criticism points to the necessary
^^^wances to be made, for practical purposes, where, as is the usual
^^ actual market conditions, instead of being fully competitive, are
^^»»iplicated in some measure by monopoly influences.

*Ibid., p. 57.

s ralac hf daagrngbt
-^i_ it;_-~^ • i; ■. t. f -la- £.'T« iiT-i-r j dc^rrrinTiinl ni uliliiyl
.-— _ :i.-;e ^ tfscpi ">• raancta je-icsfdhip frcrni other sidt,
--■ ^-r-iT"- rwn-J. L-ac*g* and nndnixtt ff ralut haj m
a ; ' •■•;"• ' '" »il ^»r>' A' i'T :ht niairafacttirrT 1" sssmw
r '""it r - **2 tifr ^-■*«!t !«c>fi»e tbrj we c»>*t!}- ic makt; anil
■Mr Bexraa: wul- =s jifli «hict be perhafft crarKlU ^tniM

^

' ir- rr. \--:'.r_. ■'- ■ ■:.-i'^. fj^rr.ir '. pr -ccfd '.he verj- lori-cs ihat dirfcl i"*^
ev'.fc- .■■--. liu; -h. -^gh i;:ilily ;hi:i r.gi:rc= af ihe nnal car.^e

of val.jf, r 1- ::■■■; rJKhr:y :^t.n a- -.he s.I« cSoien; cause ,« a> ihe
sole A'M-.rmiT.-^'r.- ..f luariiiy of value aitaching lo a stock «^f

* Hobson. of. fi/., pp. 66-71.

r

ATTEMPT AT RECONSTRUCTION 409

for the problem of the volume of the supply is still there.
And cost is perhaps the more convenient business way of
arriving at values, since every change in demand forces
will express itself as a change in the costs against which
the demand is equated, just as changes in cost will express
themselves in utility. And Hobson insists that Dietzel, in
his controversy with Boehm-Bawerk, was wrong in admit-
ting that goods limited in supply get their value from their
utility. Dietzel should have stood for scarcity also, it
being true that only as explanation for scarcity has cost
any significance. And so Marshall, in suggesting that, for
short periods, our attention is best fixed upon demand, and
for long periods upon supply, would be wrong if he had
intended to imply that cost is in ultimate analysis more
important than utility as a regulator of value; and in fact
it is not clear that more or more enduring forces affect
value from the production side than from the consumption
side.

Thus far in all of this there is remarkably little that is
not admirable, with the exception of the "fixation by mar-
gins ;" but in the latter portion of it, there is too little or no
recognition that changes in the demand for other lines of
goods, say an increased demand, must have the effect to
decrease the supply of the particular line of goods under
consideration. It is in fact by the demand for other goods,
— through the resistance of other industries, — that limita-
tion is worked upon the supply of productive goods and
agents in any g^ven industry.

That Hobson does not here appreciate in its essentials
this displacement or opportunity aspect of cost, — this resist-
ing-demand aspect, is evident from his assertion that value
in the individual economy may be treated as a case "of
exchange worked out between the two sides of ourselves,
the idle self, which shirks effort, the greedy self, which
seeks satisfaction." • This formulation would be inade-
quate for any non-producing individual economy, say, the
ordinary child or woman, or for him who finds pleasure in
work and yet recurrently quits work because of the greater
attractiveness of recreation. This last is truly a case of

* Hobson, op, cit,, p. 91.

\MUX. AKD DETRIBITnON

me"

U but in thii
, after the fovm^
. ga at a sjrdcni of valuation,
, aad a dmrathc fystem of exchange
t far ne croop w a wiiQlc.

^rf tmbjectitt vriKfy an bjr Hobscn dis-
fwf and e^jtcHc* Mtaky.
tafc^ lo cooaiM of dw actoal ffnt
I af iJMtrr^lr f «&■( ad nptded

9f uK tDanidsH

betikaiMaan

M IMi CBOTt, PtlCTTrf for

•IfcOMc Mvte^. LC hoim, foM-wn^ dc'

ooold be bflber afwt

die case is, indeed, va

or o( flppoHtioa. poMtve and negatiK. bu

:abuilj, iaco

, mcompaialMiitj-, md

■■fcaij- X«te abe tte aw of (Ik pbtral. "ibe actnal
«ABrt «f will 1 1, <ac .... and regarded as a quan-
BbL" k 4b a (""V aodoa ef aa ab*cJfoie f ediiig waga-

t appewa to Ik tlK oppodle o( nb}><(iw

" e fcdnc eot oat of ajtaatupikxt by

^ as i^^fc^i** we tna V — or nay not

Ae ptDdnco- are the same poaxi.

-, if aot ptecisd* tbe opfXHite o(

CMC Ac fanl lc» oi cnergT altaditng to tbt

wmtm^ami titptoitr m^ity measores "the scrrkct

■Me paedi W mmk objective standard, L c tf

■■■■Hr Sfe V .... the actual \

ATTEMPT AT RECONSTRUCTION 4"

But whatever this means, and whether or not it is true,
no attempt is made to equate or to relate objective cost to
subjective cost, to equate, that is to say, the expenditure of
units of energy with the pain burden of this e3q)enditure :
'*A given quantity of objective cost may be related to
indefinitely divergent quantities of subjective cost ;" workers
are of all grades of strength and endurance.

So also there is little or no correspondence between
siiljective utility and objective utility; consumers vary
^^^idely in capacity for enjoyment and in methods of enjoy-
'i^cnt, and with changes in age, financial well-being, and
health, each man is for the purpose a different man; "food
'^^^ill vary in subjective utility from infinity to zero, accord-
^^^g as it passes into the possession of a starving person or
^ fully fed one." »

Whether as criticism or as interpretation, it is at all
Events to be inferred from all this (i) that there is no
^^^rket method of comparing, for market purposes, sub-
jective costs with subjective utilities; (2) periods of time
^nnot, for market purposes, serve as measure of any sort
^f cost; (3) nor is there any machinery in the market for
^Hiparing goods according to life-sustaining power or
P*^asure-giving service, nor any machinery for comparing
^^t-tons of energy excepting in terms of price.

And so, objective costs not being comparable as outlay

^ as to serve as explanation of value or of price, and being

^^tnparable by the entrepreneur only in terms of price ; and

^^bjective costs not being comparable at all, since they

^^€ feelings of different persons; and objective costs

^^t being reducible to subjective costs, or comparable

^ith them, it only needs the following added: "A

^ven quantity of objective utility will vary indefinitely

"When reduced to terms of subject utility." And yet

Somehow out of this, Hobson arrives at the notion

that,

* Hobson, op, cit,, p. loi.

4ia

VALUE AND DISTRIBUTION

referring to oiif theory of Valut
tbe following setting:

Subfecdve Oy«riM

Objective

P

3e-
by

1

/ Measured in
/ power of sus-
Measured in\ I taioing vit^

Measured in houi5, foot- I \ energy, or Measured in

units of un- tons, or ( Importance I furnishing units of de-
desirability other meas- i or Value < mechanical sirability by
of effort uresofout- \ j force, i.e.,

put / / nitrogenous

I units, or de-
1 greesot tem-
' peraturc

It may well be that this exposition falls far short of
doing justice to the actual meaning and doctrine pre-
sented by Hobson; for the present writer confesses him-
self to have not the slightest idea of what it all means. In
the first place, it is not clear whether the discussion is
intended to restrict itself to the field of subjective value.
The chapter is entitled "The Subjective Basis of Value." and
opens with the following words: "In order to mark the
essentially subjective nature of the theory of value, it is,
etc." And it is to be noticed that, despite the fact that
subjective value, in the established sense, or in any intelli-
gible sense, is purely an individual category, this "setting"
given to the "value and importance" problem presents the
case as in part a matter of "units of desirability by con-
sumers." And directly following upon this "setting" or
formulation, the discussion runs fully in terms of market
forces and adjustments: "The first portion that is sold
goes to satisfy the strongest desires of consumers, the

next portion a somewhat weaker desire, and so on

Yet all portions have the same price and the same value." '"

It is at any rate clear that this manner of analysis is
intended and believed by Hobson to avoid somehow the
difficulty facing the utility school, "to explain how. with a
diminishing utility attached to the successive portions sold,
the value and price of the part which serves the fullest use
are as great as that which supplies a necessary of life."

"Hobson, of. d(.. p. 103.

ATTEMPT AT RECONSTRUCTION 413

The idea seems to be that value is a compound of
liminishing utility and increasing cost, the two being held
^t equilibrium and equality by the fact that as the one
increases the other diminishes, and vice versa :

Tbe first portion that is sold goes to satisfy the strongest desires
0' consumers, the next portion a somewhat weaker desire, and so on
^^1 the last portion that is sold satisfies the weakest desire, or,
^^g the ordinary language, has the smallest utility attached to it.

^^ all portions have the same price and the same value Our

^Mation which makes value^mportance, shows that the importance

*^chbg to all portions of the supply that are sold is equal. For

** ^ the subjective utility furnished by consumption of the later

/''^'ts of supply diminishes, the subjective cost of producing these

^^ increased. The first unit of consumption which satisfies the

'"^ngest-felt need is rightly considered as taking off that portion

Supply which would be produced if no other were produced, be-

^Se it can be produced most easily. Each later portion ....

^sfies a weaker need, but is produced at greater cost, and since

^^st plays the same direct part in assigning importance or value to

^, Article as does utility, there is no diminution of value by a reduc-

I ^*^ of utility accompanied by a corresponding rise of cost. The

j^®^ portion of supply with the least subjective utility has the

'^hest subjective cost"

^- ^ This seems to mean that by as much as you enjoy a
^^ng more you may be sure that its producer was less
^^ievously burdened to produce it; and thereby it appears
/5^at your valuation needs be low : And with the later per-
sons of the supply, one's wearied marginal appetite is
^^ved from positive aversion only by the knowledge that
^He laxly regarded item was produced at the maximum of
I^ain to its producer. And so the drunkard at feast could
derive not even a minor enjoyment from his latest cups
Mrere he so fuddled as to forget that "the last bottle ....
"Which furnishes the smallest satisfaction to the drinker, is
the bottle the production of which represents the last
Hour's labor of the hardest-worked producer, i. e., has the
highest subjective cost attached to it." *'

But if, in our bewilderment as to what this may possi-
bly mean, we incline to query whether, after all, the talk
may not be purely in the field of individual production for

"Hobson, op, cit,, p. 102.
^Ibid., p. 103.

qoolv. nadir ttt

fa* «f pradKlioB Mi Icn.

As w9 1W BOR h^ ^ye

fettrqct Id Ac bai-nat aad Mk ital-uart inUoiB, for

ihe fofloiBg an prapoMtaaoi:

I. llai therv ife bod hnet Au do nut cntCT tiUooai,
and other had tan* Ifaat do enter, llat U. that then an
pricc-^Jctennimag md price-tkaei luiue*! renis.

3. Tlut both bnd hires aad product prices art dnn-
miiud tn' a priKos oi tnargin fixatsoo.

3. That the detcnninaiit margin is an instnimenl itar-
gin rather than a personal margin ; this, however, oot qdu
con<iistently.

4 Hiat iJic scriicr; o) laml. bb.ir (.imi capilal gooJs?]
;iri- ri-iliiLX'<l tn a oimiTU.'n ■lenoniinator, that is, are fumled
ill tiTiii-i iif pni'liKlivily units.

5. 'I'lial l!u' liinil.iiiifntal principle in the analysis, ihf
(.;«i<k--llireail for the labyrinth, the key doctrine in the prob-
lem, is the law of iiis|ilaconient cost, the alternative iiseM
llii I'r.'.inclive a_i;ent, that which we have already anahzeii
,l^ ih>' o|>i>..rmnit>-ci>st principle, apjilied. however, by
IK'I'-.'ii, u.-t ill ihc competitive sense, bm from the col-
Uviivi-i iv'ini >.[ view ami in the collectivist tenor.

K'.v\ud>''- Ti;cthi'd of fimling iiricc-detemiiniug cost al
;'',e n.-ten: extensive mari^in of land, whereby all rent
vVi;!,l tv iei;a[deii a> the resnlt ratlier than the cause of
!':'.,-\-, ii^>b>on diviares to l>e erroneous as based ujxm "a

ir

ATTEMPT AT RECONSTRUCTION 41 S

ft/iacious simplicity in the abstract setting given by Ricardo

toliis problem" (p. 119). Of the Ricardian assumptions,

(1} that wheat is the only agricultural product, and (2)

th-t: this product is raised upon extensive-marginal land,

ne/'t:lner is correct. But, as Hobson declares, were the

a5s^«j».mptions correct, the conclusions deduced by Ricardo

^'^j^d be irrefutable.

"^'Neither of these assumptions is absolutely warrant-

;" even were there no grazing use to absorb, as against

t, the poorest g^ade of land, conditions might exist

Ti that if "an increase in the population and the demand

wheat brings into cultivation all the land available, the

TSt land in use may or must bear an actual rent." This

d rent, it is said, "will not be a differential rent, but a

ced or scarcity rent Such forced rent would

dently be reckoned as an expense incidental to all por-

ns of the wheat supply, and would enter into the prices"

120).

But the grazing use and countless other uses are really

be taken into account: "What really invalidates the

icardian treatment is the fact that most land in use has

veral alternative uses or can contribute toward several

ifferent supplies" (p. 120).

That the Ricardian argument could in principle be as
'^Satisfactorily worked out at the intensive as at the exten-
sive margin, we have already seen; and Hobson later
turns his attention to this aspect of the case, and points out,
among other objections, that a parallel line of reasoning
could be equally well invoked to exclude wages and interest
from cost And surely the argument from the extensive
margin is open to the objections raised by Hobson, as well
as to others still more serious; the poorest of wheat land
does actually pay an appreciable rent, and even were there
any entrepreneur outlays justifiably to be excluded from
the entrepreneur-cost computation, there is no very evident
reason why, as an extensive-margin argument, this poorest-
land rent should not be included.

But, as we have seen, Hobson does not greatly rely upon

this objection; he is, indeed, clear enough that such condi-

4i6 ViOCE ASD IM^nUBUnON

tiocu nrigta exist as to unafiifatc in tlits aspect the theoi
cal tdutHlrty of the Rkarfim poritina. but Ik bi od deal
that such conditioRt arc actnaQv existenL Not all Unc

anrwhrre avwlable U <ref m actual cahivatioii

fdv cofitams more bod than is required, sane of wfaid

u slightly inferior to the worst land in use," so thai

present condttioRs this objntiofi "may be held to lie

of (iractical ecuoomics for a countn* tn open commercJi

relations with die world supply of land" " — which is Ol^

tainly generous enough in coocessinn — and to spore.

The serious djfficnhy, however, as Hobson sees it,fiaia
the second of Rkardo** assitmptiwis. ihal of the what
use as the only use necessarily to be considered in the naif-
■is. Thus the issue is shifted to the significance of dit
Bitcmalive use.

The conditions, ritrfitly insisted upon by Hob»OD u
actual, may be illustratively presented as follows: Let the
poorest wheat land in use command a 20-pcr-acre rent, with
Uie better lands ranging at per-acrc rents of ai. 32, 33,24,
2$. etc., up to ,^0: <tt the same time assume that fruit, gsi-
(Icniiip. .111(1 I'lbacco-cnlturo and the bniltlinp demand bear
w i\li mkIi rclaiivi' iiitcn-ily ii|)i>ii the hotter lanil- tliai liiticas

tial- :d'iivi' the altoriiaiivc use. that is, tliat the alternative Jif-
fereiuial,-. tl|'nn the .^o, 2i). jS, 27. 26. 35. 24. 2.(, 22. 21. atnl

^\■,. i;; 1 i>>ljM'i: insi-ts, then, ihat it is the 30-hirc lanil thai
i- ir.,iri;:nLi!. iliai nil nl its rent is cost rent, is price-dcier-
HiiTiu;- n-iu. aii.l tlial with the mher laiuis. ran^'iiig down to
the .Mliire laiul. the eii>t rents arc—

ATTEMPT AT RECONSTRUCTION 41?

On the 23 hire land 221V

" " 22 " " 2nV

" " 21 " " 20tV

" " 20 " " 19

^ that the price-detennined differentials are 30— 3o«o;
^'"^Vff^iS; 28—271^=-^, etc., increasing to a unit of price-
determined differential for the 20-hire land.*^

"It must in fairness be said that Hobson does not himself put his

^^ io the precise terms of the illustration offered ; the details of the

'^hcine of statement are not his, but those of the present writer ; but the

'^^ent seems to imply them, and it is primarily and chiefly to the

^^ of assigning to the argument its clearest, shortest, and most

^ective statement that this particular device of presentation is adopted.

^^ Qust, however, be at the same time admitted that this manner of

^^Position is chosen in some measure with a view to bringing the issues

^ criticism into clearer and more telling definition. If any injustice is

^^^^, it may be pleaded that it is not intentional ; but there is perhaps

-^ ^ more urgent call that whatever justification the facts afford be

^'Uptly submitted:
I ''Though the worst grazing land may pay no rent, the worst wheat

^"^^d might be better for grazing than the worst grazing land, in which
^» ^e it can only be obtained for growing wheat by paying a little more
.^^ its differential rent for grazing purposes; this rent for the worst
'^at land will be a positive rent, and will enter into wheat prices ;

^^^^^^n, the worst market-garden land competing for a given market
^V be tolerably good wheat land, and, if so, the rent which it could

for wheat forms a marginal rent for market-garden land. So as we
^?^^nd to the higher and more special uses of land, we find that the
f^^crential rents must be measured, not from a no-rent margin, but
^^^Yn a minimum specific rent of a higher and higher order, until we get
t:K ^^^^ ground, which is measured from a minimum which must exceed
,^^ rent which that land could obtain for the best agricultural use to

*^ich it could be put" (pp. 120, 121).
« "For the sake of simplicity I have assumed that the marginal rent

1^ directly and exactly determined by the alternative use of the worst
^^d in cultivation for each use. But this, of course, is not necessarily
^^« case. It is not necessary that the worst land should have an alter-
native use ; it may be some better land, enjoying a differential as well as
^ marginal rent, which occupies that position. The worst wheat land
^ight obtain a marginal rent of 20s, per acre ; superior qualities of
^fiieat huid might take higher rents rising to 40^. Suppose that some
^f the land rented at 30J. had another use which would yield a rent of
-^9^.; it is evidently this land which fixes the margrinal rent; it must
deceive 301. in order to induce it to contribute to the wheat supply,
^j)d the 20s, taken by the worst land measures its inferiority of wheat-
lowing power as compared with the 30s, land. It is possible that the
90J. land might continue to grow wheat, however little rent was paid ;
its rent is directly determined by the cost of keeping in the supply Of
wheat land the superior land at 30s. In such a case it will be the
30/. land and not the 20s, land which is the direct determinant of

wfecx

c^pkn tbt ftict of thr poditt.

Bol (i) bom an ifceK fnoe-^^snHiaK ^^^ ^
tBCHMCttci oneraiBcai >■■ f 3) I
in wiM waMand •ovtMcoeac

I. Titt 4clccnnB(MM ot dk nnM oc nc bsd i
BEn Id be to prioopfe fntway ^mc OBt oc IK oeKinn-
tion of the price of ammmtpikm (oa
is. thai both axe aattet aJjiattiifc «ccfad ev oiir

^■■'' (Pf> '*!. 'M>.

"Km «hM ^oM ifec Ml. iMi. *• wmm «*hi tM< « ««»
tiM^ .... ft 1* iiaiia liBJO^w to BVpMi Am ^ «n<r il ta
had. b<riH| ■» anaUliI* •faoMMw «• «^ yrtcc afptBeUn w.
irigjM lw*r btcB vilUm u CMtrtlalr M M^fly c*a il . . . .
*• tnl pa acn . . . . bd ben «t lAc JaMatf •( sm. b ^
CM* t* vdl be rndtM Umi it ia tta owoct sf tfw jm. k^ atih i>
feiiiw (» ilM (ovplj iidc tltt price pn aH . . . . 4anwM *■
' tkc bad u tkc Margia »t aMnia^

dw BarciB •>( nlihniUn. If llw riicfcinw •[ Ok J
CMwn s (all of not. H i* oof Baeniarilj tk> m*. b«d wWik |MH
OM of cal>i*itloe ; it mar tie the jot.. It the Uner Ino aa ahmw*
no and ike (omcr hai not. The *c«tnU dctendaatiaa of foH tj fti>
■alhai li, of amrtr, complicated by tbc f^ tkai a> a rafe sM BBilr
MM pan of tbc Uod wpplr. tint aitay p>n> bi*c alcematrn ota W
•Utb tbtf would «uccuinb, were Ibe prke tor oac bk to (all tdo* *
certain fifure. But it U catonablc for n* to lawnii Ibal tbc price t"
aait of land u*e i* ■IvBj'a jFtermtiMO br Ibe coanaoo pOMtiao at o"
part of Hipplr. wbich ai that price ia juii inluccd Co contnbule wnn)
ibat nipply in prrffrnicc to lonie oibera; tbc fact ibat at a diffotn'
pri<* per onil •ome other land would occapjt thU poiilion need nrt
concem ui" (pp. il?. tttl.

Thia i« pcihapi Ibe opportune lime (or pretemtnc a riaum* o( *•
different tent coiuepii. and. to far u% ii relevant to Ibe prt» " *"
esMan. Ho1;««i'i ■ytlcni of terminology with regard to them :

Selective out of our Ulualntive Kbeme tbc jo-bite iraci or ■

ATTEMPT AT RECONSTRUCTION 4^9

entrepreneur bidding. True, the consumption good receives,
on the cost side, its value from the value of the instrument ;
and from this point of view there is doubtless a distinction,
in that the value of the cost good — in this case the value
of the land — is not, through an appeal to cost fixation, as
readily explained, either in whole or in part, as is the
value of the consumption good. On the whole, indeed, the
land hire appears, as we have seen, to be in part derived
from price and in part a determinant of price. But at any
rate, as a question purely of the process of market adjust-
^»>eiit, there is a complete parallel between the price of the
land use and the price of the finished consumption good :

In so far as the price of uses of factors of production is reached
^y competition and bargaining (and this is our hypothesis through-
^^t), the mode of determining rent, interest, and wages will be

^^ Und, the rent concepts applicable to it would catalogue as follows:

1. The entire hire, 30 shillings;

2. The differential hire above the poorest land in actual use, 30
'^^^'nis, say, 5=35;

^ 3. The differential hire above the poorest land in use in the par-

^lar line of production, 30 — ^20=10;

4. The differential hire above the best alternative use, 30 — 30^.
'with the 20 land in our illustrative scheme, this variety of differential
15 Evidently i ; on the cranberry patch of our earlier discussions, this

**erential would include the entire hire.)

"Now since it is convenient to retain the term 'margin of occu-
^^ion or employment' to describe the worst or least efficient part of
IJ^t^ly, some other term is needed to mark that part which occupies
^^ determinant place in any given market. I propose to speak of this
f^'^ion as *the determining portion of supply,' and of its owner as
^^ determining owner.' The worst land in cultivation for a particular

^ply will be described, in accordance with usage, as 'marginal land,'
7^^ its rent as marginal rent. 'Differential rents' will be the rents

^ined by lands of superior productivity contributing to this supply,
^^ will be measured from the margin" (p. 129).

But upon the assumption, actually made by Hobson, that the lands
f funded, there is surely no occasion for ranking any of the lands
worse or better or as more or as less efficient than any of the
• ^^ers. And one is minded to ask which of the two it is, the 30-hire
I'^d or the owner of the 30-hire land, that is determinant ; or, after all,
«^^ it not the 30 of product displacement that is determinant, the land
^*Te being merely the competitive expression of the displacement?
5^ collectivist production, at any rate, there are alternative produc-
^>enes8es and differential productivenesses, but no rents, no hires.

Bs iJijiU ti> xll tlir iKssilMStics of higgli^

;'^:ljTe a rer.i which i? price-

f-- :'>-^: in an\ ca.*e. what-
:e\: a> pr-i^e-dsienniiiing, il
: Through the y^iarket procew
;,:,'.:-§ !\t the dilTerenl land
-Uri-.v-i thjT a!! these Urn)
a— e rario between their prn-
i the vriee which the_\ cm-
a'.! furiie-j iniii unit? oi

ATTEMPT AT RECONSTRUCTION 421

jecdve valuations [offer prices and refusal prices] of a single owner
and a single tenant (the final pair) fix the limit for the price of a
tuu't of this land power, the stronger of the two fixing the price
point (pp. 126, 128)."

Adopting, then, the supposition that "what is really sold

in the bargaining between land-owners and ctiltivators for

the use of wheat land" is not merely wheat-growing power

or wheat-growing land but wheat land "as units of wheat-

gtowing power;" that is, recalling that the land supply is

conceived as a fund of abstract productive units — we turn

to examine the process by which these wheat-land hires are

Adjusted. It is significant that for this purpose Hobson

appeals to the concrete and actual and unfunded supply of

^'But upon an earlier page (25), the criticism against the "whole
^Mathematical treatment" was that it "rests upon the assumption of an

^^^finite divisibility of supply The fact that supply is not in

^^^ case infinitely divisible impairs the practical service of the whole
^Mathematical treatment." Thus "it is easy to see that there is a far
^^^leater elasticity in supply and in demand in a corn market than in a
"^^orac market, a far greater variety of possible prices with a far
^^^anower interval between them. This signifies a far closer and more
^^ffective competition between buyers on the one hand and sellers on
"^Jie other, the result being that the limits between which ordinary
^^mpetition breaks down are much narrower" (p. 27), But surely
^mnpetition should, then^ be perfect in the land market, upon the
^usumption that it is really funded into precisely equal, inter-
^angeable, abstract, productivity units. The truth of the case, how-
ever, seems to be that Hobson regards land as funded for the purposes
of cost theory, but as non-funded for the purposes of "forced-gain"
theory:

"Wheat or wool .... will, in theory and usually in practice,
rank as a number of separate supplies subject to entrepreneur barf^ain-
iog . . . . goods which are held to be identical in size and quality.
Now in the market for the sale of the use of labor or land no formal
reduction to equal-sized units takes place. Though the real object of
aale is a quantity of productive power in land or labor, what is
nominally bought and sold is the use of so many acres or so many

laborers But while the bargainers express themselves in

t^nns of acres or laborers, the real object of their bargain is the use
of land power and labor power, and they are continually engaged in
t^ucing acres and laborers to units of productive power when they
buy and -sell" (p. 1x4).

"It is admitted [by whom?] that what is really sold .... is
Units of wheat-growing power. The fact that the nominal subject of
bargain is acres must not blind us to this undertruth" (p. 125).

If so. then so much the worse for forced gains ; but Hobson does
not so see the case :

"It is the owner of the 30s, land who, in fixing for the supply side
the price per unit at sj., determines the amount of rent per acre of
the land at the margin of cultivation" — the 20s. land (p. 125).

^1^^^^ VALUE AND DISTRIBUTION ^^^^^

entrepreneurs and to their competitive bidding against or.^^
another; and it would thus seem that all the phenoniec-::^-.
forced gain or other, characterizing the price fixation
consumption goods must equally apply to production gooc:;*^
this is, indeed, Hobson's view: "If we regard the hiri .Sj]
of the factors of production as equivalent to the sale q
their use, wc are confronted with the investigation of ^Kji^
market for the sale of the use of various supplies of lav^j,
labor, and capital" (p. 114).

But, if so, how shall productivity be funded unless aJsc^
the utility in every particular stock or series of commodities^
be also taken as funded? This view must find its argu- '
mentative basis — if basis it have — in some sort of society-
as-an-organism doctrine. And what, then, becomes ot
forced gains?

We have seen that it is the 30J.-per-acre land which is
believed to determine the price, that is, under the condi-
tions as assumed, not the worst land, the 20s. land, but the
best, the 305. land, this latter being the land upon the alter-
native margin:

Suppose that some of the land .rented at 3i>»- had another use
which would yield a rent of 2Qi.; it is evidently this land that fixes

(he marginal rent It is possible that the 201. land might

continue to grow wheat, however little rcrU was paid ; its rent is
simply determined by the cost of keeping in the supply of wheat
land the superior land at 30s. In such a - ease it will
be the 30s. land and not the aw. land which is the
direct determinant of price for the supply side in the
market for sale of wheat-growing power (p. 134J. The argument,
.... though quite valid for showing thai dllTerential rents do not
enter into price, lets into price any rents which are paid for the use
of marginal land contributing to any supply. Land may be graded
according 10 its economic uses; the differential rents will be included
in the market (and even in normal) prices (p, ijo).

The subjective valuations of a single owner and a single tenant
(the final pair) Tix the limits for the price of a unit of this land
power, the stronger of the two fixing the price point. This done,
the rent per acre is determined by the net yield of land power in
each grade of land. It the higgling of the market fixes the price
of a unit at 20s., the best land available for that supply may yield
two units of power per acre, in which case the rent per acre ia 401.,
the worst land only i4 a unit with a rent of tos. per acre (p. I87).

ATTEMPT AT RECONSTRUCTION 423

But if this is true, it must follow that all lands are

equally cheap and equally dear ; and if so, all talk of areas,

or of acres, or of tracts of any sort becomes irrelevant, 1,000

acres of poorer land being both the price equivalent and the

productivity equivalent of 100 acres of a better grade or of

10 acres of the highest grade. This funding doctrine

should, then, suffice to cancel all talk of marginal lands in

any sense of marginal entrepreneur cost, or in any other

sense than that of the nearness of the wheat land to the

line of equal desirability for some alternative use. Under

the doctrine as presented, all lands are equally expensive

^or wheat purposes, and, so far as entrepreneur outlays or

entrepreneur grounds of interest are concerned, neither the

20j. land nor any other can have a non-cost element in its

rental. Here, indeed, it becomes clearly manifest that

Hobson's analysis, unconsciously collectivist in standpoint,

'"eaUy involves the entire abandonment of the entrepreneur

P^int of view.

For mark how this manner of computing entrepreneur
^osts by the displaced potentialities of the instrumental
&^^s will affect the entrepreneur computation when,car-
'^ed over into the labor and capital fields; for it is to be
'^called that Hobson protests vigorously — and rightly —
^S^iinst "that general tendency of economic science,
^^Pedally in England, .... to assimilate the theory of
^e sale of capital use and labor power to that of the sale of
SOods, but to mark off the sale of land use as subject to
^uite other economic laws" (p. 116).

I propose to bring the sale of the factors of production under

•^e general laws of value and of price For this purpose it is

^^essary (i) to co-ordinate the three factors with reference to the
^^tiditions which regulate their price; (2) to show that ^eir sales
^''^ in essence identical, as economic processes, with the sale of com-
modities (p. 117).

But if it is indeed true that the entrepreneur will reckon
^ his cost not his wage outlay, or some alternative open to
*^im with regard to the application of his expenditure, but
^^ly the worth of what the laborers could respectively pro-
duce in their next most productive lines of employment,
^nd if, out of his capital-hire outlays, the entrepreneur is to
be allowed to compute as cost only such part of this expense
^ represents, say, what his cotton machinery would have
produced in a woolen mill, there is an end of all hope that

bn own or Mt^tMVs cbc ci

TIk JdB lifiiiww •?
u pfcacMlBd br HAi ^te
tfK ionn <rf s HHHMTjr:

I. Tluwifb ttc wmebh^^e 1
•rmv at a jwUi BpyriiitfT ^ 3x
(or Ihc bukd pomat 'm At
f>-aiA tract

3. Hy leBciaJci bma t
tbr ume price ftv all oAb
a funtWd vriaeai-laiid^owca

3. Tlik marifina] land. Ae j
the Und-ooM Mde. ^ fnoe of

al the
inal-

4. Having fixed tfar wheal price, aad I
rent acrriiinff to tfaow bwh oat ftrmie*"g
iriK, thli mari;iru] land (or a it Ac cmwa
Und}) appiirliimt to tfaoe <Aa iutStAee
femitialN of rent income, that is. tbarsoa '
their nKessary ( priee-dclei iiaiiiag?)
thut to them, — in our iUustntivt
rents of from iS up to f | . Theae ptiet-itteniiaeitawa
from non-determinant lands are thus, as it secnk <fa^
for co»t purpoMrs, than Ihc service* of Iaiid» acanrkAt
altcmatEve use, and yet the lands are funded iaai t0i
productivity units.

Ami Ihus it njipearB that the marginal -land
at the opportunity niar^n, is determinant and '
a dcBTce not before appreciated even by the
nounced advKaies of the mar^n-Axatton doctrine.

iiSP

Bui despite the fact ihal this manner of analysis
impouihlc the efilirc enirepreneur-cost category,
remain* unclear wiulhcr ilie delenninant margin
tented as an enln-pn-nc-itr margin nr as an instrument mar-
The supply of wheat being a stock of similar '

ATTEMPT AT RECONSTRUCTION 425

its price was determined, on the demand side, not by the
entire demand but by the marginal bidder, on the supply
side, not by the entire supply and not by any marginal
entrepreneur but by the cost of production upon the alter-
native-use margin, with the rent for this alternative use, —
seemingly a rent for unfunded land powers, — functioning
as one of the marginal and price-determining costs. The
market 'value of units of productiiAty is thereupon fixed
by the bidding of entrepreneurs for the services of these
units, in view of the market price for their products. But
here again it is the owner of the land upon the alternative-
use margin — ^the land without an appreciable wheat differ-
ential— ^who, having fixed the price of the wheat, now in
turn, in fixing the price per unit of land use at 5^., deter-
i:^nes the amount of rent per acre for the land at the
r^^^argin of cultivation, that is, the per-acre rent of the
I>cDorest land in the wheat use ; and better lands thereupon
<^l>tain their differential of income as measured from this
y^^iargin, according to their differentials of productiveness
the unit schedule.

And thus it is on the whole evident why, with reference
the precise nature of this margin, Hobson says .

Some other term is needed to mark that fact which occupies the
^^erminant place in any given market. I prefer to speak of this
^^tion as "the determining portion of the supply" and of its owner
^ "the determining owner" (p. 128).

Both, then, seem to be determining.

But there are other difficulties :

Whether the determinant portion of supply of land be the worst

^d or not makes no difference; the price of land power and so the

. ^^t of different qualities of land, appears to be directly determined

^ the fact that some of the land has an alternative use, and that it

^^^y refuse to contribute to the supply unless a certain price is paid.

^_Mt though the alternative price .... determines a lower limit of

i^^^rginal rent, there is nothing to prevent the marginal rent rising

^^^her than this. If the 305. land has an alternative use, it is pos-

^ ^^le that use might yield only 255.; now, though the owner of that

^^nd would consent to take 26s. rent, he may be able to get 30f.,

^cause there is, for the time, an absolute scarcity of land available

K)r this supply. In a word, he may be able, as the final seller, to

e a forced gain of $s., which corresponds precisely to the "forced

VALUE AND DISTRIBUTION ^^

gain" in the price of Ihe horse in our analysis of a market for cofu-
niodities. In such a case it mighi be best to distinguish the s*. from
the 2S(., and lo class it as a third form of rem (p. 129).

But this is really not a new — a fifth — concept of land
rent; it is merely a landlord's quasi-rent subdivision of
concept I .

And now note the implications: This 30^. rent upon
land having an alternative use of only 25^. becomes the
land-cost deterniinant of the market price of wheat ; at 'be
same time the cleverness of this particular landlord, as
achieving' in bargaining a forced gain of rent for his ovra
benefit, has enabled him, as determinant owner of the tnaf
ginal land, to dictate the general price of units of whea*
productivity, and to fix this price for all the different land#*
with the result that all other lands as well as his own ar^
achieving a forced gain of ^ above their "lower limit of^
marginal rent." That this may be nonsense is not to the
purpose; to deny it is to deny to the marginal land {or to
the marginal owner — which?) the determination of the
price of products and the general rent determination for
the different qualities of land ; and at the same time it is to
deny the funding of land into productivity units.

But now as to the precise correspondence of these
forced gains to the forced gains in the horse market: If
there is the alleged correspondence, it is so much the worse
for the horse case ; for where are the other tenant bidders
that, with funded lands — or without — this 30J. or 25^. land
is left, with its $s. width of higgling-margin, to the
bargaining contest of this marginal pair? Or is it really
assumed that, except to this one tenant candidate, the land
is not 3ar. land in point of desirability, but only 255. land?
But this would be to disturb the funding principle. .And
if the land is really 30J. land to him and to other tetiants
generally, if only they would act upon their interests, are
the 5^., over and above the 25J. lower limit, really forced
in the sense that they are unjustly gained at the tenant bar-
gainer's expense? Or is the fnll 30J. the fair market value
of the value- producing power offered for sale, so that at
any rent less than 30J., there would be a forced gain for the
tenant at the expense of the landlord? And if the land
were worth only 25^. to other cultivators, but 30J. to this
one, what should be regarded as truly and justly its worth?

The validity of the argument from the intensive 1

ATTEMPT AT RECONSTRUCTION 42?

gin to prove the non-cost significance of land hires conies
in for searching examination at Hobson's hands. His line
of reasoning in criticism of Mill and of Marshall, while
perhaps not of greater interest than the foregoing, is of
considerably greater cogency.

Not overlong insisting upon the fact that the argument
which at the intensive margin excludes rent from cost "can
l>e similarly applied to show that interest and wages do not
enter into price," Hobson proceeds to the discussion of
what he regards as the fundamental error in the entire
"dosing" method of argument, whether one or another of
^e factors of production be taken as applied in the dosing
^3^hion. His objection goes to the underlying supposition
^'^^t any one of the three factors of production can be expe-
diently and economically applied as the sole constituent
^^ the expense dose. "The truth is that a certain har-
'^^Dny of combination of factors exists for various produc-
^Xre purposes; .... if there is a short supply of one
^ ^ them at the former quality and price," one or both of the
irs will be substituted, but at an increased cost per unit of
luct; this must indicate that the proportions between
le factors were wrong; it would have been better to have
id more of the first:

So when the final dose of capital and labor on a given piece of

heat land achieves a product which yields no rent, it means that

ith the same quantity of land use as sufficed for a smaller product,

larger quantity of capital and labor use has been combined; that

s no more land use was employed, none was paid for (p. 138) .

Or, better :

We may consider a piece of land as containing various land

^K>wer8, some high, some low, some powers so low that they require

9o large a proportion of capital and labor to utilize them that they

^only just pay to work. These low natural powers yield no net

economic powers of production (p. 138).

The cost is then the same for products raised upon
non-marginal land powers as upon the intensive margin,
and vice versa, since upon the intensive margin so much

^

438 VALUE AND DISTRIBUTION

more capital and labor cost [non-land cost, entrepren
capital cost] is incurred as the land-rent cost is less,"

Or put it in still another way:

Suppose it [Ihc extra product] is raised by a tenant farmer as
part of ihe result of an extra last hoeing and ploughing on his
land, il [seemingly] pays extra wages but no rent; if. however,
instead of this extra hoeing and ploughing the farmer decided lo
hire one more acre of the same quality of land and spread the same
amount of labor power over (he larger area, the product of this

last acre pays its rent but no wages The labor of working

the .... last acre of land is certainly remunerated by wages, and
at the same rale as ... . ihe other acres. Why, then, does it appear
from the "dosing" illustration that the product of ... . the last
acre pays no wagcP (P. 140.)

" No question can be raised as to the force and accaracy of this
criticism for the purposes of the actual issue; but il ia none Ibe leu
true that the argument ia not quite accurately made. There is, in
fact, no best combination of productive factors ; each entrepreneur bss
doubtless his own separate best, as depending upon bis own penonal
equation, his total capital equipment, bis credit, and bis safe limit for
using credit. But for each entrepreneur hii best combination is ■
diBerent one from that of any other entrepreneur, precisely because as
entrepreneurs they arc different; and with each entrepreneur his best
combination will be a new and different combination witb every change
in the relative costs of the various instruments and agents. Perhaps,
however, the dosing argument might avoid the entire force of this
general line of attack by reformulating the dose application in (eriDS
of doses of expense — of entrepreneur outlay — as applied lo Ihc land.

But what is the size of the economic "dose"? Is there an inteo'
live margin to the extensive margin of land?

If every other sort of land has its intensive margin, bo must also
the poorest of cultivated land and the poorest of pasture land ; the
pastured cattle are in thetnaelvcs capital doses. Absolutely nO'rent
land must then be land receiving only infinitesimally small outlays of
expense; Unlttt (i) marginal land does not, for Ibe earlier doses of
expense, fall within the law of diminishing value returns ; in this case
and up to this limit, the "doses" should rather rank as together consti-
tuting one dose : or (2) unless there is a limit of another sort to the
subdivision of expense doses, a long-time, s season, or employment
unit, adequate in point of amount to the duration of the undertaking
in hand, and to the nature of the undertaking in band ; the Grsl unit
dose must at any rate be large enough to make practicable the under-
taking of the business, its size and the time involved in obtaining
results both being considered.

