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• Editor's Preface
• Author's Preface
• Book I: The Elementary Theory of Value
• Chapter I: The Origin of Value
• Chapter II: The Value of Satisfactions of Want
• Chapter III: Gossen's Law of the Satiation of Want
• Chapter IV: The Scales of Satiation
• Chapter V: Marginal Utility
• Chapter VI: The Value of Future Satisfactions of Want
• Chapter VII: The Value of Goods
• Chapter VIII: The Valuation of a Single Commodity
• Chapter IX: The Valuation of Goods In Stocks. the Law of Marginal Utility the General Law of Value
• Chapter X: The Paradox of Value
• Chapter XI: The Antinomy of Value and the Service of Value
• Book II: Exchange Value and Natural Value
• Chapter I: Price
• Chapter II: Exchange Value In the Subjective Sense
• Chapter III: Exchange Value In the Objective Sense
• Chapter IV: The Antinomy of Exchange Value
• Chapter V: The Service of Exchange Value In General Economy
• Chapter VI: Natural Value
• Chapter VII: The Socialist Theory of Value
• Book III: The Natural Imputation of the Return From Production
• Part I: The General Principles of Imputation
• Chapter I: Return Value
• Chapter II: The Problem of Imputation
• Chapter III: The Socialist Reading of the Problem. the Claim of the Labourer to the Entire Return
• Chapter IV: Previous Attempts At Solution
• Chapter V: The Principle of Solution. the Productive Contribution
• Chapter VI: The Principle of Solution (continued) . Contribution and Co-operation
• Chapter VII: The Principle of Solution (continued) . the Economic Service of Imputation
• Chapter VIII: The Principle of Solution (continued) . Imputation and the Marginal Law
• Chapter IX: The Individual Factors of Imputation. I.—SUPPLY
• Chapter X: The Individual Factors of Imputation ( Continued ). II. — Demand and Complementary Goods
• Chapter XI: The Individual Factors of Imputation ( Continued ). III. — Technique
• Chapter XII: The Individual Factors of Imputation ( Continued ). IV. — the Imputation to Cost Goods and to Monopoly Goods
• Chapter XIII: The Individual Factors of Imputation ( Continued ). V. — the Imputation to Productive Factors of Preferable Quality
• Part II: Natural Land Rent
• Chapter XIV: Ricardo's Differential Rent: the First Part
• Chapter XV: Ricardo's Differential Rent: the Second Part
• Chapter XVI: Criticism of Ricardo's Theory
• Part III: The Natural Return to Capital
• Chapter XVII: The Productivity of Capital
• Chapter XVIII: The Calculation of Return to Capital In Primitiive and In Developed Economies
• Chapter XIX: The Imputation of Gross Return and of Net Return
• Book IV: The Natural Value of Land, Capital, and Labour
• Chapter I: Introduction
• Chapter II: The Value of Capital and the Interest On Capital I.—DISCOUNTING
• Chapter III: The Value of Capital and the Interest On Capital (continued) . II.—THE Rate of Interest
• Chapter IV: The Value of Capital and the Interest On Capital (continued). III.— The Law of the Uniform Calculation of the Interest Rate
• Chapter V: The Value of Capital and the Interest On Capital (continued.) IV.—CHANGE In the Rate of Interest
• Chapter VI: The Value of Capital and the Interest On Capital (continued) . V.—THE Valuation of Fixed Capital
• Chapter VII: The Value of Capital and the Interest On Capital ( Continued ) VI.— Capitalisation
• Chapter VIII: Interest On the Consumption Loan. House Rent
• Chapter IX: The Value of Land
• Chapter X: The Value of Labour
• Chapter XI.: The Value of Production Goods, With Reference to the Competition Between Present and Future Interests
• Book V: The Natural Cost Value of Products
• Chapter I: The Law of Costs
• Chapter II: The Conception of Costs
• Chapter III: Foundation of the Law of Costs
• Chapter IV: Conditions Under Which the Law of Costs Obtains
• Chapter V: The Determining Amount of Costs
• Chapter VI: The Law of Costs and the General Law of Value
• Chapter VII: The So-called Costs of Production of Labour
• Chapter VIII: The Cost Theories
• Chapter IX: The Cost Theories ( Continued ). Labour As an Element In Cost
• Chapter X: The Cost Theories ( Continued ). Capital As an Element In Cost
• Chapter XI: The Cost Theories (continued) . Interest As an Element In Cost
• Chapter XII: The Cost Theories (continued) . Land Rent As an Element In Cost
• Chapter XIII: The Service of Individual Economic Value In National Economy 1
• Book VI: Value In the Economy of the State
• Chapter I: Introduction
• Chapter II: The Province of a State Economy
• Chapter III: Value In the Natural Economy of the State
• Chapter IV: Value In the Present-day Economy of the State
• Chapter V: The Fundamental Law of Collective Valuation

CHAPTER XIX

the imputation of gross return and of net return

We have said that capital, rightly employed, shows itself productive, inasmuch as it reproduces itself with a surplus This proposition, although undoubtedly correct as a conclusion, requires one essential modification.

Do the arrows, bows, and nets—the capital of Thünen's illustration—really reproduce themselves in the strictest sense of the term? Certainly not. They produce nothing but fish and the spoils of the chase; in this they exhaust their direct and proximate activity. They do not in the least degree themselves bring forth new arrows, bows, and nets, nor do they give direct assistance in doing so. The return which, in the first place, falls to be imputed to them is, consequently, a gross return in foreign things; things, that is, from among which they cannot replace themselves; things with which they may possibly be compared in value but not in quantity, and by means of which a physical net return cannot therefore be represented. But we cannot stop short in our consideration at this point: as a matter of fact the indirect efficiency of capital goes much further. The bows, arrows, and nets once obtained lighten the conditions of their reproduction, if they do not actually co-operate in it. They lighten it by means of the extraordinary increase in the gross return of fish and game, as consequence of which immensely more labour than formerly is free to be employed in the creation of capital Therefore, in the total result, a net return does come in the end to be imputed to these concrete forms of capital, just as if they did directly reproduce themselves with a surplus.

The same argument holds for capital in the developed economy, only that here the conditions are much more complicated and the process, consequently, more difficult to follow. No capital, even in the most highly developed economy, directly reproduces itself; each produces first a gross return in foreign things, in which, physically, its productivity cannot be seen. The capital of a baker produces bread, that of a miller, meal, that of a peasant, grain. In order that the baker may replace his capital again, he must turn to the miller, and to all the other persons who can provide him with the necessary materials and apparatus for his production. The gross return of every capital must be exchanged against the gross returns of other capitals,—indeed, against those returns which are attributed to land and labour,—in order that the capital may be replaced, and the net return become physically cognisable. The only imputation that ever takes place directly is an imputation of gross return, but from that follows, as a final consequence, an imputation of net return, however circuitous the route may be,—so long, I mean, as the efficiency of capital is considered undiminished, and so long as it is suitably employed. It is just as though every capital did directly reproduce itself with a surplus.

In most cases the return to all the capital invested in one business or one undertaking is grouped in one estimate. It requires no proof, however, that, from the total return, each separate bit of capital (assuming suitable employment) will have its share. Every bit of capital, rightly employed, produces directly a gross return of goods different from itself, and finally, after the necessary exchange between similar gross returns, reproduces itself and yields a net return. In this sense machines, tools, raw materials, auxiliary materials, in short, all forms of concrete capital, the smallest and the most perishable, even those from which, materially speaking, nothing passes over into the product, replace themselves and yield a surplus. From this point of view every piece of coal which is burned for purposes of production creates, in the last resort, another similar piece of coal, and, beyond that, a perishable net return. And, inasmuch as the replaced portions of capital are employed again and yet again, each piece of capital — the smallest and most perishable — becomes the source of a permanent rent. 1

BOOK IV

THE NATURAL VALUE OF LAND, CAPITAL, AND LABOUR

CHAPTER I

introduction

We have now to retrace our steps. Having made clear the principles according to which the return, jointly obtained, may be imputed to the separate productive factors, we have now to return to the question as to the value of these factors. The general law we are already acquainted with: the value of the product determines the value of the production good. The point which we must now take up is the application of this proposition to the special circumstances of land, capital, and labour.

In this by far the greatest difficulties meet us in the case of capital. It seems as if our explanation of its value came into direct collision with the facts of experience. Assume that a capital, employed for one year and thereby completely used up, yields, at the end of the year, a return of the value of 105; experience tells us that the value of the capital will not be estimated at 105, but at a somewhat less amount according to the current rate of interest. At a 5 % rate, e.g., the capital will be estimated at 100. The remainder of the return will be regarded as net return of interest. How does this go with our explanation? On what ground is this deduction made? Ought not rather the full value of the gross return to go into the capital value without any deduction whatever? But if that were so, how should we explain the contradiction of experience which interest presents? How is the interest to be explained? Or does natural valuation exclude interest? Is it, perhaps, merely a phenomenon of present-day exchange and price, which would not re-emerge in the communistic state?

One of the most conclusive and brilliant among Böhm-Bawerk's critical examinations is that directed towards the attempts to deduce interest from the productivity of capital. Böhm-Bawerk himself in fact arrives at the conclusion that the attempt is hopeless. To quote his own words: “It was not simply an unfortunate chance that no one found the Open Sesame which had the power to discover the mysterious origination of interest in the productivity of capital. It was rather that on the road to the truth a wrong turning had been taken. From the first it was a hopeless endeavour to explain interest wholly and entirely from a productive power of capital. It would be different if there were a power that could make value grow directly as wheat grows from the field. But there is no such power. What the productive power can do is only to create a quantity of products, and perhaps at the same time to create a quantity of value, but never to create surplus value. Interest is a surplus, a remainder left when product of capital is the minuend and value of consumed capital is the subtrahend. The productive power of capital may find its result in increasing the minuend. But so far as that goes it cannot increase the minuend without at the same time increasing the subtrahend in the same proportion. For the productive power is undeniably the ground and measure of the value of the capital in which it resides. If with a particular form of capital one can produce nothing, that form of capital is worth nothing. If one can produce little with it, it is worth little; if one can produce much with it, it is worth much, and so on;-—always increasing in value as the value that can be produced by its help increases, i.e. as the value of its product increases. And so, however great the productive power of capital may be, and however greatly it may increase the minuend, yet so far as it does so, the subtrahend is increased in the same proportion, and there is no remainder, no surplus of value” (Capital and Interest, translated by William Smart, page 179).

When we turn to land we find also a striking contrast between the apparent demands of our theory and experience. Land yields returns that stretch away into the farthest future. The value of land, then, should surely be not merely twenty or thirty times the annual rent, as experience tells us it is, but rather an indefinite and incalculable number of times the annual rent; perhaps it should be estimated as an infinite amount (see also on this point Capital and Interest, page 67). But the same line of argument may be applied to capital. Capital also, when well employed, promises to yield its net return on into the indefinite future, so perhaps its value also ought to be estimated as an infinite amount.

It will be seen that the difficulties which meet us are not trifling. If, nevertheless, I believe that they can be overcome, it is because I trust to the support given by the results of our investigation into the imputation of return. None of the writers who tried to derive interest from the productivity of capital had this support, and even in Böhm - Bawerk's critique it is not foreseen. Have we not in fact found a productive power, which, although not capable, as Böhm-Bawerk claims, of creating “ more value,” can and does create what amounts to the same thing, “more return”; in other words, a surplus?

We shall begin with the most difficult, the theory of the value of capital. After what has been said it is clear that it cannot be taken up without taking up the theory of interest.

Almost everything in this book will find its complement in the discussion upon costs which is to follow.

CHAPTER II

the value of capital and the interest on capital i.—discounting

Capital receives its value from its fruits. If, then, we are calculating the final return of any production, and, for that purpose, deduct from the value of these fruits the capital consumed, with its value, the result will be zero, inasmuch as, sooner or later, all capital is consumed in production. The deduction made must always amount to the value of the fruits, —indeed, that value measures the deduction — and consequently the value calculation leaves no net return whatever. Not only is interest not explained; it is absolutely excluded. And, if we consider that means of production renew themselves again and again indefinitely, and yield results indefinitely, we come across another contradiction of experience, for experience shows that the value of capital is not infinite but always finite and limited.

These are the problems which lie before us for solution when we now go on to examine the value of capital and the interest on capital.

For their solution we may avail ourselves of the results of our analysis of the physical productivity of capital. All capital transforms itself in the last resort into gross return. In this gross return the capital reproduces itself with a physical surplus, the net return. These two facts, which we have already established, will suffice us to deduce the value-productivity of capital, and to solve all the contradictions with experience.

First: all capital transforms itself in the last resort into gross return; it follows from this that the value of the capital can never exceed the value of the gross return. The value of capital is thus a limited finite amount, although the working of the ever-renewed production extends away into an illimitable future. The materials and apparatus out of which, and with whose help, bread is produced, cannot possibly be worth more than the bread itself. And those things from which the materials and apparatus themselves are produced, and which, consequently, are the producers of bread one stage removed, have, in the prospective gross return —the perishable bread—a maximum limit of value. So with all capitals, however far their primary products may be removed from direct employment in the satisfaction of want. To put it into figures:—if a capital transforms itself sooner or later into a gross return of the value of 105, its own value cannot be put at anything above 105.

Second: in the gross return capital reproduces itself with a physical surplus, the net return. It follows that the capital value cannot be credited with the whole value of the gross return. In the reproduction capital represents only a portion of its own gross return, and can therefore absorb only a portion of the value of that gross return. If, from the value of 105, 5 are set aside as fruits which may be consumed without preventing the full replacement of the capital, only the remainder of 100 can be reckoned as capital value. The prospect of having this residual value of 100 transformed once more, at the close of the next period of production, into the gross return of 105—by again employing it productively — cannot make any change on this valuation; since the expected return of 105 is always divided in the same way, assuming the same conditions; viz. 100 goes to capital and 5 to the increment on capital.

Gross return and net return are thus the two given amounts from which capital gets its value. The whole difficulty of the problem lies essentially in the recognition of the fact that those two amounts are given. For proof of this we refer to our former disquisition upon imputation in general, and the imputation in the case of capital in particular. If physical productivity of capital involves, as we have maintained, the imputation of gross return and the imputation of net return, we have at once a clear and simple principle for the valuation of capital.

There is in common use a definite name for the method of calculating value required by this principle. To fix the present value of a money claim, carrying no interest, which falls due at a future date, we make use, as every one knows, of the method known as “discounting.” That is, we deduct the usual interest from the future sum. Now every capital value, —not alone the value of a sum of money but of every perishable productive instrument-—is calculated by discounting; 1 that is to say, from the value of the future expected sum of products into which the capital will be transformed, the corresponding net return is deducted. Only that, practically, in discounting money claims, a fixed rate of interest-—-i.e, a definite relation between capital value and net return—is always assumed, and always emerges, while we are explaining the formation of this relation by first discovering the principle for estimating capital value.

Böhm-Bawerk, arguing against Thünen's explanation of interest—which has much in common with that just given—asks with what right it can be assumed that the value of the gross return never raises the value of capital to its level, or, inversely, that capital value never depresses that of the gross return to its level? If a return of 105 can be obtained with an outlay of 100, will there not be competition in production, or levelling of the valuations, until either the outlay come to be valued at 105 or the return at 100, or both settle at some figure half-way between the two? Bö hm-Bawerk is right in raising the question, seeing that he does not start, as we do, with a physical net return to capital. But assuming this physical net return the question is at once answered and settled. So long as the gross return remains large enough to replace the capital and yield a net return, the value of gross return and the value of capital can never be assimilated: there will always be a difference-—viz. the value of the net return. This difference could only disappear with the disappearance of physical productivity. So long as it exists, so long does physical-productivity guarantee value-productivity to capital, and so long does capital also create more in value than itself; —to apply again the words of Böhm-Bawerk, it creates “ more value.” And if, in order to calculate the amount of capital consumed, the capital value be deducted from the gross return, it is not the whole amount of gross return that is deducted; the subtrahend is somewhat less than the minuend, and the required residue of interest must be the result.

If this be so, then, in the communistic state also, capital value must be estimated in such wise that it absorbs only a portion of the gross return to capital; so long at least as capital retains the same efficiency, as an auxiliary of production, which general experience from time immemorial has shown it to do. And for so long, consequently, must it, even in the communistic state, bear interest. Calculation of the net return to capital, and deduction or discount of the same from the gross return, in order to find the value of capital;—these are natural economic calculations, indispensable in every economy so long as the fundamental conditions of production known to general experience remain in force.

A capital which, in twelve months from the date of possession, yields the same gross return (say 105) and the same net return (say 5), is valued at the date of possession at the same amount (say 100). It is, nevertheless, not a matter of indifference whether the capital comes into our possession now or only at the end of the twelve months, inasmuch as possession now guarantees a return of interest besides It would, therefore, be incorrect if we were to take the equivalence of valuation put upon capitals in the present and in the future, and argue from that to the full economic equivalence of the present and the future possession. A present sum is always worth more than the same sum at a future date, or, as we may say, the future sum is always worth less, and that in proportion to the futurity of the time when it will come into our possession. If in the course of a year I can make 105 out of 100, the sum of 100 which I shall obtain only at the end of a year, is, to-day, worth only about 95. To reduce future capital values to present value, they must be discounted, just as the values of future gross returns are.

The reader will remember that, in chapter vi. of Book I., we defended the proposition that present and future wants, coming into competition with each other, are, as a rule, to be regarded as equal; that is to say, the diference in time does not necessitate any diference in valuation. To this proposition we have now to add a second:—that, within the sphere of production, the diference in time does necessitate a difference in valuation of the goods employed in production. The two propositions are in perfect accord, and mutually supplement one another. If wants are continuously to find the same satisfaction, equal amounts of return must continuously be produced. And if equal amounts of return are continuously produced, capital must remain continuously the same in substance. But if capital is actually to remain the same in substance, and so is able to yield continuously the same returns, this must find expression in a valuation which ascribes to capital a higher value, the earlier the point of time it comes into our possession. For the earlier the point of time, the earlier, and consequently the greater, the return that may be expected.

The business man who takes note of his own calculations, who tests his recollections and impressions, and asks himself why he calculates interest, and on what principle he graduates the value of his capital, will arrive substantially at the same conclusions as those to which we have just come The value of goods is derived from their utility; the value of capital goods from their useful returns; interest represents a net increment to or fruit of capital:—these are the axioms of practical life so much contradicted, even libelled, by theorists. They are axioms which every layman recognises, in his own way, as the motives by which he believes himself guided in his economic operations. A theory which should succeed in vindicating these axioms of ripened experience, which should give a distinct form to the vague impression, and a good and necessary content to opinions not quite conscious of their own raison d' ê tre, could have no better testimony to its correctness.

CHAPTER III

the value of capital and the interest on capital (continued). ii.—the rate of interest

Interest is the return to capital when that return, with its value, is considered in relation to capital value. The relation existing between capital value and interest, when considered in the individual case, may be described as the percentage of increment; it becomes the “ rate of interest ” only when it obtains in a large number of connected cases. The rate of interest is the general percentage of increment to all the capital in the market.

The fact that, in one and the same sphere of production, there emerges a general percentage of increment, or at least a constant tendency toward it, arises from the many-sided connections between various kinds of production. In consequence of the comparatively great freedom of choice in the destination of most capital, land, and labour, it is almost always possible to extend any single production at the cost of some other, or to limit it in favour of some other. Of this possibility people will avail themselves whenever, and according as, any one production shows a particularly favourable or particularly unfavourable percentage of increment. In seeking for the most favourable percentage of increment, and in striving towards the equalising of all differences, a general percentage of increment will be created, or at all events will be aimed at, so far as there is competition between the various productions.

The organisations which at present contribute most to the equalisation of the interest rate are the money markets, where the principal amounts of capital in the shape of money are lent. In the money markets it is, of course, in the first instance only interest on loans that is determined, but the state of the loan market in the last instance affects also the return to production, inasmuch as it influences the extending of industries carried on with borrowed capital. Not only loan capital, however, but also that capital which is the personal property of undertakers, moves perpetually in the direction of the highest percentage of increment. Under a communistic regime all capital would belong to the one single undertaker, the state; capital would no longer be lent for production; and the interest on loans would cease to influence the percentage of increment in production. But this would simply leave capital still more free to shift from one production to another; it would no longer be hindered by those barriers which the circumstances of private ownership at present oppose.

Every one knows that the rate of interest, in spite of the tendencies to equalise it, is never really the same all over. This is chiefly caused by the fact that the unity or organisation of production is by no means perfect. There is no such thing as a united money market, and much less is there anything like a united way of conducting productive business. The individualism of the present economic order distributes production among individual undertakings. These, of course, under the influence of competition and the desire for gain, are built into one coherent structure, which to some extent realises the economic order that an ideal plan of production would present. Yet at how many points do we find great gape; how many dislocations through excessive accumulation of means of production at the wrong places; how often things go too quickly, how often not fast enough ! And mistakes like these are all the greater the more distant the groups compared are from one another. The separate branches of agricultural production may be, relatively speaking, more in harmony with each other, than, for example, agriculture as a whole with manufacture as a whole. The transferences from agriculture to manufacturing, and vice versd, take place too seldom to allow of the proper balance between them being maintained.

