STATISTICAL DEMONSTRATIONS OF THE QUANTITY THEORY--THE REDISCOVERY
OF A BURIED CITY
Criticism of quantity theory statistics yields constructive
conclusions; Mitchell and Greenbacks; Kemmerer's and
Fisher's statistics of "equation of exchange"; Kemmerer's
criticism of earlier statistics 331-335
Kemmerer's and Fisher's figures all wrong except for volume
of money and deposits, and prices in base year; if correct,
would not prove quantity theory 335-337
Fisher's statistics, resting on Kemmerer's, chiefly studied:
their relation to Kinley's "deposits" figures 337-338
M'V' calculated: errors in calculation; New York very
incomplete in Kinley's figures; private banks and trust
companies; clearings and "deposits," in New York and
outside; "total transactions" and clearings; Fisher
exaggerates country checks by at least 116 billions, for
1909; major part of all "check deposits" in New York City 348-353
New York as "clearing house" for United States: extent of,
and influence of on New York clearings, much overestimated;
bulk of New York clearings and New York "deposits" grow
out of New York business 353-361
Index of variation for M'V' wrongly weighted; V' wrongly
calculated for all years; which upsets calculation of V 361-363
Volume of trade: greatly exaggerated by bank transactions,
which include vast deal of duplications in checks, loans
and repayments, etc. 363-368
Fisher's reply; _under_counting offsets _over_counting 368-369
Main items of undercounting in clearing houses of speculative
exchanges; measurement of, in New York Stock Exchange, and
Chicago Board of Trade; swamped by call loan transactions,
which exceed security sales 369-381
Price-indexes of Kemmerer and Fisher, dominated by wholesale
prices, have no relevance to their "equations of exchange" 381-383
In general, their figures bury speculation and New York City 383
PART III. THE VALUE OF MONEY
CHAPTER XX
RECAPITULATION OF POSITIVE DOCTRINE
Recapitulation of constructive theses of Parts I and II,
and program of Parts III and IV 387-396
CHAPTER XXI
THE ORIGIN OF MONEY, AND THE VALUE OF GOLD
Problem stated 397-401
Value _vs. saleability_: degrees of saleability; theory
of saleability; "buying price" _vs._ "selling price";
indirect exchange in barter economy; development of
commodity of superior saleability into money 401-406
Money never unique 406-407
Origin of gold money: ornament; store of value; social
prestige of prodigality and of ornament; love of
approbation, sex-impulse, and competitive display;
elastic value-curve of gold; industrial employments
of gold 407-413
Distribution of wealth and power, and value of gold 413-416
CHAPTER XXII
THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY
Classification 417-418
Measure of values (standard of value) distinguished
from medium of exchange; former does not add value
to money metal, latter does 418-424
Reserve function 424
Money as "bearer of options"; distinguished from store of
value; the _dynamic_ function of money _par excellence_;
explanation of low rates on call loans, and short loans,
and low yield of high grade bonds, which share "bearer of
options" function; "pure rate" of interest _vs._ "money
rates": Austria; the New York money market 424-432
Legal tender; the _Staatliche Theorie_ 432-436
Standard of deferred payments; which functions add to
value of money metal? 436
Relation of money rates to capital value of money 436-442
Agio when coinage is restricted: India _vs._ Western World 442-450
Equilibrium of gold in arts and gold as money: difficulties
of marginal analysis; the money-market phenomena 450-458
CHAPTER XXIII
CREDIT
Analysis rather than definition: "futurity" not essence
of credit; credit part of general value system; stocks
as credit instruments; juridical and accounting phases 459-462
Confidence; involved in general value phenomena as well
as credit; social psychology of confidence; contagions;
influence of centers of prestige; nothing unique in
credit; selling _vs._ borrowing 462-469
Definition of credit; credit _vs._ credit transaction;
credit and exchange; bulk of credit grows out of
dynamic conditions 469-474
Functions of credit; increasing saleability of
non-pecuniary wealth; corporate organization;
limits of credit expansion 475-478
Consideration of objections: that personal loans do not
rest on wealth; public loans; that value behind loan
would not exist if loan were not made 478-484
Schumpeter's "heresies"; his view of the function of the
banker: "dynamic credit"; America _vs._ Continental
Europe 484-488
Peculiarities and functions of bank credit; technique of
banking: capital; assets; reserves; "liquidity"; money
market 488-496
CHAPTER XXIV
CREDIT--BANK ASSETS AND BANK RESERVES
Traditional view that liquid commercial loans normal and
dominant type of bank asset disproved; cannot exceed
11-1/2 per cent of assets of American banks; analysis of
bank assets: "other loans and discounts"; stock collateral
loans; loans on "other collateral security";
stocks and bonds held by banks; classes of banks; various
combinations; excluding real estate loans, more
than half of credit extended by State and national
banks and trust companies is to stock market; rapid
development of stock collateral loans: New York;
Europe 498-512
Activity of different types of loans: banking assets get
liquidity chiefly from stock market, and from produce
speculators 512-516
Credit extended to Wall Street not at expense of ordinary
commerce; country banks and Wall Street 516-518
Federal Reserve Banks should rediscount stock collateral
loans; "Money Trust" a trust in financing corporations,
not ordinary commerce; panics and Federal Reserve System 520
Quantity theory, putting all exchanges on a par, grotesque:
volume of trade and prices in the stock market 520-523
Direct and indirect financing of corporations by banks;
"margin dealer" as "banker" 523-526
Adam Smith's view of banker's functions, and of safe bank
loans 526
Correct on basis of facts of his day, but corporate
organization and organized stock market have made
smelting house as liquid as consumers' goods 527
Division of labor in banking: America _vs._ Germany 527-528
Agriculture in money market 528-529
Reserve problem: special case of problem of liquid assets;
many flexible substitutes for cash 529-532
Causal relation runs from deposits to reserves; gold
production and reserve-ratio 532-535
No static law or "normal ratio" possible; reserve function
entirely dynamic function; reserve not needed in "static
state"; illustrated by London money market; "ideal
credit economy" 536-544
_PART IV. THE RECONCILIATION OF STATICS AND DYNAMICS_
CHAPTER XXV
THE RECONCILIATION OF STATICS AND DYNAMICS
Theory of money as focus of general economic theory,
exhibiting interdependence of doctrines; basis of
further unification of statics and dynamics in higher
synthesis 547-548
Statics _vs._ dynamics, normal _vs._ transitional, and
related contrasts; illustrations; divergent lines of
doctrine: tariffs, wars, overproduction, extravagance,
etc. 548-552
Statics quantitative; dynamics qualitative 552-553
Statics and dynamics both abstract 553-554
Dynamics and "friction" 554-555
"Theory of prosperity" and dynamics 555-556
Statics and cross-section analysis; statics as
price-theory; dynamics as value-theory 556-560
Generalization of statics: price-theory applied to
dynamic phenomena: capitalization; costs; "taxonomy;"
"discounting" dynamic changes; money the static
measuring-rod: wide scope of money-measure;
measurement of non-economic values 560-569
Generalization of dynamics: all values, whether of wheat
or "good will," have social psychological explanation;
technological and biological factors, and the static
equilibrium; business cycles 569-575
Business man _vs._ economic theorist, and value-theory;
manipulation of values and prices 575-578
Statics and time 578-580
Immaterial capital 580-582
Statics and dynamics have not different subject-matter 583-586
Equilibrium of all social values: statics and dynamics
of the law: social forces and social control 586-589
Summary of Part IV 589-591
PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE
THE VALUE OF MONEY
CHAPTER I
ECONOMIC VALUE
The problem of the value of money is a special case of the general
problem of economic value. The present chapter is concerned with the
general theory of value, while the rest of the book will consider the
numerous peculiarities and complications which make money a special
case. The main proof of the theory here presented is to be found in a
previous book[1] by the present writer. A number of periodical articles
by several writers which have since appeared, in criticism or in further
development of the theory, have at various points led to shifting
emphasis and clearer understanding on the author's part, and the present
exposition, without seeking explicitly to meet many of these criticisms,
or to embody the new developments, will none the less be different
because of them. To one writer in particular, Professor C. H. Cooley,
the theory is indebted for restatement, amplification, and important
additions.[2] On the whole, however, the theory presented in this
chapter is substantially the theory presented in the earlier book. The
theory is set forth in the present chapter with sufficient fullness to
make the present volume independent of the earlier book.
Value has long been recognized as the fundamental economic concept.
There have been many and divergent definitions of value, and many
different theories as to its origin. It is the belief of the present
writer--not shared by all his critics!--that the definition of value
which follows, and the conception of the function of value in economic
theory involved in it, conform to the actual use of the term in the main
body of economic literature. The theory of the _causes_ of value here
advanced is new, but the definition of value, and the conception of the
relation of value to wealth, to price, to exchange, and to other
economic ideas, seem to the present writer to conform to what is
implied, and often expressed, in the general usage of economists.[3]
It is important to separate sharply two questions: one, the theory of
the causes of value, and the other, the definition of value, or the
question of the formal and logical aspects of the value concept. The two
questions cannot be wholly divorced, but clarity is promoted by
considering them separately. We shall take up the formal and logical
aspects of the matter first.
Value is the common quality of wealth. Wealth in most of its aspects is
highly heterogeneous: hay and milk, iron and corn-land, cows and calico,
human services and gold watches, dollars and doughnuts, pig-pens and
pearls--all these things, diverse though they be in their physical
attributes, have one quality in common: Economic Value.[4] By virtue of
this common or generic quality, it is possible to add wealth together to
get a sum, to compare items of wealth with one another, to see which is
greater, to get ratios of exchange between items of wealth, to speak of
one item of wealth, say a crop of wheat, as being a percentage of
another, say the land which produced it, etc. This common quality,
value, is also a _quantity_. It belongs to that class of qualities which
can be greater or less, can mount or descend a scale, without ceasing to
be the same quality,--like heat or weight or length. Such qualities are
_quantities_. There is nothing novel in the statement that a quality is
also a quantity. It is implied in every day speech. We say that a man is
tall, or heavy, or that the room is hot--qualitative statements; or we
may say exactly how tall, or how heavy, or how hot--quantitative
statements. The distinction between qualitative analysis and
quantitative analysis in chemistry implies the same idea. Thus we may
speak of a piece of wealth as having a definite quantity of value, or
say that the value of the piece of wealth is a definite quantity. We may
then work out mathematical relations among the different quantities of
value, sums, ratios, percentages, etc.
Ratios of Exchange are ratios between two quantities of value, the
values of the units of the two kinds of wealth exchanged.[5] A good many
economists, particularly in their chapters on definition, have defined
value as a ratio of exchange. This is inaccurate. The ratio of exchange
presupposes _two_ values, which are the terms of the ratio. The ratio is
not between milk and wheat in all their attributes. It is between milk
and wheat with respect to one particular attribute. Compare them on the
basis of weight, or cubic contents, and you would get ratios quite
different from the ratio which actually is the ratio of exchange. The
ratio is between their values.
