[T]his method ... idealizes. It does not copy nature, but gives us a simplified representation
of it, which is no misrepresentation, but such as sharpens our vision in view of
the complexities of reality, -- like the ideal picture which the geographer draws
in his map, as a means not to deception but to more effective guidance, he meanwhile
assuming, that they who are to profit by the map will know how to read it, i.e. to
interpret it in accordance with nature.
But what is the cost, and how is it measured? The readiest way of expressing in figures the expenditure of materials and labour required to produce any article is to give the supplies to be consumed, the number of working days, the number of tons of coal, the time during which machinery is at work, the figure of each of the infinite number of items used in the production, and so on. This runs up a long list, but the items are incapable of being added up; these magnitudes are as mere bulk incomparable, incommensurable, and cannot be concentrated in one term. To sum them, every item must be put down in terms of value -- but how is this to be determined? We can tell at once. the value of the productive elements is determined on the ground of utility as afforded by the products, and this holds good of the labour no less than of the coals, the machinery, and all the other means of production. To insist then on cost of production is ultimately to insist on some utility. There is no new principle to be discovered, none save utility. Estimation of cost shows us in each particular case what utility the productive elements would confer if they were consumed otherwise than in turning out the produce desired. It shows us, for example, that the utility of the materials and labour, by the aid of which an important telegraphic communication is set up, would have amounted to very much less in those other uses, from which they have been withdrawn in order to this. From this however it follows, that it is impossible to estimate the value of the communication as highly as its won high utility would absolutely warrant, since it can only be, -- and precisely if it can be, -- set up at the much smaller sacrifice of that utility which is involved in the cost of production. This extraneous utility is in the case the 'marginal utility' which affords a measure for the value. To value a product by its cost means then to impute as much utility to it as is to be imputed to all its productive elements taken together.
The sum of 105 gulden, which I am entitled to demand after a year's interval, constitutes
the base on which its capital value is reckoned, but that value is not an equivalent
amount. It is reckoned as somewhat less, deduction being made for interest. How is
this deduction justified? In this way does the Austrian school state the problem
of interest, the solution of which is essential to the complete solution of the problem
of the value of capital.
From these considerations the following conclusions emerge: --
1. The value of circulating capital is found by discounting, i.e., by deduction of
interest from gross income.
2. If a capital of 100 can after a year be converted into 1-5, then is a sum of 100, which can only be claimed after a year, of less value than 100. Future goods have, therefore, less value than present goods.
3. The capital value of a perpetual rental may be found by summing the several instalments, but only after their future value has been reduced to present value by continuous discounting. An abbreviated method for arriving at the same result is that of capitalization, i.e., the multiplication of the yearly rental by a figure, the key to which is derived from the current rate of interest, e.g., if this be 5 per cent., multiply by 20. This abbreviated procedure yields mathematically the same result as the longer method of discounting interest and compound interest. This gives us, besides, the rule for reckoning the value of land.
4. The value of fixed capital is reckoned by corresponding combinations, either through discounting or capitalizing, attention being given to the principle of amortization or sinking fund.
Value in use is not only particular but also subjective; value in exchange is not
only general but also objective. ... Theory has to examine both phenomena. I will
restrict myself to showing why it may not neglect subjective values. The reason is,
that it would thereby leave unexplained all individual decisions in economic matters,
e.g. it would not even explain why any one buys. For by objective standards wares
and prices have the same value; by objective standards we give equals for equals,
for which we should have no motive. But further, exchange-value itself, considered
objectively, can only find its explanation in the laws of subjective value, obeyed
by buyer and seller in concluding a bargain. If commodities which are to be had in
abundance fetch no price, this can only be owing to the fact that they have subjectively
no value for anyone. The law, that in the same market equal portions of the same
commodity are equal in price, could not hold, did not every owner always assign equal
value to equal portions. Price follows marginal equivalent because subjective value
follows marginal utility; it only adjusts itself to cost of production, because every
producer subjectively for himself assigns a value to products as syntheses of their
productive elements. Rent is paid for land, interest for capital, wages for labour,
because in subjective valuation a share of the aggregate return is imputed to land,
a share to capital, a share to labour; not could any more precisely quantitative
expression be found for price, were it not that subjective value, by its bearing
on supply, number, and cost of production, already admitted of computation. Motives
it is true are ever coming into play through the conflict of price, which are wanting
in the personal calculus; on the other hand monopoly suppresses the effect of the
influence of cost, and other such differences: nevertheless without the subjective
influences of the estimation of values, no dealings in price would ultimately be
conceivable, nor could the law of price be maintained.
