The value of money, thus defined, is to be explained by marginal utility. But money has no marginal utility of its own, it has no subjective use-value, but only a subjective exchange value,--derived from the use-value (marginal utility) of the commodity purchased with the marginal dollar (II, 507-8). This subjective-exchange value of money is the personal value of money, as distinguished from its public economic value, and is the cause of the public economic value. The personal value of money changes (1) with the volume of one's personal income, (2) with the intensity of one's need for money, and (3) with market prices. The personal value of money is directly influenced and measured only in exchanges for consumption goods. Expenditures of other kinds affect it only indirectly by leaving less for consumption expenditures. The laborer always reckons with the personal value of money, but not the business man, in his business calculations. As in the case of goods, we pa.s.s from personal to public economic value (II, 509).

The personal value of money depends on the relation between an individual's money income, and his real income, in terms of goods. The public economic value of money depends on the money income of the community as a whole, and its real income. (II, 516-18). Money income grows faster than real income, through the extension of the money economy. Money income is not, like real income, dependent on quant.i.ty.

The mere extension of the money economy increases the volume of money income, lowers the personal value of money, lowers its public economic value, and raises prices. Witness the effect on a rural community of bringing it into the great market, where all costs are reckoned in money and rising costs compel rising prices. Hence, there is a tendency for the public economic value of money to sink, and this has been the historical fact (I, II, 519-520.)

Criticism of this theory is almost superfluous. There are elements in Wieser's discussion, not here presented, which have very considerable importance, and which will be presented in a later chapter when the criticism of the quant.i.ty theory is taken up. Wieser deals some heavy blows to the quant.i.ty theory. But his constructive doctrine presents the clearest possible case of the Austrian circle. The value of money depends, not on its subjective use-value, its own marginal utility--it has none. The value of money depends on its subjective value in exchange, the marginal utility of the goods which are exchanged for it.

But these depend on prices. And prices depend, in part, on the value of money itself! This circle, present in every form of the Austrian theory which seeks a causal explanation of value and prices by means of marginal utility,[73] though often less obviously present, is here quite glaring. The distinction between volume of money income and quant.i.ty of money is, on the other hand, an important one, and will be emphasized when the quant.i.ty theory is taken up.[74] One further point in Wieser's doctrine calls for comment. It is strange indeed to find an Austrian seeing in a rise in money costs a _cause_ of a general rise in prices.

The Austrian doctrine is rather that rising money costs are _reflections_ of rising general prices. Wieser's doctrine that the extension of the money economy to rural regions, compelling the farmer to reckon all his costs in money and so to raise his prices, has been adequately criticised by von Mises, who points out that Wieser sees only half the phenomenon; that eggs and b.u.t.ter are, indeed, higher in price in the rural region when it comes into contact with the city, but that they are correspondingly lower in the city from the same cause. On the other hand, the doctrine of costs is not the whole point in Wieser's notion of the extension of the money economy as a cause of higher prices, and we shall deal with the doctrine again, in a different connection.

By devitalizing the marginal utility theory, by stating it in such a way that it makes no causal a.s.sertions, and in such a way that it leaves the real value problem untouched, it is possible to free it from the circle just pointed out. Schumpeter does so state it.

Schumpeter's theory of value,[75] though he attributes it to Bohm-Bawerk, seems to the present writer to be essentially different.

Bohm-Bawerk undertakes to explain the value (objective value in exchange) of each good by its _own_ marginal utility to different individuals, buyers and sellers of the good--indeed, by its marginal utility to _four_ individuals, the two "marginal pairs."[76] He sees at points that the prices of other goods are sometimes factors, making marginal utility give way to "subjective value in exchange," as the determinant of an individual's behavior toward a given good in the market--as in his much discussed overcoat ill.u.s.tration.[77] But Bohm-Bawerk never gets out of the circle which this reaction of the market-prices on the individual subjective values involves. Schumpeter seems to rise to a higher conspectus picture, which, in form, avoids the circle. His picture is that of a vast equilibrium, in which, instead of attributing the market value of each good to its own marginal utility, you explain the exchange ratios[78] of every good to every other good, all at once, by reference to a total situation: _given_ the number of goods of each cla.s.s, given the number of individuals in the market, given the _distribution_ of each cla.s.s of goods among the individuals, given the utility-_curves_ (not marginal utilities) of each good to each individual, an equilibrium will be reached, through trading, in which ratios between marginal utilities of each kind of good to each individual are inversely proportional to the abstract ratios (ratios of exchange) between the same goods, each measured in its own unit. The ratios are abstract ratios, between pure numbers, so far as the market ratios are concerned; the ratios in the mind of each individual are concrete ratios, between marginal utilities. The scheme, thus stated, says nothing as to the _causal_ relation between marginal utility and market ratios; it merely states certain _mathematical_ relations between each individual system of marginal utilities on the one hand, and the abstract market ratios on the other. By avoiding _a.s.sertions_ as to causation, it avoids a causal circle. In such a situation, marginal utilities and market ratios are, in reality, alike resultants, _effects_, of the given quant.i.ties of goods, distribution of goods, numbers of buyers and sellers, and individual utility-_curves_--not _marginal_ utilities. To this picture, one may add--what Schumpeter does not add--the curves showing time-preferences of each individual for each sort of good, and (an element which Schumpeter does include) the curves of _dis_-utility for the individuals who produce each kind of good. The system, it may be noted, is as good a proof of _real cost_ doctrine as it is of utility doctrine.