[Illustration:
Ratio of Exchange
Milk ------------------------- Wheat
\ /
\ /
\ Value Value /
\ /
\ /
\ /
\ /
Social Mind
]
In the diagram above, something of what is to follow is anticipated,
since the cause of value is indicated. Wheat is shown to be exerting
an influence on milk, and milk exerts an influence on wheat. The
comparative strength of these two influences determines the ratio of
exchange between them. But these two influences are not ultimate. The
ratio of exchange is a relation, a _reciprocal_ relation. It works both
ways. But behind this relativity, this scheme of relations between
values, there lie two values which are absolute. These values rest in
the pull exerted on wheat and on milk by the human factor which is
fundamental, which in our diagram we have called the "social mind."
Values lie behind ratios of exchange, and causally determine them. The
important thing for present purposes is merely to note that value is
prior to exchange relations, that it is an absolute quantity, and not,
as many economists have put it, purely relative. The ratio of exchange
is relative, but there must be absolutes behind relations.
A _price_ is merely one particular kind of ratio of exchange, namely, a
ratio of exchange in which one of the terms is the value of the money
unit.[6] In modern life, prices are the chief form of ratio of exchange,
but it is important for some purposes to remember that they are not the
only form.
Values may simultaneously rise and fall. There may be an increase or
decrease in the sum total of values. Ratios of exchange cannot all rise
or fall. A rise in the ratio of the value of wheat to the value of milk
means a fall in the ratio of the value of milk to the value of wheat.
Both may have fallen in absolute value, but both cannot simultaneously
rise or fall with reference to one another. This is the truism regarding
ratios of exchange which many economists have inaccurately applied to
value itself in the doctrine that there cannot be a simultaneous rise or
fall of values. There can be a simultaneous rise or fall of values, but
not a simultaneous rise or fall of ratios of exchange.
There can be a general rise or fall of prices. Goods in general, other
than money, may rise in value, while money remains constant in value.
This would mean a rise in prices. Or, money may fall in value while
goods in general are stationary in value. This would also mean a rise in
prices. In either case, more money would be given for other goods, and
the ratio between the value of the money unit and the value of other
goods would have altered adversely to money. There are writers to whom
the term, value of money, means merely the average of prices (or the
reciprocal of the average of prices). For them, a rise in the average of
prices is, _ipso facto_, a fall in the value of money. This view will
receive repeated attention in later chapters. The view maintained in the
present book is that the value of money is a quality of money, that
quality which money shares with other forms of wealth, which lies
behind, and causally explains, the exchange relations into which money
enters. Every price implies _two_ values, the value of the money-unit
and the value of the unit of the good in question.
Value is prior to _exchange_. Value is not to be defined as "power in
exchange." Certain writers[7] who see the need of a quantitative value,
which can be attributed to goods as a quality, still cling to the notion
that value is relative, that two goods must exist before one value can
exist, and that value is "power in exchange," or "purchasing power." The
power is conceived of as something more than the fact of exchange, and
as a cause of the exchange relations, but is, none the less, defined in
terms of exchange. This position, however, does not really advance the
analysis. It is a verbal solution of difficulties merely. To say that
goods command a price because they have power in exchange is like saying
that opium puts men to sleep because it has a dormitive power.
Physicians now recognize that this is no solution of difficulties, that
it is merely a repetition of the problem in other words. If we wish to
explain exchange, we must seek the explanation in something anterior to
exchange. If value is to be distinguished from ratio of exchange at all,
it cannot be defined as "power in exchange."
To seek to confine value to exchange relations, moreover, makes it
impossible to speak of the value of such things as the Capitol at
Washington City, or the value of an entailed estate, or of values as
existing _between_ exchanges. Nor can we make the price which a good
would command at a given moment the test of its value, except in the
case of the highly organized, fluid market. Land, at forced sale,
notoriously often brings prices which do not correctly express its
value. Moreover, even for wheat in the grain pit, the exchange test is
valid only on the assumption that a comparatively small amount is to be
sold. If very much is put on the market, the situation is changed, and
the value falls. In other words, if "bulls" cease to be "bulls," and
shift to the other side of the market, the very elements which were
sustaining the value of the wheat have been weakened, and of course its
value falls. "Power in exchange" is a function of two factors, (1) value
and (2) saleability. A copper cent has high saleability, with little
value, while land has high value with little saleability.[8] Some things
have value with no saleability at all. In a socialistic community, where
all lands, houses, tools, machines, etc., are owned by the state, and
where such "prices" as exist are authoritatively prescribed, value and
exchange would have no necessary connection. Values would remain,
however, guiding the economic activity of the socialistic community,
directing labor now here, now there, determining the employment of lands
now in this sort of production, now in that. Exchange is only one of the
manifestations of value. More fundamental, and more general, including
"power in exchange," but not exhausted by it, is the power which objects
of value have over the economic activities of men. This is the
fundamental function of values. The entailed estate, which cannot be
sold, still has power over the actions of men. The care which is taken
of it, the amount of insurance which an insurance company will write on
it, etc., are manifestations and measures of its value. The same may be
said of the Capitol at Washington.[9]
In the fluid market, prices correctly express values. Assuming that the
money-unit is fixed in value, variations in prices in the fluid market
correctly indicate variations in values. The great bulk of our economic
theory, the laws of supply and demand, cost of production, the
capitalization theory, etc., do assume the fluid market, and a fixed
value of the dollar.[10] Our economic theory is static theory, in
general, and abstracts from the time factor and from "friction." In
fact, values change first, and then, more or less rapidly, and more or
less completely, prices respond. In the active wholesale and speculative
markets, where the overwhelming bulk of exchanging takes place, the
prices respond quickly. Static theory is thus adequate for the
explanation of these prices, for most practical purposes, so long as the
changes in prices are due to changing values of goods, rather than to
changing value of the money-unit. Moreover, the distinction between
value and price is, in a fluid market, where the value of money is
changing slowly, often not important. In the assumption of money, and of
a fixed value of money, the absolute value concept is already assumed.
No harm is done, however, if the economist does not explicitly refer to
this, but goes on merely talking about money-prices. Very many economic
problems indeed may be solved that way. This is why the inadequate
character of the conceptions of value as "ratio of exchange" or
"purchasing power" has not prevented these notions from being
serviceable tools in the hands of many writers. But there are many
problems for which these conceptions are not adequate, because the
implicit assumption of a fixed value of money cannot be made. Among
these problems is the problem of the value of money itself, which
constitutes the subject of this book. For that problem, an absolute
value concept is vital.
If, in our diagram above, we substitute for "social mind" the more
general expression, "human factor," we should find that our value
concept is the common property of many writers. We should find it
fitting in with the absolute value notion of Adam Smith and of
Ricardo.[11] The "human factor" which _explains_ the absolute value is,
for them, labor. We should find it fitting in with the "socially
necessary labor time" of Marx: the value of a bushel of wheat is the
amount of labor time which, on the _average_, is required to produce a
bushel of wheat. It is an absolute value. It is a causal coefficient
with the absolute value, similarly explained, of the bushel of corn, in
explaining the wheat-price of corn. Our concept will fit in exactly with
the "social use-value" of Carl Knies, according to whom the economic
value of a good in society is an _average_ of its varying use-values to
different individuals in the market. This average is an absolute
quantity. The absolute values of units of two goods, thus explained,
causally fix the exchange ratio between the goods. Knies' value-theory,
it may be noticed, is explicitly modeled on that of Marx, to whom he
refers, the difference being that Knies takes an average of individual
use-values, while Marx takes an average of individual labor-times, as
the causal explanation.[12] Our value concept will fit perfectly with
Professor J. B. Clark's "social marginal utility" theory of value.
Indeed, the present writer gratefully acknowledges that the concept is
Professor Clark's rather than his own, and that all that is necessary
for its explanation has been set forth by Professor Clark.[13]
Professor Clark's _causal_ theory of value, his explanation of this
absolute quantity of value as a _sum_ of individual marginal utilities,
we have elsewhere[14] criticised as involving circular reasoning, like
all marginal utility theories, in so far as they offer causal
explanations. But his statement of the logical character of value, of
the relation of value to wealth, of value to price, of value to
exchange, of the functions of the value concept in economic theory, and
of the functions of value in economic life,--Clark's doctrines on these
points we have accepted bodily, and in so far as the present writer has
added anything to them it has been by way of elaboration and defence.
The concept of value here developed is explicitly adopted by T. S.
Adams, David Kinley, W. A. Scott, W. G. L. Taylor, L. S. Merriam, and A.
S. Johnson, among American writers, to name no others. All of these
writers would concur in the formal and logical considerations[15] as to
the nature of value here presented, whatever differences might appear
among them as to the causal explanation of value.
The value concept here presented performs the same logical functions as
the "inner objective value" of Karl Menger, Ludwig von Mises, and Karl
Helfferich, discussed in our chapter on "Marginal Utility," below, and
is, in its formal and logical aspects, to be identified with that
notion. It is essentially like Wieser's "public economic value,"
discussed in the same chapter.[16] That there should remain critics[17]
who consider the present writer a daring innovator, who is thrusting a
personal idiosyncracy in terminology upon economic theory, is striking
evidence that men often talk about books which they have not read! The
reader who accepts, provisionally, the doctrine so far presented, as a
tool of thought which will aid us in the further progress of the
argument, may do so with the full assurance that he is accepting a tried
and tested concept, which has seemed necessary to very many indeed of
the great masters of the science.[18]
So far, the writer feels himself in accord with the main current of
economic thought. When we come to a causal explanation of the value
quantity, however, earlier theories appear unsatisfactory. The labor
theory of value has long since broken down, and has been generally
abandoned. The reasons for this will appear in the chapter on "Cost of
Production." The effort to explain value by marginal utility, by the
satisfactions which individuals derive from the last increment consumed
of a commodity, has likewise broken down, as will appear in the chapter
on "Marginal Utility." In general, it may be said that the effort to
pick out feeling magnitudes,[19] either of pleasure or pain, in the
minds of individuals, and combine them into a social quantity, leads to
circular reasoning. Thus, the utility theory: It is not alone the
intensity of a man's marginal desire for a good which determines his
influence on the market. If he has no money, he may desire a thing ever
so intensely without giving it value. If he is rich, a slight desire
counts for a great deal. In other words, utility, backed by _value_,
gives a commodity value. But this is to explain value by value, which is
circular. So with the theory of average labor _time_. How shall we
average labor time? The problem is easy if we confine ourselves, say, to
wheat. If one bushel of wheat is produced with ten hours' labor, a
second with eight hours' labor and a third with six hours' labor, the
average is eight hours, and we may fix the value of the bushel of wheat
according. But suppose we wish to compare the labor engaged in making
_hats_ with the labor engaged in raising wheat. How can such labor be
compared? Hats are, in their physical aspects, incommensurable with
wheat. The one quality which they have in common, relevant to the
present interest, is _value_. Given the value of the wheat and the value
of the hats, you may compare and average out the labor engaged in
producing them. But if value must be employed as a means of averaging
labor, it is clear that average labor can be no explanation of value.
