Chapter I: Economic Value (2)

Let us consider more narrowly the main factors affecting and explaining economic social values. Let us take, first, the simplest case, that of goods and services which minister directly to human wants, goods and services "of the first order." Goods of this sort would be oranges, bread, clothing, jewels. Services of this sort would be the services of the barber, the valet, the physician, the preacher, the teacher, the actor. I abstract, in discussing these values, from the complications that grow out of the friction in retail trade, and the existence of many customary prices, and prices fixed by other than economic values, in the case of teachers, or preachers. I shall concentrate attention upon such things as oranges, bread, clothing, and jewels. The _focus_ of the values of these things, and an essential condition of their existence, is their utility, that is to say, their power to satisfy human wants. Utility as used in economics does not mean usefulness in any moral sense. From the standpoint of the economist, whiskey and opium are as useful as bread, if they satisfy wants equally intense. And the economist is not concerned with the general utility of things considered in their totality. Air is more useful than jewels, but a carat of air is not as useful as a one-carat diamond. Air exists in such abundance that it does not need to be economized. Scarcity with reference to the extent of the wants involved is also essential to economic value. A combination of the ideas of utility and scarcity gives us the simple notion for which the formidable name of "marginal utility" has been devised. The marginal utility of a good to a man is the power the last, or "marginal," unit of the good which the man consumes has to give him satisfaction, or, viewed from the standpoint of the man, is the intensity of his desire[36] for, or of his satisfaction in, the final unit consumed. So far, our account of the value of the orange will seem perfectly acceptable to those accustomed to traditional discussions of the problem in the text-books. The difference is that many text-books stop at this point, leaving the impression that with the definition of marginal utility the whole value problem has been solved. For the social value theory, the conception of marginal utility is barely a starting point. Indeed, it is not even a starting point. We shall have to look both in front of it and _behind it_. Recognizing that marginal utilities to individuals are essential to economic values of consumption goods, we shall have to point out other things which are also essential, and we shall have to explain the factors determining these marginal utilities themselves.

The last point may be considered first. Men's desires are socially determined. Even the simplest, most instinctive, wants of human nature are, in their concrete manifestations, the product of social culture in overwhelming degree. Consider sex and hunger. We do not enjoy our food when our neighbors pick their teeth with their forks. This would not trouble a chimpanzee, whose _instinctive_ equipment in the matter of hunger is vastly more like that of a man than is the _actual_ hunger impulse of a highly civilized man like that of a savage. Civilized men will often starve rather than eat human flesh. Even when moral scruples are overcome, actual physical revulsion may prevent it. Men of different times and places wish food of special sorts, served in special ways. They wish to eat in the company of their fellows, but only of those fellows who can know and obey the ritual that is appropriate to the time and place. This is true of humble folk as of those who "dress for dinner." The ritual differs for the two sorts of people. But there is a spirit, a type of conversation, a code of etiquette, which prevails at the mealtime of virtually all men, and too serious digressions therefrom will take away the appetites of all. About the mealtime and the festal board have gathered a great host of traditions, ideals, and social activities, till they have become in verity an institution, and not the least important, by any means, of social institutions. Out of the simple instinct of sex, we have evolved many of the most precious things of our civilization, and between the sex impulse of the animal and the sex impulse of the gentleman who is seeking to marry the one woman in all the world, there is a difference so great that comparison between the two is difficult.

Here we have wants which grow out of the most elementary things in human nature, wants which are intense and universal, but which vary, in their concrete manifestations, enormously from age to age and from place to place. When we come to the wants which change more quickly, the fact that social factors dominate needs no arguing. Fashion, mode, custom, obviously account for the concrete wants that exist in clothing, ornamentation, amusement, housing, etc. If we wish to know what women will be wanting to wear six months hence, we do not go to women individually and ask them. We could not find out that way. They would not know. We go rather to the theatre, and study the stage and the boxes, to the famous designers of women's dress, to the metropolitan centres of various sorts, to the "radiant points of social control"[37] from which emanate the suggestions which pass in imitative waves through the women of the country in the next few months. The laws of imitation have been elaborately developed by Bagehot, Tarde, Baldwin, Ross, LeBon, Cooley, and others, and I content myself here with referring to their writings. The wants of women--and men--are socially given, grow out of a give and take, a social process. And in this social process, it is not true that each man counts one! Rather, a few lead, and many follow. There are centres of prestige which count overwhelmingly.