Such a picture, I submit, avoids the circle which is presented in all other formulations of the Austrian theory of value. I wish, however, to indicate its limitations as a theory of value, and the impossibility of any application of it to the problem of the value of money. (1) Its data are inaccessible: n.o.body could possibly know all the utility-curves and all the time-preference curves (and disutility of labor-curves, etc.) of all goods to all individuals in, say, the United States. To explain market ratios by utility-curves is a case of _ignotum per ignotius_, so far as practical application is concerned. Moreover, the scheme is so difficult to visualize that it is useless as a tool of thought--as one will find who tries to think it through, without the aid of higher mathematics, for ten goods, and ten persons, with unequal distribution of wealth, and different utility curves, time-preference curves, and disutility-curves for each kind of good to each individual. (2) The scheme must a.s.sume smooth curves and infinitesimal increments in consumption, which is a fiction so far as the individual psychology is concerned. Without this a.s.sumption, the point-for-point correspondence between individual and market ratios does not exist. It is only in social-value curves, or in demand-curves in the big market (which are social-value curves, expressed in money),[79] that you have, as a matter of fact, the right to smooth out your curves. (3) The theory must a.s.sume the frictionless static state, in which marginal adjustments are perfectly accomplished, and equilibrium really reached. Without this a.s.sumption, again the point-for-point inverse correspondence of market ratios and individual ratios fails. But this makes it quite impossible to apply the doctrine to any functional theory of the value of money, or to bring money in any realistic way into the scheme. As will be shown more fully in later chapters, money functions in bringing about just the absence of friction which static theory a.s.sumes. That is what money is _for_. The functional theory of money, therefore, cannot abstract from friction and dynamic change.[80] It is, of course, possible, on this scheme to pick out any one of the goods in the system, say the 1-1000th part of a horse, call it the "money-unit," and determine a set of money-prices. These "money-prices" are already given in the scheme in the ratios between the abstract numbers of this unit and the abstract numbers of the units of all other goods. But this is meaningless, so far as a theory of money is concerned. It abstracts entirely from the _differences_ in _salability_[81] of goods, on which the theory of money must rest. It gives us no clue to that part of the value of the money-article which comes from its money-functions.

(4) The theory has no bearing on the problems of supply and demand.

Demand-curves are curves, not of utility, but of money-prices. They are concerned, not with a _system_ of ratios among goods in general, but with the absolute money-prices of particular goods, one at a time. The modern demand-curves and supply-curves, representing the demand and supply doctrine first made precise by J. S. Mill,[82] are concerned with the money-prices of particular goods, and the "equation of supply and demand"--amount supplied and amount demanded--gives an equilibrium in which only one price is determined. Austrian theory, in Bohm-Bawerk's hands, and in the hands of practically all adherents of the Austrian School, including Davenport,[83] has been offered as really bearing on the explanation of demand, and as giving a psychological account and explanation of the demand-curve. The scheme of Schumpeter has simply no bearing at all on this vital point. The equilibrium picture in which _all_ goods are involved supplies no data from which to construct any of the magnitudes above or below the margin of the demand and supply-curves of any given good. One reason why this is so will appear from the point made with reference to "money-prices" in the preceding paragraph. For Schumpeter's scheme, the significance of the article chosen as "money"

would be as much a problem as anything else, when the conditions are laid down. It would vary in the process of reaching the equilibrium. Its ratios with all other things would, thus, fluctuate until the equilibrium was reached. But, as we have seen, in the chapter on "Supply and Demand," curves of supply and demand must a.s.sume a fixed significance of the money-unit. It may be further noticed, as marking off Schumpeter's scheme from supply and demand a.n.a.lysis, that in Schumpeter's scheme, the individual is the centre of interest, and his reactions _toward all kinds of goods_ is emphasized; whereas in supply and demand a.n.a.lysis, the _good_--one good--is the centre of interest, and the price-offers streaming toward it from all kinds of individuals is emphasized. The two bodies of doctrine are quite distinct.

(5) The theory has no bearing on the explanation of entrepreneur cost--money-outlay, "opportunity cost," alternative positive values, or what not. It finds no place for the modern cost doctrine. It does not in any way open the path to the Austrian theory of costs. Costs, for Austrian theory, as, in general, for modern theory, are reflections of _demand_ for the employment of the agents of production in alternative uses. Thus, it costs a great deal to raise wheat in Illinois, because of the rival demand for the land to produce corn. Labor costs are high in ordinary manufacturing, because of the rival demand for labor in the munitions factories, etc. As Schumpeter's theory can give no account of the _demand_ for labor in the munitions factories, it follows that it can give no account of the _cost_ of labor in the other factories.

