In Cairnes, the two conceptions are hopelessly confused on a single page,[203] while Marshall's whole treatment runs in terms of price.

In what follows, I wish to generalize the conception of price, to show the function of the price concept in economics, to distinguish carefully between the theory of value and the theory of prices, and to see what light the theory of value outlined in this book throws upon the problems of the price a.n.a.lysis.

In chapter II, the distinction between "absolute and relative values," or, in our present phrase, between values and prices, was sufficiently indicated not to need further elaboration here. The relation between them was made clear--the absolute value must first exist before the price, which is the expression of the value of a good in terms of some other valuable object which is chosen as a measure, can be determined. In fact, _two_ values, the value of the good measured, and the value of the good which is to serve as the measure, must first exist, as absolute quant.i.ties, before a price-ratio can be made between them, and their "relative values" shown.

In the chapter on the psychology of value, the notion of price was generalized, and we spoke of the price measure of values of non-economic sort. This notion is one of very general application and one of significance for the whole realm of social and psychical phenomena: not merely where the question of exchanging economic goods is involved, but wherever choice among alternative goods, or courses of action, or men, or inst.i.tutions, or works of art, or other objects of value, is necessary, we _compare_ them with each other, we _measure_ them by each other, we _price_ them in terms of each other. We arrange them in _scales_ of value, or in series, seeing which is higher and which lower. Where only two goods are involved, we may call either the measure, depending on the point of view.

But where many goods are to be compared, it is highly convenient to pick out some one as the common measure of all, so that they may be reduced to common terms. For measuring economic goods, money is, of course, the standard, or common measure _par excellence_, for most purposes. If we are measuring the value of the political inst.i.tutions of various countries, we usually take the inst.i.tutions of our own country, with which we are most familiar, as the common measure or standard. Or, in measuring the moral systems, or the literary masterpieces, of other countries, we again find those of our own people the most convenient standard. But it is significant of the correctness of our general point of view that values of different species may be measured in terms of each other. _Money_, in particular, is a very general measure, which may serve for many values outside the economic sphere. Thus, I have pointed out how legal values may be measured in terms of money, as when the fine for one offense is five dollars, and that for another twenty-five. Gabriel Tarde[204] points out that by comparing the theatre receipts of theatres representing different dramatic schools we may compare the vogues of each, or that by comparing the income of the clergy in different periods we may get some index of the variations of religious sentiments. He suggests that while money as a measure of economic values usually functions in exchange, it may, as a measure of beliefs or other social forces, function through gifts, through popular subscriptions to build this or that statue, for the support of scientific work or philanthropies, or even through thefts: "Quelquefois meme c'est par des vols ou se montre la perversion d'un esprit sectaire, l'aberration et la profondeur de ses convictions pa.s.sionees."

Commonly, indeed, money performs even this function, that of measuring currents of belief, pa.s.sion, enthusiasms, etc., through the process of exchange, and, ordinarily, it is difficult to get any single current separately. We simply get the resultant of an equilibrium of a complex of forces in economic values. But sometimes a single factor stands out so prominently that we can abstract from the rest, and let money changes measure changes in it alone. For example, during the three days of the battle of Gettysburg, the premium on gold, as measured in terms of Federal paper, fell from forty-five per cent to twenty-three and a fourth per cent.[205] For the market, this means simply a change in the economic value of Federal paper. But for one who cares to look even superficially behind the scenes, it means an increased volume of belief in the triumph of the Federal arms--a belief that at once affected economic values, and was measured in terms of money. Or, the economist may abstract a single legal factor, as a tax law, and measure its influence on the a.s.sumption that the rest of the situation is constant, in the well-known laws of shifting and incidence.

Such clean-cut instances are not the rule, however. The organic complexity of the social forces lying back of economic values makes it difficult to disentangle single elements, and measure their force. For one thing, variations in one factor usually mean movements in the others. If we may borrow terms from chemistry, while the economist may give us a _qualitative_ a.n.a.lysis of these forces, it is hard for him to give us a _quant.i.tative_ a.n.a.lysis. And the characteristic of pure economic theory has been its effort to get quant.i.tative, quasi-mathematical laws. The "pure theorist," therefore, does well to start with a quant.i.tative value concept (a convenient shorthand or symbol for the infinite complexity that lies behind it), a value quant.i.ty in which the net outcome of social interactions does precisely manifest itself, and study the laws which it manifests. His chief interest is, not in the origin of economic value itself, but in the changes in quant.i.ties in value in different goods and services as these manifest themselves in the market, and submit themselves to economic measurement. In a word, his chief interest is, not in value, but in _prices_.[206] And the great bulk of pure economic theory, and practically all that is of greatest importance in pure theory, is in the theory of prices, and not in the theory of value. Lest I be misunderstood, the qualification must be repeated: prices here mean, not money-prices, but prices in the generic sense. In this sense of the word price, it is just as accurate to speak of the price of money in terms of commodities, or of a composite of commodities, as to speak of prices of commodities in terms of money.