This results, as we have said, in differences of percentage of increment among the individual productive groups. It is scarcely necessary to emphasise the fact that every difference in rate of interest, arising from this cause, is a misfortune. Every such difference implies a violation of the very first principle of employing goods; that they shall first be used in the most favourable employments, and that the less favourable shall be allowed only in so far as there is not enough of the more favourable. In one group people are content with a less percentage of increment, while in others they may be obtaining higher percentages. The hurtful consequences of this are by no means confined to the use of capital; they go further, and misdirect the production of capital. Capitals which yield a trifling interest are produced far more largely, and capitals which might yield a high interest, to a much less extent than they ought to be.

On the other hand, uniformity in the percentages of increment, and a uniform rate of interest, are, where they exist, proofs, economically speaking, of a well-balanced distribution and disposal of capital. They are proofs that the economically indicated limits of the employment of capital are everywhere equally respected; that nowhere is there any falling short, and nowhere any overstepping of them. In the principle which demands that the employment of capital shall be guided by the rate of interest, and that all employments which fail to return the customary interest be left alone, we find the marginal law brought into one common expression as regards all the different forms of capital. The net return is a definite quota of the gross return, and where the quota of net return is controlled, the direction of capital generally is controlled.

In the communistic state, when production is directed from one point and to one end, the differences in percentage of increment, so far as them are occasioned by the inorganic nature of our system of production, would disappear. Of course, even there, certain differences would still remain; all those, namely, which could not be further equalised by transferences from one production to another. In the nature of things, by reason of the variety in the properties of things, no production can be increased at the cost of others beyond a certain point, and, on similar grounds, no production can be limited in favour of others below a certain point. Agricultural capital could never be completely transferred to trade, nor trade capital all transferred to agriculture. But what does observation here show? It shows that those very differences, which it seems quite impossible to remove, are always removed, and that through an instrumentality which is permissible even where transferences of capital are not permissible; by means, that is to say, of calculation.

How this happens and what it means, we shall now try to show.

CHAPTER IV

The Value Of Capital And The Interest On Capital(Continued). III.—The Law Of The Uniform Calculation Of The Interest Rate

A capital which, in a one year's production period, transforms itself into a gross return of £105, will be valued at £100 if the general rate of interest be 5 %: the residue £5 is net return. If the gross return should rise suddenly and greatly, say, e.g., to £126,—the general rate of interest remaining unaltered—it appears at first sight that the rise must affect the net return, and cause it to be calculated at £26 instead of at £5 as formerly. But, as a matter of fact, is the return so calculated? It is in one particular case; that, namely, where the rise is regarded as a solitary instance. But if it is regarded as permanent the calculation will be different. The owner certainly reckons the entire increase of £26 as gain, but he distributes it by putting £20 to capital and £6 to net return. From this time onward he will reckon his capital, and consequently his consumption of capital, at £120, and his net return at £6; so that he does not assume an increment of 26%, but only of 5%, corresponding to the general rate of interest.1

In the same way, should the gross return of a capital sink permanently, while the rate of interest remains unaltered, a portion of the loss will be written off the capital value, in such a manner that the relation between capital value and net return shall again correspond to the general rate of interest.

In this way it comes about that, where transferences from production to production are no longer permissible, the individual percentages of increment on individual capitals are, by calculation, regulated according to the general rate of interest.

The rate of interest which obtains in the particular productive group, or in the particular market to which the capital in question belongs, is the rate that decides.

The meaning of this act of calculation is easy to understand. A capital yielding 26 % interest and one yielding 5%, are not equivalent to one another, although both may be expressed in the same figures. Only equal capitals bearing equal interest are equivalent. Capitals, then, can be calculated off-hand—i.e. without consideration to the interest they bear —only where the rote of interest is the same. That is the reason why, when the rate of interest cannot be made equal, it is at least calculated as such, by means of shifting the differences to the capital value, and giving them expression there.

A 3 % capital and a 6 % capital of £100 are not equivalent to one another; they are put into terms fit for comparison by calculating the 3% capital at 6%, and so reducing the capital to £50, or by calculating the 6% capital at 3 % and raising capital value to £200.

As a means of simplifying calculation, it might be exceedingly desirable that the rate of interest should be the same in all markets, and in all productive groups. The rate, however, is not the same, and the fact must be reckoned with. If the rate of interest on bonds amount to 4 % and the bank rate to 3%, it is a consequence of the fact that the the two loan markets are separated from one another, and that demand and supply in the one do not approximate to demand and supply in the other, or, at all events, approximate only in trifling degree. This want of touch, however, which renders impossible the equalisation of rates of interest, also renders it less necessary; it is only when capital is transferred from one market to the other that the difference in rates of interest has any practical importance for the valuation of capital It is different where one and the same market is concerned. Here capitals are continually valued against each other, and here, therefore, differences in percentage of increment could not be put up with. They are overcome either by regulation of production, or, where that is not practicable, by calculation. In the communistic state, where all capitals would be under a uniform administration, it would be an obvious expedient of calculation to regulate all individual percentages of increment according to the prevailing rate of interest.

We now proceed to further applications of the fundamental proposition that the rate of interest, when possible, should be uniformly calculated.

CHAPTER V

the value of capital and the interest on capital (continued.) iv.—change in the rate of interest

It has just been shown that, when the value of the service of any individual form of capital—e.g, a raw material, or a machine-—rises or falls, the fact expresses itself in a corresponding elevation or depreciation in its capital value. The net return imputed is, of course, altered at the same time, but only in so far as will bring it again into that relation with the capital value which corresponds with the ordinary rate of interest.

In order that the general percentage of increment—the rate of interests—may fall or rise, there must be changes of an extensive kind in the return to the great mass of capitals— brought about through changes in supply, in demand, in technique, in a word, in any of the factors of imputation. A general rise in the gross return to capital, brought about by a great and universally effective invention, would cause a general rise in the net return to capital, and its relation to capital value,—that is to say, in the rate of interest. The capital value might in this instance remain entirely unaltered. Only those capitals which had no part in the effects of the invention, and were in this respect individually separated from the general mass of capital, must necessarily be affected. Where the amount of their services had remained unaltered in the midst of the general increase, in estimating the value of those capitals a greater discount from that amount would require to be made, corresponding to the increased rate of interest. Suppose the rate of interest to rise suddenly from 3% to 6%, the value of all capital whose interest remains unaltered at 3 % must be appraised at a correspondingly lower rate.

We have discussed the effect which the individual factors of imputation produce upon the contributions of capital, in sufficient detail to make the derivation of the rules which govern the change in the rate of interest a matter of no difficulty.

One single remark may be added. It is quite a hackneyed proposition that the increase of capital causes a decline in the rate of interest. This proposition is true only with a certain limitation; it holds only when, by increase of capital, is understood increase in amount, without a simultaneous increase in the variety of the forms of capital. Increased variety in capital is synonymous with an advance in technique; it is one of those facts of economic history to which special attention must be drawn, when it is desired to show clearly the difference between primitive and developed production. Thus to it is due what we know to be the effect of every technical advance; namely, a rise in the value of the services of capital, as regards individual businesses, and, when comprehensive enough, a rise in the rate of interest. Not until the qualitative advance has been quantitatively used up, and the stocks of the new varieties of capital been multiplied, without other new varieties coming to the front—that is, not until production expands and fills out the newly-set limits,—can the increase of wealth have power, first, to depress the value of the services of capital individually, and, in the long run,— should its compass be sufficiently extensive,—to cause a fall in the rate of interest.

If we look back over the changes in the rate of interest on production over the whole course of economic history, we shall notice an unceasing upward and downward movement, according as advances in production are made, or as the marginal values of the newly - acquired wealth are again depressed by the increment of capital which follows. But through these unceasing fluctuations run great fundamental tendencies, which are, of course, subject to disturbance from opposing tendencies of the rate of interest on consumption loans. Economic history begins at a period when there is almost no capital,—-the zero of property in capital as well as the zero of return from capital. From that time onwards property and return, measured absolutely, go on growing so long as the economic world thrives, and has not yet reached the down grade of the movement of value. And the relation between these two—i.e. the rate of interest—rises similarly from the beginning, and only begins to fall when the down grade in the movement of value begins to come in sight.

CHAPTER VI

the value of capital and the interest on capital (continued). v.—the valuation of fixed capital

Up to this point we have disregarded the circumstance that many capital—all those called “fixed capitals”—do not exhaust themselves in yielding one single return, hut co-operate in several processes of production, and yield several returns before they are finally used up. We were justified in hitherto neglecting this circumstance, as it is of no importance to the principle of the valuation of capital which we had first to establish. Now, however, that the principle has been established, we must go on to this next question. We shall find that the circumstance alluded to does not essentially alter matters, although it certainly renders them much more complicated.

In the case of fixed capital, instead of one single future return there are several returns, and the present value of these several returns must be determined by discounting. If a machine remains capable of work over ten years, the services of all the ten years which are to be imputed to it must be discounted and added up, at their present value, in order to obtain the capital value of the machine. It need scarcely be said that every later service must be estimated at so much less in present value, as the discount must be relative to the terminal point. Further complications are caused by the fact that repairs, and reconstructions, and extensive replacements, frequently take place in fixed capital during the period in which it is wearing out. The outlay which this occasions must be discounted—taking into account of course the period of time at which this outlay may be anticipated. Still further complications, finally, arise from the uncertainty—which increases as the period of wear and tear lengthens —whether the returns expected will actually be received at all. And this also necessitates peculiar deductions, which will be most simply made where people can insure against the danger.

In the case of such fixed capitals as are consumed exceedingly slowly, and, consequently, yield exceptionally many returns, the process of capitalisation frequently takes the place of discounting. Before speaking of this, however, it will be necessary to touch at least upon another somewhat difficult question.

This is the method of calculating the individual percentages of gross return assignable respectively to interest and to wear and tear. If a machine remains serviceable for five years, and yields every year £ 1000, this yearly income must be divided out between interest and wear and tear (Amortisation) in accordance with a certain law. In order to find this law, it is best to represent the individual rates of return as annuities. The first instalment must yield interest for the first year upon the total capital value, all return beyond that is repayment of capital; the second instalment has to yield interest on the capital value remaining after deduction of this repayment, and the residue, which must now be a larger one, serves toward further repayment; and so on, until finally the entire capital is replaced, and interest obtained upon all the portions of capital according to the period of their employment. The reason for this kind of calculation lies, in the last resort, in the law of the uniform calculation of the interest rate. 1

CHAPTER VII

The Value Of Capital And The Interest On Capital (continued) VI.—Capitalisation

Interest is always an aliquot part of capital value, and capital value is always a multiple of interest. Where interest is 5 %, for example, the interest is 1/20 of the capital value, and the capital value is equal to 20 times the interest. It is this fact which renders it possible to determine the value of capital, not by deducting interest from gross return, but by another method which leads to precisely the same result— namely, by means of a corresponding multiplication of interest, or, to use the ordinary term, by capitalisation. Whether discounting or capitalisation is preferred will depend upon circumstances. With circulating capital discounting is the usual method, as the gross return in this case forms the nearest and clearest basis. With fixed capital, if the wearing out is comparatively rapid, and the gross returns are few in number, discounting will be the preferable method in this case also; but if a long series of gross returns is to be taken into account, capitalisation will be preferred.

Capitalisation is easiest where the gross return contains no quota for wear and tear, and is therefore entirely net return. This would be the case with a capital which never wore out, which promised rent to all eternity, and a rent, moreover, absolutely secure. To carry through the process of discounting here would be laborious in the highest degree; the rent of each separate year would have to be separately calculated, until that rent was reached whose present value was zero; and not till then could the calculation be finished. How much simpler in such a case to multiply the year's rent in accordance with the rate of interest! The result obtained in this fashion agrees with that given by the former and more laborious method, not merely approximately, but with mathematical exactitude, as any text-book of mathematics will confirm. The mathematical formula for the discounting of an eternal rent is simply the formula of capitalisation.

The calculation is a little more complicated when the gross returns contain quotas for wear and tear, and when repairs and the like must be covered and insurance premiums or premiums against risk retained out of these gross returns. In such cases all necessary deductions must first be made from the gross return before we get the net return which is to be capitalised, and this is very often exceedingly difficult in the individual case. The premiums just mentioned are frequently not deducted, but the amount of risk finds instead its expression simply in the rate of interest. The return, for example, of a business regarded as of doubtful solidity will be capitalised at a higher rate of interest, i.e. as a smaller multiple. 1

CHAPTER VIII

interest on the consumption loan. house rent

The natural principles hitherto laid down for estimating capital value and interest refer only to production. It must now be asked whether there is also a natural interest which corresponds to the interest given on a loan for consumption purposes, or interest derived from letting of dwelling-houses and the like.1

The motives of a debtor who borrows with the view of spending the loan on himself are different from those of an undertaker who borrows to increase his business capital. The undertaker hopes to obtain both repayment of capital and interest out of the return on the borrowed sum. The mere debtor cannot hope for this, but must trust that it will be possible for him to repay his debt of capital and interest out of some other income. He borrows because he needs goods now, and has not got them, while he expects in the future to have them and not to need them to the same degree—at least he deludes himself with some such hope. Thus in a certain sense interest on production and interest on consumption have a common source. Both of them relate to a difference in the valuation of present and of future goods, only that the causes which produce this difference are distinct. In the case of the productive outlay of capital it is the productivity of capital which causes the difference between present and future; in the case of the consumption loan, it is accidental and personal circumstances,—accidental accumulation of present wants and expenditure, accidental disturbance of income, and so forth. One who finds himself in a situation of urgent necessity is acting quite rationally when he promises—at some future time when he hopes to be more favourably situated—to pay to the person who assists him by an advance of money out of his present difficulty, not only the amount advanced, but an extra, an interest. A sum of £105 at the end of a year may be worth less to him than £100 is at the present moment; he might even promise £150, £200, or more, and yet not be acting irrationally. But if he is to find a person willing to lend him the moncy, it is essential that every one should not be in the same circumstances of present need and future affluence as himself. It is essential that there should be people who, at the moment, have means which they can do without. And thus it follows that, in an entirely organic economy, such as would exist in the communistic state, the necessary conditions for consumption interest are wanting, inasmuch as all the citizens together would form only one economic subject, and would participate continually, either in the same condition of want, or in the same improved condition of economic well-being.

The interest obtained from the letting of dwelling-houses, and such like objects of consumption wealth, amounts, on an average, to a sum which allows the owner to enjoy—during the period for which the building lasts—interest upon the capital expended in building, and, besides, to provide what the Germans conveniently call “amortisation” of the same; so that, when the dwelling is worn out, he is in a position to replace it. In short, there is assured him, on the average, a permanent net return corresponding in amount to the general rate of interest upon property of this kind. During all the long period of time when contract interest on loans was forbidden by law, and violently combated by all theorists, no one thought of objecting to the interest on consumption-wealth. This was always held equitable; and an owner who made over his property to another in perpetuity was regarded as having a right to claim in return a permanent remuneration. If, however, we look carefully, it will be seen that the theoretical arguments employed against interest on loans apply equally to interest on house property, in so far as it brings in more than enough to repay the costs of building. If money be “unfruitful,” so are buildings; and to this extent it is impossible to see why they should bring to their owners a net income lasting beyond the physical duration of the house. Were the owner to retain the house for his own use he would, by the time it tumbled to ruins, possess nothing more of it than, possibly, the value of the materials;—is it not rather a hard condition that the person who hires the house must rebuild it for him?

To justify the usual amount of rent on house property, we must go somewhat further back, viz. to the fact that the objects of use which are let must be produced. But if they are to be produced, there must be the prospect that their value will include the full and permanent maintenance of the undertaker's capital, along with the customary return to capital, whether this value be realised through selling or through letting the property. No houses would be built for letting if the prospects of this kind of undertaking were poorer than those of any other; the interest of hire or let must, therefore, stand at the usual amount of interest on capital. It is an application of the law of costs (see below, Book V.), according to which the customary interest on capital is reckoned among costs. As in all cases, so in this, does the calculation of costs assure the fullest economic distribution of the employments of goods. The more exactly the net income received from the letting of dwelling-houses corresponds with the rate of interest general over the country, the more exactly will the building of houses, and the satisfaction of the need which this meets, correspond with the general condition of production and of the satisfaction of wants. If people were to be contented, e.g., with an exceptionally low return from houses, it would imply a disproportionately ample satisfaction of the want for dwellings. This would stand out from the general economic plane; and would necessarily be balanced and compensated by limitations in some other direction.

Even in an entirely organic economy, in which the opposition between owner and tenant was abolished, it would be as needful as it now is to take care that building of houses corresponded with the general position of production and of satisfaction. And to this extent we might draw analogies between the interest of house rent and a calculation, in terms of value, of the satisfaction given by houses, which would result in a control of expenditure quite as complete as that given by house rent.1

CHAPTER IX

the value of land

The value of land is calculated — according to the same principles as the value of a permanent rent—by capitalising the rent of land. This is a preposition which is held nowadays as self-evident. It was not always so, however, and, indeed could not always be so. In order to capitalise, a given rate of interest is necessary; and that an interest rate may be given, we need capital. To capitalise rent means to multiply it according to principles which are derived, as the name itself shows, from the valuation of capital.

Imagine an ideal condition of agriculture where no capital whatever is employed. The land yields produce of all kinds and in great quantity. In these circumstances the value of each product can be estimated exactly; the value of each harvest can be estimated exactly; rent can be fixed exactly; — but there is no means by which to determine with certainty how many rents would be required to give the value of the land.

Why is there no such means in the case of land as there is in the case of capital? The answer is simple. Capital reproduces itself in the gross return as a part of that gross return. Thus there is a fixed relation between the two “ known” quantities, gross return and net return, and the “ unknown” quantity, capital value; and this relation gives the measure for capitalisation. Land has not the same double position as productive factor and as product. It produces without being reproduced; and thus, to determine the value of land, it becomes necessary to bring to our aid the standard for capitalisation which we find in capital.

From this consideration it follows that, so long as capital was scarce, it was impossible to obtain a fixed valuation of land. Every owner of land might estimate its value differently, inasmuch as he might take, as basis of calculation, either a greater or smaller number of yearly rentals, according to varying external circumstances, and according as his judgment was influenced by recklessness or by forethought. An egoist pure and simple, who calculated only with regard to his own lifetime, and to whom his land was of importance only because it secured him a rent for life, would estimate its value according to the probable duration of his life, and would thereby obtain a kind of fixed valuation; at all events, his land would represent to him a finite sum of value and not an infinite one. But one who thought of his children, and of succeeding generations, and took their interests into consideration in estimating the value of his land, would of necessity regard it as an infinite amount. As inconsiderate egoism may be counted exceptional, the value of land must, as a rule, have been estimated as infinite, or, at all events, as an amount incapable of being measured.

As a matter of fact, this probably was the case with primitive economy. In the beginning, where land had any value at all ascribed to it—as, e.g., the pasture lands of nomadic tribes when there was no superfluous amount of such lands, — the opinion must have arisen that here man had to do with an indispensable condition of existence; a condition which required to be kept up permanently; and a condition whose importance could not in any way be compared with that of rapidly changing, coming and going, movable goods. The possession of pasture land was a matter of life and death, and the tribe, recognising that its continued existence depended upon the possession, would risk its uttermost to retain it. Even in present times a similar mode of thought may be met with in distant mountainous regions, where the peasant farms his solitary patch of land. His croft is inalienable from him, and its value indeterminable as against other goods. What should the peasant do if he ceased to be a peasant ? No sum of money that a buyer might offer could be any temptation to him, unless just then an occasion presented itself to exchange it for another and better piece of land—an unlikely possibility in the circumstances. The peasant's croft is and remains for him a good by itself, the value of it impossible of expression in goods of any other kind,—in fact, indeterminable.

This conception alters only when capital has become more plentiful, and when the landowner has become more familiar with its use and its value. There are two circumstances which bring this about. The one is that land and capital begin to be exchanged for each other, according to the amount of the rents they yield, and thus people use the value of capital to express the value of land. The other, and more important, is that the land becomes more intensively cultivated, and itself employs much capital. Consequently, in every act of cultivation, the question has to be considered, how land and capital should be employed relatively to each other, so as to give the best returns of rent. The same return in crops may be produced by taking more or less land into cultivation, or by employing more or fewer doses of capital, and agriculturists have to decide on these points. Thus land and capital become commensurable in their products; and, whenever civilisation has got this length, it is impossible longer to avoid valuing land according to the fundamental laws of valuing capital. To do otherwise would be to renounce the only possible measure for calculation and economic decisions. Just as capitals can be rightly compared with each other only when calculated at the same rate of interest, so can land and capital be rightly compared only when the valuation of land assumes the rate of interest on capital.

In the communistic state, it is true, the connection between land and capital, brought about by exchange of the one for the other, disappears, but the connection arising from their common co-operation in production remains. The capitalising of land value, accordingly, would remain as now.

CHAPTER X

the value of labour

To his master the slave is a capital, and his value, like that of an animal, a machine, or any piece of fixed capital, is determined by summing up and discounting all the services which may be expected from him, or, as we may say, by capitalising his net return.

