CHAPTER V

MARGINAL UTILITY AND THE VALUE OF MONEY

A good many writers have attempted to apply the marginal utility theory to the value of money. Among these, I may particularly mention Friedrich Wieser, Ludwig von Mises, Joseph Schumpeter, and, in America, David Kinley, and H. J. Davenport.

The marginal utility theory is ordinarily merely a thinly disguised version of supply and demand doctrine. As usually presented in the text-books, we have an analysis of the phenomenon of diminishing utility of a given commodity to a given individual, illustrated by a diagram, in which the ordinates represent diminishing psychological intensities. Often a money measure is given to these diminishing intensities, and the curve is presented as the demand schedule of a given individual. Then, with little further analysis, a leap is made to the market, and it is assumed that the market demand-curve, of many individuals, differing in wealth and character, is a utility-curve, and value in the market is "explained" by means of marginal utility. I need not here repeat my criticisms of this procedure.[62] It gives simply a confused statement of the doctrine of supply and demand. The analysis of utility which precedes the discussion of market demand is wholly irrelevant, and merely mixes things up. That such a conception is of no use in solving the problem of the value of money has been sufficiently indicated in the chapter on supply and demand.

Sometimes the contention is made that money is unique among goods in having "no power to satisfy human wants except a power _to purchase_ things which do have such power."[63] This contention, in Professor Fisher's view, precludes the application of the marginal utility theory to the problem of the value of money, and he makes no use of marginal utility in his explanation. Indeed, in the passage from which this quotation is taken, Professor Fisher says that the quantity theory of money rests on just this peculiarity of money. Not all writers who contend that money has no utility _per se_, however, have felt it necessary to give up the marginal utility theory as a theory of money, as we shall later see.

On the other hand, writers of the "commodity school" (or "metallist school"), writers who see the source of the value of money in the metal of which it is made, can apply the utility theory readily to the value of money, making the value of money depend on the marginal utility of gold, or the standard metal, whatever it is. To the writers of this school, it is incredible that anything which has no utility should become money. Money must be either valuable itself, or else a representative of some valuable thing. The value of money comes from the value of the standard of value, and that value may, so far as the logic of the situation is concerned, be as well explained by marginal utility as the value of anything else. Typical of this view is Professor W. A. Scott's discussion in his _Money and Banking_[64], though the emphasis there is not on marginal utility as the explanation of the value of the standard, but on the value (conceived of as an absolute quantity) of the standard as essential to the existence of money, and the performance of the money functions. Professor Scott attacks vigorously and effectively Nicholson's exposition of the quantity theory,[65] where the assumption is made that money consists of dodo-bones (the most useless thing Nicholson could think of). Most quantity theorists would share Nicholson's view that dodo-bones would serve as well as anything else for money--or, to put the thing less fantastically, that the substance of which money is made is irrelevant, that the only question is as to the quantity, rather than the quality, of the money-units, and the quantity of the money-units, not in pounds or bushels or yards, but in abstract number merely. For writers who seek the whole explanation of the value of money in its monetary application, and who see that money, _qua_ money, cannot administer directly to human wants, the view that Professor Fisher expresses, namely, that money has no utility, and is unique among goods in this respect, seems on the surface, to have justification. On the surface merely, however. Money is not unique among goods in being wanted only for what it can be traded for. Wheat and corn and stocks and bonds and everything else that is speculated in is wanted, by the speculators, only as a means of getting a profit[66]--they are remoter from the wants of the man who purchases them than the money profit he anticipates. Ginsing, in America, has value, though consumed only in China. And there are people, particularly jewelers, who often want money as a raw material for consumption goods. The difference is at most a difference of degree--and of slight degree indeed in the case of such things as bonds, which count on the "goods" side of the quantity theory price equation, but which really are in all cases remoter than money itself from human wants. Money really stands, for the purpose in hand, on the same level as any other instrumental good.[67] It does not give forth services directly, as a rule. Neither does a machine, or an acre of wheat land, or goods in a wholesaler's warehouse. Exchange is a productive process, an essential part of the present process of production. Money is a tool which enormously facilitates this process. It has its peculiarities, no doubt. One of them is--and money is not unique in this as will later appear--that it must have _value_ from non-monetary sources[68] before it can perform its own special functions, from some of which it draws an increased value. But there seems to me to be nothing in the contention quoted from Professor Fisher, to justify setting money sharply off from all other things, or to justify the view that marginal utility is inapplicable to the value of money, if it be applicable to the value of anything at all that is not destined for immediate consumption. I do not believe that the marginal utility theory is valid for any class of goods, not even those for immediate consumption. Where marginal utility theory is,--as in the conventional text-book expositions--merely another name for supply and demand theory, it is, as already shown, not applicable to the value of money, and it is useful in the surface explanation of market-prices of goods. But where marginal utility theory really seeks to get at value fundamentals, it is precisely as valid for money as for goods of other sorts--invalid, in my judgment, in both places, and for the same reasons in both.

Among the writers who would apply the utility theory to money, while still insisting that money, as such, has no utility, are Wieser, Schumpeter--who accepts Wieser's theory in its main outlines--and von Mises, who develops a notion very different from that of the other two.

