Front Page Titles (by Subject) CHAPTER III: foundation of the law of costs - Natural Value
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
Also in the Library:
CHAPTER III: foundation of the law of costs - Friedrich von Wieser, Natural Value 
Natural Value, edited with a Preface and Analysis by William Smart (London: Macmillan, 1893).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
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
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.