The Development of Economics

CHAPTER XX

“In the early seventies began a noteworthy series of attempts to reconstruct some of the leading doctrines of political economy on a basis in many respects different from that on which the classical economists built. These were accompanied by an equally noteworthy reaction against the historical school.”

A. Menger’s Chief Publications

“A pioneer and leader in both these directions was Karl Menger, of Vienna. In 1871 he published Grundsätze der Volkswirthschaftslehre, in which some of the fundamental concepts and doctrines of the science were treated in a new and original manner, and in 1883 he published Untersuchungen über die Methode der Sozialwissenschaften und der politischen Oekonomie inbesondere, in which the nature of the science and the methods appropriate to its various parts were discussed with a considerable degree of elaboration and detail. The criticism passed upon the German historical school in this book brought a reply from Professor Schmoller of the University of Berlin in a review published in the Jahrbuch für Gesetzgebung, Verwaltung und Volkswirthschaft im deutschen Reich, under the title ‘Zur Methodologie der Staats- und Sozialwissenschaften.’ To this Menger replied in a series of letters published in Vienna in 1884 under the title Die Irrthümer des His-torismus in der deutschen Nationalökonomie. Again in 1889 the same ideas were expressed in an article entitled ‘Grundzüge einer Klassi-fication der Wirthschaftswissenschaften,’ published in the Jahrbuch für Nationalökonomie und Statistik.”

B. The Economic Sciences

“According to Menger, instead of one, several sciences are concerned with the study of economic phenomena and these he classified as historical, theoretical, and practical. Under the first he placed economic history and statistics; under the second, economic theory; and under the third, economic politics, public finance, and private economics.

“The field of the historical economic sciences is the study of individual phenomena in both their static and dynamic aspects; that of the theoretical, the study of the general aspects of economic phenomena, of their types and typical relations; and that of the practical economic sciences, the study of the regulations suitable to the attainment of specific ends or aims.

“The historical method is appropriate to the first group only and more particularly to one member of that group, economic history. In the study of the second group of sciences the abstract method is absolutely necessary, since here we are dealing not with individual but with general phenomena, which in the very nature of the case can only be discovered by the process of abstraction. Induction, or what Menger prefers to call the empirical form of abstraction, may be here employed, but its results are less reliable than those produced by what he called the exact method, that is the analysis of phenomena into their simplest: elements and the separate study of each element both in isolation and in combination with other elements.

“The several groups of economic sciences are interrelated, and all are related to practice. The historical sciences supply aids and helps to the other two, and are, therefore, properly termed Hilfswissenschaften. However, they do not supply all the materials which these other groups must use. General observation and the common experiences of life must supplement them. The practical economic sciences use materials supplied by both the others, and the theoretical sciences also furnish guides for the economic historian and the statistician. The private and public practitioner will derive aid from all, but most, perhaps, from those belonging to the practical group, though these will not solve his problems for him. It is not their purpose to supply precepts for action, but to show how certain ends can be attained under different supposed or possible circumstances. The means for the attainment of a given end will vary with the different circumstances supposed, and these may never correspond exactly with actuality.”

C. Menger and Schmoller

“The controversy with Schmoller revealed certain fundamentals which were common to the two men and which have been widely, if not universally, accepted by economists. These are: that historical and statistical investigation as well as abstract methods of study, in the forms both of induction and of the isolated study of the simplest elements of economic life, not only have their place in the science of political economy but are essential to its development. In contrast with these points of agreement the differences between the two men appear relatively unimportant.

“Schmoller emphasized the importance of historical and statistical studies as means for the supply of materials for theorists to work upon, and thought that existing materials, or at any rate the materials that existed in the time of the older classical economists, have yielded all the results of which they are capable. Menger admitted the value of history and statistics, but denied that they are the only sources of materials and insisted that the data available to the classical economists were only imperfectly or partially worked and are capable of yielding valuable results to those who subject them to the right kind of analysis and study. Schmoller probably attached less importance to theory per se than did Menger, and does not seem to have agreed with him regarding the character of what the latter called the practical economic sciences and their relation to practice, but these are mainly differences of emphasis due to radical temperamental differences between the two men. The value of economic theories which cannot be directly applied in the solution of practical problems is difficult to estimate, and one’s attitude toward them is certain to depend in no small degree upon temperament. There is unquestionably danger of their underestimation on account partly of the youth of the science and partly of differences between the character of the data from which they are derived and that of analogous theories in the physical sciences, the importance of which time has demonstrated.

“Some of the apparent differences between the two men vanish or are reduced to small compass when the substance of their thoughts, rather than the forms in which they are expressed, is analyzed. This is notably the case in their use of the term the historical method. As Schmoller used it, this method obviously involves the use of abstraction, analysis, and induction, and its results include much that Menger would classify as economic theory, while Menger assigned to the term a much narrower meaning, one which involved little more than mere description and the analysis which it implies.

