The Positive Theory of Capital

CHAPTER I

THE FUNDAMENTAL LAW

EXCHANGES are not made simply for amusement. People who take the—not always trifling—trouble to exchange the goods which they possess for other goods, do so for a rational and material end, and, in nine hundred and ninety-nine cases out of a thousand, this end is to better their economical condition by the exchange.1 Whether this end be attained, and in what degree it be attained, depends naturally on the current conditions of exchange, particularly on the prices which the parties get as equivalent for their goods. It is, therefore, a perfectly natural thing that the motive which gives rise to exchange in general, namely, the striving after economical advantage, should maintain a commanding influence in the fixing of the exchange prices.

In what follows I mean to inquire how prices are determined under the assumption that all who take part in the exchange act exclusively from the motive of pursuing their immediate economical advantage in it. The law which we shall arrive at in this way I have already,2 for very good reasons, called the fundamental law of the formation of price. I am perfectly aware that, in practical life, this law does not exactly obtain. For, although the motive of self-advantage is almost never absent, and is almost always the most prominent motive, still, in price transactions, other motives do very often get mixed up; such motives as humanity, custom, friendship, vanity, or the influence of outside institutions, such as government taxation, union regulations, boards for fixing wages, and the like, give them another direction than that they would have taken if exclusively dominated by self-advantage. Such motives, indeed, scarcely ever get the upper hand of the other to the extent of making us conclude an exchange which would cause us positive economic loss; but they often make us decide to be content with a less amount of advantage than we should have got in steadily pursuing our interests.

I have on the same occasion 3 expressed myself with all clearness on the theoretical and practical importance of the admixture of these other influences, and I shall only now briefly sum up what I then said. In actual life this admixture of motives causes certain modifications of the fundamental law of the formation of price, and the statement of these modifications cannot be neglected in any accurate and complete theory of it. But if all that is wanted is to grasp the characteristic features of the formation of price, it is enough to put forward the “fundamental law “above mentioned. For just as, among the motives that determine price, that of striving after self-advantage in exchange has the lion’s share, so does the lion’s share in the theoretic explanation of the phenomena of price fall to the “fundamental law “here stated. And it is sufficient for us in our present task, as we have not to pursue the theory of price as an end in itself, but only so far as is necessary to establish the theoretical connection between the elementary phenomena of subjective value and the complicated phenomena of interest. In this law we obtain a principle which is not minutely accurate, but is amply sufficient for the further development of the theory of capital.

Before going on to state the peculiar laws of price, it may be desirable to preface them by some considerations that may, more accurately, unfold the content of the fundamental motive which forms the assumption and basis of the whole of the following inquiry.

In exchange transactions the decisions made always turn on two points; these are—(1) whether, in a given state of things, a man should exchange or not; and (2) if he decide to exchange, what form he should try to give to the terms of the exchange. Now in making these decisions it is obvious that the man who looks to his own immediate advantage and nothing else, will act according to the following rules. First, he will exchange only if the exchange brings him an advantage. Second, he will rather exchange for a greater advantage than for a less. Third, he will rather exchange for a small advantage than not exchange at all.

It scarcely need be shown that these three rules are dictated by our fundamental motive, and constitute the practical sub-stance of it; what does require elucidation is an expression that recurs in them all, “to exchange with advantage.”

The meaning of the expression obviously is—to exchange in such a way that the exchanger gains more in wellbeing from the goods he gets than he loses in the goods he gives; or, since the importance that goods have for life and wellbeing is expressed in their subjective value, to exchange in such a way that the goods received possess a greater subjective value than the goods parted with. If A owns a horse and is willing to exchange it for ten casks of wine, it can only be because the ten casks of wine have a greater value for him than his horse has. But, naturally, the other party to the contract thinks exactly in the same way. He, on his part, will not give up the ten casks of wine if he does not get for them a good that has a greater value for him. He will exchange his ten casks for A’s horse only if the wine is worth less to him than the horse is.

