The Development of Economics

CHAPTER XXIV

CRITICISMS OF THE AUSTRIAN DOCTRINES

A. The Marginal Utility Theory of Value

The basic doctrine of the Austrian School, the marginal utility theory of value, has appealed to and been adopted by many economists, but has been criticized by others. The controversy still rages and the end is not yet in sight. There is a middle class that has adopted the marginal utility analysis in their explanation of demand, but has reverted to the old analysis of costs in its explanation of supply. The Austrian method of explaining the operation of demand and supply has been widely adopted. The chief criticisms may be grouped under the following heads.

“It is precisely from this point of view that the Austrian school comes seriously under suspicion. Whether it be by necessity and fundamentally, or merely through terminology and gratuitously, there is overmuch flavor in it of Benthamism, too much talk of utility in the sense of pleasure, and too much analysis of market activities in the aspect, not merely of egoistical and cool-headed farsightedness, but also of calculations worked out under a common denominator of utility for feeling—‘pleasure by the shilling’s worth.’ ”

“This is, in any event, if not bad doctrine, at least questionable and unnecessary doctrine. It lacks catholicity. There are too many thinkers who believe that men sell and buy economic goods from impulse and habit and irreflection—that instinct and appetite and spontaneity manifest themselves in the economic world as truly as in the world of play or romance. There are those going even so far as to say that primarily we do not desire things because they give us pleasure, but that they give us pleasure because we desire them. Just as the chicken pecks its way out of its shell without foreknowledge of the glories of the outside day, and, immediately upon exit, picks up a grain or two of sand, nowise interested in the near-by gratification from its pungent flavor or in the faraway joys to accrue from a well-sanded digestion, just so human instinct and tastes and impulses reach their time, and spontaneous activities press forward to expression; rattles wane and dolls wax, while in later succession sleds and canes and sweethearts and homes and offspring and offices and professorships crowd upon the stage of human activity. Things move from indifference through gratification to satiation, as men change in their equipment of desires and tastes and sympathies; and, when a thing comes to give us pleasure, it does so merely because we have come to like it. As one wakes in the morning according to the inner time-lock which he set at bed-going, as a hypnotic patient carries out, days later, the mandate given during his forgotten trance experience, as the idee fixe of pathological mental conditions, or even of habit, guards one against all influence of argument or appeal, as the resolve of yesterday remains by that mere fact the cherished goal of to-day, so do all of us, in a wide domain of our activities, move in a half-blind trance of inherited impulses and instincts and of acquired tendencies and aims. So much of our action is essentially reflex that there is more question whether any of it is altogether calculated and purposeful than whether all of it is.”

“First, there is the insistent claim that the untrue psychology assumed by the theory makes the formula of marginal utility an inadequate description of the price-making process. Man does not often decide what he wants and what he does not want on a purely rational basis, nor does he make a choice between two satisfactions on any such basis. His fundamental wants, such as those for food and shelter, probably have some sort of an instinctive basis. But even these wants, as they are evidenced in everyday life, have been elaborated and rendered highly complex habits by such social forces as custom, style, and advertising. Physiologically, we demand food. Actually, we demand specified brands of a great variety of foodstuffs. Above this lower level of habitual responses, there is a second level of wants which probably have no instinctive basis, which are almost entirely habitual, and which are largely socially determined. We do not go through any extensive hedonistic calculus when we purchase a package of cigarettes, attend the weekly moving picture, or replace a worn-out item of our wardrobe. Back of the whole process, no doubt, there is some sort of a crude budgeting of income, which reflects the small element of deliberative choice so much emphasized by the marginal-utility theorist—an element which we find coming into the foreground when we are faced with the necessity of making some unusual expenditure such as that involved in the purchase of an automobile or radio. But the marginal-utility theory, ignoring as it does the instinctive and habitual elements in choice and the social origin of our wants, is, the critics say, an inadequate explanation of the price-making process.”

“It is enough that we choose in fine gradations and with clear distinctions, and it does not matter whether the measure be accurate, the process rational, or the result correct.