Instead, indeed, of giving us the modern cost doctrine, we see Schumpeter's scheme reviving the old _real cost_ doctrine, running in terms of sacrifices in production.[84]

(6) The foregoing paragraph gives emphasis to the point with which we started, namely, that Schumpeter's theory is not a _causal_ theory, but merely a theory which gives mathematical relations in a static picture.

For the general theory of the Austrians, this real cost doctrine is anathema. Values are positive. The emphasis is put on positive wants, as _causes_ which guide and motivate industry. The _clue_ to all values is in the values of _consumption_ goods, which are in direct contact with the utilities which are the source of value. From the values of consumption goods, we _derive_ the values of production goods, labor, etc., which are goods of "second, third and fourth _ranks_" and whose values are merely reflected from the causal marginal utilities of the consumption goods they are destined to create. None of this causation is brought into Schumpeter's conspectus picture. On the contrary, with the bringing in of disutility of production, we have the doctrine of the earlier English School revived. The equilibrium picture is as good a proof of the one theory as of the other. If we a.s.sume the utility-curves constant, and allow the cost-curves to vary, then causation would be initiated by the cost-curves.[85]

(7) Such an equilibrium picture leaves untouched the vital question which any theory must answer which means to be of practical use in concrete situations: what are the real _variables_ in the situation, and what factors are constant? What causes are _likely_ to produce changes in market prices? The individual-utility curves, which in Austrian theory are commonly treated as the only variables, except quant.i.ties of goods,--in the strict static picture there are no variables at all!--are really, when conceived of as individual, as growing out of the mental processes of each individual separately, the most _constant_ factor in the situation. For, on the principle of the inertia of large numbers, each unit of which is moved by its own peculiar causes, changes in the utility-curves of one man will be offset by opposite changes in the utility-curves of another, and so the general system will remain much where it was. Of course, if a rich man changes his curve, a poor man's change will not offset it in the market, but this is to emphasize the _distribution of wealth_ rather than the utility-curves. It is only when you get changes of a sort that the individualistic psychology, and the "pure economic" explanation factors, of the Austrians find no place for, that you can predict a change in the general price-system. It is only changes in fashion or mode, in general business confidence,[86] in moral att.i.tude toward this or the other sort of consumption or production, in the distribution of wealth, changes in taxes and other laws--causes of a general social character--that you can count on to produce important changes in values. Of course, changes in the adequacies of supplies would be taken account of on either interpretation.

(8) The scheme under consideration gives no value concept which the economist can make any particular use of. It gives only ratios between marginal utilities in the mind of the same individual, and abstract market ratios. It gives no _quant.i.tative_ value, which can be attributed to goods as a quality,[87] a h.o.m.ogeneous quality of wealth by means of which diverse sorts of wealth may be compared, funded, etc. Such a concept is, however, necessary for the economic a.n.a.lysis, and Schumpeter is driven to creating subst.i.tutes for it of various sorts, notably _Kaufkraft_ and _Kapital_. _Kaufkraft_, as Schumpeter uses the term, is not derived from marginal utility, but is an abstraction from the idea of money. It is not a quant.i.ty of money alone, nor even of money and credit, but is a fund of "abstract power," which depends not alone on the quant.i.ty of money and credit in which it is embodied, but also on the prices of goods.[88] This _Kaufkraft_ is needed to give the causal "steam," the "motivating power," which the social value concept connotes, but which ratios in the market lack. Similarly, _Kapital_ is conceived of as an agent, a dynamic force, distinguished from acc.u.mulations of concrete productive instruments, by means of which the entrepreneur gets control of land, labor and instrumental goods.[89]

Other functions of the quant.i.tative value are shouldered on a hard-worked and unusually defined concept, _Kredit_, which leads Schumpeter into certain "heresies"[90] regarding credit, which are mostly harmless in themselves, but which will arouse misunderstanding and opposition. "_Praeter necessitatem entia non multiplicanda sunt_,"

and the social value concept, which covers by inclusion the notion of market ratio--market ratios being ratios between social values--and which does all the work that Schumpeter attributes to _Kapital_ and _Kaufkraft_, and most of the new work which he attributes to _Kredit_, is to be preferred,[91] if only on grounds of intellectual economy.

"Capital" is then saved for more usual meanings, and economy in terminology is also effected. Schumpeter also departs, as shown, from the abstract market ratio notion in erecting a causal theory of value, in which "marginal utility" is used as the equivalent of a quant.i.tative value, and is traced by the Austrian imputation process back to the original factors of production. He even speaks of labor as having "utility," whereas labor,[92] unless used in domestic service, has, not utility, but only value.

