Front Page Titles (by Subject) Chapter XVI: How the Marginal Efficiency of Consumers' Wealth is measured - The Distribution of Wealth: A Theory of Wages, Interest and Profits
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Chapter XVI: How the Marginal Efficiency of Consumers' Wealth is measured - John Bates Clark, The Distribution of Wealth: A Theory of Wages, Interest and Profits 
The Distribution of Wealth: A Theory of Wages, Interest and Profits (New York: Macmillan, 1908).
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How the Marginal Efficiency of Consumers' Wealth is measured
The simplest condition in which the law of value could act would be a state in which each article in the stock of consumers' goods was able to render one kind of service, and that only, to the man who used it. Let us, then, at first assume that this is the fact, and later let us modify the assumption, by taking into account the different kinds of service that a commodity can actually render.
It is a psychological fact that a person cannot receive, at any given time, more than one service of a particular kind. If at this moment you can confer on him one particular benefit, you cannot, at the same moment, confer on him a second benefit that is the exact duplicate of the first. There is a difficulty encountered, in appealing to a consumer with two services that are quite alike, which is akin to the physical difficulty that is experienced if one tries to make two material objects occupy the same space at the same time. Two utilities that are absolutely alike need, as it were, to get access to the same spot on the consumer's sensorium; and they cannot do it at once. There is no enjoying two absolutely similar pleasures together. They must come in turns, if they are to be enjoyed at all.
If any commodity were able to render only one service, then, for use within a particular period of time, a first unit of it would have a positive utility and a second unit would have a negative one. Any unit after the first would be in the way, and the possessor would take some trouble to get rid of it. Having a coat of a certain kind, he would have no immediate use for another made of the same goods and cut in the same pattern. If he possessed such a coat and had to use it at once, if at all, and if there were no secondary use that he could make of it, any tramp might have it for the asking.
Under such circumstances, there is no utility curve for this commodity. The line that expresses the usefulness of successive units of it will show an abrupt drop from a point that indicates a plus quantity to a point that indicates a minus one. Let positive utilities be measured upward from the line GH, and let negative utilities, usually called disutilities, be measured downward from that line. The line descending from A to the line GH measures the amount of service rendered to a consumer by one unit of the commodity A, and the line ascending from A' to the line GH measures the disutility of a second increment of it. In like manner, the lines from B, C, D, E and F measure the usefulness of the first increments of these things; and those ascending from B', C', D', E' and F' measure the disutility of the second increments. The curve that descends through A, B, C, D, E and F is the only utility curve that the case affords. It describes the diminishing amounts of different utilities arranged in a series. The line from each of these letters to the horizontal line GH measures the importance of each single service, which is the only one of its kind that the man is receiving.
Here we have the primary law of value. Of a series of utilities that are exactly alike, the first is measured by a positive quantity and all following ones by negative quantities. These negative quantities, moreover, grow larger as the number of similar utilities is multiplied: a second superfluous A is somewhat more in the way than is a first one, and a third is a still more annoying incumbrance. The same is true of successive B's, C's, etc.
We may, however, often get secondary services out of goods, by devoting them to uses so distinct from the services which they primarily render that we can use two similar commodities at once. The case of the rolls of bread cited by Professor von Böhm-Bawerk28 is an instance of this kind. Some of the bread is there used as food for the man who possesses it, and the remainder serves to feed his dog. There we obviate the psychological difficulty which arises from the impossibility of rendering two services to the same consumer at the same time by introducing a second sentient being, a four-footed consumer, for whose welfare the man is concerned.
We can usually get secondary services from goods, by ceasing to limit the time in which they must be rendered. One might, for example, have furnishings, decorations, equipage, etc., at a city residence and similar things at a country house. The owner would then use the two sets of commodities in turn, the real utility of one set consisting in saving the cost of transportation of the other set. In all cases like this, the second unit of the commodity is virtually a different thing from the first one. It may be commercially the same article, but it is a different consumers' good. It appeals to a different want, and may be of some use to the person who is already enjoying the first unit of the commodity.
If we assume that our commodity renders only one service, we do not vitiate the principle on which value is based, and we make a gain in simplicity of statement. In making such an assumption, we put out of view the subsidiary services that a thing can often render—we forget that the roll of Professor von Böhm-Bawerk's illustration can feed the dog, as well as the man. This is separating, in a bodily way, the utilities that the market actually appraises separately. The primary fact about such isolated utilities is that we can use only one of them at a time, for a second one is worth less than nothing. The figure on page 232, then, shows what goods have a part in fixing market prices—namely, those only which are indicated by the letter F of the diagram. Each article, let us say, costs a dollar. Since all of them except F afford consumers' surpluses, or "rents," they are not on the margin of consumption, and you may ask somewhat more than you do for any of them without losing this customer; but if you raise the price of the last thing that is within his purchase limit, he will stop buying it. A, B, C, D and E are not, in this man's case, price-making articles.