“That most of our activity is of the irreflective traditional sort is, indeed, admitted by Boehm-Bawerk: ‘Numberless economic acts are performed purely automatically or mechanically’; and all choices might be reached in as mechanical a way as some are—and as perhaps all really are—and yet economic facts would remain practically and theoretically much as now. We do seem to ourselves to do some considering; we might do either more or less and still the fact of deciding would remain—choices between goods and choices between alternative activities would still take place, and our economic theories would still formulate themselves very much as they are now formulated.

“So it does not much matter for the economic aspects of either the older or the newer thought whether one concurs in the anti-utilitarian protest. The later investigators, like the earlier, appear to be grievously given over to hedonism; but so have other men been to Methodism without obvious disadvantage to their economic theories. So much is, indeed, asserted by both Boehm-Bawerk and Von Wieser; and one wonders mostly why, if all this hedonism is, in fact, so unessential, one finds so much of it. And yet it may safely be asserted that there is not one single essential doctrine in the system that might not, without substantial impairment or change of economic bearing, be stripped of its psychological or ethical implications.”

2. Futility.

Neither of these statements takes into account those aspects of the theory which relate to the explanation of costs, interest, and the other shares in distribution or adequately appraises the importance to economics of the emphasis it places upon the demand side of the price problem, however explained; of the detailed operation of demand and supply in the price determining process, which it supplies; of the “motivating function of value” which it emphasizes; and of the manner in which it utilizes the concept of margins. Because it fails to explain all the phenomena that need explanation or has been used by some of its advocates to supply false or inadequate explanations, these extreme critics would throw it on the scrap-heap, or think they have thrown it upon the scrap-heap when they are merely unconscious of the elements of it they have themselves absorbed and habitually use. The marginal utility theory may not be, and probably is not, the last word on the subject, but it will continue to hold its ground until something better has been found to take its place, and then it will probably be found that this theory has been an important aid in finding that something better.

Mr. Downey does not rest his charge of “futility” solely upon the ground of the “psychological inadequacy” of the theory but adds that it “falls short of practical usefulness.” The substance of his argument on this point is “that no generalization about price which is of much significance can be true. It is, to be sure, often convenient to comprehend the multitudinous price-factors in some general formula—as that price depends upon the demand and supply forces in the particular case, together with the relative ‘strategic’ position of buyer and seller. But such a formula has meaning only as. content has been given to its terms by previous analysis; and it is applicable to any concrete case only in the sense of pointing to the need of specific analysis.” In regard to the particular generalization he is criticizing he says:

The basic statements of this sweeping indictment have not been adequately supported in the article in which they are made and will certainly be questioned by economists who are interested in the theoretical as well as the so-called practical aspects of the science. In the first place, consider the statement “that no generalization about price which is of much significance can be true.” There is, of course, opportunity for quibbling over the meaning of the phrase “much significance,” but it is safe to say that few economists, or so-called practical men for that matter, would consider insignificant or of little significance generalizations regarding demand and supply, costs, money and credit, etc., which are commonly accepted as true by all thinkers and observers, however much they may differ regarding certain aspects of these subjects.

Consider next Mr. Downey’s statement that the marginal utility theory, or the “mode of theorizing” of which it is a sample, “is grounded upon the assumption that the behavior of men in any given situation can be predicted from elementary human nature.” While the grounds for this statement are left to the reader’s imagination, its falsity is too obvious to require comment. Theorizing from abstractions of certain qualities of what Mr. Downey calls “elementary human nature,” common from Ricardo down to the present, has never been regarded by any reputable economist as an adequate basis for the prediction of human behavior. All that has been claimed for it is that it helps to explain such behavior; it must always be supplemented by the consideration of the elements of the actual situation not included in the abstraction. The fact that some economists have been guilty of giving these abstractions greater weight in explaining human behavior than they deserve by no means justifies Mr. Downey’s sweeping statement or proves that this “mode of theorizing” is without value.