In the marginal utility scheme above outlined there is no place for money, on the a.s.sumptions laid down. It is a scheme of barter relations. The utilities which come into equilibrium are not subjective-exchange-values, which, as Schumpeter, with Wieser, contends, are the only subjective values money has, but are real subjective use values--marginal utilities. The scheme, a.s.suming as it does, perfect exchangeability of all goods, with infinitesimal increments in consumption, has no place for money. There really is no money service to be performed. Schumpeter, indeed, speaks of money as a mere "Schleier,"

which does not touch the essence of the phenomena, and such it is on his a.s.sumptions. In a similar situation, Professor Irving Fisher gives up the effort to find a psychological explanation of the value of money,[93] and offers the quant.i.ty theory as a mechanical principle, additional to the psychological barter scheme. Schumpeter, however, does lip service still to the need for a psychological explanation. His answer runs in Wieser's terms--indeed, he attributes it to Wieser. The _Preis_ of money[94]--Schumpeter does not use Wieser's absolute value concept, but lets his value of money run in purely relative terms--the price of money in goods depends on the subjective value of money. This subjective value of money rests on the experience of each individual in making purchases--rests on the prices of consumption goods, determined by the relation between real income and money income. The circle is as clear as day.

Ludwig von Mises sees this circle, and tries to avoid it. In von Mises there seem to me to be very noteworthy clarity and power. His _Theorie des Geldes und der Umlaufsmittel_ is an exceptionally excellent book.

Von Mises has a very wide knowledge of the literature of the theory of money. He has a keen insight into the difficulties involved. He recognizes fully that, so far, the utility school has failed to solve the problem (119-120). His theory is as follows: Individual valuations (93) const.i.tute the basis of the objective exchange value of money. But while for other goods, subjective use-value and subjective exchange-value are different concepts, for money the two coincide, and both rest on the objective value of money (94). This seems to be our old circle in unmistakable form, but Mises thinks he has an escape, as will later appear. No function of money is thinkable which does not rest on its objective exchange value. The subjective value of money rests on the subjective use-values of the goods for which it can be exchanged (95).

Money, at the beginning of its money-functioning, must have objective exchange value from other causes than its money-function, but it can remain valuable, even though these causes fall away, exclusively through its function as general instrument of exchange (111). He gives no argument in support of this contention, but refers with approval to Wieser (_loc. cit._), and to Simmel (_Philosophie des Geldes_, 115ff.).

Hence, the important consequence that in the value of money of to-day a historical component is contained. Herein is to be found a fundamental contrast between the value of money and the values of other goods (119-120.). The individual valuation of money rests on the objective exchange value of money of _yesterday_. This individual value of money is the explanation, on the money side, of the objective value of money of to-day. Going back, step by step, you come ultimately to the subjective use-value of the money-stuff in its non-monetary employment--a temporal _regressus_. This opens the way to a theory of the value of money based on marginal utility. This avoids the circle of explaining the objective value of money of to-day by the subjective exchange value of money of to-day, which in turn rests on the contemporary objective value of money.

I find this particularly interesting, since it employs a device which had once suggested itself to me as a means of escape from the Austrian circle, but which reflection led me to abandon. I have discussed the whole matter in my _Social Value_, and therefore venture a quotation from that book.[95]

"How are we to get out of our circle:[96] The value of a good, A, depends, in part, upon the value embodied in the goods, B, C, and D, possessed by the persons for whom good A has 'utility,' and whose 'effective demand' is a _sine qua non_ of A's value? The most convenient point of departure seems to be the simple situation which Wieser has a.s.sumed in his _Natural Value._[97] Here the 'artificial' complications due to private property and to the difference between rich and poor are gone, and only 'marginal utility' is left as a regulator of values. But what about value in a situation where there are differences in 'purchasing power'? How a.s.similate the one situation to the other?

"A _temporal regressus_, back to the first piece of wealth, which, we might a.s.sume, depended for its value solely upon the facts of utility and scarcity, and the existence of which furnished the first 'purchasing power' that upset the order of 'natural value,' might be interesting, but certainly would not be convincing. In the first place, there is no unbroken sequence of uninterrupted economic causation from that far away hypothetical day to the present, in the course of which that original quant.i.ty of value has exerted its influence. The present situation does not differ from Wieser's situation simply in the fact that some, more provident than others, have saved where others have consumed, have been industrious where others have been idle, and so have acc.u.mulated a surplus of value, which, used to back their desires, makes the wants of the industrious and provident count for more than the wants of others.

And even if these were the only differences, it is to be noted that private property has somehow crept in in the interval, for Wieser's was a communistic society. And further, an emotion felt ten thousand years ago could scarcely have any very direct or certain quant.i.tative connection with value in the market to-day. Even if there had been no 'disturbing factors' of a non-economic sort, the process of 'economic causation' could not have carried a value so far. It is the living emotion that counts! Values depend every moment upon the force of live minds, and need to be constantly renewed. And there would have been, of course, many 'non-economic' disturbances, wars and robberies, frauds and benevolences, political and religious changes--a host of historical occurrences affecting the weight of different elements in society in a way that, by historical methods, it is impossible to treat quant.i.tatively.[98]

"What is called for is, not a temporal _regressus_, which, starting with an hypothesis, picks up abstractions by the way, and tries to synthesize them into a concrete reality of to-day, but rather, a _logical a.n.a.lysis_ of existing psychic forces, which shall abstract from the concrete social situation the phases that are most significant. This method will not give us the whole story either. Value will not be completely explained by the phases we pick out. But then, we shall be aware of the fact, and we shall know that the other phases are there, ready to be picked out as they are needed for further refinement of the theory, as new problems call for further refinement. And, indeed, we shall include them in our theory, under a lump name, namely, the rest of the 'presuppositions' of value.

