The Positive Theory of Capital

CHAPTER VII

ALTERNATIVE USES

IN the present and following chapters of this book we shall continue the discussion of various casuistical complications which arise in practical life in the formation of value. We must go into these for two reasons: first, in order to put on a surer foundation the perfect agreement of our theory of value with the phenomena of actual life, and, second, because the conclusions arrived at now will find important applications later when we come to the theory of capital.

It often happens that a commodity permits of being employed or used in two or even several entirely different ways. Wood, for instance, can be used for burning or for building; grain for bread, for seed, or for distilling; salt as a relish, or as an auxiliary material in the making of chemicals. Since, then, in each different employment the commodity supplies different wants, and these wants have, of course, different degrees of importance; since, further, in these different classes of wants, the relations of want and its provision are frequently dissimilar; and since, finally, the good, if it possesses a complex usefulness, does not usually possess this usefulness in the same degree at all times,—on all these grounds it is easy to see that the increment of utility which a good causes, or the marginal utility which it may afford, may vary very greatly from one employment to another. For instance, it may very well be that a pile of boards, used for building material, affords its owner a marginal utility that may be indicated by the figure 8, while the same boards, used as fuel, would only afford a marginal utility indicated by the figure 4. The question now is: In such cases which is the true economical marginal utility that determines the value of the good?

The answer is easy enough: it is always the highest marginal utility. As has been already shown at length,1 the true marginal utility of any good is identical with the least utility which it may be employed, economically, in providing. If, then, several mutually exclusive employments compete for any particular good, it is clear that, in any rational scheme of economy, the most important among them will get the preference; it alone is economically permissible; all less important uses are excluded; and, as the good cannot be used in these employments, they can have no influence on the value set upon it. To put it in terms of our concrete example. If a peasant, after using his stock of wood to provide for all the more urgent wants of building and fuel, has still two uses for wood—two employments to which he could profitably put it—indicated by the numbers 8 and 4, but has only one pile of boards remaining, it is clear that he will apply them to the more important of the two uses, and leave the less important unprovided. So long as he can get a utility indicated by 8 in building, he will not burn the wood to get a utility indicated by 4. What depends, then, on his having or not having that particular pile of boards, is the obtaining or not obtaining of the greater utility 8. We may put the rule in general terms thus: in the case of goods which allow of alternative uses or employments, and are capable of furnishing different marginal utilities in these uses, that employment which yields the highest marginal utility is the standard for the economical value of the goods. This rule will be found amply confirmed by experience. Nobody would price oak furniture at its value as fuel, or sell a fine picture for the price of old canvas, or estimate a lady’s hunter by its capacity to draw a butcher’s cart!

The formula, however, as now stated might easily give rise to mistakes, and it will be advisable to anticipate these before going further. It might seem as if what I have just said was contradictory of what was said a little ago. I now say that, among several alternative employments having different marginal utilities, the highest is the standard, while a few pages ago it was demonstrated that, if the immediate marginal utility of a good (say the utility of the last good of its own class) was greater than its mediate marginal utility (say the marginal utility of goods of another class employed as substitutes), the lower marginal utility was the standard.2 The seeming contradiction is very simply explained. In the former case we were dealing with a distinction between several ways in which a stock of goods could be employed; now we are dealing with a distinction between two or more employments for which the stock of goods is not sufficient, and, as I have already shown 3 on a former occasion, the least of those uses to which a good is put always coincides exactly with the greatest of those uses which fail of provision if there is no such good.

When, then, in the above formula I spoke of several alternative employments and of alternative marginal utilities, it must be understood as a method of expression which, literally speaking, is not quite correct. For, naturally, of those competing employments only one can, economically, be the last; only one, therefore, can be the true “marginal employment”—that in which we find the marginal utility—while all the other employments are, economically, inhibited. They make the more demand on our attention, however, as being the first or most conspicuous representatives of an entire branch of employment. As soon as we think of this latter branch at all, these representatives force themselves, in the first place, on our consideration, and it is by choosing between them that we, as it were, give a casting vote for one among entire groups of employment, such as carving and burning of wood, hacking and knacking of horses, and so on—an actual psychological procedure which appears to me best and most concisely indicated by the above formula.