Consider finally the statement that “the marginal-utility theory aims at showing, not how price is determined in any actual case, but how price would be determined if men were to act in certain ways under certain assumed circumstances.” It is quite certain that no advocate of this theory would accept this as a correct statement of its aim. He would readily admit that certain assumptions, such as free competition with its numerous implications, are implied, but he would not admit that these assumptions prevent the theory from showing “how price is determined in any actual case.” On the contrary he would claim as the chief merit of the theory that it does in substance explain how prices are actually determined. It is probable that this statement of Professor Downey’s is based upon his assumption that this theory is necessarily based upon the hedonistic psychology, an assumption which has already been considered in preceding paragraphs.

3. Marginal Costs versus Marginal Utility.

A large part of Dietzel’s discussion is beside the mark because it does not join issue with the Austrians. For example, he begins with an attempt to prove that in a Crusoe economy labor-cost is the only practicable basis of comparison between goods. This may be true, but it is not the question at issue. The Austrians seek to determine in the first place how people assign importance to goods in relation to their well-being and in the second place how the estimates thus placed upon goods enter into the determination of exchange values.

They admit that there are cases and conceivable situations in which importance to well-being is measured by labor-costs, but they deny that these cases and situations are the typical ones in our division-of-labor-exchange economy. In any case they affirm that it is only when and to the degree that labor-costs or any or all other influences affect people’s estimates of the relation of goods to their well-being that they affect subjective value and through it exchange value. They contend that the relations of cause and effect in the chain that ends in market values begin with estimates by individuals of the relation between units of goods and their well-being, i.e., marginal utility, and run through the machinery of demand and supply from it to market value. Back of these estimates and contributing to them may be and are many and various influences, of which labor-costs—in some, but comparatively few cases—are one. Marginal utility is, so to speak, the nerve-center into which all these other nerves run and through which they exert their influence on economic value.

In the course of the discussion Böhm-Bawerk attempted to bring the controversy to precise issues, and to a degree he succeeded. It was agreed, for example, that the word costs in the discussion should refer to the different outlays of the entrepreneur and not to a “sum of labor,” labor-costs thus meaning the payments made to laborers for their services rather than a quantum of sacrifices endured by laborers. The question at issue thus became: Does the value of the cost goods, including labor, determine the value of the product or vice versa? Dietzel’s answer to this question was: Each is the cause of the other; Böhm-Bawerk’s and the other Austrians, that in the final analysis value of product determines the value of cost goods.

Dietzel’s argument consists of the superficial tracing of the mutual relations between production and consumption goods. He shows that, if the former are valueless, so are the latter and vice versa, but he does not go to the roots of the problem of explaining why either is valuable. He contents himself by affirming that the explanation is to be found in scarcity, without following out the implications of this explanation.

That there are mutual action and reaction between value of product and value of cost goods and constant readjustments of the one to the other is not only not denied but clearly asserted by Böhm-Bawerk and the other Austrians, and they even go so far as to trace these mutual reactions and adjustments; they insist, however, that, when they are fully traced, a final ultimate cause is found in marginal utility of consumption goods. For example, as one traces these actions and reactions further and further back, he comes, as the classical economists showed, to labor as the ultimate cost good and to the question of what determines the value of that labor. To say, as the classical economists said and as Dietzel asserts, that in the long adjustment the value of that labor is determined by the cost of its production in terms of the value of the food, shelter, etc., needed to support and maintain the labor supply is no answer, since it explains value of labor in terms of value of goods; no solution of the difficulty surely, since the value of said goods remains to be explained—the same old problem in the same old form.

There is no escape from the fact that Dietzel’s reasoning left the problem of value unsolved. It did not bring him to the final issues. It was occupied with mediate and not with ultimate relations of cause and effect. Whatever may be the defects of the Austrians’ reasoning, it has the merit of concerning itself with the ultimate relations. The only form of the cost theory which reaches down to these is that which conceives of labor-costs as labor sacrifices and explains the estimates individuals put upon goods, as conditions of their well-being, as determined by the sacrifices their production entails rather than by the satisfactions they yield. The issues here involved were discussed by Von Wieser and are explained in Chapter XXI. Dietzel came nearest to them in the early part of his discussion reviewed above, but in confining his analysis to the Crusoe economy he failed to grapple with them in the aspects they assume in actual life.