But in any case the dose is not a capital-goods dose or a labor
dose but an entrepreneur'capital dose, a matter of quantum of expense
rather than of the nature or the detail of the technological means or
other means selected.

J

ATTEMPT AT RECONSTRUCTION 429

m And why, also, when an extra dose of labor is applied to

m tte land, assume that all the increase in product goes to

I Remunerate the larger quantity of labor? If it be, indeed,

^e that more labor can now be applied to the land, why

Ha.^ it not before applied? The rent that was being paid

^f ore was paid on the basis of what the land was worth

i^c3.er proper utilization; and when it now comes to be so

utmX^zed and comes to produce what it ought all the while

^ ^Iiave been producing, the belated increase in product is

'^^^^fc: to be regarded as due in its entirety to the new labor

"*^-"^ also in part to the opportunity now belatedly utilized:

If a tenant hires a piece of land and puts five doses of capital
•n it when he ought to have put six, he pays a rent based upon
supposition that he will make a full economic use of the land,
that he will put six doses on it. If, discovering his error, he
^erward adds the sixth dose, he only appears to pay no rent out of
produce, because he has all the while been paying a rent based
the supposition that he was working his land with six doses
141).

The land use is thus the basis of part of the price-deter-
ining cost; true, no more is now being paid for the land
"^Jian.was before paid, but the price now being paid for a
Xatilized land service was before being paid for a non-
utilized service; one does not have to pay more for the
land when adequately supplied with labor and capital than
1)efore when it was inadequately supplied :

If I rent a piece of land in Picadilly, in which all houses are
three or four stories, the rent I shall pay will take into consideration
the capacity of the ground for building a three- or four-story house.
If I choose to put a one-story house upon the ground, the rent I
pay will be the same as if I had more fully utilized the site. If I
afterward add stories, it will seem that I pay no rent for this extra
acconunodation, but in reality I have been paying it all the time
(p. 142).

Hobson's argument here appears to be unanswerable
for the issues as they must present themselves, if "doses"
are to be regarded as doses of the separate productive
factors, rather than as doses of entrepreneur capital applied
in every case under the direction of individual and peculiar
entrepreneur initiative. The different entrepreneurs are

' 430

VALCE AXD DBTRlBtrnON

biddii^ for the use of entreprenear capital — money, cm
gooda, or credit, each in terms of money — or of insfc:^jy.
mental or other goods as retluced to the money dcnomit__na-
tor, and, as sucfa, making part of the entrepreneur funi^^l ^t
capiul. Each entrepreneur bid, whether for entreprei^^^
capital, or for instmmental goods reduced to terms of en^ (-
prenciir capital, is never accurately a bid to get more^^ ^^
anything to put with his land or his capital goods or /j^^
employwl labor, but rather to put with his entire situatton
as a whole, with his productive complex as an aggregate-, /n
which he himself is a part. Thus, one entrepreneur trill
be directing his capital funds to the hire, or purchase, o ^

jhincry. another entrepreneur to the hiring of labor ^

another to renting land or more land, another to ihcS^.-«
purchase of fertilisers, or of bams, or work cattle, or di\rf^^^^
cattle, or for insurance outlays, or advertising, or taxes, etc. " '-

And out of all the entrepreneur activities in the supply
of agents and instruments, and out of the entrepreneur
competitions for the control of these agents and instru-
ments, there undoubtedly come about market values for the
raw materials, hires for the instruments and agents, a rate
of time discount upon business capital, and a capitalization
for such of the productive facts as are susceptible of
capitalization.

Nothing, however, so far adduced denies that the entre-
preneur in making his bids proceeds upon what is essen-
tially the dosing method, if only the capital nature or
capital denominator of his method be recognized. But
even under this interpretation, Hobson is right in insisting
that, in accurate analysis, neither the entrepreneur's maxi-
mum bidding disposition nor his actual price outlay is
based upon or expresses any separate and specific produc-
tivity of the dose fact under consideration. Any separate
productivity of this sort the entrepreneur himself could
not isolate. He needs the fact in question to go along with
his a^regate situation, his entrepreneur complex, and to
become a constituent part of it; he can easily compute ^=r
what he can afford to pay for the accruing advantages, due —

in part to the independent productivity — if there be any

which the new fact boars in its own right, in part to its-
added productivity in its new setting, in part also to th&
added productivity which the old facts take on in theii—
new association and relationship ; so far as the productivity^
is a matter of the interrelations of the different parts ir»

ATTEMPT AT RECONSTRUCTION 43^

the entrepreneur complex — ^the entrepreneur being himself
a part thereof — and a matter of the organization of the
complex, there is a productivity which defies any attempt at
distribution.

It remains true, however, that the entrepreneur can
readily tell how much he would if necessary pay, and how
much he must pay, and this is all that, in this aspect, is
necessary for the validity of the dosing argument.

"But," Hobson says, "the 'dosing* illustration is

vitiated by a more fundamental flaw We may

suppose that he [the laborer] is in full knowledge of the

facts and has a full exercise of choice; as a consequence,

Ine estimates that it just pays him to work five looms instead

<yi four" (pp. 142, 143). Why say that the fifth loom pays

liim less or produces less or adds to his wage less than

suiy other one loom out of the earlier four? "The fifth

loom after it is added is found to be just as productive as

amy of the other four looms. The answer is plain. The

fifth loom only just pays because its addition has injured

his work with the other four looms." That is, each of the

later stock is producing less than each of the earlier stock

produced before, but any one item of the present stock

produces now as much as any other one item produces now.

That all this is true may be, and must be, admitted ; but
here again, there is doubt whether the argument is to the
purpose as disturbing the dosing method. Let it be
assumed that, to the four looms, 500 in product was to be
attributed, 125 for each loom ; but that with the five looms
only 600 of product is obtainable, 120 per loom. Surely it
is not true that in this second case the first four looms are
to be credited with a return of 125 each and the fifth loom
with a return of only 100. Under the new situation all are
producing equally. Hobson is certainly right here. But
it is nevertheless true that the productivity of the fifth
loom, 120, is achieved only on terms of reducing the produc-
tivity of each of the four looms from 125 to 120, with the
result that the net advantage from having this fifth loom
with its 120 of productivity is only 100; this 100 is, then,
all that can at the outside be paid as the price of the value
increase accruing to the whole situation by virtue of the
hiring of the fifth loom.

432 VALUE AND DISTRIBUTION

The next objection, the third so called, is, in truth, not
another objection, but merely another aspect of the first;
as such, it must be accepted as tenable, but this only in
view of the precise manner in which the issues in the
discussion have defined themselves :

Professor Marshall, in treating the marginal dose of labor in
agriculture (e.g., the last hoeii« applied to a field), admits that
"Ihe return to that last dose cannot be separated from the others,"
but, he adds, "we ascribe to it all that pari of the produce which wc
believe would not have been produced if the farmer had decided
against Ihe extra hoeing" {Book IV, chap, iii, p. 144, par. a).

Marshall's argument must be admitted to be unfortu-
nate; to make the best case for it, it is necessary, Hobson.
believes, to state the thing affirmatively rather than nega-
tively, the question not of what would be forfeited by tlie
loss of one item out of the existing stock, but of what
would be gained by the addition of another item. As the
expense computation is forward-looking so must also the
return computation be forward-looking.

But Hobson, in condemning, like Wieser before him.
Marshall's — as also later Qark's and Carver's — ^backward-
looking, negative metliod of value imputation to productive
agents, fails, like Wieser, to see that no ultimate conclusion
is thereby established. Wieser had somehow deduced the
tenabtlity of the forward-looking addition method; Hobson
infers the impossibility of any separate value imputation of
any kind:

Where it is essential to productivity that land, capital, and labor
shall all co-operate, it is impossible to assign 10 any one of them a
product based upon the suppositioti of a separate productivity. Simi-
larly, where there exists a necessary organic quantitative relation
between the factors, no separate product can be put down to any
single dose of each (p. 14?).

But that tltis is true of the concrete commodity product
does not necessitate the conclusion that it is true of the
value product; and Hobson himself appears to assert that
the increase of product at the margin or under the margin
is due to the capital or to the labor application, since no
valuable use of land is actually employed.'*

" As his abeady been argued, and as will later mare fully

J

ATTEMPT AT RECONSTRUCTION 433

But that entrepreneurs do actually bid not only for
^(/ditional supplies of competitive business capital, entre-
/>reneur capital, but also for different agents and instru-
ments of productions — ^these all the while, however, reduced
^o terms of capital outlay, and so ranking under the com-
'^<iDn denominator computation of entrepreneur cost — must
^^* 11 be admitted; and this leaves the dosing principle good
- *^^^ "» all that, in the present connection, the rent-cost prob-
^^ ^^^~Ti, it was ever supposed to be good for. The real difficulty
^"^^ ~^th the dosing principle is in the attempt to apply it in
jTTns of the traditional categories of productive factors,
le tripartite division is altogether inadequate to the case.
But to acquiesce in the dosing principle as an entrepre-
iur method of computation is not of necessity to concur
the conclusion that all rents, or any particular class or
^^bclass of land rents, must be excluded from price-deter-
lining entrepreneur costs; in truth, the dosing method is,
^31 entrepreneur computations, serviceable with reference to
expenses in general, or with reference to any particular
Hrection of expense. Thus we are constrained to deny
■%hat "the net result of this argument is that the application
^f the law of rent to the intensive cultivation of a single
factor must be rejected as fallacious," but we none the
less agree that the arg^iment is fallacious as used to show
that any form of land rent is irrelevant to the process of
price fixation.

THE VARIOUS RENTS IN THEIR RELATION TO VALUE

Hobson argues, as did earlier Say, and as does later
Fetter, that although land and labor are commonly regarded
as having concrete forms, we are prone to regard the pay-
ment for the use of capital as payment for the use of a
money value of a certain volume. But Hobson insists that
if any common law of price or of value is to be worked out,
both land and labor must be subjected to the abstract- value

Hobson's position is in fact correct with regard to the value product ;
but the argument under consideration falls a good way short of prov-
ing this. However, in a paper published in the September, 1904.
number of the Journal of Political Economy, Hobson has presented
a much more searching and in many respects a satisfactory analysis
of this question. See, later, chap, xxii, p. 476, note.

of thoe tqariK
Ifae tncrr fact ths ifi

'! exchar.se relati'^sh
: r-itort:? and legal in'ii-
;. :a''i'.a!ize.i value to \k

-.he >iai!_v putting-iorth

7t"-jT-batioii : the labor

~\'.-- a? lio land iise^ aiiJ

in receiving not nwrdy
'.■^c. remains despite ihal
:-ere is at this p^iint tw
--if: ■.;p-"'n the concrete-
1-!;. r..' '>ccasion for car-
■a'.i :' r the aliandniimcnt
:':c capita! goods ando!
■■ :.T.:er omrse is the one
I i hv in : thereby, as it
1 the coTiiTiion ""hu'ine«
:i n based upon t!ie rate
:- pv^ssible between this

■ luction. We must deal
: thus valued" (p. 153).

ATTEMPT AT RECONSTRUCTION 435

.^^> as it seems, he makes both unintelligible and impos-
^^ule his earlier notion of land as an abstract fund of value-
productive units.

Land and capital, Hobson urges, require no rent or
interest for purposes of upkeep; there are indeed upkeep
charges, but all charges of this sort are met before the net
income can be computed or be capitalized into present
worth. But it takes some wage to maintain labor in exist-
ence. "Thus it comes to pass that while the margin of
land is no-rent land, the margin of capital no-interest capi-
tal, the margin of labor is (say) 15^. labor." But "this 15^.
wage does not in any sense correspond to interest or rent.
It is simply a wear-and-tear fund of labor, the expenditure
necessary to replace the labor power given out in a day's
work and to maintain the laboring population at their

present numbers and at their present capacity

It is wages above i^s. that correspond to positive rent and

interest:" and the fact that, unlike land, labor and capital

"^ve no sub-marginal representatives does not impair the

^^tting; for there is a fund of capital safe to become actual

'^ the rate of interest calls for it [but, one infers, not safe to

''^*apse into non-existence if interest again falls], "while

^'^y rise of payment to the marginal 15s. labor will increase

^^ supply of labor power, either by raising the population

^t^ or by improving the efficiency of labor, or by both"

^f'P. 155, 156).''

. *• "Whether it be true or not that the prospect of obtaining interest

^ "^ necessary motive to induce the creation of capital, it may dis-
^^^tly be affirmed that interest is not necessary to secure the economic

r ^intenance of forms of capital that have been brought into existence"

•^* iSS). Not so ; there is needed the same inducement to prevent

^"^erioration of the land, or of the capital, or the slow consumption of

»^^lier that was needed to induce the creation or the improvement.

TT^Mceep is a new capitalization ; if rent or interest only cover this

rj^^rge, there is nothing left to overcome the abstinence protest against

^^^ postponed consumption involved in holding the wealth as instru-

^^^ntal or intermediate goods. But it is fairly to be inferred that all

y^Tms of positive upkeep either of land or of capital are reckoned

^V Hobson as within costs. But here again it must be noted that since

^*^« upkeep requirement applies to land equally with capital, there is

^ith land the same opportunity for abstinence and the same elasticity

43ft

VALUE AND DISTRIBUTION

And now to the questton, \S'hat pa\inent& for U6« of
land, capital, labor, enter as elements into market price of
goods? it b replied that —

Um tanM reuonng which shows that differential rents of land
need SM txtctr price tbowt alio thai differential paymentt for capital
and Ubor need not enter price. .... Jiut at rent of land need not
form as cknmt of cost or price in agricultural produce, some of
which it rwed on no-tcnt land, io interest need not figure in Ihr
co*i or price of mannfactured goods, some of which are produced
b]r no-interest bnstnesses, while similarly no cost of laI>or above the
i5«. depreciation fund need enter into the price of commodities
partly produced by marginal laborers (p. 15?).

It might, therefore, it is urged, be true that price should
be determined by the cost upon no-rent land, cultivated by
farmers obtaining no interest from their capital, and pay-
ing only a bare subsistence wage to their laborers :

Bnt normally the last am! most expensive portion of supply -^
which rules the supply price will not be produced under conditions^

which exclnde all rent and profit It will be more likely thais.

the last portion of the supply will be produced partly on no-rcnt*
land, but paying an interest on capital and perhaps a wage far abovc^
15/.. partly by tenant farmers paying rent but earning no interest o[r~i
invested capital, partly by peasants paying rent or mortgage interest. 3
but living on a bare subsistence wage. [And so] if the histor? oS:
the most expensive portion of a wheat supply could be doseljv^
traced, it might well be found that some quarters of it were rais
on no-rent land, others on no-profit capital, others on eubsisieiK^^
wages: but that an average quarter of this most expensive parlioiL J
contained some element of rent or interest or higher wage, or alEL

three, .|And so we get as the determinant of price a cost) not necei

sarily the minimum of rent interest and wages, but the lowest aver

age combination of the three Differential expenses o^E'

of supply, in kind if not in degree, ai with capital- And from Ih^
point of view of the individual calculation, either is immediately
conjumable aincc either may by sale he turned into immediate cash.

Ai to the iji. necessary upkeep for labor, it ii to be nid that
whether or not it may aiiply as a lonK-time population doctrine, it is
enlircty irrelevant as ■ business — a financial— consideration to any entre-
preneur producer. One can afford to deteriorate bis laborers where be
could not bis ilaves or bit ox ; his laborers are not hii. And note that
the hirer of any agent has not the (lightest intereit to aak how ntKh of
hii pajmient is for rent or interest and how much for upkeep; the pay'
ment i* in any case equally ■ hire oud an expense.

ATTEMPT AT RECONSTRUCTION 437

Production above this composite Hmit, whether they be rent, interest
Or wages, will not enter into the market-price of the supply

(pp. 158, 159).

Probably the fitting course for one who altogether fails
to tmderstand is to ask questions : What "last portion" is it
which, being price-determining, yet divides into "parts" or
"portions" raised under all possible forms of co-operation
of productive agents, by "numbers of farmers working
under widely different conditions, some in old, some in new
countries, .... some quarters raised on no-rent land,
others on no-profit capital, others on subsistence wages"?
And even assuming that any portion of demand or of sup-
Pfy, or any possible pair of traders, could determine the
Pn'ce, what has the sort of composite presented, — if any
^^ch there could possibly be, — to do with price fixation?
And if somewhere there were found a man working on
8'^^od-for-nothing land, and with valueless appliances in
^e hands of laborers paid at precisely the cost of their
^^p, what warrant would there be for assuming that this
mail's cost would either fix or be the market price? Why,
^^ his employees were exceptionally efficient men, but
S*"ossly wronged under some forced-gain relationship, or
^^^tract should not this exceptional farmer be making an
^l>ecially and obnoxiously high rate of profits ? Or, on the
P^Her hand, is there anything, except that he has nothing to
^«, to prevent his making serious losses? And why
p^Ould we, as the seeming beginning and occasion of all our
''<>ubles, have started with the assumption that good-for-
J^^thing, powerless, no-rent land is, for economic purposes,
^iid at all, or that rickety, payless, valueless hay-
'"^Ices are capital at all merely by the fact of being in con-
?^«te guise and in the similitude of farm machinery? And
^ it true that "the 15^. wage does not in any sense corre-
?^ond to interest or rent"? For is there not at any rate
^Jxis much of correspondence, that, under competitive con-
tritions, each productive agent gets recompensed in some
^approximation to its efficiency in the process of value pro-
duction ?

Or if it be answered that this determining cost and

'^is determining unit or portion of the supply are not the

^ost or the supply of any one man or of any one place,

>^hose then are they, and where are they? And if they

need be of no one place, need they be of some one particular

time, and why, or why not? And if they are some sort of

438 VALUE AND DISTRIBUTION

an average compounded of different marginal prodnoe=
anywhere and everywhere, how conqytite supply as dasOi
through some composite-man's processes and choices
And of whose psychological processes could it be true tl^
only i5J.-per-day labor would be computed as cost? Tim
''the law of substitution has always to be taken into accooni
can rightly mean not that the actual rents and wages am
interest are to be omitted from costs, but only that by so
much as the cost expense in one or another of these direc-
tions is less, by so much must it be more in the odiers;
excepting for differences in entrepreneurs aU the different
items of one supply would have the same cost.

And as with land and rent, so with labor and wages;
that the better lands are more highly paid than die poorer,
or that the best laborers receive higher wages than the
poorest, has no significance for the question of costs ; there
is no reason to suppose that any grade of agents or instru-
ments is better or worse paid than any other, in proportion
to the efficiency rendered. The cheaper lands or the low-
paid laborers are as dear at the price as the better. Inter-
laborcr rents, like land differentials, have no relevancy to the
cost problem. If the i5^.-man's wages enter into price, so
must the 20s,, that a man f as efficient gets, enter into price,
and this to the extent not of 15^. only, but for the full 20s,
And as with the better lands so with the better laborers or
the better entrepreneurs; the best, as easily as the poorest,
may be nearest to the margin of alternative occupation ; but
not the outlay, were it less, nor any collectivist reckoning
of some alternative concrete product, but the outlay as it is,
has sif^nificance for the purposes of competitive cost.

CHAPTER XXII

DISTRIBUTION BY VALUE PRODUCTIVITY: CLARK

The central thesis of Professor Qark's Distribution of

^^alth^ is that the diflFerent distributive shares are the

^^"relatives of productive efficiency, and that under static

^nditions and with frictionless competition these shares

^Oiiid be accurately correlative.* As corollaries from this

-^ »Johii Bates Clark, The DUtribution of Wealth, a Theory of
^»^M, Interest and ProHts, New York, Macmillan, 1899.

'"It is the purpose of this work to show that the distribution of

income of society is controlled by a natural law, and that this

; if it worked without friction, would give to every agent of pro-

tion the amount of wealth which that agent creates. However

may be adjusted by bargains freely made between individual

r^^^n, the rates of pay that result from such transactions tend, it is here

-imed, to equal that part of the product of industry which is trace-
£^r^^c to labor itself, and however interest may be adjusted by similarly
1,^ ^^. bargaining, it naturally tends to equal the fractional product that

traceable to capital." — Ibid,, Preface, p. i.

It is unnecessary to stop to discuss, or even to appraise. Dark's
^nitation of the subject-matter of the problem to concrete, material
^:5ods; eg.:

By wealth is meant those sources of human welfare which are

terial, transferable, and limited in quantity" (p. i). "Outward

terial things that are appropriable and, in this specific way, useful,

re economic goods" (p. 41). "The great income of all society — that

hich is to be distributed — really consists of concrete articles, all

f some use" (p. 13). It is unnecessary also to discuss his consistent

^utilitarianism, — ^mostly by assumption or implication,— or his pro-

^^lounced and unquestioning insistence upon "natural law" as a causal,

^^rective, and compilative agency ; e. g. :

"Is there a natural law according to which the income of society
is divided into wages, interest, and profits? If so, what is this law?
That is the problem which demands solution" (p. i). "There is, in
short, a deep-acting natural law at work amid the confusing struggles
of the labor market" (p. 2). "Where natural laws have their way,
the share of income that attaches to any productive function is
gauged by the actual product of it" (p. 3). "If the law oif which
property is supposed to rest, the rule, 'to each what he creates,'
actually works, etc" (p. 9). "For the present, be it noted that
exchanges divide and subdivide industry ; they range its forces into
groups and subgroups, the functions of which are determined by
i^tural law" (p. ao). "Dynamic changes are in another and broader
^ense natural. Nature herself is continually disturbing the r^me of

439

VALUE AND DISTRIBUTION

1

i Steps in the argument by which it is reached,
die foDoiring propoeitions become of especial significance

oattKil thee» hatt cotspctitioa ii Urins to TCstore it" (p. 79). etc.
Aat it u ■BBCccnBly 10 ducus* tberewith the adoption of llie asao-
«jMed ethical ^iew indininx to ideRtJfr natural law witb proii-
'm ntch Borl that optimisni recommendi itself a* a
1 Eairly to be said thai white all tfaeie are issues.
I fay which the general positions of the author's
It stand or fall. And while in this connection
I in many of these formulatjons. such as. "A
Mcial bw gairami the apponioninenl and if thi« law could work
witfasl ftictian, etc.." Clark means in the main by "wcial" and
"aatanL" titlj jforir. it is pTobably eqnally just to say that be
«fl^ hu in Biiiid somelhins very appreciably dillerent. though he
kimacU aMsbt be unable lo tay precisely what. — a mysterious, proii-
Jrwtial. iniriiwsc somethitig, more or Icai personal and wise and beneh-
amt, hf wtutk it comes about, among other things, that all these
■MBtal tetolls are fair and righteous and especially calculated to
jollify the wars of God to man, at the same time with furnishing a
deep scientific basis for an optimism which would otherwise and in
another senw be bopetcss.

But il is ncrenheless 10 be said that this optimism, limitless in
quantity and conlimied and radical in quality and often leading the
writer 10 iustify things which are least offensive when viewed apart
from their moral quality, has yet no necessary part or share in the
argument or in the conclusions of the book.

And further: However much dissent or question may later come to
be expressed as lo the fundamental thesis that the "income that
attaches to any productive function is gauged by the actual product
of il ; . . . . lo each agent a distinguishable share in produclion.
and lo each a corresponding reward, such is the natural law of
distribution," it is Bo necessary pari of the criticism that Clark believes
that "more hangs upon the truth of it" than does really so hang.
With the thesis once established he must slill be indefinitely distant
from justifying the present organiialion of society. It is clearly
untrue that "the right of society to exist in its present form, and
the probabilily thai it will continue so to exist are at stake." One
might concur in G ark's thesis and be yet the moil radical of
socialists. That rent is paid as the precise correlative of the pro-
ductive efficiency of land has tiotbing to say as to the right of private
ownership in land. Carver has made this clear in his review of th^^
work under consideration : nothing remains to be said : ^^H

"The right of the present social order to exist depends upoa I^^H
laws which govern not functional but personal distribution. Our >J^H
interest in functional distribution is due to the light which it throws oi^l
the vastly more important question of personal distribution. We need
lo be shown that the tendency of Ihc present social order is to give
to each individual producer the share which he individually creates,
and no more,"— T. N. Carver. "narVs Distribution of Wealth."
Qimrterty Jonmal of Economics, Vol. XV, p. S78 (August, i8gi).

But here again Clark's argument and conclusions i
Involved; the substance of the work is olbcrwhere.

DISTRIBUTION BY VALUE PRODUCTIVITY 44i

as indicating, for present purposes, the trend of the theo-
retical analysis :

1. Capital is regarded not as concrete capital goods but
as an abstract, homogeneous value fund.

2. For static purposes, land is assimilated to capital
goods and funded with them into abstract capital, socially
viewed.

3. Labor is also funded into value-productivity units.

4. Value expresses marginal utility, and is fixed and
determined by marginal utility.

5. All factor rents or hires are equally included in costs
and made of precisely similar relevancy to price; but these
remunerations are rather value-derived than value-fixing, —
this last, however, not quite definitely beyond misinterpre-
tation.

6. The possibility, under the funding principle and from
the group point of view, is asserted of isolating the separate
productivity of units of capital and of units of labor.

7. Distributive shares are determined by the value-pro-
ductive power of the final unit of the funded productive
factor.

8. Society is viewed as an organism, and derivative
concepts of g^oup pain, group pleasure, group utility,
group cost, etc., are adopted and emphasized as necessary
to the argument.

9. For dynamic purposes — purposes of retrospect or of
prophecy — the tripartite division of productive factors, in
the sense of mechanical and technological categories, is
made important.'

•Propositions (1), (2), and (3) should in this connection call
for no further discussion, excepting possibly to the extent that in
the consideration of the remaining propositions these earlier doctrines
may be found explicitly or impliedly involved ; nor, seemingly, need
any proof by quotation or citation be adduced that the positions as
above formulated are actually held.

With regard to proposition (4) also, when once it is established as
actually held, neither criticism nor discussion would appear to be
necessary for present purposes.

In the interests of space and as intimately associated with 1(4),
proposition (8) will best come in here for such citation and quotation

443 VALUE AND DISTRIBUTION

Propositions {5), (6), and (7) present the issues with
which the immediate discussion is chiefly concerned.

M may reuonsbly be called for, and for such discusaiOD as ihe
particular fonn of presentation may aeeni to demand:

"In every »tage of eionomic evolution wealth consists of useful
material thinss : but their utility is of the kind that we may call
Iptcitic. Each part of the supply has soinc importance atlachioK to

it Outward material things that are appropriable and, in

this specific way. useful, arc economic goods.

"If an article is useful to one man, it is usually so to another,
and i> therefore in itself exchangeable" (p. 41)- "If men do tn fact
use a number of units of consumers' goods, all of a kind, and if the
specific utility of these goods diminishes as they get more and more
of them, then what they will give for any one of them will be gauged
by the specific utility of the last one. If these familiar premises of
the modem theory of value correspond with the facts of life, the
theory explains the prices of goods in a modern market" (p. 4a).

"The primitive [isolated] economy .... cannot test final
utilities in a market, for it has no exchanges. Can it not. then, lesl
them at all. and does it not find it necessary to do so? We may easily
see thai it does this, and that the purpose is exactly like that for
which organiied society makes the same test. The principle of final
utility belongs in the first division of a theory of economics and has to
be assumed in the second division" (p. 43). "The law of final utility
fixes the point at which such b producer will stop creating one product
and begin making another. A modem laborer, with money in his
pocket, is supposed to consult the law of final utility in making
purchases and to spend each dime where, in view of Ibe supply of

difEerent things on hand, it will do him the most good While

markets and prices are. therefore, modem phenomena, the study of
which has no place in a division of the science devoted to universal
iniths. the law of final utility which directs the purchases that are
mode in a modem marlcet also directs the production of the isolated

man, and is a universal law of economics In modem life

these laws direct the social demand for different goods ofTered in the
shops; but in primitive life they control the manner in which a man
husbands his productive power and uses it where it will do him the
most good. The law of final utility is common to both economies"
(I^ 44).

"The picture of an isolated man turning his own labor from
making one thing, of which he now has a supply, to the making of a
thing that has a higher final utility, illustrates a characteristic of
modem life which is in danger of being overlooked. Through the
laws of value, society, in its entirety, is doing exactly this. It U
turning its collective energies from one direction to another, according
to the law of fituil utility. Markets and values afford the mechanism
for doing this. Think of society as an isolated being, turning its
collective energy to the making of one thing till it has enough of it.

and then making another, and you have the fundamental fact

Through the mechanism of a falling price, society is warned to torn
■Is energies to the making of something else r and its whole procedure
i* Dolhing more nor less than doing wbM m uolued naa would do, it

DISTRIBUTION BY VALUE PRODUCTIVITY 443

It would not, perhaps, be fair to ask whether Qark
regards costs as determining value, or rather value as

he fottnd his want of one commodity becoming satiated. If then we
ijidividtialize society, if we make it to be in its entirety one isolated
being, and if we give rein to that philosophy which treats a body of
independent beings as one organism, we find it doing what a solitary
man would do, under the influence of the law of diminishing utility.
Putting a price on each article in a market is the act of the collective
organism in estimating the importance to itself of each of its own

products Each man pursues his own interest; but as the

outcome of his activity, society acts as a solitary man would act
under the influence of die law of diminishing utility" (pp. 45, 46).

"Market value, then, is a social phenomenon; but the principle
of final utility, by which values are fijced, is universal in its scope"

(P- 47).

"By a law that Austrian studies have made familiar, the value of
any article in this series of goods of one kind is fixed by the utility
of the final one — final utiHty universally gauges value" (p. 163).

"If there are marginal laborers, in the sense that there are mar-
ginal quantities of wheat, cotton, iron, etc., then these final or mar-
ginal men are likewise in a strategic position; for their product sets
tiEe standard of every one's wages" (p. 90).

"If the man gives to an employer more than he gets from him, an
inducement is offered to other employers to take him at a better rate
of pay. Men in other occupations are in the same strategic position,
and tiie wages of social labor equal the product of a composite final
unit of it.

"How is this product to be measured? Take away one social
unit of labor, and see what is lost by the withdrawal of it ; or add
one such unit and see what is gained by the addition. In either case it
it possible to note the amount of product that is separately due to a
unit of labor and to no other agent. Let us, then, withdraw what we
have called a social unit of labor. This is a composite unit, consisting
of some labor from every industrial group that the community con-
tains. We will take away cultivators of the land, smiths, carpenters,
weavers, etc., in carefully adjusted proportions, causing a final unit
of labor to vanish from every specific industry" ^(p. 169).

It will be especially in place to note here that Professor Seligman's
interpretation of the relation of utility to price offer and to value is
substantially identical with that of Professor Clark.

Under the "General Law of Value" it is said: "Value is at
bottom the expression of marginal utility. It follows that all prices
most therefore be studied from the poii^ of view of marginal utility;
that is, of the power of marginal increments of supply to satisfy the
marginal increments of demand. This is only another way of stating
that the fundamental explanation of value is marginal efficiency or
the capacity of marginal units to satisfy marginal wants." (Seligman,
Principles of Economics, p. 262.) "The contribution or efficiency is

the positive cause ; the cost of production adjusts itself to this

The cost adjusts itself to the service" (p. 265).

"Cost of production is thus only a partial, and even then approxi-

VALUE AND DISTRIBUTION

determining costs; his analysis goes neither far nor deeply
into the value problem. To be strictly relevant to his

mate, explanation of value : marginal efficiency is the oniveml and
ultimate explanatioD" {p. 265).

"Tbere 15 an abundance of silver below the surface that is not
mined because it will cot pay ; if Ilie marginal efficiency or value of
silver should rise, these more expensive grades would at once be
marlceted. and the new marginal cost of production would adjust itself
to the price. The price would not rise because tbe cost increased :
but the higher price would be fixed at the higher cost because that
would now be the new point of marginal efficiency" (p. 264),

Professor Seligman's work is. however, of especial interest in
this connection hy virtue of the thorough, consistent, and syslentatic
manner in which he has carried this society-as>an-or^nism concept to
its logical limilB — whether of truth or of absurdity — as an interprea-
tion of the entire body of economic doctrine. Such further cHticism,
then, as is pertinent to this particular aspect of Professor Gat1c'»
doctrinal position may well be merged with a discussion having pri-
marily to do with Professor Seligman's more detailed exposition. The
following is, for the most part, either reproduction or abridgment of
the views of the present writer as elsewhere expressed in this con-
nection. (See "Seligman. 'Social Value,' ■' Jommal of Polilieal
Economy, March, 1906.)

It is with Seligman, as also with Clark, most difficult to deter-
mine the precise significance of such portions of the discussion, as are
devoted to the inveatigalion and exposition of the categories of indi-
vidual utility, individual marginal utility, iixlividual demand, entrepre-
neur supply computations, entrepreneur cost, individual sacnlice.
individual pleasure, individual pain cost, individual profits. — surplus,
competitive, and differential, etc: for in the main, all this individual-
istic discussion must, seemingly, be regarded as really and funda-
mentally beside the point, or, at the best, as only introductory to the
point, — not precisely side issues, truly, and presumably not irrelevanciei.
but rather analogical, introductory, or superficial matter ; for the heart
of the doctrine, the realities of the objective business situation are
sought otherwhere.

It is not, of course, to be taken as Seligman's intention to abandon
any of his many formulations of the strictly individualistic sort ; it
still stands that "value is an estimate of the relative importance or
utility of different quantities of goods" (p. ii) ; that "when we speak
of the value of a commodity, we think not of the total utility of the
quantity taken hy itself, but of the marginal utility as compared with
that of a definite quantity of other commodities" (p. 179).

But in view of the rich- man -poor- man complication, there must
obviously be difficulty in finding someone to make the comparison :
a pint of champagne sells for the same price as a sack of flour : are
they therefore to have ascribed to them equal volumes of utility rather
than merely an equality of command over purchasing power? Equal
utility to whom ? Who makes the comparison, or for whom is it
made? It is evidently not enough to assert that "value is not merely
the expression of utility in general, but of marginal utility"

DISTRIBUTION BY VALUE PRODUCTIVITY 445

^^cnission, the question, — ^substantially the same question,
'^^Vertheless, — should be formulated to ask whether distribu-

^^ 198). If valueB are really to be resolved into a common denomi-
-^>r of utility something further is waiting to be done.
The solution as offered runs:
^ "It is society as a whole which sets a value [market value] upon

^vigs If an apple is worth twice as much as a nut, it is only

it the group that uses apples and nuts finds, after comparing

lividual preferences, that the desire unsatisfied by the lack of an

>Ie is twice as keen as that unsatisfied by the lack of the nut.

^^^^hie, therefore, is not merely the expression of marginal utility ;

is the expression of social nlarginal utility" (p. 180).

^^ "Since value is a social conception depending on a comparison of

averse goods, and since this comparison is ordinarily made in society

their transfer from man to man, it is clear that the value with

exchange has to deal is exchange value" (p. 183).
"Value in exchange is nothing but the expression of its true value
the members of the social group, that is, of its marginal utility"
> 183).

"Exchange power is based on the comparative estimates of direct

.^^ utility which gives to every owner of the commodity the indirect

^^*5itility that fixes value in society" (p. 183).

This, then, is the first step in the solution — that the utility which
"^mderlies and explains value is not individual utility, but social utility.
^And we have, as we shall later see, in addition to this social-utility
concept, concepts of social pleasure, social pain, social demand, social
supply, social surplus, diminishing social utility, diminishing social
return, a social-labor unit, a social-effort unit, social sacrifice, social
cost ; and finally, as the goal and summation of all this, social value,
that is, market value. This will evidently bear looking into.

Some linguistic uses connected with collective nouns will offer a
point of departure. When thought of merely as indicating an aggre-
gate, a unit, the collective noun takes a singular verb ; if regarded as
a collection of units, it takes the plural verb. And so we say, "the
committee was discharged," "the committee were unable to agree"
(with one another) ; "was unable to agree" (with the conference com-
mittee) ; "the army were marching" or "was marching ;" " the crew was"
or "were exhausted." But one could hardly say, "the committee was
imable to agree" (with one another) ; the agreeing has to be done by
more than one person.

Now, in many cases, though the act or the situation asserted
is really one of each individual by himself, there is no occasion for
insisting upon this ; no ambiguity or inaccuracy or misapprehension is
involved in saying that "the battalion is eating its dinner ;" it is a
shorthand fashion of speech, but is perfectly intelligible ; it is common
enough to think of a battalion as a unit, and the act of dining is a
simple one in which all join, and in which all comport themselves in
pretty much the same way ; from the point of view adopted, the
interest proceeded upon, the purpose in hand, no importance attaches
to the fundamental separateness of the activities, and to their entire
lack either of psychical unity or of purposive co-operation; they are

446 VALUE AKD DISTRIBUTION

live shares are to be explained as derivative from value or
as causes of value; is value, that is, the intermedialc stqj

simpiy »imi1ar — roughly simultaneous— and ate thought of in block.
Tiue, ooe man cata rapidly and another slowly, tome little and otberi
much. »nd a icw sick ones not at ail : but the exprcMion »erYes, and
implie* its own limitations of accuracy.

And ao of an army, when we say that "it marches." no doubt »
even faintly luggeited that each man does his own walldnK, works his
own niusclcs, uses up his awn tissue, and that presumably many are
halt while others limp, and some swear. But no one o( these diffrr-
encei rignities (or the purposes of the thought in mind ; each man is
separately getting ahead, moving along, like all the rest: and so we
say. "the army is." etc. — serviceable speech, though in strictness
inaccurate, were any perversity bent on misinterpreting it. But when
it comes to auening that the army is brushing its teelb. or has stubbed
its toe. or has a stomach acbe. there is obvious difficulty. These
ihinRS are not done jointly, co-operatively, by aggregates, and will
not bear thinking over into this form : the inaccuracy of the collective
idiom is obtrusively manifest.

Aod so we may speak of public opinion, the preference, or habit,
or custom, or convention, of sociHy ; and no harm need come of it.
despite the fact that some men neither think nor choose in the manner
implied, but have their own peculiar judgments or choices or wishes,
and yet are members of society entitled to be included in any exact
formulation ; everyone knows that the thougiit really runs upon
nmjoritics of " 'most-evcrybodies;" that ii, no harm ne«l come of it
if only there were not people to take the notion of a "lociaT mind"
seriously, and to import into cases calling for accurate anatyns, and to
accept as sober fact, a mere figure of speech, or at best • looae analogy
drawn from biological science. For to the biologists and the socjoloffisli
it is to be charged — or credited— thai the sociely-as-an -organism
formula has found its way into economic thought. And thus hereby a
doctrine long since abandoned in economic reasonings is in the way of
reappearing; for have we not need of normals and averages? Elue
our doctrine in gelling accurate and actual will gel difficult also.
And so, by the aid of the sociologists, through the magic of the
BOci el y'SS-an -organ ism incantation, a returrectioti miracle has lately
been worked ; we salute the average t

One hesilates to approach Ihe invidious task of aawgnitig primacy
in this new school of thou^t : for that there is a new tchool. and thai
it has come to include a passably generous membership— somewhat
localiied still-HUid that its doctrine means much (or the good or evil
of economic science, is the excuse, so far as there can be any, for the
present protest. But it is iKverthelesi to be said that ProfevKir
Seligman is the Grst wnier who has seriously nnderlakm to carry the
doctrine to its logical conclusions ; and thus it necescartly como to be
true that whatever is further said here is. in purpose and in practical
bearing, impersonal, theorelical. and general in its reference:, nilbet
than primarily an examination of Professor Seligroan's doctitnc as

self

DISTMBUnON BY VALUE PRODUCTIVITY 447

toward explaining distribution, or are the distributive shares
to be taken as Ae intermediate step, and value the goal?

thus easily plucked out, why all fhis other talk of gross profits, neces-
sary and minimum cost, individual cost, individual utility, marginal
entrepreneurs, normal equilibria, true profits, competitive profits, and the
like? Why, indeed, any talk at all? Everjrthing will explain as a
social resultant, if this passes as explanation^

In this doctrine of social cost, social sacrifice, and social value,
one must look to find, as apparently one does find, a renunciation of all
allegiance to outlay cost, and a return to the distinctly pain-cost and
pleasure-balance terms of analysis:

"Cost of production is the measure of value ; hut it is not, as
Ricardo thought, individual cost. Marginal utility determines value ;
but it is not, as Jevons thought, individual utility. Both cost and
utility measure value, because .... marginal cost is always equal
to marginal social utility" (p. 198).

"The sacrifice imposed upon society to secure anything is ... .

the exertion needed to replace it Thus, when we speak of

social cost, we really mean cost of production; and when we say that
value is influenced by cost, we mean that value is influenced by cost

of production We think no longer of the sacrifice imposed

upon any one individual, but only of the social sacrifice, or cost,
embodied in the commodity ; or, rather, the sacrifice, or cost, to the
individual is the result and reflex of the sacrifice to the community"

(p. 197).