"Our reason for choosing a logical a.n.a.lysis of existing psychic forces instead of a temporal _regressus_--instead, even, of an accurate historical study of the past--is a two-fold one: first, we wish to coordinate the new factors we are to emphasize with factors already recognized, and to emerge with a value concept which shall serve the economists in the accustomed way--it is illogical to mix a logical a.n.a.lysis with a temporal _regressus_. But, more fundamental than this logical point, is this: the forces which have historically _begot_ a social situation are not, necessarily, the forces which _sustain_ it.

The rule doubtless is that new inst.i.tutions have to win their way against an opposition which grows simply out of the fact that we are, through mental inertia, wedded to what is old and familiar. We resist the new _as_ the new. Even those who are most disposed to innovate are still conservative, with reference to propaganda that they themselves are not concerned with. The great ma.s.s of activities of all men, even the most progressive, are rooted in habit, and resist change. When, however, a new value has won its way, has become familiar and established, the very forces which once opposed it now become its surest support. Or, waiving this unreflecting inertia of society, as things become actualized they are seen in new relations. What, prior to experiment, we thought might harm us, we find beneficial after it has been tried, and so support it--or the reverse may be true. The psychic forces maintaining and controlling a social situation, therefore, are not necessarily the ones which historically brought it into being."[99]

Since the foregoing was written, I have found that another theorist, Professor Alvin S. Johnson, had also given consideration to the same idea, as a means of escape from the Austrian circle. Professor Johnson refers to the notion briefly in his review of _Social Value_ (_Am. Econ.

Rev._, June, 1912, p. 322), holding that the doctrine is logically tenable, though rejecting it on psychological grounds. "The value of a thing newly created can be explained only with reference to values antecedently existing." That there is a continuity in the value system, as in the whole social-mental life of men, I should be the last to deny.

But it is not the antecedently existing values, _as_ antecedently existing, that give value to the new piece of wealth. The antecedent values function only as _persisting_, as _contemporary_ social forces.

We do not find the motivating power of existing values in the ashes of burnt out desire! It seems to me very essential to distinguish the two methods of approach to the problem. It is possible to state a historical sequence--if you know it,--showing how values have historically come and gone. But for an equilibrium picture, of the sort that our price theory demands, where there is a mechanical balancing of contemporary factors (as in Marshall's b.a.l.l.s in the bowl ill.u.s.tration), such an account is of no use. Existing social forces have their history. But, at a given moment, they are what they are, and what they _were_ at a different time adds no ounce of weight to the power they now exert. If a quant.i.tative account of value is called for--and price-theory is essentially concerned with the measurement of values--we must bring measure and measured into contemporary balance. The historical account is one thing; the cross-section a.n.a.lysis is another. "Static theory" is a mechanical abstraction from the organic cross-section picture, which, by making it superficial, is able to make it exact.

It seems to me that this distinction must be kept clear if progress in the science is to be made. At every point, divergent conclusions are reached if the two view-points are merged. The distinction between statics and dynamics is, in a general way, the same as the distinction here made between the historical and the cross-section view. It is no answer to the Ricardian theory of land-rent for Carey to point out that historically, in new countries, the uplands are cultivated first, and the more fertile river-valleys later. Ricardo is talking about statics, and Carey about dynamics. Carey does not answer Ricardo, because he is talking about a different problem. The utility theorist especially has no right to leave the static view-point. All the elementary laws on which the utility theory is based are static laws. The law of satiety, of diminishing utility, is a static law, and the utility theorists are careful to point out that it holds only for an individual at a given time. It rests on nerve fatigue. Give the nerve time to rest, and utility does not sink. On the contrary, the dynamic law of wants is that wants expand. As old wants are satisfied, new wants arise, so that, in the course of time, _marginal_ utilities do not sink--the compet.i.tion of new wants forces up the margins of the old wants. Moreover, with time, tastes change, habits are formed, and the same wants may grow more intense--as in the case of olives or whiskey. All this has been seen by the creators of the utility theory. Thus, Wieser: "The want as a whole of course retains its strength so long as a man retains his health; satisfaction does not weaken but rather stimulates it, by constantly contributing to its development, and, particularly, by giving rise to a desire for variety. It is otherwise with the separate sensations of the want. These are narrowly limited both in point of time and in point of matter. Anyone who has just taken a certain quant.i.ty of food of a certain kind will not immediately have the same strength of desire for a similar quant.i.ty. Within any single period of want every additional act of satisfaction will be estimated less highly than a preceding one obtained from a quant.i.ty of goods equal in kind and amount." (_Natural Value_, p. 9.) A similar statement is in Taussig's _Principles_ (I, 124), "In such cases, however, the tastes of the purchasers may be said to have changed in the interval. At any given stage of taste and popularity, the principle of diminishing utility will apply."