The guiding principle in devoting commodities to public purposes, as in consumption
generally, should be the consideration of their value. The scale of state-consumption
and state-mechanism, which each citizen will wish to see, must vary in proportion
to his own valuation of commodities. It is only reasonable that the rich man, who
retains, after covering his most pressing personal outgoings, a surplus of goods
for any other purposes, should desire a more expanded public expenditure than the
poor man. A just system of taxation will take account of these variations in the
valuations made by different classes of people, and adjust the fiscal burdens to
the citizens by covering the costs of state-administration with contributions graduated
accordingly. It should take me too far were I to show how Professor Sax, starting
from this idea, has carried out the theory of value in a system of progressive taxation.
I should only like to point out a remarkable political phenomenon. The state, in
taxing citizens unequally, suffers itself to be paid unequally for its equal services,
-- and we find this equitable. In the market every purchaser, from the richest to
the poorest, pays the same price for the same service, the millionaire paying for
what he buys in common with the beggar by the beggar's standard, -- and this we find
natural. How shall we interpret these inconsistencies?
If poor fishermen during the winter produce a net out of materials which nature furnishes them gratuitously, they create something which is paid for in summer by the fish which they catch by means of it. Their labor is first transformed into the net and then into the fish. Formerly the scanty tools were, perhaps, nothing more than rapidly-passing, transitional forms of human labor which embodied itself, only finally to resolve itself into the finished product, the creation of which was facilitated by this means. The distinction between such a primitive mode of production and the modern one lies in the fact that the capital-power employed in the latter is incomparably greater than that which, in the way just described, can be gained though direct transformation of labor into capital. It would not only be irrational, awkward, and expensive in any productive process to-day to begin ab ovo to create the requisite capital by means of labor alone, but it would even be impossible to attain the national income, or even a noteworthy faction of it in this way. We owe the goods which we consume not only to our industry, but also to the capital which we have inherited from our ancestors, together with Labor and Nature. This inherited capital-by the help of which we begin every process of production, without exception-must be considered as an independent and indispensable factor in our production, which can be as little ignored as it can be dispensed with.
The proposition that capital is an indispensable factor in production has nothing
novel in it to one versed in economic theory. It is discussed in every text-book
of political economy in connection with production and its conditions.
Suppose the railroad system of a country to be completed, and consequently the annual demand for rails is limited to that quantity which is required to replace the wear and tear. Let us suppose, furthermore, that the value of iron, owing to an immense increase in the production of that metal, considerably decreases -- what will be the effect on the value of rails? Their utility does not apparently change, nor the quantity produced, nevertheless their value will decrease for the very reason that the cost has lessened, and exactly so far as the cost has lessened.
The utility of the rails no longer depends upon their possession nor even upon their marginal utility, but only upon the still lower marginal utility of the material, labor, etc., which are requisite for their production. The value of these materials, labor, etc., is determined by that of commodities having a still lower marginal utility than the rails, for example, ordinary tools. The value of rails is therefore determined: (1) by the quantities of iron, etc., required; and (2) by the utility which these have in their most unimportant application in other productive processes. Although the rails do not owe their value to their utility, they owe it to some kind of utility-primarily to that of the means of production employed; finally to the marginal utility of certain other commodities.
No productive instrument, be it ever so efficient, yields a return by its unaided agency; it always requires the assistance of others. And the more the art of production is developed, the more numerous will be the productive instruments which co-operate. The very simplest products often require the most complicated methods of production, because they, more than any others, allow of the application of machinery and, therefore, of power in the mass. The proposition that production goods obtain their value from the value of their returns, suffices only for the valuation of the co-operating productive factors as a whole; not for their valuation individually. To obtain this also, we need a rule which will make it possible to divide up the whole return into single parts.