That is to say, the economist gives himself little concern, in his quasi-mathematical study, as to the ultimate nature of the social forces that manifest themselves in the market. A host of forces lie back of demand, but the economist puts the phenomena of demand into a curve which is the function of two variables, one a quant.i.ty of money, and the other a quant.i.ty of goods. Lying back of these quant.i.ties of goods and money, and giving meaning to the curve, are the more fundamental quant.i.ties, the value of the goods and the value of the money. Further than this, for the purposes of his quasi-mathematical, pure theory, the pure economist has no real occasion to go--in proof of which it need be remarked simply that the most divergent theories as to the nature of value, none of them adequate if the theory set forth in this book be true, have not prevented the development of a vast, highly organized, and immensely useful body of price doctrine, shared by economists of many schools. If only the economist have a quant.i.tative value concept, he can do wonders. And, if the question be regarding relations between factors where the question of the value of money may be ignored, he may often safely abstract from the idea of value, and speak simply of money quant.i.ties, and relative changes in these money quant.i.ties. Such is, indeed, Professor Marshall's procedure in a large part of his great work. Professor Davenport's contention that, from the standpoint of the entrepreneur, the whole thing may be looked at in pecuniary terms, is true of many problems. Cost for the entrepreneur is simply a money matter. And while, for the more fundamental a.n.a.lysis, we of course must insist that a host of psychic forces determine what those money costs shall be, our a.n.a.lysis will justify the contention that it is impossible to treat them in any but price terms, in a precise and quant.i.tative manner. They are too complex. Certainly labor-pain and abstinence, looked on as abstract individual feeling-magnitudes, will not explain the supply-prices of labor and capital, any more than individual "utilities" will explain demand-schedules. And we may add that the terms "social cost" and "social utility" can, in our scheme, get no meaning that will make them useful. The social value concept seems to us absolutely essential for the validation of the whole procedure of the price a.n.a.lysis, and to be implied in every step in it, but the only meaning we can find for the concept of social marginal utility would be one which would make it identical with social value; and against that there are two objections: first, it would be superfluous, and second, it would be misleading. "Social utility" can get only a vague, a.n.a.logical meaning in our scheme. Instead of explaining social value, it would itself present a problem.[207] A measure of social economic value in terms of a feeling-magnitude which an individual can appreciate is not to be had. Value can be measured and quant.i.tatively handled only in terms of _price_.

In saying this, I do not mean to impeach that more abstract procedure which speaks of abstract units of value, and uses arithmetical numbers which designate no particular commodities, or algebraic symbols, or even ordinary speech, to indicate quant.i.tative relations among different sums of these abstract units. Such procedure is thoroughly correct, and often highly convenient, if one be dealing with highly general laws, or if one wish to avoid any complications from changes in the value of any concrete commodity which might be chosen as the standard of value. Only, I would insist, such procedure is simply an abstraction from the price concept, and so presupposes it. A unit of value, in the concrete, must be the value of some particular concrete good, which is chosen as the standard. _What_ good is chosen is a purely arbitrary matter, determined by convenience. Abstract value, apart from valuable things, is an utter impossibility--only a Platonic idealism or mediaeval realism could hold the contrary view. And, in order to show how many units of value there are in a good, we must compare it with another good, whose value is the unit, unless, indeed, we arbitrarily choose as our unit the good in question, and say that its value is one unit, or several units, in case we arbitrarily define the unit as a fraction of its value. But clearly this latter procedure would tell us nothing after all as to the amount of the value in the good. It would be a purely formal process--like renaming a "hocus-pocus" and calling it two "Abracadabras." Any real measuring--and real measuring is essential for any quant.i.tative manipulation--implies _two_ things, one of which shall serve as the measure of the other. The conception of abstract _units_ of value, therefore, is an abstraction from the price conception, and presupposes it.[208]