This is not the only flaw in the labor-time theory, but it illustrates a
vice which it has in common with all those theories which start with
individual elements, and seek to combine them into a social quantity.
The whole method of approach is wrong. It makes two abstractions,
neither of which is legitimate: first, it abstracts the individual from
his vital and organic connections with his fellows, and then, second, it
takes from the individual, thus abstracted, only a small part, that part
immediately concerned with the consumption or production of wealth. In
this process of abstraction, very much of the explanation of value is
left out. The _whole_ man, in his _social_ relations, must be taken into
account before we can get an adequate theory of value. We turn, then, to
a brief discussion of society and the individual, and to a discussion of
those individual activities and social relations which are most
significant in the explanation of economic value.
* * * * *
All mental processes are in the minds of individual men. There is no
social "oversoul" which transcends individual minds, and there is no
social "consciousness" which stands outside of and above the
consciousnesses of individuals. So much by way of emphatic concurrence
with those critics of the social value theory[20] who persist in
foisting upon the theory the notion that there is a social oversoul, or
that the "social organism" is some so far unclassified biological
specimen. To say that economic value is a social value, the product of
many minds in organic interplay, is not to say that economic value is
independent of processes in the minds of individual men, or that it
results from any mysterious behavior of a social oversoul.
The human animal is born with certain innate instincts and capacities.
Human animals of different races and different strains are in highly
important points different in their instincts and capacities. But the
human animal is not born with a _human mind_. Nor could the human
animal, apart from association with his fellows, ever develop a human
mind. "The human mind is what happens to the human animal in a social
situation."[21] Of course, without the care of adults, the infant would,
in general, promptly perish. But, more fundamental for our purposes, is
the fact that all the important stimuli which play upon the child during
his first two years, when the human mind is being developed, are social
stimuli. So true is this, that the child's commerce with physical things
runs in social terms. The child interprets the physical objects about
him _personally_, attributes life and human attributes to them, holds
conversation with them, praises and blames them, makes companions of
them. This _animism_ of the child, so puzzling to an old-fashioned
psychology, is readily explained by social psychology. It is a social
interpretation of the universe. It follows naturally from the principle
of apperception: the interpretation of the unknown in terms of the
known; the extension of accumulated experience to the interpretation of
new experiences. The first experiences of the human animal are social
experiences.
In the history of human society, a similar generalization is possible.
The human _individual_ is found, not in primitive life, but late in the
scale of social evolution. Individuality is a social product. The savage
is not a free, self-conscious person, who can set himself off against
the group, and feel himself an isolated centre of power. His life is
wrapped up in the group life. In the great barbarian states like Ancient
Egypt or China, the life of the individual was so controlled by social
tradition, and innovation was so ruthlessly crushed out that
individuality had little scope. Greece and Judea gave larger scope to
individual variation, but the individual still felt himself bound up
with his group, and was stoned, given hemlock, or crucified if he
challenged the existing social order too seriously. The break-up of the
Greek city states, as independent sovereignties, and their subjection to
the universal sway of Rome, made it possible for the cultured Greek to
set himself up in opposition to the State; the coming of Christianity,
substituting personal relations with deity, for the communal worship
which had preceded it, gave the individual a vital interest apart from
the life of the group about him, so that he could still further feel
independent of his immediate social environment. The development by the
Roman lawyers of the _Jus Gentium_, the law which is common to all
nations as distinguished from the particular law of a given group,
emphasized the doctrine of the Christian religion and of the Stoic
philosophy of a humanity which transcends the limits of a given
state,[22]--a notion which tended to free the individual from dependence
on his immediate associates. But note that in all this we have merely a
widening and multiplying of social relationships, and that the
individual gains freedom from one set of social relationships only by
coming into others. The Christian gains freedom from his immediate
surroundings because he feels himself in communion with "angels and
archangels and all the glorious company of Heaven." Francis Bacon could
survive his degradation in the England of his day because he could leave
his "name and memory ... to foreign nations and to the next age."
Bagehot, in his _Physics and Politics_, Tarde, and Baldwin, to name no
others,[23] have shown how tremendously responsive human beings are to
suggestion, how wide is the sway of imitation in human life, how
fashion, mode, custom, etc., make and mold the individual. Cooley,[24]
with an improved psychology, has amplified the analysis, tracing the
development of the individual mind in interaction with the minds of
those about him, making still clearer the sweep and pervasiveness of
social factors in framing the very self of the individual. In what
follows, I assume the results of these investigations. They constitute
the starting point from which we set out on the quest of a theory of
economic value.
So much for the individual. He is a social product. But what of society?
Objective, external, constraining and impelling forces, which are not
physical, which are seemingly not the products of the will of other
individuals with whom the individual holds converse, meet the individual
on every hand. There is the Moral Law, sacred and majestic, which stands
above him, demanding the sacrifice of many of his impulses and desires.
There is the Law, external to him and to his fellows, in seeming,
failure to obey which may ruin his life. There is Public Opinion, which
presents itself to him as an opaque, impersonal force, before which he
must bow, and which he feels quite powerless to change. There are
Economic Values ruling in the market place, directing industry in its
changing from one sort of production to another, bringing prosperity to
one individual and bankruptcy to another, not with the caprice of an
individual will, but with the remorseless impersonality of wind and
tide. He who conforms to them, who anticipates their mutations, gains
great wealth--but no business man dare set his personal values against
them. There are great Institutions, Church and State and Courts and
Professions and giant Corporations and Political Parties, and
multitudinous other less formal or smaller institutions, which go on in
continuous life, though the men who act within them pass and change.
Their Life seems an independent life, and the individual who tries to
change their course finds that his efforts mean little indeed, as a
rule. There is a realm of Social Objectivity, a realm of organization,
activity, purpose and power, not physical in character, not mechanical
in nature, which is set in opposition to individual will, purpose,
power, and activity. How is the individual related to this objective
social world?
Three main types of theory have sought to answer this question. On the
one hand, there is a type of theory, doubtless the oldest type, a type
which arises easily in a period when social changes are slow, which sees
in the objective social world something really separate and distinct
from individual life, having a non-human origin, and deriving its power
from something other than the human will. On the other hand, there is an
extreme individualism, which emphasizes individual separateness, which
posits as a _datum_ the individuality which we have seen to be a social
product, and thinks of the objective social realm as a mere mechanical,
mathematical summing up of individual factors, or as a something which
individuals have consciously made, by contract or agreement, or what
not. Finally, there is a type of theory, to which the present writer
would adhere, which finds a false antithesis in the contrast thus
sharply made between society and individual, which holds that the
individual is not, in his psychological activity, so much set off from
the activities of his fellows as the contrast would indicate, but rather
shares in the give and take of a larger mental life. This larger mental
life is completely accounted for when all the individuals are completely
accounted for, but it cannot be accounted for by considering the
individuals _separately_. No individual is completely, or primarily,
accounted for until his _relations_ to the rest of the group are
analyzed. Thinkers who start out with the individuals separately
conceived, and then seek to combine them in some arithmetical way,
abstract from those organic social relations which constitute the very
heart of the phenomenon we are seeking to explain. The parts are in the
whole, but the whole is not the _sum_ of the parts. The relationships
are not arithmetical, additive, mechanical, but are vital and organic.
Men's minds _function_ together, in an organic unity.[25]
The first two of these types of theory (perhaps because individuals are
_physically_ sharply marked off from one another, and go on in
_biological_ functioning in obvious separateness) have falsely
accentuated the self-dependence and separateness of individual _minds_.
The second type of theory, which has sought to work out the whole thing
on the basis of this false conception of the individual, has largely
failed to see the objective social realities, or has, with
methodological rigor, denied their existence. This second type of
thinking has especially characterized a good deal of economic theory,
which rests on the philosophy and psychology of David Hume.[26] We will
set our doctrine in clearer light if we contrast three parallel types of
theory which have appeared with reference to the nature of morality, of
law, and of economic value. For each of these phenomena, we have
theories which represent all three of the types of social thinking to
which we have referred.
In the theory of morals, we have, at one extreme, doctrines like those
of Kant and Fichte, according to whom morality is a matter of
obligation, independent of the human will, independent of consequences,
inherent in the nature of things. Man's mind can find out what the moral
law is, but man's mind has nothing to do with the making of the moral
law. The same notion is involved in the ideas of "natural rights,"
"justice though the heavens fall," and the like. The conception is
strikingly brought out in the question about which old theologians
sometimes debated: is Right right because God enjoins it, or does God
enjoin Right because it is Right? Whether or not Right is supreme over
God, these old theologians never questioned that Right is supreme over
all human wishes and desires, and in no sense an outcome of them. At the
other extreme, we have the moral doctrine of the Sophists, for whom each
man's _will_ was right for him--a doctrine which reappears in every
individualistic and anarchistic age. For this doctrine, there are no
valid social standards of right and wrong. There is nothing binding on
the moral agent but his own will. In between, is the moral doctrine of
such thinkers as Friedrich Paulsen, or John Dewey, who represent the
reigning type of moral theory to-day. For them, morality is a purely
human matter. It grows out of the needs and interests of men. What is
good at one time and place is not necessarily good at another time and
place. There are no immutable moral principles, valid throughout the
ages. None the less, morality is not a private matter, about which men
may do as they please. Morality is the product of an organic society,
the product of the interplay of many minds. To a given individual, the
moral law is, indeed, an external constraining and impelling force. It
is the will of the rest of the group. It may be his own will too, but if
it is not, it overrides his personal preference, He, on the other hand,
is part of the group which constrains and guides every other individual.
There are, in fact, many sets of moral values: on the one hand, the
social moral values _par excellence_, which the group will _enforce_ in
various ways; and then, for each individual, his own moral values, which
may correspond qualitatively more or less with the group values, or may
antagonize them. But the Moral Law is the will of the group. It is no
simple composite of the moral values of individuals. It has its organic
interrelations with all phases of social life. Economic changes modify
it, legal changes modify it, religious values modify it, all phases of
social life are expressed in it.