“As Schmoller rightly said in the final summary of his estimate of Menger’s contribution to methodology, the value of his methods must be judged by their results. The chief of these are embodied in his Grundsätze, which belongs in the group of the theoretical economic sciences as he defined it. In this book Menger used what he called the exact method, namely, that of isolating the simplest elements of economic life and subjecting them to exhaustive study.”

D. Analysis of the “Grundsätze”

1. Needs.

Besides the needs of individuals must be recognized those of associations (Verbände) such as states, cities, etc., and these must be distinguished from mere collective needs, that is, needs that are common to a number of individuals and are satisfied by common institutions or instrumentalities such as railroads, bus lines, electric light and gas works, etc. The needs of associations are not felt by individuals as such, and their satisfaction is not a part of the economy of individuals, but they are requirements of the associations themselves and their satisfaction is the goal of special economics which are independent of the individual economies of the persons who directly or indirectly belong to them.

2. Goods.

Change in the condition of a person from a state of need or want to that of satisfaction, like all other changes, is subject to the law of cause and effect. The cause, in this case, is called a good and the effect, a satisfaction. In order that a good may come into existence, therefore, there must be knowledge of a need, something possessing the qualities required for the satisfaction of this need, knowledge of the existence of this thing and of its qualities, and the power to apply it to the satisfaction of the want, or the disposal (Verfügung) of it. The qualities of a thing that fit it for the satisfaction of a want are called utilities.

Menger classified goods as real or unreal, according as they do or do not result in the satisfactions they are supposed to cause; material or immaterial; transitory or durable, according as by use they lose or do not lose their qualities as goods; goods of first rank, second rank, third rank, etc., or goods of lower and of higher ranks; and complementary goods.

The basis of the two last classifications is the direct or indirect relation goods occupy to the satisfaction of needs. Those that possess in themselves the qualities needed for the satisfaction of wants Menger called goods of the first rank; those that, though they do not themselves possess these qualities, are capable of being transformed into or of producing those that do, goods of the second rank; and those capable of producing goods of the second rank, goods of the third rank, etc., etc. In referring in a general way to these various ranks he used the terms goods of lower and of higher ranks, meaning by the first those of the first and other ranks nearest to the satisfactions they cause or help to cause and by the second those further removed.

Complementary goods are those that operate in combination with other goods and not singly.

In his discussions of goods of the higher ranks and of complementary goods Menger emphasized the fact that, in the case of the former, the quality of being a good of any one of the higher ranks is conditioned upon the possession of that quality by the goods into the production of which it enters; and, in the latter case, by the existence of the other goods needed in the combination. If, for example, all the goods of the first rank into the production of which a given good of higher rank enters should cease to be goods, the same fate would follow the goods of lower rank, and, if all the other goods in a combination necessary to the production of a good or of goods in the rank below should disappear or for any other reason cease to be goods, so would the one remaining.

An important fact connected with goods of the higher ranks is that time is required to transform them into those of the rank below, and the amount of time consumed in the entire process becomes larger and larger as the number of ranks increases. In other words, the length of the period intervening between the satisfaction of a want and the starting of the process of production which creates the goods that directly causes it increases with the increase in the number of the intervening ranks of goods.

3. The Quantitative Aspects of Needs and Goods.

Under this head Menger discussed the quantities of goods respectively needed and available for the satisfaction of wants. Regarding the quantity needed, he said, the determining factor is the needs of the person in question and, as has been already observed, these are fixed by his characteristics and environment. An element of uncertainty in this case arises from the fact that not infrequently the same want may be satisfied by different goods and different combinations of goods. Regarding the quantity available, the determining factors are the physical environment and the personal services capable of being rendered by the existing population. The element of uncertainty here is the fact that the same good may be used for the satisfaction of different wants.

If instead of the immediate present we consider a period of time, other elements of uncertainty appear in the case of the quantity needed (der Bedarf). These are (a) the fact that we cannot determine in advance all the wants that should be satisfied and the degree of their intensity, there being uncertainty regarding the appearance of certain ones (those for medicine, fire-extinguishers, etc., for example) and regarding the quantity available; and (b) the fact that those at our disposal at present may deteriorate or be destroyed or may be taken from us during the period of time in question.

The quantity of goods of the higher ranks needed depends upon the deficiency that exists in the available supply of those of the first rank and upon the technique of production, but here appears a complication due to the employment of complementary goods. In the case of a certain good of higher rank essential to the production of another of lower rank, the amount of it effectively needed is also conditioned by the existence of the complementary goods that must be used in connection with it. The same thing may be said regarding the quantity of goods of higher ranks available. The fact that a certain good is at our disposal does not make it a part of the effective supply unless there are also available the necessary complementary goods. A further complication is due to the fact that the same good may be used in the production of different goods of the rank below it.