Wieser's doctrines are set forth in two expositions, separated by five years, the second representing a considerable development in his thought, though resting in part on the first. The first is an address upon the occasion of his accession to the professorship at the University of Vienna, in 1904, and is published in the _Zeitschrift fuer Volkswirtschaft, Sozialpolitik und Verwaltung_, vol. 13 entitled, "Der Geldwert und seine geschichtlichen Veraenderungen." The second is a discussion, partly written and partly spoken, "Der Geldwert und seine Veraenderungen" (written), and "Ueber die Messung der Veraenderungen des Geldwertes" (spoken), in _Schriften des Vereins fuer Sozialpolitik, Referate zur Tagung_, no. 132, 1909. For the purpose in hand, a brief statement of one or two points would suffice to show the futility of Wieser's effort to get an explanation of the value of money _via_ marginal utility, but I think that readers may be interested in a fuller account of Wieser's doctrine, just because it is Wieser's, and so shall undertake to give a more systematic account of it. For brevity, in the exposition which follows, I shall refer to the first article as "I," and to the second as "II."[69]

Wieser holds that it is possible to have money wholly apart from a commodity basis (I, p. 45), citing the Austrian _Staatsnoten_ as a case in point. The reason for giving them up is that they do not circulate in foreign trade. Gold fulfills its international money-functions the more easily because of its various employments, but, after it is thoroughly historically introduced, as money, it could fulfill its money functions even if all these employments be thought away (46). Wieser gives no argument for this contention, and its validity will be examined later.[70] There are, he says, two sources for the value of gold, the money use and the arts use, interacting. Money is further removed from wants, not only than consumption goods, but also than production goods, which are but consumption goods in the seed. The latter are technically destined for definite goods. But money may be used to procure whatever good you please, in exchange. (The absoluteness of this distinction, also, may be questioned. Pig iron is almost as unspecialized as money in its relation to wants, since tools enter into the production of almost every service that human wants require, from surgical operations, through instrumental music, to wheat and horse-shoes. On the other hand, money is not the only thing by means of which other things are purchased. The extent of barter in modern life will wait for later discussion.[71] I do not think that _any_ sharp distinction between money and all other things is valid.) Wieser complains of the older economics which treats money as a commodity. And he contends that as money and commodities show a contrast in their essence (_Wesen_), they should also manifest a contrast in the laws of their values, even though the fundamental general theory of value applies to both (I, 47). He finds in representatives of money (_Geldsurrogate_) and in velocity of circulation of money, factors which are lacking in commodities. (Again a question must be interjected by the writer. Are not corporation securities essentially like _Geldsurrogate_ from this angle? And do not goods vary greatly in the number of times they are exchanged? What of the speculative markets, where more sales are made in an active market, at times, than there are commodities or securities of the type dealt in in existence?) The value of money is essentially bound up with the money-service. Wieser indicates that he is not talking about the subjective value of money, but its objective value, using the popular meaning of the term, which, he says, is not strictly logical, but is useful: the relation of money to all other goods which are exchanged, the purchasing power of money. This depends on goods as well as on money. In the second article, Wieser refines and elaborates his conception of the objective value of money, seeking to get away from the notion of relativity which is involved in the conception of purchasing power, and to get an absolute conception, which shall be a causal factor in the determination of general prices, rather than a mere reflection of them. It is to be a coefficient with the objective values of goods in determining prices. A change in general prices may be caused by a change in the value of money, and may be caused by a change in the values of goods (II, p. 511). In explaining this objective value concept (which, in its formal and logical aspects, is in many ways similar to the absolute social value concept maintained by the present writer, though, in the present writer's judgment, inadequately accounted for by Wieser, so far as a psychological causal theory is concerned) Wieser objects to the term, "objective value" which he had used in the earlier article. He prefers "volkswirtschaftlicher Wert." (This term is perhaps best rendered "public economic value," for present purposes, to distinguish it, on the one hand, from individual or personal value, and, on the other, from the social economic value concept of the present writer. At the same time, the connotation of a communistic or authoritive value must not be read into the term. It is, in its formal and logical aspects, really the most common of all the value notions, and may, best of all perhaps, be translated simply "value," or "economic value," or "absolute value." But for the present discussion, we shall call it "public economic value.") This public economic value, in the case of goods, is not a mere objective relation between a good and its price-equivalent. It is a subjective (psychological) value, like personal value. If one wishes to call it objective value, one is using objective in the sense of the general subjective as distinguished from the personal individual idiosyncracy (II, p. 502). The objective exchange value of goods (here Wieser uses "objektiver Tauschwert" as the equivalent of his "volkswirtschaftlicher Wert" above mentioned) is the common subjective part of the individual valuations leaving out the remainder of individual peculiarities ("der allgemein subjective Teil der persoenlichen Wertschaetzungen mit Verschweigung des individual eigenartig empfundenen Restes").[72] Wieser does not seem to me to think out clearly the distinction between absolute and relative value in this connection. He wishes to get something more fundamental than a mere relation between goods and money; he wishes a psychological phenomenon. He wishes to have a value of goods which can be set over against the value of money, the two, in combination, determining prices. And yet, he wishes somehow to get these out of the prices themselves. "We must seek a concept of the public economic value of money which, to be sure, proceeds from the general price-level (_Preisstand_), but which excludes from its content everything that comes purely from the value of goods" (II, 511). To the public economic value of money, however, Wieser gives no independent definition. The definition runs in terms of the values of the goods. "The value of money rises when the same inner values (_innere Werte_) of commodities are expressed in lower prices; it falls, when they are expressed in higher prices" (II, 511-12). "Inner value" of goods is not defined, but I take it that Wieser uses it as meaning essentially the same thing as the public economic value already described--an absolute value. (_Cf._ the usage of Menger and von Mises, _infra_, in this chapter, with respect to the terms, "inner" and "outer" value.) The definition is not strictly circular, perhaps, but at least it is pretty empty. Nothing appears to give the value of money, as distinct from its purchasing power, an independent standing. The reason for this will later appear. It should be noted, however, that the definition is not in terms of prices or purchasing power. Prices might remain unchanged, in Wieser's scheme, and yet the value of money sink, if the inner values of goods should sink.

