Book I

1920; Wagner, Gr1J!ndleg1J!ng; also, Theo-r. SoziaWkonomik 1. 1907; .sulzer, Die wirtschaftl. Grundgesetze, 1896,; Dietzel, Theoretische SozialOkonomik, 18 1 95, 2. ed. 1923; Pareto, Oours d'Econ. pol., 1896; also, Ma.nuel d'Econ. pol., 1909; Car ver, Distribution of wealth, 1904; also, Principles Qf National Economy, 1921; Fetter, The Principles of Econ., 1904, 2. ed. 1912.; also, Econ. Pritnciples, 1915; Flux, Econ. Prirnoiples, 1904, 2. ed. 1923; Seager, Prmoiples of Econ., 1904~ 3. ed. 1923; Seligman, Pritn,ciples of Econ,., 1905, 9. ed. 1921; Clark, Distr'ibution of wealth, 1908, last edition 1923; Graziani, Institutioni d'Economia Politica, 1908; Schumpeter, Wesen und Haup-tinhalt der theoret. NationalOkonomie, 1908; Davenport, Value and Distribution, 1909; Wicksteed, Oommon Sense in Pol. Ecan., 1910; Oppenheimer, Theorie der reinen una pol. Oekonomie, 1911, 5. ed. 1923 and 1924; Schullern-Schr'attenhofen, Grundzilge der Volkswirtschaftslehre, 1911; Taussig, Prilnciples of Econ., 1911, 3. ed. 1922; Wicksell, Vorlcsungcn iiber theoretische NationalOkonomie, 1915; Liefmann, Grundsiitze der Volkswirtschafts lehre, 1917 bis 1919 (s. hiezu die Kritik von A.monn, Archiv Ed. 46, Heft 2 und IBd. 47, Heft 2); Cassel, Theorct'ische SozialOkonotntik, ~1918, 3. ed. 1923; Geles noff, Grwndzuge der Vollcswir>tschaftslehrc j Spann, Fundament der Vo17cswirt 8chaftslehre, 1918, 3. ed. 1923; Oswalt, Vortriige ilber wirtschaftliche Grundbe griffe, 1905, 4. ed. 1922; Verrijn Stuart, De Gronds~agernl' der Volkshu,ishoudirng, 1920; Stolzmann, Grundzilge einer Philosophie der Vollcswirtschaft, 1920 ; A.nsiaux, Traitc d'Economie pol'itique, 1920; ~. Weber, Wirtschaft und Gesell sOhaft, Grundr. d. Sozialok., Ed. III, 1921; Truchy, Oours d'c()Dnomie p'olitique, 1921; Taylor, Principles of Economics, 8. ed. 1921; Ely, Outlines of Eoonomics, 4.· ed. 1923; Eirck, The Theory of Marginal ValuB, 19:22,; Loria, 1 fondamenti scientifid della riforma economica, 1922; Lederer, Grundzuge der okon. Theorie, 1922.

The bibliography above, as we stated in our preface, is confined to a selection of modern literature. In Book I the dominant line of theoretical thought fol lows that which was introduced by Gossen and is spo~enof today as marginal utility. Only systematic treatises on the subject matter of Book I are included above; important monographs will be cited in a.ppropriate places. For all of the earlier literature we refer to SChumpeter's history of dogma, already mentioned. We have only to indicate the relative positions of the ad 17 18 SOCIAL ECONOMICS vocateg of marginal utility and the older theorists. Thruout economic literature two fundamental, contrasting views are found. One, adopted by the classical school, sees the fundamental form of value in value-in-,e:xchange. The other stresses value-in-use. In the first group of theories the labor-theory is dis tinguished by its energy. This theory has gained further importance because in it the socialistic theory takes its rise. In the text when w~ refer to the classical theory, we have reference to the labor-theory.