In the determination of the quantitative relations here under consideration the fact that goods of the first rank follow in time those of the second, and those of the second follow in time those of the third, etc., etc., is of great economic importance. If we designate successive periods of time by the Roman numerals I, II, III, etc., we may illus-strate this importance by noting that the possession of goods of the second rank in period I guarantees a supply of goods of the first rank in period II and not in period I, and we may not, therefore, count such goods as a part of the supply available for our satisfactions in period I. On the other hand, it should be noted that goods of the higher ranks that were available to us in the past contribute to the available supply in the present and must therefore be considered in the determination of that supply.

The quantity of goods needed by a socially organized people is not identical with the amount needed by the same individuals unorganized or living isolated lives. It is distinctly smaller for at least two reasons: the first is that certain goods, such as streets, parks, means of protection, etc., can satisfy the needs of a number of persons as easily and as completely as those of one; the second is that in making provision for the uncertain needs of a future period the law of chance operates in the case of an organized people in such a manner as to make a smaller supply suffice.

4. Economy and Economic Goods.

It is also important that the true relation to economy of the technical personal services put forth in production should be comprehended. These, like raw materials, tools, machines, land, etc., are part of the objective means employed in bringing into existence the goods required for the satisfaction of needs, but they should be distinguished from those other personal activities which Menger called the subjective elements of economy. These latter include all those mental and other personal activities which are involved in the utilization and manipulation of material and immaterial means for bringing into existence the largest possible quantity and the best quality of goods fitted to satisfy needs. In their nature and purpose they differ from, and are in addition to, the personal services technically employed in production.

What Menger called the subjective elements of economy (as distinguished from the personal services of various kinds put forth in the production and the exchange of goods, which he classified among the objective elements) embrace, according to his analysis, two groups of activities. The first includes (a) acquisition of the knowledge of the kind, quantity, time, and place of appearance of our needs; (b) acquisition of the knowledge of the kind, quantity, time, and place of appearance of the means at our disposition for the satisfaction of these needs; (c) acquisition of the knowledge of how to employ these means for bringing into existence the goods required; and (d) the actual placing of these various means into the necessary relation with each other and with ourselves.

A comparison between the quantities of goods required and available respectively for the satisfaction of the wants of an economic subject reveals the fact that the first aggregate may be greater than, less than, or equal to the second and has given rise to the well-known distinction between economic and non-economic goods. An analysis of the relations between these two categories and of the relations of both to human economy led Menger to the following conclusions:

(a) that the quality of being an economic good does not inhere in the good itself but results from the relation between the quantity of it available and that required for the satisfaction of needs;

(b) that a specific good may belong to the category of economic goods in one place or time and to the category of non-economic goods at another place or time;

(c) that a good may pass from one of these categories to the other as the result of a change in the wants it is fitted to satisfy or as the result of a change in the quantity of it available;

(d) that goods at present in the non-economic class may be believed or known to be certain to pass into the economic class in the future and on this account may be the objects of present-day economic activities;

(e) that certain superior parts of the supply of a non-economic good may belong to the economic class, while the entire supply may belong to the non-economic class;

(f) that the economic character of goods of the higher orders is conditioned on the economic character of those of the lower orders into the production of which they enter; and

(g) that the economic character of goods of the lower orders is not derived from that of goods of the higher orders but vice versa.

5. Property.

The concepts of property and economic goods have a common origin in the circumstance that the quantity of available goods is inadequate for the complete satisfaction of all wants, but they differ in the fact that the former implies the existence of society while the latter applies equally well to an isolated economy. When individuals are brought together into a social organization, the division and distribution of economic goods becomes necessary; one person becomes interested in appropriating goods to his own use and in preventing others from using them, and property therefore appears. It should be noted, however, that, while this institution owes its existence to society, it is not dependent upon any special form of society or upon any special form of social organization. In any society, however organized, the inadequacy of the supply of goods for the complete satisfaction of all wants necessitates the division, distribution, and appropriation of goods. There may be common property or individual property, but property there must be if the quantity of goods at the disposal of a number of associated individuals is inadequate to the complete satisfaction of all their needs.

It should also be noted that there is no reality corresponding to the frequently used concept of national (Volks) property, i.e., property distinct from that of the individuals and associations (including the state) of which the nation is composed. This concept is therefore scientifically misleading, and the expression national property should be dropped from the terminology of the science.