Ill.u.s.trations could be multiplied.

It is true that _future_ marginal utilities come into the utility theory scheme, but they come in, not as future utilities, but as "_present worths_" of future utilities, or as "present antic.i.p.ated feelings" in Jevons' phrase[100] suffering a discount, usually, in the process. But I am not aware of any writer among the founders of the utility school, who has sought to bring past utilities into the scheme. The past is dead.

Its effects persist in the present only in present processes. A _memory_ is a _present_ psychological fact.

Consider further. Is it the prices of yesterday that determine the subjective value of money to an individual, if the prices of yesterday are different from the prices of to-day, _and the individual knows it_?

In so far as we have the clear, intelligent economic mind, seeking its interests--and the marginal utility theory a.s.sumes this type of mind--the tendency is to bring all the factors in the problem into the present. If prices change slowly, so that the individual can count on essentially the same situation to-day that he had yesterday, doubtless he will not take the trouble to recast his value system. There is a tremendous lot of trouble in bringing about, in the individual's mind, the rational equilibration of values--trouble which the Austrian theory commonly abstracts from, but which should be recognized in the a.n.a.lysis, and accorded its own marginal significance in the scale. To throw the emphasis on inertia, however, and to a.s.sume that men do not readjust their margins to meet changed conditions, is to depart from the fundamentals of the Austrian theory. If the price-situation is a rapidly changing one, men do rapidly readjust their estimates of money. If money is fluctuating rapidly in value--as, say, during a time when there is depreciated paper money, whose future depends on military events, the adjustments may be very rapid indeed. I quote the following from the news columns of the _New York Times_, of April 4, 1914, p. 2: "Jaurez, Mexico, Apr. 3.--After the hysterical outbursts last night that greeted the news of the fall of Torreon, this city was preternaturally calm to-day.... The silent gentleman with the dyed mustache who spins the marble at the roulette wheel in the Jaurez Monte Carlo, conducted by Villa's officers for the benefit of the rebel treasury, seemed the only person who was not excited. When the crowd of players suddenly deserted him on the sound of the bugle call of victory, he gave the marble another whirl from sheer force of habit, but none returned.... In an hour, however, play was faster and more furious than ever, for holders of Const.i.tutionalist money early realized that their currency had suddenly increased in value, and that they were somewhat richer than before." I do not question the fact, however, that men are slow in making calculations, and that society is often unconscious of changed conditions, and often readjusts less rapidly than occasion requires.

There is a vast deal of inertia, of blind habit, of custom, etc. But emphasis on these factors is not marginal utility theory! Factors like these are emphasized by a functional psychology, and by a social psychology--not by an individualistic psychology which rests on the a.s.sumption of rational calculation. It is not _past_ utilities that explain present subjective values of money when these subjective values are out of harmony with the present market facts, but rather _present_ habits, present customs, present disinclination to readjust, etc. There is a big difference, psychologically, between the mental processes through which one arrived at one's present state of mind, and the present state of mind itself. The original "commodity utility" of the money metal, in the far away time before the money use affected its value, is surely no longer a factor. Certainly not on the basis of an individualistic psychology of the Austrian type. All the individuals who experienced that original utility are long since dead! Not even memories of the original utilities persist.

When writing the pa.s.sage in _Social Value_, quoted above, I did not suppose that I was dealing with a notion that anyone else would ever take seriously. My purpose in discussing it was chiefly to throw into sharp relief the contrast between the historical and the cross-section viewpoints, and to make clear that my own theory was based on a.n.a.lysis of existing psychological forces. Since finding, however, that two writers for whose views I have so much respect have independently developed the same idea, and have taken it seriously, I have felt it worth while to give it this extended consideration.

Von Mises, like Wieser, needs an absolute value of money in his thinking. He does not call the concept by that name, but, following Menger[101] speaks of the "inner objective value of money" and the "outer objective value of money." (Mises, p. 132.) The latter is the purchasing power of money, a relative concept, exactly expressed in the price-level. The inner objective value of money is designed to cover the causes of changes in prices which originate on the money-side of the price relation alone.[102] This inner objective value of money performs the same logical function in the theory of money that the absolute social value concept of the present writer does, even though the psychological explanation lying behind it is very different.

Von Mises considers the quant.i.ty theory at length, noting a number of defects in it, chief of which is the fact that it has no psychological theory of value behind it, that it does not account for the _existence_ of the value of money, and at most gives a law for _changes_ in a value whose existence is taken for granted. The details of this criticism, however, need not be here presented. The quant.i.ty theory is to be treated in detail at a later point of our study.

The writer who has most definitely stated the relation of utility to the functions of money, is David Kinley (_Money_, ch. viii). He would explain the value of money, by (a) its utility as a commodity, and (b) its utility in the money-employment, the employments reaching a marginal equilibrium. The utility of the money metal in its commodity use calls for no a.n.a.lysis. But what is meant by the utility of money as money?

