The Positive Theory of Capital

Eugen v. Böhm-Bawerk, from the Warren J. Samuels Portrait Collection
Böhm-Bawerk, Eugen v.
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William A. Smart, trans.
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London: Macmillan and Co.
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1. My views on the subject of Value have already been published at length in another place (Grundzüge der Theorie des Wirthschaftlichen Güterwerths, in Conrad's Jahrbücher für Nationalökonomie und Statistik, vol. xiii. 1886, pp. 1-86 and 477-541). Since then I have seen no reason to change them. What I have now to say on the same subject can, therefore, offer but few new features. On the whole, what follows is an extract from my former work adapted to the requirements of the theory of capital, and, in the composition of it, I have gone on principles suggested by the nature of my present task. Those fundamental ideas on which the understanding of the whole depends, and those lines of thought with which the theory of capital is specially connected, I have taken in all their detail from my other book; and, as a simple change of form would have been as troublesome as it was useless, I have taken them, for the most part, without change. I have omitted, on the other hand, all those explications, demonstrations, and so on, which were important for the Value theory, but seemed not altogether indispensable for the understanding of the theory of Capital. In place of these I have added a good deal of matter in which I have taken advantage of the newest literature on the subject, and have tried to give a still clearer formulation to several ideas, and, particularly, to develop with more exactitude special points where the value theory comes into more intimate connection with the theory of capital. The most important additions occur in chapter vii. of the present book, and at the end of chapter v, and in chapter vii. of the next book. Readers who are interested in the theory of value and price for its own sake, I should ask to consult the statement in Conrad's Jahrbücher, which is much more complete, and which I tried to make easier by numerous references.

2. I frankly confess that I would gladly exchange these pedantic and clumsy expressions for terms more euphonious and popular, if they could be got to indicate the opposition referred to with even approximate correctness. But I have not been able to find such expressions. The words Use Value and Exchange Value are not suitable at all, because, as we shall see, there is a Subjective exchange value.

3. The foundations of the modern value theory have been laid by three writers whose work is in substantial agreement—Carl Menger, Jevons, and Walras. Of these, in clearness and completeness, Menger's statement takes the first place. Twenty years before his time, several of the most weighty and fundamental ideas had been already propounded by Gossen in his remarkable book, Entwicklung der Gesetze des menschlichen Verkerhs und der daraus fliessenden Regeln für menschliches Handeln, Brunswick, 1854. Like the book itself, these ideas sank into complete but undeserved oblivion, and had to be rediscovered by the economists just mentioned. That this was done almost simultaneously by three different men, belonging to three different nations, and quite independently of each other, is a very remarkable coincidence, and is, at the same time, no small guarantee for the correctness of the principles on which all three were certainly agreed, although in thoroughness their statement of them was unequal. Since then these principles have had a notable development, and received wide acceptance. Not long ago, in the preface to his Theorie de la Monnaie (Lausanne, 1886), Walras could give an imposing list of writers as adherents of the new theory. Since then we may add the name of E. Sax (Grundlegung der theoretischen Staatswirthschaft, Vienna, 1887, p. 250),—with whom, however, I cannot agree in many particulars, particularly in those where he tries to establish original ideas that are not in harmony with those of his predecessors; and that of R. Meyer (Das Wesen des Einkommens, Berlin, 1887).

Book III, Chapter II

4. See Conrad's Jahrbücher, vol. xiii. p. 11.

5. Some very interesting phenomena of value may, in certain circumstances, be exhibited by free goods also. For the explanation of this see my Grundzüge, p. 15.

6. Those numerous writers of whom Scharling is the latest instance (Conrad's Jahrbücher, vol. xvi. pp. 417 and 513, and particularly 424, 430, 551), who say that the distinguishing criterion of "economical" and "valuable" goods is difficulty of attainment, the necessity of expending labour, and the like, are giving a secondary ground of definition instead of the really decisive and primary one. It is only when and because we are suffering, or fear to suffer, lose of satisfaction from insufficient supply of goods that we decide, generally speaking, to submit to the hardships of acquiring them, to labour, and so on. Labour and hardship could not by themselves confer an economical character on goods were it not that, for the most part, another circumstance, and that the really decisive one, is also present; in other words, that those kinds of goods, which are difficult or troublesome to obtain, are, at the same time, the goods that remain scarce. That, however, it is not the difficulty but the scarcity that decides is vividly shown in those cases—not, I grant, very common—where the technical circumstances are of such a nature that the good can be got only, indeed, by conquering difficulties, but then in superfluous amount. When the peasant obtains good drinking water, e.g., by bringing it along a pipe to a house, it may occasion him a permanent expenditure of labour and costs for construction, upkeep, and management of the water-supply. But if this brings the water in greater quantity than he requires, it will not occur to the peasant, in spite of the labour, that he must "economise" the water.

Book III, Chapter III

7. On certain comparatively rare exceptions see Conrad's Jahrbücher, vol. xiii. p. 42.

8. See Menger's Grudsätze der Volkswirthschaftslehre, p. 93.

Book III, Chapter IV

9. Ueber den Ursprung und die Hauptgesetze des wirtschaftlichen Werthes, p. 128. Jevons has the expressions "final degree of utility" and "terminal utility." With Menger, who first formulated the above law with entire clearness, but gets along without the convenience of a short technical expression, the law runs as follows (p. 98): "In every concrete case, accordingly, of the satisfactions of want guaranteed by the total quantity of goods, it is only those which have the smallest importance for the person that are dependent on his command over a definite part-quantity of the amount of goods at his disposal; and the value of a part-quantity of the available amount of goods is, accordingly, equal to the importance which the satisfactions of want that are least urgent among all the satisfactions guaranteed by the total quantity, and obtainable with a similar part-quantity, have for that person."