Marginal utility has been associated with the concept of value-in-use because of its invocation of use. But the doctrine is more closely related to the labor-theory. E:xcept for certain minor advances there has been little progress in the explanation of the concept of value along the line of value-in-use. This is especially true of the explanation of the formation of price and income. There would be almost no gap in the theory of price or income if everything that the German text-book says in its section on "fundamental concepts" of value-in-use were omitted. This· is not true of the discussion of the labor theory. Although this doctrine starts from false premises and must be in conclusive, it has. approached the important economic problems and has es tablished relationships that must be noted by all later theories. The analysis of marginal utility has taken over the problems touched upon by the· labor theory. It hasl even accepted a 'number of the latter's conclusions. But it endeavors to pass from the haH truths of the labor-theory to the foundation of use and to furnish a general explanation that is not dependent on the form of exchange. The final analysis should be an exhaustive elementary theory of value and the economic process,. that would be no less valid for the socialisti cally ordered economy than for the exchange economy. Lewis is of the opinion that the theory of marginal utility has deepened the psychological aspects of value-in-use, but that it has contributed nothing to our understanding of the economic mass-process and· especially of prices. If this be correct, the marginal analysis has failed of its purpose.

§3. PURPOSE AND POWER IN THE ECONOMY Purposefu.l desire and the motor stimuli--The simple p1'ocess of natural econ omy. There is a double root to every purposeful action. The most ap parent of these is the desire of achievement. The other is more hidden; it is the outgrowth of the power that must be exerted to achieve success. There is· a double stimulus: purposeful desire that our efforts attain their object, and an active motor stimulus that is massed under tension and stri"\Tes to be discharged. Fundamentally the desire and this force are intimately associated, but on.the surface of consciousness they appear dIstinct. Frequently a considerable effort is necessary to unite them. In this union volition is born. The latter is impulse controlled by purpose. On occasion these im pulses with their stimuli may mislead us, but they are nevertheless the most important vital values at our disposal. Weak individuals THE 0 R: Y 0 F 8 IMP L, E E CON 0 1\;1 Y 19 who lack them are not affected by examples of successful striving by their stronger brethren.

Socially the motor stimuli are discharged at the expense of enor mous friction during great popular movements and spiritual outflow. Only a strong people can apply the powers of the multitude to social ends with the utmost efficiency and without appreciable waste. When this can be done, a nation is at the apex of its historical development. Such unity of effort can be achieved only after centuries of prepara tory attempts, errors, struggles ,and w'asted effort. This is true of all action. It also characterizes the economic ac tivity of the individual and, still more, of society. No economic progress is possible unless a force becomes kinetic. This power must seek its goal. The force itself exists while it is still unconscious of its aims. It has been truly said that the mere desire of gain would not urge men into the regions of eternal ice or into uninhabited space. Before they do this, an inner impulse must move them to exert their full powers at all risk. Even the routine process of the economy must be actuated by the joy of work; otherwise in the hum drum of daily life energy will be deadened.

The same is true of social economic activity. The motivating forces must be cultivated-trained, disciplined and grouped-amid a cease less conflict of interests and powers. The values that must be sacri ficed often exceed the gains that are actually realized. The social economy is not soberly utilitarian activity dominated by common sense. One holdin.~ this point of view can never fully comprehend the social economy. The human economy, in search of a happy equi librium that is in the highest sense utilitarian, is after all always set in motion by the ealling forth and developing of social economic forces. At times in this process it is precipitated into revolutions of world wide importance. In the theory of the simple economy we shall examine only the effects of econolnic purposes on economic processes. We shall not consider the conditions that accompany the formation of the socio economic powers except to remark the condition of fatigue that at tends the expenditure of personal energy.

The simple economy, as described in our introduction, is the economy of a single subject. Here one does not find the contrasts that are manifest in the social formation of forces. B~t we do not have in mind the scant economy of an isolated householder. Rather we envisage an economy that has the breadth of a national economy with all its wealth, technical knowledge and problems of economic calculus. But this broad economy is guided by a single mind. It 20 SOCIAL ECONOMICS answers its purpose in an unimpeachable manner because a systematic and penetrating mind guides it. This director foresees ends, weighs them without error or passion and maintains a discipline which en sures that all directions are executed with the utmost precision and skill and without loss of energy. We shall further assume that all requisite individual forces are placed at the disposal. of this social management as cheerfully as though enlisted in their individual interest. It is not relevant whether this assumption, which we neither affirm or deny, is compatible with human nature. The concept of a model economic people is only an idealizing assumption. It is em braced only to enable us to fasten our attention exclusively on the effects that emanate from economic purposes.