As forms or subdivisions of property Menger distinguished capital and consumption goods, the former subdivided into stable and variable, use (Gebrauchs) and exchange (Waren), and fixed and circulating. His conception of capital is based upon the distinction drawn (in his discussion of the various kinds of goods) between those that do and those that do not lose their goods qualities by use, the latter being characterized by the fact that their uses can be separated from the parent good and can acquire the status of being themselves goods. In one group of these capital goods, that he calls stable (Stabiles), the parent good (Hauptgut) retains its original form—for example, land, buildings, machines, etc.; while in the other, which he calls variable (variabiles), its form changes—for example, raw materials. Use capital is that form which serves its owner by being employed in production; exchange capital, that form which serves its owner by being exchanged for other goods. The categories of fixed and circulating capital, are not identical with the above, but so to speak cut across them, that of fixed capital including a part of use capital only, namely the stable portion, while that of circulating capital includes variable use capital and exchange capital. Fixed capital may be subdivided into fixed use capital and fixed productive capital, according as it is used directly in the satisfaction of the personal needs of its owner or for purposes of production.

6. Value.

Since economic goods are insufficient in quantity completely to satisfy needs, a certain amount or degree of satisfaction is dependent upon each unit of each good at one’s disposal. Thus, adding a unit to the supply of any good increases, and subtracting a unit from it decreases, satisfactions. Consciousness of this fact results in our attaching importance or value to these units. Value thus has the same source as economic goods and belongs to them exclusively; but it is neither an inherent quality of them nor one conferred upon them by action of the will. It is merely a consequence of the recognition of their relationship to human well-being, a relationship which results from the insufficiency of the quantity available for the complete satisfaction of needs.

Since the owner of goods may use them for the satisfaction of needs directly by consuming them or indirectly by exchanging them for other goods, and since their importance to him may be greater when used in the one way than when used in the other, Menger distinguished two kinds of value which he named respectively use and exchange value. According to this conception—which is not the same as that of Adam Smith and others who identify use value with usefulness or utility—a good may have use value without exchange value and vice versa, and its economic value—that is, the one of these two that is greatest—may pass from the one category to the other on account of (a) a change in the needs of the economic subject, (b) a change in the quality or the quantity of the good, or (c) a change in the importance of the good to other people.

On account of the relation between goods and well-being, economic action requires not only that we impute value to them but that we compare the values of different goods and the value of the same good at different times and under different conditions. It is obvious that these quantitative differences are due to two causes, namely, the differences in the importance to well-being of the satisfaction of different needs and the differences in the amount of satisfaction caused by units of the same good according as the number of units at one’s disposal is greater or less. From the point of view of their importance, needs may be classified into ranks ranging from the highest, upon the satisfaction of which life itself depends, to the lowest, upon the satisfaction of which the smallest conceivable amount of well-being depends. It is obvious that different degrees of importance and consequently different values are imputed to goods according to their fitness to satisfy needs of these different ranks. It is equally obvious, however, that the amount of value imputed to a unit of a supply of a good is a function of the number of units available, and, consequently, that no more value may be imputed to a unit of a relatively large supply of a good fitted to satisfy a need high up, than to a unit of a relatively small supply of a good fitted to satisfy a need lower down, in one’s scale.

Since to each unit of a homogeneous supply of a good is imputed the same value, regardless of the fact that greater satisfaction may be derived or derivable from the use of some than others, the question arises, Is the value imputed determined by the greatest satisfaction any unit of the supply yields or by the least or by some satisfaction between the two extremes, say the middle one? The answer is, The least important one, since it is that which is conditioned upon the addition of a single unit to or the subtraction of a single unit from, the supply.

In the valuation of the different units of a supply that is not homogeneous, that is, the different units of which differ in quality, the principle that each has the same value imputed to it does not hold; on the contrary, greater value is imputed to those of superior quality in proportion to the degree of their superiority. This principle follows from the fact that the amount of well-being conditioned by a unit of a good of superior quality is greater than that conditioned by a unit of the same quantity of a good of the same kind but of inferior quality, and greater by the degree of its superiority. It should also be noted that in the case of a good, the available quantity of which is in excess of the need for it and which, therefore, belongs in the non-economic class, units of superior quality may not be in excess of the need for them and may, therefore, have value.

Since value is subjective, being imputed to goods in accordance with the judgment a person forms of their importance to his well-being, it may be false or imaginary, in the sense that the satisfaction actually yielded by the goods does not correspond to those expected or anticipated. Hence imperfect knowledge, errors of judgment, sentiment, prejudice, etc., are factors in the determination of value.

In tracing the connection between goods and the satisfaction of needs and in determining the amount of the value of goods, a complication arises in the case of those of higher ranks and in that of complementary goods. In the former case we must reckon with the fact that the goods in question do not satisfy wants directly but only indirectly, through those of first rank into which they are transformed; and in the latter case, with the fact that the goods in question are not singly responsible (either directly or indirectly) for the satisfaction of needs, but only jointly, in combination with other goods.

