The Value of Money
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Title: The Value of Money
Author: Benjamin M. Anderson
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HARVARD COLLEGE
LIBRARY
FROM THE
QUARTERLY JOURNAL
OF ECONOMICS
THE MACMILLAN COMPANY
NEW YORK . BOSTON . CHICAGO . DALLAS
ATLANTA . SAN FRANCISCO
MACMILLAN & CO., LIMITED
LONDON . BOMBAY . CALCUTTA
MELBOURNE
THE MACMILLAN CO. OF CANADA, LTD.
TORONTO
THE
VALUE OF MONEY
BY
B. M. ANDERSON, JR., PH. D.
ASSISTANT PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY
AUTHOR OF "SOCIAL VALUE"
New York
THE MACMILLAN COMPANY
1917
_All rights reserved_
COPYRIGHT, 1917
BY THE MACMILLAN COMPANY
Set up and electrotyped. Published May, 1917.
To
B. M. A., III
AND
J. C. A.
WHO OFTEN INTERRUPTED THE WORK
BUT NONE THE LESS INSPIRED IT
PREFACE
The following pages have as their central problem the value of money.
But the value of money cannot be studied successfully as an isolated
problem, and in order to reach conclusions upon this topic, it has been
necessary to consider virtually the whole range of economic theory; the
general theory of value; the role of money in economic theory and the
functions of money in economic life; the theory of the values of stocks
and bonds, of "good will," established trade connections, trade-marks,
and other "intangibles"; the theory of credit; the causes governing the
volume of trade, and particularly the place of speculation in the volume
of trade; the relation of "static" economic theory to "dynamic" economic
theory.
"Dynamic economics" is concerned with change and readjustment in
economic life. A distinctive doctrine of the present book is that the
great bulk of exchanging grows out of dynamic change, and that
speculation, in particular, constitutes by far the major part of all
trade. From this it follows that the main work of money and credit, as
instruments of exchange, is done in the process of dynamic readjustment,
and, consequently, that the theory of money and credit _must be a
dynamic theory_. It follows, further, that a theory like the "quantity
theory of money," which rests in the notions of "static equilibrium" and
"normal adjustment," abstracting from the "transitional process of
readjustment," touches the real problems of money and credit not at all.
This thesis has seemed to require statistical verification, and the
effort has been made to measure the elements in trade, to assign
proportions for retail trade and for wholesale trade, to obtain
_indicia_ of the extent and variation of speculation in securities,
grain, and other things on the organized exchanges, and to indicate
something of the extent of less organized speculation running through
the whole of business. The ratio of foreign to domestic trade has been
studied, for the years, 1890-1916.
The effort has also been made to determine the magnitudes of banking
transactions, and the relation of banking transactions to the volume of
trade. The conclusion has been reached that the overwhelming bulk of
banking transactions occur in connection with speculation. The effort
has been made to interpret bank clearings, both in New York and in the
country outside, with a view to determining quantitatively the major
factors that give rise to them.
In general, the inductive study would show that modern business and
banking centre about the stock market to a much greater degree than most
students have recognized. The analysis of banking assets would go to
show that the main function of modern bank credit is in the direct or
indirect financing of corporate and unincorporated _industry_.
"Commercial paper" is no longer the chief banking asset.
It is not concluded from this, however, that commerce in the ordinary
sense is being robbed by modern tendencies of its proper banking
accommodation, or that the banks are engaged in dangerous practices. On
the contrary it is maintained that the ability of the banks to aid
ordinary commerce is increased by the intimate connection of the banks
with the stock market. The thesis is advanced--though with a recognition
of the political difficulties involved--that the Federal Reserve Banks
should not be forbidden to rediscount loans on stock exchange
collateral, if they are to perform their best services for the country.
The quantity theory of money is examined in detail, in various
formulations, and the conclusion is reached that the quantity theory is
utterly invalid.
The theory of value set forth in Chapter I, and presupposed in the
positive argument of the book, is that first set forth in an earlier
book by the present writer, _Social Value_, published in 1911. That book
grew out of earlier studies in the theory of money, in the course of
which the writer reached the conclusion that the problem of money could
not be solved until an adequate general theory of value should be
developed. The present book thus represents investigations which run
through a good many years, and to which the major part of the past six
years has been given. On the basis of this general theory of value, and
a dynamic theory of money and exchange, our positive conclusions
regarding the value of money are reached. On the same basis, a
psychological theory of credit is developed, in which the laws of credit
are assimilated to the general laws of value.
In a final section, the constructive theory of the book is made the
basis for a "reconciliation" of "statics" and "dynamics" in economic
theory--an effort to bring together the abstract theory of price
(_i. e._, "statics") which has hitherto chiefly busied economists, and
the more realistic studies of economic change (_i. e._ "dynamics") to
which a smaller number of economists have given their attention. These
two bodies of doctrine have hitherto had little connection, and the
science of economics has suffered as a consequence.
This book was not written with the college student primarily in mind.
None the less, I incline to the view that the book, with the exception
of the chapter on "Marginal Utility," is suitable for use as a text with
juniors and seniors in money and banking, if supplemented by some
general descriptive and historical book on the subject, and that the
whole book may very well be used with such students in advanced courses
in economic theory. I think that bankers, brokers, and other business
men who are interested in the general problems of money, trade,
speculation and credit, will find the book of use. Naturally, however,
it is my hope that the special student of money and banking, and the
special student of economic theory will find the book of interest. The
book may interest also certain students of philosophy and sociology, who
are concerned with the applications of philosophy and social philosophy
to concrete problems.
My obligations to others, running through a good many years, are very
great. With Professor E. E. Agger, I talked over very many of the
problems here discussed, in the course of two years of close association
at Columbia University, and gained very much from his suggestions and
criticisms. Professor E. R. A. Seligman has read portions of the
manuscript, and given valuable advice. Professor H. J. Davenport has
given the first draft an exceedingly careful reading, and his criticisms
have been especially helpful. Professor Jesse E. Pope supervised my
investigations in the quantity theory of money in 1904-5, in his seminar
at the University of Missouri, and gave me invaluable guidance in the
general theory of money and credit then. More recently, his intimate
first hand knowledge of European and American conditions, both in
agricultural credit and in general banking, has been of great service to
me. Mr. N. J. Silberling, of the Department of Economics at Harvard
University, has been helpful in various ways, particularly by making
certain statistical investigations, to which reference will be made in
the text, at my request. Various bankers, brokers, and others closely in
touch with the subjects here discussed have been more than generous in
supplying needed information. Among these may be especially mentioned
Mr. Byron W. Holt, of New York, Mr. Osmund Phillips, Editor of the
_Annalist_ and Financial Editor of the _New York Times_, Messrs. L. H.
Parkhurst and W. B. Donham, of the Old Colony Trust Company in Boston,
various gentlemen in the offices of Charles Head & Co., and Pearmain and
Brooks, in Boston, Mr. B. F. Smith, of the Cambridge Trust Company, Mr.
W. H. Aborn, Coffee Broker, New York, Mr. Burton Thompson, Real Estate
Broker, New York, Mr. Jas. H. Taylor, Treasurer of the New York Coffee
Exchange, Mr. J. C. T. Merrill, Secretary of the Chicago Board of Trade,
DeCoppet and Doremus, New York, and Mr. F. I. Kent, Vice President of
the Bankers Trust Company, New York. My greatest obligations are to two
colleagues at Harvard University. Professor F. W. Taussig has given the
manuscript very careful consideration, from the standpoint of style as
well as of doctrine, and has discussed many problems with me in detail.
Professor O. M. W. Sprague has placed freely at my service his rich
store of practical knowledge of virtually every phase of modern money
and banking, and has read critically every page of the manuscript. None
of these gentlemen, of course, is to be held responsible for my
mistakes. I also make grateful acknowledgment of the aid and sympathy of
my wife.