The capital value of free labour, the value of the free labourer, is no object for valuation, any more than his person is an object of economical disposal, or a “good.” On the other hand, the individual acts of labour are always objects of economical disposal, and so objects of value, even in the freest community,—even in a community where the labourer himself governs and makes the laws. No economy could be conducted without men recognising not only which labour, in general, is the best and which the worst, but which, in the circumstances, is the more and which the less important, which must be used sparingly and which may be used with most freedom.

The method by which labour is valued is exceedingly simple. The ordinary principles of imputation decide what share of the return may be ascribed to each individual service, and the value of this share obtains directly as the value of the service which produces it. Thus every kind and quality of labour shows a different result according to the available supply, the demand, the support received from complementary goods, and the technical possibilities. At the top of the tree stand the “monopoly” services, when the general economic conditions of the time aid them with technical support and general demand; at the bottom stand the over — congested branches of labour, particularly unskilled manual labour. Wherever labour power is available in great quantity it is valued as a “cost-good,” and suffers from all the disadvantages of this valuation The marginal employment is always the decisive one,—that employment of the labour in question which brings the smallest result economically permissible.

The socialists would have us believe that the value of every kind of labour should be estimated simply according to time; that is to say, the duration of the service should alone decide its value relative to other labour,—which assumes, of course, that slovenly labour is reduced to earnest labour, unskilled to skilled labour. This is the extent to which the quality of the labour would be taken into consideration, but no further. Those differences of quality which reside in the task set before the labourer are left quite out of consideration. Common manual labour, higher artisan labour, superior mental labour, are all to be regarded as equal. Does it require any special proof that this is contrary to the natural laws of valuation, and that no economy could last which treated its division of labour in this way?

The socialists continually overlook the fact—although, indeed, they only follow in the footsteps of most of the economists—that value, in our present condition of society, has two services to perform. The one is to act as title to personal income. In the great round game of income-winning, every one is to receive in the end as much as the value of his stake amounts to; and in the game the stakes may be wealth as well as personal labour. The man who has much wealth to stake receives, as a rule, much income, even without personal labour, and the man who has little wealth to stake, as a rule receives little, even with the most strenuous expenditure of labour.

The other service of value,—and one usually quite overlooked,—concerns the economical balancing or weighing of goods against goods, and of employment of goods against employment, without regard to distribution among persons, and simply with a view to reach the greatest possible economic results. To this service of value belong e.g. those principles which are absolutely indispensable to any economy;—that every production should be directed so as to obtain the greatest possible return, that no more be spent upon any product than can be made good by its value, that in consumption the good suited to satisfy urgent wants, and therefore the more valuable, should not be spent on a trifling satisfaction, that, generally speaking, the limits of supply and demand, as given in marginal value, should be observed, and so on.

What would the socialists have? They wish a regulated economy, in no way worse, and possibly better regulated than that of today; but with this peculiarity that labour shall be the only source of personal income. The value of land and capital—or the value of the rents of land and capital—shall no longer be imputed to any individual as his outlay or stake; shall no longer serve any one individual as a title to personal income. Is there in this claim—the justice of which we shall not here discuss—any force which can abrogate the economical service of value as well as the personal service? Because land and capital are no longer to belong to individuals but to the state, must they therefore be regarded by the state as valueless, and be employed in production without regard to the principles of value? Because labour is to be the only basis of personal income—measured possibly by the length of time which each man has worked—is labour alone to be considered in production, and is the only measure of its value to be its duration? Because there is to be a new order in the distribution of goods among persons, must there be a complete disorganisation in the whole industrial conduct of goods?

Of course socialists are very far from desiring such a result. They wish to have a regulated economy, but they expect at the same time to secure that goods are used and employed according to their usefulness. Does this mean that the usefulness of goods is really the only thing to be considered—not quantity and its changes, not demand with its rise and fall, not the mutual connection of means of production, with all the vicissitudes of favourable and unfavourable coincidence? But if usefulness, supply, demand, complementarity are combined, what is this but to value goods according to the utility imputable to them in the given case, instead of according to their general usefulness—in other words, to estimate them according to their value?

The natural principles of valuation are indispensable, because they serve indispensable economic purposes. Consequently where these principles are observed, they serve these purposes, and are, in so far, good. In so far as exchange value corresponds with natural value, it is right that it should regulate the economic conduct and disposal of goods, and that in every department, whether as regards land, capital, or even labour. And although the labourer may suffer severely under this law of value, although society generally may suffer with him, although the recompense of the labourer may require to be adjusted, in his own interest and that of society, by a different law;—still labour cannot be valued according to any other law where its employment is concerned. When it comes to employ labour, the communistic state must retain the same law in force, or its economy will become chaos.

Not only the question of payment, but, beyond that, the question of labour in the future, must be kept distinct from its employment. Wherever common labour power is disproportionally abundant, it can, and must, be employed only in producing returns of very trifling value. None the less will it be regarded as an evil that there should be available labour power of such trifling productive capacity, and all efforts towards increasing the services of labour and thus securing it a higher value, are worthy of praise; all the more so if the small capacity brings a small payment, and thus results, over wide circles of workers, in insufficient satisfactions of wants and wretched conditions.

CHAPTER XI.

the value of production goods, with reference to the competition between present and future interests

To distribute a supply of means of subsistence, or other consumption goods, over a considerable period of time, and to value it with regard to the competition between present and future wants, is, at bottom, a very simple task. One would select the highest satisfactions which can be reached on the whole, and these would form the basis for the valuation of the goods, the marginal satisfaction deciding the value of the unit. At what point of time the marginal satisfaction will occur cannot be stated generally. It may be at the beginning that the highest satisfactions are possible, as in the case of stocks which are large and liable to spoil, and cannot well be preserved for any length of time. It may be that the greatest amount of satisfaction can be attained only at the end of the period; as when forethought demands that a certain restraint be observed at the earlier dates in case of possible accidents.

Not infrequently this task is complicated by the fact that there is a question between the productive employment of goods, and their direct employment in the satisfaction of wants. Coal, for instance, exerts its power of heating equally well in the dwelling and in the factory, and so with many other material goods which may be employed either for consumption or as capital. The same will be observed in the case of land; a field may either be employed in producing a return, or be laid out as a park. And, finally, it is the same with labour. It may either be employed as personal service—domestic service in a house for instance—or used for productive ends. As all production provides for consumption sooner or later, the choice between immediate consumption and productive employment is always a choice between present or proximate consumption and future or more distant consumption. The principle which governs this choice is the one just given; that employment which, in a consideration of the whole ground, is found to be the marginal one, decides the value. And here again it is impossible to state generally at what point of time the marginal employment will occur. It may occur in the present, the period of immediate consumption; it may occur in the future, the period of productive employment. The marginal value of coal might be decided equally well, either by its service in heating the dwelling or by its service in the factory.

This consideration may be carried further within the sphere of production. Production may be made to yield its fruits to consumption sooner or later, according to the manner in which it is directed. It is possible either to limit production principally to objects of direct consumption,—by which means the end that is nearest in point of desire is more speedily reached,—or to direct it on and on, devoting it to the making of production goods themselves, and to ensuring the conditions of great and lasting “rentability”—by which present enjoyment is postponed for the sake of a greater degree of enjoyment in the future. Not only does the choice of objects of production come into consideration, but many other circumstances also. Almost every kind of production—with the exception possibly of those strictly dependent upon seasons of the year—permits of a shorter or longer process; almost every production—with still more trifling exceptions—may be carried out “extensively” or “intensively,” with slighter means and more temporary results, or with stronger means and more durable results. In all such cases it has to be decided whether the present, the nearer enjoyment, or the future, the more distant, be preferable. And finally there is still another peculiar circumstance, which contributes to the competition between present and future interests. The accomplishment of almost every undertaking demands personal exertion; it thus demands the overcoming of the resistance offered by the natural desire for rest and comfort, In this connection also the considerations of present and future welfare come into collision.

The principle which must guide one's choice in this respect is in all cases the same, although the difficulty of applying it increases with the complication of the case. That scheme for the employment of goods which promises the greatest advantage on the whole, must be the one chosen, and valuation—so far as is practicable, marginal valuation—must be adapted to this scheme.

In general, indeed, labour and capital are more concerned in what has just been said than is land. The motives which make for labour always, or almost always, encounter in the pleasure of the moment a certain resistance which must be overcome. And capital, as it must continually be reproduced, continually raises the question whether the means necessary for its recreation could not be employed elsewhere to more advantage. In this have originated two celebrated theories, intimately related to one another, although they have emerged separately: the one relating to the value of labour, the other to the value of capital. The former derives the value of labour from the “sacrifices” of labour; this theory we shall discuss later. The other derives the value of capital, or, rather, interest, from the “sacrifice” which, as it asserts, is made by the capitalist in devoting his capital to production instead of directly consuming it. This is the well-known Abstinence Theory, which regards interest as a wage for the abstinence of the capitalist. A few words upon this theory may not be out of place here. After what has just been said there should be no difficulty in forming an opinion upon it.

It is true that, in all cases of the formation of capital, capital might have had another destination than the one actually chosen,—for production is a very Proteus in its capability of taking various shapes; but it is not true—as will now be generally acknowledged—that every capital permits also of being immediately consumed. Since Lassalle's eriticism it is unnecessary to waste another word on this point. But even supposing it were true, supposing that every concrete form of capital might be immediately consumed, the abstinence theory would none the less be false. In no way is it possible that a consumption, from which it is economical to refrain, can serve as a measure of value. What kind of sense would there be in this ? Goods are of value to us because of what we can obtain from them, and those destinations of goods which are chosen as the economically permissible ones, furnish the basis of value. The consumable nature of capital goods can influence their value only in so far as capital goods are actually devoted to consumption; if capital be consumed the productive stock will be diminished; if much capital be consumed it will be sensibly diminished, and productive value will rise. But even this effect must not be regarded as a one-sided one. The productive employment of capital and the personal consumption of it mutually determine one another. Moreover they determine one another only in consideration of the amount of value employed at the time. On the other hand, neither of them can be basis for the other. The circumstance that capital is consumable can no more give value to a foolish employment of it in production, than the circumstance that capital is capable of productive employment can make it consumable, if it be not so in its own nature. The value of an employment must be founded on itself: productive value can be derived only from production, and consumption value only from consumption. The amounts of value gained in the various employments of capital are, of course, compared with each other, so far as is practicable, in the effort to attain to the greatest possible result on the whole: and, moreover, even where they are not compared, they are still put at an equal value with one another in virtue of the particular form of valuation which the marginal law brings with it. As a matter of fact abstinence from consumption is nothing more than a symptom of productive value,—occasionally of so much productive value that the sacrifice of abstinence is at least counterbalanced.

The abstinence theory in its essence bears a striking resemblance to that theory which derives the value of products from their costs. As we shall see immediately, the law of costs does indeed exist as a very good working law of valuation. But costs do not form the foundation of value; they only equalise it: and, moreover, the circumstance that costs are expended makes us conclude for the existence of value. The cost theory, like the abstinence theory—except that it is confined to a narrower sphere—confuses a law of the more or less of value, or more exactly, a law of the equalisation of values, with the fundamental law of valuation. In the one theory as in the other, a symptom, which allows us to conclude for the existence of value, is taken to be its cause and explanation.

BOOK V

THE NATURAL COST VALUE OF PRODUCTS

CHAPTER I

the law of costs

Production goods which are capable of being employed in several ways receive their value, as we are aware, from the value of the least of their products, the production of which is economically permissible; that is, from the marginal product or from their contribution to the marginal product. This value attaches equally to all similar articles or similar items of a productive stock, even to those which arc actually employed in more remunerative ways. In a stock of iron each part has an equal value with every similar part in the stock, based on the marginal contribution. It is the same with a stock of coal; the same with any available supply of labour of equal quality; the same with any other production good. Assume that, in a productive stock of the class a, the item put to the most insignificant use gives a product of 1, every item in the stock will have the value of 1; every item of the class b has the value of 2, if the marginal productive contribution of the class be 2, and every item of the class c has the value of 3, if the marginal productive contribution amounts to 3.

Now, as a rule (the exceptions will be discussed later on) production goods retain that value which is ascribed to them before the beginning of the production—in anticipation of the best possible result,—after the completion of the process of production; that is to say, they retain it still in the products which they have been transformed into. To take the former figures, the product of the elements 10a + 10b + 10c, will, as a rule have the value 10 + 20 + 30 = 60, and the product of the elements 10a + 20b + 10c, will have the value 10 + 40 + 30 = 80.

This law may be expressed differently according as we state it from the side of production goods or from that of products.

In the former case it runs thus:—similar production goods maintain, as a rule, in every product, first, a similar value, and second, that value as it attaches to them through their marginal productive contribution. This is the correct formula. As the law of costs is usually understood, however, the second clause would be left out; thus giving a formula for relative values, but not for absolute amounts of value.

In the latter case the law runs thus:—the value of a product is, as a rule, a complex obtained by multiplying the quantity of production goods employed by the value of the productive unit, or—taking into consideration the fact that every product is always produced from several productive factors—it is a sum of such complexes (10a + 10b + 10c, or 10a + 20b + 10c, and so on). From this formula, which indicates the absolute amounts of value, there follows another for the relations of value. It is that the values of products which have one productive factor in common are, to each other, in respect of this common factor, as the quantities of it requisite for their production. This is the correct formula. As usually understood the law runs more briefly thus;—the values of products are to each other as the costs requisite for their production. This, again, is merely a relative, not an absolute expression. Closer consideration shows that it is not possible to apply this relative formula so long as it stands alone. The amount 10a+20b +10c is not twice as great as the amount 10a+10b+10c, but twice as great only as regards the factor b; the general relation can only be established when the absolute values of a, b, and c, are known. If a=10, b = 20, and c=30, the ratio is as 80 to 60; fi b = 100, it is as 240 to 140.

In the Ursprung des Werthes I called products which have one productive factor in common Productionsverwandt, which may be rendered in English as “cognate.” They represent, as it were, the descending line of this factor, and stand to one another in collateral relationship. All products made from the same quality of iron are cognate. Many products are cognate to each other in more than one respect, e.g. products of iron in the making of which have been expended similar kinds of labour or similar fuel. Understood in this sense, it is always cognate products to which the law just stated refers.

This is the well-known law of costa. The task now lies before us to explain and prove it.1

CHAPTER II

the conception of costs

Whatever economic production goods a man has within his disposal, whether lands, capital, or labour power, he counts part of his wealth—although they do not directly increase his satisfactions; and he does so with just as much right as he counts those consumption goods wealth which permit of direct enjoyment. The possession of production goods gives the promise of acquiring consumption goods later. Production, therefore, not only creates value, it also destroys value. Only so long as one is taken by surprise at the emergence of productive value, in that it is unexpected, is it reckoned as pure gain. When the Phœnicians—as the fable goes— accidentally came upon glass among the ashes, only the gain of production would be present to their minds; but whoever, thereafter, began to produce glass, and in doing so was obliged to pay attention to the materials of its production, would learn perforce the destructive part of production. If production, on the one side, brings forth products, it limits, on the other, the producing powers. On this account it is every one's duty to see that his production is always directed towards the greatest possible result, in case he should consume more value than he will eventually gain.

This circumstance receives more distinct form and emphasis in the case of production goods capable of many and various employments. Here care must be taken to choose those employments which will prove the most economically efficient, both as regards kind and amount. Circulating capital or labour power devoted to any one production, is thereby absolutely withdrawn from all others; the same is true of fixed capital, and even of unconsumable land, during the period of the production to which they are devoted. In consideration of this fact the devotion of means of production to individual undertakings must always be well considered. It is necessary, for this end, that the man who resolves on the making of one special product, should form an exact idea of the value of all the other products whose manufacture is thereby rendered impossible. But how can this be done ? It is done by taking account of the value of their common economic factors of production. In these factors the value of all “cognate” products, without exception, is incorporated. Productive value, consequently, occupies a position of mediation among the whole circle of cognate products. Whenever the value of any class of products falls or rises, and thereby either the extension or the limitation of other branches of production is demanded,1 the effect is first communicated to productive value, and is then passed on from productive value. The products and the value of the products adjust themselves, in each individual case, to the productive value, and the productive value indicates the limit of production common to all.

In this way we reach the point of view from which production goods are conceived of as costs. The first element in it is that the productive employment figures as outlay, as sacrifice, as loss; the second is that, in virtue of this, attention is called to the equalisation of several connected productions. To say that any kind of production involves cost, simply implies that the economic means of production, which could doubtless have been usefully employed in other directions, are either used up in it, or are suspended during it. Costs are production goods when these are devoted to one individual employment, and, on account of their capacity of being otherwise employed, take the shape of outlay, expenditure.1 The measure for estimating costs is always the productive marginal utility, as it is found on consideration of all the employments economically permissible.

Thus only those production goods which we have already (in Book III. chap. xii.) called “cost goods,” as opposed to “monopoly goods,” can be regarded as costs. Productive elements which admit of only one kind of employment, do not share the multiplicity of conditions necessary for the emergence of what we recognise as costs. A mineral spring, which can be used only by drawing off its contents and putting them into bottles, must, obviously, stand in a quite different relation to the value of the product from the unskilled labour which fills the bottles, but is capable of a hundred other uses besides. “Monopoly goods” simply take to themselves the value of the products imputed to them, and do not conduct it back again to these products, as do “cost goods,”—while cost goods are the parent goods of the great productive relationships, within which they act as combining forces and equalisers of value. The more various the employments of any productive element are, and the shorter the processes are,—as this continually necessitates new deliberations as to how the goods are to be employed next—the more does their employment in production obtain the character of a sacrifice whose amount must be well weighed if the proper balance of production is to be maintained. Unskilled labour and the commonest kinds of floating capital, are, consequently, the goods to which the conception of costs most frequently applies.

CHAPTER III

foundation of the law of costs

The value of costs determines the value of products in two ways. In general it determines it indirectly, by regulating the supply produced; but, in individual cases, it determines it directly by communicating the amount of its own value without any intermediary.

First: as regards the indirect action of costs. In the value of the costs is expressed the expectation of the greatest possible return from production. In order to fulfil this expectation, the relation between the amounts of all cognate products turned out must be well weighed and proportioned. If too much be produced in any one direction a loss will have to be borne elsewhere, which will be more sensible than the gain resulting from the over-production. If too little be produced in any one direction a similar loss will be felt, which it will be impossible to make good by over-production elsewhere. Whether too much or too little has been produced is seen exactly in the value. If the value of products—as it results from the equation between supply and demand—is less than that of the costs, too much has been produced; the costs which should have brought forth products having higher value have brought forth only goods having less value. Where the value of the product exceeds that of the costs, too little has been produced—with one exception which will be mentioned shortly;—the costs have not been employed entirely in bringing forth products of the highest value—the very anticipation of which gave the costs their value. If products, then, are to be produced neither over nor under cost, they must be produced exactly at cost value, if they are to find the most economically advantageous distribution of production.

If we ask why products thus produced—neither under nor over costs—have value, and why they have definite amounts of value, we shall doubtless find that they have themselves alone to thank for it. They create it out of their utility, taking into consideration the amounts produced. The circumstance that costs of a certain value have been expended in malting them, is of no consequence as regards their value. The cost value does not determine the use value; the use value exists of itself, and sanctions the cost value.

Second: as regards the direct action of costs. Under certain circumstances it is economically permissible to produce things whose use value exceeds their cost value, while they must, none the less, be estimated at their cost value. This direct action is the most striking of the two. Assume that the amount of costs necessary for an article has the value of 6, and that the first article produced has a use value of 10, while the use value of a second article would amount to only 1 (compare Book I. chap. iv. and Book III. chap. viii.): the production must be confined to one article. How is it to be valued ? This will depend upon circumstances. In a moment of extreme danger a weapon will be estimated according to its use value. But suppose a man to be leisurely preparing and equipping himself for an adventuresome journey, he will not think of valuing the best of weapons more highly than the materials and labour available for the purpose of producing and reproducing them. The loss of the weapon can always be made good—supposing one has the necessary leisure and means for its reproduction—by a sacrifice in costs, the amount of which is certainly less than the importance possessed by the weapon itself in a moment of urgent need. A good having a use value equal to 10, and a cost value equal to 6, must be estimated at 6, so long as its reproduction is possible and the satisfaction of want is not prejudiced by the delay.

The same argument as leads to our valuing at marginal utility any single item of a stock which happens to be actually devoted to satisfying a want of higher grade, leads to our valuing at cost value and no more, a product whose specific use value exceeds its cost value, supposing we have also in our possession the means of producing and reproducing it at the proper moment. For, as, in the one case, the marginal use is really the only use threatened, so, in the other, the cost value is the only value threatened. Here is a new application of the marginal law.

Cases of the kind just described attract particular notice on account of the fact that the influence of costs upon the value of products is independent of amounts produced. If the cost value, in the example just given, rise from 6 to 9, or fall to 2, one product only will be produced, and its value likewise will follow the changes of the cost value, and rise to 9 or fall to 2, without the amounts produced being changed. Ricardo, with the keenness of observation peculiar to him, pointed to the consideration of those instances, in which the value of the product adjusts itself to the cost value without any change of amounts, as a very important one from the point of theory. As a matter of fact it is so, although Ricardo was wrong in the place he gave it. He wished to prove from it that costs are fundamentally an independent source of value, whereas, as a matter of fact, it proves simply that costs may, in certain isolated cases, directly determine the amount of the value of products. It is, however, chiefly decisive in that it gives us an insight into the connections of the process of valuation such as could scarcely be obtained otherwise. It gives us, indeed, the most unequivocal and undeniable application of the marginal law that it is possible to find anywhere.