Here, however, it must be emphasised that the precedence given in the course of our inquiry to those pseudo-marginal employments is only formal: in our economical decisions they enjoy no sort of material preference. Generally speaking, the fact that the employments to which a good may be put fall into several distinct branches has really not the slightest influence on our calculations of value. Just as we do not value goods according to kinds of wants,4 so we do not distribute them according to branches of employment. Every concrete employment is only looked on as a possible employment according to the rank which it maintains in virtue of its importance among all competing employments of every branch. And thus, in obedience to the principle of economic conduct, we always follow one and the same course; we allocate our stock of goods among the concrete uses which are of most importance on our scale, and the last of these determines for us the marginal utility and the value of the good.

Now in doing so it will often happen that only one single branch of employment is taken into consideration. This will of course be, quite regularly, the case where we have only a single individual commodity to dispose of. But it will also happen where a whole series of concrete employments of one kind outweighs that of another kind in importance, and where, at the same time, this series is long enough, or the available stock of goods is small enough, to leave no provision for employments of less importance. If, for instance, in any branch of industry, there are a hundred opportunities of employing certain goods, and the importance of each opportunity is indicated by the figure 8, while the opportunities in another branch of employment are indicated only by the figure 6, and if our stock of goods consists of fifty individual commodities only, naturally all the fifty will be devoted exclusively to the first kind of employment, and their value will be fixed, according to the highest utility, at 8. But often it will happen that wants representing different branches of employment—say, for instance, timber wanted for building and for burning—demand satisfaction simultaneously; in such cases it is the ratio that chances to exist between the opportunities and the goods that decides to what branch of want the “last” employment will belong; that is to say, the employment which determines the value. Suppose that in one branch of employment there are four opportunities, indicated, according to importance, by the figures 10, 8, 6, 4; and that in another branch there are four opportunities, indicated by the figures 9, 7, 5, 3; and suppose that a man possesses in all five individual goods; there is no doubt that the five goods will be allotted to the opportunities 10, 9, 8, 7, 6, and that the last’ figure (which, accidentally, belongs to the first branch of employment) is the real marginal utility and determines the value of the good, while the employment that comes next in the second branch, that indicated by the figure 5, must, according to our formula, become the “pseudo-marginal utility.”

5 See above, p 147.

6 See above, p. 157.

7 See above, p. 154 in note 2.

8 See above, p. 142.

• 1See Monger’s Grundsätze der Volkswirthschaftslehre, p. 93.
• 2See my Capital and Interest, 1890, p. 111.
• 3The English word “Cattle,” as Knies (p. 7) has rightly remarked, has nothing in common derivatively with our conception.
• 4Capital and Interest, book i. chaps, ii. and iii.
• 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:—
• 6When 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.
• 7Originally 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.”
• 8In the meantime the disputes which had arisen over the legitimacy or illegitimacy of loan interest brought about an essential deepening and widening of the conception. It had become apparent that the interest-bearing power of “barren” money was at bottom a borrowed one—borrowed from the productive power of things that the money could buy. Money only gave the exchange form—to a certain extent the out-ward garb—in which the interest-bearing things passed from hand to hand. The true “stock” or parent stem which bore interest was not money but the goods that were got for it. In these circumstances the obvious course was so to change the conception that, besides embracing the representative thing, money, it would embrace the represented thing, goods. And, indeed, popular language seems to have made this change before science did. At least, as early as the year 1678, in a glossary of that year, besides the meaning of a sum of money there appears this further interpretation of the word capital, “Capitale dicitur bonum omne quod possidetur.” But science was not long behind in sanctioning the adoption of the conception. We find it substantially in Hume in his essay on Interest, when he shows that the rate of interest altogether depends, not on the amount of money, but on the amount of riches or stocks available; the only thing wanting is that he should have formally called these riches or stocks “real capitals.” This formal change was finally made by Turgot: “Whoever,” he says in his Réflexions sur la Formation et la Distribution des Richesses, “gets possession of more goods in a year than he requires to use, can lay past the surplus and accumulate it. These accumulated goods are what people call Capital…. It is absolutely the same whether this sum of goods, or this Capital, consists of a mass of metal, or of other things, since money represents every kind of goods, just as, on the other side, all other kinds of goods represent money.” Thus Turgot gave the second reading in historical succession to the conception of capital.