10. Even where men do not act egoistically but altruistically, they have occasion to consider the marginal utility, viz. that marginal utility which the goods given away have to the persons who get them. One gives donations, charities, and the like, when the importance of such, measured by their marginal utility, is very much higher as regards the wellbeing of the receiver than as regards that of the giver, and almost never when the converse is the case. I am glad to know that, in the idea expressed above, I am at one with so distinguished an economist as Walras. I can only express my entire concurrence with what he says, in the preface to his Théorie de la Monnaie, p. 11, as to the universal importance of the idea of marginal utility, both as regards theory and as regards the practice of economic life.

11. To guard against possible confusion it should be noted that the German writers on value generally speak of "satisfaction of want" under the metaphor of a descending scale: the increasing satisfaction creeps down the scale, and the point of saturation is zero, not 100.—W. S. Book III, Chapter V

12. On the relation of theory and practice in the sphere of valuation see Conrad's Jahrbücher, vol. xvi. p. 74.

13. Generally speaking, there are two occasions on which a man is called on to form a judgment as to value. One is on parting with a good in his possession, e.g. in giving it away, or exchanging, or consuming it; the other, on acquiring a good. In the two cases the form which the valuation assumes in thought is, externally, a little different. A good which a man has he values according to the injury which he would suffer by its loss; he values it, therefore, according to the last satisfaction which is assured him by having it. A good which a man has not he values, on the contrary, according to the increment of utility which its acquisition brings; i.e. according to the most urgent among those satisfactions which, in the conditions of his fortunes up till the present time, he has not been able to obtain. Naturally we get the same result by either method, for the final satisfaction which is assured by a good is always identical with the first which would be lost without the good. In the text I have put the formula in such a way that it will sufficiently embrace either method.

14. On certain far-reaching complications which may be connected with this, see Conrad's Jahrbücher, vol. xvi. p. 34.

15. The latter occurs only with individual goods, or with those particular goods which may have chanced to be selected just for the most insignificant service.

Book III, Chapter VI

16. In his recently published essays on Wertheorien und Werthgesetze (Conrad's Jahrbücher, N. F., vol. xvi. pp. 417-437, and 513-562) Scharling will not allow that the relation of Wants and Provision is the ultimate universal determinant of the value of goods, and would substitute Difficulty of Attainment in its place (ibid. p. 425, and particularly p. 430 in note, and p. 551). Notwithstanding some striking things in it I frankly confess—and all the more frankly that I attach so much scientific importance to the Danish economist, and so much weight to anything he says that I consider not only this proposition, but the whole treatise he has written in its proof, as a lamentable relapse in scientific analysis. Scharling has done everything possible to re-entangle certain things that had up till now scarcely escaped from confusion. And what makes it worse is that he has done it with skill, and with a certain semblance of truth. I consider "difficulty of attainment" one of those unlucky catch-words which can be stretched and stretched like an indiarubber band; it leads out of one ambiguity into another, and it either explains things falsely or (loss not explain them at all. I mean that either one connects with it a definite, limited, and narrow meaning, and holds fast by that—in which case the explanations that one would base on this narrow conception prove to be positively false; or one draws and stretches the rubber band, and, by making perverted and violent constructions, forces all sorts of foreign things under the elastic—in which case we avoid open contradiction, but at the cost of making the proposition expressed by the catch-word an insipid and weak phrase, which does not explain, but goes round about an explanation. And just this has been Scharling's fate. What does he mean by "difficulty of attainment"? He explains it as the amount of effort that every one must take on himself to obtain a good, or the effort which is spared him by the possession of the good (p. 430). And what does the word "effort;" again, mean? If any precise conception is to be attached to it, it can scarcely be understood as anything else than as some sort of exertion, pain, or labour. But if this is the meaning attached to it then the appeal to "saved effort," as the principle of the value of goods, is positively false. To give one example out of a thousand, take the case of a pensioner past work with an income of £60. He is told to value the overcoat which he possesses according to "saved effort." What kind of effort may that be? Perhaps the effort which he would have to expend to produce the overcoat himself? Certainly not; he would never himself make the coat, but always buy it. Or the effort which he would have to put forth if he were to produce those goods which he had to give away as equivalent for the coat? Neither can this be the case; for, past work as he is, he would never acquire this purchase price through effort, but simply take it from his income, and for that, of course, he must curtail the satisfaction of other less important wants. What, therefore, the possession of the overcoat spares him is not an effort, but a deprivation, and a deprivation the amount of which, as I have indicated in the work disputed by Scharling, depends exactly on the importance of those last needs which are satisfied by the good, which lose their satisfaction in losing it, and the urgency of which itself, again, is determined by the existing relation of Wants and Provision. It is only in those rare cases mentioned by me in Conrad's Jahrbücher (ibid. p. 42)—the exceptional character of which I most distinctly maintain in spite of Scharling's remarks (p. 430, note 1)—that the amount of an effort or the pain of labour can be the immediate standard of value.—Now I admit that Scharling sometimes gives the word "effort" quite another meaning from that of a pain. To avoid repetitions, however, I will show what that leads to, a little later, under the theory of price.—Finally, the illustration, with which Scharling thinks he has signally refuted my doctrine, will not mislead anyone who has rightly understood the doctrine of marginal utility. If a boy, who hitherto had only had a single apple, were allowed for once to pull as many apples as he liked in a neighbour's garden, he would, I admit, immediately reduce the value he put upon the good called "apple." But why? Not, as Scharling thinks he may assume as self-evident, because "his relish and his enjoyment in consuming the fruit remain unchanged." This enjoyment may run down a whole graduated scale from the consumption of the first and single apple to entire satiation with apples, but it is perfectly clear that the boy with the single apple sacrifices the enjoyment which stands highest in this scale, while, "with one of many apples to chose from", from, he sacrifices only a very trifling one.