In the course of the discussion, frequent criticisms are directed
against the doctrines of Professors E. W. Kemmerer and Irving Fisher,
particularly the latter, as the chief representatives of the present day
formulation of the quantity theory. Both their theories and their
statistics are fundamentally criticised. I find myself in radical
dissent on all the main theses of Professor Fisher's _Purchasing Power
of Money_, and at very many points of detail. To a less degree, I find
myself unable to concur with Professor Kemmerer. But I should be sorry
if the reader should feel that I fail to recognize the distinguished
services which both of these writers have performed for the scientific
study of money and banking, or should feel that dissent precludes
admiration. I acknowledge my own indebtedness to both, not alone for the
gain which comes from having an opposing view clearly defined and ably
presented, but also for much information and many new ideas. My general
doctrinal obligations in the theory of money and credit are far too
numerous to mention in a preface. My greatest debt in general economic
theory is to Professor J. B. Clark.
B. M. ANDERSON, JR.
HARVARD UNIVERSITY, March 31, 1917.
ANALYTICAL TABLE OF CONTENTS
_PART I. THE VALUE OF MONEY AND THE GENERAL THEORY OF VALUE_
CHAPTER I
ECONOMIC VALUE
PAGE
Problem of value of money special case of general theory of
value; present chapter concerned with general theory 1
Formal and logical aspects of value: value as quality; value
as quantity; value and wealth 5-6
Absolute _vs._ relative conceptions of value: value of money
_vs._ "reciprocal of price-level"; value prior to exchange;
value and exchangeability; do prices correctly express
values? 6-12
Doctrine so far in accord with main current of economic
opinion 12-14
Causal theory of value new: marginal utility, labor theory,
etc., rejected 14-16
Social explanation required: "individual" a social product,
both in history of individual and in history of race 16-19
And above individual impersonal psychic forces, law, public
opinion, morality, economic values 19-20
Three types of theory have dealt with these: theory of
extra-human objective forces; extreme individualism;
social value theory 20-21
Illustrated in jurisprudence, ethics, and economic theory 21-26
Law, morals, and economic values generically alike, but have
_differentiae_ 26-28
But not differentiated on basis of states of consciousness
of individual immediately moved by them, because many
minds in organic interplay involved 28-33
Economic social value (a) of consumers' goods and services:
"utility" and scarcity; "marginal utility"; social
explanation of marginal utility; marginal utilities the
conscious _focus_ of economic values of consumers' goods;
but only minor part of these values; individuals, classes
and institutions heavily weighted by legal, moral, and
other social values, in power over economic values of
consumers' goods 33-38
Economic social value (b) of labor, land, stocks, bonds,
"good will," etc.; based only in part on values of
consumers' goods; partially independent, directly
influenced by contagion, and centers of power and
prestige 38-41
Pragmatic character of theory 41-43
Relation of social values to individual values 43-45
CHAPTER II
SUPPLY AND DEMAND, AND THE VALUE OF MONEY
_Hiatus_ between general theory of value and theory of value
of money 46-47
Partly because former has been developed by different writers
from those who have developed latter 47-49
But chiefly because supply and demand, cost of production,
etc., _assume_ fixed value of money, and are theories of
_price_, rather than _value_ 49
Supply and demand useful but superficial formula, common
property of many value theories 49-50
Crude and unanalyzed in Smith and Ricardo; first made precise
by J. S. Mill, who gives essentials of modern doctrine 49-51
Boehm-Bawerk's pseudo-psychology spoils Mill's clean-cut
doctrine 51-52
Supply and demand assumes fixed _value_ of money-unit, and
hence inapplicable to money itself 52-56
But supply and demand does _not_ assume fixed _price-level_ 56-57
Cairnes _vs._ Mill 57-58
Mill's unsuccessful effort to apply supply and demand to
money 59-62
Walker's attempt 62
Supply and demand in the "money market" 62-63
Chapter III
COST OF PRODUCTION AND THE VALUE OF MONEY
Types of cost theory: modern cost doctrine is "money costs"
doctrine, and inapplicable to value of money 64
Labor cost: Smith; Ricardo; Ricardo's confession of failure;
"real costs" in Senior and Cairnes; Mill's "money-outlay"
cost doctrine, and Cairnes' criticism; but "money-cost"
has survived 64-67
Because "real cost" doctrine does not square with facts 67-69
"Money-cost" of producing money-metal 69-70
Austrian cost doctrine runs still in money terms, assuming
value, money, and fixed value of money 70-71
"Negative social values" as "real costs" note, 71
CHAPTER IV
THE CAPITALIZATION THEORY AND THE VALUE OF MONEY
Money as "capital good," and "money-rates" as rentals 72-73
Capitalization theory; formula; capital value passive
resultant of annual income and rate of discount 73-74
But in case of money, rental and rate of discount not
independent variables 74-76
And in case of money, capital value not passive shadow,
but active cause of income 76
Capitalization theory assumes money, and fixed value of
money 76-77
Assumed fixed value of money absolute, and not relative 77-78
Capitalization theory, in current formulation, inapplicable
to value of money 78-79
CHAPTER V
MARGINAL UTILITY AND THE VALUE OF MONEY
Marginal utility theory usually thinly disguised version of
supply and demand, and hence inapplicable to money 80
View that money is unique in having no utility _per se_ 81-83
Marginal utility and "commodity theory" of money-value 81-82
Quantity theorists and marginal utility of money 81-82
Money an instrumental good, and marginal utility no less
applicable here than elsewhere; marginal utility invalid
as general theory of value, hence invalid when applied to
money 82-120
Wieser's theory of value of money 83-88
A circle in reasoning 88-90
Schumpeter's similar circle 100
But Schumpeter's general utility theory, though inapplicable
to value of money, in form avoids a causal circle 90-98
Schumpeter's _conspectus_; different from Boehm-Bawerk and
most utility theorists 90-92, 113-120
Defects and limitations of Schumpeter's general theory 90-98
Schumpeter's substitutes for social value concept 98-99
Von Mises sees circle of Wieser and Schumpeter 100
Seeks to avoid it by construing utility theory as historical,
instead of static, theory 101
But this departs from fundamentals of utility theory; other
difficulties 101-110
Kinley's doctrine 110-111
General criticism of utility theory 111-115
Davenport, Wicksteed, Fisher, Perry 113-120
_PART II. THE QUANTITY THEORY_
CHAPTER VI
THE QUANTITY THEORY OF PRICES. INTRODUCTION
Preliminary statement of quantity theory, and of critical
theses to be developed in following chapters. Virtually
every contention and every assumption of quantity theory
to be challenged 123-129
CHAPTER VII
DODO-BONES
Quantity theory doctrine that valueless objects can serve as
money; Nicholson's assumption: money made of dodo-bones 130-131
Fisher's view also 130
And Ricardo's 131-132
Will dodo-bones circulate? Dodo-bones and poker chips;
circular reasoning 132
Both medium of exchange and standard of value must be
valuable 133
Is inconvertible paper an exception? 133-134
Doctrine that money gives legal claim to things in general 134
Kemmerer's assumptions; money made of commodity, once
valuable, now used only as money 135
Commodity theory requires present commodity value 135
Historical _vs._ cross-section view: possibility that such
money would circulate 135-136
Value not tied up with marginal utility or commodities:
social value theory; derived values often become
independent of original presuppositions, in economic
as well as legal and moral spheres 136-139
But this no basis for quantity theory: social psychology,
not mechanics 139
"Banker's psychology" _vs._ psychology of blind habit:
India, Austria, United States; monetary phenomena of war
times; "credit theory" of Greenbacks 139-142
Question-begging definitions 142-143
Assumptions of quantity theory: blind habit and fluid prices 143-144
Extreme commodity theory denies that money-use adds to value
of money; usually not true; analysis of money-functions 144-150
Hypothetical case in which whole value of money comes from
commodity value 150-152
Money must have value apart from monetary employments, but,
in general, gains additional value from employment as
money 152-153
CHAPTER VIII
THE "EQUATION OF EXCHANGE"
Fisher leading, most consistent, most uncompromising
quantity theorist: wide acceptance of his views 154
Taussig _vs._ Fisher 155
Fisher and dodo-bone doctrine: logical part of quantity
theory; Fisher's value concept 155-156
"Equation of exchange": analysis of Fisher's version,
typical of all 156-171
In what sense equality between two sides of equation?