4. Excessive Abstraction and Circular Reasoning.

Mr. Anderson concedes that a certain amount of abstraction in the explanation of value is necessary and therefore permissible, but he claims that the Austrians, in drawing the line between the permissible and the non-permissible, have violated the “familiar canon” that “we must include enough in our explanation phenomena to enable us to explain our problem phenomena in terms other than itself. Concretely, in explaining value, we have not solved the problem if the explanation assumes value.”

In order to determine whether this charge of “circular reasoning” against the Austrian analysis is or is not valid, we must recur to the starting point of that analysis, namely, individuals with wants; and physical environment which supplies, in various degrees of abundance from superfluity to extreme rarity, for the satisfaction of those wants, commodities ready for consumption and materials and powers capable of being transformed into such commodities. By various processes this physical environment, or that part of it capable of appropriation, became the private property, or at least subject to the disposition, of individuals or groups of individuals and constituted for them an original endowment of purchasing power. The power to render service is another original endowment which supplies purchasing power even to people who lack a share of this original physical equipment. According to the Austrian analysis, differences in the marginal utilities of these original endowments to different individuals lead to exchanges between them and to the familiar phenomena of market value and prices.

Can the charge of circular reasoning be made against that analysis?

It is true that the commodities and services exchanged are assumed to have value in the sense that they are wanted and that they exist in such a degree of scarcity as to establish a relation of cause and effect between the acquisition or the loss of the good and some degree of want-satisfaction. Is it necessary to go back of the fact of the existence of natural materials and forces and human services in a degree of scarcity as compared with the desires of individuals for them in order to explain the original endowment of individuals with purchasing power? And does the assumption of this fact justify the charge of circular reasoning? If so, can any process of reasoning escape that charge, the premises of which are alleged observations of the facts of physical and human nature?

Regarding the other phase of Mr. Anderson’s criticism, namely, that “the Austrian analysis was essentially faulty . . . in its abstraction of the economic from other aspects of the individual’s value system,” the question may be raised whether the Austrians are actually guilty of this abstraction. Is not the trouble rather that the essentials of the marginal utility theory are independent of the kind of value analysis Mr. Anderson has made, that his analysis supplements rather than supersedes the Austrian, that the problem he attacked and that attacked by the Austrians are different problems or, perhaps, different and not inconsistent phases of the same problem?

B. Böhm-Bawerk’s Treatment of Interest

Böhm-Bawerk’s critics have followed three lines of attack. They have accused him of misinterpreting many of the authors whose views he criticizes; of mistaking his own explanation of interest for a new theory, whereas it is only a restatement of old ideas; and of making an error in his attempt to connect the productivity of capital with the explanation of interest through the principal of the technical superiority of present goods.

The first kind of criticism is represented by the late Francis Walker and Professor Alfred Marshall. The former claimed that Böhm-Bawerk frequently mistook “blunders of expression” for errors of judgment. Being a firm adherent of the productivity theory, and unable to believe that any really able thinker could have sought for an explanation of interest in any other direction, Walker denied the separate existence of the abstinence and use theories, claiming that the authors of these so-called theories intended them only as “a social justification of interest” and not as adequate explanations of the causes of this phenomenon. In this connection he mentioned especially Hermann, Karl Menger, and Senior.

The following quotations in regard to the criticisms of Walker and Marshall are taken from the present writer’s preface to Recent Literature on Interest.

“Professor Marshall found the explanation of interest in the cooperation of what he calls the ‘productiveness’ and the ‘prospectiveness’ of capital, the former determining the demand for that factor of production, and the latter limiting the supply. He believed that most of the writers on interest have had both these elements of the problem in mind, and have differed from each other chiefly in the fact that some have laid more emphasis upon the one and others upon the other. He has expressed the opinion that many of the authors criticized by Böhm-Bawerk would not have accepted his statements as fair and complete presentations of their views.

“In reply, Böhm-Bawerk says that the question at issue between himself and such critics as Walker and Marshall does not so much concern the interpretation and estimation of the views of other authors as the real essence of the interest problem, and the requirements for its solution. Regarding what the authors criticized really meant, he is quite willing to leave the decision to the intelligent readers of his book, for whose benefit he has very often quoted their exact words; but in justification of his view of the nature of the problem of interest, and the conditions necessary for its solution, he submits some characteristic statements of Walker and Marshall to analysis and criticism.