Book III, Chapter VII

17. See above, p. 147.

18. See above, p. 157.

19. See above, p. 154 in note 2.

20. See above, p. 142.

Book III, Chapter VIII

21. It is easy to see that we can only speak of two values in the same loose way as we spoke above of several "alternative marginal employments," for, naturally, a good can never have anything but one value to a person. Value is the importance which a good has for the wellbeing of a man, and this importance cannot be at the same time great and small, higher or lower. But we do now and then use this rather inaccurate way of thinking and speaking, and, therefore, I have here, as on the former occasion, adapted my formula to it.

22. Notwithstanding the objections of Diehl (P. J. Proudhon. Seine Lehre und sein Leben, vol. i., Jena, 1888, p. 109), who approves of the "traditional distinction of Use Value and Exchange Value," I must hold by everything I have said above.

Book III, Chapter IX

23. Of course in this case also the peculiarities of the case decide which member is to be valued as the completing member of the group, and which as simply the isolated piece. If, for instance, the owner of the complete group is asked to sell the good A, he will value it as completing member, and the other goods B and C as isolated pieces. But if he is asked to sell C, he will value it as completing member at 100-(10+20)=70, while A and B will be valued as isolated pieces.

24. To put it concretely: although a load of bricks were absolutely indispensable to finish a house, the load could never obtain any higher value than that determined by the marginal utility of bricks generally; that is, as determined by all the uses to which bricks generally are put.—W. S.

25. If C also were replaceable by a substitute of less value the case mentioned on p. 170 would emerge, and the marginal utility of the joint use would not determine the value of the complementary group.

26. Not physically. It would, in most cases, be absolutely impossible to calculate the physical share—how could one be supposed to distinguish what percentage the material and what percentage the artist had contributed physically to the making of a statue?—but it is also a matter of no importance. On the other hand it is, in most cases, quite easy to determine what share of the utility, or of the value, would have to be done without if one were not in possession of a definite individual factor, and this quota, conditioned by the possession of one factor, I call its economical share in the total product.

27. The confusion, so common in economic literature, between the gross share assigned to the co-operation of capital (Rohzins) and net interest, has been fully discussed in my Capital and Interest (see the criticism of Lauderdale, p. 146; of Carey, p. 155; of Strasburger, p. 175; of Say, p. 189, etc.) It will not be expected of me to give a complete theory of distribution in the passing, as it were. I purposely refrain from going deeper into the subject than is necessary for my special task, the development of the Interest theory. And for this it is sufficient to sketch only in the broadest lines the principles which limit the gross share of capital, as against the shares of labour and uses of land that co-operate with it: our special task will be to lay down what is the state of the case as regards the gross share of capital. Moreover I hope that on this question of the shares allotted to the various factors, which I am compelled to treat in a very cursory way, the eagerly expected work of Wieser will very shortly shed a clear light. (Wieser's Der Natürliche Werth, Vienna, 1889, appeared while this was passing through the press.—W. S.)

Book III, Chapter X

28. Among older writers it was disputed by Say, Traité, vol. ii. chap. ix. seventh edition, p. 404: "Ce qui nous ramène à ce principe déjà établi, que les frais de production no sont pas la cause du prix des choses, mais que cette cause est dans les besoins que les produits peuvent satisfaire." In more recent literature what M'Leod has said (Elements of Political Economy, 1858, p. iii.) is worth notice. But the matter was really first grasped in its entirety by Menger, Jevons, and Walrus, whose books mark an epoch as regards the whole value theory, and of these again the work of Menger was the most profound.

29. Grundsätze, p. 8.

30. This is demanded by the principle of "economic conduct." See Wieser, Ursprung und Hauptgesetze des wirthschaftlichen Werthes, p. 148.

31. See above, p. 145.

32. See above, p. 156.

33. Wieser, p. 146.

Book IV, Chapter I

1. Menger, Grundsätze, p. 153. Of course now and then exchanges may be made simply to show some person a kindness; perhaps to conceal a present, or a charity in the guise of an exchange. But such cases form only a quite insignificant minority.

2. Grundzüge, part ii., in Conrad's Jahrbücher, vol. xiii. p. 486.

3. Grundzüge, p. 480.

4. It will be observed that our author does not confine the word Price to Money price, but applies it to the equivalent good or goods obtained in exchange for what is, pre-eminently, the good—the object of demand from buyers, and of supply from sellers. The convenient word Preisgut I render by "price equivalent," or simply "equivalent."—W. S.

5. Say, e.g., that A values his horse at five casks of wine, while B values it at fifteen, then, if the horse goes for ten casks, each gains an amount of value represented by five casks of wine. If A values the horse at eight and B values it at twelve, each gains only a value of two casks. Finally, if both agree in valuing the horse at twelve casks of wine, B, of course, would be glad to get the horse for ten casks, or for any price under twelve casks, but A, naturally, would not give it him at that price. See Menger, Grundsätze der Volkswirthschaftslehre, p. 155.

Book IV, Chapter III

6. Menger, p. 183.

7. Always without prejudice to the second or subsidiary upper limit formed by the valuation of the buyer, which the price can in no case go beyond. Where there is anything like full competition of sellers, however, this is seldom of practical importance.

Book IV, Chapter IV

8. If, e.g., a buyer erroneously imagines the number of horses brought to market to be much less than it really is, it may very well happen that he hastily consents to pay a higher price than he would have found necessary if he had given better attention to his own interests. The influence of errors like this on the formation of price must not, of course, be overlooked in a theory of price, but where we are merely trying to bring out the simplest fundamental law it is not necessary to go into such details. See Grundzüge, as before, part ii. p. 486.