Meaning of "T" 158-161
No "goods side" to equation; both sides sums of money;
equal because identical; equation meaningless 161-162
All factors in equation highly abstract 162-163
"P" and "T" cannot both be given independent definitions:
P defined as _weighted_ average, with T in denominator;
and must be changed from year to year, as elements in T
change, even though no prices change 164-166
This makes circular theory: _problem_ defined in terms of
_explanation_ 165-166
Causal theory associated with equation of exchange 166
Equation amplified to include credit; not acceptable to
Nicholson or Walker, and caricature of conditions in
Germany and France 166-170
Book-credit, bills of exchange, etc., excluded 167-170
Why a one-year period? 170-171
CHAPTER IX
THE VOLUME OF MONEY AND THE VOLUME OF CREDIT
Mill thought credit acts on prices like money, and that
this reduces quantity theory tendency to indeterminate
degree; Fisher holds volume of money _in circulation_
governs volume of credit, so that quantity theory stands 172
Fisher's arguments for fixed ratio, _money_ to
bank-deposits 172-173
Argument a _non-sequitur_, even if contentions true 173-177
Contentions untrue: no fixed ratio between _reserves_ and
deposits, or reserves and demand liabilities, either in
America or Europe 177-182
Taussig's views; virtually surrender of quantity theory in
modern conditions 182-185
Bulk of quantity theorists in between Fisher and Taussig,
but nearer to Fisher's view than to Taussig's 185
CHAPTER X
"NORMAL" VS. "TRANSITIONAL" TENDENCIES
Quantity theory qualified by distinction between "normal" and
"transitional" effects of change in quantity of money, etc. 186
Meaning of distinction, and extent of qualification hard
to determine: is "normal period" real period in time?
How long is "transitional period"? Is it realistic, or
hypothetical? Is equation of exchange realistic?
Concrete _vs._ hypothetical price-levels 186-189
Legitimate and illegitimate abstraction 189-190
Causation and temporal order 190-191
Fisher admits very slight qualification of "normal theory" 192
Mill's quantity theory "short run" theory; Taussig's "long
run" theory; radically different logic in the two 192-193
Fisher's theory sometimes "long run" and sometimes "short
run" 194-195
CHAPTER XI
BARTER
Quantity theory spoiled if resort to barter possible and
important 196
Extent of barter and other flexible substitutes for money and
bank-credit; simple barter; different methods of corporate
consolidations; flexibility, with state of money-market;
clearing-house arrangements in speculative exchanges;
offsetting book-credits 197-200
Barter made easier under money economy, by measure of
value function of money 201
Bills of exchange; foreign trade 201
CHAPTER XII
VELOCITY OF CIRCULATION
Velocity conceived by quantity theory as causal entity,
independent of quantity of money and prices; necessary
assumption for law of proportionality 203
"Coin-transfer" _vs._ "person-turnover" concepts 203-204
Velocity really non-essential by-product, meaningless
average 204-205
Doctrine that velocity independent of money; habit and
convenience; hoarding; hoarding by banks 205-209
Velocity and volume of trade; vary together 209-214
Value of money causally governs velocity 214-215
CHAPTER XIII.
THE VOLUME OF MONEY AND THE VOLUME OF TRADE--TRADE AND SPECULATION
Quantity theory doctrine that volume of trade, and volume
of money (and credit), are independent; trade governed
by physical and technical conditions, not money 216-219
View that quantity of money vitally affects production and
trade 219
Walker, Sombart, Withers, Price, Holt 219-222
Increase of money increases trade, even on static theory:
increase of money increase of capital; lowered margin
in exchanges; money-rates and interest; money tool of
exchange; elasticity of demand for money-service; in
Arizona and New York City 222-225
_Trade_ distinguished from _production_ and from _stock_ 225-226
Trade chiefly speculation; Fisher's $387,000,000,000 of
trade in U. S. in 1909 analyzed; index of variation in
trade; figure based on Kinley's returns from 12,000
banks; double-counting 227-230
Figure largely represents speculation; statistics of total
wealth of U. S.; small role of wholesale and retail
deposits; "all other deposits" bunched in speculative
centers, especially New York; trifling "deposits" in
country banks; evidence of bank-clearings: clearings
and stock speculation; clearings and ordinary business 230-241
Measurement of "ordinary trade" 241-248
Volume of stock speculation 248-251
Commodity speculation 251-252
Unorganized speculation 252-254
Bill and note speculation 255
Fisher's and Kemmerer's indicia of trade variation wholly
misleading 255-257
Production waits on trade; selling costs _vs._ "cost of
production"; "good will"; are banks useless? 257-262
"Normal _vs._ transitional": statics _vs._ dynamics; money
and credit make static assumptions possible; very little
trade in "normal equilibrium" or static state; volume
of trade depends on transitions and dynamic changes;
functional theory of money and credit must be dynamic
theory; abstraction from money by static theory; no
static theory of money and credit possible; quantity
theory misses whole point of money-functions 262-266
APPENDIX TO CHAPTER XIII
THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES
Ambiguity of "domestic trade": figures comparable with
export and import figures cannot include turnovers; net
income of United States, minus imports on retail basis,
counted as domestic trade; exports on retail basis
counted as foreign trade; net income for 1910; index of
variation for other years; cautions and qualifications;
ratio of foreign to domestic trade, 1890-1916 267-278
CHAPTER XIV
THE VOLUME OF TRADE AND THE VOLUME OF MONEY AND CREDIT
Interdependence of trade, and money (and credit);
increasing trade causes increase of money and credit 279-281
Quantity theory doctrine: Fisher _vs._ Laughlin 281-282
Quantity theory has no explanation of elastic bank credit:
"Currency Theory" of deposits 282-285
Loans and deposits 285-288
Bills of exchange 288-290
Summary of quantity theory doctrine 290-291
CHAPTER XV
THE QUANTITY THEORY: THE "PASSIVENESS OF PRICES"
Heart of quantity theory: price-level cannot change without
prior change in money, deposits, trade, or velocities:
independently rising price-level, unable to alter trade
or velocities, would drive money away, and so be unable to
sustain itself; individual prices can rise independently,
but other prices must fall to compensate 292-295
Criticism: argument impressive only because it assumes an
_uncaused_ rise in general price-level; when causes
assigned, prices can independently rise, compelling
modification in other factors in "equation of exchange";
"transitional" and "normal" effects: instances 295-299
Quantity theory conflicts with supply and demand: supply
and demand holds good: particular prices and price-level 299-300
Generalization of conflict to include cost of production,
capitalization theory, imputation theory 300
Capitalization theory _vs._ quantity theory; different
psychological assumptions of the two theories 300-306
Cost of production _vs._ quantity theory; money-_income_
_vs._ quantity of money 306-308
Quantity theory false, granting all its assumptions 308-310
Doctrine that price-level independent of particular prices,
and presupposed by them, false; absolute value of money,
not price-level, presupposed; price-level may change
with value of money constant, through changes in absolute
values of goods 310-314
CHAPTER XVI
THE QUANTITY THEORY AND INTERNATIONAL GOLD MOVEMENTS
Quantity theory holds that gold movements depend on
price-_levels_; but price-level mere average, cause
of nothing 315-316
Some prices, rising, tend to repel gold, but most prices
have no such effect 316-317
Some prices, rising, bring in gold 317-319
Gold movements and money-rates 319-320
CHAPTER XVII
THE QUANTITY THEORY _vs._ GRESHAM'S LAW 321-323
CHAPTER XVIII
THE QUANTITY THEORY AND "WORLD PRICES"
Types of quantity theory: world's volume of _gold vs._
quantity of _money_ in given country; standard _vs._
token money; abandonment of dodo-bone theory and
"equation of exchange" 324-326
Credit does not rest on money: measure of values _vs._
reserves; loans and wealth; value of money _vs._
price-level 326-328
Loose relation of reserves and credit in world as whole;
no proportionality of quantity of gold to value of gold;
no quantity theory needed to assert that value of gold
related to its quantity 328-330
CHAPTER XIX
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
When the cost theory was a labor theory, as with Ricardo, the
expression, cost of production of money, could have a definite meaning.