A valid price procedure, in my view, is essentially this: we take our quant.i.tative value concept, summing up the mult.i.tudinous social forces which determine values: then we a.s.sume a given set of ethical, legal, and social values of a non-economic sort,[209] as a sort of frozen framework within which our economic values are to operate, and which shall remain constant during the investigation: then, measuring the economic values in terms of a common unit, we let them exert their influence on the situation, and see what results follow. We vary first one and then the other, and see what readjustments any change involves. Since the situation is so infinitely complex, we bring about this artificial simplicity in thought, that we may study the tendencies one by one. But a given economic change will work out its consequences fully only on the a.s.sumption that other economic changes are not occurring. We can in thought let them vary one by one, but they do in fact all vary at once. And further--and for this fact price theory has made no allowance--the "frozen framework" of legal, moral, and other non-economic social values, is not "frozen." Changes in economic values lead to readjustments, not only in the other economic values, but also in the legal, ethical, and other values of the framework. These last are fluid, psychic forces, just as truly as are the economic values. They change because of changes in the economic values; they initiate changes in the economic values; and they initiate changes which deflect the tendencies of changes in the economic values. So that, even though we premise a thoroughly organic theory of social value, in which the influence of the non-economic social values, working _through_ the economic values, is carefully provided for, we still have to correct the results of our price a.n.a.lysis, before applying it to practice, to account for changes in the non-economic values working to deflect the tendencies which the economic values would lead to if the other values had remained constant.

This last, of course, most economists in practice constantly try to do.

Present day discussions of practical economic problems are rich in data of a non-economic sort. In practice the economist recognizes that his mission is, not to see how far a few abstract factors will go in the explanation of economic life, but rather, to _explain_ that economic life by any means in his power, though he ransack heaven and earth in the process.

Of course, it is but a commonplace to add that the economist, in practice, does try to take account of the extent to which his a.s.sumptions as to the legal and social "framework" hold: how far there is real freedom of compet.i.tion, how far real "intelligent self-interest," how far mobility of labor and of capital, how far monopoly privilege, etc. Or, at least, he usually tries to make himself think that he has done so. It still remains lamentably true that a great deal of reasoning even on practical problems is an effort to apply theories without any adequate understanding of the extent to which the theories grow out of abstractions made for purposes of study, or any effort to put back the concrete facts from which the abstraction was made. The practical business man knows how these various forces operate on values. He studies them, tries to estimate their force in quant.i.tative price terms, and adjusts his plans to them. If a religious wave sweeps over a large section of the country, the wholesaler sends in larger orders for Bibles, and smaller orders for playing cards. If a rate-reduction agitation is going on, the manufacturer of steel rails and railroad supplies plans to cut down his output. If trades-unionism grows strong, employers of labor recognize that they must readjust their budgets.

FOOTNOTES:

[198] _Cf._ Davenport, _op. cit._, pp. 296-97.

[199] _Theory of Prosperity_, New York, 1902, pp. 16-17, 89.

[200] "On the Concept of Social Value," _Quar. Jour. Econ._, Feb., 1909, pp. 226-27.

[201] See _Wealth of Nations_, introductory part of chap. VIII of bk. I (pp. 66-67 of the Cannan ed.) For Ricardo, see _Works_, McCulloch ed., London, 1852, p. 15. Adam Smith seems occasionally to use value in the relative sense, as on p. 183 of vol. II of the Cannan ed. Ricardo, though indicating that he is concerned only with relative values on the page cited _supra_, still speaks of values as simultaneously falling, in ch. XX, on "Value and Riches," which, of course, is impossible on the basis of the relative concept. There is no point to torturing these pa.s.sages unduly, however, in the effort to find our distinctions in them.

Professor Seligman calls my attention to a most interesting forty-page discussion of the theory of value by W. F. Lloyd, _A Lecture on the Notion of Value, as Distinguishable not only from Utility, but also from Value in Exchange_. The lecture was delivered before the University of Oxford, in Michaelmas Term, 1833, and published, in accordance with the rules of the foundation which provided funds for the lecture, in London, 1834. The writer insists on the conception of value as absolute, and devotes pp.

30-40 to a defense of the absolute conception. He cites the pa.s.sage in Adam Smith referred to _supra_, in which Smith distinguishes real dearness from apparent dearness (introductory part of chap. VIII of bk. I). The most striking thing about this lecture, however, is its antic.i.p.ation of Jevons's doctrine of marginal utility, and its emphasis upon the subjective character of value. The word, margin, is used in virtually the sense in which Jevons uses it, on p. 16.