9. The more experienced both parties are, and the more familiar with the condition of the market, the shorter will be the time spent in "trying the market" by preliminary offers. In an old and well-organised market competitors will save themselves the trouble of making offers that are not meant to be taken, and will make their first offers at least somewhere near that zone within which the market price will finally be fixed. The extreme limit of this curtailment is given in the "fixed prices" of sellers. In this case, trying the market is entirely dispensed with, and sellers undertake at one throw, as it were, to hit the very zone into which the condition of the market will force the price. They must try to hit this zone quite exactly; for if they put the price lower they lose their profit, while if they put it higher the buyers in the market get supplied by other competitors, and the sellers are left with their commodities. Fixed prices, however, are less common in the open market than in shops, where selling is never conducted under the full pressure of competition, and where, consequently, any mistake in the price asked is not so hazardous.

10. If the horses of B1 to B5 are sold, the most capable seller remaining is B6, who values his horse at £21:10s—that is, higher than A6. As we know, then, an exchange between A6 and B6 is economically impossible, and the same is true a fortiori of the less capable sellers B7 and B8.

11. It need scarcely be said that the gradual bidding up of buyers, and the gradual undur-offering of sellers, do not usually take place in two separate and succeeding stages, but generally occur simultaneously.

12. In the nature of things the result shown in our abstract scheme will be the more exactly realised in practice, the better known the total condition of the market is to all interested; that is to say, the more organic the market, and the more publicly the negotiations are conducted. Where, on the other hand, as is usually the case, transactions are conducted in groups that are, indeed, in communication, but are yet somewhat separated from each other either in space or time, the relations of competition that would prevail over an entire market will, naturally, not be quite active in the single groups, and this has for result that the prices formed in the single groups are frequently only more or less approximate to the ideal market price represented in our scheme, without necessarily exactly coinciding with it.

13. Or with one of the more capable competitors, but in no case with a weaker one. See more exactly on this point in my Grundzüge, p, 499.

14. In our illustration it is the valuation of the excluded parties A6 and B6. If, however, the valuation of A6, instead of being £21, had been £19, and that of B6, instead of £21:10s., had been £23, the limits would have been determined by the valuation of the last pair who actually came to terms: the price would have been fixed between £20 and £22.

15. Sax, who, in his theory of value and price, stands wholly and entirely on the foundation laid by Menger, repeatedly and with emphasis characterises market price as an "average of individual values" (Theoretische Grundlegung der Staatswirthschaft, p. 276 and passim). This expression, if given without commentary, is exceedingly unfortunate, indeed directly misleading. As may be seen from what follows above (and more exactly from what I wrote in my Grundzüge, pp. 505 and, particularly, 522), the characteristic thing, on the contrary, as regards the resultant price, is that it is not an "average" in the usual sense of the word.

16. At least under the assumption distinctly made in our inquiry, that the competitors who appear in the market have a correct knowledge of the condition of the market. If we depart from this assumption, the appearance of more than a hundred demanders might give rise to the erroneous opinion that there may be among them a great many persons of higher "capability," and this might mislead the few capable competitors who are present into rashly making higher offers.

17. To show this, suppose we leave A1 to A4 out of our illustration. The position of the parties, then, is as follows:—

A5 £22 B1 £10
A6 £21 B2 £11
A7 £20 B3 £15

A8 £18 B4 £17

A9 £17 B5 £20
A10 £15 B6 £21:10s.
B7 £25
B8 £26

Here we see that the last pair within which the economical conditions of exchange are present consists of A8 and B4. The buyers, therefore, are now represented in the decisive marginal pair by a weaker member, the sellers by a stronger one. Accordingly the limit of price, which in the last case stood between £21 and £21:10s., moves down to between £17 and £18.

18. Students of economic literature will not fail to notice an interesting relation in which the above theory stands to certain doctrines that have for long obtained full recognition. When Thünen—and with him the whole body of economic doctrine—said that the rate of interest was determined by the productivity of the "portion of capital last applied," and the rate of wage by the return of the "last worker employed in the undertaking"; or when, much earlier, the question as to which, among several costs, regulates market price was decided in favour of the "highest costs of production that were still necessary to provide for the market," i.e. in favour of the "last seller,"—we recognise in all these, without difficulty, adaptations to special cases of the same principle on which we have built the doctrine of marginal utility and the theory of the formation of price. The only thing is that at that time economists were not yet conscious of the universal importance of these peculiar lines of thought. They meant simply to state a couple of special rules of limited range, while in reality they had hit upon the dominating Leitmotiv, which underlies the entire mechanism of industry carried on under the guidance of self-interest, and which, therefore, runs through the entire formation of value and price.

Book IV, Chapter V

19. I need scarcely say in so many words that it is not the number of persons wishing to buy and sell on which the formation of price depends, but the mass of commodities desired and offered, and that in the typical scheme it is only for simplicity's sake that I have assumed each person to desire and offer for sale only one commodity, whereby number of persona and mass of commodities go pari passu.

20. See my Grundzüge, p. 525.

21. On the relation of the above theory of price to the old doctrine of Supply and Demand, as well as on the truth and error contained in that doctrine, I have already written at length in my Grundzüge, pp. 524-534; here it is sufficient to refer to that work.

22. Without being a blind adherent of the "Quantity theory," I believe that, along with other important circumstances, the quantity of money, the amount of the supply of money, exerts a powerful influence on its purchasing power. But the supply of money has exactly the peculiarity described in the text, that, rather than let money lie entirely unused, holders will be content with a comparatively unremunerative employment, and that, at the same time, the entire given quantity of money strives to realise itself in the purchase of an unlimited quantity of commodities—the more the better.

Book IV, Chapter VI

23. I should like to say that I here bring forward the theory of the determinants of price only in the briefest of epitomes, because the details of it have no immediate interest for the theory of capital. Any one interested in the theory of price as such, I would refer to the full statement in Conrad's Jahrbücher, vol. xiii. pp. 508-524.