"In society .... whatever the rate of exchange, it is only the
social utility and the social cost of which the marginal degrees are
equaL If a knife exchanges for a book, it is because the demand in the
community as a whole is such that the marginal sacrifice to society
of parting with a book is equal to the marginal pleasure of society in
getting a knife. [Whereto goes the book, and whence comes the
knife?] To put it more accurately, a knife will exchange for a book
only because the sacrifice to society in making the knife, for which it
receives in turn the pleasure of books, tends to equal the sacrifice of
making the book, for which it receives in return the pleastire of

knives (p. 197) To any individual the sacrifice may be less

than the pleasure, but there will always be a marginal individual to
whom pleasure and sacrifices are equaL The marginal pleasure in the
aggregate tends to equal the maxginal pain in the aggregate. The
balance or equilibrium is between the pains and the pleasures of the
sum of individuals The real equilibrium is a social equilib-
rium The real cost to any member of society which influ-
ences value is not the subjective cost to him" (p. 197).

Now, what does it really mean to say that the marginal pleasure
Mi the aggregate equals the marginal pain in the aggregate? What is
to be aggregated, even supposing the process to be a possible one?
There is always a marginal person, it is said — one person "to whom
pleasure and sacrifice are equal." But this man can have little to do
witli the case, for while there is such a man, "the real cost to any
member of society which influences value is not the subjective cost
to liim;" and, in point of fact, there is, after all, no such man^ for
*it H coltf the social utility and the social cost of which the marginal

F448 V.U.UE AND DISTRIBUTION ^^^^H

Or, again, is the fundamental problem one of value (^itl^H
one of distribution ? Of, finally, are the two problcnu n^^l
really two but one ? ^^M

^
^

d«sree* an cQoil ;" we leaUr ibink not "of ibe ncri&Mi tm^oBd
upon ■»)( one iadWldual. hut ohIt of *be (ociil ucHlin or coiC
«nbodi«l in the cominodity ; or rather the sacrifice or com to tk^
iadividnal >i the resalt mad reflex of the sacrifice lo the comnmmtr-"*

Nercnhcleia. it ii clear lo Profeisor Seligman — and to iii-<l««
thinsa have utility to iDdWiduali ; and fomehow it must be inx tb^ix
"the cttiniate init by the individual on one commodily u comtutevl
with another is Ihe foundalion of all value" fp. 179). "Vilut iai
exchanKC it nothing but the expression of its true value to the non-
bers of the social Bnnip. that is, of its marginal utility" (p. iSj).

It is. indeed, true that by the possibility of exchanse a coauseditr
may come to have a greater indirect utility lo its posieuor than it iai
direct utility to him ; but can it have any utility lo lodrly gnalc 01
leu than it has to him? And in this computstion is he. or is btaot
a part of locirty? "Its indirect utility to me is the result of itt direci
utility 10 society." But what or who is this tacitly whose dinn
utility ii the cause of the indiieet vlility to the possessor? And io»
add tofelher utilities to different individuals, "the uiemberi of lit
social Krnup," so that a "direct niurginal utility to society" nuy ian

It must be understood that with this latest school of valu. 11
with its predecessors, the principle that demand and supply toittha
fix price is. for whslever it is worth, freely accepted : but >U Ihe
while with this dilTcrcnce, that demand, as conceived by ihij liirt
ichoot. is really not the agKreeate of ibe separate individual dcmaiBli.
each wilb its own particular psychology and its peculiar explasitiiis -
"The demand that tells is Ihe aggregate demand depending on tbe
social utility" (p. so).

Likewise cost is essentially not a matter of individual onlliy ct
aacHfice. working out into the expansion or contraction of sucflj'.
accordingly as individual preferences and profit may direct: coo ii
rstber a transcendental thing :

"Since cost is a form oi disutility, it follows that the real cart
of imporiaoce in affecting value is social cost, and not tadiiiduil

cost Value is the measure of sacrifice. In trhit

•ense? .... Evidently not o( individual sacrifice. A strwi-
sweeper may work harder than a factory hand, and yet the value cl
hii tervices will be lest. Value is d social conception ; society put* lU
appraisil upon commodities. If value ii a measure of sacrifice, ant!
If value it a social estimate, value must be the measure of social

sacrifice or cost The sacrifice of each is compared with the

needs of society as a whole. The siandard is social, not maleriil.
It is easier to be « street-sweeper tbao a skilled factory hand. Society
la more willing to spare the former than the latter, for lo replace the
ont, society must give up more of its energy than to replace the other"

Note here ihat. precisely as when we were inlrodtictorily djscnu-
la( iiNUTidnal demand and individtial cost, cost was made a derivatin

DISTRIBUTION BY VALUE PRODUCTIVITY 449

It is evident that Qark regards distribution as in part a
process under which an aggregate of value is, as product,
apportioned to aggregates or groups of producers; in part

«f demand, so here, in the social computation, social marginal titility
is presented as adequate and controlling for value; but meanwhile our
xeal problem of how to get over from the individual reckoning to the
aocial explanation obtains admirable and adequate recognition and
expression :

"All value is the reflex of social marginal utility. We have now
to study the nature of the social forces which operate to translate into
actual prices on the market the feelings of the individuals that com-
prise the group" (p. 223).

If this problem is fairly solved, nothing will remain to be asked;
but the difficulty and the regrettable fact of it all is that the transition
over from the individual psychology to an alleged jocial psychology
is nowhere seriously attempted, unless, indeed, the following may be
taken to suffice for the purpose:

"Cost means socially necessary cost — not pains (or their money
equivalent) taken, but pains saved. It is only because individual cost
tends to adjust itself to the socially necessary cost that we can roughly
speak of the price of an3rthing depending on its cost of production"
(p. 244).

"Socially necessary cost .... is the amount which the pur-
chasers as a group are willing to give rather than make the article for
themselves. If the individuals cannot reduce their cost, they will stop
producing. If they reduce their cost below this point, the point itself
will move" (p. 244). And so, then, it appears that individual cost does
affect the quantum of the social cost. "Society will not be willing
to give more, because what the producer can do, tht rest of society can,
if necessary, do. It is in this way that an equivalence is brought
about between individual and social cost ; and it is only because of this
equivalence that cost of production may be said to influence value"
(p. 244).

But in view of the fact that, by assumption, some individual pro-
ducers will not be able "to reduce their costs and will stop producing,"
while, surely, other producers will so be able, what shall be made
of the proposition that what some "producers can do, the rest of society
can, if necessary, do"? Are all consumers to be accepted as like all
the producers, despite the fact that the producers are themselves
unlike?

Or perhaps the following should be cited upon the point:

"Cost of production does not mean individual cost. Value, as we
know, is a social conception ; the real cost of production which affects
value is the socially necessary cost" (p. 243).

"The law of exchange may be equally well stated as the law of
comparative costs. I may be so much more intelligent than my
furnace man that I could save much coal by tending the furnace myself ;
yet I prefer to look after my business, and let him tend the furnace
because it pays each of us to do so" (p. 226),

"The important point is not that a commodity costs the producer
something, but that it saves the consumer something. It may save one
consumer more than another, but its value depends on what it saves the

aM. aot M fix pH(«, bat (o be find br prict; in nnkc

4«awaul •! «slw (k ^Mirioa of wfiM a coamodiir an* bt

■y vm i> W *M^« tke cwM for Ac alilhy iMe of ibe udrH

I Aw. fadh« ta CM M «^l«iMiwi «f pmc we we kf i u on

* ~ * t immI Inrr wWck liw bdund iodi*idail

t eM ftma cMiu'deniioB *0 inil-
* ■nr_be thai Act ■" knomtd. for tiicoralinl pu-
't lUa w«TC ibr vlcK tdopted. ve AoM,
\ he prtritdtt back lo the musiiii br
_ aai posnl>l]t a htlter, tiiit

Bm ipara fiik (ar iW JJKuawaii of tkU qoestion : and we reoll tha
owr aMkn bas bimelf ifAen iJedn**^; 'ti c«n<lemTuiion of ibr
•eooMni* man. Tbcn it «l«o Ibe fwiher difficnlty tlui. wiili iMt
"•■cracc-Rian" analrwi ooec tidoptcd. Ibeic is occcsiuilj an end lo ill
talk at margint, Mciil or mIkt.

Tbe (rath ■>. hnwcver. that Iheae differeoces betweeti indiiidiilli
are full* recoenUcd. bol are regardo] as somehow mcrgrd and loit
in tbc social utilitT. the (wiat coW, the social demand, etc; and jo
the mwminit repotlialcs the ernnonic man. declines anj oirtt and
(Tilematlc acceptance of the roclhod o( avenges, and idbera
reioluiely and consisteni)]' to (he marginal ana)r*i^

Just a> upon p. ij8 il was declared (hat "a dollar is el am
wonh to a poor nun th«n to a rich man — iti marsiiul mililj ii
xnaler," and tha( "the price of an old mas(er or a mcdiaeni laiwl
will often depend on the weskh of the ptirchascr ;" bat at it mi
nercrtbelesi contended thai "in the ordinary (raonctioru a! lift.
where we deal in massei of comnioditici .... this diffeteDce is Ibc
woffli of money may be neglected." to now, in the di«cu9*ioiv of Oil
thcocy of interest, similar differences arc likewise merged, the ivm|i
owtllad reftised. and a cost-tnarBin analysis — of (he pain-co(t lypi—

"The only way id which capital can be formed is a( bottom bj

nvinx. by waiting, by forbearing (p. 319) The probkto 11

Ode of manpnat forbearance that is, of sacrifice a( tbe marein «)itii
be nniit chooK between consumption and savinK. The richer a mm
t*. Ibc more remote ii the mar^'n where be will have to decide. Tbt
nving of a dollar mean* Mmething *ery diSercDt to a rich man »nd K
a day taboter" (p. j»o),

"Wben. therefore, we say that jntercsl is the remilt of fotbcannn
«c wally mean that inlcreW is Ibe result of marginal forfaearaiM
W (oAcantK:* at the margin. .... Thi» inarBiml p«lnt will indea

DISTRIBUTION BY VALUE PRODUCTIVITY 45 1

Tess of the commodity through its various stages from raw
ntiaterial to finished product; in part, also, as a process of
partition of the subgroup holding of value between the
individual members of the subgroup. But it is not at all
so dear whether this threefold view of the total distribution
process is purely logical and analytical — merely one way of
looking at the case— or is rather intended as realistic-
^y descriptive of the objective facts, and as tra-
ting the actual sequence and direction of the causal
foTcts. But it is none the less important that an
'ntcq)retation should be arrived at upon this point.

**^ a different one for the rich and the poor [but not different ratio-

^H«e], for the spendthrift and the miser, but this difference will affect

^e rate of interest as little as the relative wealth of the

^Huthaser affects the price of wheat on the exchange. The value of

^heat is the expression of its marginal utility to the wheat-using

%ivtip; the interest on capital corresponds to the difference in the

^^larginal estimates of present and future uses for the whole capital-

^^ng group. Value in the market is social value" (p. 398).

And all of this coheres logically with the doctrine of an earlier
^>age:

"Cost of production is the measure of value ; but it is not, as

lUcardo thought, individual cost. Marginal utility determines value ;

\mt it is not, as Jevons thought, individual utility. Both cost and

utility measure value, because .... marginal cost is always equal to

marginal utility" Cp. 198).

But it is more than possible that more than justifiable space and
time have already been given to this social school of value. It remains,
however, to query why, with all these social utilities, demands, sup-
plies, costs, sacrifices, averages, and margins, we nowhere find any
social rent or interest or wages. These, indeed, as categories of dis-
tribution, seem to be admittedly individualistic ; though no good reason
offers why, if demand is social, consumption may not equally be so.
But if wages, rent, and interest are admitted and accepted as categories
of distribution — as individualistic shares received under individual
claims for value-producing service rendered — it must follow that
profit, a surplus or residual of some sort or other, is also an individual
category. And these incomes of rent, interest, and wages — distributive
shares to the recipients — are obviously costs to the entrepreneur,
and as such lead up to individual supply, and through supply to
mau'ket value, so far, at least, as market value is affected by supply
influences. What will the social-value school do with this situation?
In urging that not individual, but only social, cost is relevant to market
▼ahie, the school will be under obligations to work out, as factors of
social cost, a scheme of social wages, social rents, and social interest,
and, as surplus over social cost, a social profit.

In fact, however, it does not do this. For, as soon as we turn
from the value problem to the separate treatment of the distributive
shares, we find ourselves to have descended from the cloud-land
myiteries of transcendental economics to the old and beaten paths of
the traditional analysis.

4Sa

VALUE AND DISTRIBUTION

If the wages and rent shares, as determined inside
the subgroup, are fundamental and ultimate, the way
is dear for an adequate and consistent entrepreneur-cost
analysis, but all the while with this one difficulty, that we
must forthwith set about to find witat determined these
rent and wages shares. Or if we can start with the market
value as cause, each group share and subgroup imputation
and infra-group partition will readily resolve its difficulties,
the entrepreneur of course being taken to be present; but
the difficulty will still remain of explaining that original
value with which the explanation has improvidently set
forth. And if, for the purpose, utility or marginal utility or
subjective value be invoked, there is still no help, inasmuch
as each of these assumes as fundamental to it the exist-
ence of a supply.
■* But how does Oark present the case and dispose of it?
So far as, from discussions mainly introductory in charac-
ter, a reply may be had to questions of this sort, it must be
deduced from the following:

There is a kind of distribuiion that does not fix the rate of
wages and interest, bul determines how much one industry, as a
whole, including its laborers, its capitalists and its entrepreneurs,
shall gel, as compared with other industries. It determines whether
one whole branch of business shall be more prosperous than another.
This is an intermediate part of the general distributing operation,
and it is accomplished by means of prices. When wheat, for
example, is high in price, the farming industry is well paid, as com-
pared with others; and when wheat is cheap, that industry is ill
paid. If what we have in mind is the so-called "market price" of an
article, — the immediate price of any given supply of an article, — this
kind of value governs what wc may call group distribution. If
steel, for example, sells at a high rate, a large income goes to the
group that produces il. This income distributes itself somewhere
in the group: but how much ol it laborers get. and bow much
capitalists and employers get, is a question that we do not now
raise. This is determined by an ultimate distribution taking place
within (he groups. Group distribution is a prelimitiary division of
this social income, and it deals with branches of industry in their
entirety. The tenns of this primary division of the social income
depend on the prices of difTerent kinds of goods. Farmers want
wheat to be dear, as miners want ore lo be dear, etc Prices, then,
fix the incomes of these groups.'

•Clark, op. c

DISTRIBUTION BY VALUE PRODUCTIVITY 453

The creation of such a general stock of commodities for use is

a great synthesis, which goes on in- a systematic way. One group of

producers makes the article A, another group makes B, another C,

etc As A is sold, the sum that is paid for it is apportioned among

-fche entire group that makes it; and as B is sold, the returns from

-this sale are divided in the same way, among all who have helped

-ftio make this article. The prices of completed articles thus fix the

sncomes of groups in their entirety. These groups are, in an equally

«xact way, divided into subgroups If wool is dear, farmers

-thrive; and if the difference between the price of wool and the
price of cloth is large, manufacturers thrive. It is market values
that fix the incomes of subgroups as well as those of groups.

Neither of these price-adjusting operations, however, directly
fixes wages and interest.. This is the final and critical part of dis-
tribution. It takes place within the subgroups, and it constitutes the
third and final division that has to be made. The portions that fall
to farmers, manufacturers, etc., as such, have to be further sub-
divided; for a share must be paid to every laborer and to every

capitalist

This distribution goes on in three distinct stages. There are to
be made a division, a subdivision, and a final subdivision of the
social income. The first division fixes the income of industrial
grroups ; the second fixes that of subgroups, and the final subdivision
adjusts wages and interests within each of the innumerable sub-
groups in the system. The shares of the groups and those of the
subgroups depend entirely on the prices of goods, and therefore the
fixing of market values results in the adjustment of the terms of

group distribution Let A"' represent some one completed

product, say bread; and let A represent raw material, the standing
vrheat of which it is made. A' may then represent the wheat as

threshed A" may represent it as it is ground into flour.

.... The difference between the price of A' and that oi A" deter-
mines the income of the flouring industry, etc. The income of each
subgroup in the series, then, depends directly on prices.

A philosophy that goes behind such market prices, however,
brings us to what are called "natural" or "normal" prices. These
are the values, expressed in terms of money, to which, in the long

run, market values tend to conform

A certain force that operates within the sphere of group distri-
bution establishes the normal standards to which market values
tend to conform Market prices fix the incomes of the differ-
ent groups, as such, and so control distribution in its early stages.
.... A deeper force, and one that also acts in distribution, controls
normal prices. Market prices are the cause of group distribution;

tm m» of As tec ttat ic ii mU that "ibt «xal
^■■BB <H piWlBCSOB BlnnES MCMlIgg Sod ffiftnoobon,
aid Aal "Ar Aeorv of safae and that of fm^ [HaBcs the
fiOEM vfter'i] AMriboboB are ooc and the tanx"
ffi at). Ae pacral trend irf die doctriiif of ibc foregoing
■■^c aani to W Aot dK tbIoc field snd the ifistribnboa
Wd aK oae Ud. and tec dK two problema are bat &■
a of one peooicnL
I ik whole, the powtioa seem to be otlier thia

1. TImc awkeC vane ooiMnlf group dutnbutioii;
X- Tlacihe mmaket vahv dntrftotcd to the group onh
Vda Ae valoa andfacd lo die aubgromMt;

3. The nannol nbia eoatro) markrt values;

4. That (fhrongh fixing wage and interest incomes, and
&cRbf fixing cstrcprenenr eoUs?) the distribution iimdt
dM gronp eoBlnlf normal ▼alue.

Keamany dv qnoted passages in such fashion as lo
eapTf die n^oted acqnence, and recognizing and accept-
ing (he attaidant dai^^ers of mi«interprelation. the doctrine
wotnd ran at ibQowt!

HarlBEt prtca tx the bttamt of the aepora'e gToop&. .... The
faiaK af wvbt talaa ronla in ihc terms of group diitribtiim
.... Mirtct prices fix the tocoinei of the different graups as
MCb. aoA *a cofKfol ibe dnitibutlon in its earlier stases. . . . . T^
ktcvmf oj rmth nAgronp m tlu ttrits, then, dtftndt dirtellj 0%

■Natiual" or "normal" prieei .... Bre the values . , . . lo
wfakti, in the lonn run, nisfket vaUies lend to conform.

A certain force that r.pcrates wtlhin the sphere of groa^ dii*
tribution Mtabtithr* the nonnal itandards lo which nariui valuci

tend to conform A deeper force, and one that aito acu in

distribution, conirol* normal prices. Market prices are the cause of
group iliitrlbution The adjustment of nainraJ or nonnal

■C1«A M^ «ttv PP- ■t'tfi'

DISTRIBUTION BY VALUE PRODUCTIVITY 455

prices is a part of the distributive process. The movements that
make prices "natural" are, in fact, efforts on the part of different
men to get their natural shares of income.

Being again interpreted, this appears to say that normal
value controls market value; that market value controls
group and subgroup distribution; and that the distribution
inside the subgroup controls the normal value ; that is, that
the ultimate term in the causal sequence is this infra-sub-
group distribution process; everytfiing else is derivative
herefrom.

If, however, there is any seeming of circuity here, it is
due rather to the sentence-juggling device than to the
intrinsic thought; the difficulty is not that the explanation
offered is circuitous, but that in last analysis no explana-
tion is offered ; but perhaps none should, at this stage of the
argument, be required.

Notice, at any rate, that it is not said that the actual
market value of any time is determined by the normal
value, but only that, in the long run, market value is con-
trolled by normal value; it may remain true, then — and it
really must be true — ^that no matter what the trend of things
or the necessary long-time adjustment of them may be,
the market values of any particular time are due to the
situation, the forces, and the adjustments of that particular
time. To subscribe to some long-time control over the
short-time value disturbs in no sense this principle; the
short-time value of any particular sort of commodity
remains, for its time, the determinant of the g^^oup and
subgroup distribution of that time. For purposes, then,
of any short-time analysis, it would be necessary that some-
thing be offered in the way of explanation of these short-
time market values.

But to the logical validity of Qark's position nothing
need have been offered in this regard ; for his problem has
been specifically chosen as the problem of static distribu-
tion; all, then, that is necessary is that he explain static
value. The position on this point is as follows: Static
values, as controlling group and subgroup distribution, are
the result of the interest and wage apportionment worked
out in the infra-group distribution process.

But it nevertheless appears to be true that the magni-
tude of the group distribuendum out of which, as a static
problem, the specific wage and interest incomes are to be

> s- ^H. 9^i»«ramHK.

v-fc wKaraK

.^>—v«>_

I.^.^ Ik.....

" "~"ir*^

I IL^*"^ ^ "*^ *^ "^ ^*^ »- *»M^»

. -l.i.iii.iir. ,N ' ..'I .ill-. |.' ..l.iiiL'. tli':iji,'h i/crha:-- r.- : 'it^^rip-
(nih "I niii i|ii' i.iii'.' I . |"-riK-ni^. I'.iit. Pr \\\m cau-al
chjiliiM.iliud |pi ■ i.iiiil .!•■ I ipiij]ilrtv, iiiiirt rnu-t I)e onereii
llWII IIk' iihi'' 'Ii''|>"iiiii'Ii i>[ iiii-ii lo seek the direction of

r r

DISTRIBUTION BY VALUE PRODUCTIVITY 457

naximum pleasure or of minimum pain, or even the direc-
ion of maximum advantage or of minimum sacrifice; ac-
:ount must also be rendered of the needs and desires of men
Eor consumption goods, on the one side,— on the other side.
>f human productive capacities and differentiations, and of
the objective productive equipment — inclusive of opportuni-
ties, franchises, good-will, trade secrets, and purchasing
power — in all its differentiations and adaptations and
specializations and distributions.

But if, for any normal equilibrium value or for any
temporary equilibrium value, an explanation of the sort
offered is the kind of explanation for which we are in
quest, and if it is of a character to suffice for the problem
of distribution within the subgroup, and thereby to furnish
the basis for the explanation of costs and market values,
and thus to establish distribution as fundamental to value,
why pursue this subject farther or any subject farther?
Why need anything more be said for either the value prob-
lem or the distribution problem? All the causes are surely
adequate to explain all the results. The difficulty, however,
is that on this level of explanation both value and distribu-
tive shares are equally results, and results of the same
order, and neither is — or can be — shown to be the inter-
mediate cause of the other. And regarded from this point
of view, the explanation of distributive shares, whether
looked at as a problem of process or of causes, is neither a
g:roup nor a subgroup investigation ; the individual choice
of personal activity and of investment application is a
choice wide as the whole field of capacity and opportunity.
But further: Accepting it, for the time being, as true
that the ultimate adjustment, when reached, is an adjust-
ment presenting equalized wages and equalized interest
(property rentals?), as the result of the free play of choice
between competing opportunities, and not at all stopping
to wonder why and in what sense all wages can possibly
become equal, it is still to be objected that these competing
opportunities are themselves mainly the expression of an
existing value situation ; each individual's choice is made
within this value situation and as directed by it. True it is
that the entire situation of needs, capacities and posses-
sions, adjustments, and distributions, may be taken as
fundamentally directive and causal, but not so the indi-
vidual choices made within the conditioning and directing

*«' w^i0ip iftifir

I ll.r.

ihi nivliiiiii

.'it.t'iricr.ce^ ar.'l =acntioe3 ade-
':ri(i^ in the value equation, no
t'. l)e caliei] tor ; a complete
f market value, for, fortunately,
Nil have to be obtained by this

larki't values all satisfactorily

DlSTRlBtmON BY'VALUE PRODUCTIVITY 4S9

explained, nothing remains to be done but to deduce the
distributive shares.

Precisely so — ^but how deduce these? What problem
of distribution is open? Distribution among whom? And
under what basis of claim? Society did the producing and,
by assumption, bore the pains thereof. Who, then, is this,
or who are these now coming to demand that payment be
had by some test of distinguishable, separable, and assign-
able contributions, productions, and deservings? If value
fixation is a social fact,— costs, pains, sacrifices, pleasures,
marginal utilities, and effective utilities, all social facts
attaching to the appetitive or emotional psychology of the
social organism, — ^how comes it that "there are three generic
shares that are unlike in kind," and that

the entire study of distribution is .... a study of specific pro-
€iuction; is an analysis of the wealth -producing operation, and a
'tracing back to each of the three agencies that together bring wealth
Into existence of the part which it separately contributes to the joint
Ycsnlt To each agent a distinguishable share in production, and to

teach a corresponding reward — such is the natural law of distri-

Imtion.*

That by Qark land and all other instrumental goods
are reduced to one homogeneous fund of value units will
at this point require neither illustration nor proof. Labor
is similarly funded into a volume of homogeneous labor
units. And, either as included within this labor fund or as
basis of a distinct and separate fund, entrepreneur activity
also must seemingly be subjected to the funding process
and be reduced to a homogeneity of value units. Only so,
in fact, is it possible to establish the central thesis of Qark's
argfument, the tendency, under normal conditions, of the
remuneration of each and every unit in the fund to express,
in precise equivalence, the productive contribution of that
unit:

There is before us the picture of social labor co-operating with
social capital. Both are governed by the law of diminishing returns,
and their earnings are fixed by the productivity of their final units.

* Clark, op. cit,, pp. 3, 4.

VALUE AND DISTRIBUTION

. . . WagM c
a the product

t of social labor and interest

t of social capital.'

But "how may we measure labor, capital, and their
products" so as to make certain whether this proportionality
of remunerations to funded units everywhere holds? "We
need, evidently, a universally usable measure of value."

"Provisionally, the "doses' of capital are measured in
terms of money ; but it is necessary to know exactly what
the money ultimately represents."* Is this ultimate under-
lying verity — ^this definitive fundamental fact in value —
an objective labor homogeneity? Or is it a personal -sacri-
fice homogeneity? "If it means either of these two things,
it is still necessary to find some way in which to express
a measurement of labor or of sacrifice." And to Qark "it
is clear that the [value] product of the capital cannot, in
such connections as these, be the basis of the measurement
of the capital," for this would be circular in reasoning;
"If we say that whatever produces a unit of consumers'
wealth is a unit of capital, we assert nothing by adding
that, at any one time, alt units of capital are equally pro-
ductive." So it is only prorisionally that the doses of
capital are measured in terms of money; we must, it is
said, go deeper than this:

A universal unit for measuring economic value is necessary, if
the law of final productivity is to have scientific exactness. The
entire study of wealth is, indeed, meaningless, unless there be a unit

(or measuring it Ratios ot exchange alone afford no answer

to the economist's chief inquiries. The actual wealth of a com-
munity consists in heterogeneous things, if they are ever added
together, it must be because there is some one element found in ail

of them and this eleinent is absolutly measured There is one

element that is common lo all the diverse things that appear in the
inventory of social wealth. In every commodity there is a power of
a certain kind which can be measured. .... There resides in
of them a certain amount of influence on human wet I -being. .
Effective utility is the name by which this potency of goods will h
be designated Effective utility is the basis of values.'

Effective utility is, then, the common denominator iiq
which all values are to be resolved and by virtue of whi

'aarlc, op. Hi., p. 373.
'Ibid., p. 374-

'Ibid.. pp. J7S. 376-

DISTRIBUTION BY VALUE PRODUCTIVITy 461

each and all come to be rational, intelligible, and compa-
rable. And this is in line with the doctrine, already noted,
that "the principle of final utility by which values are fixed,
is universal in its scope." *•

"Final utility universally gauges values." **

That is to say, effective utility and final utility are

essentially the same. True, "amounts of wealth are usually

stated in money ;" but the coins are not really the measure ;

they merely express power over the things that afford

service: "They will buy goods or set men to working.

There resides in each one of them a certain amount of

irifluence on human well-being;" they control effective

latility. "Effective utility is the name by which this potency

o f goods will here be designated." ^*

But admittedly some things have utility not because

^Jiey give us pleasure but because they shield us from pain ;

SLnd Qark insists that this pain-avoiding quality is the char-

Sfccteristic and essential and ultimate fact in all effective

-utility; the marginal-utility analysis does not go deeply

enough, or, rather, it does not bring out quite adequately

the important aspect, the sacrifice aspect, of things of

service :

Give to a man a barrel of flour and you make him by so much
better oflF. .... If you had not given him the flour, he would have
got it by some sacrifice; and what you have done is, in effect, to
save him from sacrifice. This effect measures the value of the
flour." Take away a barrel of flour that the man now has, estimate
the real detriment that he suffers, and you measure the effective
utility in another way."

Is this subjective worth? It looks like it; but if it is
assumed that the loss must be made up by labor rather
than submitted to directly or, perhaps, shifted to something
else, the doctrine diverges from the Austrian analysis, and
— still more — diverges from the truth. And if it be admit-
ted that the loss has not, of necessity, to be made good, or
that, if made good, it may be at the cost of some substituted

»/WJ., p. 47. "/WJ., p. 376. »*/w</., p. 377.

"/WJ., p. 163. ^Ibid., p. 376.

463

VALUE AND DISTRIBUTION

service, we have nothing but subjective worth, the cost
aspect of utility, "the importance attached to a good as the
indispensable condition, etc.," a. purely personal category
and an unrelated feeling magnitude. Clark continues:

lie must [?] have food, and will get it by sacriHci; of some
kind. He may not fully replace the sacrilice of the flour; (or he
may live on maize, and in thai case the utility of the barrel of flour
is gauged hy the cost of the maize and the unsatisfied want of a
better quality [or quantity?] of food.

But later upon the same page the labor-necessity view
is fully adopted :

The Itnal measure in the case is one of pain; for the ultimate
injury that is done to a man by depriving him of any one means of
pleasure, resolves itself into putting bim under the oeces^Jly of
enduring a certain amount of personal sacrifice in the effort to
secure something that will effectually replace it"

But in any case, we have arived at nothing more or
other than the old difficulty with regard to either marginal
utility or subjective worth ; as a purely personal experience,
unrelatable to the experience of any other person, and, as
absolute feeling magnitude only most vaguely — as mar-
ginal item of a series — related to any other experience of
the same individual, it perhaps does not greatly matter
whether the sacrifice be asserted to refer to the loss of
utility merely or to the labor pain of replacemenL If mar-
ket value is to be resolved into a homogeneous fund of
utihty units, there are clearly some further steps to be
taken, and these of a passably difficult sort. That these
steps are, indeed, impossible of accompHshment, earlier chap-
ters have sufficiently emphasized. It remains, then, to pre-
sent, with the minimum of comment, Oark's proposed
method :

It is this process .... of determining how Important it is to
have one thing by ascertaining how much it will cost to get a very
different thing, that reveals one special significance of a study of
effective utility. Men pursue happiness in the generic, and the form
in which it may come is secondary. The measurement of well-
being, thus regarded in the abstract, is an occult but dominant fact
in exchanges. A man may have a monopoly of one means of pro-
moting happiness, yet he cannot set his own price for his wares.
That is fixed by the cost entailed on the community by the effort

"Oarlt, op. cil., p. 3f7.

DBTRrBtmON BY VALUE PRODUCTIVITY 463

0 secure, by any means whatever, an equal quantity of happiness.
Effective utility .... is measured by society as a whole; and in
tbis lies the significance of the phrase, "measure of effective social
Qtilhy.'' .... The price of a thing gauges its importance, not to
QDe man, but to all men, as organically related to each other. The
efficient serving power of an article varies in the case of different

iodividnal users, but to society as a whole it is constant Into

^ mysteries of distinctly social pyschology, therefore, the measur-
>QS process that gauges value must be traced. Essentially simple
<Q nature is the operation, simpler even than the act of the man
*bo decides how important a horse is to himself by seeing how
^^g he must work to get a boat and a tennis outfit

It is now necessary to give definiteness of meaning to the word

*^cial. There is such a thing as a unit of social improvement or

diriment It happens, however, that the detriment is mor6 avail-

^le for measuring purposes than is the improvement; and so the

^'^ unit of value is the sacrifice entailed by a quantity of dis-

^'^tctly social labor. Society, in short, sets value upon a thing by

^^Ccrtaining how much work is necessary to replace it or to get an

^^Unralent for it."

It would seem, then, that in order to measure a unit of
^^^cial utility, we must first make precise the notion of a
^*^t of "distinctly social labor ;" what, then, is this ?

Doubtless utility exists for each man and sacrifice exists

^Or each man; but because each man can make these

Estimates for himself, does it safely follow that society can

^o the same for itself? And if we know how the individual

^tian does it, shall we also know how society does it ? So it

It may be assumed that whole articles are made by individual
"Workers. As such goods leave the makers' hands day after day, in
^ continuous supply, they seek purchasers. No one man will take

many, but society will take them all That each class of goods

is made m great numbers by one man and consumed singly by many
men, b the essential thing to be noted.

It is the users of an article that can best gauge the well-being
that it gives them, and they make the estimate continually. Shall I
buy this article? .... Is this article or some other of equal cost
the more desirable? .... If each man could measure the useful-
ness of an article by the effort that it costs him to get it, and if he
could attain a fixed unit of effort, he could state the utility of a

»/«</., p. 378.

r

I
I

464 VALUE AND DISTRIBUTION

number of articles in x sum total. Similarly, if alt sodcty ifti a
reality as one man, it makes such measuremenli of all comnioiiliu,
and the trouble arising from the fact that there are many mMsuiBi
disappears. A market secures thb result, for sodciy u» u in
individual unit — like an individual buyer."

And similarly for the sacrifice, — which, we recall, his
Ihus far been presented as a better measure of the effectivt
utility than is the marginal utility itself, although this it
rot to be taken as in any sense an abandonment o( the
notion that all value resolves into and is nothing buteffca-
ive utility ; sacrifice is somehow a better measure of utiliij
than is utility itself; indeed, how can utility serve as Its
own measure? And it needs measure, while, it seems,
sacrifice does not, or perhaps is more easily measured:

Work .... consists of concrete acts of men; and ihescUEU
unlike in themselves as arc the miscellaneous articles that an to It
measured by them. Can we make one sum of the labor involridb
cutting wood, in playing violins, in setting type, etc.? Addir^ tbe
unlike acts that consiiiule sodal labor is, it appears, as difficult ai
adding the products that constitute social wealth. There is need dI
a pervasive element in the actions, and one that can be mcaiurrd
Such an element can be found; for. as utility is common to ill conv
modities, so personal sacrifice is common to all varieties of Ufcot.
There is service rendered to man, on the one hand, and there i) bur-
den imposed upon him, on the other. Social self-service — iheaciof
mankind ministering lo it^ own needs — constitutes the whole eco-
nomic process A point is to be found at which social cwti

of production offset and measure social gains We eai

estimate pleasure in terms of pain."

An isolated worker is the user of his own products, and be
naturally works each day till it does not pay to work longtr.
Additional product might be gained by prolonging the toil, hm the
advantage of having it could not compensate for the sacriRccs of

making it The man that wc are studying is a sociei; bf'

himself; he makes things and he alone uses them. .... Of a sociellf
regarded as a unit the same is true. It produces for itself, and tbt
burden of its final labor measures the utility of its final produo
which is the same as the elTective utility of any of its product^
created by the same expenditure of working time. Take away tit ~
articles that the society gains by the labor of a morning hour, t'

"ClaA, op. cii., p. jSo. "/tid,, p. j8i.

DISTRIBUnCKi BY VALUE FSODDCTIVmr 4^^

tooo^ doum^ SMI sBCKcr tan ■ anoHHiy ■MSt Mit^

mad to make good die loss k w9 dtvcn die woik pcifoficd Jt the

iqppfOidi of cvcfliiflig, wlucli voaU oiIkj wise IniTe pioduted tlie tunl

luxuries on hs list of goods. .... The duqgs othu»iaic pcodoccd

hgr ^ittt fiiBl bbor win be the ooes reallj los^aod thcb odlity b loet^

vred bj the burden entailed in the creating of them. .... Eveiy-

dnqg that is prodnccd by one honr of social labor, whether that

fabor be performed earhr in die day or late, possesses an effective

socttl utility diat equals the ahsohite utility of the final complement

of goods consumed ; and this* again, is counterpoised and measured

by the sacrifice which all society undergoes in the labor of its

final hour. .... Periods of labor are equal in cfectkye disutiHtr,

sod this makes it possible to use the labor of aqy period of a given

leosth as a unit for measuring values. .... In the subjective

▼^nations of society, as an organic whole, the product of two hours*

l^hor is always worth just twice as much as is the product of one.

Mere labor time is an accurate gauge of the values of different

coidplements of goods.*

But a group of goods to serve as a social unit of con-
Sumpdon is one thing, and the separate items made by
ilifferent individtial men may be another; is "mere labor
time .... also an adequate gauge of the values of the
different articles that enter into the complement"? Here
the answer appears to be that the utility of what I sell is
measured by the pain of society in producing what I get
in exchange for what I sell : "The pain that all other men
suffer in making products for him represents the cost to

them of what they get from him Price is, then,

an indication of the soci(il cost of acquisition of different
commodities." *®

Recalling now that each unit of labor commands under
normal conditions precisely the same remuneration as every
other unit, we become interested to know how much labor
of any given individual constitutes a labor unit. Evidently,
laborers are not paid the same per-diem wage, but only the
same wage per labor unit:

^ Ibid,, pp. 383-89, passim.
*^ Ibid,, p. 391.

466

VALUE AND DISTRIBUTION

A laborer of high grade embodies in himself tt

tiolU

than does a

The final unit of labor b the sacrifice entailed b; a c
dictinctly social labor."

A social unit of labor . ... is a composite unit conststini oj
some labor from every industrial group that the conunumt; coo-

A minulc would be a larger fraction of one man's day ihin of
another's. It is accurate enotigh for our purpose, however, ii» uj
that the social labor is made up of a fixed fraction of a day's Uboi
of every individual."

Evidently it does tiot inatter what precise quantity o!
this social labor is taken as the unit of measurement : but
take now the case of a man who makes and upon (be
market sells a commodity :

A commodity is actually measured for valne on the basis of
the social service that it renders All society, in the end, in-
curs a marginal sacrifice that measurca the value. .... The indi-
vidual labor which made the commodity is the economic equinkot
of the social labor that is induced by it and that measures its valut,*

But how does a man actually go to work to exercise
this inducing power over the social labor? Evidently he
sells his product upon the market:

If money is used in (he transactions, and if the price of W ud
that of X arc equal, it is because the last unit of supply of each
commodity, as it is made over to the miniature society for con-
sumption, imparts to sodely as a whole a uniform addition to iu

etu'oymentB Price is, then, an indication of the soeu^ reil of

aeQuijition of different commodities,"

Thus are we able to know how much of each man's
labor is necessary to constitute a unit of labor; and then
we know that these amounts of labor will be equally paiil—
these funded equal imits;and how do we know this? By
the fact that in selling them upon the market, ihey will
draw out equal quantities of social labor. Dut this means
that the products sell for the same money price, and Ihal
the two quantities of labor arc equal quantities by the mere
fact of the equal market values of their products. And yet
Qark has only a few pages back insisted that it will not do.

., p. 6j.

"Ibid., p. 378.

"* Ibid,, p, J96,

DISTRIBUTION BY VALUE PRODUCTIVITY 467

in. good logic, to make "the product .... the basis of

/neasurement. If we say that whatever produces a unit of

consumers' wealth is a unit of capital, we assert nothing

t>y adding that, at any one time, all units of capital are

illy paid." "

^e have now to recall that in Qark's view this resolu-

of market value into some sort of underlying and con-

Xling and determining homogeneity is absolutely essential

the funding of capital goods and of labor into value

Lts, and likewise essential to the proof that in each fund

compensations tend to be — and normally are — the same

^^- all of the units. That is to say, Qark rests the specific-

^Dductivity theory of distribution upon two bases, (i) that

rket values can be reduced to an ultimate homogeneity

terms of effective-utility units, it being for this purpose

5at the social-organism concept is invoked • for service ;

) that all productive agents, on the one hand, and all

oductive instruments, on the other hand, are likewise

Xibjected to the funding process, in such fashion that equal

alue productivity may be ascribed to the individual units

each fund, and this without appeal to the quantum of

"X^ue productivity as determining or defining the unit.

It is, indeed, possible that Qark has admitted here
"more than the necessities of the argument require; it is
^ronceivable that neither of these intermediate steps is
essential to the conclusion; it may be that the specific pro-
ductivity of the productive factors may be worked out,
and distributive shares be found to be the precise cor-
relatives and equivalents of specific productivity, and all this
without appeal to any sort of homogeneity underlying and
determining market values, and without any manner of
recourse to the funding devices proposed. How, indeed,
disprove it?