How, then, do these commodities get their market value? Somewhere in society there obviously must be a point at which the sale of these things will stop, if the price becomes higher than it is. There are, in fact, a number of such points. There are men in whose scale of consumption E, for example, is a marginal article. The price of E is made to be what it is, in order that these men may buy it, for their purchases are needed to carry off the supply of it. There are, again, other men to whom D is a marginal commodity; and there are those to whom, respectively, C, B and A are marginal. For each commodity, separately considered, there is a group of purchasers who will cease to buy the article, if it becomes more costly; and this group of men is, therefore, the social price-making class for this commodity. It is to insure the patronage of this class that the makers of the article put the price where it is.
Now tie these articles together, in different combinations, and sell the entire bundles. Let one combination contain all the utilities; let another contain A, B, C, D and E; let a third contain A, B, C and D; let a fourth contain A, B and C; and let a fifth contain A and B. Let A stand alone and be separately procurable. How is the law of value affected by this bunching process? Does the selling of A, B, C, D and E in the same bundle with F give to these things any power over prices that they did not have before? Not at all. F is still the sole price maker, in the case of the men who buy it. The man whose scale of consumption already contained all the articles, to and including F, will buy them all, as he did before; and of them all only F will, by the amount of its utility, act in adjusting values.
If F becomes dearer, this purchaser will not buy the bundle of goods containing it: be will buy only the bundle that contains the other articles, and E will now be the thing procured by his marginal purchase. All the men in his economic status will do this; and the demand for the combinations of goods terminating with E will be quickened, while that for the bundles which have F, in addition to these things, will be slackened. Production will adapt itself to the changed demand. More combinations without F and fewer with F will be the result. The net effect is precisely what it would have been, if each article had been sold by itself. A rise in the price of F has caused the men with whom F was a marginal article to cease buying it. A return of the price of F to its former level would cause them to resume their purchases of it. The price of F, in fact, adapts itself to the utility that this article has in the want scale of this class of men.
The price of E is regulated in a similar manner, but the regulating is accomplished by a different set of purchasers. There is a class of men to whom E is the marginal article; and a rise in the price of it would cause the members of this class to stop buying it. They do this in the way already described, by ceasing to take the bundles of goods containing E and taking instead those having D as the least needed or marginal article. Restore the former price of E, and this class of consumers will renew their habit of purchasing the combination containing it. This class, then, is the one whose estimate sets the market value of E. Another class of men similarly do the price making for D, since this is their marginal commodity. For each article, in short, one class of persons is in the strategic position, at the point in the economic society where values are determined. The estimates that members of this class may make of the utilities of other articles have no direct influence on values.29
Now we are ready to see how values are in reality adjusted. Every article, except one of the poorest and simplest kind, is a composite of different utilities, and can render various unlike kinds of service at once. It is only for the sake of these services that it is wanted or bought. Utilities, as we have said and as we cannot say too emphatically, are all that the market takes account of in fixing values. Commercial dealing has its way of measuring the importance of each specific service that an article can render, and of fixing the value of it so as to make it express these measures. In every such commodity there is a marginal utility, and this is the only one that counts in fixing the price of it. Every commodity, except the poorest and cheapest that can be made, is, in effect, such a bundle of service-rendering elements as we have just described. The marginal element in the bundle has a direct influence on prices, but the other elements have none.
For example, let A, B, C, D, E and F represent, not separate articles, of which each can render one service, but separate utilities in one article of a high grade. There are six different things that this article can do for a man who uses it; and, as the services are dissimilar, they can be rendered at the same time. A is the most important of these utilities, or service-rendering powers, and F is the least important. F is, then, for the time the only price maker. If this article, with all these qualities, becomes more costly, buyers will cease to take the article which has that quality and will content themselves with the one that is of the next lower grade. They will, in other words, cease to buy a bundle of utilities including all from A to F and will buy instead the bundle that includes the list ending with E. The demand for the utility, F, is thus slackened, and the price of that particular value element tends to fall.