The value of money, thus defined, is to be explained by marginal utility. But money has no marginal utility of its own, it has no subjective use-value, but only a subjective exchange value,--derived from the use-value (marginal utility) of the commodity purchased with the marginal dollar (II, 507-8). This subjective-exchange value of money is the personal value of money, as distinguished from its public economic value, and is the cause of the public economic value. The personal value of money changes (1) with the volume of one's personal income, (2) with the intensity of one's need for money, and (3) with market prices. The personal value of money is directly influenced and measured only in exchanges for consumption goods. Expenditures of other kinds affect it only indirectly by leaving less for consumption expenditures. The laborer always reckons with the personal value of money, but not the business man, in his business calculations. As in the case of goods, we pass from personal to public economic value (II, 509). The personal value of money depends on the relation between an individual's money income, and his real income, in terms of goods. The public economic value of money depends on the money income of the community as a whole, and its real income. (II, 516-18). Money income grows faster than real income, through the extension of the money economy. Money income is not, like real income, dependent on quantity. The mere extension of the money economy increases the volume of money income, lowers the personal value of money, lowers its public economic value, and raises prices. Witness the effect on a rural community of bringing it into the great market, where all costs are reckoned in money and rising costs compel rising prices. Hence, there is a tendency for the public economic value of money to sink, and this has been the historical fact (I, II, 519-520.)

Criticism of this theory is almost superfluous. There are elements in Wieser's discussion, not here presented, which have very considerable importance, and which will be presented in a later chapter when the criticism of the quantity theory is taken up. Wieser deals some heavy blows to the quantity theory. But his constructive doctrine presents the clearest possible case of the Austrian circle. The value of money depends, not on its subjective use-value, its own marginal utility--it has none. The value of money depends on its subjective value in exchange, the marginal utility of the goods which are exchanged for it. But these depend on prices. And prices depend, in part, on the value of money itself! This circle, present in every form of the Austrian theory which seeks a causal explanation of value and prices by means of marginal utility,[73] though often less obviously present, is here quite glaring. The distinction between volume of money income and quantity of money is, on the other hand, an important one, and will be emphasized when the quantity theory is taken up.[74] One further point in Wieser's doctrine calls for comment. It is strange indeed to find an Austrian seeing in a rise in money costs a _cause_ of a general rise in prices. The Austrian doctrine is rather that rising money costs are _reflections_ of rising general prices. Wieser's doctrine that the extension of the money economy to rural regions, compelling the farmer to reckon all his costs in money and so to raise his prices, has been adequately criticised by von Mises, who points out that Wieser sees only half the phenomenon; that eggs and butter are, indeed, higher in price in the rural region when it comes into contact with the city, but that they are correspondingly lower in the city from the same cause. On the other hand, the doctrine of costs is not the whole point in Wieser's notion of the extension of the money economy as a cause of higher prices, and we shall deal with the doctrine again, in a different connection.

By devitalizing the marginal utility theory, by stating it in such a way that it makes no causal assertions, and in such a way that it leaves the real value problem untouched, it is possible to free it from the circle just pointed out. Schumpeter does so state it.

Schumpeter's theory of value,[75] though he attributes it to Boehm-Bawerk, seems to the present writer to be essentially different. Boehm-Bawerk undertakes to explain the value (objective value in exchange) of each good by its _own_ marginal utility to different individuals, buyers and sellers of the good--indeed, by its marginal utility to _four_ individuals, the two "marginal pairs."[76] He sees at points that the prices of other goods are sometimes factors, making marginal utility give way to "subjective value in exchange," as the determinant of an individual's behavior toward a given good in the market--as in his much discussed overcoat illustration.[77] But Boehm-Bawerk never gets out of the circle which this reaction of the market-prices on the individual subjective values involves. Schumpeter seems to rise to a higher conspectus picture, which, in form, avoids the circle. His picture is that of a vast equilibrium, in which, instead of attributing the market value of each good to its own marginal utility, you explain the exchange ratios[78] of every good to every other good, all at once, by reference to a total situation: _given_ the number of goods of each class, given the number of individuals in the market, given the _distribution_ of each class of goods among the individuals, given the utility-_curves_ (not marginal utilities) of each good to each individual, an equilibrium will be reached, through trading, in which ratios between marginal utilities of each kind of good to each individual are inversely proportional to the abstract ratios (ratios of exchange) between the same goods, each measured in its own unit. The ratios are abstract ratios, between pure numbers, so far as the market ratios are concerned; the ratios in the mind of each individual are concrete ratios, between marginal utilities. The scheme, thus stated, says nothing as to the _causal_ relation between marginal utility and market ratios; it merely states certain _mathematical_ relations between each individual system of marginal utilities on the one hand, and the abstract market ratios on the other. By avoiding _assertions_ as to causation, it avoids a causal circle. In such a situation, marginal utilities and market ratios are, in reality, alike resultants, _effects_, of the given quantities of goods, distribution of goods, numbers of buyers and sellers, and individual utility-_curves_--not _marginal_ utilities. To this picture, one may add--what Schumpeter does not add--the curves showing time-preferences of each individual for each sort of good, and (an element which Schumpeter does include) the curves of _dis_-utility for the individuals who produce each kind of good. The system, it may be noted, is as good a proof of _real cost_ doctrine as it is of utility doctrine.

