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Epistemological Problems of Economics
Ludwig von Mises

5
Remarks on the Fundamental Problem of the Subjective Theory of Value

3. Use Value

Böhm-Bawerk expresses the opinion that the treatment of the theory of price determination should be divided into two parts.
The first part has the task of formulating the law of the fundamental phenomenon in all its purity; that is, to deduce all propositions following from the law that lead to the phenomena of prices on the hypothesis that for all persons interested in exchange the only impelling motive is the desire to attain a direct gain in the transaction. To the second part falls the task of combining the law of the fundamental phenomenon with modifications that result from factual conditions and the emergence of other motives. This will be the place to . . . demonstrate the influence that such commonly felt and typical "motives" as habit, custom, fairness, humanity, generosity, comfort or convenience, pride, race and nationality, hatred, etc. have in the determination of prices.[14]

In order to arrive at a correct judgment of this argument, one must note the difference that exists between classical and modern economics in the starting points of their investigations. Classical economics starts from the action of the businessman in that it places exchange value, and not use value, at the center of its treatment of the problem of price determination. Since it could not succeed in resolving the paradox of value, it had to forgo tracing the phenomenon of price determination further back and disclosing what lies behind the conduct of the businessman and governs it in every instance, viz., the conduct of the marginal consumers. Only a theory of utility, i.e., of subjective use value, can explain the action of the consumers. If such a theory cannot be formulated, any attempt at an explanation must be renounced. One certainly was not justified in leveling against the classical theory the reproach that it starts from the assumption that all men are businessmen and act like members of a stock exchange. However, it is true that the classical doctrine was not capable of comprehending the most fundamental element of economics?consumption and the direct satisfaction of a want.

Because the classical economists were able to explain only the action of businessmen and were helpless in the face of everything that went beyond it, their thinking was oriented toward bookkeeping, the supreme expression of the rationality of the businessman (but not that of the consumer). Whatever cannot be entered into the businessman's accounts they were unable to accommodate in their theory. This explains several of their ideas?for example, their position in regard to personal services. The performance of a service which caused no increase in value that could be expressed in the ledger of the businessman had to appear to them as unproductive. Only thus can it be explained why they regarded the attainment of the greatest monetary profit possible as the goal of economic action. Because of the difficulties occasioned by the paradox of value, they were unable to find a bridge from the realization, which they owed to utilitarianism, that the goal of action is an increase of pleasure and a decrease of pain, to the theory of value and price. Therefore, they were unable to comprehend any change in well-being that cannot be valued in money in the account books of the businessman.

This fact necessarily led to a distinction between economic and noneconomic action. Whoever sees and grasps the opportunity to make the cheapest purchase (in money) has acted economically. But whoever has purchased at a higher price than he could have, either out of error, ignorance, incapacity, laziness, neglectfulness, or for political, nationalistic, or religious reasons, has acted noneconomically. It is evident that this grading of action already contains an ethical coloration. A norm soon develops from the distinction between the two groups of motives: You should act economically. You should buy in the cheapest market and sell in the dearest market. In buying and selling you should know no other goal than the greatest monetary profit.

It has already been shown that the situation is altogether different for the subjective theory of value. There is little sense in distinguishing between economic and other motives in explaining, the determination of prices if one starts with the action of the marginal consumer and not with that of the businessman.

This can be clearly illustrated by an example drawn from the conditions of a politically disputed territory, let us say Czechoslovakia. A German intends to join a chauvinistic, athletic-military organization and wants to acquire the necessary outfit and paraphernalia for it. If he could make this purchase more cheaply in a store run by a Czech, then we should have to say, if we make such a distinction among motives, that in buying at a slightly higher price in a store run by a German in order to give his business to a fellow national, he would be acting uneconomically. Yet it is clear that the whole purchase as such would have to be called uneconomic, since the procuring of the outfit itself is to serve a chauvinistic purpose just as much as helping a fellow national by not considering the possibility of making a cheaper purchase from a foreigner. But then many other expenditures would have to be called uneconomic, each according to the taste of whoever judges them: contributions for all kinds of cultural or political purposes, expenditures for churches, most educational expenses, etc. One can see how ridiculous such scholastic distinctions are. The maxims of the businessman cannot be applied to the action of the consumers, which, in the last analysis, governs all business.