And it is also forthwith to be admitted that no proof has
yet been offered— or can later be adduced — that society is
not an organism ; but it is equally certain that no proof has
yet been anywhere adduced that it is ; and it is worth noting
that the sociologists themselves have long since mostly

** Ibid., p. 374*

BimON BY VALUE PRODUCTrVITY 467

ho make "the product .... the basis of
llf we say that whatever produces a unit of
|»lth is a unit of capital, we assert nothing
iny one time, all units of capital are

■w to recall that in Clark's view this resolu-

value into some sort of underlying and con-

ermining homogeneity is absolutely essential

of capital goode and of labor into value

vise essential to the proof that in each fund

jns tend to be — and normally are — the same

nits. That is to say, Clark rests the specific-

;ory of distribution upon two bases, (1) that

can be reduced to an ultimate homogeneity

ective-utility units, it being for this purpose

-organism concept is invoked for service ;

roductive agents, on the one hand, and all

iruments, on the other hand, are likewise

2 funding process, in such fashion that equal

rity may be ascribed to the individual units

and this without appeal to the quantum of

i-ity as determining or defining the unit.

ed, possible that Qark has admitted here

; necessities of the argument require; it is

lat neither of these intermediate steps is

e conclusion ; it may be that the specific pro-

the productive factors may be worked out,

ive shares be found to be the precise cor-

equivalents of specific productivity, and all this

al to any sort of homogeneity underlying and

market values, and without any manner of

the funding devices proposed. How, indeed,

also forthwith to be admitted that no proof has
ered— or can later be aikhiced — that society is
nism; but it is equally certain that no proof has
.^where adduced that it is; and it is worth noting
biologists themselves have long since mostly

VALUE AKD DISTIUBirnON

AiiAac a«

Bat ooiw tfae kss raajr Ac 4k-
e vme, tad fotfle oi more trodi: tins, bowne.ii
■aoer oi iaiaik ; and, ts wS propositions puidi at i
■^ it s It <aoe OBptwcd. unprovable, and nnfi>-
le. Aad ■> Hkcwisc it tnav be tn»e that the moiI
w h» ■ithiiili of fooding labor and of fuii<£n|
Am «r ««c not of; and — possibly etwugb— dia
wmA Mar niae fnads— organicallT valued— are tu
ban Ike viloatiaas orgaiucaily placed upon tl
Wc on dean' do part of this in any sense <
adtea aUe V> prove its &lsit>- ; to prove th
do Kit cast, «c mast, Kinsley tells us, i
It tec aoy water babies existing, we must a
■M casttig. We can. tben, do no more thi
K aad as oiticitt the cridetKc or ai^;uinm)
nea offeicd. in lopport -of the position take
*e or yet to be made must nHtstly confin
; Ae Icgie^ le^tiinacy of this estab
I propositions purely by faith, and a
f of dm kgkal Knafaility of the relations asserted
' anoned hantm dtese dnl»ousIy anthorized proposi-

Btat it. enn taidMvise, these factor funds caa be eslab-
Vabei ^em any (Mfacr dnn the repudiated basis thai "wbit-
ever producca a mut of coasamers' wealth ts a unit of
c^Ntal.** the eapbnation — if exfdanatioa it is — most appu-
cndy nnt anbstantiafly as follows:

Jnst as "effective utility .... is measured by society
as a whole.** aitd as "the meantrement of wdl-being, Ihui
regarded in die abstract, is an occult but dtxninant fact in
exchanges," and as "in this lies the significance of dx
pltrase 'measnre of effectiTe ntility.' . . . . tt was upfl
the word 'social' thai emphasis was laid :" precisely so. b]
•ome occult sodal-orgamsm process, do we get an appraisi
and a funding of capital goods and of labor. — a funditij
noo-derimliTe from those volumes of value product ascribe
■ to these productive factors, — and all this. »I«
d»t both a mystical, occult, and marvelotl
precise prupcirtioDalitr arc discoverabl
o( the funded unit and the value of il

Ins social-organism method of gettin
ucu and prodq^e factors into abstract funds I

DISTRIBUTION BY VALUE PRODUCTIVITY 469

abandoned as, on the one hand, unproved, and as, on the
other hand, unserviceable for its purpose unless logically
abused, tfie productivity theory of distribution need not, be
it repeated, thereby become untenable. It seems, indeed,
tfiat Clark has overestimated or wrongly located the diffi-
culties of his problem; and it must be remembered that it
is primarily this problem, and not Qark's solution of the
problem, that is of interest to our investigation. Take it to
be established, if we may, that market values will not
reduce to pain jelly or to utility jelly, whether by the social-
organism concept or by any other method ; the case of the
productivity theory of distribution is not forthwith to be
declared hopeless, if only it be true either, (i) that the
funding expedient is not essential, or (2) that without any
appeal to the hypothetical psychology of the social organ-
ism, the market values of products and of factors may be
xnade homogeneous on some sort of workable basis ; and it
xieed not matter whether this other basis be something dis-
'tinct from pain cost in the getting or from well-being
significance in the using.

It is, in any event, worthy of remark that the market
values of products and the market values of factors are
actually and patently homogeneous under the simple, every-
day, and commonplace guise of market price, a homogeneity,
that is to say, in terms of the money fact, a con-
ventional standard admirably adapted, as expressive of
homogeneous, undiflFerentiated purchasing power, for meet-
ing all the requirements of this greatly desired homo-
geneity. What, in fact, can capital as an abstract fund
possibly be, if it be anything other than a market- value
fund?

But, even so, we are immediately driven back upon the
problem of how to make use of this homogeneity in such
wise as to help forward the problem in hand, which is,
in part, precisely this of how to explain these very market
values or hires upon these productive factors. For it must
still remain true, as Qark has so well pointed out, that
neither capital units nor labor units, no matter in what
manner or how well funded, can logically be asserted to
possess equal value productivity and so to be equally
rewarded in value compensations, if all the while the units
are explained and established as such, only by the fact that
they produce equal values or get equal compensations.

47© V.\LUE AND DISTRIBUTION ^H

We seem compelled, then, to adventure the probl^x**"
under its other statement, how to explain the remuneiv^^
tions attributed by the market to the different, spcd&c, cotf^^;
Crete factors and items employed and remunerated w.Ati' 4-
the productive process? Is it possible to regard th^^—
remunerations as either normally or actually the precise ^
equivalent of the productive contribution? How deter-
mine this separate productivity for comparison with the
remuneration? Is any method of isolation of factors
possible? Or is all that can be said merely that the
remuneration is the market value of the value-productivitj-
contribution rather than the precise equivalent of the
value contribution? To this aspect of the problem, whidi.
after all, seems to be treated by Oark, we must now direct
attention. *'

But precisely what is our problem? It is dear that we are
not now interested in any issue as to whether cost causes
value or value causes cost, or as to whether distributive
shares are better regarded as primary- or as secondarj-;
no denial is suggested that all productive instruments
and agents are hired in view of the value products
to be derived from them ; so far as this, at least, the value-
productivity theory of distribution must be genially
accepted : nor is there question that the amount of ^-alue in
the joint product of the factors is the equivalent, the

""The sptciHc prodxclivity of tabor Axes wagis — thai is the ihcsis
to be lupportcd in this vnlume" <p. 47I.

"We have said that the speeiHc productivity of Ubor fixe* wages;
and this means that pa; conforms to the amount of product that is
spfcifically imputable to any one unit of labor in a working force.
This implies that the products of the different units are equat. In
like manner, the ipeciHc productivity of capital fixes interest. The
earnings of a dollar are what the dollar creates : and this implies that io
anf one fund of capital, as it is described in terms of money, the
products of all the different dollars are equal" (p. 49).

"A laborer's income may seem to come to him (rotn another man :
but in essence it is still the response that nature makes to bis own
labor — it is hia own virtual product" (p. $3!.

"The income of each subgroup is now the value, not of a completed
article, but of the one particular utility that it imparted to thai article"
(P- 54).

"Paying interest is [sometimes?] buying the product of capital as
paying wages is buying the product of labor. The power of capital to
create product is. then, the basis of intereit" (p. 135).

"As value depends on final utility, so shares in distribution dei>end
on final productivity" (p. loS).

DISTRIBUTION BY VALUE PRODUCTIVITY 47^

^^^urce, and the intermediate determinant of the aggre-

S^te compensations distributed to these factors, it matter-

*^g not at all for present purposes how this total value to

^ distributed was caused or fixed; nor are we tempted to

^^ny that each of these distributed compensations falls

^^t in some general and approximate proportionality with

^c value increase contributed; but rather are we con-

^^rned to determine whether any separate and specific

Productivity of the different co-operating productive fac-

Jors can be so isolated and distinguished that, actually or

.Sically, the compensation may be declared to be the pre-

^*s^ equivalent of the productivity contribution. That is

^ say, what is the meaning and what the warrant of the

^^s^rtion that out of the distribution of a joint product the

^^^erent productive agents receive the precise equivalent

^5* *^ value which they have contributed? Is it true that

»^is precise productivity can be arrived at otherwise than

i^ sheer reference and appeal to what they get?

This is, in truth, our old problem of imputation, the
^^oblem already considered at length in an earlier chapter,
r^^w to distribute between the different co-operating factors
J ^t only all the value product which, if not so co-operat-
^^g, they might have produced, but, together with this, that
Cerement or surplus of product which accrues as the very
^^sult, as it was the very purpose, of their co-operation.

Assume that in isolated uses, or in other combinations,
^ach of four productive facts, e. g., land, machines, wage-
earners, and entrepreneur, could command 3 of recom-
pense, and that when the four are brought together, their
aggregate product is not 12 but 13; what distributive
principle shall be invoked to apportion this surplus of i?
If the first of Qark's principles of imputation be accepted,
namely, that "the amount that is taken from the crop when
one cultivator is withdrawn from the force, measures the
effective productivity of every laborer of like personal
capacity," *• this subtraction method will lead us to impute
to each co-operating factor a specific productivity of 4, —
and this despite the obvious fact that the joint product is
not 16 but 13.

Qark's second principle of imputation he does not him-
self recc^^ize to be a second, but only the repetition of the

•Clark, op. cit,, p. 161.

VKLCK AND WSnOBCTlON

banr been aait meHy b;

tA aking Doe nay." M

wc sinD come into prcdit^

it nc ptopoflxNis 01 adon in

the oorrect proportions-tl, fcr

was tbe best ccmiint-

could takt{^

saBeTTBg. It iolbvtdal

■■t of labor ittsttai! ot tabug

a pfodiKl sofnewhat trnaScr

I what any- puticnlaj cDtrtpnnaii

fee nanH^a. Ui far the tttm in qoeslion to it
|vt wt lit ffvAacbon cooiplex, ttiider hii on
. m it nfe toaatribak all of the increase in pcodoa
em iaaa? Is aoc das iacreasr doe rather to die
af il of dK oo-opeialii^ facts? And
I oAcr Lln.()iLiii.ui II in diSerenl ci^
aari vC 4tfB«al dbflhiu most hare diStmit
oot of aO tJhese (fiffcrtnt
_ _ the specific prodnctintj
Aas ooes tne marwt hiFe otCKt-
: tM dK nine sagnificance ol the
Mtiikr? And are tMt tbe cases whoe
to those produe-

for all attempt!

.. _jfws of iodiffer-

, are not to be found.

I with 00 tools,

valodess land.

^ , tioo by reuon

^■^^■^ w ^vmK ^ae ID nadai|aacy of cqtupnKirt.

■Be wan laaL we i&ul.y cagnca uk msca worthy

- . - s ai dK fnim of abandemncnl, the Ubor

as ft <E«as aak wageif tin is trae. but not tnll

k la ife^cCac aat trae dnt "tbe amoant of thii

t OBKaaaa* wdfc aad capccsacs the ntc of

I ^ag%r^ md vodi wot k trae evoi if all fabor-

to eqoipfnent or to

«» OteVs mytew b there any zone

DISTRIBUTION BY VALUE PRODUCTIVITY 473

of indifference, or place of isolation, for the last or mar-
ginal worker employed by any entrepreneur:

It is this most sterile of the fields, openings, or opportunities for
labor that we describe graphically as an outermost zone within
which men produce only their wages. This is the zone of indiffer-
ence from an employer's point of view, because, if he sets men
working within this area, he must give them all that they produce
as wages.*^

But, at the most, he needs do this only upon the assump-
tion that he is the marginal employer, and upon the added
assumptions, also, that the employees are all alike and that
there is nothing peculiar in them or in him or in his land
or other capital so that another employer may not push him
to his highest possible bid. And even upon these assump-
tions, there is no reason for supposing that even the last
laborer is hired at precisely no gain; the employer may
^well have some unexhausted powers of supervision still
left in him. And so, "if one employer offers to them less
than by their productive powers [working for and under
liim] they are worth [to him]" there is no sufficient war-
rant for the belief that "another will oflFer more, pro-
vided competition is perfectly free and efficient"

It is, then, a most dubious doctrine that the last laborer
hired by the marginal employer is hired at no gain. Is
there any good reason for supposing the extended super-
vision of the employer to be non-productive? Why, then,
does he exercise it? And if it be urged that because of
limited command of capital some of the supervising abili-
ties of the employer must, in any case, run to waste, it is
to be replied that this argument recurs to an assumed
peculiarity in the employer's situation, and so far aban-
dons the attempt to explain the wages as reflecting the
isolated, objective, value-producing power of the laborer.
For note that the isolated and objective productivity in
question is not to be established even upon the assump-
tion that the production takes place upon marginal land
only, or at the marginal powers of land, and with the co-
operation of only marginal capital or the marginal powers
of capital; it must also be assumed that the production is
marginal in its relation to that marginal entrepreneur, and
to the supervisory productive powers of that entrepreneur,

•* Clark, op, dt,, p. no.

Tiux AXD DcrntiBirnoN

■V turn ier Ae hbor aod who, hirinu; it. m\-i n

■■. SM^M^ even dni cue of utmost {ajmcsi—
I ta«ac ao kaft madoc of rent or intend or
stmmt^aiaoo tor tbe comfort of the cnipbjtr-
maoi movincnt goes to Ihr hhorcri tod

t and unqucJtkrocd value produclim.
it tbc dearer that the wage outlay} o( ihc
_ r asv not fixed bv him. but fixed for hug;

be Ittft ao ilniT to tbe remits as fixed, except to ihc atan
dot as eae ittm in the daoand schedule, his iaraai ha
|Me»qited Aai ftSI kiau wage which would have illinded
tlic thrcwrinf of these bboren over lo the emptnvmcnt of
tome son 1» tifeien! and still weaker entrepreneur. But
■• in such caar the wage« ntust admiliedly have been luwcr
troder din othcrwuc excluded employer, it follows thu to
oar marginal enqiloyer. or to his entire productive conphi
as a unit, there most be ascribed some part of that {iny
ductility which Clark's analysis imptttes to the hbint
alone,"

"Qarfc htnarll nrogniie* ik imporlance of ihc productin rav
|da« — ncocnif. (hat i*,— •» pcrkapa ia riryt at hia ibitrut-caiiiul oon-
Mpt be locicallr niial, — thai atk uMed dove o( capiul lakci the km
MM ot a qusnluni of machincTT, o« of land, or of cars, or of nili, etc,
Imt o( a com|itex or ciin|il«Rrii( of m-oficraling factors, a'l applidJ uwlti
tkt cniw of an item or doK of productive outlay. > onil nui e( aptul
rxf^atc i and Ihii ia adinirat>>r. only ihai it U autimed Itnc in ceacrnt
BunlfcHaltan, ihia capital outlay niu*t take th« fona and raM a!
— Hrial capital Rood^ nihcf ibaB he applied is lel« or ia nrrtai
(ractl««ia lo all linci of gainful rxpcndirurc. inchisve of labor, mm-
■■!«. ad*«iuunc, tax«s, and what not :

'Hart, for insunce. is a new locomotive. Ii liaa not bm

. M lain the place of one woni out. bitt ia an additiiinil

aary by an en!ars«l tTaflic. Is it a final incicmnn

It would be uneconoRiicat to comtrine one [M'

t ot cDod cara. good mil*, etc Tbii complt-

j af fmAKcn* looda muil alwayi be comidaed

The umBu «f tfce ne« et«(D* ii dcietmined liy that of (he roadbti tk
*Mita. the kri4c««, tkc can. etc^ with which ii ia aied" (p. 148).

Bm tmtt tkat lk>* mllr denies any diilinsiilabable and ^fic
imaBctiTitT ia tkc i^«r»li iWn* of capital good*: and note alio Ibt
ttia mmr Mtwiuml ai^lie* in pnacipte to atl combination* of wlul
wta aaar. ar of ri>Wnl t**^ *^ «>■>« capital goodi. or of l>l»c

all-around tinintic to
' if (ociety hu •»

► TV cawrwiti**' *« e«»«»al ... . ii an afl-aroi

Ctt twieww tUnoa duU «rw akMtf m ^ Tke capital of
—I"*** tn • U iM dw ahipe ia arWtfc tmtrtfrtmtur, a
w» ■■»— » irt •»•* for 4* WMMfatliinT. mentb

DISTRIBUTION BY VALUE PRODUCTIVITY 475

But wc have now to notice a still more important and
1 more disastrous error in this method of analysis:

The product that can be attributed to this second increment of
K>r is, of course, not all that it creates by the aid of the capital
^i the earlier division of workers has surrendered to it; it is only
hat its presence adds to the product previously created."

This is crucial ; in point of fact, the new labor does not
'^t all the increase; the conditions of distribution are dis-
^H'bed to the advantage of the capital ; wages are suflFering
^ot merely from the fact of a diminishing production incre-
ment, but also from the fact that out of this situation every
^*Uit of capital is deriving an increased income; that is to
^y, wages are suffering not only on the production side
'^Ut on 3ie distribution side.

The fundamental error in all analysis of this sort — and
Uie later economics is full of it — is traceable to the assump-
tion that the marginal-utility analysis for the individual
iHan can safely be carried over to society as a whole, and
^Iso that the method of computation supposedly valid for
Consumption goods can safely be applied to production
^foods disposed of under entrepreneur bidding:

There is a commercial principle which causes the final or mar-
part of the supply to be strategic in its action on the value
the whole group. The value of the whole crop .... conforms
that of the marginal bushel. If there are marginal laborers,
the sense in which there are marginal quantities of wheat, cotton,
Sron, etc, then the final or marginal men are likewise in a strategic
XK>sition; for their products set the standard of everyone's wages.
.... The last increment in the supply of any commodity fixes the
general price of it.**

retailer, Tefaicles for the carrier, etc., capital has no existence at

til Bidding for capital, then, is bidding for something

which .... will consist mainly in a change of quality of working
implements" (p. 259).

"The final increment of the capital of this railroad corporation is,

in reality, a difference between two kinds of plants One of

these is the railroad as it stands The other is the road built

and equipped as it would have been if the resources had been one
degree less" (p. 2Si). All this presents the social concept of coital
rather than the competitive.

•Clark, op, dt,, p. 176.
^Ibid,, p. 90.

j5»iiiii«ii t mm ><»ie —""^ »"<"?■

j^— «» la »■« ij* «t *^ «»> iu i«i »

^■^■A^BK^nprHft. Tkne C3i^ Itexcsncr le ID (Be

.i*«Kkoa iforia

■ -•tyiiiinrfi

ti

ao(b

ate

L

w

DISTRIBUTION BY VALUE PRODUCTIVITY

477

repudiation of ihe "dosing" method of analysis and of ils purported
b^ricK iqion the relations of land rent to cost ; and the opinion was
(here expressed (hat Hobson's criticism, as (ormutated in bis "Distri-
bution," falls appreciably short of seriously damaging the doclrinc.

la his later contribution to the discussion be adopts, as we shall
see, a dosing analysis of his own, but attacks with great force and
cogency the notion that under any dosing analysis, properly applied,
ia it possible to isolate and measure ihe separate productivity of any
one of the different productive factors in the production process.
Ueanwhile. and especially after the reply of Professor Carver, other
inleresljng issues are introduced, some of them possibly not stnctty
gennanc to the original question. Gark's doctrine is necessarily
involved, though Oark himself takes no part in the discussion.

Hobson denies that any entrepreneur, e. g., a farmer, deciding to
employ a Bhh laborer, can properly regard tbe resulting increase of
product as representing or expressing Ihe value productivity of this
fifth man:

I . The work of this fifth man, being by assumption just like
that of the other men. is equally productive, and is paid for at precisely
-Khe same rate, because of this precise equality in productivity; if
actually there is less than five-fourths of Ihe old product, it is in pari
because tbe employment of the fifth man has lowered the value
effectiveness of each of Ihe other men.

3, If the employer's managerial capacity leaves him yet able gain-
fully to supervise another — a fifth — man, it must follow that a share
of the increase in product is to be attributed to the utiHcation of a
fraction of managerial ability which hitherto had run to waste.

3. Tbe doses applied arc really not labor doses ; one does not
make an increase in Ihe labor solely, but an increase partly in labor,
partly in capital, partly in land ; the dose is a land- labor-capital com-
posite, and Ihe increase in product is an increase which, if separately
attributable to anything in the dose sort, must be imputed 10 this
composite dose.

Hobson also argues — perhaps unfortunately, at all events, unneces-
sarily— that if the employer's payment were really the full equivalent
of the productivity of the marginal man— if this marginal productivity
were actually ascertainable — and if the productivity theorists were
correct in asserting that this marginal productivity determines Ihe
wages and expresses and measures the value productivity of the
(rage-paid labor, it would thereupon follow, inasmuch as the other
men are equally productive and equally paid, all getting precisely
what they produce, that there could be no gain in the case for tbe
entrepreneur. Hobson holds that it is precisely because the entrepre-
neur gets a forced gain, something which, morally, does not belong to
bim, that be gets a profit : and that Clark it justified in bis view, that
under the complete equilibrium of perfect competition, in "normal
equilibrium," all entrepreneur profit would disappear: but that there
■a, on tbe other hand, nothing in tbe competitive trend to bring
about this equiliijrium situation ; and that even were it to be estab-
lished, the benefit of it would accrue not to wage-earners exclusively.

Cat*er join
to indicate what is left over
ri^tly proceeds to infer that c

question of profit : and taking profits
after the other shares are paid," he
impecicion can never cancel all entre-

w» ^k r -» v^ * k .B*r -Amm

L4^"5^§KEfdS;£^

""" '''*'-'°'~^"^» Ik t^ ^az. <a— ^ Ji

_^tr «- a^ o-L - ^ tail - ' ■>H> >A d-c iSI

DISTRIBUTION BY VALUE PRODUCTIVITY 479

ntther a land-labor-capital composite, a unit only in the fente of a

vmt complex, goes in one direction somewhat overfar, and in another

<finction not qoite far enough. For surely with his last dollar or last

thousand dollars of expense, the entrepreneur may hire nothing but

libor or nothing but land, or nothing but capital ^ods ; but as surely,

^ may hire two of them or all three of them together. Nor is it

^ that there is, under any one situation or at any one time, one

^ technological combination for each and all entrepreneurs ; the

different entrepreneurs being different in degree and kind of ability

*^ of equipment, there is, in truth, never any one situation, but only

^ous situations. One entrepreneur will apply his last dose of

^^Pense in one way, another in another, and these different ways may

^ne of them be of the "composite" sort, or they may all be of

*is8ort.

But, as we have seen, the truth is not far away ; the dose with

^^*^ entrepreneur is a dose of outlay, a dose of purchasing power, a

^^^ of competitive entrepreneur capital. Nowhere in economic theory

^^re seriously perhaps than here has the traditional threefold classi-

^^tion of productive factors exerted its influence to perplex and

^^Oiplicate and vitiate.

It must be recognized here that, for the purposes of this
'^oblem. Carle's notion of abstract capital has led him to the enuncia-
^On of what is substantially the truth. Without at all concurring in
^Hc dictum that "the idea that different parts of a product can be
^f^eated by an entrepreneur at greater or less advantage to himself is
^^Uacious," — ^this notion seeming to cut away from under Qark's feet
^^e only valuable and true thing in his entire marginal-productivity
^ftialysis, — the central idea in the following must command entire
Approval: "To him it makes no difference whether he hires one agent
^>T another or the two together since he gets the same result for the
^ame outlay in all cases" (p. 365).

CHAPTER XXni
THE LAWS OF RETURN

To hare established in economic theon.-, on the one
hand, the distinction between long-time and short-dnic
influeoces or, on the other tiand, the distinction betv«n
the sutk atid the d>Tiamic in value problems is. irrespective
of other and possibly greater grounds of obligation, to
have placed the science under no small burden of debt
These are, however, really distinct services; for thou^,
at first impression, thev appear lo rank as merely different
formulations of the same principle of distinction, this is
seemingly neither a s\'mpathetic nor a fair interpretation
of either.

Jilarshall's tong-time reckoning points rather to such nor-
mal or static equilibria as are eitficr reached or always in pro-
cess of being reached within one general and established situ-
ation of fundamental conditions; the short-time reckomng
aUows for the minor perturbations and rearrangemenU
wluch yet do not imply movements or tendencies in the direc-
tion of radical, permanent, or fundamental change. Oark's
even more important recognition of dynamic forces in
economic life points, on the other hand, to radical ami
permanent modifications in the ultimate determinants uf
value — changes in lliose greater and ultimately direclive
forces which have been here somewhat awkwardly denomi-
nated situation facts, as the basis of situation costs.

It is. howe^'cr. obrious. that tlie two lines of distinction
are prone to coalesce, and that long-run influences and
dynamic influences, while sufficiently distinct at tlie extreine,
shade off into each other in intermediate cases.

The long-run price is a normal price, a static equilibrium
price as distinguished from those actual and unstable prices
likely to obtain at anv particular moment. That there
480

THE LAWS OF RETURN 481

^t^ke place a merging of actual price into normal price

Requires the assumption both of a static society and of a

long-run period. Nevertheless, the long-run computation

^ essentially one of an ideal, static, equilibrium price, the

formal price, and is a concept far from new in the science.

fiut up to the time of Qark, the distinction between funda-

^Jiental change and temporary flux had been only vaguely

^«lt and loosely formulated.*

But, as has already been urged, that the distinction be-
^een long-time and short-time influences is recognized as
^3.1id and illuminating, does not deny the cost relevancy of
^1 those influences whose effect is believed to be transitory ;
^^ distinction rightly employed points merely to the tempo-
^^ry nature of these costs, to the probability or the certainty
^'"^^t they will later be greater or smaller. It is, indeed,
strange doctrine that admits a cost as temporary only
n the assumption that it is permanent. The distinction
^^ally points the way to an investigation of the influences
^ing behind costs, and to the level of costs which it is
t trend of these influences to establish. Mere seasonal
^d climatic changes, droughts and crop failures, pesti-
ces, famines, whims and flurries of fashion, stand as
^tic influences which render the long-time computation

^"Oearly there is the necessity in economic reasoning of regard-
man as the subject and central point in economic science ; his
"^Jirironment as his opportunity; his industrial product as his remun-
aeration; his economic activity as his attempt to produce and distribute
"this produce along the lines of least resistance (sacrifice). Normal
price is to be conceived as the line of least resistance not only for the
buyers and sellers directly engaged, but also for the producers in
other employments searching for those lines of activity affording the
highest remunerations. Market prices are found to fluctuate in either
direction about these normal or ideal prices and cannot, in the competi-
tive adjustment of sacrifice, long or widely depart therefrom. In
short, the normal price is that price at which no producer can, to
his own thinking, better employ himself in some other line of produc-
tion. Prices generally would stand at their normal, if no producer
or consumer could, to his own thinking, advantageously changie his
manner of economic action. But like the ocean, market values have
00 rest. Prices ripple and wave above or below their ideal level, as
desires and appetites, opportunities and abilities, slowly or rapidly
change in force." — Davenport, op, cit,, sec. 91.

w

48a

VALUE ASD DISTRIBTmON

safer for purposes of understanding the larger laws ol
price. Acconfing u> Marshall, "the value of a thing in the
long nm tends to measure its cost of production" ; not p^^
dselv that the value of anything tends to be 6xed or
governed by its cost of production: "we might u
reasonaUy (fisputc whether it is the upper or the hva
blade of a pair of scissors that cuts a piece of paper;" bat.
*■« a gmrrat nie, Ihe shoHcr the period which we are con-
sitknog. the greater must be the share of our attention
wMcfa we give to the infloence of demand on value : and the
laager the period, the more important will be the inHuena
of oost of prodoctioa on value" :' all of which must be m-
ognized as valid, stoce, as we have seen, cost in one indujin
resoives ttsdf mostly into the demands of other industries;
only ID Utt laag ran can these opportunity-cost induenccs
make Ibemsdves adeqaatdy fdL>

Tint, as men acquire larger knowledge, strength, and
I sidi). tbey become more effective producerj oi

•i B liac M any oAe (or working ont loac

■fckk Ihue ibMl-ttRie inflacncei aStd tb«

•«d ar« faaBy ab«ort>cd into ilie knvMme

foDow umc price riic >* ibt

tMt ri*e Uldas pbce, it

kiUu of eoBsamption?

I int mht pImc, ia ike tkan-timt mi'immtM. u
~ I «f ■■ tnimOiyt n^iwcn m tlvt iodnn.
E of *> tadcriM povcn wf all Ae bada ul «( dl
Ifcc other >r>totb»t afCMs fttriiii lantfayrd. aad M the laiac tiiK
" " " ~ . Uxn. ui

t cmM b« bravskt aboM fa tke nke of

■K n the tvHE nvvtia QBplM tr It*

t fact •( *nr b«i^ liii« hi. to amnl «tenM urfuaUici: iW

iMier cStct ao^ be fdt Iv <^ acnU krHi«. fer^ ine Wat

>mM Mt wotfc itadf j»l Mlf ;
• of frietiBB. Let ii be aiMtJ

ilia M I . iii»>«iiliiw (wrid liaiJIf be «o »HI or to tStKtitr t\ vlth
riiiwc priea »f p " ' "

prtcc* of tW i

THE LAWS OF RETURN 483

ealth; that, with larger and larger supplies of any con-
sixmable good, there must go a smaller importance attach-
ing to each successive unit of supply ; that, upon any given
^X"ea of land, successive increments of product are obtain-
able only on terms of increasing difficulty per unit of
product; that, in many lines of production, the greater
business has, in point of economies of production, the
^<lvantage over the smaller business — are propositions no
^ie of which is markedly economic or technical in import,
^r of a nature to present overserious difficulty of compre-
'^ension, or of a character to offer especial temptations to
^^troversy.

Not precisely so, however, for the same propositions as,

^^tcr subjection to the necessities of economic analysis,

'"^interpretation for the purposes of economic investigation,

^nd reformulation for the purposes of economic doctrine,

^^y present themselves transformed and rearranged into

^^ well-known "economic laws of return."

Superficially, though not thereby incorrectly, regarded,
^^*^« ordinary formulations of the law of diminishing return
ay be distributed under three heads : ( i ) A law of falling

^gher costs of production. To begin with, the machines could not be

iljr moved or sold, and competing producers could not step into

sston of these monopoly appliances in their associated setting.

"^ fact, the advantages do not attach to any monopoly agent separately

nd in isolation, but to appliances as members of a distinct producing

p, with a pronounced interdependency between its various con-

ituent members. Thus the problem of imputation within the group

8, at least for the short-time adjustment, incapable of solution ; prac-

'^ically speaking, the gains would appear as enhanced profits of manage-

^nent ; but this is crude in theory.

And were the entrepreneur himself the owner of the different
agents, the difficulty would be precisely the same difficulty ; he could
not ascribe to any one agent the productive advantages enjoyed by the
group. The monopoly goods might be — would be — essential to the
situation, but so, also, would the situation as a whole be essential ; and
the entrepreneur's own abilities in their relation to the rest of the
situation would be equally essential. He could not expediently rent or
sell the monopoly agents ; they would not be practically mobile ; there-
fore no alternative application would be possible whereby to apportion
their shares in the group product. The problem of complementarity
is present in an aggravated form ; the product is simply and irreducibly
a group product.

4B4 VALUE AND DISTRIBUTION

Utility; (2) a law of falling product by weight and tale, a
diminishing producti%'ity in terms of concrete, objective,
physical measures; (3) a law of falling value productivity.

1. The first formulation asserts that with successive
, increases in the size of the productive complex, the return in

utility falls short of proportional increase, — obviously a
direct corollary from the law of satiation, if not, indeed, a
mere repetition of it ; thus a law of unquestionable validity
for the purposes of the individual reckoning, and indirectly
of significance for problems of .Crusoe valuation; but
equally clearly, a law only vaguely and only average-wise
applicable to group-utility computations; and, in any case,
a law relevant to market value only through the individual
comparison of competing utilities.

It is, however, here to be noted that, were all the dif-
ferent agents and instruments of production keeping
abreast in rapidity of increase, this fact of falling utility
could have no necessary bearing upon exchange relations.
But equally for one agent or for all agents taken collect-
ively, the law of diminishing utility, of failing significance
with relation to need, must hold, since it holds for all
products, unless, indeed, it is offset by the fact of increasing
productivity by weight and tale.

2. The law of falling volume of concrete product, rela-
tively to the enlarging productive complex, has evidently
little significance for purposes of any individual competi-
tive reckoning, otherwise than as the weight -and -tale aspect
of the case transforms itself into a value-return outcome.
And here, also, if alt agents were manifesting the same
rapidity of increase, it must follow, as will later more fully
appear, that neither as volume nor as value need any law of
diminishing return obtain,

3. The third rendering of the law, as one of diminishing
value return, is the only formulation having direct signifi-
cance for any purposes of the competitive reckoning; and in
this regard, also, it will later appear that no matter how
clearly manifest the utility fall may conceivably be, there is

J

THE LAWS OF RETURN 485

possftility in industry of a generally falling value return.

I, upon the assumption of equality in the rates of increase
^^xiong productive agents, there is possible neither a dimin-
isliing weight-and-tale productivity nor a diminishing value
l^^x-oductivity.

Malthus and his successors long since made it clear
^noug^ that, looked at solely from the point of view of the
land situation, the prospects of the human race are not
Encouraging. Increasing numbers of human beings must
find the food problem progressively a more serious prob-
lem; overcrowded land is the same thing as poor land; a
larger and larger share of human energies must, then, with
Expanding population be applied to the solution of the food
problem. The law of diminishing return for land is a
fundamental fact in human affairs, a fixed, opaque, and
"Hital fact, full of bad omens and sad prophecies.

And more than this ; it is evident that but for this law of

^Sniinishing return there could be no possibility of land

shortage, or of that inevitable derivative of land shortage,

^^tit Thus, as with increasing population, there falls out,

^r capita, a smaller product to divide, there must also go

^ the landlords a larger and larger proportion of the more

^^d more tragically inadequate total. The social classes

disinherited of land are doomed to a double and compounded

^^^^sure of adversity; this law of diminishing return

lites them with both edges of its sword.
But the optimists also have their innings. All this
^N^oukl be true, other things remaining the same. But
^^ther things are not to remain the same; for if
^liere is a law of diminishing return, there is also, it is
^aid, a law of increasing return. If, with relative
l.and famine, a larger share of the productive energies at
luman disposal must be applied to the land, it will also be
^rue that, with improving methods and processes in manu-
factures, we can spare for the land a larger share of our
productive energies. Who knows that progress in one

486 VALUE ASD DISTRIBUTION

direction may not more than make good the deficit i
Other direction?

And not this alone ; progress is possible and is probably
not only in the technique of non-agricultural production
but also in agricultural production itself. Progress of tbj,-
very sort has indeed been rapid even without the increasin
pressure of need. For what has been the meaning of ij^
redistributions of population especially characterizing tbt
last two centuries? The urban population has far out.,
stripped in rapidity of increase the agricultural popiilaiicgi'
The growth of the small citj- as against the country, and
of the great city as against the small ctt}' is one of the
most obtrusive facts of modem life: the new and agri-
cultural countries like America and Australia, eqtially vith
the older countries, manifest these population redisln'ba-
tions ; and on the other hand, in point of the degree of Ihe
tendency, the thickly populated ctmntries of Europe faO
not at aH behind the sparsely and newly settled couotrid
City gitjwth is general in the modem world.

Wliy is it? It is fruitless to search for the fundamcnUl
explanation in the improretnent of industrial processa;
Only such men can work in manufacturing as on U
spared from the processes of food production. As loa
as ibe food pro«lact from one nan's tabor staked for d
food reqnimnent of only ooe man, the <
ms compelled to occupy itself with agricnltnre ;
BOW ooe man's labor wis feed tbrec men, two-thirds of A
poptdatkn may be ttrbon. So sbo, tbc derekfrnent
tnnsportatioa senres for the most pan to e
so large a proportian of tfie popabtioa i> i
tnr^ bal ndy tot <£sUibulxxi of Ac i
popotarioti To tfae exiciit wcMy tlal I
opened ap nofv land or better gndcs of I
caltwal uses, or is itsdf to be mAcd i
cesses of xgiKJilUua] prodactioa,
sSilc for die growA of non jpicalngal ca^
prectsdr faov it shndd be mnaifaj Art to 1

THE LAWS OF RETURN 487

•
that, in the production of implements and appliances,

manufacturing is itself an agricultural process, to pre-
cisely this extent industrial improvement must have aided
ftc relative growth of the urban population.

Improving transportation, then, so far as it is not at the
same time to be regarded as improving agriculture, has
had its effect, not in emphasizing the growth of urban
as against agricultural population, but in fostering the
growth of the small city as against the village and of the
^eat city as against the small city.

Looked at from a more distinctly technological point of
^ew, this truth would read that transportation has fostered
Ac giant industry as over against many small competing

Malthus in his formulation of the law of diminishing
'^^tum for land was very plainly proceeding from a purely
^^lal and general point of view, rather than from the
iHiint of view of the distinct and independent and com-
I^titive interest. That the law of increasing return, con-
^^ived as summing up the optimistic offsets in the social
^litlook, is equally a non-competitive formulation is equally
^lear.

But, after all, what part, if any, of all this raw material
^f optimism is, accurately speaking, embraced within the
Economic law of increasing return? So far, all the
^'returns" suggested have sounded in terms of social service
' — of g^oup or race utility, of quantum of productivity by
measure of concrete item product, a purely weight-and-
tale standard and basis of computation. And it is unques-
tionable that, for certain purposes and from certain points
of view, this interpretation of the laws of return is not
merely a possible one, but is the sole interpretation either
relevant or possible. But it is equally beyond question that,
for certain other points of view and for certain other com-
putations, measures of utility return at the one extreme
and of value return at the other extreme are much more to

VALUE AND DISTRIBUTION

the point For most purposes in the competitive reckon-
ing only laws of value return can have significance.

But docs the law of increasing return, accuraidy
formulated, have exclusive reference to such indusirial
eflfects as are due to the development of the human fac-
tor ia production, whether in physical efficiency, in naiivc
mental pon-er. in real ami persistency of effort, in scieniific
knowledge, in control of Icchnological methods and appli-
ances, or. finalU, in the advantages and methods of "team
play" as exhibited in higher forms of organization? Thai
is to say. docs the law merely affirm that the better the pro-
ducer the larger the aggregate social product, precisely as
in the Malthusian reasoning it is asserted that the less
adequate in quantity or quality the land the smaller the
retimi to hunum activity applied to the land ?

But, so interpreted, the law of increasing return applies,
equally with the law of diminishing return, to agriculture:
and the law of diminishing return applies, equally with
increasing return, to manufacturing. Agriculture bene-
fits by good appliances, by good transportation, and by
real and care and intelligence in supervision and in organi-
sation ; manufacturing suffers by every inadequacy of
equipment.

t)r does the law of increasing return assert that some-
how, as manufacturing in the aggregate comes to emplor
more men (or more capital?), it makes more tlian pro-
portionate increase in its wejght-and-tale productivity?
So understoo<.i — and irrespective of the effect of concentra-
tion into larger and larger productive units — there is only
so much in the doctrine as may be implied through the
division and specialization of emplo>-mcnt between indus-
tries ; and here again, the principle applies unequally to
different manufacturing industries, and while perhaps
applying more noticeably to manufactures as a whole than
to agriculture as a whole, applies to some branches of agri-
culture in higher degree than to some branches of i
facture,

THE LAWS OF RETURN 489

Or does the law in question assert that, with organiza-
tion into larger production units, there results an increase
^^ the weight-and-tale productivity of manufacturing
industries in the aggregate? Here again, the advocates of
*^ grande culture in England or among the bonanza farm-
^*"s of the Northwest would insist that the law is also in
^^gree an ag^cultural law.*

Or is the law to the effect that, among competing units
^f production, the relatively large competitor has the rela-
^Vely large weight-and-tale product?

Or does the law run that among competing producers
^lie relatively large units get better results in value product
^n proportion to the value outlays of production?