From this we get an important rule. An exchange is economically possible only between persons who put a different value, even an opposite value, upon the commodity and upon the price equivalent.4 The buyer must put a higher, the seller a lower, estimate on the commodity than he does on the equivalent. Indeed the interest which the two parties have in the exchange, and the gain they get from it, increases as the difference between their estimates increases; if the difference decreases their gain decreases; and if the difference disappears, and their estimates coincide, no exchange is, economically, possible between them.5

It is easy to see that, under the regime of the division of labour, there must be innumerable chances of opposing estimates, and therefore innumerable opportunities of exchange. That is to say, as each producer makes only one or two kinds of articles, and these far in excess of his own personal requirements, he has at once a superfluity of his own products and an absence of all others. He will, therefore, ascribe to his own product a low subjective value, and to other products a relatively high subjective value. But, conversely, the other producers will ascribe a high value to all products which they have not, and a low value to their own products of which they have too many, and here we have in the fullest degree that relation of opposite valuations which is most favourable to the effecting of exchange.

Another idea that comes out in what has been said we may follow to its logical consequences. To one consulting his own advantage an exchange, as we saw, is economically possible only when he estimates the good to be acquired more highly than the good possessed. Now, obviously, this will more readily occur the less value he puts on his own commodity, and the more value he puts on the equivalent. A man who values his horse, subjectively, at £50, and values a cask of wine at £10, has, economically, a much greater possibility of exchange—or, as we shall say in future for brevity’s sake, is much more “capable of exchange”—than another who values his horse at £100 and a cask of wine at £5. The former, obviously, can proceed with the exchange if six casks are offered him for his horse, while the latter must hold back unless something over twenty casks is offered him. If a third party again values his horse at £40 only, and a cask of wine at £15, obviously he would be economically capable of concluding an exchange if even three casks were offered him. Generally speaking, then, that exchanger is the “most capable “who puts the least value on his own commodity in comparison with that offered him in exchange, or, what is the same thing, puts the highest value on the other commodity in comparison with the commodity which he offers in exchange for it

Now that we are sufficiently acquainted with the meaning and content of our “fundamental motive,” we may proceed with our proper work, and consider what are the normal effects which this fundamental motive exerts on the formation of price. In this part of our work the method already pursued by several distinguished economists seems to me by far the most convenient: first, by typical illustrations to show how, under certain definite assumptions, price is and must be determined, and then to separate the accidental surroundings of the illustration from what is universal and typical, and formulate the latter into laws. I shall begin with the simplest typical case, the determination of price in isolated exchange between a single pair of exchangers.

6 Menger, Grundsätze, p. 153. Of course now and then exchanges may be made simply to show some person a kindness; perhaps to conceal a present, or a charity in the guise of an exchange. But such cases form only a quite insignificant minority.

7 Grundzüge, part ii., in Conrad’s Jahrbücher, vol. xiii. p. 486.

8 Grundzüge, p. 480.

9 It will be observed that our author does not confine the word Price to Money price, but applies it to the equivalent good or goods obtained in exchange for what is, pre-eminently, the good—the object of demand from buyers, and of supply from sellers. The convenient word Preisgut I render by “price equivalent,” or simply “equivalent.”—W. S.

10 Say, e.g., that A values his horse at five casks of wine, while B values it at fifteen, then, if the horse goes for ten casks, each gains an amount of value represented by five casks of wine. If A values the horse at eight and B values it at twelve, each gains only a value of two casks. Finally, if both agree in valuing the horse at twelve casks of wine, B, of course, would be glad to get the horse for ten casks, or for any price under twelve casks, but A, naturally, would not give it him at that price. See Menger, Grundsätze der Volkswirthschaftslehre, p. 155.