Certain wants are competitive.[38] Where social status depends on having as good a house as one's neighbors, and where social leadership depends on having a better house than one's neighbors, there is no limit to men's desires for better houses. With each improvement which one introduces, each feels the desire to improve, however contented he might have been had the other not made the improvement. To this we shall recur in our discussion of the origin of money, in explaining the value of gold.

So much for the human wants which stand as the focus of economic values in the case of articles of immediate consumption.

But, given these wants, and given their marginal intensities, we are only at the beginning of our explanation of the economic values of the consumption goods. It is again not a case of each want counting one, to the extent of its intensity. There are again, by virtue of the legal and moral values governing the distribution of wealth, _centres_ of power. The wants of some men count for nothing, however intense they may be. The pauper, the prisoner, the beggar--popular proverb about "beggars and horses" understands them, however much the "marginal utilitarian" may forget that their wants count for nothing.[39] The slightest whim, on the other hand, of the man who has inherited millions may count heavily in giving values to goods. For the explanation of the values of consumption goods, then, we need both the socially determined marginal utilities of individuals, and the socially determined _weight_ which these individuals have in our economic system. This _weight_ would involve a very elaborate explanation. Many factors affect it. We call attention here, however, especially to the fact that it rests in large part on the legal and moral values and institutions concerned with the distribution of wealth. Changes in the distribution of wealth are as important as changes in the wants themselves in giving the explanation of changes in values. The economic social values of consumption goods include not merely the values of those goods _to_ the individuals who consume them, but also the values _of_ the individuals themselves in the social scheme of things.

What of the values of instrumental goods, of goods of "higher orders," of labor, of stocks and bonds, of lands, of franchise rights and good will?

It is the one great contribution of the Austrian economists to have shown that the causation in value runs, primarily, from consumption goods to the goods of higher "orders" which are concerned with their production, and that these values of instrumental goods, etc., are derived and secondary values. The value of wheat is based on the value of bread, the value of land on the value of wheat. The value of the stock of United States Steel rests in part on the value of iron lands, which rests on the value of ore, which rests on the value of pig iron, which rests on the value of steel rails, which rests on the value of the service of transporting building materials, which rests on the value of a building, which rests on the value of the services which a dentist performs in an office in the building. This is the main line of causation. This is the first approximation which gives us a clue, without which we should find problems insoluble. But is it not clear that this cannot be the whole story? At every step complications enter. The whole thing cannot be got out of the value of the dentist's services, and the other consumers' goods and services, which are indirectly aided by the property to which title is given by ownership of U.S. Steel stock; nor is the value of the stock to be fully explained by the value of the property to which it gives title.

At every step, we meet the complication that men must estimate and calculate, for one thing. And rarely indeed can men see all the steps, the end from the beginning. Take first a very simple case, wheat land. The value of the wheat land of to-day rests on the value of wheat, but it is the wheat of to-morrow and for many years to come; the wheat of to-morrow rests for its value on the value of the bread of the day after to-morrow. Sometimes the differential between goods at two consecutive steps in the productive process is pretty constant. Wheat and flour vary pretty closely together. The differential is not strictly fixed even there. But bread and wheat land have a much looser connection in their variations. If land could produce no wheat or corn or other good that would satisfy human wants, and if it could not itself satisfy human wants, it would ordinarily have no value.[40] But the connection between the value of the bread and the value of the land is loose and uncertain, while the connection between the value of the land and the intensity of the wants actually satisfied by the bread produced from it, is absolutely _nil_. Whether the bread saves a starving man or feeds the pet pigeons of a millionaire, is a matter of indifference so far as the value of the land (or of the bread) is concerned.