And if by chance the law be interpreted in this com-
l>etitiye and value sense, is it to be taken to compare the
Average entrepreneur costs and average value produc-
tivity of different units of production, or rather only their
^wnarginal value costs and their marginal value productivity ?

And this leads us to the question whether the law is
framed as primarily of service in the . determination of
comparative profits and thereby as explaining the trend

^ Carver makes the following especially illuminating observation :
"Confusion has sometimes resulted from a failure to distinguish the
law of diminishing return from a somewhat similar law relating to
the comparative economy of large- and small-scale production. It is,
for example, sometimes stated that manufacturing is carried on under
the law of increasing return, because a large factory- can be run more
economically and turn out product at a lower cost, than can a small
one. But tiiis is quite different from saying that a large factory can
be run more economically than a small one on a given piece of land,
or that it would not be necessary to use more land in connection with

a large factory than with a small one of the same kind

Among the various questions on which the manager of such a unit has
to determine are the two following: (i) What is the best proportion
in which to combine the various factors; (2) What is the best size
for the whole business unit? The law of diminishing return has to
do with only the former of these questions. That is to say, it
relates to the varying productivity of an industrial unit when the
factors are combined in varying proportions. [Concrete productivity?
Value productivity?] On the other hand the law which relates to the
comparative productivity of large- and small-scale production has to do
primarily with the size of the unit" — The Distribution of Wealth,
pp. 64, 6$.

490

VALUE AND DBTRIBUTIOS

of industry (oward the giant oi^anization. or ralhw js
explaining ibe bearing oi giaitt organization upon msrlw
price*, and as explaining also the relation of thoc maikti
prices lo the productivity and the remunerations of dx
various profjnrtive agents.

At any rate, the law can hardly be one of incrtuing
proportional value productivity with increasing siie oi iht
productive unit, unless the law is taken to apply not to
induitrics taken as a group a^rcgate. but to the compdng
industries inside the group: for it may readily betrudhai
the oi^faniiation of any industry into the giant form ^d
so reduce its costs that even with an expanding product b;
weight and tde, the ag^rcgaic value of the product sboulil
be a diminished one; and tliis might hold of manufactuits
as a whole as over against agriculture as a whole,

Nor can the law rightly mean lliat greater valocpi*
ductivcness goes, jkt unit of expense, with increasing silt
This is not necessarily true; it is safe to assert only tint to
the greater imlustrial unit goes the relatively greater profit
For, where the elasticity of consumption is not great, ind
where cotnpetition among rival businesses is dose, lower
prices may obtain to an extent to bring a lower value pro-
ductiveness for each, and a generally lower average of
profits ; and jet it may remain true that the greater units
suffer least, that to the larger units there accrues a relative
advantage.

Or docs the law run only to the effect that, in
industries of heavy investment and heavy fixed charges,
the extra cost of successive items of prodact is
less than proportional to the increase of product,
a law which, as of necessity, says nothing as to
the aggregate increase in value going with the increast
of product, but leaves it possible to be assumed thai the
entrepreneur will limit his product at tlie point where the
exTra expense of production, together with the falling
jirici-s u[x>n the original output, balances the extra value
represented in the added items?

TBE LAWS OP RETURN 49^

If this last is the significance of the law, a danger

signal is called for; monopoly production would, it is true,

follow the policy outlined; but with competing producers

^eaiiy competing, there is, as trust promoters and trust

apologists have correctly urged, and as the influences

'^hind railroad pooling fully illustrate, no such assurance;

^^^^petition may bring prices down nearly or quite to the

^^^^\ of the costs of the extra product, practically canceling

.^^ earning power of the fixed-charge portion of the

''^Vestment*

It appears, then, that to find what there really is in this
^^ of increasing return it is necessary rigidly to exclude
^*1 influences of improving technique, developing human
^^itig^, and all influences ranking under increasing demand
^t* products, and to confine ourselves to the sheer com-
petitive advantages of combination and concentration,
^ ^ ) for increased weight-and-tale product per unit of
^^Cpense, (2) for increased value product per unit of
^^Cpense. Evidently (i) may be found without (2), though
V^) is impossible in the absence of (i).

Note that no a-priori reason exists why this law of
^^creasing return might not characterize all industries. If
^t does not, or if it does so unequally, the reason must be
^^ught in the peculiar nature of the industries in question.
^Xhe law may fail to hold with certain industries, because
\^y the nature of the instruments which they employ, or of
"Wie processes required, e. g., as with land, the business unit
^rannot greatly increase, the giant organization being
impracticable; or the market may be of so limited powers
of consumption as to render giant organization impossible.
At any rate, the law is not one referring by necessity
to the interdependence of factors or to the constitution of
the business unit in respect to the factors included. The
law might hoki for one industry almost exclusively labor-
employing, or land-employing, or machine-employing. For

'Cf. Marshall, op. cit., pp. 448, 449.

VALUE AND DISTRIBOTION

tlK parpoM* of the law more bbor may apply iisdf to
labor as wdl as to land or capital : or the advaaugt ol

; size may br ubtaineil by ailding more
goods to an cxiitii^ capital undcrlaldng, or by adding

9 of bod to the acres already employed.

The taw of dimiitishmg return is per)u|» even ran
difficoll of making precise and deftoitc. There is the sunt
tendency to oscillate between value formulatjcms or impli-
cations and the weight-and*t»le t>-pe of cotKept, Malthu.
as we hare seen, gave to the doctrine a <listincti) 9M
■igniiicance, and thereby of necessity a definitely wcighl-
and-talc type of formulation.

But earlier than the time of Malthus' formulalion of
the law in terms of population and subsistence, the problon
of agricultural returns had received thoughtful ud
authoritative consideration, wherein the two aspects of tbt
taw so hopelessly confused in later discussion attained
some measure of vague differentiation.

Canlillon, for example, thiiugh regarding the prob-
lem as, on the outlay side, one of labor units of investmenl,
bad yet. in prophetic anticipation of I^ysiocratic doctrine.
rendered over this labor into terms of value cost according
to the quantum of subsistence material, land-produclive
power, embodied in these units. It is, however, true that
the significance of labor in the case is for llie most part
regarded as measurable in units of time.

But with Quesnay the talk 19, on the cost side, whoUj
of labor and capital conceived as reduced to an cntn-
pceueuT common denominator^ and as aggregated umki
tbe head of "depense," a competitive fomtnlalion and J
value retMlering: at tbe same time, tbe return, the produit
mtt, is conceived as a value surplus over the invested capital
outlay.

Mshhns' doctrine was evidently not directed to the eln-
n of tbe law of rent, and was formulated in advance
of avr weU-cooskkred md widely accepted doctrine Of/an

THE LAWS OF RETURN 493

the land-rent problem. Mostly, perhaps, because the disf
cussion was innocent of rental connotations, the formula-
tion was consistent and free from confusion. But in later
discussion, and especially since there has appeared to
esdst a close relation between diminishing return and the
rent-cost issue, there has prevailed an almost iminterrupted
ocnfusion.*

But all of this should become clearer after a catalogue
of the different concepts of diminishing returns has been
sittempted and an analysis of these concepts completed.

I. Based upon the law of satiety applicable to any stock
of consumption goods in the hands of any single indi-

' Proof of this assertion is in the nature of the case almost
impossible of giving; some random citations out of the latest of
economic literature are, however, offered:

"The law of diminishing returns is simply a part of the general
obsenration that the product [concrete product? value product?] of
any given piece of land does not .... bear a constant ratio to the
amount of labor [time sum? pain sum? value sum?] and capital [how
are labor and capital aggregated?] used in producing it." — Carver,
Disiributum, p. 55.

"Though large applications of labor and capital may continue to
produce larger crops, the crc^s will not be as large in proportion to the
labor and capital." — Ibid,, p. 56. [The weight-and-tale aspect of the
crop is here compared with labor somehow measured, plus capital of
some sort or other somehow reduced to homogeneity with the labor.]

And on pages 58, 59, and 60 of the same work the tables given
make comparisons between "days* labor with man and tools" and
bushels of product, and state the results in "bushels per day's labor."

But on page 60 the v^lue formulation of the law is presented:
"Whenever you find a competent farmer devoting a part of his labor
ai^ capital [how united?] to the growing of any crop on more than
one grade of landj you may be sure that he thinks it pays better to
do so than to concentrate all his energies on his best land."

However, later on the same page the discussion lapses into the
other concept: "We shall find by comparing the two tables, that if
he had only twenty days' labor to use, he could get more bushels by
concentrating them all on his best field" [time vs. bushels].

"The law of diminishing returns relates to the amount [?] which
can be produced on a given piece of land [area?] by varying amounts

of labor and capital [?] After a certain point, the amount

that can be produced on any given piece of land does not increase in
proportion to the labor and capital used." — Ibid., pp. 63, 64.

Entirely justifiably Carver takes issue with Bullock (cf. "The
Variation of Productive Forces," Quarterly Journal of Economics,
Angast, 1902), in regarding the law of diminishing returns as applicable

VALUE AND DISTRIBUTH

viduat, and upon the derived concept of marginal utllitfil
there has been, as we have already seen, somehow deduced

not only to land but to nil form* of combinaiinns of praductive factor^^
Carver says upon this point: "A complete formula which should >bt^, ■
ever; possible application of this extension of the law of diminisbi^^^*
reiuma would require a separate term for each and every kind ?

labor, land, and capital The following simple formula •t^ -,,

have to suffice :

pi

Xwixb F wiU produce F

\ more than aP (inrrrasing returns)
ihati aP (diminishing returns)

Then JV with oK will produce J

I

And aX with aV will produce

' less ihnn aP

large-scale pn>v^uc-
Uon)
(Diminishing tton.'^ryinj
of large-scale pn>«Joc-

I aatumed that i

I positive quantity greater
(p. 66). But a of what? and 1 of what? We sceni to m
land as superficies, plus labor and land somehow aggregated,
whole set over against weight-and-lale product.

pagc» on

"There is another factor .... with which we must reckon. ind
to which we may give the name of managemrnl. An industrial e ^nt
liahment is a combination of various fncfors under one manageirKifat
and the question of large- or smalUscale production beeoniea. UVkk.
fore, a question of Ihe proportion between the factor called man^fg.
ment, on the one hand, and all the other factors, on the other. [Tlel
formula .... which was given as an expression for the l»w of
increasing or decreasing economy of large-scale production, mSy ig
s follows, to take account of this new factor:

If it with X with Y with Z will produce P

i( ( Incniasing ecoaomr
more than aP ) of large-scnlt pro-
( duction)

( (Decreasing ecoo*
less than aP i my of Urgc-sctk
( produrtionj."

The (ollowing quotations illustrate, within the limits of the pin-

THE LAWS OF RETURN 495

^ law of falling market price in society for any increas-
^*^g supply of consumption goods. The haziness of reason-

Craph quoted, a shift from one point of view to the other; questions
^^ "pay" are value questions, not "amount*' questions:

"An increase in the amount of labor on a given amount of land

^^ never, in any normal case, increase the product as much as the

*^r is increased. That is to say, except on the frontier, it always

f^yj to cultivate land beyond the point where diminishing returns

^^, if it pays to cultivate it at all, but it never pays to cultivate it

pP to the point where an increase in the labor would yield no increase

^ the gross product" (p. 73), "Similarly .... an increase in the

f^ount of land with such given amount of labor will always increase

^^ gross product. But since so little land is never profitably used in

^tinection with a given amount of labor as to produce the maximum

J ^ unit of land, it follows that, in any normal case, an increase in the

^^^d with such given amount of labor will not increase the product as

^"Uch as the land is increased" (p. 74).

In other cases the argument goes clearly over to the value-return
^t)int of view; for evidently there can be no talk of substituting one
^^ctor for another, or of the proper proportions of the different factors
^^ combination, excepting upon the value-return basis:

"Where each factor costs something it always pays to combine
%hem in such proportions that if any one or two of them were increased
^t would increase the product, but not so much as the variable factor,

«r factors, were increased But what is the most profitable

proportion in which to combine the various factors of production?

As already suggested, this depends upon their relative cost

There are, for example, several ways to grow a hundred bushels of
com. One is to use much labor with little land, making the land pro-
duce a heavy crop, but getting a small product per unit of labor.
Anodier is to use little labor with much land but enabling the labor

to produce a larger amount per unit Where land is dear

and labor cheap, the former is the better method ; but where land is

cheap and labor dear, the latter method is better The

question which is the better method depends upon the relative cost of
Uic two factors" (pp. 76, 78).

Seager's formal statement of the law reads as one of labor and
Capital set over against concrete product: "After 0 certain point has
been passed in the cultivation of an acre of land or the exploitation
of a mine, increased applications of labor and capital yield less than

Proportionate returns in product Possible improvement in

the method of cultivation beyond the roughest scratching over of the
9oil may and probably will yield more than proportionate returns in the
^heat crop, but after a certain point has been passed, all experience
confirms the law that further improvements afford less than propor-
tionate returns." — Introduction, pp. 114, 115. But the more accurate
Tendering is elsewhere, but less formally, presented : "The final 'doses'
of labor and capital he applies to his land may be just paid for in the
price he gets for the additional produce that results from them. It is
to his interest to continue his cultivation so long as it is remunerative.
But all earlier applications of labor and capital will be more than

TKLUZ AND DISTRlBCnON ^^^

ing bv which has been achio-ed this affiltatkm of denaod
price upon marginal utility, and of falling mdi%-idual
demand price upon falling personal marginal utility, and
of market price upon some assumed social marginal ntihtr,
need not here again concern us. But the further step by
whidi have been worked out a falling marginal signiScance
and a falling marginal demand price for Jttcreasing sup-
plies of productive instruments, requires especial attention
at this point

The law of falling price with increasing supplies of con-
sumption goods holds in its usual formulation only because
(he demand schedule with any one line of consumption
goods may be taken as a fixed fact; new supplies can be

covereij by the price received [or what ihey added lo the prodnct'
(p. 117).

SeUgman ; "In the case of agricultural land .... addiiiooa)
dOKi of capital and labor will yield a relatively smaller pTOdnce." —
PrxHcipltt. p. jo6. "Whenever double the amount of exertion yields
more than double the amount of output, we are in presence of the
law of increasing returns or decreasing cost. When double the exer-
tion just doublet the output, we bsve the law of coiMtant rctiniu or
conitant cost" (p. 250).

Gide {Principei d'Economir Politique, aixieme ed., p. 13*) Mates
in one formulation both laws, that of produce return and that of value
return, seemingly upon the assumption that they are really one and
that it does not particularly matter whether quantity of fabor be
compared with value of product or quantity of product be compared
with value o( labor: "Sans doute il n'est peut-etre pas une scule terre
dont I'asriculteur ne piil, a la rigeur, accroitre le retvlement : seulement,
passj un certain stage de I'induatric agricole, il ne peut Ic faire qti'am
pHx d'HM travail qui va croiisant. en sorle qu'il arrive un moment ou
reflort il exercer pour forcer le rendeipent serait hors de proportion
kvec le rjiultat. Soil un hectare de terre qui produit is hectolitres de

hi* Supposons que cea is hect. de blc representent 100

joumjei dc travail ou, si Ton prefire s'enprimcr de la sorte, rcpre-
■entent joo francs de frais ; la proposition revient i dire que pour
faire produlre & cette terre deux foia plus de bli, soit ]o hect.. il
faud™ d^penser flui de loo joum^es dc travail ou plui de 200 francs
de frnis. Pour doubler le produit, il faudra peut-elre ttipler. peut-etre
quadrupler, peut-etre meme djcupler le travail et les frais. C'est li
ce qu'on appelle la loi da Trndetnein nonproportional (nonproportionel

THE LAWS OF RETURN 497

'^^''keted only on terms of such price as will tap lower
levels of price-paying disposition. If, however, the increase
^^ One of a productive agent, there results a new and larger
^^^Ume of value product and a rearrangement of the condi-
^otis of demand; the new level of remuneration is to be
^^ked out only as the outcome of a new problem of dis-
^bution, upon the assumption of a new volume of value
I^oduct to be imputed to a new and a rearranged and read-
Jested set of productive agents. So, then, with popula-
^On increasing relatively to the other factors, there may be
^^^p>ected a fall in the level of wages, but this only by virtue
^f two influences, (i) a less than proportional increase in
^^ product to be distributed, (2) less favorable terms of
distribution for labor relatively to the other agents con-
^^med in the technological process. The rule and the rea-

-J^acrease of labor and capital devoted to the cultivation of a given
^^cce of land will, at any rate after a certain degree of thoroughness
^^ cultivation is exceeded, result in increased product, indeed, but that
^^crease will be in a constantly decreasing proportion to the labor and
^^pital to which it is due." — Economic Principles, p. 98.

In the main and in general purport Fetter's formulation sounds

Consistently as one of value expenditure over against value return ;

^s, e. g. : "Economic diminishing return always has reference to

'Value. If a particular kind and amount of a certain material is used

"^n Tarying combinations with other agents, the value of the added

^>roduct will not always be in the same proportion to the value of the

«dded agent. The bridgv-builder must consider not only what the

added material will add to strength, but what it will cost, and whether

the result will justify the expense. So the economic problem of

diminishing returns is more complicated than the mechanical one"

{Principles, p. 64). But it is none the less true that the discussion is

always near to the point of dropping into utility calculations ; as, for

example, on page 61 : "The phrase 'diminishing^ returns of industrial

agents/ is the expression of the fact that there is an elastic limit to

the utility any indirect good can afford within a given time," And

again upon page 71 : "Diminishing return of indirect agents is a

special case of the universal law of the diminishing utility of goods.

Diminishing return has to do with indirect goods, while diminishing

gratification has to do with direct or consumption goods. They are two

species or aspects of the same general principle Any indirect

agent, added to a fixed amount of other agfents with which it is techni-
cally used, is credited with a diminished utility, just as an additional
supply of enjoyable goods coming to meet a fixed demand, falls in
value."

TMJTE A5D IKESTUBUTION

soppfies of coQStxmption goods
^^ Tcr xr.tx ii?r ym^hadiiiL §oodsL'

ZL Hat JL2iX2z:2i2x r^mierii^ ot the law of diminish
TS^ ras -x: i:nii:::?n Trttfi: any piiodple of rising o

T

jr jf -smg jr faUfng prke, as supplies c ^::^i
2X!Sizrrtr-Tt ^ais Tra;- :imser expand or contract Th».^-^^e

uar c I irra irra jt tmd mujt be rrmumerated by ^ q
dST TKx *^r^/y'!4^TKa wmtxse^ in (ibfectkre, concret -%. -rs/e,

's'- X iisrvAciTe from the technology (^ of
agr:^.:s:r^'? f ^rjceirac jc iIL it is only borrowedly so^».^^so;
r r?»c=mc^ sxrr TTOCTy 3i 3sr3is of tzme, or, possible ^zi>ly,
It 1=3^ M iferr JT iCDc?? :?r ?am. bat certainly not : in

•g::a^ JT -oirff -ntasars .t .'£ va&:e oodav^ Xor is tMli^'tbc
jHTicarr T?.-acnr .r 5< n nr* sense a ralxze aggregate; nmMT-rtor
HT* xrsi^OK: i5cH7t:tiT»; leanj^:? nrievaat to the distinct:^K"^r
sxM £0^'.:?%'^*' ^\r::ii 5«^TtmnEiCtt ^>t the point of viei^" -^w.
r^ 'saLir 2^^>u:rn7txT!^ ir; : rrat jimi cs present in nnchac — u.
^ns^ nsirntrt^ jimi nrniice?: ^ that Jibor« amnodified Jo
xti*i.:r *j: :-^.T.i<::r^ r: rrtintir.-. tttcsc 3X?pIv itsrif to t]F:»e
T.v- . .. • - .'J.* :•. T'rc 11 V f:iriiitf< -rerelv that in a^rm'.
r^ini'-i- •- :.'• • ::':^ r-^nz rrv-jx-nv; fac:on> are requirevf ,•
%■::! <*w.'^ *- i.j::- -• ^:"\r •.' rrt.'^;: ~icr:ri are gratuitous Ir
.TT^vv: . * .\: -^v \- \:.i::^:ti :r:»r^-dcn c^jmes to depend
ri.TT: ^r-. ■■■■-: ::•>-- :-rc :'.r--^ir-r-'c:> fact=:'rs. that is,
zi^'iz j-vr .:r.-.- • ;r :^^.^: ?r/r:^i-cr we-^th : all of which
-^:rrs ir ": —.-::• ":ra: - r jul >.xt;i. rcrpv^?e< crowc-ed land

-iu { * - . ■ * .• ' - .. : j; . .-t . ■ . ;^-c* . i ^c: ^ lir-cytaVjiV f^'-isimcf:

\

fTHE LAWS OF RETDKN 499

This is a law midway in transition from a social and
(KmB-terial computation to a competitive and value computa-
don- Precisely how labor and capital are to be aggregated,
-»vlielher upon a value basis, or upon the notion simply that
ca-pital is merely indirect labor, and how, if the value
^Lspect of the labor and capital is accepted, they are con-
©ci'ved to be related to the land as mere area, and how labor
value and capital value and land value are competitively
relevant to weight-and-tale product, are evidently past know-
ing. The law is one of muddled thinking,

IV. Thai with an increasing money quantum of costs
ttpon a fixed area of land goes a weight-and-tale product
l^ss than proportional to the increasing money costs:

This law is manifestly one of more nearly completed
transition to a value basis. It assumes the land area as
fixed and. together with this, a fixed entrepreneur activity
Of supervision; and it conceives the application of pro-
tluctive energies in terms of value outlay ; and it abandons
%ny distinction, for its purpose, between capital outlays for
labor, and capital outlays for instrumental goods ; but it is
«ot at all clear that either the fixed land area or the fixed
entrepreneur activity has been carried over into a value
rendering; the product remains a non-value fact, though it
would be an easy step to carry this over into the value
denominator, by assuming that the same price level holds
for the new product as for the old,'

v. Thai upon a fixed area of land, an increasing
expense outlay, with fixed entrepreneur activity of super-

'In this general field of annlysis, hy far the best work known to
the present writer is that of Professor Commons in his DislribuHon of
IVeallh (MacmiUan. iSqj). The following passages especially deserwe
citation in tbis connection:

"The Innd-owner doci not produte goods for his own consumption,
but for sale. Hence his land is valuable to him in proportion to the

exchange value of the product A given area of land does

not usually alford room for the production of so large a supply of
goods as to affect the general supply of those goods. The prices of
products arc dclcmiined by the general forces of society, operating

throughout the world So far, then, as ihe given area is con-

1, the price per unit of its product changes so little that we may

'/ I ■' ti

^s. rte^.prii

-* -» J"^ -* "*iJ IJ «ai*y-»».

» fm »^ a* a^Boaal Ij fai

THE LAWS OF RETURN S^^

Subjected to reinterpretation, this appears to mean no
more than if value-wise you double only a part of your
cxitlays of production, you will fall more or less short of
doubling the value output, a proposition not seriously
€questionable as doctrine and not especially fertile of new
-ixuth. There is also to be noted, in passing, the assumption
xnade — an assumption common to practically all discussion
in this connection — that the costs imposed upon entrepre-
neur capital in the productive process are actually and
necessarily restricted to four directions of expenditure,
land hire, capital hire, labor hire, and supervision charge.
VIII. A law of rising costs of production generally and
of rising market prices for land products, with increasing
population:

It is assumed that with increasing population there
must go an increasing land scarcity; and it is assumed,
in addition, that, because of the relatively inelastic quality
of this increased consumption need, production must take
place at a high level of entrepreneur cost, and that this
production will cease only at the point where the neces-
sary cost outweighs the possible price; and that in the
process of adjusting and distributing the outlays, the
increased selling-price of the product will mostly go for the
services of these necessary agents which, relatively to the
increasing demand, are assumed to have become relatively
scarce, e. g., the land.

That is to say, this formulation of the law conceives of
all entrepreneur debits against production as equally costs
of production under the value measure; in other words, it
reduces land hires and all other hires, together with the
entrepreneur's own necessary remuneration, to the value
statement as supply-limiting resistances offered to entre-
preneur activity as applied to this particular line of produc-
tion.

But this formulation, while not open to attack for inaccu-
racy or for lack of business actuality, is evidently a formu-
lation which assumes, as fundamental to the entrepreneur

SO» VALUE AND DISTRIBUTION V

computation, an existing system of value costs, and, among
other things, assumes such action of distributive iorns u
have attributed a high rent, a value hire, to the betttt
quahties of land, and this by very virtue of the fact tiul
these better quaUties of land excuse the producer fiooi
high alternative expenses for other productive agoils.
Tliat is to say, this law reports the results of an econanic
analysis instead of contributing to such an analysis; it is
a law summarizing distributive results rather than a hv ot
production making toward an ultimate solution of the iihie \
problem; in last analysis, it is a law of value determination
only in so far as it points to the underlying and funda-
menul conditions determinative of entrepreneur activii)',
entrepreneur costs, and entrepreneur value adjustmenB.
The relative scarcity of those agents requisite for certain
products is the ultimate explanation — on the cost side — (of
the relatively high exchange position of those products
These hi^j values are, in point of process, reached and
adjusted as the outcome of the entrepreneur system ol
production; in tlie course of the process, as means to Oie
result, and as motived by the result, there come to te
imputed to the scarce agents, under entrepreneur bidding.
their high rental and sale values.

IX. That with increasing population there go in H"'
culture increasingly large value outlays by the ettlrtf"-
neur, relatiivly to the value product:

But if this is true, it must be true only as based up**
some distributive analysis not contained in the law and no'
in terms appealed to by the law. On the face of it, the"
appears to be no reason why, with increasing population.
agriculture should become less profitable to the entrepre-
neur cultivator. If his costs, rent and other, become in the
a^regate higher,so might also tlie value of his products be
higher : or his wage outlays might be lower, though this
again, if true, must deduce its warrant from stxne source
outside the law, — by appeal, perhaps, to the same distribu-
tive analysis as that upon which the law itself is based.

THE LAWS OF RETURN 5^3

WTiy, indeed, must rent be higher, or, if higher, the other
istributive shares also lower? The law — valid doubtless — ^is
Sstributive in tenor; land receives its larger ratio of the
'alue product, but this depends as much upon the peculiari-
fcs of the demand for the product as upon the technological
Onditions of its production. With some commodities,
Indeed, increasing difficulty in production cancels all
he value of the agent That there could be no land
carcity but for the limited productive powers of any
imited area of land ; that is, that high rents could not exist
1 the absence of the technological fact of the diminishing
esponsiveness of land, leaves it, in the absence of other
onditions, still possible that rent should fall with the
iminishing weight-and-tale return. This form of the law
f diminishing return is, then, not so much a law illumi-
ating other problems as deriving illumination from other
cautions ; and all laws either of diminishing or of increas-
ig" value return are necessarily of this sort.

X. That with increasing population there goes in agri-
ulture an increasing entrepreneur value outlay relatively
9 weight-and'tale product:

A useless formulation excepting as working out to the
lurport of law VIII, viz., that the product being, rela-
ivdy to costs, smaller in value, the price per unit must be
igher.

XI. That with increasing population there goes a higher
ental and exchange value for land:

The same assumption of progressive land scarcity is
lade here as in VIII ; the law is, indeed, in some respects
ractically a restatement of VIII, but with some difference
1 emphasis. Underlying either law is the assumption that
16 food demand increases in approximate proportion to
le increase in population, that despite the fact that labor
nd capital are contributory factors, their relation to land
i rather complementary than substitutional, and that thereby
he emphasis of demand falls upon land as productive
ristrument.

itei ft » tok Mlet 4M, I

aB ^^i^Hid ^p^Mb ^ nittiHa^rtal goods — tecfaai>-
Iqpctf tafitd. Wm, m bcl. '■■me Ae avcnce qn% of
■Air^MadkAeftnaBMBd ac loaHaHS ■■ ifac agpegUe to
SBMSiBKailAaryBan'aBdastD pawat mo 'aenast ol
anttanBrtd C**^ ft ««d< Mfl be tnc. Ac fcwd nqniR-

ilaai. Jtf faB «i pn^B wnrid siffer in ontpDl,
MHHd fas am HvhiAr doa faod GBCs,aaddai

^ ia aac ^^ac •«« faas of I

H viMk a I II ■ I I III' I. bad pemm hnc
■■^irf •» be fin^ *BC «aa ao lacnaK ol bbor povET
v^ «^irf lawi^ «a« fsdi be m> anwc of had
tm^kmm. 9«^ ft war m ^tf ttx

THE LAWS OF RETURN 5^5

for labor and capital. Therefore, were it true that labor
and capital were in the main substitutionary rather than
complementary in their technological relations to land in
agricultural production, there could be no such redistri-
bution of production-distribution advantages as is implied
in the law as formulated. Thus, also, if it were true of
land that it could take the place of labor and capital in any
large share of their uses, rather than serving as co-operat-
ing complementary productive instrument with them, land
could never have experienced the fall in rents and in
market price characteristic of the past half-century.

It follows that, under the assumed conditions of increas-
ing population, of only proportionately increasing food
requirement, and of more than proportionately increasing
labor effectiveness and capital expansion, there is no basis
of foretelling the effect upon land rents and land values
otherwise than accordingly as assumptions are made as to
the direction of human development. Improvements in
transportation or in the technique of production may be so
g^eat in the direction of agriculture as to make even the
best grades of land free land, and thus to cancel the impor-
tance of rent in the computation of costs, and to leave the
food supply to find its relative cost purely in the relative
outlays for labor and for non-land instrumental goods.

But in the degree that the actual inelasticity of the con-
sumption of agricultural products — not all are food prod-
ucts— is overstated in the assumption, and in the degree
that the development of human productive powers may
not take place in food-product directions, must this solu-
tion undergo modification. On the other hand, a gain in
land rent must follow upon an increase of non-substitu-
tionary supplies of labor; but whether this would be
accompanied with any marked rise in the prices of food
products would depend greatly upon the character of the
increase in the supply of labor, whether, for example, and
in what degree, it were adapted to other than agricultural
production.

r

506

VALUE AND DISTRIBUTION

If these solutions shall appear to be disappointingV-j
vague and conjectural, the explanation must be sought ia
the nature of the problem and of the assumptions nee
sarily attendant.

The foregoing analysis of the various different
cepts of diminishing return — and there are possibly sH^KiU
others waiting to be catalogued — should have sufficed to

make it clear that such formulations of the law as prom^HiEe
significance or serviceability for economic purposes of a Jiy
sort, competitive or collective, are three in number:

1. A d>Tiamic and sociological generalization forete^ Jl-
ing a diminution in the per-capita command of consur-»i-
able goods, by reason solely of the society coming to
contain more members, these being assumed to be substan-
tially unmodified in all relevant aspects.

2. A law in the d>-namics of competitive economics; a
forecast of changes in the relative distributive shares
accruing to the different agents and instruments in produc-
tion technolc^cally viewed, changes due solely to changes
in the relative supply of these concrete factors; thereby,
changes in their relative value through the capitalization
their income-earning power ; and thereby, also, upon the'
supply side (and for whatever the cost of production com-
putation may be worth), and solely by reason of these
distributive shares functioning as costs in competitive entre-
preneur production, a forecast of the relative changes in
the market prices of the various sorts of commodities
technologically dependent in various degrees upon the use
of these differently remunerated productive facts.

3. A static, competitive, entrepreneur law expressing
the disadvantages accniing to the entrepreneur from any
relative excess or defect in the quantities employed of any
productive agent or agents, in view of the existing levels
of compensation for lliese different agents — a law formu-
lating the disadvantage from the unskilful combination oj
cost goods.

THE LAWS OF RETURN 5^7

It is to be noted with regard to Law (i), the popula-
tion-food law, that the reasoning upon which it is formu-
lated abstracts entirely from the possibility that human
development may — at least in some measure — avail to
enlarge the land supply, from the possibility also that agri-
cultural technique and transportation effectiveness may
appreciably modify the situation, and finally from the pos-
sibility that the sources of food supply may not remain
essentially agricultural, and that the food requirement may
not increase precisely in the ratio that the labor supply
increases. That, upon the assumptions made, the social
product, food and other goods together, must be unfavor-
ably affected seems to be a ready and necessary inference
from the general principle that if some, but not all, of
the productive factors are doubled, the weight-and-tale
product will not fully double.

Law (3) carries over into the competitive field this
principle that a shortage in any one factor of production
affects the product unfavorably; those factors increasing
least rapidly, or not at all, take on relatively a more or
less pronounced scarcity, and thereby acquire scarcity
values as compared with the increasing factors, the degree
of the scarcity depending upon the degree of technolc^cal
monopoly held by the factor in question, that is, upon the
substitutions and upon the terms of the substitutions pos-
sible in the case, — a changing problem with every change
in the direction of human efficiency in the technique of
production.

With every change in the per-capita productiveness of
society, human needs and desires being assumed as a con-
stant, there goes, of course, a fall in the average signifi-
cance of new increments of product, a law of diminishing
utility return per item of weight-and-tale product. But
while this law is consistent with an expanding weight-
and-tale productivity — depends indeed, upon it — the law is
not inconsistent with unchanging conditions of value produc-
tivity. For value productivity is distributive in reference —

VALCe AKD DBTEiBUnOS

dat tir wiA tfac difftrmt fadon cod-
IB the dhriaon of product, and witb '
■hsres to one ancriier. Bent
ol cwdbaage rdatiatu, H hecomEi i
■bam io the total ontpui of nhi
if aU fidan in pnxtactMn were incrcaiiif
'. two yards of ckith, two ptin
of wbat bong produced where
oalv one of rsdi. there i:
tbould be cither increasing or
for uiT factor in production.
to foncut (timtiiiihtng rdini
\j imst be b> rcftson of ok
of aopply supfXMcd to attadi to »ne
I pcodoctioo. It looks, then, as if
TTOMBdiiig the land supply taust
\mtis and occasion for all dimin-
9D ^ as rt is something nure
law of disadvaotage front a badly
ivofi cnmplt^

THE LAWS OF RETURN 5^9

this equal proportional expansion in all productive factors,
in such sort as to leave the value resultant one of unmodi-
fied exchange ratios and the distributive outcome one of
tinchanged proportionate shares? Only upon the assump-
tion that the increase in the supply of each factor of pro-
duction has been accompanied by a proportionate increase
in the demand for the various commodities especially
dependent technologically upon the respective factors. But
increase in labor supply, if it comes by increase in number
of human beings, rather than by expanding individual
efficiency, is certain to do at least one thing, viz., to bring
with it an approximately proportional increase in the food
requirement; and precisely the contrary will be the fact, if
the increase of labor power accrues through higher per-
capita powers of production.

And precisely as the food requirement is the most
inelastic of needs in face of shortage, so it is least expan-
sive in the event of expanding supplies. It follows that
^v^hat appears upon its face to be a prospect of constant
"value return may turn out to be one either of falling or of
vising distributive advantage for land. And as we have
already seen, this is further complicated by considerations
relating to the direction in which technological develop-
ment may take place.

Our third law of return, the static law of the proper
proportions for the productive factors in the entrepreneur
complex, is obviously the only one of the three laws having
significance for the cost problem of any particular entre-
preneur at any particular time. Law (2) is a forecast of
probable changes in the conditions under which the cost-
value problem must come to be worked out. That the hire
of any particular factor will be — or may be — greater or
less than it now is, does not make greater or less the pres-
ent hire, and does not modify the present relation of the
present hire to present cost and present value. It is unneces-

VALUE AND DISTRIBUTION

sary to look ahead fifty years in order, by finding what the
costs will be then, to know what the costs are now.

It must now be noted that, simply because tliis law of bad
proportions between productive factors is an entrepreneur
law, it must, in any accurate formulation, take into account
the entrepreneur himself as a productive fact. As entre-
preneur, he is a fixed quantity, and at some point or other
the law of disadvantageous combination, of diminishing
value return, must apply to any fnrtlier increases in the
magnitude of his operations, and must set a limit to the
application of the law of increasing returns with the
greater siie of the production complex.

It remains once more to call attention to the danger-
ously teclinological tenor of all this diminishing- return dis-
cussion. Tor purposes of retrospect or of prophecy, and in
the field of value distribution no less than in the field of
social welfare, there are meaning and interest attaching to
the broaidly admitted threefold classification of productive
factors. But it is equally clear that the classification is
inaccurate and unworkable for close theoretical purposes;
that the technological relations between the different pro-
duction goods are in a state of constant flux; that the sub-
stitutionary relation is everywhere found in a measure, and
is almost as likely to obtain between classes of factors as
within any one class, while the complementary relation is
not appreciably rarer within a class than between classes;
that the determination in any specific case of what share is
land instrument and what share non-land is impracticable
or impossible; and finally and chiefly, that tn conipetiti\-e
production no one is concerned in any way either with th(
validity of the classification or with the accuracy of t|
application.

For, from the point of view of the individual, all qui
tions of cost are questions of value expense, and capital is
merely the fund out of which the costs are advanced and

i

1

THE LAWS OF RETURN 511

into which the instrumental charges and all other produc-
tion expenses are reduced. Thus while, if one likes, he
may distribute this capital expense among its different
technological and other items, including much that cannot
be classified as either land, labor, or capital, it will remain
true that the outlay for labor hire is a capital outlay, the
outlay for capital goods likewise a capital outlay, the outlay
for land also equally a capital outlay, and therefore that the
law of diminishing return is, for competitive purposes, a
law of diminishing return upon capital and not upon land
or instruments or labor. And to show that this falling
return upon capital is or is not due to unfortunate com-
binations of technological items indefinite in variety and
susceptible of indefinite classification and subclassification,
tripartite or other, would leave it still true that, for all
competitive purposes, the only falling return having sig-
nificance or interest must be the falling return upon value
cost, expressed under the private-capital denominator. But
all this will become clearer, as approached from a slightly
different point of view, in the next chapter.

^

CHAPTER XXrV
THE DYNAMICS OF VALUE AND OF DISTRIBUTION

As has already been sufficiently shown, the long-time
computation of costs, the dynamic aspect of economic
tticory, points not lo a new value theory or even to a
supplementary %-alue theory, but simply to the tendencies
and influences making for change in the fundamental con-
ditions under which the value problem must later be worked
out, the costs fixed, and the production distribution reached.

These changes in fundamental conditions are evidently
restricted to two sorts, ( i ) changes in the demands for
consumption goods, and (2) changes in the supplies or in
the ownership of the productive agents, instruments, rights,
and opportunities.

That either of these two lines of influence may affect
the remunerations of productive factors, and thereby their
values, b readily seen; that changes in the deniand for
products should have the same result carries its own war-
rant in the very statement ; so, also, that changes in the
supply of any factor of production must affect the remunera-
tion of it commends itself as obvious — looks, indeed, much
simpler and clearer than it really is. But that changes in
the supply of some factors have of necessity direct and
important bearing upon the remunerations of other facti
is a long distance away from self-approving.

It is nevertheless true:

A demand for means of production arises only when, o
one hand, we are obliged to employ them or else go withont
they produce; and when, on the other hand, we can employ
ioasmuch as wc have at our disposal the necessary complime

goods It follows .... that the effective demand for r

of production must vary, not only when there
sonal wants, but also when there is
complementary goods'

■Wieier, Natural falne, p. loa.

I

DYNAMICS OF VALUE AND DISTRIBUTION 5^3

The demand for plows is truly derivative from the
demand for foods, but not directly; in any event, it is
equally to be said that the supply of land furnishes the
demand for plows; lumber affords a demand for nails,
horses for wagons, wagons for horses, plows for land, men
for plows, plows for men, horses for stables, stables and
horses for carpenters and for stable boys, horses and
>vagons for harnesses and for drivers, etc.

It is true that not rarely the possibility of substitution
exists between different orders or varieties of productive
agents, — that one sort takes the place of another, supplies
the demand for it, rather than furnishes a demand for it.
But more commonly it is through the principle of comple-
mentarity rather than of substitution that most of the
dynamic forces in economics exert their influence upon sup-
plies of products, upon entrepreneur bidding, upon costs
and distributive shares, and upon the exchange relations of
goods, as it is likewise under this same principle of com-
plementarity that various perplexing theoretical problems
both in static-value imputation and in dynamic-value impu-
tation are presented. New combinations of productive
factors entail what new value results and what new dis-
tributive outcomes?

The usual treatment of the problem, as one centering
about questions of multiplying human beings as over against
a geographically limited land supply, emphasizes what is,
for economic prophecy, the most important and interesting
phase of this investigation ; for it is again to be emphasized
that only in the expectation that some factor or factors of
production will come to be relatively scarce is there any-
thing to be discussed. The laws of increasing return are
laws of change in one aspect of human productive ability
and adaptability; the laws of diminishing return are laws
reflecting the influence of change in the relative supplies of
the different factors of production. It is, perhaps, true,
practically speaking, that, but for the limitation upon the

DYNAMICS OF VALUE AND DISTRIBUTION $13

Urx^tr modifications in environment:

^ V . 1 ^ i changes in the sources of food supply,

^ ^ ( changes in the sources of raw materials of industry.