Moreover, even in this case, the fact that costs have been expended is of no importance as regards the value of products. The decisive circumstance is, that costs could again be expended, and secure a higher utility at a less sacrifice of utility.1

CHAPTER IV

conditions under which the law of costs obtains

It is unnecessary to say that products only come under the law of costs. The products which principally come under this law are those which are produced frequently, regularly, and in large amounts, and, in particular, those in the production of which cost-goods are exclusively employed. Products whose manufacture is strictly and narrowly limited by confessedly monopoly goods do not experience the influence of costs at all. All alterations in costs in such cases go, not to products, but to the monopoly factors of production; every diminution of costs raises, and every increase lowers, the value of these factors.1

Such products too as are to be re-employed in production—i.e. all produced concrete forms of capital, or “capital goods,” as we may call them for convenience sake—come under the law of costs. Thus the valuation of capital becomes an exceedingly complicated matter. One has always to combine two things;—the return to the capital and its costs. Both amounts stand in mutual relation, and tend, so far as possible, towards equality. The greater the value of the return, the greater the costs that may be expended in producing it; and the greater will be the expenditure of costs, so far as is practicable and necessary: the smaller the requisite expenditure of costs, the smaller will finally be the value of the return, whether this result from the fact that production finally is correspondingly extended, or from the fact that the valuation of the utility is directly pressed down to the level of the costs. If a machine does very good work, that is a cause for valuing it highly; but if it can be cheaply produced, the machine itself, and, finally, its products also, will find a low value. The costs of producing capital transmit their effects right down to the fruits of the capital, however remote these may be, so long as they fall within the producer's field of vision, and can be taken into consideration in the estimates of value.

Products which come under the law of costs do not, however, come under it in all circumstances. To do so they must come under consideration as products, i.e. as dependent upon the elements from which they are formed. If they are estimated independently, if they are valued in isolation and for themselves, their own utility alone—or their marginal utility— will determine their value, without their productive marginal utility being taken into consideration at all.

This is most clearly seen in the case of the immediate determination of value by costs. Why in this case is the valuation made according to costs ? Because the products can always be obtained again at the sacrifice of the costs, and, just on that account, only when they can be obtained at this sacrifice. If the possibility of their reproduction be excluded through any circumstance whatever—say e.g. that the import of some article is stopped by a blockade, or that demand has increased so rapidly that production cannot keep pace with it,—the value will be estimated at the full amount of the utility (or marginal utility) which the products are expected to give. As a rule, there are such abundant supplies of all products—partly in the possession of private householders, partly in the larger stores of producers and merchants —that people are provided against the smaller increases in demand. Valuation by costs is suspended only in the case of large and permanent disturbance of production. If reproduction remains possible, although at a higher outlay than before,—not, however, coming up to the height of utility,—the law of costs will still obtain, only that the determining amount of costs will have risen. If demand decrease, or unforeseen supplies increase the stock, to such an extent that the marginal utility falls below the amount of costs, the law of costs will be suspended until marginal utility shall have so far risen as to render production again practicable.

The same applies where costs do not directly determine value, but determine, in the first instance, only the extent of production. The influence of costs ceases so soon as, and so far as, the possibility of production ceases. Here again may be observed the same influence of accumulated stocks—that, through the medium of them, all smaller disturbances in the provision for want are equalised.1

When the disturbances which caused the suspension or limitation of the law of costs are over, it again becomes active. So far as is at all possible, men try to conduct production according to a universal plan which embraces all the productions “cognate” at the time. Isolated production prevents complete utilisation of the means of production; it limits provisions for human want too greatly at certain points, while going too far in other directions, or, what is still worse, leaving production at certain points entirely alone. On this account there is always a tendency to return to the most comprehensive conditions of production, and thus, so far as is possible, to the valuation according to costs.

If society were ever to arrive, in its economic life, at such perfection and control that no plan of production ever miscarried, that there was no interruption in exchange, that no unforeseen loss of goods happened, that all acquisitions of goods could be anticipated to the fullest extent and in the most exact degree, that, finally, the demands should never vary or, at least, that the variations should always be adequately anticipated:—in such circumstances the law of costs would be the only form in which the general law of value would appear as regards those goods in respect to which it holds. It is not to be expected that any disposition of affairs could bring social economy to such perfection. Even in the most perfect condition of society there will be changes, such as must for the moment limit or extend the sphere over which the law of costs holds sway.

If the socialists expect that, in their future state, valuation by costs will be all-sufficient, they are in error, unless man is able to exert such mastery over the natural conditions of the life of goods, that no harvest shall ever fail, or, indeed, be overabundant; and, moreover, unless the national life can be assured of a perfectly peaceful course, such as can be conceived of only when war has ceased, when invention is no more, and when no new need ever emerges.

CHAPTER V

the determining amount of costs

The circumstance, as such, that a good has involved costs, and that it has involved a certain amount of costs, does not determine its value. Not only must the conditions under which the law of costs obtains be fulfilled, but the justifiable amount of costs must be observed.

It is only the “socially necessary” costs, the smallest amount of costs required, that determines value, whether the determination is “indirect” or “direct.” In cases of “indirect” determination, cost value requires the sanction of use value. Whatever is expended uselessly receives no value, and whatever is superfluously expended,—expended in excess of what is necessary to obtain the utility,—receives no value. In cases of “direct” determination of value, the important thing from the first is the outlay requisite for reproduction.

The value of products which are economically produced with the smallest cost, must consequently alter should there be, later on, any change in the determining amount of costs. And, in particular, if the amount of costs should become less, the value of commodities produced at the old dearer rate must fall, from the moment when the new and cheap goods are capable of meeting the demand, or even sooner than this, so far as the old stocks are large and dare not be held back in view of the increasing production.

It may be that all the products in demand cannot be produced at the one cheapest rate of cost. Then, of necessity, the amount of costs must rise. The value of goods produced at different costs is determined throughout by the highest cost necessary; the portion which has been produced at the greatest expense must be valued correspondingly high, if it is permissible to produce it at all at so great an expense; and the other portion, which has been produced more cheaply, must be valued equally high, because all products of equal quality must have equal value.

All these propositions are well known both theoretically and practically, so far as regards exchange value. It is of interest for us to know that they also obtain as regards natural value.

CHAPTER VI

the law of costs and the general law of value

If the statement of the law of costs just laid down be correct, there can be no doubt regarding its relation to the general law of value.

Between costs and utility there is no fundamental opposition. Costs are goods valued, in the individual case, according to their general utility. The opposition between costs and utility is only that between the utility of the individual case, and utility on the whole. Whoever thinks of “utility” without thinking of “costs,” simply neglects, in the utility of one production, the utility of the others. And whoever produces, in the individual case, at the least cost, produces, on the whole, with the highest utility, inasmuch as he thus saves all the opportunities of utility possible, and consequently in the long run utilises all these opportunities to the utmost extent.

Thus where the law of costs obtains, utility remains the source of value. More than this, marginal utility remains the measure of value. The only thing is that utility and marginal utility are no longer determined in a one-sided way within the limits of each particular group of products, but over the entire field of cognate production. Over this field it is always the common productive marginal utility that decides. The result of the productive combination 10a + 10b + 10c possesses the common marginal utility of all productive goods of the class A ten times, and so with the classes B and C. It consequently stands in a definite ratio of value to the product resulting from 10a + 20b + 10c, and this ratio corresponds to the general law of value, according to which separate parts of a stock are to be valued by multiplying the number of items by the marginal utility. Even products which, in outward appearance and destination, are entirely different from one another, if traced back to the productive elements of their manufacture come ultimately into the same value relations as do the separate parts of a stock. A cupboard and a table are in themselves different goods; reduced to their productive factors they are of the same nature, belong to the same class of supply, and receive a corresponding expression of value. The law of costs is a peculiar and complicated conception of the general law of value, used in a peculiar and complicated case, viz. where the connection of goods with one and the same stock is not apparent from their outward appearance, but can only be recognised after reduction to the productive elements of their manufacture.

This statement would be imperfect if we did not add that the law of costs as regards products is by far the most usual form assumed by the general law of value. Products of almost every kind are continually being reproduced, and consequently their value must continually be decided by comparing the amount of the productive supplies with the amount of the productive demand. The vast majority of changes in value are occasioned by the changes which occur in the coming forward of production goods (or in their production, where they are themselves objects of production), as also by technical changes, or changes in the conditions of production which make the quantity of costs necessary to produce the goods greater or less. Thus it happens that variations in the value of products are traceable, in the majority of cases, to some cause which is to be found in production goods. Even in cases where the change of value first arises in the demand and in the products, the effect of this circumstance communicates itself, through the medium of the cost goods, to the cognate products, and causes their value to rise or fall. A product which is “cognate” with a hundred others, will, in all probability, be affected a hundred times by changes in their supply and demand relations, for once that it is affected by a change in its own relations; and all these influences are communicated to it from outside through the cost value. And thus it is that changes in any single supply and demand must pass without leaving any trace, unless they chance to be exceedingly comprehensive, and are, therefore, capable, as against the supply and demand over the whole circle of cognate production, of disturbing the determining marginal utility.

The phenomena of costs are, therefore, a new proof of how greatly the objective conditions of the existence of goods influence the value of goods. How far the value of goods, in its final form of “cost value,” is from being the mirror of that subjective fact from which it is derived—the value of wants! The circumstance that cognate products are produced by different quantities of the same productive elements, brings their subjective valuations into a ratio, the terms of which are derived entirely from the objective conditions of production; while the impulses which call for their emergence, as well as the absolute value amounts of the elements whose multiples enter into the ratio, remain subjective, and thus prove the subjectivity of the source and nature of value.

It was impossible that the influence of costs upon the value of products could escape the observation of economists. None the less has recognition by economic theory of the law of costs remained for long very imperfect. It was conceived of only as a relative law—that the value of products was as the quantity of costs; but as to what was the nature of costs, whence they themselves receive their measure, what absolute amounts might accrue to the value of products,—on these points economists were no more capable of saying anything than they were capable of explaining the numerous contradictions which were inevitable so long as costs were conceived as the final cause of the value of products. Possibly it is the greatest triumph of the theory of marginal utility that it fully explains the obscure conception of costs, with which every other theory had to reckon, and with which no theory could come to any reckoning. The labour theory alone has attempted it, but it has thereby—as we shall go on to show—introduced into theoretic political economy the greatest errors that have ever been perpetrated within its sphere.

CHAPTER VII

the so-called costs of production of labour

Through a very strange error in judgment the classical school of political economy has put forward the proposition that the exchange value of human labour also is determined by costs of production.

The costs of production of human labour—if we substitute the prosaic personal meaning of this expression for the impersonal and figurative one—would be the costs of producing the labourer. What a monstrous idea! Can it be that there is a “production” of labourers in the same sense as there is a production of material things? Has such a thing ever been said even in the darkest ages of barbarism ? Surely another name at least might have been chosen. But leaving the name, let us get to the substance.

The substance is, that, by the cost of production of labour is meant the necessary cost of maintaining the labourer and his family; the means of subsistence which the labourers themselves regard as the minimum necessary to keep themselves in life, in strength, and in ability to work, to bring children into the world, and to bring them up to labour. And as the price of goods can never stand permanently either above or below the costs of production, so it is asserted that the wages of labour can never stand permanently either above or below the existence-minimum. Of course, this proposition can never be understood to apply to any but the commonest and worst paid form of labour, seeing that the better paid labour does raise itself above the lowest wage level that can be considered permissible.

On the one side, so far as regards the impossibility of sinking below the minimum, there is, as a fact, a close, indeed a frightful analogy between the law of wage and the law of costs. Where the labourer has no other income to spend than his wage, wages cannot indeed fall permanently below the amount marked by the prices of the necessary means of subsistence. If the means of subsistence are scarce and dear, a higher wage must ultimately be conceded. Misery and death are the imperious forces which bring about this result, inasmuch as they reduce the number of labourers until the reduced supply has raised wage sufficiently to cover the necessaries of life.

But how is it as regards the other side ? Is it true that wages can never rise permanently above the costs of subsistence ? Is there the smallest analogy, or even an apparent analogy, between the pressure exercised by the cognisance of cheaper conditions of production upon the valuation of products, and the pressure which might be exercised upon the valuation of labour by cognisance of cheaper conditions of life ? Economists of the classical school assert that there is, and thereby they bring again into the question motives which have as little in common with the considerations that govern the production of goods, as the law of nature, which says that he who can find no means of sustenance must die, has with the considerations that govern the manufacturer who discontinues a business when it fails to return him its costs. The motive which is called upon to prove that wage cannot maintain itself above the minimum of subsistence is the power of the sexual instinct. If means of subsistence become cheaper and more abundant, there is the more room for increase of population, for marrying, producing children, and supporting them. The supply of labourers can go on increasing, and wages go on diminishing, until the maximum of population possible to maintain, and the existence minimum of wage, are again reached. This result is possible. But must it ever happen? Does it always happen ? What has experience to say? It speaks plainly enough—so plainly that even those who assert that the law of costs obtains for labour find themselves forced to add to that law certain clauses which amount to nullifying it. Thus a clause is added which says that what determines wage is that amount of subsistence which the labourers themselves regard as the permissible minimum, since experience shows that the minimum wage differs from time to time, from place to place, and from nation to nation. But this clause cancels the law. If the opinion of the labourer is to be decisive, there can be no more talk of a compulsory, objective, fixed standard of wage. In yet another direction experience speaks still more conclusively. We notice everywhere that the wage for different kinds of labour is of varying amount. Only some of the labourers, and that not by any means the majority, are always held down to the lowest possible wage. But how could this be the case if the whole position of labour were entirely governed by the power of sexual impulse as is asserted ? Would not the supply of labour under such a supposition be overwhelmingly large,—as a rule, and in the long run at all events,—and wages be reduced to the minimum in all branches of production? Would not all wages be equally low ? The fact that higher wages are continuously maintained in the higher branches of labour, is a clear proof that the height of wage continues to be determined by considerations which are too powerful to admit of their favourable results being suspended by the sexual instinct; or—what amounts to the same thing—that the sexual impulse does not possess that destructive power which is ascribed to it. And if it does not possess this as regards one class of labour, it is impossible to see why it should be held necessary as regards the other class.

If the law of costs were true as regards wages of labour, it would also be true as regards the natural value of labour. The forces which are relied on to prove the law of costs in regard to labour, would, of necessity—if they do act as is asserted of them—have an equal effect under any social organisation. If the sexual impulse were possessed of such surpassing strength, it would, even in a communistic state, increase the number of labourers to the highest point which could be maintained at the existence minimum; only that here, where the labouring class would include the whole nation, the consequences would be so much the more comprehensive and destructive. To-day's “iron law of wage” would be extended in the future to an iron law of universal misery.

Modern economists are almost unanimous in repudiating the application of the law of costs to labour in its older and cruder form, but, on the other hand, they concede to the consideration of the costs of maintaining the labourer another effect. It is the effort of every class of labourers, they say, to retain the level of life to which they have once attained, making their claim of wages in correspondence therewith and striving to realise their claim, besides regulating their marriages and the size of their families in conformity. The wage, once become customary, is said to have a tendency to maintain itself as a permanency, and to resist the tendencies which would press it down. This law also, if it were a true law of wage, would have to be recognised as a natural economic law, as it also is founded upon a universal force. Experience, however, does not seem to justify it. Do not wages continually rise and fall ? It is to be feared that the quite intelligible wish of the worker to retain a standard of income once reached has not the efficacy ascribed to it, of resisting the chances of an unfavourable issue to labour. If the return to labour falls, the natural value of labour falls, without being in the least prevented by the previous customary level of comfort, and it is in the highest degree likely that its exchange value will fall along with it. For although these do not by any means invariably coincide,—do we not often see wages falling short of natural value ?—as things are, it may be considered an exceedingly rare occurrence that wages are in excess of natural value. The result which might be expected from the postponing of marriage and production of children would, in any case, come much too late; it could only be felt after years, in a succeeding generation, when circumstances would probably have been long before completely changed. Of course, the desire to obtain the highest possible income is a motive which cannot be considered as quite insignificant among the many motives determining the return from production. It is as fraught with consequences as are intelligence, skill, favourable natural circumstances. But why should this motive be brought prominently forward only as regards the return to labour? Is it not equally powerful as regards the products obtained from land and capital ? And why should its influence be limited to the amount of income once obtained ? Does it not go beyond this to the procuring of fresh income ? The truth is that men endeavour to make all productive returns as large as ever their personal capacities will allow, and that the returns so obtained determine the value of the productive factors,—of labour, as of all the others. It is impossible to consider it even plausible, that a cause shall be effective as regards labour alone, by which the level of wage once reached obtains a peculiar power to maintain itself permanently unimpaired.

Here too the modern economists, who advance such theories, probably do so merely in order to bring the law of wage into correspondence with the general law of the price of commodities. In one as in the other, they start with the false assumption of a fundamental opposition between costs and utility, and wish to find value between the “upper margin of utility” and the “under margin of costs.” But even supposing such an opposition did exist, it would not at all events be in the least applicable to labour. It is not possible to force labour into all the economic categories in which material goods by their nature are placed. A producible article is a good, that is, a useful thing—in two respects; firstly, in virtue of its effects—the effects in which it is “of use”; and, secondly, in virtue of its origin and upkeep, in which respects it is materially a matter of property. Labour can only be regarded as a thing in the former respect: in respect of its useful effects the economic use of labour may and ought to be considered. In the latter respect, labour is an affair of persons, and its origin and upkeep cannot be decided by purely economic considerations. It is overstepping the permissible sphere of economic control when the attempt is made to interfere with the personality of the labourer without regard to other considerations; and economic theory goes beyond its sphere when it claims to explain the facts of personal life exclusively by economic considerations.1

CHAPTER VIII

the cost theories

I have hitherto almost entirely refrained from criticising outside theories of value. Up to this point, the subject of costs, none of these contains any foreign element whatever. What renders them inadequate is chiefly their inadequate explanation of the true elements of value. Should I have succeeded—as I scarcely dare hope—in proving beyond dispute the theory to which I have given my adhesion, all other theories in themselves are thereby confuted, inasmuch as it completes what they began. Where they have said only half, the whole has been said; where they have only approximated to truth, the truth itself has been found. But it is otherwise —though of course only in the case of some of them,—with those theories which derive the value of goods from costs. They appeal to a foreign element which does not lie in the path I have chosen to follow, and must therefore be dealt with, as it were, on a bye-path of criticism. At the same time, it must be said that this foreign element contains so much that is plausible, that there would be a presumption against any one who passed it by without remark, and a suspicion that his statement did not embrace the entire truth.

As I said, it is only some of the theories of costs with which we are here concerned.

All such theories have this one point in common, that they place costs and utility in opposition to each other, and explain them as dissimilar principles of value. They differ, however, in their manner of treating the principle of costs. Some limit themselves to collating the individual elements of costs, and showing their influence upon value, without answering, or even bringing up, the essential and fundamental question as to what costs really are, and whence they obtain their influence and economic importance. Criticism of these theories is superfluous. They contain no error to criticise. Their fault lies in their silence; in their stopping short at the very heart of the subject.

The rest of the cost theories must be judged differently. They give to the idea of costs an entirely distinct meaning; a meaning which is certainly—taking it all in all—incorrect; but one which, in view of the largeness of its theoretic intention, may be pardoned, and even regarded with some recognition and respect. This division of the cost theories may be marked by the title of Labour Theories, as the element of labour forms their theoretic starting-point. Ricardo's system indicates the high-water mark of the labour theory; the socialist system is its final consequence. Many writers who reject both of these systems, nevertheless take the fundamental motive of the labour theory into their own systems. In fact, there are very few writers who have kept entirely free from it. The critic has consequently a large task before him. I make no secret of it that to do battle with those views, as developed by economic writers, seems to me a matter of considerably more importance that they arise, in the last instance, from popular opinions widely held. The fundamental idea of the labour theory is foreign to no one; everybody has frequently enough had practical occasion to apply it. But for this, Ricardo's system would never have obtained its great hold, and this circumstance may prepare us to expect in the future ever new formulations of the labour theory, should it not be possible meantime to purify theoretically the popular view, and lead it back from its exaggerations, which are easily traceable to the imperfection of popular reasoning, into its true and incontestable form.1

CHAPTER IX

the cost theories (continued). labour as an element in cost

It cannot well be questioned that, among the costs of any product, the labour necessary for its making comes first. Every product withdraws the labour-power that is devoted to it from other products to which it might have been devoted. There would be nothing further to say on the subject, were it not that labour calls for economic deliberation as to its employment on a second ground besides that of its utility. Labour carried too far becomes a burden, and brings a succession of serious personal evils in its train. Where labour brings pain, strain, or danger, there is good reason to think seriously over these consequences; and, on their account alone, to regard every act of labour as a sacrifice which should be made only if it is certain to be adequately recompensed by its result. It is in this sense that it is commonly said that production “costs” labour, and it is in this sense that most economists conceive of labour as a cost good. Not the utility but the personal sacrifice of the labourer is to determine the economic valuation of labour, and its influence upon the value of commodities.