The application of the value principle to these more complicated cases requires the determination of the manner in which we trace the relation between them and changes in our well-being. In the case of goods of the higher ranks, the line of dependence clearly runs from needs to goods of the first rank, and from them to goods of the second rank and so on. We first recognize the importance to well-being of the satisfaction of needs; then transfer or impute that importance to the goods that cause their satisfaction, that is to goods of the first rank, and thence to those of the second rank that condition the existence of those of the first rank, and so on down the line to goods of the third, fourth, fifth, etc., ranks. The value of goods of the second rank is thus derived from that of goods of the first rank, for the production of which they are essential, and not vice versa, and that: of goods of each rank higher up is derived from that of those in the rank next below for the production of which they are essential and not vice versa. We do not impute value to bread because it is produced from valuable wheat, but we impute value to wheat because it produces bread which we value, and we impute value to wheat-growing land because we value the wheat it grows and to the extent that we value the wheat, and not vice versa.

Since goods of the first rank follow those of the second, and those of the second rank follow those of the third and so on, only after the lapse of a period of time, in the valuation of goods of the higher ranks arises the further problem of estimating the value to us now of goods that will be placed at our disposal at a future period of time. Two facts should be distinguished in this connection: one is that we are dealing with estimated as distinguished from realized values and the other is that we are seeking for the present value of future goods. The value which we estimate that goods will have in the future may or may not be realized. Errors of various kinds, due to imperfect knowledge, lack of imagination, unforeseen occurrences, etc., may vitiate and lead astray our judgment.

That phase of the problem suggested by the second fact Menger solved by making use of the conception which he named the economic uses of capital. By these he meant the services goods of the higher ranks continue, according to his view, to render after they have been transformed into other goods, by making possible a longer and therefore more remunerative productive process. He therefore argued that a quantity of goods coming into the possession of a person in the future is worth as much less than that same quantity in his possession at the present time as the economic uses of these goods during the period are worth.

Regarding the valuation of complementary goods, Menger noted the fact that they are not always like the elements of a chemical compound, of which it may be said that, if one is lacking, the compound cannot be produced. Instead it frequently happens that the absence of one complementary good may be partially or wholly made good by the substitution of another. Or its absence may result, not in the failure of the entire productive enterprise, but in a diminution in the quantity or a deterioration of the quality of the product. It also often happens that a complementary good may be taken from one combination and used in another. Indeed, many of the most widely used complementary goods, iron, land, labor, etc., are used in a large number of combinations.

The principles of value are applicable without modification to land, labor, and capital and therefore determine what economists call the distribution of wealth. Each of these, however, has peculiarities which must be considered in the explanation of its valuation. In the case of land these peculiarities are limited quantity which cannot be increased at will, immobility, and wide difference between the quality of the different pieces. These peculiarities and similar ones belonging to labor and capital, however, do not in any way exempt them from the operation of the principle that their value results from and is measured by their relation to human well-being.

7. Exchange.

In the case of goods capable of subdivision, so that parts of them may be exchanged, it is obvious that the amounts exchanged may be more or less; and consequently, on account of changes in value due to the changes in the relative quantities of the goods at the disposal of the exchangers, it is equally obvious that there is a limit beyond which the exchange of additional quantities may be unprofitable, indeed may be injurious.

The explanation of the terms on which exchanges are made is the purpose of the theory of prices, the latter term being usually defined as the amount of one good that is exchanged for a unit of another. From the explanation of the nature of exchange given in the preceding paragraph, it is obvious that all theories of price based upon the assumed equivalence of the goods exchanged—for example, the labor and all other forms of the cost-of-production theory—are wrong, since the only reason for, and the only possible cause of, an exchange is the lack of equivalence (to the exchangers) between the goods exchanged. On the assumption of equivalence the motive to exchange disappears.

If there are a number of competitors on both sides, the case differs from that in which there is a monopolist on one side by the fact that in the latter case the question arises as to the relative profitableness of limiting the amount put upon the market, since the monopolist has control of the entire supply. In the former case each competitor knows that any effect produced upon the price by his withholding a portion of his supply will be neutralized by the increased quantity thrown upon the market by the others. The monopolist may find it more profitable to sell a small supply at a high price per unit than a larger supply at a much lower price per unit and will fix the supply and consequently the price at the point that will yield him the largest returns.

8. Merchandise (Waren).

The exchangeability or saleability (Absatzfähigkeit) of merchandise is its important characteristic. Some articles possess it in a higher degree than others, and the same article may possess it in a higher degree at some times than at others. The saleability of goods is determined and modified by many conditions and circumstances such, for example, as the nature of the need the article is fitted to satisfy, the number of people who have that need, its price, and the presence or absence of limitations on its sale. Among the latter are climatic conditions, transportation facilities and costs, import and export duties, bounties, premiums, etc. There are also quantitative limitations. There are some goods the quantity of which that may be sold at some price is practically unlimited, for example gold and silver, while in the case of others the quantity that may be sold at any price is very small, for example a book on the peculiarities of the syntax of the language of a little-known tribe of Indians.