It meant the labor-cost of producing the money metal. Even in this form,
it is recognized that cost of production has a looser connection with
value in the case of money than in the case of most commodities, because
the supply of money metal is large and durable, and the annual
production affects it slowly. But cost of production theories, in the
form of labor theories, or labor-abstinence-risk theories, have little
standing in modern economic theory. Ricardo himself saw the break-down
of the pure labor theory; and Cairnes, Ultimus Romanorum, so limited and
modified the "real costs" doctrine as to leave little validity in it,
even on his own showing. The prevalent doctrine of cost of production
runs in terms of "money-costs"--and hence is of no use when the problem
of the value of money itself is to be solved.
A brief historical sketch of the cost theory will be helpful. Costs are
sometimes conceived as a cause of value, and sometimes as a measure of
value. Often these two aspects are mixed, and writers shift from one
notion to the other. This is particularly true of the labor theory. In
Adam Smith the contention sometimes is that labor is unvarying in value,
hence an admirable measure of values, and an excellent standard of
long-time deferred payments. Smith compares wheat and silver from the
standpoint of the constancy of their relation to labor, and concludes
that wheat is the better standard in the long run, because it remains
more nearly fixed with reference to labor than does silver. Sometimes
Smith thinks of labor as a cause of value, and thinks of the labor that
enters into the production of a good as the significant thing. At other
times, the labor that goods will command or purchase is the significant
thing--and here one is not clear whether he thinks of labor as a cause
or as a measure. Whether labor is to be funded as labor-pain, or as
labor-time, Smith does not state. Sometimes labor seems to be considered
as homogeneous in its efficiency. At other times, he makes comparison
between different kinds of labor as to their efficiency, and compares
the efficiency of labor in different occupations. One can find nearly
anything one pleases in Adam Smith on these points. At times he speaks
of "labor and expense," rather than labor alone, as governing prices.
Labor-cost to the laborer would take the form of labor-pain or
labor-time. To the employer, it would take the form of outlay in wages.
Adam Smith never makes any definite statement of point of view here, and
shifts back and forth from one to the other. He recognizes variations in
labor-pain, in danger, etc., in different kinds of labor when discussing
wages.
Ricardo elaborated the labor theory of value, and tried to think it
through. He was too keen a logician to shift view-points with Smith's
facility, and he tried to make a completed system.[55] There is some
shifting from the theory of labor as a cause of value to labor as a
measure of value, as in the following passage: "If the state charges a
seigniorage for coinage, the coined piece of money will generally exceed
the value of the uncoined piece of metal by the whole seigniorage
charged, because it will require a greater quantity of labour, or,
which is the same thing, the value of the produce of a greater quantity
of labour, to procure it." (_Works_, McCulloch ed., 213.) In general,
however, Ricardo developed a causal theory of value, quantity of labor
being the basis of the absolute values of goods, their _relative_ values
depending on the relative amounts of labor involved in the production of
each. I shall not go into the matter fully, but shall call attention to
the rock on which the system split, as Ricardo himself admits. A greater
or less proportion of capital works with labor in producing different
things, and the value of product, in that case, varies not merely with
the labor, but also with the amount of capital, and the length of time
the capital is employed. How say, then, that labor alone governs value?
How reduce labor-cost and capital-cost to homogeneous terms? James Mill
tried to do it for him by making capital merely stored up or petrified
labor, which gives up its value again in production. But this doesn't
meet the difficulty, because there is a _surplus_ value, over and above
that explained by all the labor, including the labor which produced the
machine, and the labor which produced the raw materials which entered
into the machine, etc. The case of wine is a particularly obstinate
case. Wine increases in value merely with the passage of time, at a rate
which corresponds to the profit on capital. Ricardo finally, in
correspondence with McCulloch, definitely abandons the case, stating
that there are many exceptions to the proportionality between exchange
value and labor-cost. "I sometimes think that if I were to write the
chapter on value again which is in my book, I should acknowledge that
the relative value of commodities was regulated by two causes instead of
one, namely, by the relative quantity of labor necessary to produce the
commodities in question, and by the rate of profit for the time that the
capital remained dormant." (Davenport, _Value and Distribution_, p.
41.) But this is a "dualistic" rather than a "monistic" explanation--one
element is a money-expense, or at all events a pecuniary item, while the
other is a "real cost" item. The two are incommensurate and
incommensurable.
Senior seeks to supply the unifying principle. "Abstinence" and labor
have pain as a common element, and so are commensurable. Costs, reduced
to labor and abstinence, become homogeneous again. Monism is restored.
Cairnes completes the doctrine by adding risk to the real cost elements:
a triune cost concept, sacrifice being the generic fact in the three
manifestations.
With John Stuart Mill, in general, we have an entrepreneur view-point.
Money-expenses of production, entrepreneur outlay, plus wages of
management, or including wages of management, are the factors with which
Mill reckons. He is no longer concerned with psychological ultimates, or
real costs. Cairnes criticised Mill sharply for this. No distinction is
more fundamental he holds, than that between costs or sacrifice on the
one hand, and rewards on the other. Labor, abstinence and risk are
sacrifices; wages, interest, profits are rewards. None the less, in cost
doctrine, as in supply and demand doctrine, it is Mill's view which has
prevailed. Cost as conceived by Mill is a superficial, pecuniary notion.
It tells little as to ultimate causation. But it is virtually only as a
pecuniary doctrine, costs from the entrepreneur view-point, that the
cost doctrine is met in modern theory.
Why is this? Well, first, the real-cost doctrine simply does not square
with the facts. The hardest labor does not produce the most valuable
goods. Value in fact does not vary either with labor-pain or labor-time.
In fact, whatever the explanation, it would seem to be truer that the
relation is an inverse relation. Nor does the abstinence that pinches
hardest produce the largest amount of capital. And while there is some
correlation between risks and profits, the correlation is at best low
and is not a correlation between psychological sacrifice and profits.
Even "marginal abstinence" for a Rothschild or a Rockefeller causes no
pain. It is absurd to seek to find a common element in the "abstinence"
of a rich man and the pain of a poor and aged laborer. I pass over the
supposed difficulty that abstinence is, in general, suffered by one set
of minds, and labor-pain by a different set of minds, and hence, since
men cannot compare their own emotions with the emotions of other men,
there is no comparability. This subjectivistic psychology would, of
course, make it equally impossible to fund labor-pains of different
laborers, or to get any common denominator at all.[56] It is enough to
point out that differences between rich and poor, between successful and
unsuccessful, between efficient and inefficient, (apart from acquired
differences which may be smoothed out by the "stored up
labor-of-training" principle) make labor-pain, and marginal labor-pain,
vary greatly from value, and make labor-pain, abstinence and risk quite
incommensurable, and quite without fixed relation to value. Cairnes saw
this in part, and developed his doctrine of non-competing groups to deal
with it. Labor-pain and value vary together only when we are comparing
goods produced by laborers within a competing group. Laborers in one
group do not compete with laborers in another group. There is perfect
competition in the capital market, however, and so capital costs
("abstinence") are perfectly correlated with value, to the extent that
capital enters. Cairnes seems to think that the whole difficulty with
his real cost doctrine comes from the failure of competition. In fact,
however, it comes also from the inequalities in wealth. And even in his
highly competitive capital market it is equally true that abstinence, or
even marginal abstinence (a term which Cairnes does not use) has no
constant relation to amount of capital accumulated, value produced, or
interest received. The cost theory breaks down at every point when it
runs in labor-abstinence-risk terms. So generally has this been
recognized, that the cost theory has generally given way to the utility
theory, and cost doctrine when it appears in modern economics is either
the very superficial money-outlay notion of Mill, or else the Austrian
cost doctrine, later to be discussed, which is still a pecuniary
concept. I have elsewhere undertaken to show (_Social Value_, chs. 3-7,
and the ch. on "Marginal Utility," _infra_) that these defects of the
"real-cost" theory, are just as much in evidence in the utility theory.