To decide how much is right in this conception is one of the most difficult tasks of political economy, and, as the theory has developed, one of the most important. Beginning with the idea that labour is valued according to the personal sacrifice it involves, and going on to the wider idea that labour is the only production good, that all products are directly products of labour, and that all costs are labour costs, the conclusion has been reached that the sacrifice of labour necessary for the production of a good is the exclusive source of its cost value, indeed, of its value pure and simple. From its relation to the labour sacrifice the conception of value receives its content, the amount of value its standard. In Adam Smith we find, as was said in the preface, this “philosophical” conception of value coming into collision with a second “empirical” conception. Ricardo's system aims at proving that this “philosophical” conception is almost realised in the empirical formation of value. Finally the socialists roundly demand its complete realisation, and condemn the empirical deviations as disturbances. In connection with this conception of value, a second conclusion, which relates to the origin and aim of human economy, is drawn from the same premises. Human economy derives its origin, in the last resort, from the fact that goods must be obtained at the price of the sacrifice of labour, and the aim of all economy is ultimately to make the sacrifice of labour necessary for the production of goods as small as possible. And thus, when we endeavour to examine the position of labour as a cost good, we find ourselves plunged into the quarrel of theory as to the fundamental questions of political economy.

The opponents of the Labour Theory do not in my opinion give it full justice. They try to overturn it completely, whereas it is by no means entirely false. It is conceivable, only it does not fit in with facts; it is, if the expression may be allowed, philosophically right, but it is not empirically realised.

It is possible to conceive of a condition of economic life under which the single consideration of the sacrifice involved in labour would determine the value, both of labour itself and of all products. The widespread recognition which Ricardo's theory has obtained can only be explained by the fact that it is founded upon a conceivable and attractive fundamental idea. Men learned the meaning of “value” as a whole—not as a philosophical conception, but as applied to the circumstances of everyday life—for the first time, and then overlooked the fact that the “value” of actual life was not completely explained.

I shall endeavour to formulate with all possible distinctness those conditions under which the labour theory would apply. This is the best means of enabling us to recognise how far these fall short of realisation in existing economic circumstances.

Suppose that a community—already abundantly provided with all the material auxiliaries for labour—had at their disposal so great a supply of labour power, and so few wants, that they were able to satisfy completely and without delay any desire that they might happen to feel, simply by putting forth the exertion necessary to produce the means of satisfaction. In this case the means of satisfaction so produced would have no value from the consideration of their utility, because—as assumed—they were to be had immediately at all times and in superfluity. On the other hand, the consideration of the exertion of labour required to produce them must give them value. Every product made and possessed would save an effort; the effort, namely, involved in its reproduction. And, so far, one would have a lively interest in holding on to any possession once obtained. The amount of this interest would depend upon the exertion saved by the possession. A product with a utility expressed by the intensity of 100, and necessitating labour equal to 10, would have a value of 10, and would have no value at all if its reproduction cost no effort.

The conceptions of value and wealth evolved from the assumed circumstances would, formally considered, be such as should arise if value and wealth were derived from consideration of the utility which the goods assure, while, all the time, materially, they would be completely different. Value would be the importance which goods would then have in virtue of the interest every one would feel in securing exemption from the undesirable pain of labour. Wealth would be equivalent to great possessions of goods securing immunity from the pain of labour. The advantage of wealth would be rest. Poverty would not mean want, but only unrest, pain. By a little increase of exertion any advantage of prior possession could soon be overtaken.

That this is not the poverty which the poor man knows: that this is not wealth as men really estimate it: that this is not the value or the economy of which we have any experience:—requires no proving. If merely by pain men could be rich, the very people who are to-day the poorest would long ere this have become the richest. Nothing in reality is as assumed by the labour theory. Our desires are too great, the material resources at our disposal too limited, our labour power too small. No economical possession can be lost without some enjoyment being lost. The idea of utility cannot possibly be separated from the purposes of economy and the conception of value.

There is only one question that may still be asked. It is whether consideration of the sacrifice of labour does not always enter into the valuation of labour as a cost-good, and thus into the cost value of all products, alongside of and bound up with the consideration of the utility of labour. But neither is this the case. It could not be so. Such a possibility is excluded, not empirically but logically. Productive labour can never have value on account of the utility which is dependent upon its success or non-success, and also on account of the personal effort which it involves. In what circumstances does an act of labour have use value ? When, in event of its failure, the utility has to be given up, because the labour cannot be put forth a second time; or when, in the same case, the repetition of the service demands that another use of the labour be abandoned, and its expected utility with it; in other words, when there is not sufficient labour available to meet the demand, when labour power is not available in superfluity. And in what circumstances would a service be estimated according to the sacrifice involved ? When, in event of failure, one would not need to give up the utility, because it could always be obtained again at no greater expense than the repeated effort; in other words, when all the available labour power had not a predetermined and distinct destination, but when there was always free labour power available in superfluity. Labour could only be estimated at once by its utility and by personal effort, if it were at once capable and incapable of repetition; if there were at once a deficiency and superfluity of labour Powers. Where the available labour Power is less than the demand, labour value will be estimated exclusively according to utility. Where the available labour Power is in excess of the demand, it will be valued exclusively with reference to the labour sacrifice.1

Even where labour value is estimated by utility, naturally one does not cease to consider the toils and dangers of labour. And although the consideration of these does not directly enter into the value of labour, it will continue to be a consideration so long as toil is felt to be toil, and danger danger. It may even obtain an indirect influence upon valuation, as it must continue to receive economic consideration in several connections.

These connections may be exactly enumerated.

First, before undertaking any labour a man has to consider whether the utility outweighs the effort. Only those acts of labour whose result outweighs the hardship entailed can be reasonably performed. Herein, moreover, is contained the reason why labour, estimated by amount of hardship alone, is less highly valued than when it receives its value from its return. This also gives rise to another important issue. The circumstance that expenditure of labour is felt to be a burden, must somewhat affect the selection of employments to which it is devoted. It may occur, as Sax (see note) has forcibly shown, that a less useful employment of labour is chosen before a more useful one, because the latter requires comparatively a greater amount of exertion.

Second, when labour is once decided on, its performance must always be ordered in such a way that the toil and danger are made as light as possible.

Third, the fact that labour is felt to be a burden has the effect of curtailing somewhat the supply of labour as a whole. If labour were not burdensome and exhausting, more labour would be expended than is. And thus the use value of labour is, as we have already suggested, indirectly affected, by being placed at a slightly higher level on account of the diminished supply. Services of equal utility, but of different degrees of hardship, are so regulated in regard to value that the more troublesome labour is more highly appraised. But this result can only ensue when the supply is really diminished. Wherever the fear of toil and danger does not have an actively deterrent effect, or where it is overcome by the presence of other motives to such an extent that the supply remains un-diminished, the value of labour does not increase. Experience shows that the most wearisome, wearing, and least healthy of employments are valued least highly, because they are the most easily accessible to the great majority, and are consequently the most amply supplied. In the communistic state it would not, in all probability, be in any wise different. The great majority of the citizens will always be suited for the coarsest kind of work only, and those kinds of work are at once the most burdensome and the simplest. And while the communistic state would be plentifully supplied with this sort of labour, so that it could be employed down to the smallest possible return in utility, the better labour powers, in virtue of their more limited number, would require to be economised and have careful consideration given to their employment, just as happens today. Utility and not toil would, in general, afford the standard for the valuation of personal services.

But we are not finished with our consideration of the labour theory. Its greatest errors relate to the valuation which it gives to capital as an element in cost.1

CHAPTER X

the cost theories (continued). capital as an element in cost

In any complete estimate of costs there can be no doubt that the figures representing the necessary consumption of capital must be added to the costs of labour. Of two products costing equal amounts of labour, that one must be dearer for which the greater consumption of capital is required. Thus it has been calculated ever since capital was possessed by man, and thus it will continue to be calculated, even in the communistic state. The necessity for it is so obvious that even the adherents of the labour theory bow before it. Even they admit that the costs of capital co-operate in determining the value of products. There is nothing for it but to try and reconcile their theory with this incontestable fact. To do this there is only one resource, but one so singular that only a kind of theoretical infatuation could avail itself of it. If all costs go back in the last resort to labour, and if the existence of capital-costs cannot be denied, capital-costs must ultimately go back to labour-costs—capital must be labour.

The attempt to reduce capital to labour has been made in two ways, both of them following out the same fundamental idea. Labour must be shown to be the primary economic element, and capital represented as a secondary or derivative form of it. Labour value appears as the primitive economic value from which capital value is derived.

The first of the two efforts made to prove this proposition is deduced from the manner in which capital works. The effect of all capital is either to save labour or to increase the result of labour. Does not a machine save human labour ? Does it not bring it to greater productiveness ? As a matter of fact, there are forms of capital which are able to render services as human labour renders them, and which can, to that extent, be substituted for labour. But can this be maintained of all capital ? What labour power, for example, does a raw material replace ? And, on the other hand, it may undoubtedly be said of many kinds of labour, with equal right, that their effects are either to save capital or to increase capital. Capital frequently supplants labour, but frequently also labour supplants capital. Where wages are low every undertaker will save his capital and employ more labourers.

The second attempt is much more important. It points to the origin of capital. Here we go back to the first beginnings of the acquisition of capital All capital has, in the last resort—says this theory—been obtained by labour, and on this ground all capital ultimately represents labour. In the most varied forms, and illustrated by a perfect wealth of examples, this thought finds itself in many writers. It is found in Adam Smith and Ricardo, and it is triumphantly adopted by the socialists in order to make good their contention that all costs are labour-costs, and that capital is simply “materialised labour.”

It is not easy to imagine greater contradictions than the labour theory presents when it takes up this line—more particularly in the extreme socialistic conception of it. Let the reader judge! First, the economic valuation of labour is explained by the peculiar nature of labour—that its employment necessitates personal sacrifice. Then capital, after being recognised as materialised labour, and so labour that has become impersonal, is subjected to the same valuation;—a proceeding for which there is no possible justification. First, it is asserted that labour is the only productive power; that it alone produces, creates goods, creates value; that capital is merely its dead instrument: and then capital emerges from its shell and becomes labour, which contributes its part in determining the cost value of goods. At first it is asserted that capital and labour stand in the strongest opposition to one another, and then every distinction disappears save the one, that capital, like labour, may indeed give value, but may not, like it, receive value. Materialised labour is labour, but no share in the return shall be imputed to it.

It would not be right to entirely reject a theory on account of its contradictions. There might be a kernel of truth in it, and that kernel might be rejected along with the rest. We shall, therefore, submit the contention we are discussing to a further test, though, truth to tell, it will only be to find that seldom, if ever, has so small a truth been clothed in so much error.

As we have seen, products are valued by their costs only when they can be reproduced for the amount of the same. Capital, as a rule, consists of products, and this proposition applies to capital as to other products. Capital may be valued according to its costs in so far as it can be reproduced for the amount of the costs. The costs actually expended since the beginning of history in gradually forming our present capital—and it may be noted in passing that no one knows the amount of these costs, and that there has never been offered a less accurate standard for any measurement whatever —are taken as little into consideration as any costs which, though actually expended, would never again be so expended. If all that was wanted economically to replace the capital consumed was to regain it by labour, then capital might be economically measured by labour alone, and would represent economically nothing but labour. If, for instance, coal consumed could be replaced simply by the labourers bringing new coal to the surface, without any assistance whatever beyond the labour of their hands, the coal would be worth just so much labour as was needed to bring it to the surface. If a machine could be made by labourers, without any other assistance than that afforded by other labourers collecting for them valueless materials, and simply using their bodily strength to shape and combine them, the value of this machine would be measured by the quantity of labour that had been expended upon it. So long, however, as capital is consumed in order to produce capital, the factor of capital cannot be dismissed from among the costs of capital, and, therefore, from the costs of all the products of capital; and, so long as it is credited with the use value which experience assures us may be received from it, this factor will continue to be counted alongside of labour in the estimates of costs.

The idea that capital represents labour and nothing more, may be held so long as economists draw their examples, as they usually do, from the circumstances of a Crusoe or a savage, where the chief features are the slaying of wild animals, primitive bows and arrows, bark canoes, rude axes, and the like—where capital, so to speak, is always conceived of in a state of nature. In face of the complicated economical phenomena of a wealthy and developed society the idea loses all weight. The labour theory, with its assumptions which take no count of historical development, was well enough in a science belonging to the time when men spoke of Natural Rights and the Philosophy of Nature. At that period of history this theory was worth being taken up by any gifted genius who could make it throw a first ray of light into the dark mass of economic phenomena. Even at a later period it might have tempted some thoughtful mind to give a thorough systematic examination to its illusive ideas. But for men who have gone through the school of the founders of our science, and have had the benefit of all the experience and elaboration of these founders, and of their successors, it is only worthy of a schoolboy to hold for ever by the opinions of the first teachers. A great thought may in the long run turn into a childish error.

To the manufacturer who owns it, as to the labourers whom it aids, and as indeed to every one, a machine is an instrument, capable of certain useful work, whose production necessitates a certain consumption of labour, of other machines, of tools, and so forth. What must people think of a science which casts aside this simple definition, and informs the manufacturer that, in his machine, he possesses merely the “materialised” labour, the “previous” labour, of all those who have ever contributed anything towards the complete machine since the making of the first rough tool onward? It is an ingenious way of looking at things, no doubt, but one that lends extraordinarily little aid towards advancing the practical purposes of economic life. What buyer has ever paid a price, or seller demanded one, what producer ever expended costs, or what chancellor ever laid a tax upon value, based upon such a consideration as this? Is it conceivable that any one will ever allow his economic conclusions to be guided by such a consideration? After all, in economic theory we must make up our minds whether we intend to explain economic life, or to pursue after useless and fanciful ideas.

CHAPTER XI

the cost theories(continued). interest as an element in cost

In calculating the cost value of his products every undertaker, in addition to the value of the capital consumed, includes interest upon the whole capital sunk and bound up in the production, even on that which remains unconsumed, for the period during which the capital must remain sunk. It is a matter of familiar observation that the exchange value of products, in so far as it is influenced by costs, expresses also the interest thus calculated. If the production of one article costs merely labour and circulating capital, while that of another requires, in addition to the same expenditure of labour and circulating capital, a large outlay of fixed capital, the second product (neglecting, of course, the quota for amortisa-tion) will be considered the more valuable by the interest on the whole fixed capital. The question now arises whether we have, in this circumstance also, a phenomenon of natural value; whether it is in the interest of society generally, or merely in that of the individual undertaker, that interest should be calculated among costs, and whether this principle would require to be observed in the communistic state also.

There is something that strikes one as peculiar in the idea of including interest among costs. Torrens' objection is well known. Interest, he says, is profit, and must first be earned through production as the surplus of return over costa Thus it is impossible to reckon it among costs.

From the point of terminology Torrens' objection is certainly justified. If we wish, on the one hand, to fix the net return, we shall not impute interest to costs, but if, on the other hand, we are seeking for the cost value of products, interest must be included. In these two cases the term “costs” is used in an entirely different sense. And this is an error in so far as the double meaning remains unnoticed, and is, in any case, a misfortune, whether noticed or not. It would be better to have a second name for the second use of the term.

When we put the name on one side, and examine the actual matter of Torrens' objection, we come to a different conclusion Here the objection entirely breaks down. It proves too much. It is not only interest that is derived from the return and its value, but the value of capital itself. Torrens' argument expanded runs thus:-—the value of products is first; interest, capital value, the value of production goods generally, second. Right enough up to this point. We have come to the same conclusion, and argued from it that production goods have, as against products, no independent power to create value. On the other hand, we have acknowledged that they do possess the power to equalise the value of products. In virtue of this power, and of no higher one, do they influence cost value generally, and this power cannot be denied to interest, on account of its origin in the return, so far, that is to say, as the conditions in this case are similar to those which hold as regards the elements of costs hitherto considered.

This, as a matter of fact, is the case. As we know, there is a constant tendency towards a uniform rate of increment for all capital in one and the same market, and, on the whole, the rate is realised. From this it follows, on the one hand, that nothing can be produced whose use value does not at least yield the universal increment on capital-—which is an indirect determination of the value of products by interest, in the way of determining the amounts produced. And it follows, on the other hand, that every product whose use value, regarded by itself, might yield a somewhat higher increment, can be valued only according to the universal rate of interest, to the extent that it can be reproduced at the price of the same-—which is a direct determination of value. If things may not be produced under the general rate of interest, and if they cannot be valued above the general rate of interest, their final value must, along with the other elements of costs, include the interest according to the amount and duration of the capital employed.

The principle of including interest among costs follows from a plan of production which aims at obtaining the highest rate of increment from every employment of capital. And as it results from this, so again has it a reflex influence in controlling the plan and giving it definite limits. If interest were not estimated among costs, or were not estimated on the whole amount of capital expended, or for the entire length of time during which the capital remains employed, the distribution of capital goods among the individual branches of production could not be so regulated as to attain the highest possible rate of increment. It would then be permissible to employ capital where it only covered its consumption, but brought no increment, or where it did not obtain the highest increment, or the increment on the whole amount of capital sunk, or the increment over the whole period of time when it was sunk in the productive process.

Under certain circumstances it is necessary to include even compound interest among costs; that is to say, when the period of time during which the capital is sunk exceeds the period at the end of which interest would usually be expected. Products are themselves re-employed as interest bearing capital, and it is therefore so far profitable to find productions which have a shorter process, The products of longer processes of production must receive an equivalent against this advantage of having interest on interest at an earlier date, and they obtain it by a corresponding increase in their use value. Only in this way is the highest degree of utilisation in production as regards time obtained and regulated.

Connected with this is an exceedingly curious conclusion.

In the cost value of products, undertakers include the interest due to that portion of their money capital which they must hold, for paying the wages of their labourers, until the sale of the products takes place. In the communistic state this money capital would not be required. It would, therefore, appear that, in the communistic state, the interest expenditure in production would be correspondingly lower, and that the present manner of doing is so far opposed to the natural laws of valuation. As a matter of fact this is not the case; in this point also the interest of the undertaker is identical with that of the community at large, and leads to the economic valuation of goods. The undertaker, in including the interest on his wage fund, simply estimates and expresses-—with reference to human labour-—the differences in time of employment. It is not the same thing to employ ten labourers during one year or to employ one labourer during ten years, any more than it is the same thing to employ a capital of £100 for one year or a capital of £10 for ten years. In the former case as in the latter, the principles of economic action require that, besides ordinary interest, compound interest also be reckoned to the value of the product, if a proper distribution of production is to be attained.

It needs no explanation that, in virtue of this, production is the more limited the longer the period of the process, for the reason that a corresponding increase in the value of the product is required to make the longer process appear sufficiently profitable. Productions of very long duration must yield a very rich return if they are to bear the burden of the interest which accumulates up till the time when they yield their first return.

CHAPTER XII

the cost theories(continued). land rent as an element in cost

Land— understanding the word in that familiar theoretical sense which refers to the indestructible part of land-—suffers no loss of substance in production. Among the costs of agricultural products, consequently, there is nothing to be calculated for what we may call the “substance-value” of land. Ricardo goes farther than this, and affirms that the rent of land, like the value of land, cannot enter into costs. This contention is entirely in harmony with his theory that rent is a net differential rent, only ascribable to the better classes of land employed, while the poorest classes, those which are available in superfluity, yield no rent. If the classes of land which are last employed are free and bear no rent, the determining costs will, as a matter of fact, be made up without consideration of rent, simply by the sum of costs in capital and labour which are applied to the poorest classes of land. The rent yielded by the better qualities of land originates, as we know, from the surplus return of products which they assure to equal costs of capital and labour and equal value of products. Rent is, therefore, derived from the return, without finding expression in the value of the products.

It is otherwise if rent is not merely a differential but a general one. A general rent must enter into costs just as interest does. It must be included in the calculation if the determining amount of costs is to be obtained. Where all qualities of lands and all powers of the land, even those of the lowest class, are required to meet the demand, and all bear rent, the circumstance that classes of land of the poorest quality are devoted to a definite production, and so “tied up” throughout the duration of that production, is not a matter of economic indifference. For, so long as they remain tied up, their services are withheld from other productions to which they might have been devoted. In case of failure, their rent, which would otherwise have been obtained, is lost. Their rent consequently belongs to and must be included in the cost of the products.

For Ricardo it is of primary importance to persist in maintaining the foregoing contention, that land rent is always differential. His economic system cannot dispense with the proposition depending upon it, that rent does not enter into the value of products. He imagines it possible to bring the value of products under a general law, and consider them simply as multiples of units of capital and units of labour. The intervention of interest already forms a disturbing element in his law, but he believes himself able to prove that the disturbing element thus introduced is of no great importance. But if, besides, the element of rent plays a part in the value, the whole laborious structure of his theory falls to the ground, and his attempt to derive the value of products from labour, and to unite empirical amounts of value with amounts philosophically demanded, is completely overturned.

For the theory of value which we represent, on the other hand, it is a matter of entire indifference whether the circumstances are such that rent remains purely differential, and thus does not enter into the value of products, or are such as cause rent to become general, and thus to enter of necessity into the value of products. The one case fits into our system as well as the other.