In legal theory, we find these three types of doctrine also. The first
type is clearly indicated in the general attitude of American and
English courts, especially toward the common law, though it influences
their interpretation of all law. The law is something which the mind of
man may find out, but may not make. If a new situation arises, the court
"finds" the law--in theory the principle "discovered" by the court was
in the common law at the beginning. Of course, we know that the judge
invents the rule he makes, to fit a novel case, but the judge himself
will not admit it. The theory of the law and the theory of morality have
developed in close connection, and the notion of "natural right" is a
juristic as well as a moral idea. At the other extreme, we have from
certain recent students of law the doctrine that "The Law" is a myth,
that there is nothing but the particular opinion of a particular judge
at a particular time. Individualism cannot go so far in legal theory as
to give every individual in society a chance to put his oar in, and have
a separate law for himself! The social and institutional character of
law is too obvious to permit that. But individualism has gone so far in
legal theory as to deny all objectivity to law except in a given
decision in a particular case. In between these two extreme views,
appear the views of writers like Savigny, or Professor Munroe Smith, for
whom the law is a changing product of social psychology, volitional[27]
rather than intellectual in character, objective enough to the
individual who violates it, or the judge who seeks to pervert it, but
none the less not outside the minds and interests of men. In Professor
Munroe Smith's phrase, law is "that part of the social order which by
virtue of the social will may be supported by physical force."[28] I
venture to describe this type of legal theory as the "social value"
theory of the law. In the chapter on "The Reconciliation of Statics and
Dynamics," _infra_, I have cited certain opinions of Mr. Justice Holmes
which apply it, and even bring into it the notions of the marginal
analysis.
There are, similarly, three types of economic theory. At the one extreme
we have theories of "intrinsic" value, which would place economic value
outside the wills of men. The mediaeval discussions of "just price" often
illustrate this notion. It creeps not infrequently into judicial
opinions,--to which such notions are essentially congenial! The working
economist of our own day has found little use for it, but in periods
when economic change was slow it suggested itself not unnaturally to
men, as an explanation of the seeming impersonality of market phenomena,
and as a practical idea for combatting extortion and injustice.
Something of the idea is involved in a sentence of Shakspere's:[29]
"But value dwells not in particular will;
It holds his estimate and dignity
As well wherein 'tis precious of itself
As in the prizer."
At the opposite extreme would be those economists, as Professor
Davenport and Jevons, who find no value for a good except in the minds
of individual men, so that there may be as many different values as
there are different men. That something social and objective exists in
the market place can hardly be denied, but when pressed for an account
of it, these writers reduce it to a bare, abstract, mathematical
ratio.[30] Each individual mind is shut up within its own limits,
inscrutable to other minds, and there can be no psychological phenomena
which include activities in many minds, for this view. In between these
two extremes, is the social value theory of the present writer. Economic
value is not intrinsic in goods, independent of the minds of men. But it
is a fact which is in large degree independent of the mind of any given
man. To a given individual in the market, the economic value of a good
is a fact as external, as objective, as opaque and stubborn, as is the
weight of the object, or the law against murder. There are individual
values, marginal utilities, of goods which may differ in magnitude and
in quality from man to man, but there is, over and above these,
influenced by them in part, influencing them much more than they
influence it, a social value for each commodity, a product of a complex
social psychology, which includes the individual values, but includes
very much more as well. Our theory puts law, moral values, and economic
values in the same general class, _species_ of the _genus_, social
value, alike in their psychological "stuff" and character, to be
explained by the same general principles, even though differentiated in
their functions, and in the extent to which they depend on various
factors in the social situation. They are parts of a social system of
motivation and control. They are the _social forces_, which govern, in a
social scheme, the actions of men.
It may be well to suggest rough _differentiae_ which mark off these
values from one another. Legal values are social values which will be
enforced, if need be, by the organized _physical_ force of the group,
through the government. Moral values are social values which the group
enforces by approbation and disapprobation, by cold shoulders and
ostracism or by honor and praise. Economic values are values which the
group enforces under a system of free enterprise, by means of profits
and losses, by riches or bankruptcy. The group may, under a communistic
or socialistic system, rely in whole or in part upon the machinery of
the law; in which case economic values appear not in their own form as
immediately guiding production, but as "presuppositions" of some of the
legal values.
The differentiation of these types of social value may also run in
terms of their _functions_,[31] though it is not so easy to mark them
off here, since their functions overlap. The function of economic values
is to guide and control the economic activities of men, to send labor
from one industry to another, to cause one sort of thing to be produced
or another, to supply the motive force which _impels_ industry. Legal
and moral values also directly affect industry, often working to check
the results which the economic values alone would lead to--as when the
law forbids the production and sale of liquor, or checks child labor,
etc. The law, on the other hand, does not, primarily, in its influence
on industry, seek _positively_ to determine its direction. The law
forbids the production of liquor, but does not decree the production of
bread. The law may seek to affect industry positively, by protective
tariffs, for example, which aim at the building up of certain
industries, but its effects are here indirect, reached through
modifications in the economic values. Economic values, on the other
hand, do not primarily aim at the regulation of the conduct of men
outside the market place, or the shop or the farm, etc. Economic values
are not primarily concerned with making men be good husbands or good
neighbors, or brave soldiers. Economic values may be used, in part, for
these purposes, as when a father-in-law uses his wealth as a lever to
make his son-in-law behave--or, indeed, as a bait to get a son-in-law!
It is hard to find a phase of social life which is not touched by all
types of social values, but it is possible, roughly, to mark off those
phases of social life which are subject to primary regulation by one or
the other sort of social value.
The differentiation is easier when we look at the social _institutions_
which have to do primarily with the one or the other sort of value.
Courts and legislatures are easily marked off from stock exchanges and
banking houses. There is not so clearly an institutional nucleus for
moral values, since the church has lost its control over the moral
situation.
When we view the matter from the standpoint of the _objects_ of value,
_differentiae_ also appear. The main type of object of moral value is
modes of conduct; the "type object" of economic value is physical things
which men eat, wear, drink, etc., even though _quantitatively_ the major
part of the sum total of economic values attach to other things,
instrumental goods, lands, labor, and social relations, like franchise
rights, good will, which in the main reflect the values of consumers'
goods;[32] objects of legal value are in large degree the same as
objects of moral value, namely, modes of conduct, but moral values
attach to a wider group of objects, and legal values attach to certain
forms of conduct which are morally indifferent.
It is not so easy to make the differentiation when we view the thing
from the standpoint of the consciousness of men who are at the centre of
the situation, to whose consciousness the social values are presented.
We may put at the very forefront of the economic value of oranges the
gustatory feelings or desires of those who consume them; at the
forefront of the moral value of a heroic rescue by a fireman the thrill
that runs through the onlookers. Qualitatively, these psychological
states are different, as those who have experienced both will know. But
it is difficult indeed to put the difference into words. When it comes
to a legal value, say the legal value of a given contract right which a
man seeks to enforce in court, it is not easy to find any particular
emotion or state of consciousness which is peculiar or appropriate to
it. The value is so highly institutionalized and impersonal, that it
seems to the court and lawyers and even the litigants to be merely a
question of fact to be intellectually analyzed. Its roots are deep in
human emotions, but not in the emotions, primarily, of those who are
handling the transaction. Perhaps the jurist has states of consciousness
we know not of. There may be a distinctively legal emotion. It seems to
crop out at times when one questions, in conversation with a judge or
lawyer, the infallibility of the courts. But the law does not derive its
power therefrom! Rather, the law derives its power from the general
consent and acquiescence and support of the mass of men, who turn over
to experts the details of administering it, and who support The Law in
general, rather than the rule of the _corpus delicti_, with their
emotional sanction.
I think that we have here a clue to a vital point for our theory. We
need not expect to find the major part of the explanation of any of
these social values in the conscious emotions of those who are moved by
them. In the case of the orange or the heroic act, we are, indeed, close
to pretty simple human feelings and desires. In general, in the case of
moral values, the individual emotion and the social value are
_qualitatively_ comparable, since moral values rarely take on a highly
institutional character. They are more free from class or institutional
control than other social values. This need not be true. Thus, the
plantation negro need not feel any personal shame in the moral
delinquency which he none the less hides from the "white folks" whose
values he must more or less conform to. But, on the whole, moral values
are much more "participation values,"[33] shared by the whole group in
common, than are economic values or legal values. When we pass beyond
the simple case of a consumption good, and get into the realm of the
more institutional economic values, we lose all guidance from the clue
of satisfactions in consumption. Just what emotion, for example, is
appropriate in the presence of the four and a half per cent convertible
bond of the Chesapeake and Ohio Railway Co.? If it be answered that
ultimately that bond represents satisfactions in consumption, since the
owner of it may spend the income for consumers' goods, or since the
railroad in question carries coal which goes to Italy to be used in a
cruiser which will sink an Austrian warship, thereby giving consumers'
satisfactions to individuals in Italy, so that the value of the bond is
ultimately reducible to specific satisfactions of given individuals, we
may still hold that those satisfactions do not constitute the value of
the bond, as such. Moreover, the same is true of the legal values.
Ultimately, very specific human emotions are affected by the rule of the
_corpus delicti_, or the rule governing pleas in _estoppel_. Both in
legal and in economic values we have an elaborate and complex system of
social psychological character, which can by no means be reduced to
elementary desires or feelings of individuals, even though when the
whole story is told, no part of the system will be found outside the
minds of individual men. The point has been well put by Professor C. H.
Cooley: "It would be as reasonable to attempt to explain the theology of
St. Thomas Aquinas, or the _Institutes_ of Calvin, by the immediate
working of religious instinct as to explain the market values of the
present time by the immediate working of natural wants."[34] I think
that any attempt to differentiate the various kinds of social value on
the basis of the type of emotion in the minds of those who have most
immediately to do with them, or to explain them primarily by those
emotions, is foredoomed. The law does not get its power from the emotion
of the judge who gives a decision, nor does the value of a rare painting
rest chiefly in the intensity of desire of the few rich connoisseurs who
compete for it. Back of the judge, giving _validity_ to his decision,
stands the will of the group; back of the rich connoisseurs stand the
legal and other social values concerned with the distribution of wealth,
by virtue of which they are able to make their wants felt in the market.
Both judge and connoisseur are focal points, through which stream the
social forces affecting the values in question. Both are important. But
the emotions and ideas of neither exhaust the psychological causation
involved in the values.