That this is no bit of pure imagination, may be seen by examining the workings of the market for any kind of goods of high quality. Our illustration is, in fact, far from making our theoretical statement actually as subtle as is the working of demand and supply in the commercial world. Unerringly does this process single out the value elements in goods and adjust prices, in all cases, by appraisal of the marginal element in them.
Here, for example, is a canoe that a man keeps, for his recreation, in a lake in the wilderness. It is a composite article; and, if we were to analyze it into the elements that give it value, we should find that, for all economic purposes, it virtually consists in a series of utilities. This series of economic qualities, named in the order of their importance, would stand somewhat as follows:—
Here are five distinct services that the sailing canoe renders, and of them all the first is the most important. A means of floating is what the man absolutely needs, if he is to entrust himself at all to the waters. The capacity to sustain the man on the surface of the lake is, then, the primary utility of the canoe. If the man embarks on the water at all, there is no limit to the "subjective value" that he would assign to this quality in the thing that he uses to sustain him. Though this thing were only a dead tree rolled into the water, the one utility that it has is greater than is any other utility that the best canoe can possess. Nothing whatever in the finished and graceful craft is as important to the owner as that element in it which is nothing more than the equivalent of a floating tree. The quality that is next in importance is power to move, and this a smooth log possesses. The third is the increased commodiousness afforded by the dugout, the next is the speed possessed by the well-shaped canoe with its sail, and the last is the elegance of the handsomely shaped and decorated vessel.
Figuratively speaking, in a very good canoe there are a dead tree, a log, a dugout, a convenient sailing boat and an elegant one; for the qualities of all these things are massed in the one craft that a sportsman actually procures. We need, however, to see clearly that only the last of these qualities is, in the economic sense, a final utility and that the whole boat cannot be such. The boat in its entirety includes utilities of every grade. For them all the owner may have given seventy-five dollars; but he would, perhaps, have given a thousand, if he had paid what would measure the individual importance of the various utilities. The power of the canoe to keep him afloat would be worth five hundred dollars to him, if he could not have it for less. The power to move to and fro would be worth three hundred. Carrying power counts for one hundred dollars, speed of movement for seventy-five and decoration for twenty-five. These sums represent what he would give, if he had to do so, for the various utilities in this commodity. If this man were the marginal purchaser of this whole commodity, a thousand dollars would then be the price of it.
The last quality that the boat possesses is a final utility in the true sense. If the decoration of this vessel cost thirty dollars, the fisherman would buy a less ornate canoe. The demand for decorated vessels would thus be reduced, and the demand for vessels of the less ornate type would be increased. More canoes of the inferior kind would be made, and there would be fewer of the superior kind. The net result would be a reduction in the output of that product which consists in utility number five in the series. As many canoes would be made as before, but they would be without the special decoration that constitutes the final utility in the canoes of the highest quality. In canoes costing seventy-five dollars, this utility is clearly the only one the measure of which is a gauge of price.
How, then, do the other utilities in the boat get their market valuation? There is a class of persons to whom the fourth utility in the canoe, its speed, is the final one. They buy boats of the fourth grade instead of those of the fifth, doing without the decorations. The amount that these men spend, in order to insure a boat that will sail by some points faster than another would do, yields to them, in pleasure, a result that is worth just what it costs. The floating power of the boat and its other intra-marginal qualities are, however, worth to them more than they cost—they yield a "consumers' rent," or a gain that exceeds the gain that can be had by a marginal purchase. To this class of men, therefore, only the fourth utility in the canoe is a price-making one. In consequence of the demand of this class of persons, this utility may bring twenty dollars in the market.
There is, likewise, a class of persons to whom the third utility in this composite article is marginal; and these men are the consumers whose demand sets the market value of this third utility. They sacrifice speed, contenting themselves with comfort; and their demand may make this utility worth fifteen dollars. There is, again, a class of buyers who fix the price of the second utility—say, at ten dollars—and another of those who fix the price of the first utility—say, at five dollars. If there are five distinct services rendered by such a pleasure craft as we have selected for illustration, it takes five distinct classes of persons to fix the value of it in the market. The law of final utility works as it would if each service-rendering power possessed by the boat were a distinct article. To all intents and purposes, the different utilities are different articles tied in bundles, some of which contain all five of the articles, some four, some three, etc. To no one consumer are all these virtually different things final utilities. A bundle, as a whole, is never a final unit of any one's consumers' wealth; but each element in it is a final utility to some class, and it is that class only whose mental estimate of it fixes its price. There are, then, five prices in the canoe. Expressing the values of the five different services which the canoe renders, they are, respectively, twenty-five, twenty, fifteen, ten and five dollars. The entire canoe, then, brings seventy-five dollars in the market.