(b) non-land changes, capital goods.

/ from the point of view of each entrepre-

. I neur an objective, environmental fact;

(c) dianges in loan \ ^^^ ^^^ ^^^^ ^^^ ^£ ^.^ ^^^^^y re-
fund.and m prop- < j^^j^^ ^^^^ ^^^. ^^^^^ properly
erty institutions J ^^ j^j ^^^^^ u modifications in human-

\ ity-"

But here again the question presents itself as to what
>se, other than schematic, this classification may be
to serve; but if for nothing further, it will, at any
\ afford a convenient guide for purposes of exposition.
Doubtless it is possible to make some broad generaliza-
'k:ions with regard to the effects of increasing population
xapon land values and upon land rents in the aggregate,
irrespective of whether all lands must equally share in
"toese effects. Possibly also, though less securely, some-
tiling might, in wide generalization, be said of the effects
of increasing machinery upon rents or upon wages, all this,
likewise, without attempt to differentiate the sorts of
machinery, and also without attempt to distribute labor into
different sorts and grades in its technological relation to
machinery.

But the difficulty with all this is that all of it has its
basis in the technological relation of different instruments
and agents to one another, and that these technological
relations will not classify in even a loose and general coin-
cidence with the traditional threefold classification of pro-
ductive factors.

Increase of literary ability is technologically irrelevant
to the increase of inventive power in industry; increase of
artisan skill may intensify the demand for some machinery,
the while that it displaces other. Again, the multiplication
of unskilled labor may in some directions displace skilled
labor or the labor-saving appliances produced by it. It is,
for example, practically impossible, because unprofitable,

. S»6

VALUE AND DISTRIBUTION

to introduce labor-saving machinery into Mexico or India ;
crude labor in those countries is too cheap compared with
artisan labor. At the same time, enlarged supplies of some
grades of labor furnish a demand for other grades of
labor, e. g.. carpenters for architects and masons, masons
for hod-carriers, spinners for weavers, and so on indefi-
nitely. Again, some machinery creates demand not for
land as complementary good, and not, in any appreciable
degree, for labor, but for other machinery- In the history
of Enghsh industry, the spinning jenny placed an immense
premium upon the invention of the power loom, and both
called shrilly not for more men but for the introduction of
power machinery.'

And mere increase in population, to the extent that it
should be attended by the traditionally menaced poverty,
would not greatly intensify the demand for champagne
lands, or place high values on diamond fields ; something
would result of advantage for apple and prune orchards,
a lower degree of advantage to orange and walnut groves,
great stress upon fuel and iron mines, and famine rents for
the sources of the coarser foods. New coal lands would
injure the wood lots, and benefit the iron mines. New
fisheries would probably lower the income from pasture
lands, and, perhaps, intensify the demand for cereal lands.

The truth is that all these relations, on the one hand, of
complementarity, on the other, of substitution, depend upon
the particular situation in point of technique, and have not
even the remotest relation to the land-capital -labor classi-
fication. It is possible enough, it is indeed characteristic
of modern life, that modifications in technique, that is to
say, in the human factor of production, greatly reduce the
pressure upon land. This is especially noticeable in the
effect of farm machinery toward the lowering of agricul-
tural rents taken in the aggregate. Improvements in trans-
portation work in the same direction, and at the same time

DYNAMICS OF VALUE AND DISTRIBUTION $17

do another thing, they create accessibility ; thus, practically
speaking, they create land.

So, new knowledge is constantly sending much old
machinery — ^and some new machinery — ^to the scrap pile,
and this, not rarely, with the requirement of no new
machinery.

So again, changes in the standards of living or changes
merely in the direction of consumption may cancel the
alleged effects of the multiplication of human beings upon
rent and interest: for example, vegetarianism would post-
pone the land famine for a succession of centuries.

And changes in technique may conceivably be so far-
reaching as to leave to humanity practically no land prob-
lem at all, or, at least, only a mining-land and dwelling-
land problem :

Chemistry may some time solve the problem of food production
without recourse to agricultural methods. The secret once known,
the nitrogen in the air of the back yard and the ton of coal in the
bin may furnish food for an ordinary family for a year.*

But none of this is to deny that there is a dynamics to
the value problem, or rather to the distribution-and-cost
aspect of the value problem, but only to deny that much
more can be done with it than to surmise here and there,
as well as may be, what are the probable changes in condi-
tions, and then to deduce the probable and possible eco-
nomic significance of some few of these changes.

Increasing population appears reasonably probable,
though there is question enough as to the races and the

•Davenport, op, cit,, sec 352.

It is a noteworthy as well as a perplexing fact that one of the
economists firmest in adherence to the separate land and capital cate-
gories, and strongest in the conviction that interest and wages are cost
facts while rent is not, should have given allegiance to doctrine which,
sufficiently elaborated and worked out to its necessary conclusion,
must cancel the possibility of all discussion of the laws of return as
based upon the threefold division of categories ; and incidentally also,
would strike the pen across most of the pages of his own admirable
and suggestive work upon the distribution of wealth. (See Carver,
Distribution of Wealth, p. 85, or quotation, note ante, p. 131.)

classes likely to furnish ihe increase. No attendant dui^fs
appear probable of a sort to prevent an increasing sitb*
upon land, varying in degree, it is likely, according to tht
different qualities and capacities of the land, but probibly
affecting in sonne measure all or almost all lands. But fe
swamps of the Amazon or the African jungle may fot*
long time remain an undisturbed suriilus. And in this
connection also it would be possible for the growth of
laml rent to impose important changes in the distribution
puTvhasing power in society, and thereby to work apptf"
ciablc nmdi locations in the direction and volume of dificren^
ct.^iisumpt)on demands, with wide and conflicting circles o>
varying intcraaion.

From the land source, together with other influence
bearing upon ihe consumable product at the disposal of trt

as probable upon the standards of living of the differen ^*^
races and nations of men, these effects being different witfc^ ' ^
the different races and in the different levels of societj" of^^^^
each different race. .\nd \-arious interactions between
standards of li\-ing and rates of multiplication may be more
or less (lulMously asserted. .\nd possible bearings of
standards of Ii%'ing upon wages may be worked out through
Ihe general retatioo of the density of population to the
wage levH.

But what is. in truth, other things remaining unchanged,
the bearing of increasing population upon the wage
lex-el?

To make the question accurately intelligible it must be
assumed that the different grades and kinds of labor
increase proportionally. And even then will it do to assert
that wages must bll? How comes it to be true, if it is
Irue. that the volume of population influences the wage
le\-el? Is it. for example, possible to say, with Carver,
that "the wages of labor are determined by an equilibrium
..of two forces. — (he productivity- of labor, on the one hand.

.*

DYNAMICS OF VALUE AND DISTRIBUTION S^Q

creating the demand for it, and the standand of living, on
the other hand, limiting the supply of it" *

Not at all denying the bearing of these two forces as
somehow influencing wages, each in its own way and time,
it is yet to be objected that the ways and the times are
separate, that the offered explanation of wages is really a
mixture of long-time and short-time influences, — on the one
side a static category, a situation, on the other side a
dynamic variant making for possible changes, — and then a
balance somehow struck between them. The analysis
neither stays in nor abandons the field of entrepreneur
wage costs, but confuses the costs as they are with supposed
causes of the costs, and with possible or probable variations
of the costs. But, even so, the argument is open to further
serious criticism; for in reality the standard of living is
itself a derivative from the productivity of the labor; the
standard of living, as supply term, set over against pro-
ductivity as the demand term, will, then, hardly serve as a
full explanation of wages. But however this may be, it is
in any case clear that as a question of existing wages the
productivity of today cannot, for any purpose of present
costs or present wages, or under any entrepreneur compu-
tation, be equated against the labor supply of some years
hence. The wages of all the yesterdays and of today may
possibly have something to do with the supply of labor
twenty years hence; and the supply of labor of that time
will doubtless equate against the demand of that time. The
supply of today has precisely that same relation to the
demand of today. Today there is no equating of the
demand or supply of today with the demand or supply of
any other time. Any alleged effect from wages, through
standards of living, on the supply of labor, — whether, on the
erne hand, the position urged be that high wages and high
standards of living stimulate the birth-rate and the per-
centage of maturities, or whether, on the other hand, the

*CBnrcr, "The Marginal Theory of Distribution," Journal of
Political Economy, March, 1905, p. 263.

I
I

520 VALUE AND DISTRIBUTION

effect be asserted to be precisely the reverse — may be equally
well admitted or dented with equal irrelevancy to all prob-
lems of the current adjustment of wages; productivity is
as it is. Investigation of these lines of influence is. then,
merely a more or less successful attempt at a historical
explanation of the present labor supply, and, so far as the
labor supply has to do with the individual wage, is aa J
attempt to explain some of ike causes of the present condi- J
tions controlling or influencing the ruling level of wages. J
But the ruling level of wages will be the samefl
whether or not the historical explanations offered!
be well supported. So the wages to rule twenty years!
hence may today be possible of vague conjecture; and
in the making-up of the prophecy some bearing may '
be ascribed to the expected population totals of that time ;
and these totals may, with more or less justification, be
attributed to the standards of living prevailing today. But
all this is prophecy, atkd has nothing to say for the wages
of today.

Nor — and this is the important fact for the present dis-
cussion— even after the twenty-years" term has expired,
will such population changes as may liave taken place have |
overmuch to say; it is vastly dangerous doctrine to assert,
even on the supply side, the dependence of wages on the
supply of labor. For consumption goods, truly, the reason-
ing rightly runs that an increased supply diminishes price;
but for production goods the doctrine, so far as it is appli-
cable at all, applies in quite other significance and to quite
different results. Whenever the very increase in supply
itself implies and necessitates a change in the volume of
demand, the demand-and-snpply formula, entirely accurate
for consumption goods, becomes, for production goods, ^
entirely misleading unless used in a very different sense.

1 f the labor supply increases, how can anyone knouf I
that the wages must fall? Is it certain that either the per- j
capita productivity by weight and tale or the per-capita '
value productivity must suffer? Not unless the otiier

I
I

DYNAMICS OF VALUE AND DISTRIBUTION $21

classes and qualities of agents have failed to make a corre-
sponding increase. And suppose that they have not; with
an increased labor supply the social dividend is increased;
is it to be assumed that only the old total of wages can,
under the new aggregate productivity of labor, be- dis-
tributed among laborers? If labor has doubled and all
kinds of it have doubled, but if, at the same time, the other
productive factors have failed to increase or to increase
with corresponding rapidity, it may be taken as true that
not quite twice as much aggregate social product will be
possible; and out of this somewhat smaller per-capita
product a larger relative share will go to the agents rela-
tively scarce, and a somewhat smaller relative share to the
laborers. And this is all there can possibly be of truth in
the proposition that "the wages of labor are determined
by an equilibrium of forces — the productivity of labor, on
the one hand, creating the demand for it, and the standard
of living of laborers, on the other hand, limiting the
supply of it" (Carver).

To put it another way: Since with the change in the
supply of labor the value product to pay with is all the
while changing, that is, the productivity demand is chan-
ging, the effect upon the wage level must sum up as the
solution of two inquiries: (i) in what measure, relatively
to the increase of labor, is there a resulting increase in the
total product to be distributed? (2) in what measure does
labor, in the distributive process, fail of receiving the whole
of the increase in product resulting from the labor increase ?
It is evident that an appeal to the ordinary demand-and-
supply formula does not promise great results for the
purposes of this problem.

Inasmuch as changes in population can take place only
with attendant changes in the demand for goods and in the
production of goods and in the distribution of purchasing
power, there is room here for all sorts of varying influence
upon values and upon distributive shares. No especially

XALCE ASJ> DISTEIBUTION

present ihemselves i

t ia the prodoctiTTtii' of human efiorl,
mess, in tnistwwthi-
; atteadoa. And, for the
; be exclttdecl from ton-
[ the cue nav stud simply as one of
CBiplBflini fcmtt m Knes and methods ard directions
afeiBiif ottUdhed. Tvke as efficient a man is. for pro-
4KboB pMpOBcs. two men: oci the prodoction side, thi&
aaaaM^ Abb, Io a pnpnbtioo increase. Are land rents to
W Ifaerd^ JBOMLRd. or is tlie value itnputatioa in general^
to be uALiatnL affected dbwfvmtageously to labotT
s»; Sor wUe, wkfa larger wetgfat-and-tak pro-
nd a gnsttr auKUKUird soda! prodact, the abso-
of binr laaj increase, its ratio share will suffer.
m H sobject to amendment accordingty as the
; power, attendant upon higher pro-
, turns out to be directed. If,
1 power were directed to
Ac pffc*— of flew sorts of persooal service, or to lines
of goods B wUcfa labor akme could be appUed, the new
bbor po««T conU farwsh no new demand for land or for
any otber insmimeatal good, and no advantages in distri-
bntioo ootdd aocrne to any of these non-human factors of
pcoductioa as against labor.

Amiii^ and bgfeer wages, t

Belter organiiatioa of productton may be merely

, or it may point directly to an increase in entre-
dency: if. however, it be assumed that the
increase of product is due solely to an imprm-cment in
cntrepreneor ability, it may, ^ma facii, be expected that,
out of the resulting higher social dividend, the larger share
will be distributed to the non-increasing factors, employee
labor being here included. But here also the breadth and
die tmdiscriminaling iodusix-cness of the accepted dasst-

DYNAMICS OF VALUE AND DISTRIBUTION S23

fications destroy all promise of accuracy in the conclusions.
Better organization does not apply equally to all grades and
kinds of labor, or equally in all businesses and industries,
or equally to all kinds and varieties of instruments. The
threefold classification must be especially misleading here.
But even more misleading is the traditional classifica-
tion as related to changes in technique. Hygiene may
render pill-rolling machinery useless; inventions may
largely displace both labor and instrumental goods, and
may shift the emphasis over upon land generally or upon
particular kinds and qualities of land. There is, in truth,
no limit to the possible and the probable permutations here ;
here, indeed, it is always the unexpected that is the
probable. How complicated these problems are, and how
<lepenjdent for their solution upon assumptions tacitly made
or unconsciously implied, may be seen in an analysis of
the relations of improvements in transportation and in
crop-raising technique to the rental values of land.*

'Traditional discussion of the rent problem has assumed a prac-
tically inelastic consumption for the products of agjiculture. Making
no question that, relatively to other consumption goods, food products
manifest a great inelasticity of consumption, it is nevertheless to be
asserted that this inelasticity has been, in almost all rent discussion,
past or current, greatly exaggerated, to the serious prejudice of the
theoretical deductions. It is at any rate clear that "the law of
diminishing returns falls far short of a full theoretical equipment
for the analysis of rent movements. This law points merely to one
▼ery important fact in the supply aspect of the problem. But dimin-
ishing returns are the condition upon which rents depend rather than

their ultimate cause No economic explanation in terms of

supply alone is exhaustive or satisfactory How rapidly, for

example, rents may advance with an enlarging market for products,
must depend upon the measure in which demand will be retired by
rising prices. How rapidly rents may be made to fall by the opening
up of new lands, is incapable of estimate till something is known of the
degree in which falling prices may be expected to attract a larger
consumption. All rent tendencies must be studied, not alone from the
point of view of the facts peculiar to supply, but as well from the
point of view of the peculiar nature of the demand.

"Commodities vary greatly in the elasticity of consumption. With
falling prices, the demand for books, for example, greatly expands,
while higher prices would be met by greatly decreased consumption.
Where consumption is very elastic, small changes in price work large
changes in consumption. It follows, then, that small changes in supply

t fc^OMt^rf

™«ir. ■* fc— iMi ^^Iti*.

■» ■■in» rf »». u. ««. —E. ■rhdii
»x. «.&«■*«■ k ■• bK tat M

>W>*^ «NM f^ MM .1 te

^

DYNAMICS OP VALUE AND DISTRIBUTION 525

discussion here, mostiy deduced from the principles already
established. But much depends upon the sense in which

**c^ as in the previous illustration. Each grade of land, from the
^*«rgin, increases in rent by 2 for differential of fertility, and by 2 more
^<^r differential of £reii^t.

•'If now the freight differential falls to i for each grade, the
^*^* payments will fall from ao + 16 + la i- 8 -t- 4 to 15 + 12 + 9 + 6 + 3. Even

could cultivation extend two g^rades
lower without a material fall in prices,
io+S"iS this would carry the rent pasrments only
to 21 + 18+15+12 + 9 + 6+3. In fact,
8+4" 12 however, prices would greatly fall upon
the assumption of this extension. These
6+3— 9 lands could no longer be treated as
30-, 28-, etc« (bushel) times one (dol-
4+2-6 lar) lands. The 2, 4, 6, 8, etc., as dif-
ferential in bushels, would still remain,
^"'"^" 3 but these bushels would have greatly
shrunk as measured in terms of

market value

"It is not even true that improve-
ments in the art of agricultural neces-
sarily lower rent, if these improve-
ments are such as to apply solely or
mostly to the better lands. If, for
example, there were in cultivation

LAND

10—20

30

8-16

28

6—12

27

4- 8

24

2- 4

22

20

18

16

14

2 units of 3c>-bushel land

3 " " 29- "

5 " " 28- "

6 " " 27-

i<

(I

^nd some method were devised of doubling the output of classes i and
^, it would still remain necessary to cultivate some of the 27-bushel
land, while the 30 and 29 lands would have become 60 and 58 lands
"^th their rent differential measured from the old margin of 27*

"In no case, then, is it safe to assume that the mere fact of the

extension of cultivation to inferior lands means of necessity an

increase in rents. For anything like an accurate forecast of rent

tendencies in any case, there is required a Gregory King's law of

altogether unattainable accuracy. Were the demand for agricultural

products as elastic as is the demand for books, or sewing-machines, or

bicycles, improved arts of transportation would probably raise rents.

If, for example, rent differentials were due one-half to lower expenses

of transportation, and these expenses were reduced by one-half, it

would become practicable to cultivate much larger areas of land, if the

demand for products were such that the prices should not sharply

falL In this case, rents would increase in the total.

"Ultimately, then, we fall back upon the character of the demand
as the critical point in our rent investigation. The law of diminishing
returns explains the existence of rent only after demand is assumed.
The degree of rise or fall in rent can be guessed at only in view of
the demand.

"Some questions we can hardly even guess at It is com-

S>6 Value and distribution

the temi capital is to be understood. If taken as loan-iun''
or 15 competitive capital in the most inclusive sense, i^^
would follow thai ch^per capital, meaning merely lower ,
nites of intcrcsi, might raise or might lower rents accoid-
injrly as, under the prevailing conditions of technique, ihe
borrowed purchasing power should be directed to comple-
mentary or to substitutionary goods.

But if the term capital be taken to mean non-land pro-
ductive instnnncnts, further assumptions become necessar}-.
How elastic is the consumption of agricultural products?
And hovf far is it taken as possible tliat non-land
instruments can be made to function successfidly on lands
which were before submarginal? Costless capital goods
might conceivably go so far in substitutionary lines as to
destroy all differentials of serviceability between different
lands, or even as to render all lands equally valueless.

But all this detail grows wearisome, simply because
there can never cotnc any end to it ; at the best, it is mostly

Boatr Mnnn**) lfa«l iniprov«nicnt« in fana machinery wotk in line
«ilh iifimil fcniliicfs uxl improved methods to reduce renti. This
!■ Cttmct tot *ach inMhinery as increases the per-acre output. Bui
(or lb« MMt part, ibesc labor-savinc devices &rc not land-saving
4«rkt«. They ioereaie the amouiil of Lmd employed in ptoducinc a
(i<r«n ■wniim *( product ; thetetiy tbey lower the maTgiii of fertility,
•McUit t«i«nuv ttK cffcet of feitiltien. If renli fall, il must be
frOBi the bet that culti««boti is carried so far upon inferior soils, at
(krouch ■ CMUMleTabte expansion of supply, to lower prices, and to da
this to luch u> cxMol tbal Ihe inAaence of an increased differential
in prodnci ii oi«rcom« by the iweessity of marketing ibe products at
tower pnce«." — 0«T«npart, o^. r>l.. pp. 86-91 (somewhat adapted).

But a ekuiMB is needed here. l>oub(iess ihc lands espeeisllr
affected by ntw truuportation facilities may exhibit a marked ri*e of
rental). So hkewisc Ihc opening; np of America may have had more
effect 10 advance rents here ilrnn lo depress nrvis in Europe alone.
This means merely that to the extent that the agricultural market it
world-wide, so most aln be the rent gencralitations. if they are to be
theoretically safe.

But neither in theory not in fact does room for doubt remain as
to Ihe validity of (he point at present urged. Improvements in trans-
portation and in agricultural techni<;ae. impttwemeou. that is, io the
eflkicncy of human effort as applied to prodoctitm. serve to reduce the
feessuTc npon the land factor in prodoctioo. — fuDctios. that is to av-
as substttutionary rather than as complcmoitaiy ageDU.

DYNAMICS OF VALUE AND DISTRIBUTION 527

a disciplinary gymnastic. But this much, at least, stands

forth clearly : Every problem in the dynamics of value, in

its distributive aspect, must seek its solution along two

lines of inquiry: (i) how does the new development

affect the social dividend; (2) does the new development

bear, as complementary good or process, to make relatively

greater the demand for the instrument or agent under

examination, or rather is the relation one of substitutionary

good or process, summing up, that is, in the emergence of a

new competitor, or, practically, in an increase in the supply

of the goods under examination?

The bearing of education upon the various distributive
shares must be worked out as in parallel with other develop-
mental influences making toward increase in the productive
efficiency of human effort ; but allowance must be made for
the different effects upon different grades of human activ-
ity,— ^the probable effect, for example, to lessen the differen-
tials in favor of entrepreneur activity as against employee-
ship. And other effects toward increase in the volume and
in the variety of consumption requirements would come
in here for discussion.

A seemingly more difficult question is that of the prob-
able future tendency in the rate of time discount. So far
as the trend of things is toward an increasing social pro-
ductiveness and an increasing per-capita share in that prod-
uct, and thereby a diminished pressure of subsistence needs
upon the individual income, it would seem safe to infer an
increasing volume of deferred rights of consumption offer-
ing themselves upon the market. On the other hand, there
appears probable a progressive development in the science
and technique of industry. Temporarily, then, at any rate,
the greater ease of saving may be offset, in effect upon the
discount rate, by the increasing weight-and-tale productive-
ness of indirect methods of production.

But here again much depends upon the degree and direc-

S«8

V.U,UE AND DISTRIBUTION

tion in which improvements in technique express tfem- 1
selves in the form of substitutionary devices and instru-
ments rather than of complementary instruments in relation
to the general stock of instrumental goods. It is con'' ^
ceivable that knowledge of ways of getting on withou*^^
capital should greatly limit the capital-goods field of invest-
ment for the loan fund.

So the increase of savings and the growth of capital
goods might go so far, in directions substitutionary to
particular grades or qualities of labor, as to depress the
wages of these laborers even below the permanent subsist-
ence minimum. But it is difficult to conceive how laborers
in the aggregate could seriously suffer through any pos-
sible increase of capital instruments produced in the main
by labor, unless, indeed, these instruments were of a sort to
function with reference to labor as substitutionary goods,
and at the same time, with reference to land, as comple-
mentary goods. In such case, manifestly, no difficulty
could arise in any lack of supplies of consumption goods at
human disposal, but only with the distributive titles under
which the distribution would take place; rent would tend
to absorb the entire social product. Parallel theoretical
possibilities present themselves in connection with such
developments in methods and devices as should tend to dis-
place either capital goods or labor or both.

And tliere is possibility in many industries of monopoly
organization going so far and so profitably, through the
increase of savings and of capital goods by entrepreneurs,
and through the decrease of consumption demand on the
part of the laborers, and through the displacement of
labor by substitulionary instruments, as to bring about
either a progressive non -employment of labor, or an
employment upon increasingly harsh conditions, and to
bring about at the same time a tendency toward an increas-
ing volume of consumption loans, represented either by
an increasing volume of indebtedness from the non-capital-
izing classes to the capitalizing classes, or, more prol^bly,

DYNAMICS OF VALUE AND DISTRIBUTION 5^9

2tn increasing resort to public debts both by the employee
<^lass seeking employment and by the capitalizing classes
steking avenues of investment.*

* But all of this leads up to questions falling within the problem of
^*at has been termed the "fallacy of saving," — ^upon which problem the
'^^sent writer is disposed to confess himself sorely perplexed.
-^ Ruskin, Robertson, Hobson, and Veblen seem to have done the
^^«"t work here, not perhaps toward the solution of the problem, but to
^^^ development and definition of it. Surely, the ordinary "capital"
'^'^ with its assumption that capital must be both concrete goods and
,/^j*^tively to labor complementary goods, is crassly superficial. And the
^^^*^«le subject is seemingly in intimate and intricate relations with the
^^nomena of industrial depressions. (See page 227, note.)
The truth may be something as follows:

So long as industrial technique will permit the utilization of new

^^>plie8 of production goods, at results surpassing in service the dis-

^ced products or the displaced consumption represented by the

"'^^^termcdiate appliances, so long private saving may be a clear

T^^^vantage to society as a whole, but this only upon the assumption that

^^*^e saving goes to the increase of productive equipment, rather than to

^^^vate consumption loans, or to fiscal extravagance, or to the orgies of

But on what terms can any agency making for increased volumes

^^ products render service to society? Only upon the condition that

"^^le products are to be consumed, upon the condition, that is to say,

^liat the standard of consumption keeps pace with the increase in

productive efficiency.

But even so, something may depend upon what classes of society
do the consuming. Is it meli that those classes receiving large incomes
of purchasing power shall further capitalize to the indefinite increase
of instrumental goods, or would they better consume?

Note that the question is not at all whether these disposable
incomes were reputably earned, or were institutionally justifiable, or, on
the contrary, were predatorially obtained, or were better otherwise
distributed, but only whether, once obtained, and however obtained,
they are, from the point of view of the other classes of society, better
consumed forthwith by their recipients, or are better directed into the
creation of new technological equipment.

We must, then, first inquire whether and in what degree tech-
nological capital may, in ordinary times, affect the distributive shares
of other factors and claimants in production.

If it were true that, for whatever addition to product were due to
the new instruments, an equivalent income accrued to the owners of
these instruments, it would follow that other claimants could have no
interest in the increase of capital. The problem is, then, in this
aspect, a problem in the theory of distribution ; for it is clear that in
the imputation of distributive shares, the other claimants will receive
some 'share of that product mechanically attributable to the enlarged
supplies of technological goods. In this sense only, and by this method
oidy, does the employer's capital benefit the laborers or other claim-
ants. Any solution which directly deduces from the fact of an
increasing social dividend made possible by capital, or from the fact of

Ill li.t.t.b«l^

^hv •K^ii*W«»

DYNAMICS OF VALUE AND DISTRIBUTION S^l

classes and qualities of agents have failed to make a corre-
sponding increase. And suppose that they have not; with
an increased labor supply the social dividend is increased;
is it to be assumed that only the old total of wages can,
under the new aggregate productivity of labor, be- dis-
tributed among laborers? If labor has doubled and all
kinds of it have doubled, but if, at the same time, the other
productive factors have failed to increase or to increase
with corresponding rapidity, it may be taken as true that
not quite twice as much aggregate social product will be
possible; and out of this somewhat smaller per-capita
product a larger relative share will go to the agents rela-
tively scarce, and a somewhat smaller relative share to the
laborers. And this is all there can possibly be of truth in
the proposition that "the wages of labor are determined
by an equilibrium of forces — ^the productivity of labor, on
"the one hand, creating the demand for it, and the standard
of living of laborers, on the other hand, limiting the
supply of it" (Carver).

To put it another way: Since with the change in the

supply of labor the value product to pay with is all the

^hile changing, that is, the productivity demand is chan-

S^g, the effect upon the wage level must sum up as the

solution of two inquiries: (i) in what measure, relatively

to the increase of labor, is there a resulting increase in the

total product to be distributed? (2) in what measure does

labor, in the distributive process, fail of receiving the whole

of the increase in product resulting from the labor increase ?

It is evident that an appeal to the ordinary dematld-and-

supply formula does not promise great results for the

purposes of this problem.

Inasmuch as changes in population can take place only
with attendant changes in the demand for goods and in the
production of goods and in the distribution of purchasing
power, there is room here for all sorts of varying influence
upon values and upon distributive shares. No especially

AND DISTRIBUnO!

one effect nor to the other. The value of each and cveiv ^"•■
instrument will be a capitalization based upon the curren -^

discount rate; but this discount rate will be the point a^^^^
which all the saving in loan-fund form, the genera!-pur- ^
chasing-power form, find a market among the various
demands of borrowers for consumption purposes, for sod-
aily productive purposes, and for privately acquisitive pur-
poses. The technological demand is only a part of tbe^^g
entire demand. ^^H

time, takes toll from social product by other title than of cqiil*«lM^^^|
addition to thai product is a socially disastrous thing. No nailer
what personal or moral Justificalion there may seem to be, and
as belween man and man may really be, the case is, in last analysis,
nothing but serfdom on the one side, and puuitism on the othcf.

CHAPTER XXV

THE ADJUSTMENT OF PRICE

Such examination of the psychology of utility and of
Valuation as falls within the sphere of economics to under-
t^e has already been attempted, with something over.
(See note, p. 307.) For present purposes it suffices that
market prices may always safely — albeit superficially — ^be
3"educed to a problem of adjustment between the forces of
demand and supply. But, even so, there remain some
sispects both of demand and supply and of the process of
adjustment still requiring attention.

For purposes of analysis and of exposition, the device
of plotting demand and supply volumes into intersecting
curves expressive, at their point of intersection, of the
place and the method of market-price adjustment, has suffi-
ciently demonstrated its claim to serviceability.^ It is,

' Oddly enough, the general adoption of the plotting methods has

not availed to . remove the old-time ambiguities connected with the

demand and supply notions. Potential demand, or excluded demand,

and potential, or excluded, supply, are clearly brought out in the

plotting device, as are also the respective relations to the actual and

the possible adjustments of price. Nevertheless, the bad logic of the

terminology which employs the concepts of demand and of supply to

explain price and then defines demand and supply as derivatives of

IMrice, still abides. Ruskin's inspirational methods touched the heart

of the case when he wrote, "The economists mean by demand *the

quantity of a thing sold.' I mean by it the force of a buyer's capable

intention to buy. In good English, a person's demand is not what he

giets, but what he asks for." (Munera Pulveris, chap, iii, "Ad

Valorem.")

And so Pantaleoni :

"When price falls, a determined scale of wants being given, more
consumers purchase ; when, on the contrary, prices rise, fewer con-
sumers purchase. Here we have to do with the extension or restric-
tion of consumption in accordance with a given and determinate law
of demand. But the extension or restriction of consumption is termed
an extension or resfriction of the demand, which gives rise to endless
ambiguities. By the use of the graphic method these ambiguities
are avoided The consumption, to speak accurately, or

533

534

however, at the same time true that the uses actually
macJe of curves of utility and curves of demand have been
prolific of much loose thinking, — this, for the most part,
because of the lack of difTerentiation between curves of
individual utility and CTirves of group or social utility, and
between curves of individual demand price and curves o/
group demand price.

As referring to the individual, precisely what may
demand or utility curves be made to express? As of any
one time, and for any individual, it is undoubtedly pos-
sible to construct a curve of utility for all of the various
items of a stock of precisely similar goods; but it is seem-
ingly impossible, and it is certainly profitless, to attempt to
incUide in the formulation more than one kind and one:;^^
grade of goods. And with reference to any one kind anf^--,^ ■
grade of goods, at any given point of time, a demand curv*. ,^^
in terms of price is also easily possible of construction fo^r::ajr
the individual ; and for any given point of time, a tota'^^^t
expenditure curve, expressive of the distribution of pu',^-^.

figuratively the demand, i« extcndrd or restricted ; but it iwitlier
nor falls- [Pure Bconamici, Macmillan, 1898. pp. 148. 167).

Flux also 15 accurate in essentials;

"The stale of demand may be really unaltered wbite the ami
demanded [ ?] teaponds (0 cbangei of price quotations. Price chai
in fact, leads lo eiclcnaion or reatnction of the amount demanded,
as is commonly said, of the demand, though Ihia phrBseology docs
really dewribe the true nature of what is occurring" {cp.

ri

The folIowinR. however
less defensible u

; examples of the i

SeagcT : "The general law of demand la (hat it varies dir^f<(]„
with changes in the inlcluity of wants, and inversely wilb cbangcrs in

the prices that must be paid for goods When drmaitij

increases or decrease* readily in response to price changes, it is ajjj
to be elastic" (op. cit.. p. 6fi).

Hadley : "In any given market, the supply of an article, in irj 1
technical sense, is the amount offered at a given price. It (ends in

increase as the price diminishes The demand for an xiHtk

is the amount which will be taken at any given price. It tends to

Increase as the price diminishes The market price for u

article .... is the price at which the demand is equal 10 the supply"
(of. cH., p. 74).

Fetter; "In the case of any good - ... a change in its niio
to other goods will increase the demaod" (_op, cil,, p. 19).

THE ADJUSTMENT OF PRICE 535

chasing power, in terms of some standard, among all the
diflferent grades and kinds of commodities is, theoretically,
within easy accomplishment.

But for any g^oup of individuals, a utility curve is,
as we have seen, a hopeless impossibility. A group
demand-price curve for any one kind and grade of article
is readily attainable; and a g^oup demand-price curve for
commodities in general is also a possibility; but this last
only in the sense that, as such, no curve remains, but only
an aggregate market-price adjustment expressive of the
price relations of all the different exchanging goods. All
this, however, may require elaboration:

For any one kind and gjade of commodity, the indi-
vidual curve of falling utility per unit of commodity, as
distinguished from a falling price-paying disposition, could
have little or no significance as expressive of absolute utility
magnitudes; not that some common denominator, in units
of pleasure, or of satisfaction, or of desirability, or of
choice, might not exist in the individual psychology; but,
if existent, it could hardly be expressed, and, if expressible,
could hardly be of service. The significance of the curve
is in the expression not of the absolute utility magnitude
of the different items of the stock, but only of their relative
significance. The marginal item also could become only
vaguely quantitative in meaning, quantitative in the sense
merely of asserting a smaller utility than that of any other
item in the series.

There is, therefore, no measure function anywhere
expressed in the utility or marginal-utility analysis; the
very fact that the series is a series, and that the law of
satiation which it expresses implies that the items are of
diminishing utility volume, makes each item incapable
of serving accurately as the utility equivalent or measure of
any other.

Nor, as we have seen, is it, with the individual demand-
price schedule, possible to find a measure of utility in
money. The limit of price offer expresses merely an

536 VALUE .\ND DISTRIBUTION

equivalence in utility between the thing in prospect ^^
some foregone alternative. (See page 315.)

It follows that the total-expenditure schedule of tfi^
individual indicates not absolute utilities, but only iv/^f
usesVill be made of the individual's fund of purchasing
power as against the competing claims of other desirable
commodities. And no item of expenditure among all ihe
items need be marginal in the sense of being at indifference
between the actual direction and the alternative direction
of purchase. The marginal unit of expenditure will be
merely the lowest-service unit of all, without any neces-
sary or probable implication as to the absolute size of ii.
Any attempted reduction for the individual of all the
different commodities into one utility curve or schedule
could, at best, be a mere repetition of the original expendi-
ture curve.

But it can hardly be too many times repeated tliat, so far
as concerns utility schedules, we can never get beyoiid Ihe
individual. Society can have no utility curves or computa-
tions, unless upon some heroic assumption — nevertheless
possibly inevitable in socialism — that all men are alike, or,
at all events, that their differences may or must be over-
looked. As between different individuals, there can be no
comparison of utilities either quantitatively or qualitatively.

There may. however, be constructed for any one kind
and grade of commodity a social or market price-demanri
curve, a curve indicative of the varying volumes of com-
modity marketable at the different prices set in the schedule.
But neither for the group, nor for society as a whole, nor
for any individual within the group is the price offer
indicative of any absolute utility magnitude.'

'As forcibly illustrating this mixup between the individuil ntililf
curve and the individual price-offer curve.— between the posiible indi-
vidual utility curve and Ihe impossible group or social utility tant,
and t>elwcen the individual demand-price curve and the K">up or lociil
demand -price curve, Macfarlane's "grsphic representation of the
marRtnal-utility theory" (fa/i« and Dittritmlion. p. 37) is aft-
ciaJiy worthy of citation. "The utility of luccess

represented by line* at right angles to OM.

THE ADJUSTMENT OF PRICE

537

The relations between the individual desire and the
individual price-offer curve, and of both of these to the
Jtiarket-price-offer curve, require some further attention.

How much of today's fund of purchasing power,
money or credit, shall a given individual turn toward the
acquiring of wheat? Not merely the hunger of today, but
the foreseen hunger of later days must be taken into the
reckoning, as must also the expected future supplies of
wheat and the expected future command of purchasing
poorer, and over against all this must be examined the same

cordins: to the marginal utility theory, the value of the whole com-
tnodity is determined by the utility of the last increment of supply."
So "A U or M N represent severally the marginal utility or value
per unit of the commodity."

Accurately, this curve might represent the utility curve of any one
commodity for any one individual at any given time, or it would serve
for his price-demand curve, or for the price-demand curve of society
as bearing upon any one commodity at any one time ; but it cannot
serve for utility curve and price-demand curve together, whether for
some one individual or for society. A price-demand curve differs
from a utility curve, where this latter is possible, in that the price-
demand curve shows the effect of the desire for other things. Thus,
even though the utility curves of several different men could be
identical, there would be as many different demand curves as ther«
were different men, and the demand curve of any one man would vary
with different days, even though the utility curve might conceivably
not do so. So, when Macfarlane is going to have AU or M N repre-
sent the marginal utility or unit value of the commodity, he is
again confusing the possible interpretations of the diagram ; he is
really treatingf the curve not as a utility curve of any sort but as a
social demand-price curve expressive of different volumes of purchas-
ing disposition in view of the differing individual comparisons and
decisions as to the respective applications of purchasing power.

I

538 VALUE AND DISTRIBUTION

total of considerations as bearing upon the conpcting
claims of all other direcDons of expenditure. That is to
say, a purely personal system of discounting future facts
into bases of present activity must be applied over a wide
commoditj- field, heiore the individual can decide, in any
given case, whether he shall buy wheat or raiment, or
rather hold for future occasions certain items of onspe-
cialized purchasing power. Thus today's hunger-utility
line, if it could be drawn, and today's price-demand line, as
it can be drawn, must both be lines of steep descent, wncelhe
appetite for food, and particularly for any one sort of
food, is quickly satiated. Not so, however, when the long-
time aspect is included in the computation. As the needs
of days-ahead, or even of weeks and months, make them-
selves felt in thought, the price-offer line descends not at
all so sharply ; possibilities of storage, of decay, of ravages
by vermin, as well as possibilities or probabilities on the
side of future supplies, future needs, and future purchasing
power, all are data in ilic problem. But in view of eadi
man's situation and prospects, the law of satiety holds,
and a limit comes to the purchasing disposition as reaching
out toward wheat. This curve does not, however, find its
lowest offer item at the point of satiation but at the point
where some stronger pull attaches upon the purchasing
power in hand. The items of price offer in the individual's
wheat-demand schedule will therefore probably scatter
tliemselves along at considerable intervals in the construc-
tion of the individual's general -expenditure schedule or
curve, this last curve serving to express the same f;
which, from another point of view, might stand as the ii
vidual's money-utility curve.

It is now to be noted that the individual's price-ol
curve for any particular line of goods, and the individual
expenditure schedule, are both worked out upon the assump-
tion of a given price situation for each and every line and
grade of commodity ; very considerable modifications, there-
fore, in the amount of each commodity demanded, and in

i

DYNAMICS Ot VALUE AND DISTRIBUTION 523

fications destroy all promise of accuracy in the conclusions.
Better organization does not apply equally to all grades and
Icinds of labor, or equally in all businesses and industries,
or equally to all kinds and varieties of instruments. The
threefold classification must be especially misleading here.
But even more misleading is the traditional classifica-
tion as related to changes in technique. Hygiene may
render pill-rolling machinery useless; inventions may
largely displace both labor and instrumental goods, and
may shift the emphasis over upon land generally or upon
particular kinds and qualities of land. There is, in truth,
no limit to the possible and the probable permutations here ;
here, indeed, it is always the unexpected that is the
probable. How complicated these problems are, and how
dependent for their solution upon assumptions tacitly made
or unconsciously implied, may be seen in an analysis of
the relations of improvements in transportation and in
crop-raising technique to the rental values of land."