Such a picture, I submit, avoids the circle which is presented in all other formulations of the Austrian theory of value. I wish, however, to indicate its limitations as a theory of value, and the impossibility of any application of it to the problem of the value of money. (1) Its data are inaccessible: nobody could possibly know all the utility-curves and all the time-preference curves (and disutility of labor-curves, etc.) of all goods to all individuals in, say, the United States. To explain market ratios by utility-curves is a case of _ignotum per ignotius_, so far as practical application is concerned. Moreover, the scheme is so difficult to visualize that it is useless as a tool of thought--as one will find who tries to think it through, without the aid of higher mathematics, for ten goods, and ten persons, with unequal distribution of wealth, and different utility curves, time-preference curves, and disutility-curves for each kind of good to each individual. (2) The scheme must assume smooth curves and infinitesimal increments in consumption, which is a fiction so far as the individual psychology is concerned. Without this assumption, the point-for-point correspondence between individual and market ratios does not exist. It is only in social-value curves, or in demand-curves in the big market (which are social-value curves, expressed in money),[79] that you have, as a matter of fact, the right to smooth out your curves. (3) The theory must assume the frictionless static state, in which marginal adjustments are perfectly accomplished, and equilibrium really reached. Without this assumption, again the point-for-point inverse correspondence of market ratios and individual ratios fails. But this makes it quite impossible to apply the doctrine to any functional theory of the value of money, or to bring money in any realistic way into the scheme. As will be shown more fully in later chapters, money functions in bringing about just the absence of friction which static theory assumes. That is what money is _for_. The functional theory of money, therefore, cannot abstract from friction and dynamic change.[80] It is, of course, possible, on this scheme to pick out any one of the goods in the system, say the 1-1000th part of a horse, call it the "money-unit," and determine a set of money-prices. These "money-prices" are already given in the scheme in the ratios between the abstract numbers of this unit and the abstract numbers of the units of all other goods. But this is meaningless, so far as a theory of money is concerned. It abstracts entirely from the _differences_ in _salability_[81] of goods, on which the theory of money must rest. It gives us no clue to that part of the value of the money-article which comes from its money-functions.

(4) The theory has no bearing on the problems of supply and demand. Demand-curves are curves, not of utility, but of money-prices. They are concerned, not with a _system_ of ratios among goods in general, but with the absolute money-prices of particular goods, one at a time. The modern demand-curves and supply-curves, representing the demand and supply doctrine first made precise by J. S. Mill,[82] are concerned with the money-prices of particular goods, and the "equation of supply and demand"--amount supplied and amount demanded--gives an equilibrium in which only one price is determined. Austrian theory, in Boehm-Bawerk's hands, and in the hands of practically all adherents of the Austrian School, including Davenport,[83] has been offered as really bearing on the explanation of demand, and as giving a psychological account and explanation of the demand-curve. The scheme of Schumpeter has simply no bearing at all on this vital point. The equilibrium picture in which _all_ goods are involved supplies no data from which to construct any of the magnitudes above or below the margin of the demand and supply-curves of any given good. One reason why this is so will appear from the point made with reference to "money-prices" in the preceding paragraph. For Schumpeter's scheme, the significance of the article chosen as "money" would be as much a problem as anything else, when the conditions are laid down. It would vary in the process of reaching the equilibrium. Its ratios with all other things would, thus, fluctuate until the equilibrium was reached. But, as we have seen, in the chapter on "Supply and Demand," curves of supply and demand must assume a fixed significance of the money-unit. It may be further noticed, as marking off Schumpeter's scheme from supply and demand analysis, that in Schumpeter's scheme, the individual is the centre of interest, and his reactions _toward all kinds of goods_ is emphasized; whereas in supply and demand analysis, the _good_--one good--is the centre of interest, and the price-offers streaming toward it from all kinds of individuals is emphasized. The two bodies of doctrine are quite distinct.

(5) The theory has no bearing on the explanation of entrepreneur cost--money-outlay, "opportunity cost," alternative positive values, or what not. It finds no place for the modern cost doctrine. It does not in any way open the path to the Austrian theory of costs. Costs, for Austrian theory, as, in general, for modern theory, are reflections of _demand_ for the employment of the agents of production in alternative uses. Thus, it costs a great deal to raise wheat in Illinois, because of the rival demand for the land to produce corn. Labor costs are high in ordinary manufacturing, because of the rival demand for labor in the munitions factories, etc. As Schumpeter's theory can give no account of the _demand_ for labor in the munitions factories, it follows that it can give no account of the _cost_ of labor in the other factories. Instead, indeed, of giving us the modern cost doctrine, we see Schumpeter's scheme reviving the old _real cost_ doctrine, running in terms of sacrifices in production.[84]

(6) The foregoing paragraph gives emphasis to the point with which we started, namely, that Schumpeter's theory is not a _causal_ theory, but merely a theory which gives mathematical relations in a static picture. For the general theory of the Austrians, this real cost doctrine is anathema. Values are positive. The emphasis is put on positive wants, as _causes_ which guide and motivate industry. The _clue_ to all values is in the values of _consumption_ goods, which are in direct contact with the utilities which are the source of value. From the values of consumption goods, we _derive_ the values of production goods, labor, etc., which are goods of "second, third and fourth _ranks_" and whose values are merely reflected from the causal marginal utilities of the consumption goods they are destined to create. None of this causation is brought into Schumpeter's conspectus picture. On the contrary, with the bringing in of disutility of production, we have the doctrine of the earlier English School revived. The equilibrium picture is as good a proof of the one theory as of the other. If we assume the utility-curves constant, and allow the cost-curves to vary, then causation would be initiated by the cost-curves.[85]