Within the range of its possibilities, the actual saleability of a good depends upon the realization of what Menger called an effective price, and this in turn depends upon the perfection or imperfection of competition, upon the extent to which buyers and sellers are or are not guided by purely economic considerations, and upon the degree of knowledge they have of their own interests. The organization of commerce is also an important factor in the determination of the extent to which people who have the capacity actually take part in the marketing process.

Another aspect of saleability considered by Menger is the ease or difficulty with which a good passes from hand to hand, that is, its capacity for circulation. In this connection he called attention to the fact that some articles—food and certain kinds of clothing and bedding, for example—circulate more readily through the hands of certain persons than through those of others; while in other cases, that of gold, for example, the character of the persons through whose hands they pass is not a matter of any importance. Certain goods also circulate only or readily when they are in the hands of people who have special kinds of knowledge, preparation, connections, special official and legal rights, etc. Menger also noted the fact that goods that require to be specially fitted to the needs of consumers circulate less readily than those that are not so handicapped, and that goods whose prices are not widely known or are subject to wide fluctuations circulate less readily than those whose prices are widely known and are relatively stable.

9. Money.

Service as a medium of exchange resulted in other uses, of which the most important are (a) as substitutes for other goods in one-sided transfers of various kinds such as dues, taxes, gifts, etc.; (b) as means of payment; (c) as means of hoarding, and in the accumulation of capital; (d) as means for the promotion of transfers of property between localities and from the present to the future and as a means of making loans; and (e) as a standard. This latter use is described at length by Menger, and erroneous ideas concerning it are pointed out.

The use of money as a standard raises the question of the influences affecting its external and internal value. By the former is meant its purchasing power, that is, the quantity of other goods it will command in exchange; by the latter, its own power in determining the ratio at which it exchanges for other goods. The difference between these two phases of the value of money becomes clear when one remembers that two goods are involved in every exchange—in those in which money is used, money and one other good, and that the terms or ratio of the exchange may be affected, and are always actually determined, by influences acting on both sides, that is, on the money side and on the side of the good. An investigation into the external value of money contemplates merely the final result of the operation of all these influences, that is, the actual ratio realized at any given time and the changes in that ratio from time to time. An investigation into the internal value of money, on the other hand, aims to separate the influences operating on the money from those operating on the goods side and to determine the result of the former.

The desirability of stable external as well as internal value in money is very great, and neither is theoretically, though both are practically, unattainable. This latter fact, however, does not lessen the desirability of the analysis, and so far as possible of the measure, of the influences affecting both. Researches into these problems may establish strong probabilities of great practical importance.

Footnotes

1 The quotations in sections A, B, and C are from the author’s contribution (Ch. VII, pp. 233-236) to Ingram’s History of Political Economy, New and Enlarged Ed. (1915). By permission of The Macmillan Company, publishers.

2 “Der Ausgangspunkt aller wirtschaftstheoretischen Untersuchungen ist die be-dürftige Menschennatur. Ohne Bedürfnisse gäbe es Keine Wirtschaft, Keine Volkswirt-schaft, Keine Wissenschaft von derselben. Die Bedürfnisse sind der letzte Grund, die Bedeutung, welche ihre Befriedigung für uns hat, das letzte Mass, die Sicherstellung ihrer Befriedigung das letzte Ziel aller Menschlichen Wirtschaft.”—Grundsätze, 2d. ed. (1923).

3 “Der Erfordernisse der Erhaltung und harmonischen Entwickelung der menschlichen Natur in ihrer Totalität,” ibid., p. 3.

4 Ibid., p. 4.

5 “Je mehr factoren bei der Güterentstehung mitwirken, die wir nicht kennen, oder über die wir, wenn sie von uns erkannt sind, nicht zu verfiigen vermögen, d.i. eine je grössere Anzahl dieser Factoren keine Güterqualität besitzen so grosser pflegt auch die Unsicherheit über die Qualität und Quantität des Produktes zu sein, über welcher wir durch den Besitz von guter höherer Ordnung (also mittelbar) verfügen.”—Grundsätze, p. 30.

6 Grundsätze, p. 49.

7 Ibid., pp. 51-54.

8 “Der Ausgangspunkt der Wirtschaft sind die uns durch die naturliche (unter sozialen Verhältnissen durch die rechdiche Sachlage, in die wir uns gestellt finden), unmittelbar gegebenen Güter.”—Ibid., p. 60.

“Der Zielpunkt unserer Wirtschaft ist die Deckung unseres Bedarfes an genuss be-reiten (an unmittelbar zur Befriediegung unserer Bedürfnisse geeigneten) Gutern.”— Ibid., p. 61.