The book is very rare,--only three copies, one in Professor Seligman's library, one in the British Museum, and one in the Goldsmiths' (formerly Foxwell) Library in London, are known to exist. It seems to have made no impression upon the economists of the time of its publication. A reprint to-day would enable the economic world to do belated justice to a very acute and original thinker. _Cf._ Professor Seligman's article "On Some Neglected British Economists" in the _Economic Journal_, vol. XIII, esp.

pp. 357-63.

[202] _Principles_, bk. III, chap. XV, par. 2.

[203] _Leading Principles_, editions of 1878 and 1900, pp. 12-13.

[204] _Psychologie economique_, vol. I, pp. 77-78.

[205] Scott, _Money and Banking_, 1903 ed., p. 60.

[206] _Cf._ Schumpeter, _Quar. Jour. Econ._, Feb., 1909, pp. 226-27.

[207] See _supra_, p. 163, n.

[208] _Cf._ p. 50, n. It is sufficiently clear, I trust, that this argument is concerned with the relativity of _knowledge_, and not with the relativity of _value_. We can _know_ things only in terms of our "apperceptive ma.s.s," but that does not mean that things _exist_ only by virtue of our apperceptive ma.s.s. And even knowledge is relative only when it is "_Knowledge-about_." _Cf._ James, _Principles of Psychology_, vol. I, p. 221, and _The Meaning of Truth_, p. 4, n.

[209] Marshall accords a limited recognition to our doctrine. See _Principles_, 1907 ed., p. 35, where he indicates that certain parts of the theory of value a.s.sume the prevailing ethical standards of our Western civilization, and that prices of various stock exchange securities are "normally" affected by the patriotic feelings of purchasers, and even brokers, etc.

CHAPTER XVIII

THE THEORY OF VALUE AND THE THEORY OF PRICES (_concluded_)

My strictures upon the Austrian, or "utility" theory of value in what has gone before seem to call for further qualification here. As a theory of _value_, as a theory to explain the nature and origin of value, I am convinced that the Austrian theory is utterly and hopelessly inadequate.

And yet, for the work of the Austrian economists, taken by and large, I have the highest admiration. Their treatment of margins, their conception of the motivating function of value, and their new stress on the demand side of the price-problem, const.i.tute a marked advance over the point of view of the earlier English School, even though perhaps too extreme a reaction. And their detailed work in the price a.n.a.lysis, despite the utterly inadequate basis which the utility theory of value affords for it, has been marvelously accurate, sound, and useful. Having no logical warrant for an objectively valid quant.i.tative value concept, they have none the less a.s.sumed and used one--and used it marvelously well. Sometimes that objective value is called by the name, "objective value." Sometimes they call it "marginal utility," and yet it is clearly anything but the feeling of an individual, for it is broken up into different parts, and reflected back and back through different productive goods of remoter and remoter rank till it has got very far from the individual who may be supposed to feel it. Production is the production, not of material things, but of "utilities"--and yet these utilities, as treated in the a.n.a.lysis, are anything but individual feeling-magnitudes, and the actual reasoning on the basis of them would not be different if they were called quant.i.ties of value outright. By logical leaps, by confusing "utility" with demand, or by confusing "marginal utility" with objective value,[210] the Austrians have got what the practical exigencies of price theory demand. A detailed estimate of the work of the Austrian School is, of course, out of place here, but I do not wish to be understood as failing to recognize the immense value of the work of men who have given so great an impetus to economic thought as has been the case with the Austrian masters.

There is a further topic in connection with the relation between value theory and price theory that calls for more explicit attention here, though frequent reference has been made to it already. What is the relation of the distributive problem to value theory and to price theory? Is distribution a price problem or a value problem?

It may be looked at from either angle, and treated in either way. A complete theory of distribution involves many of the most fundamental social values. Indeed, it is through the machinery of distribution that the non-economic values most vitally affect economic values. Wages, interest, compet.i.tive profits, are surely legal categories, and are possible only in a society where there is free labor and private control of industry. We may agree with Wieser[211] that, as categories of economic causation, interest, rent, and wages will remain even in a communistic society (and, doubtless, also profit and loss), but that is far from saying (as Wieser of course recognizes) that they would remain as distributive shares. Each social system has its own distributive scheme.