This is very much more apparent when we consider the values that arise
in the great speculative markets, say in the wheat pit, or the stock
exchange. Those who buy and sell are primarily interpreters, students,
of impersonal, social forces, seeking to adjust themselves to them, to
forecast them, in such a way as to derive profit from them. Their
choices and decisions are also factors. Indeed, it is possible to view
the matter in such a way as to make their decisions the whole story. In
the same way, it is possible to make the mind of the judge the final
explanation of the legal value. But the speculators themselves are under
no such illusion. They know very well that if they run counter to the
facts they will lose money. And the judge knows very well that the range
of arbitrary choice which he can exercise without impeachment, or at
least without reversal by a higher court, is very limited. Nor is even
a Supreme Court of the United States free to do its arbitrary will. Just
because it is so conspicuous, and because its doings are so important,
it has manifested more respect for judicial tradition, and more
responsiveness to the tides of public sentiment, than any other court in
the Federal Judiciary.[35]
The head of a great banking house makes a decision regarding an
underwriting operation. On his decision depends the question of whether
or not the securities are issued. On the issue of the new securities
depends, in part, the values of the existing securities of the
corporation in question, and the nature of the future employment of
thousands of men and great quantities of land and capital. Tremendous
power is concentrated in the hands of this banker. But it is not _his_
power! He cannot exercise it in an arbitrary or capricious way. He
approaches his problem in much the same spirit that the judge approaches
a disputed question of law. He analyzes the factors involved. He
considers the condition of the money-market, the question of the
probable ease or difficulty of marketing the new securities to
investors, the prospects of the business of the corporation in question,
the probable future demand for its products, the stability of that
demand, the personnel of the management of the corporation, the attitude
of the government toward it, the nature of its other outstanding
securities, with special reference to the proportion of bonds to stocks,
and the amount of "fixed charges" against its earnings. He may also take
into account other enterprises of similar character which he has
connections with, and the question of whether or not building up the
corporation in question may injure other corporations to which he has
responsibilities. He looks far into the future, seeking to conserve his
prestige, and unwilling to assume responsibility for an issue which
investors will later lose faith in. Proximately, his decision is
tremendously important, and his thoughts and feelings are of immense
significance, but ultimately, _they_ are determined by all manner of
social considerations, and _always_, _the degree to which they count_ in
determining values depends on his weight in the economic situation,
which rests (1) on his _prestige_, _i. e._, the massing of beliefs and
hopes of many men, (2) on his _wealth_, which rests in the legal and
moral values governing distribution, and (3) on his institutional
relationships, which again are psychological facts, partly legal in
character. He is as much a social instrument as is the judge. Both may
abuse their power. Both do at times abuse their power. But the
significant point is that the power both have is social power, and is in
no sense proportional to the intensity of their own emotions. It arises
from the emotional power in the minds of many men.
It would be easy to elaborate the points in which morals, laws, and
economic values are alike, and to show in detail that the theory of
economic value is merely a special case of the general theory of social
value. For our present purposes, however, it is enough to have
illustrated the general doctrine, and to have set up the economic values
as true social forces. It may be noticed that the effort to
differentiate the different kinds of value is not altogether successful.
They are not in watertight compartments in social life. It is a
commonplace among students of ethics that moral values grow, in greater
or less degree, out of economic factors. Indeed, the "economic
interpretation of history" has as its central theme the doctrine that
morality, law, and ideal values in general are governed by the economic
situation. This is a one-sided view. Moral and legal values are
influenced and modified by economic forces. Legal and moral values do,
in part, derive their power from economic values. But on the other hand,
economic values likewise derive part of their power from legal and moral
values. The "social mind" is an organic whole, in which no factors exist
"pure," and in which there is constant give and take. The effort to
explain moral values by a single principle, as sympathy, legal values by
another simple principle, as fear, and economic values by a different
simple principle, as utility, is foredoomed. It has been given up by the
students of law and morals, and should be abandoned by the students of
economics.
Let us consider more narrowly the main factors affecting and explaining
economic social values. Let us take, first, the simplest case, that of
goods and services which minister directly to human wants, goods and
services "of the first order." Goods of this sort would be oranges,
bread, clothing, jewels. Services of this sort would be the services of
the barber, the valet, the physician, the preacher, the teacher, the
actor. I abstract, in discussing these values, from the complications
that grow out of the friction in retail trade, and the existence of many
customary prices, and prices fixed by other than economic values, in the
case of teachers, or preachers. I shall concentrate attention upon such
things as oranges, bread, clothing, and jewels. The _focus_ of the
values of these things, and an essential condition of their existence,
is their utility, that is to say, their power to satisfy human wants.
Utility as used in economics does not mean usefulness in any moral
sense. From the standpoint of the economist, whiskey and opium are as
useful as bread, if they satisfy wants equally intense. And the
economist is not concerned with the general utility of things considered
in their totality. Air is more useful than jewels, but a carat of air is
not as useful as a one-carat diamond. Air exists in such abundance that
it does not need to be economized. Scarcity with reference to the
extent of the wants involved is also essential to economic value. A
combination of the ideas of utility and scarcity gives us the simple
notion for which the formidable name of "marginal utility" has been
devised. The marginal utility of a good to a man is the power the last,
or "marginal," unit of the good which the man consumes has to give him
satisfaction, or, viewed from the standpoint of the man, is the
intensity of his desire[36] for, or of his satisfaction in, the final
unit consumed. So far, our account of the value of the orange will seem
perfectly acceptable to those accustomed to traditional discussions of
the problem in the text-books. The difference is that many text-books
stop at this point, leaving the impression that with the definition of
marginal utility the whole value problem has been solved. For the social
value theory, the conception of marginal utility is barely a starting
point. Indeed, it is not even a starting point. We shall have to look
both in front of it and _behind it_. Recognizing that marginal utilities
to individuals are essential to economic values of consumption goods, we
shall have to point out other things which are also essential, and we
shall have to explain the factors determining these marginal utilities
themselves.
The last point may be considered first. Men's desires are socially
determined. Even the simplest, most instinctive, wants of human nature
are, in their concrete manifestations, the product of social culture in
overwhelming degree. Consider sex and hunger. We do not enjoy our food
when our neighbors pick their teeth with their forks. This would not
trouble a chimpanzee, whose _instinctive_ equipment in the matter of
hunger is vastly more like that of a man than is the _actual_ hunger
impulse of a highly civilized man like that of a savage. Civilized men
will often starve rather than eat human flesh. Even when moral scruples
are overcome, actual physical revulsion may prevent it. Men of different
times and places wish food of special sorts, served in special ways.
They wish to eat in the company of their fellows, but only of those
fellows who can know and obey the ritual that is appropriate to the time
and place. This is true of humble folk as of those who "dress for
dinner." The ritual differs for the two sorts of people. But there is a
spirit, a type of conversation, a code of etiquette, which prevails at
the mealtime of virtually all men, and too serious digressions therefrom
will take away the appetites of all. About the mealtime and the festal
board have gathered a great host of traditions, ideals, and social
activities, till they have become in verity an institution, and not the
least important, by any means, of social institutions. Out of the simple
instinct of sex, we have evolved many of the most precious things of our
civilization, and between the sex impulse of the animal and the sex
impulse of the gentleman who is seeking to marry the one woman in all
the world, there is a difference so great that comparison between the
two is difficult.
Here we have wants which grow out of the most elementary things in human
nature, wants which are intense and universal, but which vary, in their
concrete manifestations, enormously from age to age and from place to
place. When we come to the wants which change more quickly, the fact
that social factors dominate needs no arguing. Fashion, mode, custom,
obviously account for the concrete wants that exist in clothing,
ornamentation, amusement, housing, etc. If we wish to know what women
will be wanting to wear six months hence, we do not go to women
individually and ask them. We could not find out that way. They would
not know. We go rather to the theatre, and study the stage and the
boxes, to the famous designers of women's dress, to the metropolitan
centres of various sorts, to the "radiant points of social control"[37]
from which emanate the suggestions which pass in imitative waves through
the women of the country in the next few months. The laws of imitation
have been elaborately developed by Bagehot, Tarde, Baldwin, Ross, LeBon,
Cooley, and others, and I content myself here with referring to their
writings. The wants of women--and men--are socially given, grow out of a
give and take, a social process. And in this social process, it is not
true that each man counts one! Rather, a few lead, and many follow.
There are centres of prestige which count overwhelmingly.
Certain wants are competitive.[38] Where social status depends on having
as good a house as one's neighbors, and where social leadership depends
on having a better house than one's neighbors, there is no limit to
men's desires for better houses. With each improvement which one
introduces, each feels the desire to improve, however contented he might
have been had the other not made the improvement. To this we shall recur
in our discussion of the origin of money, in explaining the value of
gold.
So much for the human wants which stand as the focus of economic values
in the case of articles of immediate consumption.
But, given these wants, and given their marginal intensities, we are
only at the beginning of our explanation of the economic values of the
consumption goods. It is again not a case of each want counting one, to
the extent of its intensity. There are again, by virtue of the legal and
moral values governing the distribution of wealth, _centres_ of power.
The wants of some men count for nothing, however intense they may be.
The pauper, the prisoner, the beggar--popular proverb about "beggars and
horses" understands them, however much the "marginal utilitarian" may
forget that their wants count for nothing.[39] The slightest whim, on
the other hand, of the man who has inherited millions may count heavily
in giving values to goods. For the explanation of the values of
consumption goods, then, we need both the socially determined marginal
utilities of individuals, and the socially determined _weight_ which
these individuals have in our economic system. This _weight_ would
involve a very elaborate explanation. Many factors affect it. We call
attention here, however, especially to the fact that it rests in large
part on the legal and moral values and institutions concerned with the
distribution of wealth. Changes in the distribution of wealth are as
important as changes in the wants themselves in giving the explanation
of changes in values. The economic social values of consumption goods
include not merely the values of those goods _to_ the individuals who
consume them, but also the values _of_ the individuals themselves in the
social scheme of things.
What of the values of instrumental goods, of goods of "higher orders,"
of labor, of stocks and bonds, of lands, of franchise rights and good
will?
It is the one great contribution of the Austrian economists to have
shown that the causation in value runs, primarily, from consumption
goods to the goods of higher "orders" which are concerned with their
production, and that these values of instrumental goods, etc., are
derived and secondary values. The value of wheat is based on the value
of bread, the value of land on the value of wheat. The value of the
stock of United States Steel rests in part on the value of iron lands,
which rests on the value of ore, which rests on the value of pig iron,
which rests on the value of steel rails, which rests on the value of the
service of transporting building materials, which rests on the value of
a building, which rests on the value of the services which a dentist
performs in an office in the building. This is the main line of
causation. This is the first approximation which gives us a clue,
without which we should find problems insoluble. But is it not clear
that this cannot be the whole story? At every step complications enter.
The whole thing cannot be got out of the value of the dentist's
services, and the other consumers' goods and services, which are
indirectly aided by the property to which title is given by ownership of
U.S. Steel stock; nor is the value of the stock to be fully explained by
the value of the property to which it gives title.
At every step, we meet the complication that men must estimate and
calculate, for one thing. And rarely indeed can men see all the steps,
the end from the beginning. Take first a very simple case, wheat land.