24. The older theory was misled by this into substituting, for the determinant "subjective valuation of the equivalent price," the "ability to pay" of the buyers, which is not exactly false, but is very one-sided. See the more exact statement in Conrad's Jahrbücher, pp. 520, 527.

25. This, and not subjective exchange value, is the important thing for the formation of price. See the Grundzüge, p. 516.

26. This may be a suitable place to finish the analysis of Scharling's argument, which I began on p. 160. Scharling explains (Conrad's Jahrbücher, vol. xvi. p. 542) that in all essential respects he can agree with my theory of price; only, he says, it does not go far enough. My "determinants," and even the determinants of these determinants, do not go to the very root of the explanation; there is still something wanting; and this something, this Schlussstein or "element which, in the last resort, determines the conditions for an exchange," Scharling thinks that he has found in the "exertion (Anstrengung) which is spared the man who wishes... to obtain possession of a good by the fact that the good is transferred to him, in the case in question, by the other party in the exchange" (p. 551). If Scharling here were to mean by Anstrengung the toil of production which must otherwise be expended, directly or indirectly, for the acquisition of the good, his proposition would be positively false (see above, p. 160 in note), and this, indeed, Scharling himself seems to see and, indirectly at least, to admit (pp. 531, 554). But he goes on to give this expression a wider meaning. Under it he now embraces, among other things, the exertion which it costs to induce an owner to part with his commodity (p. 554), or "to meet competitors" (p. 558), or "to meet other suitors by overbidding" (p. 558), or "to overcome the indisposition of the owner to part with the good" (p. 558), and so on. "The right of the owner to possess the good," explains Scharling in the most significant passage of this kind, "is the last hindrance which stands in the way of the buyer's acquisition of the same, and this is now the thing to remove. The exertion which is required for this determines the value, the conditions for the exchange" (p. 558). Now, what kind of "exertion" is this? Scharling himself speaks of it more than once with all desirable plainness (e.g. p. 555, line 15; p. 558, lines 5, 16, etc.) It consists simply in the offering of a sufficiently high or higher price, in a bidding up or bidding higher. And now I ask: First, is there any justification, material or linguistic, for calling the offering of a price an "exertion," and, specially, for calling the offering of a price of £20 twice as great an exertion as offering a price of £10? Second, is the "exertion" which consists in offering the purchase price, e.g. at an auction, spared the purchaser, or must he not rather take the exertion on himself if he is to obtain the good? And, third and principally, is it explaining the formation of price, or going round about the explanation in a manifest circle, to account for the height of price by the amount of the exertion which the meeting of competition and the inducing of the owner cost, and then explain this exertion again as the offering of a sufficiently high or higher price? Is this not rather to say directly;—the price is high when and because much must be paid to get the good, and it is low in another case when and because but little need be paid? Who will be inclined to accept this as "der Weisheit letzen Schluss," as the long-sought-for coping-stone of the theory of price?—And now one more remark in case of misunderstanding. I am very far from denying that "difficulty of attainment" or "amount of toil of production" may, and very often actually does, afford one single important secondary determinant for the relation of want and provision for want, thereby for the height of marginal utility, and so, finally, for the amount of value. But this determinant only works in the way, and within the limits, which I have indicated in my theory (see in particular the statement of the "exceptional case," where the amount of a pain or strain averted determines the value of a good, Grundzüge, p. 42, and especially the statement of the influence of costs of production on value and price, p. 61; then pp. 521, 532, 534). On the other hand, the more extensive claim that Scharling puts forward with so much emphasis (vol. xvi. pp. 551, 552), that difficulty of attainment by itself alone is the last universal determinant and measure of value, I can only most emphatically reject.

Book IV, Chapter VII

27. Thus the question as to costs of production or costs of reproduction; whether, in the case of a variety of costs, it is the highest, the lowest, or an average cost that is to be taken as standard; what elements are to be reckoned among costs, and so on.

28. To simplify the matter, we shall omit for the moment the co-operation of any other complementary means of production.

29. Again, for simplicity's sake, I leave out the other requisites of production.

30. It must be remembered that here we are making abstraction of the co-operation of other complementary means of production, as Labour, Tools, Coal, etc. If otherwise, of course, recording to the principles laid down above (p. 170) on the value of complementary goods, we should have to put a portion of the value of the product to the account of the other co-operating goods, and assign only a quota of the product's value to the iron. But, in that case, exactly the same relations, as are shown in the text to exist between the value of iron and the full value of the product, would hold between the value of the iron and that quota of the product's value.

31. See above, p. 221.

32. That these two, unfortunately, are not usually the same I have shown at length in Conrad's Jahrbücher, pp. 510-513, when discussing the causes and effects of this fact.

33. It is possible that the amount of costs may itself be shifted—raised, for instance—by the process of correction just described. It may happen, that is to say, that in order to satisfy the demand, hitherto unsatisfied, which is desirous of buying iron products at a higher price than 6s., so much iron is taken out of the iron market that the stock is no longer sufficient for the demand that is willing to pay just 6s. This latter, then, will, of course, be shut out by the stronger competitors, and the market price settles at a higher figure than 6s.—another proof that costs are not the fixed point to which the price of products adapts itself, but vice versâ.

34. It must not be forgotten that we are simplifying the matter by leaving out of account the co-operation of other complementary goods in the production of iron products. If we were to take these into consideration, and assume, for instance, that, to change the iron into the iron product, the expenditure of other two days of immediate or mediate labour was necessary, then 8s., as the price of iron product, would correspond to 4s. as the price of iron, and of this, according to the law of complementary goods, 4s. would be reckoned to the productive good, iron, as its share.