'Traditional discussion of the rent problem has assumed a prac-
%ically inelastic consumption for the products of agriculture. Making
no question that, relatively to other consumption goods, food products
manifest a great inelasticity of consumption, it is nevertheless to be
asserted that this inelasticity has been, in almost all rent discussion,
I>ast or current, greatly exaggerated, to the serious prejudice of the
theoretical deductions. It is at any rate clear that "the law of
diminishing returns falls far short of a full theoretical equipment
for the analysis of rent movements. This law points merely to one
▼ery important fact in the supply aspect of the problem. But dimin-
ishing returns are the condition upon which rents depend rather than

their ultimate cause No economic explanation in terms of

supply alone is exhaustive or satisfactory How rapidly, for

example, rents may advance with an enlarging market for products,
must depend upon the measure in which demand will be retired by
rising prices. How rapidly rents may be made to fall by the opening
up of new lands, is incapable of estimate till something is known of the
degree in which falling prices may be expected to attract a larger
consomption. All rent tendencies must be studied, not alone from the
point of view of the facts peculiar to supply, but as well from the
point of view of the peculiar nature of the demand.

"Commodities vary greatly in the elasticity of consumption. With
falling prices, the demand for books, for example, greatly expands,
while higher prices would be met by greatly decreased consumption.
Where consumption is very elastic, small changes in price work large
changes in consumption. It follows, then, that small changes in supply

1

540 VALUE AND DISTRIBUTION ^|

price curves combining to make iL The individual pri^ ^,
offer curves of A, B, C, D. and E. say for bread, bei J^^
assumed as respectively depicting price demands of 9, ^
7. 6, 5;8. 7. 6. 5. 4:7. 6, 5-4. 3:6,5,4.3, 2; 5,4, 3, 2_ ^'
and as represented in plotting as lines of a 45-degree decl^c^^ '
sion, would, as an aggregate demand volume of 9. 8, 8; 7. -
- 7; 6. 6, 6, 6; 5. 5. 5, 5. 5:4, 4, 4. 4: 3. 3, 3: 2, 2; i, ffc/o,'
into a group demand curve represented as follows :

^

n /

'.,

-

^_

■.

■^

-s

■•-.

■-,

I

^

\

"■..

■-,

-

-_

^.

"0

s.

~\

"\

■\

z\

-._

rpA

!

The value equation requires a supply as well as a
demand term ; but it does not require the assumption of a
produced or of an elastic supply. To make, therefore, still
clearer llie concept of demand, and to prepare for the
introduction of supply considerations, let there be assuraed;^^
an existing supply, truly, but a supply fixed and limited W^|
volume, in the sense that all sources of new supply 3I^^|
Uken as, for the time being, closed. ^^B

Nor is this an especially heroic assumption; the eco-
nomics of child-trading approximalcs this case; and the
situation among the reservation Indians after a general-t-
issue of supplies is a still closer approximation. How wotiUj^|
demand present itself under this gift-supply assumptioo^^|
And how would values adjust themselves? ^^|

Trading actually goes on briskly in ttiese cases, an^^f
doubtless would do so. if confined entirely to barter pn>^^|
cesses ; but the barter problem has already been sufficiently ^*
considered, and, even if capable of satisfactory analysis,
would not afford an analysis serviceable for our existing

lUSTMENT OF PRICE

541

Re is, therefore, also to be assumed

exchange, a price standard.
[advance our problem, the determi-
I nd of the price of any one article, to
I 1, obviously true for certain purposes,
o f commodities at any time is in one
ilic other aspect supply, and that
in the total supply is at the same
le total demand. The problem in
I hat amounts of money or of equiva-
■ are, under all the conditions and
1 the situation, at present held to be
I n commodity at its various levels of
I g-power demands are now extended
1 in question. All the different holders
exchange prices of which are to be
)mmodity under consideration, must
transferred their various commodity
I ogeneous purchasing-power medium.
I se possessors of commodities or any
ran figure as data in the analysis
Our question is, what money
any selected commodity; we have no
ind supply as aggregates in relation
' for the total of commodities.
[ iidividual in the assumed group of five
ned as disposed to purchase some share
I d supply, if only the price turns out to
attract him; each, that is, represents
Individual A will take one item if the
r t 9; five items if the price is 5 ; and evi-
] 31^ not to give more than 5 for the
rn, etc., expresses

p 6 for the fourtfL
ditain son]

er expression.
Hand schedules

hedule of dif-
ice levels,— our

VAIXE AXO DETUBCTIOS

e at pricr 9. Arte at 8^ ttz ac 7. fea X C^ fitei ■
a II 4, tmatcj-two M ^ mcotf-fav tt ^ taotK

Dos nis """T***- oar dEinisd MacBBcf S^pnti

ibCTotfaitida to be fornle: at iriatlndd

i frioe be adjoMed? Hcr we out ofctindf Mt

t of tvo ASeraoi poaaaie Mamptiawi. <i) tbuAc

olden of Ae eooeiMwfey will sdl at may pntx ikl *?

ioB get, ti) thai dim are refunl pncci.

L poo tbe nrft a<jiiiup<iott. inat oi a rtriraiid xseanlcff
carve capraaay nttrimnm pricz oOks of 9^ ^^7.7,^
6^6,6^^ 5. 5. ^ 5. rtc. ten toaa of TttcRrd B^Tlyai
be afaiortml Ik- the noricet mty npos ten» of apriss
Iowa> 5.

No sodi nsak will, however, obtain ncider the ttaxA
mstaittfUioo ; here, obriofsly. fbe tmooaie nrast be a £■
((efent one tcootoogfy as dunsvU anatfBfmoBS are nit
with rqcard id tht feacratMXi pnces art br Ibe «wh
K''e- 'T'* " ill * '^'^r ■» ra*< 'a'' -^ ^ 'h - •'• ^ tfcV

THE ADJUSTMENT OF PRICE 543

Against a demand schedule or curve of lo, 9, 9, 8, 8, 8, 7, 7, 7, 7,
^> 6, 6, 6, 6, s, s, s, s, s, Si 4, 4, 4, 4, 4i 3, 3, 3, 3i 2, 2, 2,
*> 1. The price will then adjust itself at the point where
^^ market demand will absorb ten items of supply, that is
^^ say, at some price greater than 6 and not greater than 7.

The manner of market analysis especially characteristic
^^ the Austrian school has, under the name of the mar-
ginal method, now established itself among practically all
^^^onomists, although there remain different views enough
^5 to the possible purposes which this analysis may serve.

*In isolated exchange, exchange between one buyer and
^^ne seller, the price is determined somewhere between the

Subjective valuation of the commodity by the buyer as

\ipper limit and the subjective valuation of the seller as

lower limit." ■

* Positive Theory of Capital, p. 199.

No one would be disposed to dissent further than to remark that
Boefam-Bawerk has here shifted his subjective-worth concept over into a
something derivative from the comparison of subjective worths — a
true subjective valuation expressed in terms of price. B, the seller of
the horse, and A, the buyer, work out the price-result by higgling.
But it is worth while once more to urge that the case is more complex
than it seems upon the face of it. What are these different subjective
valuations? A is concerned not merely with the utility of the horse,
but also with the utility of what he must let go in order to get the
horse. B likewise has really two things in mind — the horse to be sold
and the return therefor to be received. Evidently, there is present in
the problem a medium of exchange, and tacitly and indirectly present
a whole range of commodities into which the transferred medium may be
exchanged. For ideally simple conditions, the case should be assumed
as one in which B has only horses for sale, A only sheep, and neither
A nor B the disposition, at the same time with the opportunity, to
part with the property to be acquired. If, then, B's supply of horses
is such as to make horses a burden to him, while A is equally over-
stocked with sheep, the terms of exchange may be anything — ^thirty
horses for one sheep or thirty sheep for one horse ; there are no limits
but those of skill in bargaining. But, directly it is assumed that each
finds in both horses and sheep a utility for himself, there comes about
a raluation by both A and B, not, however, a valuation by B of his
horses or by A of his sheep in terms of some unrelated marginal useful-
ness, but a comparison by B of the marginal usefulness of his horsea
in terms of the marginal usefulness of the sheep offered, by A of the
sheep in terms of the horses offered. That is to say, upon a basis of
one marginal utility for each exchanger there can be no limit prices
between which the exchange price must finally be found. Each trader

544 VALUE AND DISTRIBUTION

This explanation ot value is based upon tfic assamption
thai, as the items of offer and demand become more numer-
ous, the margin interval within which the higgling process
may be operative is constantly reduced. A sufficiently
minute gradation of both offer and demand is assumed — so
near an approach to intiniteslmals — as to justify the treat-
ment of the selling-price as accurately a marginal price for
both demand and supply. Admitting all the necessary
attendant conditions, namely, that all the commodities are
of equal desirability, all the competitors in the market |
simultaneously, and "that the buyers and sellers make no J
mistakes about the actual state of the market such as would ]
prevent them from really pursuing their ^oistic interest"'
— assuming, in short, a perfectly frictionless market, this I
may be admitted as an accurate account, descriptively, of I
the market process ; but it is another maner to assert that ]
the point of adjustment expresses marginal utilitie
measures them, or is measiu^ed by them. As we have seen,
two marginal utilities must be compared by each marginal J
trader — utilities must become marginal relative utilities^ I
before a trader can become a marginal trader. It is still I
another matter to assert that these mai^nal traders are. as '
against tlie opposing in-pressing volumes of commodity
and of purchasing power, the causal facts determining the
ultimate price adjustment. It is yet even more questionable
to assert that, white the market price coincides with the
price limits of both mar^nal traders, tlie price is invariably
determined by the price limit of only one — the buyer. All
these questions really resolve themselves into the one great
question. What are the causative forces in the market
adjustment ?

muM b« concerned with two mBrginal atilities. and must have baied
his subjective valuation upon the outcome of this companion. It is
only upon these condition* ihal A can set his minimum olTer al Ten
sbeep for one horse, or B determine, as bis limit, to accept live sheep
for one horse, and the price limits be declared fixed nt ten to one as
upper limit and five lo one as lower limit.

The importance of the further assumption of an exchange medium
and a surrounding commodity market Is now suAicientl]' evident. To
tay that B will accept fifty dollars for his hone, and that A will, is
limit, give sixty dollars, is to &iy that B prefers as against the utility
'of the horse the things which 5fty dollars will purchase, and that, even
as against the utility of the Ibines that sixty dollars will purchase, A J
prefers the utility of the horse.

*Fotilivt Theory, p. 304.

THE ADJUSTMENT OF PRICE S4S

The illustration — quoted from Positive Theory— oi
isolated exchange has already received sufficient examina-
tion. No talk of determination of price by margins or at
margins, but only between margins, can be made for this
case.

Consider now the illustration of competition confined
to the selling side. If ^4 is the only buyer, with 30 as
his price limit, and if tc^ether with B, with a minimum
price of 10, there are other items of supply, S, at 12, S,
at 15, B^ at 20, and S^ at 25, the price must be made at
somewhere between. 10 and 12 as the limit'

This second case gives little support to the theory that
the price adjustment either expresses a demand price or
is limited in either direction by demand margins. Both
the upper and the lower limits are fixed by offerers' prices.

It appears, indeed, that only where, at a certain mini-
mum of price as set by supply, the demand items out-
number the supply items, can a demand schedule furnish
both price limits ; but cases of this sort are presented only
in the one-sided competition of buyers:

"Assume now that, in addition to A^^ and A2, three other
buyers, A^, A^, and A^^, compete for the horse, and their
respective circumstances are such that they count the pos-
session of the horse equivalent to 22, 25, and 28, respect-
ively ^8 will bid to the limit of 22, A^ to 25,

and A^ to 28." •

Thus at 28 ^1 and Af^ would close, so A^^ must pay a
price somwhere between 28 and 30.

TWO-SIDED COMPETITION

Buyers

ould bu^
i4, " " " " 58,' " " "' " "' ' " " 28

A^ " " " " 26, " " u U U U U ^g

A^ " " " " 24, " " a a a u u

As " " " " 22, " " a a a u a ^^

A

9

A%«^««# «* AAX#

28,

n x#««sv

K «^«« 7

«*h

fKAJ

tl

26,

It

tt

22,

U

tt

H

tt

21,

tt

tt

20,

U

tt

18,

€t

tt

17,

tl

tt

I«>,

((

tt

At " " " " 21, " " tt tt tt tt tt ^j

A^ " " " " 20, " " u u tt tt tt ^

Ag " " " " 18, " " tt tt tt tt tt jg

17

A tt tt tt tt -^ tt tt tt tt tt tt tt -«

^xo 15, 15

^Positive Theory, p. 201.
• Ihid.

\

54fi VALUE AND DISTRIBUTION

Sellffs
Bi rates a horse at lo, and would sell at any price ove

Bt " " " " »il." " " " ' 'I*

B, ' " as, " " " " " " " »s

B, " " " " 36, " " " " " " ■ a6

"At any price over 20 only six horses are demanded and
five offered Tfie solution becomes essentially differ-
ent when the rising bids have reached the limit of 21. At
that price A^ is compelled to cease bidding, and there

are now only five sellers against five buyers The

bargain may be concluded at the price of 21." But at
the price of 2iJ-^ "there would be a sixth possible seller in

the form of fl, The limits within which the

price must necessarily be determined are narrowed to 21
and 2i>4."'

But meanwhile observe that, though in an isolated
exchange, B and A get at the terms of sale by higgling,
and though, in the case of the one seller B, in face of A^
and A,, the price is fixed by the bargaining of B with A^,
it is a hazardous step to conclude that any similar pairing-
ofl? can obtain under the two-sided competition of the ordi-

' Foiilive Theory, pp. J03-106.

Recasting the prnblem so as lo make reiervBlton prices appear in
the demand column, (be supply schedule Hands as eight items for sale
without reservation as against offers of 10, 11, is. 17, 17, 18, la, itt,
ai, aiSi, 23. as. '5. 16, a7. 18, 30. The price outcome is, of course,
llie same as before.

It is worthy of note that this view of supply as having also a
demand aspect and as leaving both the upper and the lower price limits
lo be furnished from (he demand schedule affords scant comfort lo the
demand school of value, since it remains true thai the number of
items in the supply schedule must delermine between which limit
pair of demands the price shall finally settle. Otherwise than by
somehow showing that the volume of the supply schedule is itself to be
traced back to demand forces and explained by them, Ihe demand point
of view fails to moke out its case.

But, in whichever manner Ihe problems are analyied. it is evident
ibal no warrant has yet been given for asserting the paramount impor-
tance of either demand or offer in the determination of price. Admit-
ting that for cases where infinitesimals have excluded higgling, "we
now see that every market price is a marginal price" (Potilivt
Thtory, p. 309), the existence and origin of any one determining force
must still be held in doubt. To justify the Austrian interpretation,
supply has yet to be resolved into demand.

THE ADJUSTMENT OF PRICE 547

nary market, no matter how idealized may be assumed to
be the conditions. It can hardly be true that, in order to
reach the price adjustment, any particular individuals
must get together; yet our rationalized schematic narrative
has it that the least anxious actual buyer who would pay
22, if necessary, and the least anxious actual dealer with
his limit of 20 — ^the marginal bargainers — arrange the
price adjustment through their skill of fence in the bar-
gaining process. They certainly need not; all that the
perfect market assumes is that such a price be reached as
shall leave no one having the willingness to sell below the
price to cry his wares without a purchaser, and as shall
leave unsupplied no purchaser who would yet take the
commodity at any slightest fraction above the price estab-
lished. The price which will fulfil these conditions may
be established in no matter what wise ; it is sufficient that it
will not be disturbed. The chances are evidently thousands
to one that the marginal traders will not get together to
higgle, and it is by no means clear that these are the traders
of especially marked disposition to higgle. That they are
the most indiflferent of all, in point of the volume of quasi-
rents at stake, may not indeed fairly imply that they are the
least interested in the particular penny or two to be con-
tended for ; but in actual fact not the number of pennies at
stake, but the kind of people playing for these pennies, will
mostly determine who will do the higgling and how much
higgling will be done. Women of the shopping and bar-
gain-counter mania deserve especial attention in this con-
nection. There is no sufficient reason for supposing them
to be purchasers at or near the margin of indifference.

And, even were it true that the traders nearest the
margin chiefly do the higgling, their activity could be
effective in setting the last touches to the price adjustment
only so far as they were assumed not to be marginal. It
is of the essence of the theory that in. a perfect market
higgling is not a force to modify the outcome; and, even
upon the assumption of an inter-marginal area, it could be
only within this narrowest of limits and as putting, so to
speak, a fine edge on the price that bargaining could avail
to fix the terms of the exchange. Certainly, in the broad
view, these marginal or quasi-marginal bargainers are the
results of the price limit, and not the cause of it. The
marginal item, whether of demand or supply, differs from
any other item only that through it as marginal increment

a determination may schematically be made of just what
effect it, or any other single item, has had upon the price
adjustment, measurement being tnade from the point at
which all the other forces in the market would otherwise I
have left the price. Not to the soldier who fires the lastJ
gun is the victory to l>e accountefl. nor is the smallest boy I
who touches off a fire-cracker to be held responsible for
the Fourth-of-July hubbub. If there is truly a marpoal
buyer, the marginal price must coincide with his valuation;
but neither the point of adjustment nor the buyer at this
point is the delerminant of price. This buyer is the least
forceful among all the buyers. True it i.s that, if he were
not in the case, tlie price would have been other ; but so is
this true of all other buyers. The marginal demand is oooj
among the whole number of demands, and as such has ita#
part in the resulting adjustment; but it is the entire demand I
in equilibrium with the entire supply which gives ihiti
market adjustment. Almost as well talk of the child who I
chases the wave up and down the shingle as fixing the I
wave- front. I

For most purposes the marginal traders are obscrvera.!
It is true that their added weight in the market majl
move the price from one margin to another, but the basis.!
on which they build or to which they add is made 1
thousands of other demands in face of thousands <
offers.*

) cvid«nl not merely from uiunttcrlea
me of the pTesent writer's among thOB'l
the marginaJ doctrine is node Ibe hui> ot I

— hut from case* where
really abiurd conclmioni

"Al first sight It mRy appear strange that so few pertons,
those *o little conspicuoui, should decide the fate of the whole msricei;
but on closer examination this will b« found quite oalunL If all arc
to exchange at one market price, the price must be such i
all exchanging parlies : and since naturally the price which suits the
least capable contracting party suits, in a higher degree, all the
more capable, it fotlnws iguite naturally that the relations of tbe last
buyer whom the price must suit. or. as the case may be. the first buyer
whom it cannot suit, afford the tlandard for the height of pricc."-
Poiilive Thtory, p. 113.

"We may go a little farther, ar>d aRirm that, so far from the
money demand proper being the regulating demand, in Ibe adjustment
of ratios between the precious metals and other commodities th*

money demand can hardly ever be the regulator [It] cai

hardly ever he that lost margin of demand to which the last margin 0
supply is adjusted, and by which the ratio of exchange between the j
precious metals and other articles will be finally set tied. "-
"■ ! Case against Biinrlallitm, pp. 94. SS-

THE ADJUSTMENT OF PRICE 549

The fact appears to be that the , marginal method of
^Uialysis is of very limited application as an account of the
concrete facts of industry, and is of even less value as a
statement of causal sequences. As a thoroughly rational-
ised statement of that which never remotely approaches
^e rational — as a formulation of the logic implicit in the
f^Utrket — it has, in some directions, an important function
^'i economic investigation ; but it says merely that, with the
^rious occasions of friction eliminated, with things differ-
f^t in degree merely, the forces and tendencies of the mar-
■^^t would work out in conformity with the illustrative
?cheme. It has nothing to say as to the nature or causal
*^terplay of these forces.

This is in no sense to deny the important service of the
^^larginal method, but rather to define and limit its pur-
Pose. Only by such close analysis of what is characteristic
iri marginal relations does the ready and sensitive response
C^f value to market influences become intelligible, or a
National and detailed account of the ultimate relations of
demand and supply to each other, and of both to market
X>rices, become possible.

Precisely as demand at any given time must include all
the purchasing dispositions in possession of money or of
equivalent purchasing power translated into terms of money
—credits, deposit rights, goods appraised in terms of money
— so the supply schedule, in whatever manner it is formu-
lated, must allow for all the commodities for sale on any
money-price terms. As an intermediate step in the elucida-
tion of the price problem, supply no more than demand is
to be formulated as a derivative from the price adjustment.

And here we may stop to question whether anything is
really gained by distributing into the demand schedule
the demand elements hidden in supply. Is the price adjust-
ment thereby made either more intelligible or easier of
manipulation ?

Probably not; no preference is urged; it is only when,
presently, under cost-of-production influences, the supply
volume of any particular commodity is to be explained, or
when an analysis is attempted of the influences by which

■^ » tutt nAMSKRS 4C ntae ■■■( ^'^' ^ *< wi uhir nrt;
IdlBf aancAiK

IM. a fiaB af bet. ^BBCk at caa ol I

■ «f Ikr mJhi^al fmtnpnmaK, Ifacn
C a^y bear to ''*""*

tfc Mfli .1. bj tbe

A« k is siffljMi^bictHt is the feasii or the
K of a CUM? ii*B*KT k iffBa Id one orto Bmy
t lo dte pRscBi par-
fOM:. X* ■AnAal cMRproHar kaovs or cans as to
t of (fiBtmic sofiffis.
sBH^ or Ike 3 Kpatt;
«rlhe IMW CsEBMi^ or Ae tti^ B^ a otfKT adnatries be
««■■* m amom im^tm >» m Ac Kae of [wodactiaa
fTwei; bat Aoe ik ■■ wr cvoK. Ae ahcnalzvc of mo-
fRMKXMo. Tk ftKf cbbI ot-pmdoctKn qnestKHi ts, Aot,
«tat ii^iMeiaiiao oMBt he retgi*cd to ■notsm Ae oat-
p^ TUt nmammAm ^tot W Aufckul to fcwp Ae pro-

Sne, or bisD Rtira^ oiiRiir or ■ pan, to IttBoeL Thv
Ae CBBt ■argm mr W oae of ^kmge of prxxbtct or of
wMriUiow t>f p««AkI or of iniiuiKuL Boi, in hit
case, cost s Ae mwr jtMLBmt of Ae necess

THE ADJUSTMENT OF PRICE 55^

Superficially viewed, there is, however, apparent force in
the doctrine that all such burdens or expenses — if any such
there are — as are common to all industries, could be omitted
from cost computations, not as excluded from cost, but as
irrelevant to relative costs ; for, after all, it is, in the broad
view, true that cost as bearing upon value must be cost in
the relative sense. And it must be admitted that it would
be possible to regard entrepreneur qualities, capacities,
conditions, and preferences as the sole variant influences
upon cost, taken in this relative sense, were it not for the
fact that the different industries vary gpreatly in their tech-
nique in respect to the relative call for one productive
agent or class of agents as against another. So were all
industries alike in this respect, or, so far as the technology
of production were concerned, were the different agents and
instruments practicably interchangeable at their established
price levels, so that no agent or instrument could be in
relatively short supply, their could remain no basis for
variations in the relative costs of commodities, other than
through such differences as depended strictly upon dif-
ferences in entrepreneurs.

As the outcome of this discussion — more or less repeti-
tious,— we arrive at a clearer view of the relation of costs
to value and of the ultimate determinants of value as
expressing themselves through costs. Taking entrepre-
neurs as they are, with all their differences, and as competi-
tively operating under given and common conditions of
technological development, and placing these entrepre-
neurs, with their different abilities and adaptations, over
against the conditions of human needs and wants on the
one side, and over against the existing supply of instru-
ments and the actual limitations and conditions upon the
supply of these instruments, on the other side, we have a
full explanation for the relative volumes of products and
for their respective market prices. Cost of production is
merely the entrepreneur computation under which these

S5»

VALUE AND DISTRIBUTION

1

underlying forces and conditions exert their determinative
influence uixwi the relative volumes of products.

Cost, then, is to the entrepreneur something more than
a return for the outlays of production, often something
more also than a personal justification for activity as
against idleness. The producer must in most cases also
justify his occupation against any other line of gainful
activity open to him. As bearing upon price, cost is, we
repeat, nothing more than the inducement, expressed in
money, necessary to the bringing- forth of product. The
search for the maximum price remuneration for the pro-
ductive energies and opportunities at one's disposal dis-
closes what is commonly the most important element in
cost in any particular line of production.

Or. again, cost may be stated as the refusal price
below which, as a margin, the advantages of some alterna-
tive of production or of recreation will tip the scales of
choice. Taking account, in this refusal price, of its most
important constituent, the relative advantages of some
other line of employment, the compensations held forth for
the ministry to other demands, supply takes on a distinctly
dynamic aspect; it is no longer an inert or passive fact as
the recipient of demand, and as having the capacity to
affect value only as it satiates demand. It has rather the
aspect of a resistance, since it is, in large part and in the
relative computation, almost solely the expression of
demands in other directions. .

If it he granted that the supply schedule is equally a
demand schedule, the futility of the contest between the
utility school and the cost school becomes apparent. Each
of the contestants will have to make room for the other,
with both elements recognized as dynamic in precisely the
.same sort. Relatively speaking, however, the demand
schedule is, doubtless, a fixed one. However fully, then,
tlie primal and causal nature of demand be recognized,
there is much to say for the view that, given man as he is,
with his equipment of desires and tastes and habits and

THE ADJUSTMENT OF PRICE 553

customs, modifications in price are most profitably studied
from the point of view of variations in the supply term.
Diminishing relative costs now here, now there, are the
characteristics of a progressive economy; the proximate
causes of modifications in value are, therefore, to be found
in those changes of productive processes which, by dimin-
ishing the relative cost of particular commodities, expand
their supply. A better process implies simply that per
unit of product it is now necessary to divert a smaller
total of productive forces from other lines of production.
Prices fall until the rising curve of product cuts the falling
curve of price at a new equilibrium point of compensations.
Productive energies and the derived remunerations dis-
tiribute themselves in view of the marginal urgency of
the different demands. But the more clearly, then, is it an
inadequate formulation to say that the market, having
"become overstocked at the old price, the increased supply
makes it necessary to make sale connections with wants of
lower intensity — ^that the larger supply has, so to speak,
uncovered lower levels of demand, so that the market price
is still the marginal demand price of the newly attracted
purchasers. Doubtless so it is, but it is equally the mar-
ginal supply price. Neither the relative-marginal-utility-
demand items nor the marginal-utility-supply items can be,
either alone or in conjunction, taken as fixing value, but
only as commensurate with value.

CH.\PTER XXVI
DISTRIBUTION

Fundamental to all problems of costs, and, indeed, to all
aspects of distribution, is the problem of the fund or
quantity of goods to be distributed. What is tlie dis-
tribuetidum, the group or social dividend?

Suppose Fanner A to have succeeded during the year
in covering his living expenses and to have added $500 to
the value of his farm; what is his income, $500 or $1,000?

Mr. Cannan stands for the view that within income
must be included (i) the things enjoyed, (2) the increase
made in personal capital, the $1,000 solution.' Professor
Fisher, on the contrary-, insisting that income is strictly to
be distinguished from capital — income being taken to consist
purely of psychic services, the flow, while capital stands
solely for the fund of possessions from which this flow
is derived — holds that the $500 of improvement added to the
farm is really not present income but rather the postpone-
ment of present income, and thai the increase in tlie value
of the farm is merely the present worth, the capitaUzed
value, of a prospective increase in income.'

Por the purposes of the present discussion. Professor
Fisher's view appears to be the better one; human affairs
may, if one likes, be regarded in two aspects, on the one
side, the appetitive side, an analysis of human desires for
valuable services, on the other side, an investigation of die
productive processes and the distributive forces under
which these desires reach their more or less of satisfaction.
Consumption is the final goal of production, psychic income
(utility) the ultimate significance of the production -distribu-
tion process. If by drouth or fire or murrain and before a

'Economic Journal, Vol, VII, p, 284,

•;Wrf„ pp. S34. S3S-

554

DISTRIBUTION SSS

enjoyment had accrued, our capitalizing farmer had seen
his improvements canceled, they could not be held to have
furnished income, in any sense with which ultimately the
distribution problem is concerned.

But how about the products of the farmer's kitchen
garden, making part of his $500 of "living" supplies, or
about the eggs and butter produced and consumed upon the
farm, and, generally, about all those commodities and serv-
ices which might have been, but were not, marketed?

Or how about the fresh air breathed and the fine views
commanded and the neighborhood privileges enjoyed upon
the farm — ^all facts controlled and appropriated under the
right and title of the farm ownership, and all in their share
contributing to its command of those rental incomes, of the
long series of which the value of the farm stands as the
capitalized present worth ? Is it necessary that a potentially
marketable fact pass through the market crucible, before
this fact can stand as an item in the social distribuendumf

And what shall be said of the housewifely activities of
the women folk at home, their errand-goings and sHpper-
bringings and nurselike ministrations? Are these to be
accounted unproductive merely by the fact that they are
not, in any usual sense, paid for? And if productive, what
is the relation of the product to the national dividend?
^hat also about the labor of the domestic servant? And
how exclude this, without applying the same rule to the
efforts of the actors, teachers, and preachers? Or is the
line of distinction still this one of appearance or non-
appearance in market exchanges?

And, theoretically, these are far from being the most
serious difficulties. If it be agreed that, even at the margin
of withdrawal, work may be pleasurable, and yet be aban-
doned at the point where the pleasure of the activity,
plus the pleasure from the product, is outweighed by the
advantages attaching to other pleasant work or to leisure,
where, then, shall be drawn the line between work and

' 55^ VALUE AND DISTRIBUTII

play? Shall it be said that anything is work which is d(w
with any slimiest regard to the resulting product, and t*
only that is play which is done purely and solely for the
very joy of the activity? This is probably the more com-
mon formulation; but what is product for the purposes of
the case in hand? If one hires someone to play the violin
for him, the activity of the player is clearly productive;
that is why it is paid for. And if gratuitously rendered —
a gift of service — is the playing thereby to be regarded as
the less a service and the less productive? And why is not
equally productive the act of playing for oneself? Ifr_
the distinction purely in the fact that in this last case the(
is no external and marketable somewhat? Or is the (
tinction merely one of the degree of roundaboutness of t
path by which the service arrives?

Surely if one spend some days in making a violin, 1
to be used for one's self -amusement, the process of making"
must be accounted productive. Is tlie distinction then
between the productive and the unproductive one of exter-
nality of result? or of roundaboutness? If one apply hiii)-4
self to grievous study in preparation for the making OJH
violins, this must be regarded as productive effort, unlesfl
indeed, the denial rest upon tlie fact that as yet there aifl
no external results, the study being regarded rather as fl
preparation for producing than as actual production, aaM
the skill rather as producer than as product, and its remu^^
eratiou rather as wages than as interest. ^M

But would it at all matter for the purpose, were the stud^l
a preparation not to make violins for oneself, but to pl^H
violins to oneself? In economic usage, it is difficult t^|
call this sort of preparation work, but in any lay sense ofl
the term, difficult to call it anything else. But, deartfl
enough, no product has yet manifested itself, of a sort t^|
rank as a psychic income, or to function as rent or hire afl
wage with relation to the aggregate product to be di«fl
tributed. It seems, then, that not all desirable results JalSM
within the dividend concept. ^M

DISTRIBUTION 557

Possibly another line of approach to the problem will
6^%ter serve. Leisure and recreation cannot altogether be
^:^ccluded from the field of economic reasoning, since they
nk as among the costs setting a limit to productive activ-
"y; not merely the outlays of production, but the pains of
■roduction, and likewise the pleasure displacements of pro-
duction, are facts affecting the money recompense required
induce production. That is to say, recreation wants are
alue-affecting influences to be taken into account in the
mputation of costs.

All this, however, does not involve the inference that,
font the market-value point of view, recreation is produc-
tive. Recreation never looks toward marketable product,
and is therefore irrelevant to market value, otherwise than
in this aspect of cost. In the market-value sense, at any
rate, it is not productive.

But how, from the individual point of view, say, in the
Crusoe reckoning? Shall basking in the sun be, from this
I>oint of view, accorded productivity, even though it be a
^productivity without activity ? Plainly, the result is a satis-
faction, a utility, a psychic income. What does it signify in
Crusoe's economic life — ^his zvirthschaftlichen Leben —
whether or not somewhere in the process an external fact
presents itself? The truth seems to be that basking in the
sun and every ordinary sort of play can fall short of eco-
nomic quality not by any test of externality, but only by the
fact that free goods are not economic goods ; they need no
economizing. In the economic sense, the production of
free utilities is not production at all. So if, aside from any
market aspect of the case, violin-making were an enjoyable
activity — ^a costless process, it could not become economically
productive by the mere fact that a desirable thing resulted
from it, any more than the playing of the violin for self-
amusement becomes productive by the mere fact that it
gives amusement. No matter how greatly prized mud
pies may possibly be when once they are made, they are not
thereby economic goods — and this, simply because they are

W:

1

S5fl VALUE AKD DISTRIBirnOK

ideM — goods; one tnav have them to the limit of
fais desirex. exenpt Irotn all coodttions of burden.

Bat ag^in. what ii the case be oaz where the recreation
is rcaltjr jpptecialed as a costly thing, as displacing some
Tateabie prodact which, but for the overbalancing claims
of recreatioD. would have been produced? In this case.
the recreaUoo mnst, it seems, be accepted as a productive
iatX ; the rcsttkiiig good a oo longer a tree good but a good
obt^ned on terms of consciotis sacrifice. &Iany a man
foregoes an outing, not sotdy as a question of the expense
of the trip, hot in part because of the attendant suspension
of earnings.

And surdy the pkasure that, in any way, one pays for
has a value; it is, indeed, the essential characteristic of
an valitablt psychic incontc that, in some sort, it costs to
get it

We coodnde, then, that much that is called play, and
nnich thai is ignored, either as unproductive or as irrcJe-
rant to market-value coaiputatiodj. must, in the individual
psychology, be held to he productive, and that only such
activities are, in the individual reckoning, unproductive a&
arc, in the actual thought of the individual, held to be
costless.

This conclusion receives corroboration from the fact
that where another pla^-s the violin for your pleasure, and
>'et does it witfaoot chaise, the naive common-sense would
rank the case as neither more nor less productive
is one*s own activity for one's own amusement.

1

But to declare an activity productive, whether indi-
vidualiy or socially, is not precisely to establish its product
as an item in the social dislribuendum. Not all product is
implicated in the distributive process ; there is much pro-
ductivity against the result of which no competing and oon-
fiicting claims on behalf of co-operating productive factors
can attach, or, at all events, do attach, and which has no
other relevancy to the distributive problem than is implied

biSTRIBUnON $59

in th^ fact that the production of it may have had some
"^I'ing to restrict the quantum of distributive goods.'

Regarding, then, the social dividend as made up solely
^* Products ripe for consumption, and as including not all
°^ these, but only such as, either by the conditions of their
P^'odviction or by the manner of their consumption, come
^ be involved within the distributive process, we are now
^^ncerned to note that all consumption goods ripening to
^'^vice within the economic process, as distinguished from
^^Tie, or warlike foray, or other non-market predation,
-j^'^l to their recipients under the guise of economic income.
^^ not all incomes are received by title either of inde-
*r^^dent production or of co-operative contribution to pro-
•. ^^tion. If we are to render any adequate account of the
'^^ces determining the apportionment of the social distribu-
^^dum, it will be necessary to explain the actual distribution
^ purchasing power in society. This the productive-
distributive process is adequate to do only in part. And
^Productivity of income i^ something other and more inclu-
sive than mere technological productivity, present or past.
^joods for consumption are acquired through the posses-
sion and oflFer of current purchasing power; and this in
'turn may have been acquired by inheritance, by gift, by
speculation, by gambling, by stealing, as well as by title of

•It wotdd be hard to decide whether the net result of this discus-
sion is concurrence in the prevailing doctrine or divergence from it.
So far as the present writer is aware, surprisingly small thought has
been directed to making the social-dividend concept precise. The dis-
cussions of Cannon, Fisher, and Fetter bearing upon the concept of
income are both pertinent and illuminating for the purposes of the
problem ; and yet — as it seems to this writer — the social dividend is
something appreciably smaller than the aggregate of all individual
incomes. Smart (The Distribution of Income, chap, xi) has discussed
with great acuteness some aspects of the question, and concludes not
only that the work of the housewife is productive, as it surely is,
but that the product is to be included within the social dividend. It
is, then, evident that the view here taken goes farther than the
prevailing opinion in extending the notion of productiveness, at the
same time verging toward extreme restriction in deciding what share
of the aggregate product is to be included in the distribuendum.

w

> DISTRIBUTION

having produced, or of having helped produce, a valuable
commodity. For, in truth, not merely tlie distribution of
the landed and other instrumental, income-commanding
wealth in society, but also the distribution of general pur-
chasing power and of rights to wield and direct the appli-
cation of general purchasing power, are, at any moment in
society, to be explained only by appeal lo a long and c
plex history, a distribution resting, no doubt, in part upon
technological value productivity, past or present, but in
part also tracing back to bad institutions of property rights
and inheritance, to bad taxation, to class privileges, i
stock -exchange manipulation, political favor, legislative
and administrative corruption, pensions, lolls, royalties,
perquisites, patents, interest on public loans, interest on-
consumption loans, and, as well, to every sort of vested
right in iniquity.

And some of these mere rights of tribute come to be
included in the production process, and to rank there
as valuable market advantage or opportunity to such indi-
viduals as control these rights, e. g., business blackmail,
royalties on patents and processes, toil Is, transportation
impositions, and the like. But there being no apparent
method of bringing this class of facts within the orderly
sequences of economic law, we shall — perhaps — do well lo
dismiss them from our discussion, merely stopping, how-
ever, to note thai the incomes upon them — to the extent ihat
these incomes are so far vested as to promise future
revenues — arc capitalized under the discount principle, are
salable like other acquisitive goods, are wealth for all uidi-
vidiial ends of gain or of social prestige, and carry with
them the right to participate in the enjoyment of the social
product.

But none the less is there a distribution by right of pro-
ductive contribution. And under this title must, among
other things, be discussed the compensations allotted lo
human labor and human supervisory activity, as wages,

I

I

DISTRIBUTION S^l

^^ri^s, and profits, — ^to the owners of instrumental goods,
^ '"ents, and to capital-owners, as time discount upon
^^alth in its time aspect.

But in order that the difficulty of the distribution prob-

^^ be not exaggerated or its importance disparaged,

recourse must be had to the principle that production pre-

^^des and conditions and limits consumption, and that

^^efore the production-distribution process logically pre-

p^^es and theoretically underlies all such other distribution

^^fluences as have no basis in productivity rendered, and as

Modify — even profoundly — the ultimate apportionment of

^^Hsumption rights. Interest received upon public war

^^ns is of this secondary-distribution sort; so pensions,

Sinecure salaries, subsidies, profits upon corrupt contracts,

^nd not a few of the secondary effects of taxation.

The chief theoretical difficulty in the subject is, indeed,
to draw the line between this primary and this secondary
distribution, and to make allowance for the mutual inter-
actions; for example, consumption loans, by affecting the
Supply of funds for loan in productive directions, exercise an
influence upon the discount costs of production. Such
taxation, also, as can be appreciated by the contributor as
falling upon his productive process rather than upon his
consumption, are treated by him as production costs. Taxes
also which burden a distinct line of raw materials function
as cost items in particular industries. And taxes which
burden distinct lines of consumption, and thus disturb the
relative volumes of consumption goods to be marketed, may
superficially appear to have no further effect than to redis-
tribute the productive energies of society, but, nevertheless,
by modifying the relative hires of productive agencies, do
appreciably disturb the distribution of purchasing power in
society. Privately achieved or publicly granted monopolies
of production, patents, process royalties, trade secrets of
method, and any exclusive control of sources or of methods
of supply — all command rents, and thereby affect the dis-
tribution of purchasing power; and, on the other hand.

S62 V.\LUE AND DISTRIBUTION

the opportunities and advantages paid for under the form
of these rents hold the same relation to cost of production
as are held by land and other instalment differentials of
advantage; these costs, in turn, are mostly passed along
under the guise of enhanced market prices, and are ulti-
mately mainly a burden upon the consumers of the goods,
whereby, again, redistributions of purchasing power are
initiated.

