The Positive Theory of Capital

CHAPTER V

COMPLICATIONS

THE 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.1 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.2

The first very obvious but, theoretically, not unimportant application, leads us to recognise that in valuing a good some-times it is the importance of some one individual concrete want that is taken into consideration, sometimes it is the importance of many concrete wants that has to be summed up. That is to say, in the nature of things the layers of want that depend on the object we are valuing may turn out to be very various, in compass and extent, according to the constitution of that object. If it is a single individual of a perishable group of goods, for instance a food, the marginal utility will usually include no more than one single concrete want, or even a partial want. If the object, again, is a durable good, and thus susceptible of repeated acts of use, or if it is a number of goods considered as a whole, it is natural that an entire sum—in certain circumstances, a very great sum—of concrete wants may be included in the layer of wants that depends on it. On the possession or non-possession of a piano, for instance, depend hundreds of musical enjoyments; on the possession of a cask of wine hundreds of pleasures of the palate; and the importance of those pleasures naturally must be summed up in valuing these goods.3

To pass on now to another far-reaching complication. It follows from our earlier analysis that the marginal utility which determines the value of a good is not (or is only accidentally) identical with the utility which the good itself actually affords.4 As a rule, the marginal utility of any good is a foreign utility, the utility of the last individual good (or of the last similar part) which may be taken to replace it. In simple cases this utility, although the utility of another good, is at the least the utility of a good of the same kind. In the illustration already made use of, the value of each individual sack of corn—and therefore the value, for instance, of the first sack—was determined by the utility of another, the last sack of corn, but always by the utility of a sack of corn. The existence of organised exchange, however, may cause consider-able complications here. In making it possible to exchange goods of one kind, without loss of time, for goods of another kind, it also makes it possible to shift a loss, which occurs in one kind of goods, over to another kind. Instead of replacing the loss of an individual good by withdrawing another good of the same kind from a less important employment, and leaving there a vacancy, we may summon goods of entirely different kinds from the occupation in which they have previously been employed, and, by way of barter, procure the good required to supply the loss. What is here lost in losing a good of class A is really the utility which the goods taken from class B would otherwise have afforded; and since, of course, we should not think of taking the replacing good from the more important but from the least important employments in their spheres of utility, the loss comes upon the marginal utility of the foreign good, that transferred from class B to class A. Here, therefore, the marginal utility and the value of a good of one kind is measured by the marginal utility of a good of another kind—by the good (or portion of goods) devoted to replace it.

To illustrate this. My only overcoat has been stolen. There is no question of replacing it directly by another coat of the same kind, because I had only the one. But, all the same, I shall not willingly let the loss caused me by the theft rest where it originally fell. For the want which now makes itself felt—that of warm winter clothing—is a very urgent one; its non-satisfaction may involve the most serious consequences to my health, and even endanger my life. I shall accordingly try to shift the incidence of the loss on to other kinds of goods, and I shall do so by parting, in exchange for a new overcoat, with goods which, in other circumstances, would have been put to other uses. The goods needed for this ex-change I shall, naturally, withdraw from those uses which are of least consequence to me; that is to say, I shall take the goods which are of least marginal utility to me. If I am well off I shall probably take the £3, the price of a new greatcoat, out of my cash-box, and I shall be able to buy one luxury the less with my diminished funds. If I am not well off, but am not exactly a poor man, I shall have to fill up the deficit in the cash-box by economising on my house-keeping expenses for a couple of months. If I am so poor that I neither have the money nor can save it out of my monthly income, I may have to sell or pawn some articles of furniture which can be most easily dispensed with. Finally, if I am so far reduced that I can provide only for the most urgent concrete wants in all the other classes, then I cannot shift the loss to other classes of wants, and needs must get along without an overcoat.

If we put ourselves for the moment into the position of the owner of the overcoat, and ask what it is, as regards his wellbeing, that depends on the coat being stolen or not, we shall find that the dependent circumstance is, in the first case, the spending of money on some luxury; in the second, some little curtailments in house-keeping; in the third, de-privation of the utility of the goods sold or pawned; in the fourth, the actual preservation of health. Only in the last case, therefore, is the value of the coat determined by the immediate marginal utility of its own class (which marginal utility here happens to coincide with the utility of the good itself because the class is represented by a single individual); in all the other cases it is determined by the marginal utility of foreign classes of goods and wants.

Under the present economic system, where exchange is very highly organised, a notable importance attaches to the casuistical modification we have just described. We might almost say that it includes the majority of subjective estimates of value. For reasons which may be easily inferred from what has been said, we scarcely ever value goods that are indispensable to us by their direct utility, but, almost always, according to the “substitutionary utility “of foreign classes of goods. I should say, however, emphatically that, even where exchange is most highly organised, we do not always have occasion to employ this latter method of valuation; it is only under certain conditions, although of course conditions that very often occur. That is to say, we employ the “substitutionary” method only when the marginal utility of the replacing good is less than the immediate marginal utility of the class into which it is transferred; to put it more exactly, when the prices of goods, and, at the same time, the circumstances of provision for the various kinds of wants, are such that, if a loss occurring in one kind were borne inside the kind itself, wants relatively more important would go unsatisfied than if the purchase price of the replacing good were drawn from other kinds of wants. But through all complications it is always the least utility, mediately or immediately dependent on a good, that determines its true marginal utility and value.

Casuistical complications similar to those made possible by exchange may be caused by the fact that replacing goods can be quickly obtained by production. This kind of complication also has a very notable place in the theory of value, from the fact that it gives the key to the influence of cost of production on value. It requires, on that account, particularly careful treatment. But it will be more appropriate to give an inde-pendent consideration to this and to certain other casuistical complications somewhat later, and to return meantime to the simple fundamental law, the statement of which requires to be supplemented in a particular direction.

5 On the relation of theory and practice in the sphere of valuation see Conrad’s Jahrbücher, vol. xvi. p. 74.

6 Generally 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.

7 On certain far-reaching complications which may be connected with this, see Conrad’s Jahrbücher, vol. xvi. p. 34.

8 The latter occurs only with individual goods, or with those particular goods which may have chanced to be selected just for the most insignificant service.

• 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.
• 4The English word “Cattle,” as Knies (p. 7) has rightly remarked, has nothing in common derivatively with our conception.
• 5If 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:—
• 6THE 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.
• 7When 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.
• 8Originally the word Capital (Capitale from Caput) was used to signify the Principal of a money loan (Capitalis pars debiti) in opposition to the Interest. This usage; already foreshadowed in the Greek formation κεϕάλαιον, became firmly established in mediæval Latin, and appears to have remained the prevailing one for a very long time, even pretty far down in the new era. Here, therefore, Capital meant the same thing as “an interest-bearing sum of money.”