Book V, Chapter I

1. A history of the theory of this subject—which I have no intention of writing here—would probably start with Adam Smith's emphatic opposition of "present enjoyment" to "future profit" (ii. 1). In more recent times there are some good observations on the subject in Senior (Political Economy, third edition, p. 58) under the headings of "Abstinence" and "Capital"; in Rae (New Principles of Political Economy, quoted in Mill's Principles, book i. chap. xi.); and in Menger (Grundsätze der Volkswirthschaftslehre, p. 127). The first, so far as I know, to treat it as a subject by itself, was Jevons (Theory of Political Economy, 1871, second edition, 1879). Jevons's work is exceedingly interesting and suggestive, but, on the whole, it is rather imperfect—as could scarcely be otherwise in a first attempt, and on a field of speculation hitherto all but untouched. It shows a good deal of incorrectness, a good many contradictions, and, in particular, many obvious gaps. Jevous may be said rather to have shown, by a bold stroke of genius, that here was a new circle of ideas waiting to be taken up, than shown what was to be done with them. Closely following Jevons, without going beyond their master, are, quite recently, Launhardt Mathematische Begründung der Volkswirthschaftslehre, 1885) and Emil has (Grundlegung der theoretischen Staatswirthschaft, 1887, pp. 178, 313). A little before these G. Gross (Die Zeit in der Volkswirthschaft, in the Zeitschrift für die ges. Staatswissenschaft, 1883, p. 126) had made a well-meant suggestion,—which, however, was by that time carried out by Jevons and then by myself,—that the element of time in economical theory was worthy of a fuller consideration. Finally, as concerns my own work, I owe it to myself to say that I arrived at my views on this subject in complete independence, and altogether uninfluenced by Jevons—and, naturally, still less by later writers. I first became acquainted with Jevons's writings in 1883,—shortly before the printing of my Capital and Interest,—when completing the historical material already collected in that work by a review of the latest English literature on the subject. The principles of my own theory of capital, on the other hand, were laid down by me as early as 1876. In that year I first suggested them in a youthful work never published. In later writings I gave many plain, if still cautious, hints of my leading ideas (e.g. in Rechte und Verhältnisse, p. 68 in note on the phenomenon of Abnützung, pp. 76 and particularly 109, 115 in note, on the computation of the future rise, and p. 152; in Capital and Interest, pp. 257, 276, 343, 424, and particularly on p. 428 where I formulated the programme of my positive theory in saying that the explanation of interest was to be deduced from the influence of Time on human valuations of goods). The cautious tone which I still deliberately adopted in giving these hints was due to my desire not to compromise my new ideas by any premature or incomplete formulation of them. I meant that they should not go before the public till I was in a position to produce them as a finished whole, all harmoniously fitted in to a system of carefully planned economic doctrine. That is why I preferred to work for ten years at laying the foundation of the present theory by completing the theory of goods (1881), the criticism of the theories of capital (1884), and the theory of value (1886), rather than snatch, as I might easily have done, at the glory of priority by publishing original but still immature ideas a decade earlier. Moreover my theory, if it touches that of Jevons at several points, by no means agrees with it in essence; and in the most important points, such as the explanation of interest, it is in distinct opposition to his.

2. When Jevons calls that intellectual phenomenon which impels us to provide for future wants and to value future goods, a "present anticipated feeling" (Political Economy, second edition, p. 37), the expression is very apt to be misleading. We must distinguish between two fundamentally distinct things, which Jevons seems to me not to have sufficiently kept apart. It is one thing to represent to ourselves, or imagine, a future pleasure or future pain, and to estimate its presumable intensity on the ground of this imagination. It is quite another thing to experience, in this imagination itself, a pleasure, an actual present pleasure of anticipation. To give an example. I think of taking a pleasure trip to Italy. From personal experiences, or from travellers' tales heard or read, I represent to myself the pleasures of the journey, and I put the intensity of these pleasures so high, that it seems to me worth the sacrifice of £50 to realise them. But, beyond this, in picturing to myself the future pleasure of the journey, a real present pleasure of anticipation is kindled. Thinking on the journey affords me an actual pleasure, but, in any case, it is an entirely different pleasure and, in all probability, its intensity is ever so much less than the pleasure of the journey itself. If I value the latter at £50, the pleasure of anticipation is, perhaps, not worth more than 10s.—of which it may be sufficient proof that I am willing to lay out so much money, and no more, in buying a book of travels that lifts me into the pleasant world of thought. The concrete figures here are of no moment. No constant or normal quantitative relation can be established between an anticipated pleasure and a pleasure of anticipation: the relation will vary in the wildest way according to persons, motives, and circumstances. With dreamy imaginative men, for instance, who are apt to be strongly excited by their own imaginings, the pleasures of anticipation may be relatively strong; with hard-headed unimpassioned men, on the other hand, they will be disproportionately weak. For our purpose it is sufficient to establish two things: first, that the intensity of the represented future pleasure and that of the actually felt pleasure of anticipation, are two different quantities; and second, in the vast majority of cases, the intensity of the pleasure of anticipation is less than the anticipated pleasure, not by a few per cent, but infinitely.

The question now is: When we value future goods, and when in conformity with that valuation we are making these economical determinations on which we provide for future wants, with which of these two intensities have we to do? On this, at any rate, there call be no doubt: we shall all agree that it is the intensity of the future pleasure (or of the averted future pain) valued on the representation or imagination of it. A good which I have every reason to expect will bring me all intensity of satisfaction indicated by 100, I shall value at 100 and not at 1, even if, in anticipating the same, I experience only all actual pleasure of anticipation of the intensity 1. And, in the same way, in choosing whether I shall provide for any definite future want, in general, or to which of several I should give the preference, I shall try to decide, as impartially as possible, according to my reasonable valuation of the future pleasure, and not according to the degree of my momentary feeling of pleasure. (That we not seldom have our clear judgment clouded by the latter, and that it thus obtains an indirect influence on our determinations, is a phenomenon which belongs to quite another sphere.) If, after what has been said, there should still be any doubt on the subject—which I do not anticipate—it may be removed by pointing to the well-known fact, that enthusiastic dreamers, in whom the anticipation of future events excite very lively present emotions, are not at all the sort of people who are given to provide economically for their future needs in the most efficient way. On the contrary, it is the cold calculating men who do so; men whose sober intellectual judgment of future situations is little or not at all affected by accompanying excitement.