When land, capital, and labour work together, we must be able to separate out the quota of land, the quota of capital, and the quota of labour from the joint product. More than that, we must be able to measure the services of each separate piece of land, of each separate quantity of capital, and of each separate labourer. Of what use is it to know the return which falls to machinery, coal, and raw material together? It is necessary to distinguish what each has contributed to the total result, just as the contribution of the stone-cutter who hews the block must be distinguished from that of the artist who chisels it into the statue.
The imputation of return to land, capital, and labour, according to the measure of their respective productive contributions, is a natural economic dictate; it holds in all forms of economic life in the communistic state as well as in the present one. It may -- possibly -- be a just demand that the whole product be given over to the labourers as personal income; but in any case, and even should this come to pass, it is an economic demand that the products be credited to the sources of the return, according to the contributions which they afford, in order that we may have a standard for the further employment of the means of production.
In what follows I understand by the term capital the perishable or (with the extended meaning explained in the text) the movable means of production. This conception is adapted to the conditions of a communistic state, in which the national income is obtained solely through production.
The difference between our solution and that of Menger is as follows. Menger assumes an economic course of events different from that which actually regulates economic life. To discover what return is obtained from the production goods which we possess, he tries to show what would happen should we cease to possess them. According to Menger, for example, the value to a farmer of a cart-horse is calculated by the diminution of return which would ensue were the farmer to lose the horse, and be forced to go on without it. That portion of return calculated by Menger to the single production good we may designate "the share dependent upon its co-operation." We, on the other hand, start by assuming an economic course of events such as owners of production goods would expect. We trace the effects that will ensue if all the production goods which we possess are actually employed as we wish and plan. In this way we calculate what we have called the "productive contribution" of each factor. The sum of all the "productive contributions" is exactly the same as the sum of value of all the products; the sum of all the "shares dependent upon co-operation" is, on the other hand, as we have already shown, greater. In other words, the "productive contribution" is essentially smaller than the "share dependent upon co-operation," We reckon for instance the return which the cart-horse gives to the farm lower than Menger does, as we only estimate it at a portion of the decrease that would ensue were the owner obliged to farm without it. According to Menger, consequently, the farmer who loses his cart-horse loses only the value of the animal, whereas, according to our conception -- which calculates differently the same numerical loss -- not only does he lose the value of the animal, but he suffers, beyond this, some disturbance in the value of his remaining productive wealth. Menger's is undoubtedly the simpler and clearer method. ... It is a generally-accepted fact that every productive factor furnishes the basis, not only for its own value, but also for that of all the other factors in the production. If any essential element is removed from any undertaking whatever, the whole undertaking must sensibly suffer. If there be a scarcity of raw material, human labour and machinery will lose some of their capacity of service, and vice versa; experience can show thousands of such cases. In innumerable ways experience shows that means of production mutually demand and mutually hamper each other. Increased activity on the part of labour raises the return to productive wealth, and extended exploitation of productive wealth raises the return to labour. What does this prove but that the share of return which furnishes the basis of value for its factor -- the "return" imputed to it which we have called its "contribution" -- does not exhaust the entire share contributed by it to the success of the production?
In the case of production goods which are available, not individually but in stocks, imputation of the productive contribution follows the marginal law. To each single item or quantity is imputed the smallest contribution which, under the circumstances, can be economically aimed at by the employment of this particular item or quantity -- the "Marginal Contribution" as I have already called it (Ursprung des Werthes, p. 177), or, looking at it from a different point of view, the "Marginal Product." Bohm-Bawerk has drawn attention (Werth, p. 502) to the fact that this law of exchange value has long been recognised in the case of certain production goods: -- "Thunen, and all the body of economic doctrine after him, have taught that the rate of interest is decided by the productiveness of the last applied dose of capital, and the rate of wages by the return of the last labourer employed in the undertaking." Now what is here conceded to a limited extent holds generally of all production goods, and for every form of value, as a law of natural valuation.