(7) Such an equilibrium picture leaves untouched the vital question which any theory must answer which means to be of practical use in concrete situations: what are the real _variables_ in the situation, and what factors are constant? What causes are _likely_ to produce changes in market prices? The individual-utility curves, which in Austrian theory are commonly treated as the only variables, except quantities of goods,--in the strict static picture there are no variables at all!--are really, when conceived of as individual, as growing out of the mental processes of each individual separately, the most _constant_ factor in the situation. For, on the principle of the inertia of large numbers, each unit of which is moved by its own peculiar causes, changes in the utility-curves of one man will be offset by opposite changes in the utility-curves of another, and so the general system will remain much where it was. Of course, if a rich man changes his curve, a poor man's change will not offset it in the market, but this is to emphasize the _distribution of wealth_ rather than the utility-curves. It is only when you get changes of a sort that the individualistic psychology, and the "pure economic" explanation factors, of the Austrians find no place for, that you can predict a change in the general price-system. It is only changes in fashion or mode, in general business confidence,[86] in moral attitude toward this or the other sort of consumption or production, in the distribution of wealth, changes in taxes and other laws--causes of a general social character--that you can count on to produce important changes in values. Of course, changes in the adequacies of supplies would be taken account of on either interpretation.

(8) The scheme under consideration gives no value concept which the economist can make any particular use of. It gives only ratios between marginal utilities in the mind of the same individual, and abstract market ratios. It gives no _quantitative_ value, which can be attributed to goods as a quality,[87] a homogeneous quality of wealth by means of which diverse sorts of wealth may be compared, funded, etc. Such a concept is, however, necessary for the economic analysis, and Schumpeter is driven to creating substitutes for it of various sorts, notably _Kaufkraft_ and _Kapital_. _Kaufkraft_, as Schumpeter uses the term, is not derived from marginal utility, but is an abstraction from the idea of money. It is not a quantity of money alone, nor even of money and credit, but is a fund of "abstract power," which depends not alone on the quantity of money and credit in which it is embodied, but also on the prices of goods.[88] This _Kaufkraft_ is needed to give the causal "steam," the "motivating power," which the social value concept connotes, but which ratios in the market lack. Similarly, _Kapital_ is conceived of as an agent, a dynamic force, distinguished from accumulations of concrete productive instruments, by means of which the entrepreneur gets control of land, labor and instrumental goods.[89] Other functions of the quantitative value are shouldered on a hard-worked and unusually defined concept, _Kredit_, which leads Schumpeter into certain "heresies"[90] regarding credit, which are mostly harmless in themselves, but which will arouse misunderstanding and opposition. "_Praeter necessitatem entia non multiplicanda sunt_," and the social value concept, which covers by inclusion the notion of market ratio--market ratios being ratios between social values--and which does all the work that Schumpeter attributes to _Kapital_ and _Kaufkraft_, and most of the new work which he attributes to _Kredit_, is to be preferred,[91] if only on grounds of intellectual economy. "Capital" is then saved for more usual meanings, and economy in terminology is also effected. Schumpeter also departs, as shown, from the abstract market ratio notion in erecting a causal theory of value, in which "marginal utility" is used as the equivalent of a quantitative value, and is traced by the Austrian imputation process back to the original factors of production. He even speaks of labor as having "utility," whereas labor,[92] unless used in domestic service, has, not utility, but only value.

In the marginal utility scheme above outlined there is no place for money, on the assumptions laid down. It is a scheme of barter relations. The utilities which come into equilibrium are not subjective-exchange-values, which, as Schumpeter, with Wieser, contends, are the only subjective values money has, but are real subjective use values--marginal utilities. The scheme, assuming as it does, perfect exchangeability of all goods, with infinitesimal increments in consumption, has no place for money. There really is no money service to be performed. Schumpeter, indeed, speaks of money as a mere "Schleier," which does not touch the essence of the phenomena, and such it is on his assumptions. In a similar situation, Professor Irving Fisher gives up the effort to find a psychological explanation of the value of money,[93] and offers the quantity theory as a mechanical principle, additional to the psychological barter scheme. Schumpeter, however, does lip service still to the need for a psychological explanation. His answer runs in Wieser's terms--indeed, he attributes it to Wieser. The _Preis_ of money[94]--Schumpeter does not use Wieser's absolute value concept, but lets his value of money run in purely relative terms--the price of money in goods depends on the subjective value of money. This subjective value of money rests on the experience of each individual in making purchases--rests on the prices of consumption goods, determined by the relation between real income and money income. The circle is as clear as day.

Ludwig von Mises sees this circle, and tries to avoid it. In von Mises there seem to me to be very noteworthy clarity and power. His _Theorie des Geldes und der Umlaufsmittel_ is an exceptionally excellent book. Von Mises has a very wide knowledge of the literature of the theory of money. He has a keen insight into the difficulties involved. He recognizes fully that, so far, the utility school has failed to solve the problem (119-120). His theory is as follows: Individual valuations (93) constitute the basis of the objective exchange value of money. But while for other goods, subjective use-value and subjective exchange-value are different concepts, for money the two coincide, and both rest on the objective value of money (94). This seems to be our old circle in unmistakable form, but Mises thinks he has an escape, as will later appear. No function of money is thinkable which does not rest on its objective exchange value. The subjective value of money rests on the subjective use-values of the goods for which it can be exchanged (95). Money, at the beginning of its money-functioning, must have objective exchange value from other causes than its money-function, but it can remain valuable, even though these causes fall away, exclusively through its function as general instrument of exchange (111). He gives no argument in support of this contention, but refers with approval to Wieser (_loc. cit._), and to Simmel (_Philosophie des Geldes_, 115ff.). Hence, the important consequence that in the value of money of to-day a historical component is contained. Herein is to be found a fundamental contrast between the value of money and the values of other goods (119-120.). The individual valuation of money rests on the objective exchange value of money of _yesterday_. This individual value of money is the explanation, on the money side, of the objective value of money of to-day. Going back, step by step, you come ultimately to the subjective use-value of the money-stuff in its non-monetary employment--a temporal _regressus_. This opens the way to a theory of the value of money based on marginal utility. This avoids the circle of explaining the objective value of money of to-day by the subjective exchange value of money of to-day, which in turn rests on the contemporary objective value of money.