Now Jevons has fundamentally confused these things. He makes out that our economical transactions have for their motive present feelings, which, according to the distance of time, remain a few per cent behind the intensity of future pleasures and pains—standing to the latter, perhaps, in the ratio of 95 to 100. But nothing is more certain than that, while we represent to ourselves feelings of that intensity and anticipate them, we do not experience them as present feelings. Sax, again, who, in this respect, has obviously followed Jevons without proving the facts of the case for himself, has made the same blunder in a ruder way. He speaks of a Vorempfindung of future wants—to be distinguished from a simple prescience (Grundlegung, p. 178), and out of these "previous feelings" he even construes actual "present wants" and "feelings of want," which should be only a little weaker, according to the distance of time, than the corresponding immediate want of the present itself (p. 314). Surely Sax has scarcely considered what tortures aye must constantly endure if all the future pleasures and pains, against which we protect ourselves by forethought, are really to be experienced by us in anticipation, and only a few per cent less vividly than in reality!—Let me add the following remark. I am quite aware that the psychologists attach two distinct conceptions to the words "feeling" and "sensation" (Gefühl and Empfindung). The speech of economics, however, has not yet carried out this distinction and it is usual to speak either of sensations or feelings of want, pain, and so on. I retain these common expressions because, by giving them up, I should probably lose more, among economic readers, in plainness, than I could gain in exactness.

NOTE BY TRANSLATOR.—I may suggest here that, so far as concerns Jevons, the above criticism scarcely applies. It is based on a literal reading of two unfortunate expressions, "present anticipated feeling" and "vague though powerful feeling of the future." The whole passage, however, shows that Jevons did not mean the present feeling, but the represented future feeling—what he himself calls the "actual amount of feeling anticipated." The criticism, however, probably finds its mark in those German writers who have too faithfully followed the letter of Jevons.—W. S.

3. On the conception of Material Services see Capital and Interest, p. 223.

4. Menger, Grundsätze, p. 124.

5. This proposition has lately been disputed by Mataja (Das Recht des Schadenersatzes vom Standpunkte der Nationalökonomie, Leipsic, 1888, p. 149, note 1) on the ground that, in the selling of such goods, one might actually obtain their average return as price, and therefore, quite correctly, value them according to this. But Mataja forgets that the market price is not the cause, but is itself the result of the fact that the individuals, who appear as buyers and sellers of such goods, value them in the first instance—that is, in the individual case, objectively falsely—according to the average return.

6. See my former tract on Rechte and Verhältnisse, p. 85, where I brought out the same idea in a somewhat different connection: also Mataja, ibid. p. 139.

7. It embraces also goods which, materially, are present, but are intended for future consumption; for instance, productive goods, the technical transformation of which into consumption goods is accompanied by a danger of not succeeding.

Book V, Chapter II

8. The proverb bis dat qui cito dat has therefore a quite sound economical basis.

9. For this reason the well-known postponement of university fees in the case of poor students in Germany (Stundung) is found to be a relief not much inferior to the total exemption of the same class in Austria (Befreiung). Or we may think of the conditions of the contract which the impresario makes with the singers he educates and brings out.

10. According to the law laid down above on p. 162, for the case of alternative employments with different marginal utilities.

11. I need scarcely say that, in practical life, we seldom or never make out our valuations with such minute exactitude as in the above illustration. But it does give a faithful picture of the kind of considerations of which we avail ourselves in such cases.

Book V, Chapter III

12. See above, p. 245.

13. If there is objective uncertainty as well as subjective there will, naturally, be two deductions. Of these the one made on account of objective uncertainty, as a particular phenomenon of certain kinds of goods, has nothing to do with interest; we have only to deal with the deduction on account of subjective uncertainty.

14. An effect analogous to that of the uncertainty of life might be exerted by the uncertainty of the duration of our capacity of enjoyment; but in any case the limits of the efficiency of this motive are much more closely drawn.

15. Jevons, like his follower Sax, as we saw in the note to p. 239, fell into a misunderstanding as to the entire nature of the phenomenon mentioned in the text, in confusing the representations and valuations which we make as regards future feelings with actually present feelings. We need not wonder, then, at not finding in these writers any sound thorough-going explanation of the phenomena, or even an attempt at such. They accept the supposed "weakened anticipated feelings" of future needs simply as fact, as a " well-known psychological fact," and they pass over much of its detail—which really very much requires explanation—without comment as "self-evident" (see e.g., Sax as before, p. 178).

16. Indirectly this effect will be strengthened by the fact that, through the under-valuation of the future utility, men will refrain from providing for the future so amply as they would otherwise have done. In other words, this underestimate acts to the prejudice of saving and accumulation of wealth, and still further reduces the number of persons who have to throw an accumulated surplus of present goods on the market.

Book V, Chapter IV

17. See Capital and Interest, p. 111.

18. See above, pp. 18, 84.

19. Naturally, in the case of lengthier processes, the labour first expended requires that the production should be continued by the addition of new labour. By the figures given in the text is always meant that share in the product which, of the total product, falls to the productive unit—in this case the thirty days' labour. If, e.g., in the case of a one year's process, other eleven months of labour follow the one first expended, this would involve, in terms of our illustration, that a total product of 2400 units was obtained in the twelve months taken together, and thus, to the one month, would be ascribed a product of 200 units.