9 “Wir wirtschaften, indem wir die Mittel zur Befriedegung unserer Bedürfnisse und solcherart die Möglichtkeit der Konsumption in kommenden Zeitraumen sicherstellen, nicht indem wir konsumieren.”—Grundsätze, p. 62.

10 Ibid., pp. 73 and 74.

11 Ibid., pp. 74 and 77.

12 Ibid., p. 79.

13 Grundsätze, p. 91.

14 Ibid., pp. 92-94.

15 This use of the term capital differs from the one previously described in that it does not include in the capital category desirable goods devoted to present-time consumption. Grundsätze, p. 100, note.

16 Grundsätze, p. 157.

17 Grundsätze, p. 173.

18 Ibid., p. 188.

19 Ibid., pp. 190-194.

20 Grundsätze, p. 220.

21 Ibid., pp. 259-264.

22 Grundsätze, pp. 295-297.

• 1Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 2Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 3The industrial organization of the towns was also gradually weakened by conflicts of interest between townsmen themselves and the oppression of the weaker trades by the stronger, and by the growth of domestic industries. Increasing interference of the central government in town affairs was invited by these conditions, and the power of resistance to it was weakened. The growth of a merchant class in London and some of the other large towns also contributed to the same result. The interests of this class extended beyond the boundaries of the town in which they lived and were promoted by the breaking-down of local trade barriers. The power of this class grew rapidly in and after the sixteenth century.
• 4By the seventeenth century a national commercial and industrial organization had developed, the chief organs of which were middlemen who intervened between producers and consumers and between different classes of producers. Among those of chief importance were the wool-staplers, the clothiers, the drapers, and the foreign trading companies. The wool-staplers purchased the farmers’ wool, their most important staple, and sold it to manufacturers or foreign merchants. The clothiers acted as middlemen between the carders, spinners, weavers, and other handicraftsmen engaged in transforming the wool into cloth. They purchased the wool from the staplers, delivered it to the carders and spinners, distributed the yarn among the weavers to be woven into cloth, and then placed the cloth in the hands of the “fuller,” “walker,” or “tucker” to be fulled and cleansed. The spinners, carders, weavers, and fullers were scattered throughout the hamlets and villages as well as the cities of the country, in many, perhaps most cases, doing agricultural work as a main or a side occupation. The drapers purchased the cloth and sold it to consumers or to foreign merchants; some of them were themselves connected with one of the trading companies. Foreign commerce was chiefly carried on by these latter organizations, to each of which a charter had been granted conferring the exclusive right to trade in a specified part of the world. The Eastland Company, for example, had the exclusive right to trade with Scandinavia and the Baltic region; the Russian Company, with Russia; the Merchant Adventurers, with the Netherlands; the Levant Company, with the Mediterranean region; the Guinea or African Company, with Africa; the East India Company, with the countries of Asia; and several other companies with portions of the American field. At the beginning of the seventeenth century France, Spain, and Portugal were the only countries with which trade could be carried on by an Englishman not a member of one of the companies.
• 5The literary remains of Colbert are of the same general character as those of Sully in that they consist of letters, instructions, and memoirs. They differ from Sully’s, however, in the extent to which they reflect mercantile doctrines. Colbert was the chief executor of the mercantile policy of France, and among his letters, instructions, and other papers may be found expositions and defense of nearly every feature of it. Much more completely than the English writers he reflected the doctrines of nationalism and of the entrepreneur relation of the state to industry. To a greater extent than in any other country these doctrines were realized in the practices of France during the reign of Louis XIV, and for this fact Colbert was largely responsible. Louis XIV aspired to be not only absolute sovereign in France but the dictator of Europe, and he fully realized that foreign commerce and command of the world’s supply of the precious metals would assist in the accomplishment of his purposes.
• 6Becher was at one time a court physician and professor of medicine in Mainz, whence he went to Wurzburg, and later to Vienna. At the two latter places, he was connected with the carneræ of the reigning sovereigns. He wrote on natural science as well as Kameralwissenschaft, his chief work in the latter field appearing at Frankfurt in 1668 under the title Politische Discurs von den eigentlichen Ursachen des Auf- und Abnehmens der Städte, Lander und Republiken, in specie, wie ein Land Volkreich und Nahrhaft zu machen und in rechte Societaten civilen zu bringen. In this book he defines a city as eine volkreiche, nahrhafte Gemeine and defends the following fundamental propositions: The more populous a city, the more powerful it is; but in order to be populous, it must be supplied with an abundance of nourishment; the membership of a community consists of (a) those who serve it and are supported by it, for example, government officers, clergy, learned men, physicians, apothecaries, soldiers, etc.; and (b) those who really constitute it, namely, peasants, handicraftsmen, and merchants. These three classes are essential each to the other. In explaining their mutual relations, however, he makes the following argument: “Consumption is the soul of the three classes, the only bond which holds them together and enables them to live by each other. It is on account of consumption that the merchant class is so necessary in a community, however large the peasant class may be. . . . Since the nourishing of a community can only be accomplished through the trading [Verhandlung] and turning into money [Versilberung] of goods . . . everything which hinders these operations hinders and weakens the populousness which results from it.”