The failure of the real cost theory of value is by no means a
vindication of the utility theory. Both have the same vice--the effort
to combine into a homogeneous sum a lot of individual psychological
magnitudes measured in money, when the money-measure has a different
psychological significance for each individual, and so comparison and
addition are impossible. But in any case, the real cost doctrine of the
Classical School has failed, and so cannot serve as the basis of the
theory of the value of money.
Obviously the money-outlay cost theory of Mill cannot explain the value
of money itself. The marginal cost of producing twenty-three and
twenty-two hundredths grains of gold will always be a dollar, however
the dollar may vary in value. Indeed, in general, the assumption of a
constant value of the money-unit is implied in the monetary cost
concept. Cost curves are _supply_-curves and the reasoning already given
as to the need for assuming constant value for money in the supply and
demand concept will apply here. Costs function in value-determination
only by checking supply. Rising costs tend to mean a lessened supply.
But if the cost-curve is rising _because_ of a fall in the value of
money, then the demand-curve will be rising also, and production will
not be checked. The general law as to the relation of cost to demand and
supply assumes a fixed value of the unit of cost, the dollar.
To the Austrian economists we owe a rational theory of costs which gives
the money-outlay concept more than a merely empirical basis. First, they
see in costs not causes, but results. Value causation comes ultimately,
not from the side of supply, but from the side of demand. I shall not
now undertake a criticism of their explanation of demand. I have
elsewhere criticised their confusion of demand-curves and
utility-curves, and pointed out that marginal utility gives no
explanation of demand. I shall recur to the utility theory of value at a
later point. For the present, it is enough to point out that the
Austrian theory of costs is independent of their utility vagaries, and
rests best on the notion of supply and demand, as expressed in the
modern curves, with the assumption of a fixed value of the money-unit.
Costs consists of entrepreneur money outlay of various kinds, chiefly
wages, interest, and rent. Rent is, for the Austrians, as much a cost as
any other item of entrepreneur outlay. But these items of cost are not
ultimate data. They are rather reflections of the positive values of the
products. Value runs from finished product to agents of production,
labor, and instrumental goods, and land. Avoiding needless complications
from a discussion of interest as a factor in cost--a doctrine on which
the Austrians, say Wieser and Boehm-Bawerk, are not agreed,--it is enough
to point out that high wages or high rents, which limit production in
any given industry or establishment, are high _because_ the land and
labor in question have _alternative_ uses, because other industries, or
other competitors in the same industry, bid for them. Cost-curves,
then, are reflections of demand-curves. The cost-curve of wheat, _e.
g._, is what it is because of the demand-curve for corn, for cattle, and
for every other commodity that could be produced with the same labor and
land. Cost doctrine thus becomes part of the general doctrine of supply
and demand, and runs in pecuniary terms, assuming money, and a fixed
value of money, and hence is incapable of serving as a theory of the
value of money itself.
That some vaguer form of cost doctrine, where the unit of cost is, not
money, but some composite commodity of things used in the production of
the standard money metal, or a unit of abstract value, might be worked
out, is doubtless true. Gold production, like other industry, is part of
the general economic scheme, and there is some sort of equilibrium
reached which draws labor and capital now away from, and now back to,
the gold mine. To bring this equilibrium into the general scheme of the
modern theory of costs, however, in terms precise enough to make a
satisfactory theory of the value of money, is a thing which has not so
far been done, and I do not have high hopes of its early accomplishment.
In any case, such a theory must rest upon a positive theory of value.
Cost doctrine is negative, and can never be fundamental.[57]
CHAPTER IV
THE CAPITALIZATION THEORY AND THE VALUE OF MONEY
Money is capital. A dollar is a capital-good. Money is, moreover, a
durable form of capital, which gives forth its services bit by bit, and
indeed, in a community where the state bears the burden of wear and
tear, never ceases to give forth those services. In any case, from the
standpoint of a given individual, so long as there is a limit of
tolerance prescribed for legal tender, it is a matter of accident if he
ever incurs a loss from the wastage of the capital instrument, money,
through wear and tear. Moreover, the fact that money is "fungible," and
that its use is to be found in a process which commonly returns to the
owner, not the same coin, but a different coin, we may, in general,
abstract from the wear and tear of the dollar, and look upon the dollar
as a capital instrument which promises its owner, if he chooses to use
it as capital, a perpetual annuity. The nature of this money service
will be more fully described later. For the present it is sufficient to
say that exchange is a productive process, that exchange creates values,
in as true a sense as manufacturing does, and that money facilitates
exchange in as true a sense as coal facilitates manufacturing. There is,
at any given time, a demand-curve for this money service, manifesting
itself in the money market, a demand for the short time use of money as
a tool of exchange, and the "prices" which come out of the interaction
of demand and supply in the money market are the short time "money
rates" including the "call rates." These are properly to be conceived,
not as pure interest on abstract capital, but as rents[58] which are to
be attributed to money as a concrete tool.
Now, in general, when such rents appear, they may be capitalized. And
the price of the instrument of production that bears these rents, will
be the sum of the rents, discounted at the prevailing rate of interest,
with considerations of risk, etc., allowed for. The reasoning of the
capitalization theory is really quite simple. Take, for example, a piece
of urban site land, which is expected to bring a perpetual annuity of
one hundred dollars. The whole economic significance of the land is
contained in its services, present and prospective. The possession of
land under certain circumstances brings other services, as social
prestige, than the services which can be alienated to a lessee. But in
this case I am abstracting from considerations of that sort, and also
from the factor of risk. The whole value of the piece of land under
consideration comes from the value of the one hundred dollars a year.
But these annual incomes are not all equally valuable, even though all
expressed as one hundred dollars. The first one hundred dollars is due
one year hence, the tenth ten years hence, the thousandth, a thousand
years hence. The principle of perspective comes in--I abstain from any
detailed discussion of the theory of interest, simply stating that in a
general way I agree with the contention that _time_ constitutes the
essence of the phenomenon, or rather, the tendency to discount the
future. The capital price of the land is the sum of an infinite
convergent series of the "present worths" of the incomes. The formula
is as follows: capital price of land = $100/1.05 + $100/(1.05)^2 +
$100/(1.05)^3 ... + $100/(1.05)^n when the rate of interest is 5%. The
limit of this series, assuming the series to be infinite, is $2000, and
a simple formula for calculating it under the assumptions, is to divide
$100, the annual income, by .05, the rate of interest. Given the annual
income, given the prevailing rate of interest, the capital price is
determined. The relation may be illustrated, roughly, by the figure of a
candle, a disk, and the shadow of the disk on the wall. The disk
represents the annual income, the shadow on the wall the capital value,
and the distance between the flame and the disk the rate of interest.
Increase the distance between the flame and the disk, the rate of
interest, and the shadow becomes smaller; shorten the distance, and the
shadow is increased. Similarly, enlarge the disk, and the shadow is
enlarged. The capital value varies directly with the annual income, and
inversely with the rate of discount. Now my purpose here does not
involve a detailed examination of the validity or limitations of the
capitalization theory. For the present, the only question is, has this
theory any application at all to the problem of the value of money? It
offers itself as a general theory of the values of durable bearers of
income. Money is a durable bearer of income.
The capitalization theory, however, is of no use for the purpose in
hand. Money does not obey the general law in the relation which the
magnitude of the income bears to the rate of interest. In general, the
income and the rate of discount are independent variables. Their
influence, operating in opposite directions, fixes the capital value,
increasing income increasing the capital value, increasing discount rate
reducing it. In the case of money, however, the two factors are not
independent. The short time money rate is not, to be sure, identical
with the long time rate of interest, which is the rate of discount for
the purpose in hand. But the two tend to vary together in the long run
average in fact, and they are related in the _expectation_ of those who
are concerned in the capitalization process.