I find this particularly interesting, since it employs a device which had once suggested itself to me as a means of escape from the Austrian circle, but which reflection led me to abandon. I have discussed the whole matter in my _Social Value_, and therefore venture a quotation from that book.[95]

"How are we to get out of our circle:[96] The value of a good, A, depends, in part, upon the value embodied in the goods, B, C, and D, possessed by the persons for whom good A has 'utility,' and whose 'effective demand' is a _sine qua non_ of A's value? The most convenient point of departure seems to be the simple situation which Wieser has assumed in his _Natural Value._[97] Here the 'artificial' complications due to private property and to the difference between rich and poor are gone, and only 'marginal utility' is left as a regulator of values. But what about value in a situation where there are differences in 'purchasing power'? How assimilate the one situation to the other?

"A _temporal regressus_, back to the first piece of wealth, which, we might assume, depended for its value solely upon the facts of utility and scarcity, and the existence of which furnished the first 'purchasing power' that upset the order of 'natural value,' might be interesting, but certainly would not be convincing. In the first place, there is no unbroken sequence of uninterrupted economic causation from that far away hypothetical day to the present, in the course of which that original quantity of value has exerted its influence. The present situation does not differ from Wieser's situation simply in the fact that some, more provident than others, have saved where others have consumed, have been industrious where others have been idle, and so have accumulated a surplus of value, which, used to back their desires, makes the wants of the industrious and provident count for more than the wants of others. And even if these were the only differences, it is to be noted that private property has somehow crept in in the interval, for Wieser's was a communistic society. And further, an emotion felt ten thousand years ago could scarcely have any very direct or certain quantitative connection with value in the market to-day. Even if there had been no 'disturbing factors' of a non-economic sort, the process of 'economic causation' could not have carried a value so far. It is the living emotion that counts! Values depend every moment upon the force of live minds, and need to be constantly renewed. And there would have been, of course, many 'non-economic' disturbances, wars and robberies, frauds and benevolences, political and religious changes--a host of historical occurrences affecting the weight of different elements in society in a way that, by historical methods, it is impossible to treat quantitatively.[98]

"What is called for is, not a temporal _regressus_, which, starting with an hypothesis, picks up abstractions by the way, and tries to synthesize them into a concrete reality of to-day, but rather, a _logical analysis_ of existing psychic forces, which shall abstract from the concrete social situation the phases that are most significant. This method will not give us the whole story either. Value will not be completely explained by the phases we pick out. But then, we shall be aware of the fact, and we shall know that the other phases are there, ready to be picked out as they are needed for further refinement of the theory, as new problems call for further refinement. And, indeed, we shall include them in our theory, under a lump name, namely, the rest of the 'presuppositions' of value.

"Our reason for choosing a logical analysis of existing psychic forces instead of a temporal _regressus_--instead, even, of an accurate historical study of the past--is a two-fold one: first, we wish to cooerdinate the new factors we are to emphasize with factors already recognized, and to emerge with a value concept which shall serve the economists in the accustomed way--it is illogical to mix a logical analysis with a temporal _regressus_. But, more fundamental than this logical point, is this: the forces which have historically _begot_ a social situation are not, necessarily, the forces which _sustain_ it. The rule doubtless is that new institutions have to win their way against an opposition which grows simply out of the fact that we are, through mental inertia, wedded to what is old and familiar. We resist the new _as_ the new. Even those who are most disposed to innovate are still conservative, with reference to propaganda that they themselves are not concerned with. The great mass of activities of all men, even the most progressive, are rooted in habit, and resist change. When, however, a new value has won its way, has become familiar and established, the very forces which once opposed it now become its surest support. Or, waiving this unreflecting inertia of society, as things become actualized they are seen in new relations. What, prior to experiment, we thought might harm us, we find beneficial after it has been tried, and so support it--or the reverse may be true. The psychic forces maintaining and controlling a social situation, therefore, are not necessarily the ones which historically brought it into being."[99]

Since the foregoing was written, I have found that another theorist, Professor Alvin S. Johnson, had also given consideration to the same idea, as a means of escape from the Austrian circle. Professor Johnson refers to the notion briefly in his review of _Social Value_ (_Am. Econ. Rev._, June, 1912, p. 322), holding that the doctrine is logically tenable, though rejecting it on psychological grounds. "The value of a thing newly created can be explained only with reference to values antecedently existing." That there is a continuity in the value system, as in the whole social-mental life of men, I should be the last to deny. But it is not the antecedently existing values, _as_ antecedently existing, that give value to the new piece of wealth. The antecedent values function only as _persisting_, as _contemporary_ social forces. We do not find the motivating power of existing values in the ashes of burnt out desire! It seems to me very essential to distinguish the two methods of approach to the problem. It is possible to state a historical sequence--if you know it,--showing how values have historically come and gone. But for an equilibrium picture, of the sort that our price theory demands, where there is a mechanical balancing of contemporary factors (as in Marshall's balls in the bowl illustration), such an account is of no use. Existing social forces have their history. But, at a given moment, they are what they are, and what they _were_ at a different time adds no ounce of weight to the power they now exert. If a quantitative account of value is called for--and price-theory is essentially concerned with the measurement of values--we must bring measure and measured into contemporary balance. The historical account is one thing; the cross-section analysis is another. "Static theory" is a mechanical abstraction from the organic cross-section picture, which, by making it superficial, is able to make it exact.