The value of the wheat land of to-day rests on the value of wheat, but
it is the wheat of to-morrow and for many years to come; the wheat of
to-morrow rests for its value on the value of the bread of the day after
to-morrow. Sometimes the differential between goods at two consecutive
steps in the productive process is pretty constant. Wheat and flour vary
pretty closely together. The differential is not strictly fixed even
there. But bread and wheat land have a much looser connection in their
variations. If land could produce no wheat or corn or other good that
would satisfy human wants, and if it could not itself satisfy human
wants, it would ordinarily have no value.[40] But the connection
between the value of the bread and the value of the land is loose and
uncertain, while the connection between the value of the land and the
intensity of the wants actually satisfied by the bread produced from it,
is absolutely _nil_. Whether the bread saves a starving man or feeds the
pet pigeons of a millionaire, is a matter of indifference so far as the
value of the land (or of the bread) is concerned.
We take the values of consumption goods, and break them up, attributing
part to the labor that immediately produced them, part to the raw
materials that entered into them, part to the machine that fashioned
them, and so on. We then break up the value attributed to the raw
material, attributing part to the labor that worked in producing it
immediately, part to the machine that fashioned it, part to the rawer
material of which it was made. And so with the values of the machines.
Ultimately we get back to the values of labor, or of land, or of
securities giving title to complexes of lands, machines, etc.--values
which we do not further break up. But at every step, we find additional
factors. We find these derived values becoming independent, substantial,
standing in their own right. Moral and legal values affect them
directly, as in the case of patriotic support of government securities,
moral antagonism to the securities of the Distillers' Securities
Corporation, or the influence of court decisions, legislation and
elections on security values. Such values rest, in large degree, on the
massing of _beliefs_ and hopes, not concerned with specific
satisfactions of wants, but with the existence of _future_ economic
values. These beliefs and hopes again have their social explanation. It
is not a case where each man counts one. There are centres of prestige
and power, bankers and financial magnates, whose opinions and decisions
count heavily, and waves of optimism and pessimism, which affect the
whole group. We shall discuss these matters more fully in connection
with the analysis of credit, at a later point of our study. For the
present, it is enough to point out that the whole thing cannot be
explained on the basis of the values of consumers' goods, and that the
values of consumers' goods are only in small part explained by the
intensities of the wants they serve.
In summary: Economic value is the common quality of wealth, by virtue of
which it is possible to compare divers kinds of wealth, and treat wealth
quantitatively, getting ratios of exchange, sums of wealth, etc. Value
is a quantity, _i. e._, a quality which has degrees of intensity. Ratios
of exchange are ratios between values. Price is a particular sort of
ratio of exchange, namely, a ratio in which one of the terms is the
value of the money-unit. Prices correctly express values on the
assumption of the fluid market, and on the assumption that the value of
the money-unit does not vary.
The value quality is psychological in character. It rests in human
minds. But not in the minds of individuals thought of separately.
It is a complex of many individual mental activities, highly
institutionalized, and including legal and moral values, hopes and
beliefs and expectations, as well as the immediate intensities of men's
wants for consumption goods.
The ultimate test of scientific theory must be practice. If a theory
aids in manipulating facts, if it leads to the discovery of ways of
doing things which are better than old ways, if it solves problems which
have hitherto remained unsolved, or carries the solution of problems
farther than has hitherto been the case, it is a good theory. It need
not be the best possible theory. It need not be a final theory. The
chief claim for the present theory of value is that it not only unlocks
all the doors that earlier theories have unlocked, but also others which
have resisted the old keys. The man who goes into the modern stock
market armed with marginal utility and the quantity theory is like the
man who would fight Hindenburg with bows and arrows. Bows and arrows are
effective in the hands of expert archers, and the great figures in the
history of economics have done wonderful things with marginal utility,
"real costs," and the quantity theory. But the social value theory is
offered as a better weapon.
The writer believes that the problem of the value of money has not been
solved by the older theories of value. He believes that the social value
theory will solve it. He proposes on the basis of the social value
theory to make clearer the nature of credit phenomena, and to assimilate
the laws of credit to the general laws of value. He proposes with the
social value theory to bring together in a higher synthesis two
divergent types of economic theory, the "static" and the "dynamic." He
thinks that a rigorous and consistent application of the absolute
concept of value will clarify confusions at various points in the
general body of price theory, as the laws of supply and demand, etc.
He offers the social value theory as the only way of giving a
_psychological_ explanation to the demand-curve, and a marginal _value_
explanation of marginal demand-_price_. Demand-curves are social value
curves, on the assumption of the fixed social value of the dollar. The
utility theory, as will appear in the chapter on "Marginal Utility," has
failed to give psychological magnitudes corresponding to _any_ point on
the demand-curve. In general, he offers the social value notion as the
justification for the assumption of a quantitative value which, as we
shall see, underlies the whole of our current price analysis.
The theory here outlined has been, as stated, developed and defended
more fully in a previous book. For the rest, the author would have it
judged by its usefulness or failure as a tool of thought in the
investigations which follow.
NOTE. It has seemed best not to break the main course of the
argument of this chapter for the elaboration of one point on
which there has appeared to some critics to be vagueness in the
exposition of the social value theory in my earlier volume,
namely, the relation of social values to the individual values
of those who are moved by the social values. Social values have
as their function the guidance and control of the activities of
men. But men are also moved by their own individual feelings,
interests, and desires.
What is the relation between these two sets of factors? In what
has gone before, it has been made clear that social values
present themselves to the individual as opaque, objective
facts, largely beyond his control, to which he must adjust
himself. They represent the minds of other men, acting in
corporate and organic ways, putting pressure on him, or
offering him lures. Now the individual reckons with these
social values in the same way that he reckons with any other of
the facts affecting the economy of his life. He must adjust
himself to them in the same way that he must, if he is a
blacksmith, adjust himself to the technical qualities of the
iron he is manipulating. This does not mean that he is passive
before them, any more than he is passive before the iron. He
rather seeks to carry out his personal purposes and desires by
actively adapting himself to objective facts, whatever they be.
This means that different individuals will react in different
ways to the same social value. The fear of the law will keep
one man from burning dead leaves in the street where it will
not keep another man from murder. A given degree of social
pressure will make one man crease his trousers, while another
man will not even know that the pressure to crease one's
trousers exists! There are great individual variations in
responsiveness and sensitiveness to social pressure. In part,
these variations are due to inborn qualities. In larger part,
they are due to social education, and to social status. Thus,
the fact that one man will work all day in a ditch in response
to the lure of a dollar and a half, while another will not
work in the ditch for a hundred dollars a day, may rest in
slight degree on the greater inborn sensitiveness of the latter
to the physical pain of labor, but rests primarily on the fact
that the latter doesn't need the money, and has a social
standard, growing out of his class-associations and education,
which would make him ashamed to be seen in the ditch. Indeed,
we may think of the social standard in question as a social
value acting _on_ him, rather than _in_ him. He fears ridicule.
The same degree of social power, luring men toward the ditch,
exists in the dollar in each case, but the response is very
different in the two cases.
Later formulations of the utility theory and the labor cost
theory, as represented by the theory of Schumpeter, which we
shall discuss in the chapter on "Marginal Utility," give us, in
a scheme of purely static equilibrium, a picture of the
adjustment of the individual values to the social values. As we
shall see, they give us no account whatever of the social
values. They do not explain causation at all. But they do show
that there is a tendency for the individual marginal utilities
of consumption to become proportional to the social values of
the goods consumed by each individual; and for the individual
marginal disutilities in production to become proportional to
the social values of the rewards that come to producers. The
scheme is highly unrealistic. It has been emphatically
repudiated by Boehm-Bawerk, so far as the disutility equilibrium
is concerned. ("Ultimate Standard of Value," _Annals of the
American Academy_, Vol. V, pp. 149-209.) But it is worth
something, not as explaining social values or market prices,
but rather, as showing how individuals _conform_ to social
values and market prices. _Cf. Social Value_, pp. 43-44, n. 2,
and 148.
The theory that individual marginal utilities and disutilities
are proportional to market values is unrealistic enough, in the
light of the analysis of individual utilities which we have
given, even for the utilities. It is quite impossible to make
anything of importance of it from the side of individual
disutilities. The length of the working day is not fixed for
each worker by a comparison of his own labor pain with the
satisfactions he expects from his wages. It is fixed by
conditions largely external to him, and the whole group works
the same number of hours, with the machine. The law may limit
the working day. Trades-union effort may do it. Opportunities
for alternative employment may do it, for the labor force of a
factory as a whole. But the theory, which really must rest in
the notion that each individual has many options, and that the
working period is flexible, cannot mean much. The prosperity of
the laborer does more to limit the working day than does his
suffering!
The reactions of individuals as consumers or producers on the
social values modify the social values. But, as we have shown,
the primary explanation of the social values is not to be found
in the individual utilities and disutilities of those who react
to them. Utilities and labor pains are parts, but minor parts,
in the explanation of social values.
CHAPTER II
SUPPLY AND DEMAND, AND THE VALUE OF MONEY
The theory of the value of money is a special case of the general theory
of economic value. To the layman, this would seem to go without saying.
To the student of the literature of the subject, however, who has
noticed the wide divergence between the method of approach to the
general problem of value and the method of approach to the problem of
the value of money, in most treatises which include both these topics,
the proposition will sound unusual if not heretical. Most text-books in
English to-day will offer the marginal utility theory as the general
theory of value. The same books commonly present the quantity theory of
the value of money. Whether or not the two theories are consistent may
wait for later discussion, but that the quantity theory of money is a
_deduction from_ the utility theory of value, and a _special case_ of
the utility theory of value, will not, I believe, be contended by
anyone. Certainly in its origin, the quantity theory is much the older
theory. The same is true for those writers who seek to explain value in
general on the basis of cost of production, and who at the same time
offer the quantity theory to explain the value of money. The two
theories may or may not be consistent, but in any case, they are
logically and historically independent, neither being a deduction from
the other. Older writers (as Walker and Mill), whose treatment of the
general theory of value runs in terms of "supply and demand," have
stated that the quantity theory is merely a special case of the law of
supply and demand, and the statement is occasionally met in present-day
writings, though one of the most recent and best known of the
expositions of the quantity theory, Professor Fisher's _Purchasing Power
of Money_, very explicitly repudiates this doctrine.[41] But it may be
easily shown, and will be shown later, that the quantity theory, and the
present-day formulation of the law of supply and demand, are in no way
logically dependent upon each other. This lack of connection between two
bodies of doctrine which should be in a most intimate and essential way
related to each other, may well throw suspicion on the current
treatments of both topics. In any case the lack of connection raises a
problem, and calls for explanation.
Part of the explanation may be sought in the fact that the writers who
have developed the general theory of value have not been, in general,
the writers who have most elaborated the theory of the value of money.
The theory of money has been for a long time a more or less isolated
discipline. In Ricardo, we have an elaboration of the labor theory of
value, and we also have the quantity theory of money. But it is not
clear that Ricardo added anything to the quantity theory. He found it,
in much the form in which he used it, in the writings of predecessors,
among them Locke and Hume. Ricardo makes large use of the quantity
theory as a premise, but apparently feels the theory to be so
self-evident that it needs little exposition or defence at his hands.