• 1See Monger’s Grundsätze der Volkswirthschaftslehre, p. 93.
• 2Generally speaking, there are two occasions on which a man is called on to form a judgment as to value. One is on parting with a good in his possession, e.g. in giving it away, or exchanging, or consuming it; the other, on acquiring a good. In the two cases the form which the valuation assumes in thought is, externally, a little different. A good which a man has he values according to the injury which he would suffer by its loss; he values it, therefore, according to the last satisfaction which is assured him by having it. A good which a man has not he values, on the contrary, according to the increment of utility which its acquisition brings; i.e. according to the most urgent among those satisfactions which, in the conditions of his fortunes up till the present time, he has not been able to obtain. Naturally we get the same result by either method, for the final satis-faction which is assured by a good is always identical with the first which would be lost without the good. In the text I have put the formula in such a way that it will sufficiently embrace either method.
• 3See my Capital and Interest, 1890, p. 111.
• 4P. 219 (German edition, p. 266). See also my Hechte und Verhältnisse, p. 51. Innsbruck, 1881.
• 5See Mill’s Principles, i. 1. 2.
• 6If we try to represent the classification of our wants by a typical scheme we must, on the principles just laid down, give it something like the following shape:—
• 7THE cases we have hitherto considered have been comparatively easy of interpretation; but practical economic life brings out a great many complications which the practical man treats with easy assurance, but the theorist finds considerable difficulty in explaining. To understand these everything depends on the correctness of our casuistical decision as to that amount of utility which, in* the given circumstances, is the marginal utility. For this purpose the following general direction may serve as master-key to all the more difficult problems of value. We must look at the economic position of the person who is estimating the value of a good from two points of view. First, we must in thought add the good to his stock, and consider what further and lesser concrete wants can now be satisfied. Second, we must in thought deduct the good from his stock, and consider again what concrete wants will still be satisfied. In the latter case, of course, it becomes manifest that a certain layer of wants, viz. the lowest layer, has lost its former pro-vision; this lowest layer indicates the marginal utility that determines the valuation.
• 8When we are told that capital assists in the production of wealth, and then again that it assists in the obtaining of wealth for its owner, we are apt to jump to the conclusion that the two phenomena are intimately and essentially connected, and that the one is the immediate result of the other—that capital can bring wealth to its owner because capital assists in the production of wealth. As a fact, Political Economy has taken up this idea only too readily and too completely. Captivated by the deceptive symmetry that exists between the three great factors of production—Nature, Labour, Capital—and the three great branches of income—Rent, Wage, and Interest—the science, from Say’s day till the present, has taught that these three branches of income are nothing else than the payment for the three factors of production, and that Interest in particular is nothing else than the compensation which capital receives for its productive services when the product is divided out among society. Propounded by various interest theories in various forms this idea has found its most concise and, at the same time, its most naive expression, in the well-known “Productivity theories”—those theories which explain interest directly as the natural fruit of a productive power peculiar to and resident in capital.
• 9The theory of the use of goods I have already gone into at length in Capital and Interest. I there showed that material goods are nothing else than such distinct forms of matter as admit of the natural powers residing in them being directed to human advantage. I showed how the “use” they afford is realised through concrete activities of these natural powers, and, therefore, by real forth putting of power. I showed how a use (Gebrauch or Nutzung) cannot be made of them otherwise than by taking the peculiar forms of the energy of the good at the proper moment, supplying the conditions necessary to render them available where they previously existed in an unavailable form, and then bringing these forms of energy into proper connection with that object in which the useful effect is to take place. On these considerations I based the conception of the “Material Services” (Nutzleistungen) which I believe to be the only one that corresponds with facts, and rejected certain shadowy ideas which connected the old theory of interest with the word “Uses” of goods. What remains for us here is, on the same lines, to lay down certain fundamental ideas as to the origin of material goods.
• 10If we look more closely at the way in which man assists natural processes, we find that his sole but ample contribution consists in the moving of things. “Putting objects in motion” is the idea which gives the key to all human production and its results;—to all man’s mastery over nature and its powers. And this is so simply because the powers reside in the objects. Now when man by his physical powers—the power of moving things—is able to dictate where the object shall be, he obtains a control over the place at which a natural power may become effective; and this means broadly a control over the way and over the time in which it may become effective.