In our chapter on the "Functions of Money," in Part III, it will be
shown that normally there tends to be a difference between the money
rates and the long time interest rates, the long time rates tending to
be higher than the rates on short loans, the rate on very short loans
being lower than the rate on somewhat longer short time loans, and the
call loan rate being lowest of all. The explanation of this must be
deferred till we have analyzed the functions of money. But the important
thing, for present purposes, is that the money rates, though lower than
the "pure rate" of interest, tend to vary, in long time averages, with
that "pure rate,"[59] and that, consequently, the income from renting
money, and the discount rate to be applied in capitalizing that income,
are not independent magnitudes, but tend to vary together. They thus
tend to neutralize one another. If money rates go up, and if they are
expected to stay up long enough to justify (on the ordinary
capitalization theory) a rise in the capital value of money, we have a
counteracting influence in the long time interest rate, which also
rises, and tends to pull down the capital value of money. To recur to
our illustration of the candle and the disk, as the disk increases in
diameter, the distance between the candle and the disk grows greater,
and so the _shadow_ tends to remain the same.
There is a further difficulty, to which attention will be called more
fully in later chapters, particularly the chapter on "Dodo Bones," and
the chapter on the "Functions of Money." In other cases, in general, the
capital value is, as the capitalization theory requires it to be, a true
shadow, a passive function of the income and the discount, of the disk
and the distance between the candle and the disk. In the case of money,
however, the income is causally dependent, in part, upon the capital
value. Money can function as money only by virtue of having value. The
shadow becomes substance in the case of money. It is the _value of
money_ which makes possible the _money work_. The capitalization theory,
thus, if applicable at all, must be radically modified before being
applied. We shall subsequently, in the chapters above referred to, take
account of this fundamental complication. For the present, we can state
it merely as a problem: how can we construe the interaction of the
income value of money and the capital value of money in such a way as to
avoid a circular theory?
But further, the capitalization theory, as heretofore formulated, like
the doctrines of supply and demand and cost of production, assumes
_money_, and a _fixed absolute value_ of money. This assumption must be
made if we are to be able to predict, on the basis of the capitalization
theory, that a given annual income, at a given rate of discount, will
give a specified capital value. This may be shown by the following
considerations: If men anticipate that the value of the income, which is
a fixed sum of dollars, is to grow less in the future, then the present
worth of the bearer of that income will shrink to an extent greater than
the "pure rate" of interest would call for. The principle of
"appreciation and interest" comes in. The nominal interest, in times of
falling value of money, tends to exceed the pure rate by an amount which
compensates for the loss in value of future income as the dollar falls
in value. We have here, however, a principle different from the
principle of time discount. It is not the influence of time, which makes
a _given_ value appear smaller as it is further removed in time, but it
is an anticipated lessening in the value of the income itself, that
counts. In terms of our candle and disk illustration, it is a factor
affecting the size of the disk, rather than a factor affecting the
distance between the disk and the candle. For the purposes of
calculation, the two elements in the nominal rate of interest may be
lumped together, and the nominal rate, rather than the pure rate, may be
taken as the rate of discount for capitalization purposes. But for
theoretical purposes, the two must be kept distinct. The capitalization
theory rests on the assumption of a fixed value of the money unit.
That the fixed value of the money unit assumed is an absolute value, and
not a mere "reciprocal of the price level," may be proved by some
further considerations regarding relations among these same factors.
Assume a fall in the rate of interest. Then, on the capitalization
theory, prices of lands, stocks and bonds, houses, horses, and all items
of wealth which give forth their services through an appreciable period
of time, will rise, and with them the average of prices, or the general
price level, will rise.[60] If one hold the _relative_ conception of
value, according to which the value of money necessarily falls when
prices rise, because the two are merely obverse phases of the same
thing, then this rise in the price level is, _ipso facto_, a fall in the
value of money. But we have seen that a fall in the value of money
means, on the "principle of appreciation and interest," a rise in the
interest rate! Hence, we would have proved that a fall in the interest
rate causes a rise in the interest rate--which is absurd. If, however,
we recognize that prices can rise without a fall in the value of money,
if, _i. e._, we use the absolute conception of value, this difficulty
disappears. The capitalization theory and the theory of appreciation and
interest can be reconciled only on the basis of the absolute conception
of value.
The capitalization theory, then, in its present formulation, assumes
money, and a fixed absolute value of money. It is, therefore,
inapplicable to the problem of the value of money itself.
In general, none of the polished tools of the economic
analysis,--neither cost of production, the capitalization theory,[61]
nor the law of supply and demand,--is applicable to the problem of the
value of money. The reason is that they get their edge from money
itself. The razor does not easily cut the hone. It is to this fact, I
think, that we owe the widespread and long continued vogue of a theory
so crude and mechanical as the quantity theory. In the next chapter we
shall show that the utility theory of value--which we shall not
recognize as a polished tool!--has also failed to give us help in
explaining the value of money.
CHAPTER V
MARGINAL UTILITY AND THE VALUE OF MONEY
A good many writers have attempted to apply the marginal utility theory
to the value of money. Among these, I may particularly mention Friedrich
Wieser, Ludwig von Mises, Joseph Schumpeter, and, in America, David
Kinley, and H. J. Davenport.
The marginal utility theory is ordinarily merely a thinly disguised
version of supply and demand doctrine. As usually presented in the
text-books, we have an analysis of the phenomenon of diminishing utility
of a given commodity to a given individual, illustrated by a diagram, in
which the ordinates represent diminishing psychological intensities.
Often a money measure is given to these diminishing intensities, and the
curve is presented as the demand schedule of a given individual. Then,
with little further analysis, a leap is made to the market, and it is
assumed that the market demand-curve, of many individuals, differing in
wealth and character, is a utility-curve, and value in the market is
"explained" by means of marginal utility. I need not here repeat my
criticisms of this procedure.[62] It gives simply a confused statement
of the doctrine of supply and demand. The analysis of utility which
precedes the discussion of market demand is wholly irrelevant, and
merely mixes things up. That such a conception is of no use in solving
the problem of the value of money has been sufficiently indicated in the
chapter on supply and demand.
Sometimes the contention is made that money is unique among goods in
having "no power to satisfy human wants except a power _to purchase_
things which do have such power."[63] This contention, in Professor
Fisher's view, precludes the application of the marginal utility theory
to the problem of the value of money, and he makes no use of marginal
utility in his explanation. Indeed, in the passage from which this
quotation is taken, Professor Fisher says that the quantity theory of
money rests on just this peculiarity of money. Not all writers who
contend that money has no utility _per se_, however, have felt it
necessary to give up the marginal utility theory as a theory of money,
as we shall later see.
On the other hand, writers of the "commodity school" (or "metallist
school"), writers who see the source of the value of money in the metal
of which it is made, can apply the utility theory readily to the value
of money, making the value of money depend on the marginal utility of
gold, or the standard metal, whatever it is. To the writers of this
school, it is incredible that anything which has no utility should
become money. Money must be either valuable itself, or else a
representative of some valuable thing. The value of money comes from the
value of the standard of value, and that value may, so far as the logic
of the situation is concerned, be as well explained by marginal utility
as the value of anything else. Typical of this view is Professor W. A.
Scott's discussion in his _Money and Banking_[64], though the emphasis
there is not on marginal utility as the explanation of the value of the
standard, but on the value (conceived of as an absolute quantity) of the
standard as essential to the existence of money, and the performance of
the money functions. Professor Scott attacks vigorously and effectively
Nicholson's exposition of the quantity theory,[65] where the assumption
is made that money consists of dodo-bones (the most useless thing
Nicholson could think of). Most quantity theorists would share
Nicholson's view that dodo-bones would serve as well as anything else
for money--or, to put the thing less fantastically, that the substance
of which money is made is irrelevant, that the only question is as to
the quantity, rather than the quality, of the money-units, and the
quantity of the money-units, not in pounds or bushels or yards, but in
abstract number merely. For writers who seek the whole explanation of
the value of money in its monetary application, and who see that money,
_qua_ money, cannot administer directly to human wants, the view that
Professor Fisher expresses, namely, that money has no utility, and is
unique among goods in this respect, seems on the surface, to have
justification. On the surface merely, however. Money is not unique among
goods in being wanted only for what it can be traded for. Wheat and corn
and stocks and bonds and everything else that is speculated in is
wanted, by the speculators, only as a means of getting a
profit[66]--they are remoter from the wants of the man who purchases
them than the money profit he anticipates. Ginsing, in America, has
value, though consumed only in China. And there are people, particularly
jewelers, who often want money as a raw material for consumption goods.