John Stuart Mill is a clear exception to the general statement. Cairnes,
likewise, did treat both topics in considerable detail, but while his
interest in the general theory of value was that of the theorist, his
treatment of money was primarily in the spirit of the publicist, and his
interest was less in the justification of the theory--which he again
seems to feel needs little defence--as in its application. A similar
statement may be made with reference to Jevons. He worked out his
general theory of value for its own sake; his utterances on the theory
of the value of money must be sought scattered through his practical
writings on money. Alfred Marshall's _Principles_ (Vol. I) says almost
nothing about the theory of money; his opinions on that subject are to
be found in some _ex cathedra_ replies to questions from a Parliamentary
Commission. The most important discussions in England of the value of
money are to be found in the long polemic between the Currency and the
Banking Schools, by writers who would not be listed among the makers of
the general theory of value. In the United States to-day, with the
exceptions of Professors Fisher and Taussig, the writers who have been
interested in the general field of economic theory have done
comparatively little with the value of money (_e. g._, Professors Clark
and Fetter), and the writers who have been most interested in the value
of money have usually not written largely on the general theory of value
(_e. g._, Professors Laughlin, Scott, Kinley). Professor Kemmerer might
well be included as an illustration of this last statement. His primary
interest is in money, rather than general theory, even though he does
precede his theory of the value of money with an exposition of the
utility theory of value. In German, a similar situation obtains.
Boehm-Bawerk has touched the theory of money scarcely at all. Menger has
written an important article on "Geld" in the _Handwoerterbuch der
Staatswissenschaften_, but the important thing about this article is the
theory of the origin of money, and the reader will find little on the
problem of the value of money. Wieser has recently taken up the value of
money (in articles published in 1904 and 1909), but no trace of his
views has as yet manifested itself in the English literature on money,
and the writer may here express the opinion that Wieser's contributions
to the theory of money are not likely to be very influential, or to add
to his reputation.[42] Austrian writers on the value of money, as Wieser
and von Mises, have recognized more clearly than anyone in America or
England, the essential dependence of the theory of the value of money on
the general theory of value. The German writer on money who has
attracted most attention recently, however, G. F. Knapp, troubles
himself about the general theory of value not at all.
But the main explanation of the hiatus between the two bodies of
literature and doctrine is to be sought in something more fundamental.
Neither utility nor costs nor supply and demand furnishes an adequate
basis from which the quantity theory, or any other theory of the value
of money can be deduced. The cost theory, and the supply and demand
theory, in their present-day formulation, are really not theories of
value at all, but are theories of _prices_, theories which presuppose
_value_, and _money_, and a _fixed value of money_. And the utility
theory, as usually presented, is either a theory of barter relations, or
else (more commonly) speedily settles down into the grooves of supply
and demand, leaping by means of a confusion of utility curves and
demand-curves (or sometimes by a deliberate identification of them, _e.
g._, Flux and Taussig[43]) to the treatment of market prices. I shall
take up these points in order.
A historical summary of the development of the notions of supply and
demand will aid the exposition. It may be noticed, first of all, that
supply and demand is really a very superficial formula even though an
exceedingly useful one. By virtue of its superficial character, it
antagonizes few other theories, and it has been the common property of
almost all schools of value theory. Cost theories and utility theories,
labor theories, or social value theories, all find use for it, in one
form or another. It is really quite neutral and colorless, so far as the
ultimate questions of value-causation are concerned. The more
fundamental causal factors offered by one theory or another are commonly
supposed to operate _through_ supply or demand, in price-determination.
Adam Smith seems to see this more clearly than does Ricardo. Ricardo,
indeed, sometimes thought of demand and supply as forces antithetical to
the forces of labor-costs which he was considering. In ch. xxx of his
_Principles of Political Economy and Taxation_ (ed. McCulloch, pp.
232ff.) he holds that his natural value ultimately rules, except (p.
234) in the case of monopolized articles. Supply and demand govern the
prices of monopolized articles and of all articles in the short run. I
do not find in Ricardo any clear statement to the effect that cost of
production operates _through_ influence on supply. Neither Adam Smith
nor Ricardo felt the need of very much precision in the definition of
supply and demand. Smith does, indeed, distinguish "effectual" from
"absolute" demand, in a well-known passage (ed. Cannan, I, p. 58),
defining effectual demand as the demand of the effectual demanders,
_i. e._, these who are willing to pay the "natural price" of the
commodity. The term "supply" he does not use in this passage, but speaks
of the "quantity which is actually brought to market," and gives as the
law of market price that it is determined by the "proportion" between
this quantity and the effectual demand. That much is wanting in this
analysis will be sufficiently clear when the views of J. S. Mill and
Cairnes are considered. Ricardo offers even less than Smith in the way
of definition. The reader may compare the pages in _Ricardo's Works_
cited above, and the discussion of the demand for labor on p. 241 in the
same volume.
In J.S. Mill, a clean-cut notion first appears. The doctrine that price
is determined by a ratio between effectual demand (_i. e._, the wish to
possess combined with the power to purchase) and supply (_i. e._, the
quantity available in the market), is sharply criticised. How have a
ratio between two things not of the same denomination? "What ratio can
there be between a quantity and a desire, or even a desire combined with
a power?" To make supply and demand comparable, demand must be defined
as "quantity demanded," and then the difficulty arises that the quantity
demanded will vary with the price, which seems to present a case of
circular reasoning if demand is to be a determinant of price. The
solution which Mill develops for this difficulty really gives us our
modern conception, virtually complete except that Mill does not present
it in the useful diagrammatic form and does not whisper the magic word,
"margin." There is a demand-schedule, which, plotted, would give a
demand-curve. At such and such prices, such and such quantities are
demanded, or will be purchased. There is a supply schedule, presenting a
supply situation of similar character (though not so clearly indicated).
The price reached is that price which _equalizes_ amount demanded and
amount supplied. A higher price will lead to competition among sellers,
forcing down the price, a lower price will lead to competition among
buyers, forcing up the price. The notion of a _ratio_ between supply and
demand is replaced by the notion of an _equation_ between them. The
present writer wishes to remark, in this connection, that Boehm-Bawerk's
elaborate analysis, with his "marginal pairs," etc., has not advanced
one step beyond this conception of Mill's, that it is really less
satisfactory than Mill's analysis, because of the impedimenta of
pseudo-psychology it has to carry, and because of its confusion of
utility schedules with demand schedules.[44] In our present-day
expositions, as presented in the diagrams, we are accustomed to say that
price is fixed when marginal supply-price and marginal demand-price are
equal, putting the stress on the ordinate, rather than on the abscissa,
on the identity of the dollars paid or received, rather than on the
identity of the goods given or received. But this is merely another way
of stating the same equilibrium which Mill perceived--when marginal
demand and supply prices are equal, amount supplied and amount demanded
will be equal, and conversely.
One point is to be added, making explicit what is implicit in the modern
theory of supply and demand. Supply and demand doctrine assumes _money_,
and a _fixed value_ of money. That there should be a given schedule of
money-prices for varying quantities of a good, is possible only if there
be a given value of the money-unit.
That the modern doctrine of supply and demand necessarily involves the
assumptions of value, of money, and of a fixed value of money, may be
proved by the following considerations:
Supply-situation, represented by the supply-curve, and demand-situation,
represented by the demand-curve, are conceived of as antithetical and
independent causal forces, whose equilibrium determines both "supply and
demand" (in the sense of quantities supplied and demanded) and price.
Mill's doctrine that supply and demand determine price gets out of the
circle that demand (amount demanded) is itself dependent on price, only
by making both demand in this sense and price _results_, rather than
causes, and by putting the causation back into the more complex factors
which I call "supply-situation" and "demand-situation." The two
independent causes, then, are summed up in the supply-curve and the
demand-curve. But, first, these curves are expressed in money. And
second, a change in the value of money would affect _both_ of them
proportionately. But a theory which is concerned with supply and demand
as independent and antithetical must abstract from factors which give
them a _common_ movement, without modifying their _relation_ to each
other. A change in the value of money would lead the supply-curve to
move to the right, and the demand-curve to move to the left, the change
in each being proportionate, and the amount supplied, and amount
demanded, would remain unchanged. Changes in the value of money must,
therefore, be abstracted from.
Again, we must precise the notion of an _increase_ in demand, or of
supply. Increase in demand may mean mere increase in amount demanded,
consequent upon a lower price, consequent, _i. e._, upon a lowering of
the supply schedule. In this sense, increase in demand is a passive
fact, a result rather than a cause. On the other hand, if the increase
in demand is an increase in the amount demanded at the _same_ price, if
it means a change in the demand-situation, represented by the moving to
the right of the demand-curve, we have a causal factor in increase in
demand, a factor which raises the price and compels new supply to come
into the market. We may distinguish these two meanings as increase in
demand in the active and in the passive senses. _Mutatis mutandis_, we
may speak of increase of supply in the active and passive senses. These
distinctions have been made before, but it has not been clearly seen
that these distinctions, and the connected doctrines, involve the
assumption of a fixed value of money. But consider: it is the current
doctrine that increase in demand in the active sense, the demanding of
a greater amount at the same price, the moving of the demand-curve to
the right, not only raises the price, but also tends to _increase the
supply_. But this is true only if the _cause_ of the increase in demand
is not a cause which simultaneously works on supply, neutralizing that
tendency. If the increase in amount demanded at a given price be due to
a lowered value of money, then the same lowered value of money will
reduce the supply available at that price _pro tanto_, and the new
equilibrium, _caeteris paribus_, will be at a higher price, to be sure,
but with the same amount supplied and demanded. "Demand" is a term which
carries the connotation of motivating power in economic theory. Through
demand run the forces which regulate production and supply. The function
of increased demand is to induce increased supply. But the value
concept, and the assumption of a fixed value of money, are needed to
preserve this part of the doctrine. Without them we have no way of
distinguishing a _real_ increase in demand in the active sense, which
does modify the adjustments in production, and alter the proportions of
different supplies, from a _nominal_ increase in demand in the active
sense, which merely raises a money-price, without affecting supply.[45]
Another approach will lead to the same conclusion. Demand and
supply-curves are not to be understood merely in terms of brute,
physical quantities. They are rather curves expressing economic
_significances_, manifesting _psychological_ forces which lie behind
them. No considerations of mere physical quantity will explain why one
demand-curve should be "elastic" and another inelastic,--each curve has
its own peculiarities, which are not mechanical in their nature.