Monopolies or privileges of sale — as distinguished from
those of production — fiinction in this regard like taxes
upon consumption. Transportation charges, whether justi-
fiable or predatory, also operate like taxes, and are produc-
tion costs or mere consumption tribute accordingly as the
original incidence is upon production rather than upon
consumption ; but in either case the final burden re;
most cases and for the most part upon consumers.'

stSj^H

The broad principle for all problems of cost of produc-
tion is, however, that any outlay or sacrifice for a difTcr-
ential opportunity, whether this be a mere permit or a
license, or be attached to the possession of some agent or
instrument of productkin, is a cost. For, as we have seen,
any production cost is merely another way of looking at
what is, from another point of view, a distributive share in
the product. But that a!! agent or instrument hires are
costs is far from saying that they include all costs. The
technological point of view, which sums up costs as a total

* From this reasoning i£ accepted BS correct, appticatioos of wry
consideralite significBnce may be tnnde to imporlanl problems in the
theory of taxation and to the general principles upon which isiport
dutie! ihotild be levied. So also the merits of the cotnpetitiTe organl-
lation of society should therefrom receive some illumination. But
all thiii would be aside from our main purpose of realistic description
and theoretical analysis. It must here niflice 10 note thtt such
imperfections as, from the present point of view, are incident (o the
competitive system refer not so much to the processes and the reirolt*
of the primary— the production — distribution, as to the political and
property institutions under which the Mcondary distribution i
place, and to the modifications of the primary distribution T
reactions upon it from Ibe secondary distribution. (See i
nKtion note, p. j6s,)

DISTRIBUTION 563

of wages, interest, rent, and profits, is in its general accept-
ance little short of astounding; for even if taxes, insurance,
advertising, and like outlays may finally be traced to labor
or capital-goods bases, — which, by the way, is not a simple
matter with, say, taxes to pay interest on war debts — it is, at
all events, clear that these are not outlays for labor or capital
as technological factors in production. The tripartite, or
-any other technological classification of productive factors,
must be especially misleading for purposes of the entrepre-
neur-cost computation.

And once again must it be repeated that the mere fact
that cost-distribution shares are received through the entre-
preneur as intermediary, does not imply either that no part
of the entrepreneur remuneration, profit, is cost, or that
all of it is cost. For it is precisely at this point of entre-
preneur remunerations that costs and distributive shares
fail of coincidence. All of the entrepreneur remuneration
is a distributive share, but only for the marginal entrepre-
neur, or only for the marginal items of each entrepreneur's
production, is all of the compensation cost. All quasi-rents
of entrepreneurship, all unnecessary or supra-minimum
profits, are distributive shares falling outside of costs.

But this does not mean that all occupation or instru-
ment-employment differentials above the next most attract-
ive opportunity are non-cost facts wherever found. Cost
is an entrepreneur reckoning; the entrepreneur knows
what hire in the actual employment competition forces
him to pay; but he cannot know, and he need not care,
what hire in some other employment the agent or instru-
ment might command. For competitive purp)oses, occupation
differentials are non-cost facts only for those indi-
viduals who receive the hire of them and to whom it, at
the same time, falls to compute costs. It is the entrepre-
neur alone whose occupation differentials fulfil both these
requirements. The self-employed laborer — entrepreneur-
ship at its siqiplest — computes his costs as the money state-

VALUE AND DISTRIBUTION

1

564

ment of his best alternative line of conduct, whether this be
one of independent production, or of wage-earning', or of
leisure. The employee might — but without any bearing
upon market cost of procUiction — compute for himself in
what degree his compensation was greater than an equiva-
lent for his pain, or greater than his wage under another
employer, or in another industry. And so, with equal irrele-
vancy to any market-value problem, might the land-owner
compute what his rent as actually received was greater { i )
than that which he himself coidd make out of the land, or
{2) than another in tlie same line of production would pay,
or (3) than some tenant in some other line of production
would pay. Or a collectivist society could properly com-
pute as its land cost of any given product only the dis-
placed alternative products, But the entrepreneur must
compute as his cost not what he would pay if he paid less,
but what he does pay, as compelled thereto by all the facts
of the situalion.

Land worth too as wheat rent but only 90 in its next
best use would permit, for collectivist computations, only
90 of cost; in a competitive society, this land will pay its
owner in rent to more than it could command in any other
line of production, and may. under the actual tenant, pay
the owner i of rent more than any other tenant could or
would pay. But since the land costs the cultivating tenant
too of rent, it is a 100 cost for him.

This does not carry the cost computation to its closest
approximation to accuracy, though even at its closest,
something, as we have seen, must commonly be lacking to
the entire accuracy of the productive imputation. If the
actual renter at 100 is conscious that he could, in another
line of production, make the land count him for loz of
return, the while that it is actually paying him 103
in wheat, he must compute against its actual productivity
of 103 a cost not of too, the rent outlay, but of 102,
foregone opportunity. His cost, so
is in his best foregone alternative.

far as it is a land c
I the case suppt

DISTRIBUTION

565

this best alternative was not to keep his money in his
pocket. The necessary price to induce the production of
the wheat was not, in point of land cost, 100 but 102.*

Were all entrepreneurs, albeit of unequal abilities, yet
equal in equipment of wealth, credit, and instrumental goods,
and alike in adaptation to the equipment in hand, alike also
in relative adaptation to alternate lines of employment,
all costs would be equal in each respective line of produc-
tion, and no entrepreneur more marginal than any other,
or marginal at a different output of commodity product.
But, even so, there would be no warrant for expecting all
profits to fall to the general wages level — if such a level
there were — unless it were also assumed that all men were
equally able and equally well equipped and equally disposed
to undertake entreprcneurship. With fluid and perfect com-
petition among unlike entrepreneurs, instrument rents and
time discounts would be forced to so high a level that the last
dose of expense, and each instrumental good employed
thereunder, would be employed at a rate of remuneration
so high as barely to leave to the entrepreneur an induce-

s applicable ti

' The taw of costs, correctly forniul
competitively produced, no mailer how many scarcity goods
enter into the production process. In the accurate
monopoly connotes conditions of noncompetition, or
restricted competition. But, in any case, tlie law has
the underlying influences explaining the actual cos:
the situation as it is without attempt to invesltgale

And even in monopoly conditions the cost law
violence, be made to cover the computalion under
of output becomes advantageous. The cost law at its broadest indi-
cates the point at which product, or added product, cancels as many
price-measured facts as it adds to selling-price ; production ceases at
the point at which value costs are at balance against value product.

The monopoly compulation applies this principle ; on the credit
side of the account is computed the increment of product at the new
level of price attendant upon its production ; to be charged against this
are (i) the extra outlays of production, and (a) the loss in price
suffered by the earlier items of product through the addition of the
new items. The point of equation between the two sides of the account
is the limit upon production.

S66

ment further to burden himself with supervision and
further lo increase the volume of his product. But still
there would exist no warrant for asserting the equality of j
costs with the aggri^ate compensations of the productive
factors, in any otlicr sense tlian that competition could .
carry these compensations no higher. The distributive shares j
out of the product would be the higher for all entreprc-J
neurs, as entrepreneur ability should be scarce relatively 1
to instrumental goods and to employee labor. Instrumental |
goods of different sorts would be better paid relatively to j
labor or to entrepreneur ability accordingly as they were J
respectively in limited supply.

For it is to be remembered that, tlie demand fof con>J
sumption good being assumed, the demand for any instru-
mental good or agent is contlilioned by the quantum of
instrumental goods or agents adapted to co-operate with
it and unadapted to serve as substitutes for it. Just
as it is the limitation upon the supply of productive I
instruments and agents that makes value possible, so I

ontaniiation lo the tndilional theory and terminology of thr science.
However important and, indeed, ovcnhodowins in modern bu»incj» the
phenomena of the later methods of buliness orKaniialicn may be. not
much inlercit allachei to iheni for purposes of value theory. Nor for
distributive theory does ttreat significaiicc attach to the corporate •
aspect* of business orvaniiation, excepting as these are, in practical |
affairs, associated with the monopoly feature. *

As to corporationi purely and simply as luch. there is little
greater occasion for separate treatment than for partnerships. The
theoretical aspects of the new problems presented have already been
sufRciently summed up in an earlier exarnination of the bearing of
corporate organization upon the established concepts and lermioalogy
of the cost-of-production problem. ,(See note, p. gS.)

Monopolies also offer few dilEcullies of analysis i _ .. .

effects are confined exclusively either within the field of primary
distribution, the cost and value analysis, or within the field of second-
ary distribution -. very often, however, this simplicity of effects il

Particularly are the activities of the operator in the field o!
"high finance" difficult to dislributc between the two categories of
market-value product! vily^primary distribution — as over againit
predalion or parasitism — secondary distribution.

The activities of the lace- weaver, the bonnet -trimmer,
diamond-polisher, the patent -medicine manufacturer, (he elown. and

DISTRIBUTION 5^7

'^ is the relatively limited supply of one class of

P^CKiuctive factors that attaches to it a high remun-

^^^tion relatively to the co-operating factors. The ultimate

f^^Cplanation for the value of any commodity, be it repeated,

^^ found, on the one side, in the demand for the commodity,

the other, in the fact that the supply of productive

cans is limited, whether by the absolute scarcity of these

t^^oductive facts, or by a scarcity due to the diverting

^^nfluences exerted by the demand for other commodities.

-^Siid the actual level of remuneration is everywhere reached

"^Jirough the bidding of entrepreneurs for increased pro-

^3uctive intermediates to be added to the productive effi-

^^ency already in hand; and the actual payment is thus

commonly in some rude approximation to the amount

"which the successful bidder is able to pay for the purpose

of enlarging his production complex.

With goods present in stocks of similar items, this
approximation is theoretically close accordingly as entre-
preneur competition is close. Where each item of goods

the prostitute, are, in the economic sense of the term, clearly enough
productive; on the other hand, the three-card-monte man, the shell-
game man, and the gold-brick man, would be, at least by the naive
intelligvpce, ranked as agencies of secondary distribution, under
methods more or less ingenious and interesting. Somewhere near the
line between these two extremes are to be ranked the methods most
distinctly characteristic of high finance, at all events, most notorious
in connection with it.

The promoter or underwriter is in the business of producing
stocks and bonds for the investment and the speculative markets; the
products are commonly of considerably greater worth than those of the
patent-medicine vender, and, indeed, are often of the very highest
title to market recognition. Relatively small stores of instrumental
wealth, much good-will or franchise or monopoly, more of pros-
pectus and gilded promise are, under the guidance of high ability and
ingenious skill of organization, combined into a marketable commodity
most profit-giving to the producers, commonly, truly, of moderate
advantage to the purchasing investors, and sorely disastrous to the
general public. All this is hard to rule out of the category of market
productivity and of productive distribution.

The later processes by which the market is rigged through bear
stories and through artificially low dividends, or by declaration of
unearned or bookkeeping dividends, may, as more or less reputable
predation, be safely classed as entirely within the field of secondary
distribution. (Cf. Veblen, Theory of Business Enterprise, passim,)

1

$68 VALUE AND DISTRIBUTION

u jui generit, the room for higgling U appreciably more
ample and the point of price adjustment is quite possibly
found at considerably below what the successful bidder
would, if necessary, have consented to pay.

With the recognition that entrepreneurs are different
must come the abandonment not only of the notion that
profiu can arrive, in any conceivable state of equilibrium,
at equably, but also of the notion that, at no matter what
point of development in technique, there can ever be any
one best formula for the combining of the various differ-
ent factors or classes of productive agents. There is, indeed,
no such \}cst combination for any one entrepreneur, except-
ing upon the assumption of an established level and ratio of
prices and of hires upon the different productive agents;
Willi each change in these relative hires, that which was
best becomes not best, and the production complex under-
goes a reconstruction. And finally, with varying financial
resources, the licst combination is again a different combina-
tion. Most men are compelled to adapt their productive
combinations to the conditions set by their capital and their
credit ; what additions or subtractions of different factors
arc expedient depends not so much upon what would be
advantageous if the entrepreneur could command the neces-
sary resources, as ujren what he can with reasonable caution
attempt.

CHAPTER XXVII

SUMMARY OF DOCTRINE

In the interests of economy of space, and to avoid the
further detailed repetition of what has already been suffi-
ciently set forth in earlier pages, the following propositions
are presented:

Value is a ratio of exchange between two goods, quanti-
tatively specified. The concept of a general market value
depends upon the assumption of an established medium of
exchange, and finds its only expression as price.

The primary fact in the explanation of value is the
existence of human needs and desires. Utility as expressed
in the existence of goods is merely the relation of adapted-
ness of the thing or fact to the human need or desire.
Limitation upon the supply of goods relatively to the need
gives value. Thus value in producible goods is ultimately
explained by human desires over against a limitation of sup-
ply due either to the shortage of instrumental goods or to
the irksomeness of eflFort or to both.

With great esteem for good singing and with the rarity of good
singers, the high gains of prima donnas find sufficient explanation.

With scarce iron mines and a relatively high need for iron, a
high value upon iron is readily explicable.

With relatively scant equipment of land, and a high need for
wheat, the high value of wheat land would be explained, irre-
spective of the fact that various other uses for land further greatly
restrict the supply of wheat land.

Human needs and their relative intensity being assumed,
the value-causal sequence runs from relative scarcity of
agents to relative scarcity of products; from relative
scarcity of products to high exchange power of products —

569

57°

VALUE AND DISTRIBUTION

high value, relatively high price; from relatively high price
of products to relatively high remuneration of agents;
from relatively high remuneration of agents to relatively
high present worth of agents.

Under the competitive activity of various and differing
entrepreneurs, each seeking his most advantageous line of
activity in view of his particular situation in point of capi-
tal, credit, ability, and preference, market supplies of prtxi-
ucts are worked out in adjustment with the price demand;
and under the competitive bidding of entrepreneurs for
productive auxiliaries, the market values of instruments
and agents are worked out. and the cost situation confront-
ing each individual entrepreneur determined.

That underlying the competitions and costs of entre-
preneurs is a situation, a controlling complex of funda-
mental facts, under the influence and direction and deter-
mination of which the details of market production and of
value adjustment take place, and with changes in which most
commonly take place changes in the resulting market adjust-
ment, furnishes us with the principle from the point of
view of which must be examined the dynamics of value
and of distribution, a group of problems having to do with
the manner and degree of change in market adjustments'
attendant upon different probable or possible changes in the
underlying situation.

Neither in utility on the demand side nor in pain cost
on the supply side can there be found a common denomina-
tor or standard or determinant of market value, or of price
as its money expression. The only common denominator
of value is found in the selection of a conventional stand-
ard for the purpose, a price commodity.

Neither in terms of market-value equivalence nor
in terms of pain or cost, but only in terms of

SUMMARY OF DOCTRINE 57^

utility equivalence is to be sought the standard of
deferred payments. Equivalence in terms of unspedalized
purchasing power, expressed under some conventional price
standard, is the only resource for the case.

The equation of demand with supply is an explanation
for value only in the sense that the entrepreneur-cost situa-
tion and the condition of price demand reflect and express
the effects of the underlying and determining situation.
Therefore both demand and supply themselves require
analysis and explanation.

DEMAND

Utility, marginal utility, and subjective worth are pri-
marily categories leading up to the explanation of the
demand side of the value equation, as expressed in terms of
purchasing power, and as bearing upon the price adjust-
ment of any particular commodity.

Marginal utility — b, purely individual category and an
sibsolute magnitude — is a step toward explaining subjective
i¥orth — ^a purely subjective and individual fact and an abso^
lute feeling magnitude, the cost aspect of marginal utility.
Two subjective worths in comparison explain price offer, or
refusal price, this latter being merely a demand fact in
another aspect.

To different men, utilities, marginal utilities, and sub-
jective worths are, as such, incapable of comparison ; nor is
it possible to give to utility, marginal utility, or subjective
worth expression or measurement in terms of money. A
maximum demand price expresses merely the equivalence,
in point of subjective worth, of the thing bid for and the
thing otherwise to be obtained through the purchasing
power.

COST

The emergence of value is not dependent upon cost-of-
production influences as a prerequisite, but only upon there

57» VALUE AND DISTRIBUTION

being a supply limited relatively to human desires. But so
far as the cost-of-production investigation bears to explain
the relative volumes of supply of different commoditia
bears to explain the values of these commodities.

1

But so
explain

purely

For competitive purposes, cost of production is purd|
a computation of the individual entrepreneur ; for any item
or quantum of product, it is the price statement of the
compensation necessary to the forthcoming of that product.

Outlay costs to the entrepreneur are distributive shares
to the recipients; the distributive share of the entrepreneur
also— his profit — is cost, to the extent that it is necessary
profit.

But the distribution that takcc place under ihe production
process and as part and parcel of it. is not the only distributive
process in society. Such incomes as are received otherwise than by
title of separate or co-operative productivity, lind their explanation
in those other social facts and forces which distribute purchasing
power in society.

All productive-distributive compensations come by the
same and equal title of contribution to valtie productivity;
but they are the market value of the value contribution
rather than the accurate equivalent of the value productive-
ness; this last varies for each instrument with each entre-
preneur, and is nowhere precisely ascertainable by any.

Only relative costs of production have to do with the
exchange relations of goods.

All influences making to increase the indemnity-pi
total which a commodity must afford to its producer if it is
to be produced, rank, under the price denominator,
costs ; chief among these influences is commonly opportunity
cost — demand in another direction functioning as
ance in the given direction.

'^^^

SUMMARY OF DOCTRINE 573

The resistance attractiveness of recreation or of rest may also
included within the opportunity-cost concept if interpreted

l^Toadly. Instrument and agent costs are often accurately to be

Reckoned as costs only in this opportunity aspect.

As a cost concept capital is neither technological nor
social in significance; it stands for the total invested fund
of value, inclusive of all instrument values, and of all
general purchasing power devoted to the gain-seeking en-
terprise ; it is an acquisitive category.

For competitive purposes, the capital concept should be
formulated in the individual, private, and competitive
sense. It should include all things, facts, or rights having
value so that to them abstinence— ^the postponement of c©n-
sumption — applies. Capital in this sense is a private fimd
of wealth expressed under the price denominator and
viewed in the time aspect. The market value of any basis
of income is the present worth of its entire series of
putative incomes.

Market time — discount — interest in the accurate and ulti-
mate sense — is the premium, expressed as a rate per cent,
per unit of time, which any fact, as present purchasing
power expressed in terms of the conventional standard,
commands over future purchasing power likewise expressed.

The surplus in any instrument hire over upkeep or
depreciation is a market time-discount fact; expressed as a
ratio between the value of the instrument and the hire, it
is interest in the accurate sense.

All costs are merely sacrifices of production reduced to
terms of the price denominator. Costs, then, include,
among other items, all necessary indemnities for capital
outlays in production, and a time-discount charge upon the
capital fund invested.

574 VALUE AND DISTRIBUTION

But the cost to ilie individual entrepreneur is not a funda-
mental explanation of anything; it assumes values upon instrumenul
facts as a step toward value explanation. Nor does the aggregate
activity of entrepreneurs explain the cost conditions facing each,
unless and until the great underlying facts of human wants and
capacities, and of instrumental equipment and opportunity are in-
cluded in the survey.

Slitlic-value analysis takes as definitive and ultimate the actually
existing total situation, inclusive of human needs and productive
powers, and with all the existing supplies and existing limitations
of equipment and opportunity, and all this irresp«^tive of how far
the situation is due to an original bounty or to an original inade-
quacy, and irrespective of whether human activity has in the past
added or subtracted relevant elements, aspects, or facts. Not the
outlays for productive facts, or these same outlays regarded as
incomes, but the scarcity of these productive facts relatively to the
human need, is responsible for the emergence of scarcity of prod-
ucts anywhere and for the relative scarcity of products which under-
lies and explains exchange relatione.

But the inadequacy of the general equipment does not explain
the market values of any particular line of products, that is to say.
the exchange relations beween different classes of goods. Inside the
general situation of inadequacy of productive factors must be worked
out the relative inadequacy of productive equipments for the various
lines of commodiiies, in view of the relative strength of the pur-
chasing power disposable in these various commodity directions.
Here enter the influences of various different lines of productiou to
restrict the supplies of productive factors in each particular line of
industry.

All rent outlays, whether for land or for other instru-
mental goods, and all wage outlays and all discount charges
upon the capital fund employed in production are equally to
be included within costs of production as an intermediate
explanation of the supply side of the value equation.

Nowhere is the distinction between price- determining and price-
determined costs valid. In the main, the value of each productive
fact is value-determined; but as part of the supply of productive
facts, each is, through its products, in its small measure, a value-
affecting influence. So also each individual activity bearing upon
price or related to price, whether, on the one hand, of production or
of sale offer, or. on the other hand, of price offer or of price
refusal, is, in the main, price- determined, because chosen in view

SUMMARY OF DOCTRINE S7S

of the actual price situation and in adaptation to this situation; but
each such activity, as affecting in its own small measure the aggre-
gate of supply or of demand, must thereby and pro tanto act as a
price-determining influence.

The only one of the several rent concepts important to
the cost analysis is that of the actual hire; but as oppor-
tunity cost, the land or any other productive fact may
figure as cost at something vaguely more than the actual
hire paid.

Costs to the entrepreneur are mostly but not entirely
traceable (i) to value serviceability to entrepreneurs in
other lines of production, or (2) to value serviceability to
entrepreneurs in the same line of production, or (3) to
alternative value possibilities of the productive facts,
inclusive of the entrepreneur's own productive power, when
under his own employment. But pain and weariness and
displaced recreation have also their place in fixing the total
remuneration necessary to the forthcoming of product.

All margins are ultimately personal and not instru-
ment margins. Instruments are marginal only with refer-
ence to the entrepreneur and relatively to him and to his
situation; marg^nality is a psychological attitude with
reference to productive activity or to the productive employ-
ment of instruments.

Marginal instruments are variously understood to indicate (i)
valueless instruments, a market-value standing, not inconsistent with
the rendering of services for which the user would, if necessary,
pay an appreciable hire; (2) instruments having neither market-
value nor personal-value significance; (3) instruments which at the
actual market charge are just barely worth employing by the actual
employer.

Number one is a concept derivative from the relationships of
instrumental goods to entrepreneur activity, but not necessarily giv-
ing a precise expression to any one of these relationships. Numbers
two and three are meaningless excepting in terms of relativity to
entrepreneur activity. Marginality is, in last analysis, an entre-
preneur attitude with relation to one's own productive activity or to
the productive efficiency of agents and instruments.

INDEX

Abstinence: Carver on, 225, n. See
Cost of Production; Interest; Cap-
ital.

Abstract Capital, 170-74. See
Capital.

AxTSTRiAN School: terminology
criticized, 308-11. See Boehm-
Bawerk; Wieser; Utility, Cost and
Utility, Subjective Value.

Average Man, 446, n.

B

Bagehot, Walter: dted, 166, n.

Banking: Essential nature of, 231,
n-, 255» n.

Boehm-Bawerk, EuGEN v.: chaps,
xvii, xviii, jdx; explanation of in-
terest, chap, xiv; controversy with
Clark, 201-12; controversy with
Dietzel, 339-51; on capital, 155,
n., 2X1, 215, n.; on pnce adjust-
ment, 543-48. See Interest.

Bxtllock, C. J.: on laws of return,

493-
BoNAR, J. : on Hedonism, 307, n.

C

Caird, Edward: on Hedonism, 2x3,
n.

Cannan, Edwin: savings vs. in-
come, 554; on income, 559, n.

Cairnes, J. E.: chap, vi; cost as
life-draft, 382, n.; loan-fund capi-
tal, X65.

Cantillon, R.: laws of return, 492.

Capital: chaps, x, xi, xii.

— Is land capital ? chaps, x, xi; 50;
socially viewed, chap, xi; competi-
tively viewed, chap, xi; fixed and
circulating, 170, n.; Ricardo's,
Smith's, Senior's, James Mill's,
J. S. MilPs, views on, 170, n.;
productivity of, and interest,
chaps, xiv, xv. See Factors of
Production; Loan Fund.

— ^Asloan fund: chap, xii; Caimes's
view, X65; Ricarao's confusion,
42; related to banking, 165-69.
Are men capital ? 154, n.

— ^Various concepts: Boehm-Ba-
werk, X55, n.; Fetter, X47, n.,
X54, n.; Fisher, X47, n., 157, n.;
Smith, X49; Ricarao, 151; J. S.
Mill, 151, n.; Tuttle, 154, n.;
Veblen, 153; Clark, 170-74.

— ^Wage-fund capital, 148.

— ^Abstract capital, 170-74.

— Competitive capital, cnap. zi.

Carver, T. N. : on abstract capital,
X72, n., X73, n.; abstinence and
interest, 225; factors of produc-
tion distinguished, 13 1, n.; on op-
E)rtunity cost, 383, n.; profits rc-
ted to cost, 100, n., xo6, n.; wage
determination, 518; measure of
value, x8x, n.; laws of return, 489,
493, n. ; criticism of Clark, 440, n.;
controversy with Hobson, 476, n.

Charity: expenditure for, 529, n.

Clark, J. B.: chap, xxii; abstract
capital, X 70-74; entrepreneur cap-
ital, 479, n.; on interest — contro-
versy with Boehm-Bawerk, 20X-X a;
on roundaboutness, 208, n.; doses
of outlay, 432, 434; labor as fimd,
263; nature of rent, 397, n.; dy-
namic forces, 480, 5x4.

Commons, J. R.: laws of return,
499, n.

Competitive Capital. 5m Capital.

Consumption: productive and im-
productive. See Productivity.

Cost of Production: various cost
concepts, chap, i; Adam Smith's
doctrine, chap, ii; Ricardo's doc-
trine, chap, iii; labor-purchase
cost, X, 8; labor-time cost, 3; labor-
value cost, 4; labor-pain cost, 3,
62-83; non-competiuve groups,
71-80; labor not always painful,
48, 82; abstinence as pain cost —
Senior, 45; skill and cost, 75; real

577

VALUE AND DISTRIBUTION

costs — Manhftll, ,.
Crusoe ecoaomy, 84.
— Opportunity

1

3:3;

P

Smith's doctrine, lo-ii; Ricardo's
docirine, 31; Senior's doctrine,
4S, 49; AustrioD docldne, ^56;
displaced utility as, 8s, 347, 366;
any displacement as, S7; siterna-
tive use as rent, igo-y, as related
to profit, 89-92; vanous views as
to profit opportunity — Fetter 98,
n. — Scagcr, 99, a. — Flux, 99, n. —
Carver, too, a, — Scligmali, 100, n.

— CoUectivist cost, 191, 356.

— Abitiaencp as cost: as 10 land —
Senior, 50; capital-use cost, 5.

— Interest as cosl: J. S. Mill's ei-

elotialian, ^8, 59.
^age-subsisience cosi, 34'.
— Profit as cost, 56; only part U, 65;

rclationof profit to cost, SS; Had-

ley'i doctrine, 89; Mill's, 90;

Walker's, 91; Fetter's, 104: Sea-

ger's, 104; Carver's, 106; Flui's,

106; Seligman's, 100.
— Cosl merely relative, S5, a6i; com-

Dvativc cost — Caim«, 64; J. S.

Mill, 60; b opportunity cosl, 60.
— Ejilrepreneur cost, 10; adopted

byJ.S. MiU, S3, st>.
— Rent and cost, chap, xvi; J. S.

Mill's doctrine, 60; Say's i i6-iSi

Ricardo's controveray with Say,

109-ij; Malthus' doctrine, 183;

Seiuor's, 50, 3S3; Adam Smith's,

84, 17; Ricardo's, 36, 38; Hol>- Factoss

. 4i4~3S; Wieser's, 371.

— Marginal cost, chap, ivi, 361; in-
cludes various influences, 87, n.;
eitensive and intensive margins,
436; price-delermining vs. price-
dclcnnincd, 401, n., 415; margin-
determining vs. margin-deter-
mined, chap, xvi, 173.

— Land as opportunity cost — J. S.
Mill, S9, 61; views of Patten,

Jevons, A. S. Johnson, Macfar-
ine. Feller, Hobson, Hyde, 190-
95; Marshall. 3S5-98.
— Relation of different f aclort to coat ,

'35-37-
— Risk cosl, 98.
— UtiUty vs. coat, 339-52.
— Ultimate determinants — ailualion

cost, 383, 383, 385, 394.
— Skill and cost, 75.

Davenport, H. J.; Ovtiinti 0) Eco-
nomic Theory, cited, iSO, n,, 187,
n.; depressions, 3iS, n.; normal
price, 179 n.; normal value, 4S1,

Defebsed Payuents. 5e« Standard
of Deferred Payments.

Deuahd: curve, chap, xiv.; de-
fined, S33, n,

DiETiEt, Heinrich: critidied by
Hobson, 409; conirovetsy wiih
Boehm-Bawerk, 339-^.

DtuiNiSBJNO Retitxm. See Return.

DtsTHtBtrrios: chap, ixvi; by
value produciivity, chap, mii, 360
3^-

Doses: of outlay, 417; size of,
478, n.; views of Hobson and Car-
ver, 476, n. 5m Rent.

DVNAiacs: of value and distribu-
tion, chap, xdv.

E
EFFECTIVE Utiuty. Ste Mar

Utility.
Entkepr£Nedb Capital. SiCt

lal.
ElxpEcsEs OT Phodwctiom:

penses vs. costs. 173, 383, n

Cost of Production.

logical classification, 136-35. "8,
n. ; Carver's view, 131, n.; Sen-
ior's view, 137, n. Sfe Land;
labor; Capit^; Cost of Produc-

Fetter, F. a.: definition of de-
mand, 533, D.; interest theory,
3oS, n., 111; roundabouiness,
307; income, 559. n.; profits re-
lated 10 cost, g8. n.. 104, n.; ex-
pense coat and opportunity cost,
3&3. n.; utility and marginal util-
ity, 315, n.; laws of return, 497. n.
5m Capital.

FiGHEB, Ibvdic: on income. 559, n.;
savings vs. income, 554; inlere$t
thcoi7, 143, n. Set Capital.

Fns, Warmer: on Uedonli
308.11.

INDEX

579

^Xvx, A. W. : definition of demand,
53 a, n.; profits related to cost, 99,
n.; Z06, B.; expense cost and
opportunity cost, 383, n.; laws of
reUim, 496, n.

^F^JNDINO of productive factors, 263.

ToRCED Gains, 432, 426; Hobson
on, 405, n.

G

Galiani, F., 107, 231, n., 233.

GiDE, Chasles: on laws of return,
496, n.

GiTFEN, Robest: determination of
value, 548, n.

GONNEK, E. C. K., 30.

Green, D. I., 93.

H

Hadley, a. T.: definition of de-
mand, 532, n.; profits related to
cost, 89*

Hedonism, 48, n., 303-10.

Hobson, J. A.: chap, zxi; forced
gains, 405, n.; rent and cost, 414-
35; displaced rent and cost, 290;
controversy with Carver, 476, n.;
savings, 529, n.; utility and value,

3^5. n-
Hollander, J.: rent and cost, 290;
intensive margin, 266.

Hyde, A. M. : rent and cost, 290.

Hyndman, H. M.: labor measure of
value, i77» n.

I

Increasing Return. See Returns.

Income: vs. capital, 554.

Interest: chap>s. xiv, xv; defined,
188; problem stated, 190-93; pro-
ductivity theory, chap, xiv; as
cost; see cost of production; risk,
95; roundaboutness, 207; Boehm-
Bawerk on, 194; Fisher, 242, n.;
Ricardo's diflSculty, 36-41; Veb-
len as to relation to credit, 255, n.

J.
Jevons, W. S.: relation to eco-
nomic doctrine, 334, n.; on utility,
316, n.; definition of wealth, 314,
n.; displaced rent and cost, 290;
subsistence goods as capital, 209.

Johnson, A. S.: displaced rent as
cost, 290.

Johnson, J. F.: on loan capital,
174, n.

Labor: as cost: jm Cost of Produc-
tion; as fund, 263, 459; produc-
tive and unproductive: see Pro-
ductivity; as cost denominator, 15,
25, 118; as cost determinant, 15;
as standard of deferred payments,
15; real value of, 11; as real price,
8, 11; value proportioned to —
Ricardo, chap, iii, Oumes, ch^.
vi. See Factors of Production.

Lamarck, J. B. P. A., 308, n.

Land: as capital: see Capital; as
funded, 263, 414, 419, 422; up-
keep, 435; incidence of tax on,
248, n. See Factors of Produc-
tion; Rent.

Laughun, J. L.: measurement of
value, z8i, n.

Laws of Return. See Returns,

Loan Fund: Ricardo on, x6a See
Capital.

Luxury, 529, n.

M

Macfarlane, C. W.: utility and de-
mand curves, 536, n.; forced gains
405, n.; WflJker's definition of
profit, 400; rent of labor, 400, n.;
labor as fund, 263, n.; interest,
206, n.

Mackenzie, J. : on Hedonism, 307, n.

McCxTLLOCH, J. R.: interest as cost,
37» 40.

Malthus, T. R.: laws of rc|um,
chap, zxiii; doctrine of cost, 283;
on general glut, 218, n., 231, n.;
labor as cost measure and deter-
minant, 1x8, n.; rent and cost, 55,
n., 56, n.; cost doctrine criticized
by Senior, 48, n.

Margins: extensive and intensive:
see Cost of Production; personal
or instrumental, 424, chap, zvi;
in price fixation, 405; nature of
land margin, 286; cause or result,
275; various kinds, 87, n., 278, n.

VALUE AND DISTRIBUTION

Mabginai. Utuity: chap, ivii; as

value determinant, chap. xxii.

Makshaix, Alfked: chap, xx;
mcasuremeni ot utility by price,
37a; onjevotia, 337.n.; displaced
rent as cost, iQo; mar^ns and
cost, »73: long-time reckoning,
4801 criticized by Hobson, 409.

Mabx, Ka>l: on money, 33S: labor
measureol value, 177, n.; labor as
fund, 163.

Mencek, Anton: relation to eco-
nomic doctrine, 334; definition of
subjective value, 317; principle ol
imputation, 360; capitalization,

Mekcahtilists: value doclrine, 107;
notion ot productivity; nw Pro-
ductivity.

MtLL, Jaukb: inleresl as cost, 37,
39-4ii general glut — controversy,
with ^Ithus, ilS, n., 131, D.
Stg Capital, fixed and circulating.

Mill, John SniASTr chap, v;
coat, chap, ivi; marginal cost and
relative cost, a6i; profit related to
coal, 90; displaced rent as cost,
390. Sea Capital; Productivity.

MOMEv: its place in value theory,
a:7-iio; function in deferred pay-
ments, 117-10. Set Price.

Monopoly: coit in, 565, n.

N

NOK-

GKOtrps, 71-80,

ism, 310, XX., 311 n., on Galiui

133, n.
Patten, Siwon: recreation cost, 4]

il; displaced rent
PavsioCEATs: cost theory, 107. .

Productivity.
PiERSON, N. G.: on cost, 368, i
Pleasubb. 5m Utility.
PoFtnjkTiON: redistribution of, 4I

and wages, 519. Set Subsisten
Pbicb: defined, iiS; adjustment □(^

chap, zzv; peculiarities in tbeciy

of, 138, a.; Dormal, 179, a.; rent

and price. See Rent.

pBODUCTtON: what is, 555. ,5m

Factors of Production.
Productivity: defined,

productive labor, iia, n.; prodin

tive consumption, "~

cantilist notion, 11 .

daticQotion, 111, n.; funded,4l

distribution by, 385;

cording lo, chap. riv. See Fao

lora of Production.
Pkofits: as cost; only part ai

6s; necessary or minimum

tion to cost, 89-91: Hadlc/s vienn
89; J. S. MiU's, s8, 90; Walkei'^'"
9t; risk profit, 96-98. See Cost

of Production.
Pkouotion: profits of, $57, □.

Q
Quantity Theoby. 141,
Qdasi-Rents: and com

401, n.
Quesnay, FRAHgoia: laws of

Ostentation: in industrial deprts-
sioos, 519, n. See Luxury,

OtnxAV Cost. See Cost of Produc-
tion; Entrepreneur Cost.

OvXRPBODUCT'iON, 117, n.; possi-
bility of, »3t, n.; in industrial dc^-
pressions, aji, n.
P

Pain Cost. See Cost of Production.

Panics: depression following, »3i,n.

Fantaleoni, Maffeo: relation to
economic doctrine, 338, n.; defini-
tion of demand, 531, n.; Hedon-

Rent: vanous concepts, 370, , .^^
n.; causes of — Maithus, Ricardo,
Senior, 183, 1S4: on labor, 399;
aflrcied t^ improved technique,
513, n.; incidence of tax on, 148,
D.;' as cost: M> Cos! of Prodi

RBPBESEMTATtVE FlKM, 374, D.

RBTinuJ, Laws or, chap. xxiiL

RiCAKOo, David: chap, iii;

cost, 3; controversy with S

cost, 109-13; riches vs. val

]

INDEX

S8i

cause of rent, 383. See Rent;
Cost of Production; Capital, fixed,
circulating, and Loan Fund.
Robertson, J. M. : on saving, 5 29, n.

RouNDABOXTTNESS. See Interest.

RxTSEiN, John: on saving, 529, n.;
definition of demand, 532, n.

Savings: as loan fund, chap, ziii;
"fallacy of," 529, n.; market for,
in prosperity and in depression,
231, n.; how far desirable, 222-25;
upkeep, 435, n. See Capital; In-
terest; Abstinence.

Say, J. B.: chap, ix; on capitaliza-
tion, 208, n.; controversy with
Ricardo on cost, 109-13; loi de
d^bouch^es, 238, n.

Seages^BLR.: expenses and oppor-
tunity cost, 383, n.; profit related
to cost, 99, n., 104, n.; on Hedon-
ism, 309, n.; definition of demand,
532, n.; laws of return, 495, n.

Seugican, £. R. A.: social-organ-
ism doctrine, 443, n.; expenses
and opportunity cost, 383, n. ; profit
related to cost, 100, n., 103, n.;
displaced rent and cost, 2^2, n.;
on Hedonism, 309, n.; utibty and
marginal utility confused, 315, n.;
laws of return, 496, n.

Senior, W. N.: chap, iv; definition
of wealth, 314, n.; abstinence as
pain cost, 45; opportunity cost,
48; causesof rent, 284, n.; utility,
317, n. See Capital; Factors of
Froduction.

Sewall, H. R., 107.

Sedgwick, H., 225, n.

Single Tax, 248, n.

Skill: related to cost, 75.

Smith, Adam: chap, ii; various cost
doctrines, 2; capital concept, 148;
rent and cost, 27. See Capital.

Social Dividend: defined, 121,
chap. xxvi.

Social Organism: chap, xxii, 441,
n., 458.

Standard of Deferred Payments :
chap, xiii; labor, utility, or value,
15-18, chap. xiii.

Standard of Living, 518, 529, n.

SuBjEcnvx Exchange Valtts, 330.

SuBjEcnvx Value: chap. xvii.

SuBjEcnvx Worth, 147; a cost
concept, 354. 5m Subjective Value.

Subsistence: relation to wages,
435, n.; goods as capital, ao8-xo.

Supply: defined, 532, n.; curves of,
chap. XXV.

Taxation: incidence of, on land
and rent, 248, n.

Thackeray, W. M., 300, n.

Transferability, 314, n.

Transportation: an agricultiiral
process, 486; effect of improve-
ments on rent, 523, n.; chap. zzir.

Turoot, a. R. J., X07.
Tuttle, C. a.: capital concept,
X54» n.

U

UNDERCONSXTMPnoN. See Overpro-
duction.

Upkeep: of land and of labor, 435.
See Interest.

Utility: displaced as cost; seeCcM
of Production, Opportunity Cost;
curves of, chap, xxv; intrinsic or
extrinsic, 317, n.; absolute and
relative, 317, n.; relative marginal,
299; comparability, 300, 309-14;
vs. cost, 339-51. See Marginal
Utility; Subjective Value; Cost
of Production.

Value: real and exchange, 31, 34;
vs. riches, 33; can it be measured ?
177, 178, 181, n.; views of social-
ist 177, n.; Marx's, 177, n., x8i,
n.; Laughlin's, x8z, n.; Carver's,
181, n.; Walsh's, 188, n.; natural
value, 358. See Subjective Value;
Price.

Veblen, T. B. : profits and time, 97,
n.; credit related to price, interest,
and profit, 255, n.; profits of pro-
motion, 567, n.; savmg, 529, n.

S82

VALUE AND DISTRIBUTION

W

Wages: subsistence minimum, 435,
n. Se$ Labor; Cost of Produc-
tion; Subsistence.

Walker, Francis: profit related to
cost, 91; marginal cost, 265; rent
of labor, 400.

Walras, Leon: relation to eco-
nomic doctrine, 334, n.

Walsh, C. M. : standard of deferred
payments, 188, n.

Wealth: defined, 3x4, n.

Weissmann, a., 308, n.

Whittakkr, a. C. : on Adam Smith,
93, 25, n.; Mjdthus, 56, n.; Ri-
cardo, 34,n.; Mill, 59, n.; Senior,

WiESER, Frdcdrzch, V.: chaps,
zvii, six; interest, 199, 300; capi-
talization, ao8, n.; principle of
imputation, 360-62; demand for
productive goods, 512.

Work: defined, 556.

Z
Zones oy Indifference, 472.
zuckerkandl, r., 339, 34z.

OOKBINOINO CO.

0 3*^7

DATE DUE

tlilH t991

NOV 1983

STANFORD UNIVERSITY UBRARIES

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