The difference is at most a difference of degree--and of slight degree
indeed in the case of such things as bonds, which count on the "goods"
side of the quantity theory price equation, but which really are in all
cases remoter than money itself from human wants. Money really stands,
for the purpose in hand, on the same level as any other instrumental
good.[67] It does not give forth services directly, as a rule. Neither
does a machine, or an acre of wheat land, or goods in a wholesaler's
warehouse. Exchange is a productive process, an essential part of the
present process of production. Money is a tool which enormously
facilitates this process. It has its peculiarities, no doubt. One of
them is--and money is not unique in this as will later appear--that it
must have _value_ from non-monetary sources[68] before it can perform
its own special functions, from some of which it draws an increased
value. But there seems to me to be nothing in the contention quoted from
Professor Fisher, to justify setting money sharply off from all other
things, or to justify the view that marginal utility is inapplicable to
the value of money, if it be applicable to the value of anything at all
that is not destined for immediate consumption. I do not believe that
the marginal utility theory is valid for any class of goods, not even
those for immediate consumption. Where marginal utility theory is,--as
in the conventional text-book expositions--merely another name for
supply and demand theory, it is, as already shown, not applicable to the
value of money, and it is useful in the surface explanation of
market-prices of goods. But where marginal utility theory really seeks
to get at value fundamentals, it is precisely as valid for money as for
goods of other sorts--invalid, in my judgment, in both places, and for
the same reasons in both.
Among the writers who would apply the utility theory to money, while
still insisting that money, as such, has no utility, are Wieser,
Schumpeter--who accepts Wieser's theory in its main outlines--and von
Mises, who develops a notion very different from that of the other two.
Wieser's doctrines are set forth in two expositions, separated by five
years, the second representing a considerable development in his
thought, though resting in part on the first. The first is an address
upon the occasion of his accession to the professorship at the
University of Vienna, in 1904, and is published in the _Zeitschrift fuer
Volkswirtschaft, Sozialpolitik und Verwaltung_, vol. 13 entitled, "Der
Geldwert und seine geschichtlichen Veraenderungen." The second is a
discussion, partly written and partly spoken, "Der Geldwert und seine
Veraenderungen" (written), and "Ueber die Messung der Veraenderungen des
Geldwertes" (spoken), in _Schriften des Vereins fuer Sozialpolitik,
Referate zur Tagung_, no. 132, 1909. For the purpose in hand, a brief
statement of one or two points would suffice to show the futility of
Wieser's effort to get an explanation of the value of money _via_
marginal utility, but I think that readers may be interested in a fuller
account of Wieser's doctrine, just because it is Wieser's, and so shall
undertake to give a more systematic account of it. For brevity, in the
exposition which follows, I shall refer to the first article as "I," and
to the second as "II."[69]
Wieser holds that it is possible to have money wholly apart from a
commodity basis (I, p. 45), citing the Austrian _Staatsnoten_ as a case
in point. The reason for giving them up is that they do not circulate in
foreign trade. Gold fulfills its international money-functions the more
easily because of its various employments, but, after it is thoroughly
historically introduced, as money, it could fulfill its money functions
even if all these employments be thought away (46). Wieser gives no
argument for this contention, and its validity will be examined
later.[70] There are, he says, two sources for the value of gold, the
money use and the arts use, interacting. Money is further removed from
wants, not only than consumption goods, but also than production goods,
which are but consumption goods in the seed. The latter are technically
destined for definite goods. But money may be used to procure whatever
good you please, in exchange. (The absoluteness of this distinction,
also, may be questioned. Pig iron is almost as unspecialized as money in
its relation to wants, since tools enter into the production of almost
every service that human wants require, from surgical operations,
through instrumental music, to wheat and horse-shoes. On the other hand,
money is not the only thing by means of which other things are
purchased. The extent of barter in modern life will wait for later
discussion.[71] I do not think that _any_ sharp distinction between
money and all other things is valid.) Wieser complains of the older
economics which treats money as a commodity. And he contends that as
money and commodities show a contrast in their essence (_Wesen_), they
should also manifest a contrast in the laws of their values, even though
the fundamental general theory of value applies to both (I, 47). He
finds in representatives of money (_Geldsurrogate_) and in velocity of
circulation of money, factors which are lacking in commodities. (Again a
question must be interjected by the writer. Are not corporation
securities essentially like _Geldsurrogate_ from this angle? And do not
goods vary greatly in the number of times they are exchanged? What of
the speculative markets, where more sales are made in an active market,
at times, than there are commodities or securities of the type dealt in
in existence?) The value of money is essentially bound up with the
money-service. Wieser indicates that he is not talking about the
subjective value of money, but its objective value, using the popular
meaning of the term, which, he says, is not strictly logical, but is
useful: the relation of money to all other goods which are exchanged,
the purchasing power of money. This depends on goods as well as on
money. In the second article, Wieser refines and elaborates his
conception of the objective value of money, seeking to get away from the
notion of relativity which is involved in the conception of purchasing
power, and to get an absolute conception, which shall be a causal factor
in the determination of general prices, rather than a mere reflection of
them. It is to be a coefficient with the objective values of goods in
determining prices. A change in general prices may be caused by a change
in the value of money, and may be caused by a change in the values of
goods (II, p. 511). In explaining this objective value concept (which,
in its formal and logical aspects, is in many ways similar to the
absolute social value concept maintained by the present writer, though,
in the present writer's judgment, inadequately accounted for by Wieser,
so far as a psychological causal theory is concerned) Wieser objects to
the term, "objective value" which he had used in the earlier article. He
prefers "volkswirtschaftlicher Wert." (This term is perhaps best
rendered "public economic value," for present purposes, to distinguish
it, on the one hand, from individual or personal value, and, on the
other, from the social economic value concept of the present writer. At
the same time, the connotation of a communistic or authoritive value
must not be read into the term. It is, in its formal and logical
aspects, really the most common of all the value notions, and may, best
of all perhaps, be translated simply "value," or "economic value," or
"absolute value." But for the present discussion, we shall call it
"public economic value.") This public economic value, in the case of
goods, is not a mere objective relation between a good and its
price-equivalent. It is a subjective (psychological) value, like
personal value. If one wishes to call it objective value, one is using
objective in the sense of the general subjective as distinguished from
the personal individual idiosyncracy (II, p. 502). The objective
exchange value of goods (here Wieser uses "objektiver Tauschwert" as the
equivalent of his "volkswirtschaftlicher Wert" above mentioned) is the
common subjective part of the individual valuations leaving out the
remainder of individual peculiarities ("der allgemein subjective Teil
der persoenlichen Wertschaetzungen mit Verschweigung des individual
eigenartig empfundenen Restes").[72] Wieser does not seem to me to think
out clearly the distinction between absolute and relative value in this
connection. He wishes to get something more fundamental than a mere
relation between goods and money; he wishes a psychological phenomenon.
He wishes to have a value of goods which can be set over against the
value of money, the two, in combination, determining prices. And yet, he
wishes somehow to get these out of the prices themselves. "We must seek
a concept of the public economic value of money which, to be sure,
proceeds from the general price-level (_Preisstand_), but which excludes
from its content everything that comes purely from the value of goods"
(II, 511). To the public economic value of money, however, Wieser gives
no independent definition. The definition runs in terms of the values of
the goods. "The value of money rises when the same inner values (_innere
Werte_) of commodities are expressed in lower prices; it falls, when
they are expressed in higher prices" (II, 511-12). "Inner value" of
goods is not defined, but I take it that Wieser uses it as meaning
essentially the same thing as the public economic value already
described--an absolute value. (_Cf._ the usage of Menger and von Mises,
_infra_, in this chapter, with respect to the terms, "inner" and "outer"
value.) The definition is not strictly circular, perhaps, but at least
it is pretty empty. Nothing appears to give the value of money, as
distinct from its purchasing power, an independent standing. The reason
for this will later appear. It should be noted, however, that the
definition is not in terms of prices or purchasing power. Prices might
remain unchanged, in Wieser's scheme, and yet the value of money sink,
if the inner values of goods should sink.