Make watches dearer than they are, and the man who pays a hundred dollars for a watch will not go without one. He will buy one that formerly sold for ninety dollars, and will forego something in the way of ornamentation. Another class will take the grade that lately sold for eighty dollars, and will forego something in the way of accuracy. Each class will give up, not watches, but something in watches. A certain class that formerly bought dollar watches will, however, give them up altogether, since there is no cheaper pocket timepiece to be had. To these men the lowest grade of watches, taken in their entirety, may be rated as final utilities. Their demand fixes the price of watches of this first and lowest grade.
Although this statement may seem to take us into a region of theoretical subtlety, there is no doubt of the substantial fact that the market acts in this analytical way, and that the commerce of the world takes a character which is the result of this action. Over the whole world the mills would be turning out different goods from those that they are now making, ships and railway cars would have different contents from those that they now contain, shops would everywhere have different goods in their windows and on their shelves and counters, if the law of final utility, as applied to goods in their entirety, determined the values of the goods. If we could make the theory of value, as it is commonly stated, rule actual markets, we should radically change the prices of all kinds of goods; and in doing this we should change the quantity of goods of each kind that is produced and used—we should effect a radical transformation in the economic life of the world. Goods of fine quality would then be, as a rule, many times dearer than they are.
If we were here undertaking to present at length the theory of value, we should lay great stress on the fact that value is a social phenomenon. Things sell, indeed, according to their final utilities; but it is their final utilities to society. In the social body as a whole, every utility in a costly article is somewhere in the position of a final utility. The shanty that, in an earlier illustration, we found was virtually contained in the palace, is a final utility to some members of society; and it is their valuation that fixes the market rate which that element in the palace commands. This quality in the palace we may call the first of the value elements that compose it. It is the lowest and cheapest of the economic constituents that compose the royal dwelling, and may be had for a hundred dollars. The difference between the shanty and a cottage may be regarded as the second value element; and this also has its marginal purchasers. If it were possible to make the shanty and then to transform it into a cottage, the two value elements would be produced at different times. What is actually done, however, is to build the cottage instead of building the shanty; and the second class of purchasers gauge by their demand the value of this substitution. It is in this way that a distinct class of buyers has the fixing of the actual price of each value element that enters into a palatial dwelling. If there are ten grades of watches, and if, therefore, it takes ten classes of purchasers to fix the value of a watch of the highest grade, each of these classes may be regarded as the social valuers and appraisers of the particular value element that, in the consumption of its members, is a final utility. In general, then, when fine articles—composite things, bundles of distinct elements—are offered to society, the great composite consumer, each element has somewhere in the social organism the effect of fixing a part of the total value. In no other way can the article, as a whole, get a valuation. To no individual are all its utilities final.30
[28.]See The Positive Theory of Capital, by Professor von Böhm-Bawerk, page 146.
[29.]A full study of value would, of course, notice many things that we here omit. One of them is, that a rise in the price of any article in the list would cause purchasers of the class first mentioned, if their incomes in money remained unchanged, to cease buying F. The demand for the marginal goods of each of the classes of purchasers is thus checked, wherever goods that are not marginal became dearer. Moreover, when a rise in price, either of F or of one of the other things, throws F out of the purchasing list, some article—say, G—may take its place. There is in this, however, nothing that calls for a modification of what we here affirm—namely, that each class of purchasers has its marginal article, that the utility of that article to them has a direct influence in the adjusting of the price of it, and that the utility to these persons of other things has no direct influence on values.
[30.]A point of much consequence is the fact that many articles have secondary uses, besides those for which they are primarily intended; and so more than one such article may be useful—but for different purposes—to a consumer at one time. The roll, in Professor Böhm-Bawerk's illustration, already cited, can be used to feed a dog as well as a man; and, if we regard the dog, not as a consumer, but as a commodity for his owner's consumption, the roll that appeases the dog's hunger is put to a distinct and subordinate use. Again, the sportsman whose hunting lodge is on one of the Adirondack lakes may keep boats on several others, for the sole purpose of saving the trouble involved in carrying boats from place to place. None of these boats, of course, except the least useful of them, can, in its entirety, be a marginal and price-making commodity. If the owner, for economy, relinquishes any of his boats, it will be this marginal one; and he will give for no one of them more than the marginal one is worth to him. Does that change the principle that we have just stated, that values rest on marginal utilities in goods rather than on goods in their entirety? Let us see.