On the other hand, it is possible for the subjective theory of value to comprehend from its standpoint also the action of the businessman (whether he is a manufacturer or only a merchant) precisely because it starts from the action of the consumers. Under the pressure of the market the businessman must always act in accordance with the wishes of the marginal consumers. For the same reason that he cannot, without suffering a loss, produce fabrics that do not suit the taste of the consumers, he cannot, without taking a loss, act on the basis of political considerations that are not acknowledged and accepted by his customers. Therefore, the businessman must purchase from the cheapest source, without any such considerations, if those whose patronage he seeks are not prepared, for political reasons, to compensate him for his increased expenses in paying higher prices to a fellow national. But if the consumers themselves?let us say in purchasing trademarked articles?are prepared to compensate him, he will conduct his business affairs accordingly.

If we take the other examples cited by Böhm-Bawerk and go through the whole series, we shall find the same thing in each case. Custom requires that in the evening a man of "good" society appear in evening clothes. If somewhere the prejudices of the circle in which he lives demand that the suit not come from the shop of a radical tailor, where it can be bought more cheaply, but that it be procured from the more expensive shop of a tailor with conservative leanings, and if our man acts in accordance with these views, he follows no other motive in doing so than that of getting a suit in general. In both instances, in agreeing to purchase evening clothes in the first place, and in procuring them from the tailor with conservative leanings, he acts in accordance with the views of his circle, which he acknowledges as authoritative for himself.

What is that "direct gain in the exchange" which Böhm-Bawerk speaks of? When, for humanitarian reasons, I do not buy pencils in the stationery store, but make my purchase from a warwounded peddler who asks a higher price, I aim at two goals at the same time: that of obtaining pencils and that of assisting an invalid. If I did not think this second purpose worthy of the expense involved, I should buy in the store. With the more expensive purchase I satisfy two wants: that for pencils and that of helping a war veteran. When, for reasons of "comfort and convenience," I pay more in a nearby store rather than buy more cheaply in one further away, I satisfy my desire for "comfort and convenience," in the same way as by buying an easy chair or by using a taxi or by hiring a maid to keep my room in order. It cannot be denied that in all these instances I make a "direct gain in the exchange" in the sense intended by Böhm-Bawerk. Why, then, should the case be any different when I buy in a nearby store?

Böhm-Bawerk's distinction can be understood only when it is recognized as a tenet taken over from the older, objective system of classical economics. It is not at all compatible with the system of subjective economics. But in saying this, we must emphasize that such a dichotomy had not the slightest influence on Böhm-Bawerk's theory of value and price determination and that the pages in which it is propounded could be removed from his book without changing anything significant in it. In the context of this work it represents nothing more than?as we believe we have shown?an unsuccessful defense against the objections that had been raised against the possibility of a theory of value and price determination.

Strigl expresses the matter more nearly in accordance with the subjective system than does Böhm-Bawerk. He points out that the scale of values "is fundamentally composed also of elements that popular usage treats as noneconomic in contrast to the economic principle." Therefore, the "maximum quantity of available goods cannot be opposed, as 'economic,' to the 'uneconomic' goals of action."[15]

For the comprehension of economic phenomena it is quite permissible to distinguish "purely economic" action from other action which, if one wishes, may be called "noneconomic," or "uneconomic" in popular usage, provided it is understood that "purely economic" action is necessarily susceptible of calculation in terms of money. Indeed, both for the scientific study of phenomena and for the practical conduct of men, there may even be good reason to make this distinction and perhaps to say that under given conditions it is not advisable, from the "purely economic" point of view, to manifest a certain conviction or that some course of action is "bad business," that is to say, it cannot involve a monetary gain, but only losses. If, nevertheless, one persists in acting in that way, he has done so not for the sake of monetary gain, but for reasons of honor or loyalty or for the sake of other ethical values. But for the theory of value and price determination, catallactics, and theoretical economics, this dichotomy has no significance. For it is a matter of complete indifference for the exchange ratios of the market, the explanation of which is the task of these disciplines, whether the demand for domestic products arises because they cost less money than foreign goods (of the same quality, of course) or because nationalist ideology makes the purchase of domestic products even at a higher price seem right; just as, from the point of view of economic theory, the situation remains the same whether the demand for weapons comes from honorable men who want to enforce the law or from criminals who are planning monstrous crimes.

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[14] Cf. Böhm-Bawerk, Kapital und Kapitalzins, II, 354.

[15] Strigl, Die ?konomischen Kategorien und die Organisation der Wirtschaft (Jena, 1923), p. 75 et seq. Cf. further ibid., pp. 146 ff.

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