We take the values of consumption goods, and break them up, attributing part to the labor that immediately produced them, part to the raw materials that entered into them, part to the machine that fashioned them, and so on. We then break up the value attributed to the raw material, attributing part to the labor that worked in producing it immediately, part to the machine that fashioned it, part to the rawer material of which it was made. And so with the values of the machines. Ultimately we get back to the values of labor, or of land, or of securities giving title to complexes of lands, machines, etc.--values which we do not further break up. But at every step, we find additional factors. We find these derived values becoming independent, substantial, standing in their own right. Moral and legal values affect them directly, as in the case of patriotic support of government securities, moral antagonism to the securities of the Distillers' Securities Corporation, or the influence of court decisions, legislation and elections on security values. Such values rest, in large degree, on the massing of _beliefs_ and hopes, not concerned with specific satisfactions of wants, but with the existence of _future_ economic values. These beliefs and hopes again have their social explanation. It is not a case where each man counts one. There are centres of prestige and power, bankers and financial magnates, whose opinions and decisions count heavily, and waves of optimism and pessimism, which affect the whole group. We shall discuss these matters more fully in connection with the analysis of credit, at a later point of our study. For the present, it is enough to point out that the whole thing cannot be explained on the basis of the values of consumers' goods, and that the values of consumers' goods are only in small part explained by the intensities of the wants they serve.

In summary: Economic value is the common quality of wealth, by virtue of which it is possible to compare divers kinds of wealth, and treat wealth quantitatively, getting ratios of exchange, sums of wealth, etc. Value is a quantity, _i. e._, a quality which has degrees of intensity. Ratios of exchange are ratios between values. Price is a particular sort of ratio of exchange, namely, a ratio in which one of the terms is the value of the money-unit. Prices correctly express values on the assumption of the fluid market, and on the assumption that the value of the money-unit does not vary.

The value quality is psychological in character. It rests in human minds. But not in the minds of individuals thought of separately. It is a complex of many individual mental activities, highly institutionalized, and including legal and moral values, hopes and beliefs and expectations, as well as the immediate intensities of men's wants for consumption goods.

The ultimate test of scientific theory must be practice. If a theory aids in manipulating facts, if it leads to the discovery of ways of doing things which are better than old ways, if it solves problems which have hitherto remained unsolved, or carries the solution of problems farther than has hitherto been the case, it is a good theory. It need not be the best possible theory. It need not be a final theory. The chief claim for the present theory of value is that it not only unlocks all the doors that earlier theories have unlocked, but also others which have resisted the old keys. The man who goes into the modern stock market armed with marginal utility and the quantity theory is like the man who would fight Hindenburg with bows and arrows. Bows and arrows are effective in the hands of expert archers, and the great figures in the history of economics have done wonderful things with marginal utility, "real costs," and the quantity theory. But the social value theory is offered as a better weapon.

The writer believes that the problem of the value of money has not been solved by the older theories of value. He believes that the social value theory will solve it. He proposes on the basis of the social value theory to make clearer the nature of credit phenomena, and to assimilate the laws of credit to the general laws of value. He proposes with the social value theory to bring together in a higher synthesis two divergent types of economic theory, the "static" and the "dynamic." He thinks that a rigorous and consistent application of the absolute concept of value will clarify confusions at various points in the general body of price theory, as the laws of supply and demand, etc.

He offers the social value theory as the only way of giving a _psychological_ explanation to the demand-curve, and a marginal _value_ explanation of marginal demand-_price_. Demand-curves are social value curves, on the assumption of the fixed social value of the dollar. The utility theory, as will appear in the chapter on "Marginal Utility," has failed to give psychological magnitudes corresponding to _any_ point on the demand-curve. In general, he offers the social value notion as the justification for the assumption of a quantitative value which, as we shall see, underlies the whole of our current price analysis.

The theory here outlined has been, as stated, developed and defended more fully in a previous book. For the rest, the author would have it judged by its usefulness or failure as a tool of thought in the investigations which follow.