Further, there are certain exceptions to the proposition that a differential rent cannot enter into the value of products. Alongside of those employments of land which may be regarded as the principal ones, and of those forms of rent which might be called the original ones, there exist others which are secondary and derivative. The principal employment of fertile land is in agriculture, but the building of a factory upon land suitable for cultivation is an example of a secondary employment,—of an employment, to express it otherwise, for which land in general will be less required, and which in itself would never exhaust the available supply of lands, as the agricultural demand might easily do. If a fertile field is employed as site for a factory the agricultural rent which, in other circumstances, might be expected from it, will have to be surrendered. The sacrifice of this rent means an outlay of costs which cannot be neglected in calculating the costs of the factory's products. Whatever the amount of the rent, it must be deducted from the value of the products made on that building ground, and it is not till the remainder covers the costs of capital and labour that the calculation is complete.

The case is similar with the ground-rents of dwelling-houses. Ground-rent in a large town is never a simple differential rent. At the periphery of the town, house-rent finds its measure in agricultural rent, and rises towards the business centre, according to desirability of situation. The more valuable for cultivation the land round about the town is, the dearer will be the houses in that town. To this extent agricultural rent acts as a universal element of costs in the calculation of house-rents. The differential rents received from favoured sites do not make houses dearer, but are rather a result of the high valuation placed upon houses in a favourable situation. And in so far as the need for dwelling-houses and the need for business premises compete with each other, does the one employment of land act upon the other as an element of costs.

In following out this line of thought we see that Ricardo's proposition gradually loses its applicability almost entirely, as the cultivation of land becomes very artificial, and the uses of land multiply. The various employments begin to compete with each other, and one has always to make choice among several; thus the differential rents which are surrendered take effect as costs. Ricardo's preposition that the rent of land does not enter into costs, can be legitimately applied only to land devoted of necessity to one distinct use, such as mines, vineyards, and the like.

CHAPTER XIII

the service of individual economic value in national economy1

The supreme principle of economic action being utility, value presents a means by which to grasp the utility of goods in a simplified and comprehensive manner, and so to control the employment of goods. Thus we have described the service of value in economy generally, in doing which we have assumed that value is estimated according to natural laws, and that we are concerned with the valuation of goods in stocks, or marginal valuation.

The return value of production goods and the cost value of products are likewise phenomena of natural marginal value. They afford us a simplified and widely comprehensive estimate of utility in the most complicated circumstances of production. The most heterogeneous kinds of production goods obtain a common measure of valuation through their common products: their return values are multiples of the value of the common marginal products. The most heterogeneous products receive a common measure of valuation through their common elements of cost; their cost values are multiples of the value of the common cost goods. Different return values, or different cost values, bear the same relation to one another as amounts of goods which are multiples of the same unit. In this way it becomes possible to estimate these value relations in figures, although the value and the amounts of value have their origin in the incalculable intensities of want.

And yet, it is not this consideration that attracts our attention at this point. Now when we have pursued the main threads of the much-tangled web of productive combinations, first from the return up to the co-operating production goods, and then back again from the cost goods to the products, another consideration forces itself to the front: namely, that in any larger economy whatever, particularly in such a one as has the compass of a national economy, and is based upon a complicated system of production, it is quite impossible to dispense with value if we wish to have any clear notion of the utility of goods. A Robinson Crusoe does not require the aid of value; he can arrive at a right decision in every instance by simply testing what manner of treatment is likely to secure him the greatest amount of utility on the whole. In a national economy, on the other hand, with a complicated system of production, it is impossible in any way to make the necessary economic decisions by testing the utility of goods on the whole. No one can take in the total result of a community's production at a glance. There are too many goods, and too many possible employments of goods, to permit of making one survey of the whole, and one comparison on the whole. Things must be gone into individually; utility must be divided up, and every good have measured out to it its share in the total result; then only is it possible to recognise individually which are the poorer, which the more profitable, and which the best. But how otherwise is utility to be measured out to individual goods than by applying to them the methods of marginal valuation, the principle of which is, to give them that utility which is dependent on the smallest quantity of goods that is yet practically taken into consideration?

And, further, the economical employments of goods result from the relations of supply and demand. It appears then that it would be impossible to discover these economical employments if the amounts of supply and demand were not known numerically. But who knows the amounts of supply and demand in the widely-extended economy of a nation, or, indeed, in the world economy, the relations of which make themselves felt everywhere? Wholesale merchants of course try to make themselves acquainted with them, and do as a fact succeed in obtaining certain figures representing what comes from production, which are tolerably exact, especially as regards large production. But, on the other hand, it is almost impossible for them to obtain, with any measure of exactitude, the equally important figures of demand. If, in spite of this, it can be maintained that economy on the whole is capable of adjusting itself to the variations in supply and demand, this is due solely to the aid afforded by marginal valuation. Value, as marginal value, gives expression in the marginal calculation to the effect produced by the existing amounts of supply and demand, even if these amounts have not hitherto been measured. No owner can attempt to get rid of a good, no buyer can be eager to get one, without this circumstance having an effect on the market, and influencing the sensitive medium of value. Although no one is able, and even though no one should attempt, to figure out the amounts of supply and demand, value shows, with numerical exactitude and down to the finest gradations that people usually make in practical life, the relation between supply and demand in so far as these tend to make themselves felt in exchange. Value shows the effect of causes which in themselves are hidden. And through the fact that we adapt ourselves to this effect, this value, it finally becomes possible to adapt ourselves to the causes, the amounts of supply and demand, and thus to regulate an economy with due regard to economic laws. If at any given point of time the value of all goods remains as it has hitherto been, we may be pretty sure of acting economically and according to the standard of economical insight already obtained, if we retain the disposition of all goods in production and consumption unaltered. If value has altered at any point, it is an indication that the present disposition of goods must be changed, and changed in direct accordance with the change of value. Where value has risen there must new goods be directed, be it for production or for consumption: where it has fallen these goods must be withdrawn. And this transferring of goods from one point to another must be continued until all values are brought once more into equilibrium, and for every stock of goods the law of equal valuation of all its units is re-established.

A knowledge of the values of goods, such as has existed in every economy up till now, is consequently, in itself, one of the most valuable of possessions. It is almost as valuable as the possession of the goods themselves, inasmuch as it is the key to their use. The sum of thousands of years of experience concerning the sources of supply of goods, and the suitability or otherwise of the conditions of their production, as well as concerning the amount of demand for them, is represented in the figures of value handed down to us. Were a nation to lose all remembrance of these, it would be an enormous economic misfortune. An almost incalculable period of time, an almost incalculable amount of error and loss, would have to be gone through, before the nation could again obtain mastery over the relations of goods formerly expressed, with numerical clearness, for each individual good by means of value.

By the socialist programme it is proposed to manage the counting of stocks and calculation of demand, in the state of the future, by means of government statistics. Could this plan be sufficiently carried out it would be so far possible to dispense with marginal value. On the other hand, it can never be dispensed with where the finding of an expression for the utility in the individual good is concerned. To dispense with it would be equivalent to giving up the attempt to determine utility in the individual case, and being content with making a general determination as to the direction of production and consumption, leaving out consideration of the quantities which it is desirable to gain or consume.

Here I leave the sphere of conditions of value in private economies. Clearly as I realise the imperfection of what I have tried to do, I yet trust that the reader will have been convinced that exchange value, as expressed in price, is not only governed by price competition, but contains a deeper economic content; that exchange value, although mixed with foreign elements, unites in itself all the essential elements of the natural valuation of goods, the valuation which is indispensable to economic action. If the prices for all similar goods in one and the same market are equal in amount, it is because, in the last resort, the valuations of all similar goods in one and the same economy are equal. If the prices for all goods in one stock are fixed at the marginal point, it is because, in the last resort, the valuations are so fixed. In so far as prices represent natural value, an enormous and arduous mental labour of calculating the exchange value of things is saved. By thousandfold weighing and consideration of the productive and other economical relations, each individual good gets measured out to it that amount of the total return which must be directly imputed to it out of the total amount of the total production, if the goods are to be profitably dealt with. I have chosen the word “Imputation” after much deliberation. It is not only to production goods that return is imputed and distributed; all goods get imputed and distributed out to them the utility which they give only when co-operating with one another. There is no satisfaction that is not prepared for and followed by others; all our satisfactions stand in mutual action and reaction with each other. Every man's means are thus linked together. Individual economic valuation succeeds, nevertheless, in distributing this whole, and imputing to each separate portion of wealth its share of return, in such a way that, as a rule, every one is well advised who, within the sphere of his own individual economy, takes the amount of value thus ascertained as measure for his economic action.

Where exchange value diverges from natural value, something else must of course obtain, but it is beyond our special task to enter on this consideration.

It still remains to show how far natural laws require that individual economic valuation be complemented by the economical considerations of a community, or, more particularly, of a state.

BOOK VI

VALUE IN THE ECONOMY OF THE STATE

CHAPTER I

introduction

In the exchange transactions of private economies with one another, objective exchange value acts as the economical measure of goods, while, within individual private economies, this part is taken by subjective value as each individual owner estimates it, whether it be subjective exchange value in connection with objective exchange value, or use value independent of it. All these forms of value, reflecting with more or less truth their common prototype, go back to one original form, viz. that which we have indicated as natural value; natural value being, in the last resort, the resultant of two simple fundamental components, quantity of goods and utility of goods. Even such phenomena as land rent, interest on capital, costs, are natural phenomena of value which could be suppressed only by a force so powerful that it would at the same time injure economic life and action itself.

Besides private economies there exist a great many public economies. The question now is whether, in them also, the value of goods holds the same place, and whether in them it takes on any new and peculiar forms. I shall limit my inquiry to the most important of social economies, that of the state, and deal even with it only in the most general way. The theory of social economies is yet in its infancy, and it would be impossible to discuss value in them at all exhaustively without first having thoroughly gone into a great many other subjects. It, therefore, appears to me best to confine myself to an entirely general and comprehensive statement.

State economy divides itself into two great spheres, the economy of income or finance, and the economy of expenditure or administration. Administration, however, belongs to the economy of the state only in so far as it is determined by economical considerations. This is the case mainly where regard is had to the material interests of the people, that is to say, in the economic administration or the economic superintendence of the state; but there is no single form of national activity but must follow economic principles, if only in the second instance; viz in regard to the careful and economical employment of its resources.

Up till quite recently economists have not, either in finance or administration, recognised in value that importance which, by analogy, might be suspected from its rôle in private economy. With regard, in particular, to finance, theory has managed to do almost entirely without value. The principles of taxation have been and are almost always stated without value being mentioned, or if mentioned it has been, at the most, only cursorily touched upon by way of comparison. Taxation gets its warrant in specific considerations, not in general economic ones. We speak of minimum of subsistence, ability to pay, sacrifice of taxation, progressive taxation and so on, almost entirely as if they were facts and conceptions belonging to a distinct sphere, while neither is the relation of this sphere to the fundamental phenomena of all economy made clear, nor is any attempt made to make it clear.

Adam Smith and his school treat the economic administration of the state also in a similar manner. They explain it simply by the necessities of national life, and value never enters into their consideration. Where they do make mention of it exchange value is always understood,—that being the only value which the school, as a rule, recognises. Any peculiar value pertaining to the economy of a state is never discussed, as in general all economic conceptions are borrowed entirely from the circumstances of private economies, and bear their characteristics. Connected with this—as cause and effect—there is a strong tendency to limit the sphere of state economy, and to extend that of private economy. Every theory formulates its conceptions in conformity with its fundamental tendencies, but it strengthens these fundamental tendencies in turn by the logical weight which the conceptions once constructed exert. A person who recognises no other value than exchange value will, wherever his common sense says that it is a question of value, generally allow exchange value to decide the matter in its one-sided way, or will, at all events, give to it too great a preponderance. The way in which Adam Smith rejects protection and argues for free trade may be regarded as typical of the school. The national income is to be measured by exchange value: but thus measured free trade will undoubtedly give the larger income in the near future: consequently, as it is always the income of the present that forms the capital of the future, free trade assures the greatest amount of well-being for all time to come.

In Germany this one-sidedness of the English school was early recognised. Many writers, as, for instance, Friedrich List, actively combated it. List placed his “theory of productive forces” alongside of his “theory of value”: exchange value was to be the determining force in private economic relations, whereas, in the economy of the state, “productive force” was to take its place — an antithesis whose inadequacy is most clearly shown from the consideration that “productive forces” are themselves estimated according to exchange value. Most writers took a different course. They tried, gradually, and at first altogether academically, to broaden the private economic views of the English School, in such a way as to make them as far as possible applicable to all economic relations. As regards value in particular, exchange value was traced back to the general conception of use value, and then conceived of as national or social use value. Thus little by little the theory altered its formal character. It undoubtedly became more rounded, more plausible, more adaptable, but at the same time more indefinite and inexact. Without following accurately the further development of this theory, I may point out its most important fact: that the scientific discussion did finally give up its academic hesitation, and, in spite of the slightness of its theoretic foundation, laid down with success and decision principles for the practical formation of a state economy. Like the financial system of the European states, their economic politics were gradually reformed by the active assistance of theory, although theory itself had not completely accomplished its task, nor, indeed, was quite aware what that task was. The “theory” was a highly-developed technology, capable of giving right direction, although it did not succeed in finding its justification—and with that, of course, its limitation—in absolutely convincing clearness.

The lately published work of E. Sax (Grundlegung der Theoretischen Staatsurirthschaft) is the first to complete the transition from technology to the theory of national economy, and has thus at last reached a goal aimed at by the German economists through a long and steady development. In the sphere of administration Sax has succeeded in indicating how public interests may have the widest play, while still maintaining a fixed economic conception which holds fast by the essentially economic. The economic is one and the same in all its forms, everywhere entirely distinct from the non-economic. Very important is the application of Sax's work to the sphere of finance—all the more important that here he had almost no predeceseors—and that the idea is thought out into details with great clearness. The whole system of imposts rests on value: this simple proposition makes the science of finance for the first time what it should always have been, a part of political economy. “Imposts of all kinds are examples of collective valuation which find their full explanation in the general nature of the phenomenon of value. The truth which finds expression in this formula is directly decisive for the theory of national economy, as a branch of the total theory of political economy, balancing that of private economy. The simplicity of the solution is a guarantee of its correctness. The apple falls from the tree and the stars describe their courses in obedience to one and the same law, that of gravitation. A Robinson Crusoe and a nation numbering a hundred million souls obey one and the same law in their economical transactions, that of value” (pp. 307–8).

The statement which follows is so general and so condensed that I have had but little chance of going into the rich contents of Sax's book. In the interests of the statement I have, moreover, considered it wiser, even where I disagree with Sax, to refrain from the most part from any attempt to prove my divergences with any great exactitude, as, in this portion of my work, even more than in the former, I have neglected the literary aspect of the subject. Here, as formerly, my task has been to demonstrate, comprehensively and as a whole, what has hitherto been considered only in isolation, if at all. It appeared to me foreign to the plan of my work, and likely only to increase the difficulty of the task which chiefly concerned me,—that of affording a survey of the whole subject,—were I to let myself be carried away by criticism and polemic into detail which I should not have gone into for its own sake.

CHAPTER II

the province of a state economy

It is generally assumed that the object of the individual economy is provision for the wants of the individual—that is to say, those wants which the individual feels as an individual; and that the economy of a community provides for the common or collective wants—that is, those which are experienced by the individual as member of a community, or, to put it differently, the wants of a community. The economy of a state therefore provides for the wants of the state, i.e. those wants experienced by the citizens of a state in consideration of their civic connection with each other. This conception, however, scarcely corresponds with the actual division of the economic sphere. National interests, which are undoubtedly to be reckoned under the head of collective interests, are frequently furthered by personal sacrifice and expenditure. And more numerous instances may be adduced of the contrary case—that individual interests are fostered by collective efforts. The desire to Possess a means of coming and going to one's business, is undoubtedly personal in the highest degree; but the highways of traffic have been included among the concerns of the commonwealth almost since the beginning of time. In the communistic state the care of providing for the entire sum of individual wants, would fall altogether to the economy of the state without these wants having changed their nature in any way. It must, therefore, be some circumstance which does not touch the nature of the want itself that determines the division of the economic sphere.

A simple consideration enables us to recognise what circumstance this is.

The personal ability of the individual is in many cases sufficient to secure him the realisation of his personal wishes. In particular, the sphere within which the individual is capable of making himself felt with effect, is quite extraordinarily enlarged when men have learnt to make use of the division and co-operation of labour. By means of this they enter into combinations and exchange with one another, and thus increase enormously their power of work, while, at the same time, they calculate and distribute out again to the individual the advantages obtained, and thus remain separate from each other, as individuals with individual rights. There are, however, certain results which demand a more intimate kind of connection,—a condition of real community,—and cannot be obtained without it. The desire to obtain these results, which often amounts to the feeling of a peremptory necessity, leads to the formation of the commonwealth.

There are various reasons which may make the attainment of a certain result dependent upon the formation of collective bodies, and upon the carrying out of collective actions.

In the first place may be mentioned the nature of the action in question. For many kinds of action the individual, as individual, is not qualified; he feels himself too weak, or, it may be, quite incapable. From the first it has devolved upon the state to represent the common weal, in cases where nothing but the solidarity of many or of all is able to create the force that is lacking to the scattered individuals. Only as a united state can a people hope to ward off its enemies, and to protect its citizens when in foreign countries. Only a union of people can succeed in guarding a country's peace, and preserving order against crime within its borders. From the general feeling of justice are obtained the weight and power necessary for the laying down of laws which will bind every one, and for the appointing of judges and officers who will make every one bow before the one common law. And thus numerous interests, partly collective, partly the most ordinary general interests of the individual, lead to an ever-widening extension of the sphere of the state's activity, wherever the opinion prevails that only the state possesses the power of offering any guarantee of the satisfaction, or the full satisfaction, that is desired.

In the case of such actions as are executed in common, there is an overwhelming tendency to bear the burden in common, and to enjoy the results in common. Even if the power of the state is set in motion for the sake of one solitary citizen, the occasion cannot well be judged merely from the standpoint of the interest of that one citizen. The very fact that the power of the state has been set in motion at all, engages the interest of the public, because this power, once set in motion, cannot be allowed to move in vain. All its future success depends on the recognition of this. For this reason the outcome, for instance, of every single criminal or civil process is full of importance to the whole community. Every such process must be so conducted that respect for the law may be strengthened, not shaken. But generally speaking the occasions on which the machinery of the state appears on the scene are, in their origin, matters of great importance and of great compass—frequently, of the greatest importance and the greatest compass; they are indeed such matters as only the united strength of the whole people is sufficient for. This circumstance of itself makes it impossible, as a rule, to divide out among the individual citizens the result obtained by the combined effort, or even to charge it to the individual according to its effects; hence the necessity of making the benefit universally accessible, or ascribing it to the people as a whole without further distinction. It happens comparatively seldom that individuals can be indicated and singled out, whose interests are exceptionally concerned, and for whom the services of the state may be exceptionally interposed and charged.

In the second place, just as the results of a war are not to be bought or sold, and a war cannot therefore be carried on as a private matter,1 so it happens that, among the undertakings for which the means and powers of the individual citizens suffice, there are very many which must be excluded from the circle of private business because of the impossibility of obtaining any profit out of them. The most various circumstances may have this effect. The streets of a town would be useless for purposes of traffic if they were not free to use without payment; this makes it impossible that any citizen should retain public routes for his own benefit. The same principle holds in all cases where goods whose production costs something must be made over to the public free of charge—“quasi-free goods,” as Menger calls them. Many undertakings also, although the public interest demands them at once, give promise of return only in the distant future;—so distant indeed that no private individual could be expected to wait for it: this is the case, e.g., as regards many railways. Very often again it is doubtful whether the return of an undertaking will ever be sufficient to cover the costs, while at the same time the results in case of success are temptingly large; here private enterprise would hesitate, either on account of the great amount of capital necessary or for other incidental reasons. Very often there is a scarcity of capable and energetic private undertakers, simply on account of the defective economical development of the citizens. And there are often cases where the goods concerned are, for the private economy, only in process of becoming — still incomplete, unripe, latent; where the goods must first be got at, or the goods that are to supplement and complement them be discovered, before they become capable of rendering any useful service. How much latent labour power there is which must first become conscious of its own existence and train itself, before it can find a market! What hidden wealth may not slumber in a land favoured by nature but uncultivated, its existence suspected, even known, but out of reach owing to the general backward condition of industry, of wealth, of education, of credit, of law, or of peace! And, although, in such a case, there is as yet no secure foundation for private enterprise, what government would not regard it as a duty itself to come forward and take hold, not only in the way of general administration, but by economic undertakings which train and ripen human faculty though they may give no direct return? Sometimes only the want is there, crying urgently for satisfaction, while those who feel it have no power to pay for its satisfaction; in this case no private undertaker can do anything, and the state must step in to mitigate an evil which might grow to be a great public ill. Many other similar circumstances might be added, all acting in the same direction; that is to say, excluding private enterprise by reason of their unprofitableness, but demanding the activity of the state on account of the importance of the goods concerned.