Where the writers so far discussed have denied that money as money has any utility, Dean Kinley finds a utility in the money-function itself: money facilitates exchange, and exchange, by transferring goods from those who do not need them to those who do need them, increases the utility of those goods. Money, as money, thus produces utility.[103] The utility of money is the extra utility which comes into being by virtue of its use, as compared with what would exist in a state of barter. The marginal utility of money is the utility of money in the marginal exchange--the exchange which would be effected by means of barter if money were any more difficult to procure. The marginal utility of money, then, is not the whole of the marginal utility of the good for which it is exchanged, but rather is the differential part of that utility which is created by means of the use of money in exchange. The marginal utility of money, thus, appears in separate services of money. Money is a durable good, which gives forth its services bit by bit. The value of money is based on these separate services, it is "the capitalized value of the service rendered in the marginal exchange."

This conception is, it seems to me, much truer to the spirit of the general marginal utility theory than the theories of Wieser, Schumpeter, or von Mises. If the utility theory at large were valid, the application here would be valid. To Dean Kinley's conception of a marginal utility of the money service, I offer simply the objections which I offer to the utility theory at large--objections indicated in what has gone before, and in my _Social Value_. The application of the capitalization theory to the value of money I have already discussed in a previous chapter, and shall again consider in the chapter on "The Functions of Money."

I conclude that the marginal utility theory has not solved the problem of the value of money. The reason, however, is simply that it has not solved the general problem of value. The marginal utility theory, in so far as it seeks to make marginal utility the _cause_ of value, is circular. The effect of a given man's wants upon the value of the goods he wants depends, not on the marginal intensity of those wants alone--a penniless prisoner may desire a marble palace ever so intensely without affecting its value--but also upon the value of the wealth possessed by the individual who experiences the wants. But this is to explain value, not by marginal utility alone, but by value as well--a circle. Or, if we leave the standpoint of absolute values, and look at the matter in terms of prices, the same situation presents itself. The price which an individual is willing to pay for a good depends on his income,--which commonly rests on prices--and on the prices he has to pay for other goods which enter into his budget. His price-offer, expressive of the marginal utility of a horse to him, is made with consideration of the price of a buggy, of harness, of feed, of the wages of the servant who cares for the horse, the price of a barn, and of the other things that the possession of the horse involves. And not these alone: less immediately, but still vitally, his whole budget enters. Higher prices for theatre tickets or for food or for clothing will reduce his price-offer for a horse. Further, his price-offer for the horse will be tremendously influenced by his opinion as to the permanent market price of horses. He will not be willing to pay a price for the horse which he cannot expect to get back if he should decide later to sell the horse.

The direct influence of market price on individual demand-price is very great indeed. Marginal utility (subjective use-value) very frequently gives place to subjective value-in-exchange in the determination of an individual's marginal demand-price--which means that the market controls the individual instead of the individual controlling the market. With sellers, it is _generally_ subjective-exchange-value, rather than marginal utility, that determines supply-price-offer. The sellers, in so far as they are producers, have little need for the great ma.s.s of their stocks. They will sell them, rather than keep them, at almost any price.

The reason they ask high prices is simply that they think the market will give them the high prices. The individual price-offers, in the aggregate therefore, presuppose the whole market situation--presuppose a general value and price system already fixed and determined. Each individual price offer presupposes many other prices, though not, of course, the whole market. Since, then, much of the market situation is a.s.sumed in the determination of each particular price, by the Austrian method, it is obviously circular reasoning to think that the determination of each price separately by this method will supply data for a summary of the market situation as a whole. In the one form in which the utility theory avoids a circle,--that presented by Schumpeter, and discussed in an earlier part of this chapter--it is not a causal theory. Marginal utility is not a cause of market prices, but rather, marginal utilities and market prices are alike resultants, effects, of more fundamental factors. No writer[104] who has presented the utility theory in this form has tried to apply it to the value of money, and even if it could be so applied, it would not give a causal explanation of the value of money in terms of marginal utility. In most of the efforts to apply the utility theory to money, the circle becomes so obvious that one marvels that able theorists should for a moment fail to see it.