20. On the same analogy, as a present month of labour is technically superior to a future, so is a past month to a present. According to our scheme a month of the period 1883, e.g., would give for 1888, in a 5 years' process, 440 units, while a month of the year 1888 would give only 100 units. But, naturally, the past years would realise their technical superiority, as against the present, only under the condition that they also were actually invested in correspondingly lengthy and roundabout processes. But this is seldom the case as regards long past years. And, therefore, one need not be frightened at the consequences which, of course, the above theory involves; that, for instance, a month's labour of the fifteenth century is, perhaps, a hundred times, and a month's labour of the year of our Lord, perhaps, a thousand times more fruitful than a month's labour of the present year; that, accordingly, to a certain extent, the productive powers of the past were gigantic beside those of to-day, and to-day's productive powers gigantic compared to those of future centuries—a view which would seem to give us but a dreary outlook to a continuous degeneracy of our productive powers. Certainly, if any one in the year I had expended a month of labour with a view to the marginal utility of the year 1888, and had arranged for the systematic continuation of the work during all the 1888 years intervening, in that case, thanks to the natural powers impressed into the service in the course of such a roundabout journey, the product of that long past month would be mountains high beside the product of a month of the present year. But, as things are, trees do not grow up till they meet the sky. The productive powers are too necessary for the wants of the living, to let us employ them in advance for the behoof of future centuries or future thousands of years. And thus the year of those future wants to which we look forward and work, and by which we get the measure of the productiveness of the powers, moves forward very much parallel with the year when the productive powers are exerted. It is quite certain that our productive powers of 1888 do for the wants, say, of the year 1898, as much as and more than the productive powers of the year 1 A.D. did for the wants of the year 11 A.D. And thus the productive powers of giants do not degenerate into those of pigmies, as a sophistical dialectic might easily delude us into believing: in all ages, the productive powers, according to the advance of technique, do as much or, rather, increasingly more for the wants of their own circle of provision.

21. See above, p. 179.

22. See above, p. 163. To prevent a mistake which is very apt to arise through the similarity of the words, I again emphasise here that the proposition in the text is not in contradiction with the fundamental proposition on p. 186, that, for productive goods, the value of the least valuable of their products, the value of the "marginal product," is the standard. The marginal product, that is to say, is the last of several products which may all be made from the available means of production; but, in the case we are now considering, it is not a matter of employing a month's labour in one and more years' production, but in one or more years' production. And of these alternative employments, naturally, the most important has the preference.

23. e.g. the economic centre of gravity for the month's labour of 1888 in the former case lay in the product attainable for the year 1890; it now lies in that attainable for 1894.

24. But here, all the same, the month's labour of 1888 remains superior to that of 1889. For, as regards any one remote period, say, the year 1988, the former, as employed in a process longer by one year, could produce a somewhat greater product than the latter.

25. Those who prefer somewhat more venturous generalisations might, perhaps, be inclined to put the first and the third cause together under one common category, that of the "technical superiority" of present goods. For the preference given to present goods in virtue of the different relations of provision also rests peculiarly on a technical circumstance; namely, that they allow of a greater choice of employments, both as regards present and future wants, while future goods, naturally, are adapted to serve future wants only. At all events, this technical superiority is so essentially distinct from the other, of the greater technical productivity, that the two elements would require again to be kept separate from each other. It appears to me, therefore, in the interests of clearness that they should be kept entirely distinct from the first.

26. Grundlagen, § 189.

Book V, Chapter V

27. Suppose, e.g., that a man has 6 units of goods, say 6 five-pound notes, at his disposal. There are present groups of wants, which these notes could supply, and their importance is indicated by the figures 10, 9, 8, 7, 6, 5. Now there appear opportunities of employing these in business transactions which will not yield any result for a year, but are so profitable that, even after deducting the necessary dis-agio on account of the year's delay, they are equal to a present utility of 7. The following will evidently be the disposition of the notes. Four of them will go to the present wants which bear the utility 10, 9, 8, 7, the remaining two to the future employments which, likewise, show the (reduced) figure 7. The marginal utility which attaches to the present five-pound note is, therefore, 7, while, without the competition of the profitable future employments, it would have been only 5.

28. The statement of how the productivity of capital works into and together with the other two grounds of the higher valuation of present goods, I consider one of the most difficult points in the theory of interest, and, at the same time, the one which must decide the fate of that theory. It is just at this point that we discover the chief weakness in Jevons's otherwise suggestive work. None of the groups of phenomena concerned escaped his keen observation; what did escape him was the way in which they work into one another. Consequently his work remains an eclectic piece of patchwork instead of being welded into an organic theory. He gathers together quite correctly all the primary phenomena required for the explanation. But he does not find the common channel through which they all work together to the one common end, and so he explains it differently from each different point of view, with a result that is eclectic and self-contradictory. After a most promising beginning he quite loses sight of the element of the different valuations put upon present and future wants, and for the rest gives a double explanation, full of contradictions, and scarcely rising much above the level of the old classical economy,—part of it taken from the Abstinence, part from the Productivity theory. (See my Capital and Interest, p. 400.) The not very independent treatment which the subject has received from Sax is in one respect better, while in another it is even more incomplete than that of Jevons. It shows an advance to find the element of the undervaluation of future wants generally interwoven into the explanation of interest. (See also on this point Launhardt, Mathematische Begründung der Volkswirthschaftslehre, Leipsic, 1885, § 2, and again my Capital and Interest, pp. 344, 427.) But, on the other hand, it is a sensible omission that the difference between the values of present and future goods is traced exclusively to this factor, and that the much more important factor that co-operates with it, that of the greater productiveness, does not get even the scanty consideration it gets from Jevons. (Sax, Grundlegung, p. 314.)

29. See above, p. 195.

30. For reasons with which we are now familiar almost all the competitors, whether buyers or sellers, will value present goods, absolutely, above future. But the valuation will be higher on the part of the buyers, as a class, than on the part of the sellers.

End of Notes to Books III-V.
Frontmatter, Books I-II Books III-V Books VI-VII

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