In the third place, many undertakings which lie within the power of a citizen, and which also hold forth to him a promise of gain, are reserved to the state, for the simple reason that they would put too much power into the hands of the private undertaker, or assure him too great a gain. The fear is that the exceptional position they would necessarily give to the person who undertook them might be misused. The businesses which belong to this class are mostly necessary monopolies,—particularly monopolies of great extent, such as the post and the railway. We do not expect, in an independent private undertaker, the requisite reliableness, or the will to undertake such huge businesses, or to carry them through as we should like; or we expect that too high a price would be charged for the service. But in all these points people look for something better from a government. This does not, however, in the least involve that the form of undertaking for profit be entirely rejected. It may be retained, but, with the endeavour to obtain the highest business return, must be conjoined, in some way or other, the endeavour to serve the interests of the public. In particular, where any considerable want is concerned while the power to pay is wanting, the service must be undertaken at limited prices, — that is to say, valuation according to exchange value must be replaced by valuation according to natural value. Thus emerges the “public enterprise.” In the communistic state all production would be the affair of the state, and fall under public enterprise, from a consideration which amounts essentially to this;—that private production is one-sided, and looks to the interests of the richer classes, while putting in the background the interests of the community in general. Even the affairs of the private household would be, for the most part, given over to the state.

If we cast a glance over the whole series of duties which constitute the economy of the state, it will easily be seen that, apart from the diversity of originating causes just described, they are also distinguished from each other by their content. Certain of them—of which the last-mentioned group is the best instance—are very closely related to private undertakings. Like them they have to do with the direct application of labour to goods; they have to do with detail and with individual production; and they are scattered in countless separate actions and occupations — many of these of a similar nature — over countless separate goods. Here it is considerations more remote and far-reaching that exclude private administration in matters where, otherwise, it might be suitable enough. This can be most clearly realised if we consider the businesses of production and of housekeeping as transferred to a communistic state. These would indeed cease to be matters of private economy in the personal sense, but, essentially or technically, they would remain, if the expression may be employed, “economic in detail.”

Quite different is the character of the remaining acts of state economy, which chiefly belong to the first and second groups just described. Their duties do not admit of being discharged by private economies for various reasons, but these reasons all lead, in the last resort, to the same issue;—that such acts are beyond the calculation of the individual, either because their products cannot be bought and sold, or cannot be bought and sold individually. Their results go without money and without price to the public,—either in whole or in great part,—according to what Sax calls the Princip des allgemeinen Genussgutes. They are transactions on a great scale, working with large means, and large returns,—returns which it is often entirely impossible to distribute. They assure the general foundations of personal life and of economic action. Their results must be distributed over all the community and not divided out individually, even supposing it possible to conceive of them as distributed to the individual. Of course they are undertaken on account of the utility they promise; but it is frequently far from certain—as e.g. in the case of war —whether the desired result will ever be attained. And even if it is attained its amount can, for the most part, be only approximately determined, partly on account of the wide range which it covers, partly on account of the large number of persons concerned, partly on account of the impossibility of conceiving the individual's share in it, partly on account of the long process of development, and the long time that must elapse before many of its effects emerge Very often all that one knows of an action is that it must not be neglected, and that we must summon all our forces to undertake it; while it is almost entirely uncertain how in the end the life of the people may be affected thereby. Often it is other generations that must pass judgment upon it.

In the communistic state also, if all economical matters are to devolve upon the state, decisions will certainly be made from this point of view; the affairs of the household and of ordinary production will be kept separate from those of the general economic and state administration. In the former case goods will be estimated at their natural value as that is now determined in private economy, i.e. according to marginal value; in the latter case, this form of valuation will be—as we shall go on to show—to a great extent abandoned. Alongside of it, or in its stead, will be placed another form of valuation, which we may best call “national economic” valuation,—a term which certainly does not express the formulas of communism, but those of existing economical conditions.

CHAPTER III

value in the natural economy of the state

Suppose the utopian state of communism actually realised, there also, as we have just seen, where all economic life has become the concern of the state, must the same distinction as now be made between private economy and state economy,— though possibly under different names. On one side must be grouped by themselves all those businesses of the household and of production which are now left in the hands of private individuals, together with many undertakings which essentially belong to private economy, but are at present, for special reasons, conducted by the state. On the other side and distinct from these, must be placed all matters of the general administration of the state—or of all that is economic in it— and of economic politics in general. Of course, there would be no lack of transferences to and from each group, and whatever might be the ruling consideration in the one group would have a place in the other. This does not, however, in any way conflict with the statement that the leading principles in each must be different.

In the former, or private economic group, where goods are capable of being measured very accurately as to their amount and utility, the main endeavour must be to obtain from every practically measurable portion of goods the greatest amount of generally recognised utility. This endeavour must find its expression in an estimate of value which takes its measure, for each single good, from the margin at which the most perfectly utilised supply meets the most perfectly sifted demand. In the sphere of production such an estimate of value takes, as we are aware, the form of an estimate of return or of costs. The value of stocks of similar goods must be represented as multiples: the value of production goods combined in the shape of products as sums of multiples. The individual amounts must be calculable—in many instances very exactly calculable—against each other. An exact economic calculus must be established, the advantage and disadvantage of every sufficiently familiar process being put in figures; and it must be regarded as the triumph of economic art to exactly ascertain and exactly realise that plan which the value calculation indicates as the best.

In the latter, or national economic group, the first principle must also be to secure the greatest amount of utility, the highest well-being of the citizens. But the utility and its amount will not be so exactly estimated; will often, indeed, as we have already proved at length, be very inexactly estimated. As the means necessary to achieve the ends of the state are for the most part very extensive, and the more or less cannot be so exactly determined, the indefiniteness of the valuation will be increased from the side of the goods also. The estimate of value will often be very vague, and in many cases unanimity of opinion regarding it is not to be expected. More exact estimates will be obtained only as regards such goods as are also employed in private economy, by transferring to them the definite estimate obtained by private economy, and also as regards such goods as are obtained through production. But where national economy makes use of specific goods which do not, either by reason of their employment or origin, take to themselves the estimate of private economy;1 where national economy stands absolutely and entirely by itself, and seeks to guard public interests by specific public methods; there, in place of the quantitative estimate of the value of goods in masses, will emerge the vague and disputable valuation of interests, influenced by inclinations and passions.2

The opposition between natural value in national economy and natural value in private economy reduces itself, in effect, to an opposition between vagueness and definiteness, subjective valuation and exact calculation. Even thus the contrast is sufficiently great to obtain clear and peculiar expression in practical politics. Theoretically, of course, there can never be any doubt as to the relation of the two. Just as private economic interests, where they compete with each other, are ranked according to their relative importance, so the interests of private and of national economy are ranked in relation to each other. The more important aim takes precedence of the less important—this forms the theoretic basis on which the estimate of value is built. But how will this rule work in practice when any doubt arises as to the degree of importance? As a matter of fact, the indefinite nature of national economic valuations must in practice frequently give rise to doubts as to the exact relation which the acts of private and of national economy should bear to each other. Very frequently it is the same goods that may be employed by either private or national economy; in the last resort, indeed, there is nothing but one fund out of which to provide for both, and only a few goods are from the first specifically reserved for one or the other sphere. A characteristic and common instance of the competition between the two interests occurs where an undertaking, which is profitable as a private business as shown by its calculable return in direct results, is maintained, from the side of national economy, to have an unfavourable, destructive, or undermining effect; that is to say, as regards results which are more remote and difficult to follow. Alongside of this we have the converse instance, that an undertaking which is unprofitable as a private business, and whose valuable returns do not cover the costs, may, from the point of view of national economy, be regarded as profitable, whether tending to progress or conservative as the case may be. What holds as regards individual undertakings, also obtains as regards whole groups of these,—of the great acts of legislation and administration, of the various branches and spheres of production, of the activity of the producing class of a nation. It might e.g. be disputed whether agriculture or the labouring classes ought to have public subsidy—i.e. support which might not be justified, from the point of view of private economy, by the value of the land products or the results of labour, but might be justified if one looked at the maintenance of the stability of the national economy and of the life of the people.

In the communistic state, as in the economy of to-day, there will be no lack of occasions which will continually force people to decide anew between considerations of the quantitative and calculable proximate returns—considerations of direct profit,—and of results more remote and less calculable—considerations of general interests. Suppose that the subject were some technical improvement like the establishing of railways, discussions would undoubtedly arise,—as they did at the time when railways were introduced,—as to their utility, feasibility, and consequences. And even after experience has put an end to the general discussion, there will still continue to be a conflict of opinions as to the more exact relation between the calculable results and the incalculable. Or, possibly, there may be a doubt whether the industry of a people should take the direction of trade or of agriculture; whether the power of the labouring classes should be more utilised, or more economised; possibly, also, whether it would be wise to carry on war, whether preparations should be made for it, or whether it might be better to foster the arts of peace, and so forth. And certainly there will always be one party which calculates, and which looks dispassionately to the profitableness or unprofitableness of any scheme, and another, party which looks far ahead and leaves room for imagination and passion. Under different names the economical oppositions of interest to-day will recur. The conflict which we may observe now between exchange value and public interests, depends accordingly—apart altogether from the opposition of personal advantage—upon a difference in economic aims which is inevitable, and arises out of natural economic conditions.

If it must be confessed that, in the communistic state, the private economical valuation of goods is not satisfactory because it sometimes neglects necessary deductions, sometimes essential additions, and so comes out too high or too low, we must a fortiori say the same of exchange value in the present order of things, where it goes too far in emphasising the characteristics of the private economy. It is the exact calculation and the incalculable but actually observed influences, that, together, make up the full value of goods. The theorist must admit so much, however hard it is for him, when he considers how greatly economic theory loses by it in exact conception of its formulas and precepts. How simple and how easy to apply any advice whenever only calculable quantities are concerned;—whatever, calculated by exchange value, yields a profit is economically permissible; everything else is forbidden! And how misty and obscure all theoretical solutions become when they put absolute laws aside, and are obliged to appeal to concrete existing circumstances to decide for them! In the end it is to politics we must leave the task of deciding, as well as of carrying out its decisions in the concrete—remembering that politics belongs not only to the politician but to political science. However much the pride of theory may suffer in recognising this, it is a fact not to be gainsaid. In order to observe and understand things, they are often thought of as being less complicated than they really are: and this is right enough when nothing further is intended than to simplify the process of thought by beginning at the easiest. But it is not permissible to call a halt at this point, and apply the solution thus found, without more ado, to reality. This is the sort of thing that might be described as “the disease of theory”: to take things first in the way in which they can be most simply grasped, and then to represent the whole world according to the picture we have just been able to think out for ourselves; to take what is most easily grasped, or at all events most precisely grasped, for the actual.

Like every exaggeration this also produces its own reaction, viz. the opposition to all theory whatever. The book which my readers now hold in their hands is a proof that I do not share in this opposition. Possibly it may not prove equally clearly that I consider every other direction of investigation, besides the purely theoretical one, necessary and significant in its own place; but no candid critic will, I hope, find any reason to dispute this.

That the theory, even when it recognises the influences of national economy upon value, in some sort paves the way for politics, is not likely to be denied. The man who has thought out the theory of value to the end, even within the limits just mentioned, will have cause to point with pride to the help which this has afforded him in political science and practical statecraft. It is a matter of the first importance—one without which no decision can be arrived at,—to recognise that there is a sphere within which the estimate of exchange value is applicable, and another in which it is not. Now if we could define these spheres, even in the most general way; if we could keep entirely and clearly separate the laws of the national estimate and the laws of the private estimate of value, so that every one who followed with sufficient earnestness would be convinced that they corresponded to the essential demands of economic action; if it were possible, besides, to indicate the directions in which the actual course of things diverges from these laws most frequently and with the most serious results:— in that case the foundation for political action would be so plainly laid down, and would compare so well with all the errors and difficulties which beset its path without these principles, that no one would deny that such a theory had justified its existence. To mention only one special case. The representing of goods by weighed and counted sums of barren metal or paper, and the consequent valuation of goods, and of the well-being they secure, by numbers and figures, by items and weights, is in itself a somewhat mysterious matter; a matter which a man who wishes to obtain a clear view of things might imagine to have an artificial and unhealthy origin; a matter which does, in fact, lead many an honest and intelligent thinker to such a conjecture. It is, then, a conclusion well worthy of consideration when a science succeeds in proving that such a manner of procedure is, at bottom and in its own place, sound and simple, and that it would be impossible to obtain a more exact and distinct measure for the thousandfold variety of economic satisfactions, than that afforded, under the necessary conditions, by the natural marginal value of goods.

CHAPTER IV

value in the present-day economy of the state

The conduct of economic life, as actually carried on, adds another and a stronger contrast to that which naturally exists between private and national valuation.

The state as it actually exists—unlike the communistic state—has not the management of all economic matters, but only of a trifling portion of them. And, again, all economic good only do not belong to the state. Indeed it does not possess even enough for the proper carrying out of its own objects. As a rule it possesses only the buildings and the fixed plant necessary for the exercise of its public functions. Whatever beyond is required for the current service must, for the most part, be handed over to it by the citizens in the shape of annual contributions from their property and income. The most important of these contributions are raised, as we know, in the shape of taxation, and to the consideration of this alone we shall here confine ourselves.

Schäffle (Steuerpolitik, p. 17) has already laid down the principle on which the goods which form the income of the citizens should be divided out, between taxes on the one hand for the satisfaction of public interests, and domestic outlay on the other for the satisfaction of private wants. He calls it the “principle of proportionate provision for the wants of the individual and the wants of the government.” The income of the citizens must always be devoted to those employments which at the time are the most important. There must not be too rich an endowment of the public housekeeping at the expense of keeping down the citizen's, nor of the private housekeeping at the cost of deterioration in the public service.

Sax has developed the same idea still further. Goods obtain their value from the uses to which they are put. The correct principle for the appropriation of income to the purposes of the state is therefore simple; it is the universal principle of economical employment, viz. that goods be employed in accordance with their value. If the state should claim too much, it diminishes value, by expending goods for purposes of state economy which would have a higher value if employed in private economy. If it claims too little, value is again diminished—as in this case also the entire importance of the goods is not realised.

This law obtains its full significance in consequence of the fact that riches are unequally distributed, and that personal incomes and, moreover, personal wants are of different degrees. If every one had the same wealth, income, and wants, all the citizens would have to contribute the same quota of taxes. But as this is not so, they must contribute unequal quotas and again it is value which provides the measure. Every individual economy, in respect of the relation of supply and demand peculiar to it, has what Sax calls an “individual Werthstand. ” The same amounts of goods are valued differently, or, what amounts to the same thing, the same amounts of value are expressed in different quantities of goods. To understand this expression of Sax, it may be best to recur to a fact which we have already taken as a starting-point in arriving at the law of price. We said that every intending purchaser who goes on the market calculates to himself, or ought to calculate, the money equivalent of the goods he wishes to buy, i.e. the sum of money whose value to him will equal the value of the goods, so that it is not economically permissible for him to go beyond it. Now a similar money-equivalent must be calculated for the value which the services of the state have to the individual citizen. More than this money equivalent it cannot, economically speaking, be the duty of any citizen to pay in taxation, but, on the other hand, it is the duty of every one to pay taxes up to this amount in order to meet the costs of the public service.

This acknowledged, the next matter is the more exact estimate of the individual equivalents. The circumstances which decide are wealth, income, and want. The greater the wealth and income, the greater will be the subjective equivalent or the taxation; and the greater the degree of want, the smaller will be the subjective equivalent or the taxation. All the same, taxation cannot simply be fixed proportionally to wealth and income: a progressive rate of taxation is justifiable. The man who only earns enough to sustain the physical minimum of existence has nothing left to give up to the state. I cannot go further than this and show the reasons which Sax gives for the claim of exemption of those who are at the minimum of existence, for the progressive rate of taxation, and all the other familiar claims of modern taxation. While it need scarcely be said that, as the science grows, many things will probably be formulated otherwise, still he has reached the essential matter. In all points which have been indicated as important by economic discussion up till the present, and which developed legislation has called into notice, he has discovered the connection between them and general economic facts and principles, and thus given to what has been empirically reached a basis in theory.

Hitherto, as regards the most important points of the theory of taxation, the science of finance has rested its tenets on an appeal to the claims of justice. In this almost unanimous dependence upon outside and non-economic considerations, the imperfect condition of that science betrays itself even more than in its lack of agreement over the purely economic part of its investigation, and so far as this remains it must resign all claim to be regarded as an essentially economic doctrine. Thanks to the labours of Sax this is to a great extent altered. All the principal requirements of the theory of taxation have obtained an economic foundation in being derived from the general economic categories—Want, Goods, Economy, Value. In spite of this, however, I cannot believe—though this brings me into opposition to Sax—that the economic basis of taxation has proved so perfect as to be able to dispense altogether with considerations of justice. Without attempting any complete proof of this statement—which could not be done without the difficult and tedious work of distinguishing between the economic and the just,—I should like to advance one single argument which appears to me sufficiently to corroborate its correctness.

Sax as we have seen requires that every one pay in taxation the full money equivalent in which, according to his own individual standpoint of value, is expressed the value of the services of the state to him. This claim is certainly absolutely economic, in so far as it prevents the less able being taxed at their maximum or above it, while it taxes the more able under their maximum. The claim is, further, certainly an economic one, in so much as it excludes the possibility of any one being taxed above his maximum. But in so far it is not an absolutely economic claim; it rests also upon the legal assumption of private property; it would be uneconomic if it could be proved that private property is itself uneconomic. But how would it be if this claim were set against one which demanded that the rich, and possibly the middle classes also, should be taxed at their maximum, while the poorer and poorest classes were taxed below it? What could be opposed to this claim? Certainly no absolutely economic consideration; for the result of this being realised would be, economically considered, a more perfect satisfaction of the people's want. The only thing that could be opposed to it would be the consideration that, as a matter of justice, the same formal fundamental proposition must hold for all,—equal justice for all; a consideration which might, perhaps, in the last instance, be traced back to an economic basis, but which, in the present state of scientific development, is simply derived from the feeling of justice, and represents a quite distinct phase of that feeling. It may possibly be that, at a later period of time, it will be declared the duty of the rich to free the poorer classes from all public burdens, in order somewhat to mitigate the privations they suffer from the unequal distribution of wealth. Sax himself suggests (page 522) that, when that time comes, there may be an active endeavour, based on altruistic motives, to extend exemption from the “physical” minimum of subsistence to a “culture” minimum. It is possible that this endeavour might be only a symptom of gradual development in the direction of freeing the weakest and weaker classes, entirely or in part, according to the degree of their weakness, from the burden of taxation.1

As it is with the ordering of taxation, so is it, in my opinion, with all valuations in private and national economy, in so far as they have to weigh the conflicting interests of many persons. The principle which will reduce to a common measure of advantage the interests of persons who are differently situated in respect of wealth, has, I think I may venture to say without hesitation, not yet been found. So long as it remains undiscovered, it is impossible in such cases to dispense with some reference to that ranking of personal claims with which the feeling of justice is somewhat satisfied. If we give our assent to the principle of taxation demanded by economic theory, it is only because, without having an entirely strict theoretical justification for it, practical considerations which cannot be rejected compel us to approve of private property, and, moreover, of a degree of its utilisation quite definite and in accordance with modern ideas.

CHAPTER V

the fundamental law of collective valuation

If the burden of taxation is distributed among the citizens in the manner just described, a very remarkable contrast emerges between the law which regulates public imposts, and that law of price (under free exchange on a market uncontrolled by the state) which regulates the burden that must be borne by all individuals when they wish to acquire goods produced or offered for sale by private industry. As return for the services of the state, or as contribution towards meeting the costs of these services, each individual gives the maximum which he is able to give, the full equivalent. In free exchange, on the other hand, the (approximate) maximum is paid only by the marginal purchaser; the other purchasers get off more cheaply, as the one price is established for all, and no one requires to pay more than the equivalent of the marginal purchaser, even although his own valuation may be much higher. The state, accordingly, takes advantage of the purchasing power of every one in a much more thorough way; and, more especially, the purchasing power of the wealthier citizens. It does not suffer the rich to pay according to the standard of the poor, but insists that every one shall be taxed in accordance with the full measure of his own personal estimate of the value which the services of the state have for him.

Hence is derived a peculiar law of national economic valuation—as of collective valuation generally. In every self-contained economy equal quantities of goods have an equal value; similar items, or fractions, or units, of a stock have for their owner the same value. This law holds also in all free economies, and for the economic bodies created by it; similar goods have on the same market the same price, the same exchange value. But it is different in the case of the national economic body, as, generally, in that of every collective economy which binds together several otherwise independent economic subjects to carry out distinct purposes. Here the goods which belong to the individual economic subjects, and from which the taxes are to be drawn, are valued as unequal,—equal taxes have unequal value, the same value is expressed by unequal taxes. The valuation of individual wealth and income on the part of a government agrees exactly with the individual degree of valuation for purposes of taxation; a government estimates the property of each person exactly as he estimates it himself, and in so far the collective economy is not like a self-contained economy. Not until the government comes to the spending of the taxes does it act in accordance with the universal law; not till then do sums, which were valued as unequal so long as the government had to collect them, come to be equal in value.1

Not only, then, does the levying of taxes rest on valuation, but in the levying of taxes is directly expressed a distinct valuation; a valuation which—as regards the wants of the public housekeeping—estimates every good at a lower figure in proportion to the number of other goods which are bound up with it in one individual's wealth, or in proportion to the limited character of the private wants to which it is devoted. In other words, the theory of taxation, in its economic foundations, belongs not to the applications of the theory of value, but to the theory of value itself.