“He disposes of Walker in a single paragraph. Referring to his statement regarding the teachings of Hermann, Menger, and Senior that ‘they thus reached a social justification of interest which no one of them probably ever mistook for a scientific ascertainment of the cause of interest,’ and that on account of their ‘blunders in expression’ Böhm-Bawerk ascribed to them independent, deeply thought-out theories which they never held. He says: ‘I do not think that I need waste a single word to prove that, on the contrary, it would have been most ungenerous, and for a true historian absolutely impossible, to have simply obliterated the use and abstinence theories from the history of the development of interest theories and to have drawn the old story of the productivity theory from the most widely differing methods of explanation, or, more accurately, to have forced that interpretation upon them.’

“The criticism of Marshall bears upon two points chiefly. In Böhm-Bawerk’s opinion he overestimated the explanatory power of the cooperation of ‘productiveness’ and ‘prospectiveness,’ and was deceived regarding the actual relation in which the different groups of theories stand to this coöperation.

“On the first point Böhm-Bawerk refers to a passage in the chapter on the eclectics, in which he says that no impartial observer could fail to see that interest is in some way connected with the productivity of capital, and with the abstinence required for saving, but such an observation, he says, comes far short of an explanation of interest. It may be compared to the observation that a rainbow appears whenever the sun strikes a rain-cloud at a certain angle. No one would regard this as a scientific explanation of the rainbow. It is the duty of science to point out the exact connection between this apparent cause and its effects, and the explanation would be very different according as the scientist assumed the undulatory or the emission theory of light. In like manner, ‘productiveness’ and ‘prospectiveness’ furnish no explanation of interest. They constitute only the framework of an explanation. The problem is to show the connection between these facts and interest.

“The injustice of Marshall’s charges and his evident misunderstanding of Böhm-Bawerk’s real attitude toward the authors he criticizes is further shown by reference to certain passages in the first edition in which Böhm-Bawerk pointed out the affinity between the use and the productivity theories. In one place he called the former an offshoot of the latter, and in another he said: ‘This theory [the use theory] assumes capital to be productive.’ Again he said: ‘The relation of use theories to the productive power of capital will not, however, be found stated so clearly in the writings of their representatives as I have thought necessary to state it. On the contrary, indeed, appeals to the productive power of capital long accompany the development of the use theory proper, and we are very often left in doubt whether the author relies, for his explanations of surplus value, more on the productive power of capital or on the arguments peculiar to the use theory.

The second type of critic is represented by Messrs. Macfarlane and Carver who regard the agio theory as substantially identical with the abstinence theory stated in the forms they approve. They do not, therefore, so much disapprove of the substance of Böhm-Bawerk’s explanation of interest as of the form in which it is stated. The explanation which they approve, however, and which they regard as substantially like his, Böhm-Bawerk regards as forms of the abstinence theory and subject to the criticisms he has passed on that theory.

It should be noted that Fisher does not deny the technical superiority of present goods in the sense in which Böhm-Bawerk uses the term, as simply indicating the capacity which present goods give to adopt “round-a-bout” and therefore more productive processes, but claims that it produces its effect on interest not independently, as Böhm-Bawerk claims, but through its admitted effect upon the “relative scarcity of present goods compared with future goods.” In other words Fisher does not deny that the technical superiority of present goods is often the cause of the relation that actually exists between the provision for the wants of the present and the future and, therefore, of the value of present as compared with that of future goods, but he denies to this cause the attribute of independence because it produces its effect mediately, i.e., through an intermediary rather than directly or without an intermediary.

If any criticism is to be passed upon Böhm-Bawerk at this point, it should be not that he treated the technical superiority of present goods as an independent cause of interest but that he so treated the relation between wants and provision for wants, since this relation is always the result of causes lying back of it, of which technical superiority of present goods is one, while “bad harvests,” “loss by fire,” “death in the family,” and other things mentioned by Böhm-Bawerk are others.