NOTE. It has seemed best not to break the main course of the
argument of this chapter for the elaboration of one point on
which there has appeared to some critics to be vagueness in the
exposition of the social value theory in my earlier volume,
namely, the relation of social values to the individual values
of those who are moved by the social values. Social values have
as their function the guidance and control of the activities of
men. But men are also moved by their own individual feelings,
interests, and desires.

What is the relation between these two sets of factors? In what
has gone before, it has been made clear that social values
present themselves to the individual as opaque, objective
facts, largely beyond his control, to which he must adjust
himself. They represent the minds of other men, acting in
corporate and organic ways, putting pressure on him, or
offering him lures. Now the individual reckons with these
social values in the same way that he reckons with any other of
the facts affecting the economy of his life. He must adjust
himself to them in the same way that he must, if he is a
blacksmith, adjust himself to the technical qualities of the
iron he is manipulating. This does not mean that he is passive
before them, any more than he is passive before the iron. He
rather seeks to carry out his personal purposes and desires by
actively adapting himself to objective facts, whatever they be.
This means that different individuals will react in different
ways to the same social value. The fear of the law will keep
one man from burning dead leaves in the street where it will
not keep another man from murder. A given degree of social
pressure will make one man crease his trousers, while another
man will not even know that the pressure to crease one's
trousers exists! There are great individual variations in
responsiveness and sensitiveness to social pressure. In part,
these variations are due to inborn qualities. In larger part,
they are due to social education, and to social status. Thus,
the fact that one man will work all day in a ditch in response
to the lure of a dollar and a half, while another will not
work in the ditch for a hundred dollars a day, may rest in
slight degree on the greater inborn sensitiveness of the latter
to the physical pain of labor, but rests primarily on the fact
that the latter doesn't need the money, and has a social
standard, growing out of his class-associations and education,
which would make him ashamed to be seen in the ditch. Indeed,
we may think of the social standard in question as a social
value acting _on_ him, rather than _in_ him. He fears ridicule.
The same degree of social power, luring men toward the ditch,
exists in the dollar in each case, but the response is very
different in the two cases.

Later formulations of the utility theory and the labor cost
theory, as represented by the theory of Schumpeter, which we
shall discuss in the chapter on "Marginal Utility," give us, in
a scheme of purely static equilibrium, a picture of the
adjustment of the individual values to the social values. As we
shall see, they give us no account whatever of the social
values. They do not explain causation at all. But they do show
that there is a tendency for the individual marginal utilities
of consumption to become proportional to the social values of
the goods consumed by each individual; and for the individual
marginal disutilities in production to become proportional to
the social values of the rewards that come to producers. The
scheme is highly unrealistic. It has been emphatically
repudiated by Boehm-Bawerk, so far as the disutility equilibrium
is concerned. ("Ultimate Standard of Value," _Annals of the
American Academy_, Vol. V, pp. 149-209.) But it is worth
something, not as explaining social values or market prices,
but rather, as showing how individuals _conform_ to social
values and market prices. _Cf. Social Value_, pp. 43-44, n. 2,
and 148.

The theory that individual marginal utilities and disutilities
are proportional to market values is unrealistic enough, in the
light of the analysis of individual utilities which we have
given, even for the utilities. It is quite impossible to make
anything of importance of it from the side of individual
disutilities. The length of the working day is not fixed for
each worker by a comparison of his own labor pain with the
satisfactions he expects from his wages. It is fixed by
conditions largely external to him, and the whole group works
the same number of hours, with the machine. The law may limit
the working day. Trades-union effort may do it. Opportunities
for alternative employment may do it, for the labor force of a
factory as a whole. But the theory, which really must rest in
the notion that each individual has many options, and that the
working period is flexible, cannot mean much. The prosperity of
the laborer does more to limit the working day than does his
suffering!

The reactions of individuals as consumers or producers on the
social values modify the social values. But, as we have shown,
the primary explanation of the social values is not to be found
in the individual utilities and disutilities of those who react
to them. Utilities and labor pains are parts, but minor parts,
in the explanation of social values.