The value of money, thus defined, is to be explained by marginal
utility. But money has no marginal utility of its own, it has no
subjective use-value, but only a subjective exchange value,--derived
from the use-value (marginal utility) of the commodity purchased with
the marginal dollar (II, 507-8). This subjective-exchange value of money
is the personal value of money, as distinguished from its public
economic value, and is the cause of the public economic value. The
personal value of money changes (1) with the volume of one's personal
income, (2) with the intensity of one's need for money, and (3) with
market prices. The personal value of money is directly influenced and
measured only in exchanges for consumption goods. Expenditures of other
kinds affect it only indirectly by leaving less for consumption
expenditures. The laborer always reckons with the personal value of
money, but not the business man, in his business calculations. As in the
case of goods, we pass from personal to public economic value (II, 509).
The personal value of money depends on the relation between an
individual's money income, and his real income, in terms of goods. The
public economic value of money depends on the money income of the
community as a whole, and its real income. (II, 516-18). Money income
grows faster than real income, through the extension of the money
economy. Money income is not, like real income, dependent on quantity.
The mere extension of the money economy increases the volume of money
income, lowers the personal value of money, lowers its public economic
value, and raises prices. Witness the effect on a rural community of
bringing it into the great market, where all costs are reckoned in money
and rising costs compel rising prices. Hence, there is a tendency for
the public economic value of money to sink, and this has been the
historical fact (I, II, 519-520.)
Criticism of this theory is almost superfluous. There are elements in
Wieser's discussion, not here presented, which have very considerable
importance, and which will be presented in a later chapter when the
criticism of the quantity theory is taken up. Wieser deals some heavy
blows to the quantity theory. But his constructive doctrine presents the
clearest possible case of the Austrian circle. The value of money
depends, not on its subjective use-value, its own marginal utility--it
has none. The value of money depends on its subjective value in
exchange, the marginal utility of the goods which are exchanged for it.
But these depend on prices. And prices depend, in part, on the value of
money itself! This circle, present in every form of the Austrian theory
which seeks a causal explanation of value and prices by means of
marginal utility,[73] though often less obviously present, is here quite
glaring. The distinction between volume of money income and quantity of
money is, on the other hand, an important one, and will be emphasized
when the quantity theory is taken up.[74] One further point in Wieser's
doctrine calls for comment. It is strange indeed to find an Austrian
seeing in a rise in money costs a _cause_ of a general rise in prices.
The Austrian doctrine is rather that rising money costs are
_reflections_ of rising general prices. Wieser's doctrine that the
extension of the money economy to rural regions, compelling the farmer
to reckon all his costs in money and so to raise his prices, has been
adequately criticised by von Mises, who points out that Wieser sees only
half the phenomenon; that eggs and butter are, indeed, higher in price
in the rural region when it comes into contact with the city, but that
they are correspondingly lower in the city from the same cause. On the
other hand, the doctrine of costs is not the whole point in Wieser's
notion of the extension of the money economy as a cause of higher
prices, and we shall deal with the doctrine again, in a different
connection.
By devitalizing the marginal utility theory, by stating it in such a way
that it makes no causal assertions, and in such a way that it leaves the
real value problem untouched, it is possible to free it from the circle
just pointed out. Schumpeter does so state it.
Schumpeter's theory of value,[75] though he attributes it to
Boehm-Bawerk, seems to the present writer to be essentially different.
Boehm-Bawerk undertakes to explain the value (objective value in
exchange) of each good by its _own_ marginal utility to different
individuals, buyers and sellers of the good--indeed, by its marginal
utility to _four_ individuals, the two "marginal pairs."[76] He sees at
points that the prices of other goods are sometimes factors, making
marginal utility give way to "subjective value in exchange," as the
determinant of an individual's behavior toward a given good in the
market--as in his much discussed overcoat illustration.[77] But
Boehm-Bawerk never gets out of the circle which this reaction of the
market-prices on the individual subjective values involves. Schumpeter
seems to rise to a higher conspectus picture, which, in form, avoids the
circle. His picture is that of a vast equilibrium, in which, instead of
attributing the market value of each good to its own marginal utility,
you explain the exchange ratios[78] of every good to every other good,
all at once, by reference to a total situation: _given_ the number of
goods of each class, given the number of individuals in the market,
given the _distribution_ of each class of goods among the individuals,
given the utility-_curves_ (not marginal utilities) of each good to each
individual, an equilibrium will be reached, through trading, in which
ratios between marginal utilities of each kind of good to each
individual are inversely proportional to the abstract ratios (ratios of
exchange) between the same goods, each measured in its own unit. The
ratios are abstract ratios, between pure numbers, so far as the market
ratios are concerned; the ratios in the mind of each individual are
concrete ratios, between marginal utilities. The scheme, thus stated,
says nothing as to the _causal_ relation between marginal utility and
market ratios; it merely states certain _mathematical_ relations between
each individual system of marginal utilities on the one hand, and the
abstract market ratios on the other. By avoiding _assertions_ as to
causation, it avoids a causal circle. In such a situation, marginal
utilities and market ratios are, in reality, alike resultants,
_effects_, of the given quantities of goods, distribution of goods,
numbers of buyers and sellers, and individual utility-_curves_--not
_marginal_ utilities. To this picture, one may add--what Schumpeter does
not add--the curves showing time-preferences of each individual for each
sort of good, and (an element which Schumpeter does include) the curves
of _dis_-utility for the individuals who produce each kind of good. The
system, it may be noted, is as good a proof of _real cost_ doctrine as
it is of utility doctrine.
Such a picture, I submit, avoids the circle which is presented in all
other formulations of the Austrian theory of value. I wish, however, to
indicate its limitations as a theory of value, and the impossibility of
any application of it to the problem of the value of money. (1) Its data
are inaccessible: nobody could possibly know all the utility-curves and
all the time-preference curves (and disutility of labor-curves, etc.) of
all goods to all individuals in, say, the United States. To explain
market ratios by utility-curves is a case of _ignotum per ignotius_, so
far as practical application is concerned. Moreover, the scheme is so
difficult to visualize that it is useless as a tool of thought--as one
will find who tries to think it through, without the aid of higher
mathematics, for ten goods, and ten persons, with unequal distribution
of wealth, and different utility curves, time-preference curves, and
disutility-curves for each kind of good to each individual. (2) The
scheme must assume smooth curves and infinitesimal increments in
consumption, which is a fiction so far as the individual psychology is
concerned. Without this assumption, the point-for-point correspondence
between individual and market ratios does not exist. It is only in
social-value curves, or in demand-curves in the big market (which are
social-value curves, expressed in money),[79] that you have, as a matter
of fact, the right to smooth out your curves. (3) The theory must assume
the frictionless static state, in which marginal adjustments are
perfectly accomplished, and equilibrium really reached. Without this
assumption, again the point-for-point inverse correspondence of market
ratios and individual ratios fails. But this makes it quite impossible
to apply the doctrine to any functional theory of the value of money, or
to bring money in any realistic way into the scheme. As will be shown
more fully in later chapters, money functions in bringing about just
the absence of friction which static theory assumes. That is what money
is _for_. The functional theory of money, therefore, cannot abstract
from friction and dynamic change.[80] It is, of course, possible, on
this scheme to pick out any one of the goods in the system, say the
1-1000th part of a horse, call it the "money-unit," and determine a set
of money-prices. These "money-prices" are already given in the scheme in
the ratios between the abstract numbers of this unit and the abstract
numbers of the units of all other goods. But this is meaningless, so far
as a theory of money is concerned. It abstracts entirely from the
_differences_ in _salability_[81] of goods, on which the theory of money
must rest. It gives us no clue to that part of the value of the
money-article which comes from its money-functions.
(4) The theory has no bearing on the problems of supply and demand.
Demand-
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