Demand-curves express the diminishing economic significance of goods as
their quantity is increased. How economic significance is to be
interpreted need not be argued here. I have elsewhere undertaken to show
that the utility theory of value does not explain the economic
significance which demand-curves express--that demand-curves are not
utility curves. My own theory is that demand-curves are to be explained
only in terms of a social psychology, that demand-curves are
social-value curves. But my argument at this point does not rest on the
particular type of causal theory of value one chooses. It is enough that
the demand-curve be recognized as expressing economic significance, and
diminishing economic significance.[46] But for the demand-curve to
express variation in economic significance of a good, there is need for
a unit in which to express that variation. That unit is the economic
significance of the dollar, itself assumed to be invariable--as all
measures must be assumed to be invariable if measurement is to mean
anything. If the unit chosen vary in the course of a given
investigation, the curve tells you nothing at all.
Another way of reaching the same conclusion is to say that an increase
in demand in the active sense will lead to an increase in supply only if
there be no corresponding increase in demand for the alternative
employments of the sources of that supply, that, _e. g._, an increased
demand for wheat will lead to increased production of wheat only if
there be not a corresponding increase in the demands for corn and other
crops which can be raised on land and with labor and capital that would
otherwise produce wheat. This is only another phase of the argument that
went before, that an increase in demand due to a falling value of money
would lead to a corresponding shift in the supply-curve. It is not quite
the same argument, however, because that was an argument concerned with
short run tendencies, resting on the assumption that the holders of
supply would immediately react to a change in the value of money,
whereas the argument just presented rests on the longer adjustments,
based on the law of costs, as worked out by the Austrians. This point
will be made clearer in the next chapter.
Yet another, and perhaps simpler, approach to the same conclusion is by
pointing out that an individual, deciding to buy, must take account of
the prices of other things in his budget--that individual
demand-schedules would be different if market prices of other
things--which depend on the value of money--were different.
The doctrine that supply and demand (and cost of production, the
capitalization theory, and other elements in the current price-analysis)
presuppose a fixed value of money, must be sharply distinguished from
the doctrine of Professor Fisher (_Purchasing Power of Money_, ch. 8),
and others, that a fixed _general price level_ is assumed by supply and
demand, etc. I should deny that a fixed general price level is assumed.
The point rests in the distinction between value as _absolute_ and value
as _relative_. For my theory, it is perfectly possible for the general
price level to rise, with the value of money constant, because of a rise
in the values of _goods_. In a later chapter, on "The Passiveness of
Prices," I shall examine the doctrine of Professor Fisher more closely,
and set these two views in clearer contrast. For the present, it is
enough to point out one vital difference between a rise in prices due to
a fall in the value of money and a rise in prices due to a rise in the
values of goods, with the absolute value of money unchanged: in the
latter case, there is an increase in the psychological stimulus to
industry, an increase in economic power in motivation, which energizes
and increases production. In the latter case, especially when the fall
in the value of money is rapid, and the rise in prices is clearly due to
that cause (as in the case of Confederate paper, or the French
_Assignats_), we find a reverse effect on industry. Intermediate cases,
where money is falling in value, but where goods are also rising, give
us intermediate results.
In what follows, I shall from time to time refer to this distinction. In
my own exposition, I shall always use "value of money" in the absolute
sense, as distinguished from the mere "reciprocal of the price
level,"--a practice which I have sought to justify in the chapter on
"Value," and in other places there referred to.[47]
The modern theory of supply and demand, then, assumes money, and a fixed
value of money. It is, therefore, obviously unfitted as an instrument to
solve the problem of the value of money. If supply and demand concepts
are to be applied to this problem, they must be of a different sort.
This was pointed out by Cairnes[48] who criticised Mill's formulation,
and pointed out that Mill departed from it in three capital doctrines:
in the theory of the value of money, in the theory of wages, and in the
theory of international values. By the demand for money, Mill means, not
the amount of _money_ demanded, but the quantity of goods offered
against money--a very different conception. (Mill, _Principles_, Bk.
III, ch. viii, par. 2.) In what sense a quantity of goods can equal a
quantity of money, or in what sense there can be a ratio between goods
and money, (to recur to Mill's former problem as to the ratio between
things not of the same denomination) Mill does not make clear, nor is it
defensible to speak of either a ratio or an equation on the basis of
Mill's system, since Mill had no absolute value concept. Cairnes seeks
to reconstruct the notion of supply and demand, in such fashion as to
make it possible to apply it universally, and takes up the question of
the comparability of supply conceived as a quantity of goods, and
demand, conceived, not as a quantity of goods, but as desire combined
with the ability to pay. He concludes that in both supply and demand
there is a physical, as well as a mental, element. Demand he defines as
the desire for a commodity backed by general purchasing power; supply as
the desire for general purchasing power, backed by the offer of a
commodity. Thus he thinks he has made the two of the same denomination,
so that comparison may be instituted between them, and the ideas of
equation, ratio, and proportion made legitimate. By "general purchasing
power," Cairnes seems to mean money and the representatives of money. It
is not an abstract power, since it is the "physical" element in demand,
comparable with, and of the same denomination with, the physical element
in supply, a commodity. Cairnes' solution of Mill's difficulty seems to
me to be merely verbal, however. First, in what way is the desire for
general purchasing power in the mind of one man comparable with the
desire for a commodity in the mind of another man? I pass over the
supposed difficulty that knowledge of other men's emotions is
impossible,[49] and emphasize simply the point that price offer, either
by demander or supplier, is no test of the intensity of desire where
there are inequalities in the distribution of wealth. But second: in
what sense is general purchasing power, money and money-funds, of the
same denomination as a commodity? Cairnes emphasizes the physical
character of both. But surely they are not comparable on the basis of
any physical attributes--weight, bulk, etc. Certainly if we look at the
concept of demand here given, the physical aspect is simply
irrelevant--gold money goes by weight, but what of paper money and
credit instruments? And in what sense is even gold money physically of
the same denomination with, say, wheat, or hay or base-ball tickets? Not
physical quantities, but economic quantities, are relevant here; not
weight or bulk, but _value_. By means of a concept of value, as the
homogeneous quality of wealth, present in each piece of wealth in
definite, quantitative degree, could Cairnes bring about comparability
between the "physical" elements in supply and demand. But not otherwise.
Only significances, values, are relevant here. Supply and demand
presuppose value.
It will be interesting to consider the effort to solve the problem of
the value of money by means of supply and demand on the lines employed
by Mill, where demand for money is defined as quantity of goods to be
exchanged, and supply of money as quantity of money times rapidity of
circulation, and where physical quantities are treated as the relevant
factor, no value concept of the sort here contended for being
presupposed. This is, essentially, Mill's method. There is, in this
conception, first the difficulty that "quantity of goods to be
exchanged" is not a true quantity at all, but is a mere collection of
things of different denominations, dozens of eggs, pounds of butter,
gallons of milk, etc., incapable of being funded into a quantity.[50]
There is, second, the difficulty that increasing the amount of any one
of the items in this heterogeneous composite need not increase the
"demand" for money, in the sense that it increases the "pull" on money,
or tends to increase the supply of money. Yet, under the general
doctrine of supply and demand, an increase in demand should be a
stimulus to increase in supply. Indeed, it is easy to construct a case
where an increase in the quantity of one of the items in this composite,
the others remaining unchanged, would actually tend to _repel_ money, to
reduce the _supply_ of money. Suppose that one item in America's stock
of goods, say cotton, is much increased in quantity, and suppose that
cotton has a highly inelastic demand-curve, so that the increased
quantity sells for less money than the original quantity.[51] Suppose,
too, that cotton is our chief article of export, and that the bulk of
our cotton is exported. Would not the "balance of trade" tend to turn
against us, so that gold would tend to leave the country, and the supply
of money be reduced? There is nothing in the situation assumed to raise
the prices of other goods,[52] so that they could exert a counteracting
"pull" on money. Europeans, to be sure, having less to pay for cotton,
could demand more of other things, and Americans paying less for cotton
could demand more of other things. But, on the other hand, American
producers of cotton, receiving less for their cotton--receiving
precisely as much less as the others had more--could then demand less of
other things, exactly as much less as the others are able to demand
more. The original tendency for gold to leave the country, and the
tendency for gold to leave the money-form and be used in the arts, would
remain unneutralized. An "increase of demand for money," in Mill's
sense, would in this case present the remarkable phenomenon of driving
money away. Physical quantities are irrelevant. Psychological
significances are what count.
It is interesting to note, in this connection, that some striking
contradictions in quantity theory reasoning on any formulation, whether
connected with the notions of supply and demand or not, are involved in
this hypothesis. The illustration above gives a case where a lowered
price level leads money to flow away from your country. But, on the
quantity theory explanation of foreign exchange, it is _rising_ price
levels which drive gold away, and _falling_ price levels which attract
gold![53]
Mill's effort to apply the notion of demand and supply to the value of
money is, then, (1) not an application of his formal doctrine of supply
and demand, and (2), is a failure, leads to results contradictory to the
general law of supply and demand, as soon as we take account of the
peculiarities of individual commodities, and cease to look at
commodities in one huge lump. Psychological forces, rather than
physical quantities, are what count. Whether or not the supply and
demand notion of Cairnes, reinterpreted by putting a quantitative value
concept into it, could serve as a means of approach to the value of
money, I shall not here argue. No one so far as I know has attempted to
do the thing that way, and my own theory is best developed by another
method. It is interesting to note, however, another somewhat different
effort to apply the supply and demand formula. General Walker does so,
including among the factors determining the demand for money, not only
the quantity of goods to be exchanged, but also the _prices_[54]
prevailing. Since by value of money Walker means merely the reciprocal
of the price-level, this is the clearest possible case of a vicious
circle. It would be a circle even if he were trying to explain the
absolute value of money, as distinguished from the reciprocal of the
price-level, since the former is one of the determinants of the latter.
Value of money and values of goods determine prices; prices and quantity
of goods determine demand for money; demand and supply of money
determine value of money,--a hopeless circle.
I know no sense in which the terms, demand and supply of money, can have
relevance to the problem of the value of money. There is one sense in
which the terms can be used which fits in with the modern supply and
demand-curves, and that is the sense in which they are used in the money
market. Demand for money comes from borrowers; supply of money from
lenders. The price paid is a money-price, the curves express the short
time money-rates, the rental of money, in terms of money, for stated
periods of time. There is a relation, later to be investigated, between
the rental of money, the money-rate, and the value of money, but the two
are in no sense the same. It should be noted, too, that we are here
concerned with "money-funds" rather than with money in the strict
sense,--distinctions and relations in this connection properly belong at
another stage of our inquiry. Whenever the terms, demand and supply of
money, appear in the following pages, they will be used in the sense
developed in this paragraph.
Demand and supply are superficial formulae. They cannot touch a problem
so fundamental as that of the value of money.
CHAPTER III
COST OF PRODUCTION AND THE VALUE OF MONEY