But, in a system like that of Western civilization to-day, where human services and the uses of land and instrumental goods are offered in the market like other commodities, we may treat them in terms of the price a.n.a.lysis with as much propriety as the other commodities. The prices paid for them measure a complex of social forces, but we cannot always disentangle these social forces and measure them separately. It is hard to tell precisely how much influence on the price of labor has been exerted by a speech from Mr. Gompers, or a Federal injunction, or a law for the exclusion of certain cla.s.ses of immigrants. If we wish to handle distribution quant.i.tatively, we must do it superficially, studying in the market the effects which the underlying social forces manifest there with reference to the rewards of the different factors of production. This has been increasingly the case with later theories of distribution. If, on the other hand, we take the discussion which J. S. Mill gives in book II of his _Principles_, we shall find that the price a.n.a.lysis plays relatively little part, and that he considers chiefly the influence of the more fundamental social values.[212]

A failure to recognize the distinction between value theory and price theory seems to lie behind the complaint which Professor Davenport makes against the "Social Value School" in his criticism of Professor Seligman: "As soon as we turn from the value problem to the separate treatment of the distributive shares, we find ourselves to have descended from the cloud-land mysteries of transcendental economics to the old and beaten paths of the traditional a.n.a.lysis."[213] To this complaint the obvious answer is that we have turned from fundamental value theory to abstract, quant.i.tative price a.n.a.lysis. And the social value theorist has as much right to do this as has any other economist--in fact, if our theory be true, only on the basis of a social value doctrine has any economist a right (logically) to take up price a.n.a.lysis.

The theory of value, as I conceive it, is, then, not a subst.i.tute for detailed price a.n.a.lysis, but rather a presupposition of it. The theory of value is to interpret, validate, and guide the theory of prices. If the theory here outlined be true, it will have significant consequences for the theory of prices, in that it will open up new problems for the price a.n.a.lysis to attack. There are many social forces which can be measured with substantial accuracy, and many more which can be, for purposes of theory, disentangled from the complex in which they appear, and treated by the methods of price a.n.a.lysis already discussed, which economic theory has not yet thought it worth while to attack. The economist must emulate the practical business man, in trying to treat in price terms the various social changes which affect economic values. There is much left for the theory of prices to do. The theory defended here, with its sharp sundering of values and prices, will, of course, criticize the mixing of the two. One chief criticism of the Austrian theory, and also of the theory of the English School in so far as it attempts to give a "real cost" doctrine, is that they are attempts to give both a theory of value and a theory of prices at the same time. Certainly we must object to Bohm-Bawerk's contention that the solving of the price problem _ipso facto_ solves the value problem.[214] The purpose of this book is, not _destructive_, but _reconstructive_. A detailed criticism of the various economic theories that have appeared, as theories of prices, is manifestly too big a task to be undertaken here. All of them cannot, of course, be accepted _in toto_, for there are, doubtless, irreconcilable differences among them at points.

But it is the belief of the writer that the great bulk of what has been done in the study of the quasi-mathematical laws of prices is of substantial worth, that a recognition of the distinction between value theory and price theory, and of the confusions that result from mixing the two, will remove many seemingly irreconcilable differences between opposing schools, and that existing price theories are less to be criticized for what they affirm than for what they ignore and deny.

Much of the significance of the theory of value for the interpretation of price theory has been indicated from time to time, in what has gone before.

Prices have _meanings_. They express _values_. To understand the meanings of prices, we must know what the values mean. There is one further point in this connection which is so important that we shall give a separate chapter to it.

FOOTNOTES:

[210] _Vide supra_, chaps. V and XI.

[211] _Natural Value_, _pa.s.sim_.

[212] Mill's self-congratulation on having written two books of his treatise without taking up the theory of value has been commented on by many economists. He was able to do this, because value theory meant price theory for him. Value theory in the sense of the theory of the forces of social control and motivation does appear in plenty in Mill's first two books, and also the wealth concept, which he connects with the idea of value, and a quant.i.tative value concept, not formally defined, but probably all the more useful on that account. It was a sound instinct that led Mill to take up the problem of distribution before taking up the problem of "value." Really, in discussing distribution as he did, he was making a very real contribution to the ultimate value problem.

[213] _Value and Distribution_, p. 451.

[214] _Vide supra_, chap. IV.

CHAPTER XIX

THE THEORY OF VALUE AND THE SOCIAL OUTLOOK. SUMMARY