• 7Wilhelm Freiherr von Schroder was in the service of Austria as conductor of a factory according to plans outlined by Becher. He wrote several books, the most noteworthy of which was entitled Fürst-liche Schatz und Rentkammer, which was published in 1686. He was a strong advocate of absolute monarchy and admirably set forth the mercantilistic view of the relation of a sovereign to his people, in the following passage: “A Prince is like a housefather. Now a housefather must fertilize and plough his fields if he would reap a harvest therefrom. He must well stock his pond if he would have fish. He must feed his cattle if he would slaughter them, and well fodder his cows if he desires them to give much milk. Thus a Prince must first help his subjects to a good living, if he wishes to take anything from them.”
• 8In the Détail he gives a discussion of the relation between money and wealth in which he says: “As gold and silver are not and never have been wealth in themselves and are valued only in relation to other things necessary to life,—to which things they serve only as a guarantee and a measure of value,—it is a matter of indifference whether we have much or little of them, provided the same results are produced.” That the same results are produced by much or little he attempts to prove by the following: “Thus we learn from the old accounts that in 1250 a laborer in Paris, who to-day earns 40 or 50 sous a day, earned only 4 pennies a day, 12 one-hundredths part of what he earns now. Nevertheless he then lived with as much comfort as now because all things were in proportion. He satisfied his wants with his four pennies as well as one of the same trade now does with his 50 sous. It follows that a man who at that time had a thousand livres of rent was as rich as one who at present has one hundred thousand.”
• 9In other connections he says: “It is very certain that it [money] is not a good in itself and that the quantity of it does nothing for the opulence of a country in general provided there is enough of it to sustain the prices of the goods necessary to life.”
• 10Silver and gold, he says, have as competitors copper, leather, shells, and “a simple piece of paper which costs nothing but nevertheless performs all the functions of money to the amount of millions by passing from hand to hand an infinite number of times.” By way of illustration he refers to the Lyons fair in the following manner: “In a commerce consisting of purchases and sales to the amount of more than eighty millions not a ‘sou marque’ of money is seen. Everything is done by bills of exchange which after passing through an infinite number of hands, finally return to the original drawer.”
• 11In other connections he emphasized the need of an equilibrium between purchases and sales and the importance of proper adjustments of prices, especially of the prices of raw produce and manufactures.
• 12In order to secure these and other needed adjustments, he affirmed that reliance can be placed only on nature. The following words of his taken from Chapter V of the Dissertation present this doctrine clearly:
• 13In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 14In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 15In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 16The author, Richard Cantillon, was born in Ireland between 1650 and 1690. Soon after the death of Louis XIV he removed to Paris and engaged in the business of banking during the period in which John Law flourished. Being confident of the ultimate failure of the Mississippi scheme, Cantillon speculated on the bear side of the market and made a fortune, but incurred the enmity of Law and was obliged to leave France. He was murdered in London on May 16, 1734, by a discharged man-servant, who set fire to his house and stole some of his papers.
• 17The deviation of the market prices of commodities from “their primary and natural price” Ricardo also described as “accidental and temporary.” The demand and supply of a commodity at the moment may be such as to establish a price for it above or below the point indicated by the labor principle, but in that case the profits of the capital employed in its production will be above or below the average in other industries, and this fact will increase in the one case and decrease in the other the amount of capital employed in this industry, thus causing changes in the supply which will tend to bring the market into accord with the natural price. He concludes his discussion with these words: “In speaking, then, of the exchangeable value of commodities, or the power of purchasing possessed by any one commodity, I mean always that power which it would possess, if not disturbed by any temporary or accidental cause, and which is its natural price.”
• 18The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 19The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 20The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 21The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 22Even before land of inferior fertility is taken into cultivation, superior lands may bear rent, according to Ricardo, provided the point of diminishing returns in their cultivation has been reached. “It often, and, indeed, commonly happens,” he says, “that before No. 2, 3, 4 or 5, of the inferior lands are cultivated, capital can be employed more productively on those lands which are already in cultivation.” By way of illustration he assumes that equal amounts of capital and labor will produce on land of qualities numbered 1, 2, and 3, 100, 90 and 80 quarters of corn respectively and then adds: “It may perhaps be found, that by doubling the original capital employed on No. 1, though the produce will not be doubled, will not be increased by 100 quarters, it may be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital on land No. 3.”