The fact that, when levying taxes, a government, in contrast to the general law of ordinary economic life, rates economic property differently according to the individual circumstances of those who are taxed, has, economically speaking, undoubtedly beneficial results. It allows that the public burdens of the poorer classes be put at a lower figure; it allows the ability of the wealthier to bear taxation to be more fully utilised; and it thus places the taxes where they will cause least injury to the satisfaction of private needs. Were the state to act otherwise; were it to impose equal contributions, like poll taxes, on every citizen; it would inflict on the poorer classes privations in no way compensated by the extended indulgence in luxury that would now be possible to the richer.

To this extent it might be desirable that the same principle should also apply in free economic life; that there also each should pay according to the amount of his purchasing power. In this way a universal equalisation of satisfaction might be attained; if every person were obliged to pay a dearer price according as he possessed more means, riches would offer no advantage, poverty no privation; all would have in the long run the same satisfactions. It need scarcely be said that, so long as our economy remains free, this cannot be. For so long as it is so, every one will strive to buy as cheaply as possible, and sellers will meet buyers in the same spirit—inasmuch as they will make the slightest advance in price an occasion to give the preference to the buyer who offers it, and will not in the least insist on adapting the objective amounts of price to the subjective purchasing power of the buyers. And just because this law of the free economy is so closely united with the freedom of that economy, it would be useless to condemn it for the undoubted evil effects which it directly has upon the distribution of the satisfaction of wants. In order to judge adequately, one must in any case take into consideration as well the effects of economic freedom—or, to put it differently, of private economies and private property — on all other economic relations, and particularly as regards the formation of productive returns. It may very well be that private property gives rise to great inequalities in the satisfaction of wants, while it, nevertheless, secures, even to those who receive the smallest share in the general distribution, an enormously increased satisfaction of want on the whole— the reason being the enormous increase in productive return which it allows and brings with it. And here, perhaps, may be found a reason for the remarkable phenomenon that one and the same community should contain at the same time two such diverse organisations as a free economy and a collective economy. In the former of these it diverges from the natural measure of value in that it over-estimates the goods reserved for acquisition by the rich, while, in the latter, it diverges from it in that it puts all goods possessed by the rich at a low figure so far as the public housekeeping is concerned. In the former the community is governed by a law which spares the rich, except where they come into competition with each other; while in the latter it lays down a law for itself which utilises their purchasing power to a quite unlimited extent. In the former it favours the unequal distribution of satisfactions: in the latter, it helps to equalise them. Such deeply-rooted divergences can only be explained by showing that the two organisations serve different purposes,—purposes in which personal freedom demands different scope.

We could not follow out this line of thought without leaving the sphere of the theory of value, and trespassing into the wide sphere of economic justice and economic philosophy. The explanation of the social organisation within which the valuations take place, is a task with which the theory of value, with its limited means, is not capable of dealing. And it is not only the theory of value which is unequal to this task; only a theory of society, which took into consideration other than merely economic facts, could adequately undertake it.

If now, in closing, there is one thing which, more than another, I wish to repeat with special emphasis, it is the intention which has dominated me throughout the whole work, and in every part of it,—the intention to be, in the best sense of the word, empirical. I may perhaps hope that the attainment of this object has not been disturbed by the fiction—undoubtedly unempirical—of a natural value and of the utopian state of communism. So far as I can judge of my own work, I have nowhere pointed to any foreign non-empirical power in the actuality of economic life. The only liberty I have taken has been to leave out of consideration facts of whose activity there could be no doubt:—the actual imperfections of valuation, the individualism of our economy, and, finally, the inequality of wealth. At the same time, however, I have not neglected to indicate, at all events in a general way, the directions in which these circumstances must of necessity cause value, both in the private economy and in the economy of the state, to deviate from the natural standard. I hope that my statement has not by this means become untrue, though I know very well that it must of necessity be imperfect. But what is incompletely stated is certainly not, on that account alone, non-empirical—if it were so, what statement would be empirical, seeing that we are unable ever to do more than investigate mere fragments of the great organic structure of our world? All judgment as regards any attempt at investigation must depend on whether the fragment, with which the inquiry is concerned, be large enough and solid enough to have a coherence of its own, and to deserve consideration by itself. If the imperfect description of the phenomena of value, which I have attempted to give, is justified in this sense, it is empirical.

The form of the fiction cannot have misled any one. I might, of course, have stated drily that I intended to abstain from the consideration of certain facts. But like one who wishes to look at certain things undisturbed by the impressions of other things, and aids his senses by spreading a veil over the disturbing objects, I thought to aid imagination by making use of the easily comprehended figure of a communistic society, concerned to abolish in actuality all that I wished to disregard in thought. The fiction which I have employed must be regarded in that light alone, and I trust that the veil has been transparent enough to allow the complete body of phenomena to be clearly outlined at every turn under its slight disguise.

[1]In the exchanges necessary to procure the goods which are to replace the capital, in lieu of the directly obtained goods which form the gross return, goods are, of course, estimated according to their value. Capital goods, are, therefore, estimated at their capital value. To this extent it appears that the knowledge of the value of capital and of the laws which regulate it, must precede the imputation of net return. Only in such a simple instance as that given by Thünen can an imputation of net return be made without a previous knowledge of the value of capital, and this destroys our proof that the imputation of net return is fundamentally independent of the valuation of capital. It is, of course, practically impossible to employ this fundamental principle so soon as production becomes complicated. But whenever production becomes complicated every new calculation must practically be laid on the lines of the old ones; otherwise no conclusion could be come to. Every new determination of value practically presupposes old ones (compare Book III. chap. v. at end). As little, then, as the conclusion can be drawn from this, that theory requires value in order to explain value, so little can it be concluded that, theoretically, the value of capital conditions the imputation of net return.

[1]Compare Menger, p. 135.

[1]In the above example I assume (1) circulating capital, and (2) circulating capital whose value is not depressed to a lower level by cheaper costs of production;-—say, a scarce raw material. Suppose there is an increased demand for articles made from amber, while amber cannot be obtained in greater quantities; it will rise in value. Those undertakings which work with amber certainly obtain thereby a rise in their gross returns; but there is, on the other hand, a similar rise in the amount deducted for consumption of capital, and this must be taken into consideration in their estimate of gain. In the long run there remains a higher net return, but it is only relatively to the increased outlay of capital.

A much more complicated calculation has to be made as regards fixed capital as also as regards capital whose value is influenced by the costs of production. I must leave the reader to think out for himself—in the light of the principles now to be discussed-—the corresponding modifications in the valuation of fixed capital and in the influence of costs.

[1]Calculated on the figures given above, and assuming a 5 % rate of interest, the value of the machine, on putting into present value the five expected annual returns of 1000, with interest and compound interest, may be reckoned at 4329· 48. The first return of 1000 pays 216· 47, as 5 % interest on the capital, while the residue of 783· 53 goes to repayment of capital, thus leaving a remaining capital sum of 3545· 95. From the second return 177· 80 falls to interest, and 822· 70 to the sinking fund; from the third, in the same manner, to interest 136· 16, and, to replacement, 863· 84; from the fourth, 92· 97 to interest, 907· 03 to capital; and, finally, from the fifth, 47· 62 to interest, and 952· 38 to repayment, whereby the entire capital is replaced.

[1]All the separate principles here deduced for the calculating of capital value and interest are followed in practical life and are practically familiar to us. The theory of them, too, is often given. But they are always followed and taught under the assumption that the fact of interest and a fixed rate of interest are given. Nothing is simpler, under such an assumption, than to capitalise a rent, or to show the method of capitalisation. But the duty of the theorist is to discover these laws, and, at the same time, to explain why such assumptions may be made. Whence comes interest! whence the rate of interest! These are our fundamental questions. All the single laws which we have laid down are confirmed theoretically only if we have succeeded in explaining also the assumption on which they are based, i.e. the existence of interest and the rate of interest.

The analysis of the value of land which follows will once more give the reader occasion to notice how difficult it is with the matter in hand to escape arguing in a circle, and to prevent the entrance of any assumption which is itself in need of explanation.

[1]A further form of interest will be discussed in Book V. chap. ii.

[1]That is to say:—In the present state the due provision of houses for the people is guaranteed by the consideration that capitalist, investing their money in house property, will get the ordinary return ot interest on capital generally. Rent must cover replacement as well as interest. In a communistic state, where the government provided everything, the building of house would be controlled by considerations of wants and satisfactions which placed the demand for houses very much in the same relative position to other satisfactions is now. No socialist state, for instances, could provide houses in such quantities that their value was reduced to the mere expenses of building, without disturbing the marginal plane, and diminishing the total sum of satisfaction obtainable by the employment of the national capital. — W. S.

[1]I have formulated the law of costs only with relation to the so-called costs of production. Besides this we speak sometimes of costs, when we refer to expenses of purchase. By this is meant the sums of money a buyer has to expend to obtain possession of good. An exactly analogous law obtains as regards these costs. All sums of money of equal amount destined for the purchase of goods have equal value to the one owner, and all goods purchased for money—under certain assumptions entirely analogous to those conditions which hold as regards the law of costs in production—have to the one owner a value in proportion to their costs of purchase (see Book II. chap. ii.). The law of costs of production has, however, a more far-reaching importance than the law of costs of purchase, inasmuch as it is not, like the latter, limited subjectively, but also holds as regards objective exchange value. In consideration of these more far-reaching effects it is entitled to a special statement.

Sax has stated the conception of costs still more comprehensively (see chap. 56 in his Grundlegung der Staatswirthschaft). Nevertheless, important though the results thus obtained may be, it appears to me that, for the reason just stated, it is right to hold by the narrower conception of the costs of production, as against this wider one.

In connection with the present book, see Ursprung des Werthes, pp. 97, 103, and 146; further, in Böhm-Bawerk's Werth, pp. 61 and 534; as also Sax, p. 327; and, finally, the parts referring to this subject in Jevons and Walras. Menger does not treat of costs.

[1]If, for instance, the price of cotton thread is reduced, thread manufacturers will not pay the former price for cotton yarns. But if cotton spinners are compelled to quote a lower price to thread manufacturers they cannot ask a higher price from cloth weavers. Thus the weavers get their raw material cheaper because of the fall in the price of the cognate product, thread, and this tends to an extension of the cloth manufacture.—W. S.

[1]This definition requires a slight readjustment only in so far as interest and land rent (see below, Book V. chaps, xi. and xii.) are reckoned among costs. Interest and rent—or the goods which constitute them—are not production goods; they are simply elements of the production calculus, as production goods are.

[1]The foundation of the law of costs given in the text appears to be applicable only to natural value, and not to exchange value or price. But it is also applicable to them. The proximate explanation of the validity of the law of costs, in the case of price, is that producers are not willing to sell under cost, and—where there is free competition—are not able to sell over cost. But why is it that they will not sell in the former case, and why does competition make it impossible to sell in the latter ! In the last resort it is because every one applies for himself, as well as he is able, the natural laws of valuation, and those laws bring him to that amount of product, or that valuation of what is produced, from which the law of costs results. Competition—i.e. the efforts of others who apply the same natural laws—then forces him to give expression, in the price which he asks from the consumers, to the valuation which he has made for himself. The actual position of price depends, therefore, essentially upon the actual position of competition, particularly on how far the efforts of competition are limited by the “hindrances to equalisation.” These “hindrances” are peculiarly strong in international trade, in which, accordingly, the law of costs holds only very slightly.

[1]Thus in the cotton thread trade neither changes in wages nor in the price of raw material seem to affect prices; they only increase or decrease profits.— W.S.

[1]Up to a certain point costs do—-even in such cases as these— directly determine value. All goods that can be supplemented from stocks in warehouses and the like, which stocks again can be renewed through production, thereby appear to us directly as mere combinations of their productive elements. And to this extent it may be said that, on the whole, the cases where costs directly determine value predominate.

[1]As labour is not the product of the labourer's means of subsistence, so, conversely, the means of subsistence cannot be regarded as the productive factors of labour. In other words, the labourer's means of subsistence are not capital. If labour be a good of the second rank, producing any kind of good of the first rank—a consumption good—the labourer's fund of subsistence is in no way a good of the third rank, producing the labourer; it is again merely a good of the first rank, a consumption good for the labourer. This has a result of great importance as regards value. Value is communicated, as we have seen, first from the want for goods of the first rank, and then from these to the goods of second rank, and so on through all the ranks. If means of subsistence were capital, they would receive their value from the value of the service rendered by the labourer. But as they are simply means of subsistence, they receive their value from the wants which they provide for.

[1]In his Werththsorien und Werthgesetz, in Conrad's Jahrbūcher for 1888, W. Scharling, one of the latest writers upon the theory of value, has again traced it to the fundamental motive of the labour theory, although with considerable amplification and modification. He derives value from the difficulty of attainment, or, more exactly, from the amount of effort which he who wishes to acquire an object is spared by attaining his end through exchange. I shall not at this point dwell on Scharling's positive work, but rather refer the reader, in regard to his fundamental motif, to the succeeding chapter. Only, in passing, I may note that, among the efforts which are to give the standard to price. Scharling includes that (p. 558) “which it costs (at an auction) to distance other bidders,” or what it costs “to overcome an owner's disinclination to part from his goods.” Both of these efforts have their origin in nothing else than the payment of that very price whose standard they are supposed to explain. In this sense there might be included among the difficulties of attainment the fact that things must be paid for with money, while people are bound to be economical with money. His views on the theory of marginal utility are given, in an illustration cited by Böhm-Bawerk, of a boy to whom “the pleasure of eating an apple is more than seven times but less than eight times that of eating a plum.” “Let us suppose” continues Scharling “that the father comes and says to his boy: ‘Our neighbour has given you permission to pull as many apples from his garden as you wish’; the boy will at once alter his opinion as to the relation between apples and plums, although his taste for and his enjoyment in consuming the fruit remains unchanged. But the effort which the possession of one apple saves him from putting forth, is no longer the same.” To my mind this illustration, which Scharling advances in opposition to the theory of marginal utility, is really a proof of that theory. In what way has the situation chenged after the father's speech ! Clearly that the boy may now have as many apples as he will, while formerly he had only one, i.e. the available supply has been increased to superfluity. And thus the result is attained which the theory of marginal utility demands; the valuation of the apples is entirely altered. Scharling's opposition would be justified if it were directed against a theory which made value depend simply upon utility and not on marginal utility. In our theory, along with utility, all the influences are weighed which determine the degree of utilisation, and of estimation of utility, by the supply; indeed, even those influences which determine the amount of supply by the conditions of production.

[1]It is not at all impossible that, at one and the same place, there may be a lack of labour in certain department—e.g. skilled labour—while there is superfluity in the available supply in other—e.g. common hand labour. In such a case the services of the former are estimated by utility, and the latter by amount of hardship. Under primitive economic conditions the “supply of labour power” is frequently too large; not until there has been a considerable advance in civilisation does it become the rule that labour is insufficient. Further, even the labour power of one and the same individual may be too small as regards certain requirements of labour, and at the same time too great as regards others. It happens almost invariably that labourers whose capacity for performing some particular form of service is not sufficient to meet the economic demand for such services, have always sufficient capacity remaining to meet the trifling necessity for labour in their own private lives. With this is connected the fact that labour power is never entirely worn out; after performing the labour of his particular vocation, man refreshes and restores his energy best by light and distracting employments. Even in a country where the economic demand for labour is entirely insufficient, there are not lacking occasions in which labour may be estimated according to the amount of hardship involved. Every individual is continually finding such occasions; and every one thus learns from his own experience the fundamental motif of the labour theory.

[1]See Ursprung des Werthes, p. 103, and also Böhm-Bawerk's Werth, p. 42, and, on the opposite side, Sax, chapter 45. Sax, starting from the correct proposition that only those goods should be produced whose utility outweighs the burden of labour they involve, appears to me to go rather far in the conclusions he draws, when he says: “If the Unlust connected with the want in question (i.e. the unlust which originates from the want not being satisfied) is less than that of the burden of labour, then the desire for the good will be a passive one. The want itself ceases to be felt.” Only in so far as the desire is “active” does the expected product receive a value in thought. That, as I have said, seems to me to go too far. In considering whether a thing should be made or not, the value, as derived from the expected utility, will be estimated undiminished; and, at the same time, the expected toil will be weighed as a thing by itself. If I hunger but am too lazy to work, I still continue to feel the hunger, and thus estimate the value of food according to the measure of my hunger; only it may happen that the presentation of this value is not sufficient to overcome my laziness.

[1]See Ursprung des Werthes, p. 165.

[1]This, however, is not the reason why it is reserved for government to carry on wars; that reason being simply that no private individual possesses the means necessary for it.

[1]We may take as illustration the case of a barren island whose occupation is demanded by military or political considerations.

[2]See note at end of chapter.

Even in private economy, all things considered, one has to deal with masses of goods and with wants of great compass: private undertakings are in fact more numerous than state undertakings, and form the principal part of the body economic. All the same, the extent of the undertaking, in private economy, has only to a trifling extent that indefiniteness of valuation which it so easily gives rise to in national economy. In private economy one has to deal with more, but smaller objects; in state economy, with isolated but more wide-reaching matters. In the former all quantities finally resolve themselves into divisible sums; in the latter, they do not. This contrast is so important, and recognition of it affords so deep an insight into the structure of exchange value, that, at the risk of repeating myself, I shall try once more to give to it as exact expression as possible.

There are two considerations which must be carefully taken into account if we would understand the calculus of private economy.

First: all stocks of goods of a similar kind—and, along with these, all goods which, as products, relate themselves through costs to such stocks—come within the range of the marginal law, and are measured as divisible sums made up of the smallest units, each unit estimated at one and the same value. This makes it appear as though all wealth were split up into “atoms,” but it is so only in appearance; as a matter of fact within the sphere of the marginal law every “atom” in the whole circle of wealth is valued by this method of measurement; not only are all the marginal employments put in evidence but, with and through them, all permissible employments from the highest down to those standing on the margin,—-only that we are saved the trouble of putting into the calculation any but the marginal uses. This makes it possible to calculate even the almost infinite quantities which are destined to meet almost infinitely various wants. For the purposes of carrying on ordinary private business, for instance, the whole enormous agricultural wealth of a nation can be quite properly grasped through the ordinary economic estimate of the same, even although this estimate, which only takes stocks and marginal employments into consideration, is very far from giving expression to the whole importance which those satisfactions that are provided through agriculture have for the life of the nation. There is, therefore, nothing more misleading than to introduce a treatise on the price of agricultural products by a disquisition upon the importance of agriculture in this latter sense. The “surplus value” left out from the calculation need not be taken into the calculation; for one thing, that it is omitted, not only in agricultural taxation, but everywhere, and, for another thing, that, as regards detail, a quite adequate balancing of agriculture against trade, industry, and the other branches of economy, and also of the individual businesses of agriculture against each other, may be obtained, if only the margin be everywhere observed down to which wants are satisfied, production extended, and cost goods expended.

If this same agricultural wealth be considered with regard to the purposes of general economic politics, the point of view changes. We are no longer concerned with innumerable individual goods as opposed to each other, but with that which affects them all in common. Thus agriculture, or great parts of it, become a whole; then is the time to consider the importance of all its services; and then we have to face an enormous complex of results which must all be estimated in their entire extent.

Second: by private economy the whole productive return—again taking into account the smallest quantities—is distributed among the complementary productive factors without remainder. The sum of all the “productive contributions” is equal in value to the total return, and the productive value is consequently as clearly calculable as the value of the products. On the other hand, in questions of economic politics, if the destinies of large quantities of production goods have to be weighed all at one time, the estimate of the “contribution” does not suffice. It becomes necessary to undertake the exceedingly difficult task of considering how deep the “complementarity” of the productive factors in its ultimate ground may reach, and how far these factors mutually condition one another—in the way of fructifying or serving as foundation—if they are all at once brought together in masses, or severed from each other. Here, again, in the “contribution” of private economy we calculate only the marginal value, whereas, in the total “Co-operation” of national economy, we calculate the more far-reaching and less easily calculable importance of the goods.

This must all be understood with the above-mentioned limitation, that we have here indicated only the leading characteristic of the two economic systems, while each system always shows traces of the other, and the transitions from one to the other escape notice.

[1]Sax (page 522) remarks that, in any case, as regards the over-burdening of the rich, the economic margin is already given in their “individual valuation looking to possible taxation.” But even granting that this margin is of purely economic origin, there remains, as we have seen, inside of it, sufficient room for the activity of other than purely economic considerations.

[1]A great deal of the history of taxation may be explained by the fact that people only learnt gradually to distinguish between the valuation of goods in national economy and in free economy. In ordinary economic life one feels injured who has to pay a higher price than any one else; and it can be easily understood that, in face of this rooted opinion, it was hard to introduce the principle that every person should pay more taxation for the same state services according as he possessed more goods for the satisfaction of his wants—and that not simply but progressively.