It seems to me that this distinction must be kept clear if progress in the science is to be made. At every point, divergent conclusions are reached if the two view-points are merged. The distinction between statics and dynamics is, in a general way, the same as the distinction here made between the historical and the cross-section view. It is no answer to the Ricardian theory of land-rent for Carey to point out that historically, in new countries, the uplands are cultivated first, and the more fertile river-valleys later. Ricardo is talking about statics, and Carey about dynamics. Carey does not answer Ricardo, because he is talking about a different problem. The utility theorist especially has no right to leave the static view-point. All the elementary laws on which the utility theory is based are static laws. The law of satiety, of diminishing utility, is a static law, and the utility theorists are careful to point out that it holds only for an individual at a given time. It rests on nerve fatigue. Give the nerve time to rest, and utility does not sink. On the contrary, the dynamic law of wants is that wants expand. As old wants are satisfied, new wants arise, so that, in the course of time, _marginal_ utilities do not sink--the competition of new wants forces up the margins of the old wants. Moreover, with time, tastes change, habits are formed, and the same wants may grow more intense--as in the case of olives or whiskey. All this has been seen by the creators of the utility theory. Thus, Wieser: "The want as a whole of course retains its strength so long as a man retains his health; satisfaction does not weaken but rather stimulates it, by constantly contributing to its development, and, particularly, by giving rise to a desire for variety. It is otherwise with the separate sensations of the want. These are narrowly limited both in point of time and in point of matter. Anyone who has just taken a certain quantity of food of a certain kind will not immediately have the same strength of desire for a similar quantity. Within any single period of want every additional act of satisfaction will be estimated less highly than a preceding one obtained from a quantity of goods equal in kind and amount." (_Natural Value_, p. 9.) A similar statement is in Taussig's _Principles_ (I, 124), "In such cases, however, the tastes of the purchasers may be said to have changed in the interval. At any given stage of taste and popularity, the principle of diminishing utility will apply." Illustrations could be multiplied.

It is true that _future_ marginal utilities come into the utility theory scheme, but they come in, not as future utilities, but as "_present worths_" of future utilities, or as "present anticipated feelings" in Jevons' phrase[100] suffering a discount, usually, in the process. But I am not aware of any writer among the founders of the utility school, who has sought to bring past utilities into the scheme. The past is dead. Its effects persist in the present only in present processes. A _memory_ is a _present_ psychological fact.

Consider further. Is it the prices of yesterday that determine the subjective value of money to an individual, if the prices of yesterday are different from the prices of to-day, _and the individual knows it_? In so far as we have the clear, intelligent economic mind, seeking its interests--and the marginal utility theory assumes this type of mind--the tendency is to bring all the factors in the problem into the present. If prices change slowly, so that the individual can count on essentially the same situation to-day that he had yesterday, doubtless he will not take the trouble to recast his value system. There is a tremendous lot of trouble in bringing about, in the individual's mind, the rational equilibration of values--trouble which the Austrian theory commonly abstracts from, but which should be recognized in the analysis, and accorded its own marginal significance in the scale. To throw the emphasis on inertia, however, and to assume that men do not readjust their margins to meet changed conditions, is to depart from the fundamentals of the Austrian theory. If the price-situation is a rapidly changing one, men do rapidly readjust their estimates of money. If money is fluctuating rapidly in value--as, say, during a time when there is depreciated paper money, whose future depends on military events, the adjustments may be very rapid indeed. I quote the following from the news columns of the _New York Times_, of April 4, 1914, p. 2: "Jaurez, Mexico, Apr. 3.--After the hysterical outbursts last night that greeted the news of the fall of Torreon, this city was preternaturally calm to-day.... The silent gentleman with the dyed mustache who spins the marble at the roulette wheel in the Jaurez Monte Carlo, conducted by Villa's officers for the benefit of the rebel treasury, seemed the only person who was not excited. When the crowd of players suddenly deserted him on the sound of the bugle call of victory, he gave the marble another whirl from sheer force of habit, but none returned.... In an hour, however, play was faster and more furious than ever, for holders of Constitutionalist money early realized that their currency had suddenly increased in value, and that they were somewhat richer than before." I do not question the fact, however, that men are slow in making calculations, and that society is often unconscious of changed conditions, and often readjusts less rapidly than occasion requires. There is a vast deal of inertia, of blind habit, of custom, etc. But emphasis on these factors is not marginal utility theory! Factors like these are emphasized by a functional psychology, and by a social psychology--not by an individualistic psychology which rests on the assumption of rational calculation. It is not _past_ utilities that explain present subjective values of money when these subjective values are out of harmony with the present market facts, but rather _present_ habits, present customs, present disinclination to readjust, etc. There is a big difference, psychologically, between the mental processes through which one arrived at one's present state of mind, and the present state of mind itself. The original "commodity utility" of the money metal, in the far away time before the money use affected its value, is surely no longer a factor. Certainly not on the basis of an individualistic psychology of the Austrian type. All the individuals who experienced that original utility are long since dead! Not even memories of the original utilities persist.