Fisher’s criticism turns upon the meaning to be attached to the term independent cause. He apparently means by it any cause, whether mediate or final, which may or does operate without the cooperation of other causes. Böhm-Bawerk meant by it a cause that can and should be distinguished from others as contributing to the effect in question, whether operating alone or in cooperation and combination with other causes. All that Böhm-Bawerk meant by the statement that the technical superiority of present goods is a cause of interest is that the fact that present goods enable one to undertake “round-a-bout,” and therefore more productive, processes of production cannot be ignored in the explanation of the higher estimate which men put upon present goods as compared with future. Other facts which likewise cannot be ignored in such an explanation are the tendency of people for one reason or another to underestimate the future and a variety of influences beside the use of present goods in “round-a-bout” processes, such as bad harvests, losses by fire, death in the family, etc., which for short he summarized as influences affecting the relation between wants and the provision for wants in the present and future. Nothing that Fisher has said affects in the slightest degree the validity of these propositions.

Indeed, Fisher includes them all in his own explanation, which differs from Böhm-Bawerk’s in form only and not in essential substance.

In the third edition of his Positive Theory (Exkurs XII) Böhm-Bawerk analyzed Fisher’s criticism and replied to it in a manner which compares favorably with the best of his critical work.

Footnotes

1 In the third edition of his Positive Theorie des Kapitals (1912), pp. 310-330, Böhm-Bawerk replied to this criticism.

2 Value and Distribution (Chicago: University of Chicago Press, 1908), pp. 303-305.

3 Proceedings of the Sixth Annual Meeting of the Pacific Collegiate Economic and Commercial Congress, pp. 4, 5.

4 Ibid., p. 5.

5 Zenar Clark Dickinson, Economic Motives (Cambridge, Massachusetts: Harvard University Press, 1922), p. 205.

6 “The Hedonistic Interpretation of Subjective Value,” Jour. Pol. Econ., IV, 74, 75.

7 Op. cit., pp. 306, 307.

8 Notably Fetter, Pareto, Walras, and Schumpeter.

9 “The Futility of Marginal Utility,” Jour. Pol. Econ., XVIII, 262.

10 Haley, loc. cit., pp. 8 and 9.

11 Loc. cit., p. 268.

12 Ibid.

13 See Dietzel’s “Die klassische Werttheorie und die Theorie vom Grenznutzen,” N. F. XX, 563; Zuckerkandl’s same title, ibid., XXI, 509; Böhm-Bawerk, “Ein Zwisch-enwort zur Werttheorie,” ibid., XXI, 519; Dietzel’s “Zur klassischen Wert und Preis-theorie,” dritte Folge, I, 685; and Böhm-Bawerk’s “Wert, Kosten und Grenznutzen,” ibid., III, 321. See also Davenport, op. cit., pp. 339 ff.

14 B. M. Anderson, Social Value (Boston: Houghton Mifflin Company, 1911), pp. 45-47.

15 Ibid., pp. 46, 47.

16 Eugen von Böhm-Bawerk, Recent Literature on Interest, translated by William A. Scott and Siegmund Feilbogen (New York, The Macmillan Company, 1903), p. 6.

17 From Böhm-Bawerk, Recent Literature on Interest, p. xxxii. By permission of The Macmillan Company, publishers.

18 Ibid., pp. xxxii, xxxiii.

19 Quoted from the writer’s preface to Böhm-Bawerk, Recent Literature on Interest, pp. ix-xv. By permission of The Macmillan Company, publishers.

20 Other critics belonging to this group are F. A. Fetter, “The Roundabout Process in the Interest Theory,” Q.J.E., XVII, 13; Lexis, Jahrbuch fur Gesetzgebung, Verwaltung und Volkswirtschaft, 1895, pp. 332-337; and Bortkiewiez, ibid., 1906, p. 69. Fisher’s criticism is selected as representative because it includes all the important points brought out by the others and is more comprehensive and complete than any of the others.

21 Irving Fisher, The Rate of Interest (New York: The Macmillan Company, 1907), p. 55.

22 Ibid., p. 56.

• 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.”