Chapter VI: The Vicious Circle of the Austrians

The great and permanent service of the Austrian analysis is in the fact that it looks for the explanation of value--a psychical fact--in human minds. Its essential defect is that it takes only a small part of the human mind for that explanation. It makes two abstractions, neither of which is allowable: first, it abstracts the "individual mind" from its vital and organic union with the social _milieu_; and second, it abstracts from the "individual mind" thus abstracted, only those desires and thoughts which are immediately concerned with the consumption and production of economic goods--really, in the narrower analysis of "market price," only those concerned with the consumption of economic goods. Now it is at once conceded that a science, in explaining its phenomena, must ignore some of the relations which those phenomena bear to other phenomena. No science is called upon to link its facts with all the other facts in the universe. Some abstraction,[76] much abstraction, is legitimate and necessary. Where to draw the line is often a perplexing question, and I do not intend to lay down a general rule here. But there is one familiar canon which the Austrians have violated in drawing the line so narrowly as they have done: we must include enough in our _explanation_ phenomena to enable us to explain our _problem_ phenomenon in terms other than itself. Concretely, in explaining value, we have not solved the problem if the explanation assumes value. Rather, we are reasoning in a circle. Now have the Austrians done this? Wieser explicitly rejects the older circle in the _definition_ of value,[77] which made the value of A equal to what it would exchange for, B, the value of B being in turn equal to what it would exchange for, namely, A, and does point out that the value of a good must be treated as an absolute thing, independent of the particular exchange that happens to be made. He even works out an explanation of value in purely psychical terms,[78] as it would exist in a hypothetical individual economy, or in a hypothetical "natural" communistic society, where all men's wants are equally regarded. But when the Austrians come to the explanation of value as it exists in society as actually organized, the attempt to explain value in terms of individual desires for economic goods (or individual aversions in connection with their production) fails, and a circle again emerges: Why has the good, A, value? Because men desire it? No, that is not enough: the men who desire it must have other economic goods, i.e., wealth, with which to buy it. And why will these other goods buy it? Because they have _value_! For the power is proportioned, not to the quantity of their wealth in pounds or yards or other physical units, but simply to its amount in _value_.--The explanation of the value of these goods then becomes another problem, for which the Austrian analysis can offer only the same solution, with the same circle in reasoning, and the same problem of value at the end. This circle is made explicit in Wieser's treatment:--

The relation of natural value to exchange value is
clear. Natural value is one element in the formation of
exchange value. It does not, however, enter simply and
thoroughly into exchange value. On the one side, it is
disturbed by human imperfection, by error, fraud,
force, chance; and on the other, by the present order
of society, by the existence of private property, and
by the differences between rich and poor,--as a
consequence of which latter a second element mingles
itself in the formation of exchange value, namely,
_purchasing power_.[79] [Italics mine.]

This _purchasing power_ can only be either the inaccurate name of the English School for value itself, or else a consequence of the possession of goods which have value in the sense in which Wieser uses the term value, in the note on page 53 of his _Natural Value_ already quoted.[80] The circle becomes still more explicit in Hobson.[81] Hobson attempts to coordinate the Austrian theory with the older cost theory, and in this connection gives a table analyzing the forces that lie back of value, or "importance," from the supply side, and from the demand side. And there, apparently oblivious of the obvious circle, he places "purchasing power" as one of the ultimate factors on the demand side! If the Austrian analysis attempt nothing more than the determination of particular prices, one at a time, on the assumption that the transactions are, in each particular case, so small as not to disturb the marginal utility of money for each buyer and seller, and on the assumption that the values and prices of all the goods owned by buyers and sellers are already determined and known, except that of the good immediately in question, it is clear that it but plays over the surface of things. If it attempt more it is involved in a circle.

FOOTNOTES:

[76] The extreme abstraction of the utility school is made very clear by Pareto, _op. cit._, introductory chapter. He is concerned only with "the science of ophelimity" (p. 6), and ophelimity is a "wholly subjective quality" (p. 4).

[77] See _supra_, chap. II.

[78] But as later indicated (_infra_, chap. XIII), the apparent simplicity of his analysis simply covers up, and does not eliminate, the complexity of the situation.

[79] _Op. cit._, pp. 61-62.

[80] See _supra_, chap. II.

[81] _Economics of Distribution_, p. 81.