When writing the passage in _Social Value_, quoted above, I did not suppose that I was dealing with a notion that anyone else would ever take seriously. My purpose in discussing it was chiefly to throw into sharp relief the contrast between the historical and the cross-section viewpoints, and to make clear that my own theory was based on analysis of existing psychological forces. Since finding, however, that two writers for whose views I have so much respect have independently developed the same idea, and have taken it seriously, I have felt it worth while to give it this extended consideration.

Von Mises, like Wieser, needs an absolute value of money in his thinking. He does not call the concept by that name, but, following Menger[101] speaks of the "inner objective value of money" and the "outer objective value of money." (Mises, p. 132.) The latter is the purchasing power of money, a relative concept, exactly expressed in the price-level. The inner objective value of money is designed to cover the causes of changes in prices which originate on the money-side of the price relation alone.[102] This inner objective value of money performs the same logical function in the theory of money that the absolute social value concept of the present writer does, even though the psychological explanation lying behind it is very different.

Von Mises considers the quantity theory at length, noting a number of defects in it, chief of which is the fact that it has no psychological theory of value behind it, that it does not account for the _existence_ of the value of money, and at most gives a law for _changes_ in a value whose existence is taken for granted. The details of this criticism, however, need not be here presented. The quantity theory is to be treated in detail at a later point of our study.

The writer who has most definitely stated the relation of utility to the functions of money, is David Kinley (_Money_, ch. viii). He would explain the value of money, by (a) its utility as a commodity, and (b) its utility in the money-employment, the employments reaching a marginal equilibrium. The utility of the money metal in its commodity use calls for no analysis. But what is meant by the utility of money as money? Where the writers so far discussed have denied that money as money has any utility, Dean Kinley finds a utility in the money-function itself: money facilitates exchange, and exchange, by transferring goods from those who do not need them to those who do need them, increases the utility of those goods. Money, as money, thus produces utility.[103] The utility of money is the extra utility which comes into being by virtue of its use, as compared with what would exist in a state of barter. The marginal utility of money is the utility of money in the marginal exchange--the exchange which would be effected by means of barter if money were any more difficult to procure. The marginal utility of money, then, is not the whole of the marginal utility of the good for which it is exchanged, but rather is the differential part of that utility which is created by means of the use of money in exchange. The marginal utility of money, thus, appears in separate services of money. Money is a durable good, which gives forth its services bit by bit. The value of money is based on these separate services, it is "the capitalized value of the service rendered in the marginal exchange."

This conception is, it seems to me, much truer to the spirit of the general marginal utility theory than the theories of Wieser, Schumpeter, or von Mises. If the utility theory at large were valid, the application here would be valid. To Dean Kinley's conception of a marginal utility of the money service, I offer simply the objections which I offer to the utility theory at large--objections indicated in what has gone before, and in my _Social Value_. The application of the capitalization theory to the value of money I have already discussed in a previous chapter, and shall again consider in the chapter on "The Functions of Money."

I conclude that the marginal utility theory has not solved the problem of the value of money. The reason, however, is simply that it has not solved the general problem of value. The marginal utility theory, in so far as it seeks to make marginal utility the _cause_ of value, is circular. The effect of a given man's wants upon the value of the goods he wants depends, not on the marginal intensity of those wants alone--a penniless prisoner may desire a marble palace ever so intensely without affecting its value--but also upon the value of the wealth possessed by the individual who experiences the wants. But this is to explain value, not by marginal utility alone, but by value as well--a circle. Or, if we leave the standpoint of absolute values, and look at the matter in terms of prices, the same situation presents itself. The price which an individual is willing to pay for a good depends on his income,--which commonly rests on prices--and on the prices he has to pay for other goods which enter into his budget. His price-offer, expressive of the marginal utility of a horse to him, is made with consideration of the price of a buggy, of harness, of feed, of the wages of the servant who cares for the horse, the price of a barn, and of the other things that the possession of the horse involves. And not these alone: less immediately, but still vitally, his whole budget enters. Higher prices for theatre tickets or for food or for clothing will reduce his price-offer for a horse. Further, his price-offer for the horse will be tremendously influenced by his opinion as to the permanent market price of horses. He will not be willing to pay a price for the horse which he cannot expect to get back if he should decide later to sell the horse. The direct influence of market price on individual demand-price is very great indeed. Marginal utility (subjective use-value) very frequently gives place to subjective value-in-exchange in the determination of an individual's marginal demand-price--which means that the market controls the individual instead of the individual controlling the market. With sellers, it is _generally_ subjective-exchange-value, rather than marginal utility, that determines supply-price-offer. The sellers, in so far as they are producers, have little need for the great mass of their stocks. They will sell them, rather than keep them, at almost any price. The reason they ask high prices is simply that they think the market will give them the high prices. The individual price-offers, in the aggregate therefore, presuppose the whole market situation--presuppose a general value and price system already fixed and determined. Each individual price offer presupposes many other prices, though not, of course, the whole market. Since, then, much of the market situation is assumed in the determination of each particular price, by the Austrian method, it is obviously circular reasoning to think that the determination of each price separately by this method will supply data for a summary of the market situation as a whole. In the one form in which the utility theory avoids a circle,--that presented by Schumpeter, and discussed in an earlier part of this chapter--it is not a causal theory. Marginal utility is not a cause of market prices, but rather, marginal utilities and market prices are alike resultants, effects, of more fundamental factors. No writer[104] who has presented the utility theory in this form has tried to apply it to the value of money, and even if it could be so applied, it would not give a causal explanation of the value of money in terms of marginal utility. In most of the efforts to apply the utility theory to money, the circle becomes so obvious that one marvels that able theorists should for a moment fail to see it.