PART II. THE QUANt.i.tY THEORY

CHAPTER VI

THE QUANt.i.tY THEORY OF PRICES. INTRODUCTION

The quant.i.ty theory, in its usual formulations, is a theory, not of the value of money, in the absolute sense of value, but of the general price-level, the average price of goods exchanged for money. It is not a psychological theory. It does not deal with psychological quant.i.ties, or psychological forces. It is a mechanical theory, concerned simply with quant.i.ties, and the relations between them. The essence of the quant.i.ty theory comes out in the following brief statement: given a number of units of money; given a number of units of goods to be exchanged; a.s.sume these two numbers to be independent[105] of each other; a.s.sume all the goods to be exchanged for all the money; then the average price will be a simple function of the quant.i.ties of goods and of money respectively, such that an increase in the amount of money will increase the average price per unit of goods proportionately, if goods remain unchanged in amount, or an increase in goods will lower the price per unit proportionately, money being a.s.sumed to remain unchanged in amount. The qualification is commonly added that if goods have to be exchanged more than once, the effect is the same on prices as if there were an added number of goods equal to the added number of exchanges, and that if money is used more than once in exchanging a given number of goods, the effect is the same as if there were proportionately more money. Both quant.i.ty of goods and quant.i.ty of money are commonly defined as actual quant.i.ty multiplied by "rapidity of circulation." Rapidity of circulation, however, for both money and goods, is commonly thought of as a constant, so that the original formula remains unaffected by the qualification, so far as a prediction as to the effect of increase or decrease of money or goods on prices is concerned. Involved in the quant.i.ty theory, and explicitly stated by many writers, is the doctrine that the substance of which money is made is irrelevant, that it is the number, and not the quality or size of the money-units that counts. "In short, the quant.i.ty theory a.s.serts that (provided velocity of circulation and volume of trade are unchanged) if we increase the _number_ of dollars, whether by renaming coins, or by debasing coins, or by increasing coinage, or by any other means, prices will be increased in the same proportion. It is the number, and not the weight, that is essential. This fact needs great emphasis. It is a fact which differentiates money from all other goods and explains the peculiar manner in which its purchasing power is related to other goods. Sugar, for instance, has a specific desirability dependent on its quant.i.ty in pounds. Money has no such quality. The value of sugar depends on its _actual quant.i.ty_. If the quant.i.ty of sugar is changed from 1,000,000 pounds to 1,000,000 hundredweight, it does not follow that a hundredweight will have the value previously possessed by a pound. But if money in circulation is changed from 1,000,000 units of one weight to 1,000,000 units of another weight, the value of each unit will remain unchanged." (Irving Fisher, _Purchasing Power of Money_, pp. 31-32.) To the same effect is Nicholson's exposition, in which the money is a.s.sumed to consist of dodo-bones, the most useless substance that Nicholson could think of. For the quant.i.ty theory, prices are determined by the _numbers_ of goods and dollars that are to be exchanged for one another, and not by the _values_ of the goods and dollars;--indeed, for the quant.i.ty theory, "value" commonly has no meaning apart from the prices which are supposed to be adequately explained by the mechanical relations of numbers.

In the critical study which follows, virtually every doctrine and every a.s.sumption of this preliminary statement will be challenged. I shall deny, first, that the quant.i.ty of goods to be exchanged and the quant.i.ty of money to be exchanged for the goods, are independent quant.i.ties, maintaining, rather, that an increase in either of them tends normally to be accompanied by an increase in the other. Quant.i.ty of goods and quant.i.ty of money _exchanged_ are not simple physical stocks, given data. Rather, they are consequences of human choices and human relationships, and vary from a large number of highly complex psychological causes, many of which are common to both. I shall deny, second, that "rapidity of circulation," either of goods or of money, is a simple constant, independent of quant.i.ty of goods or of quant.i.ty of money. I shall maintain, rather, that rapidity of circulation of money is a phenomenon which calls for psychological explanation: that the rapidity of money really means the _activities of men_; that these activities are complex, and obey no simple law; that instead of being an independent factor, constant, in the situation, the rapidity of circulation of money is bound up with the quant.i.ty of money, the quant.i.ty of goods to be exchanged, the rapidity of circulation of goods, and the prices of the goods, and that the rapidity of circulation of goods is likewise causally dependent on the factors named--or better, on the causes which control them; that rapidity of circulation, whether of money or of goods, is not a causal factor independent of prices, but rather in part depends on prices. In the third place, I deny the doctrine that the question as to _what_ the money-unit is made of is irrelevant. On the contrary, I shall maintain that the _quality_ of money, rather than its quant.i.ty, is the determining factor. I shall not maintain that only money made of or redeemable in valuable bullion can circulate, nor shall I maintain that the value of money depends wholly on the value of its bullion content when money is made of valuable metal. I recognize that value can come from other sources. But I shall maintain that value from some source other than the monetary employment is an essential precondition of the monetary employment, even though recognizing that that monetary employment may, in a way later to be a.n.a.lyzed, add to the original value of the money. The doctrine that only physical quant.i.ties, or abstract numbers, of goods are relevant I shall challenge especially, maintaining, on the contrary, that the psychological significances, the values, of goods are the really important thing, so that an increase in the number of one sort of goods may have a very different effect on the average of prices from an increase of the same number of units of some other good, and so that an increase in the number of goods exchanged under one set of conditions may have a very different effect on prices--or may be accompanied by a very different movement in prices, for the question of causal relations is a complicated one--from the change in prices that might accompany the same increase in the amount exchanged of same goods under other circ.u.mstances. Finally, the doctrine of the quant.i.ty theory that the price-level is a pa.s.sive result of the other factors named: quant.i.ties of goods and money, and their respective velocities; that prices cannot initiate a change in the situation, will also be challenged. I shall undertake to show that the first change in the situation may appear in prices themselves, and that the quant.i.ties of goods exchanged, and of money, and their velocities, may then be altered to correspond with the change in prices.