In the money economy of today there is a flow of goods and serv ices that issues from every individual household participating in exchange. This· flow is intended with the aid of money exchanged to induce a counter-movement of other goods and services that shall supply the needs of the individual household. The great social cir culation is composed of a number of minor circulatory movements, each participating· household being a nucleus. In the simple economy as we conceive it, no matter how extensive it may be, the economic process of periodical production and utilization of goods goes on as a process of natural economy. Only one move ment of goods need be considered, the flow from sources of production to the final consumer. Therefore the economic process is simple in this sense as well, and the significance of economic. action at once be comes more apparent than it can be in the labyrinth of intersecting movements in the exchan~ge economy. We must leave to later dis cussion the question, whether or not the significance of economic ac tivity is thwarted in the economy of exchange. This question cannot be answered until the significance of this activity is itself understood.

We deduce the theory of the simple economy by the assumption of the greatest usefulness of economic action. This is a rationalisti cally utilitarian point of view. We take this position in order to determine the maximum influence of purpose on national economy. But we expressly protest that this does not imply. that we are either rationalist or utilitarian. We expect to show later by a process of decreasing abstraction what diminution of this maximum is required by typical conditions. More than one of the expositions of the classical school suggest pure rationalistic and utilitarian doctrine to the reader. But in every instance it is impossible to say in how far the authors intended to unfold a complete picture of economic life and in how far, to simplify the presentation, they resorted to idealizaTHE 0 R YO F SIMP LEE, CON OM Y 21 tion. It is possible that· they themselves did not discriminate nicely in this respect.

§ 4. HUMAN NEEDS Demand--The narrower ooncept of economio need-Utility-Foresight. Solic itude tor others. Oom1non need. Sociat need. CuheI, Zwr Lehre von den Bedurfniss'(m, 1907; Kraus, D'as Bedurfn<is, 1894; Tiburtius, Der Begriff de'S Bedurtnisses, 1914; Oppenheimer, System der Sozi ologie, vol. III, 5th ed., 1923; A. Voigt, Begriff der Dringlichkeit, Z. f. Stw., vol. 55; Mayer, art. Bedurfnis, in Hdw. d. Stw., 4th ed. The economic organization is directed to meeting the human needs. The household requires a certain quantity of goods and services to satisfy its needs. This quantity is called the demand. As we shall later show, the economy is not concerned with the direct satisfaction of needs. Rather, its aim is to cover the demand. This explains why the term, need, occurs infrequently in the speech of economic life while the term, demand, is used daily. Current speech regards the concept of need in its most general form. It embraces a multitude of meanings that can never be the basis of economic demand. Thus economic theory must fashion a narrower concept. It must discriminate the specific need, which leads to demand, from all other needs. This refinement requires no more exact analysis of the psychological nature. of human needs.

This is the province of scientific psychology. Economic theory has only to explain needs in their economic sense. Briefly, they may be called economic needs. And even this explanation is sufficient if it distinguishes them from the most closely related phenomena. Cuhel (a.a.o.s. 61) describes a need in this economic sense. It is the desire to use, i. e., a desire directed to the employment of the means of satisfaction. Schumpeter appropriately identifies its na ture by referring to it as a "felt want." Thus, for example, eco nomic theory should not be expected to analyze the physiological re quirement of warmth. Its interest is direGted rather t.o the need of fuel, of clothing and of shelter. Again it is not concerned with the nature of hunger, as such. Its attention is focused on the need of nourishment which demands the absorption of food of a definite kind. Economic theory is even less concerned with that vague impulse which is conscious of w'anting something without being aware of its object.

This impulse is the original, primitive phenomenon. The economy, however, takes its rise in the desire which is plainly aware of its ob22 SOCIAL ECONOMICS ject and strives toward it. The problem of economic theory starts only at this point. Needs may be classified on the basis of their physiological ef fects as needs of preservation or of amelioration. The former are directed to the maintenance of an existing state o£well being. Thus one seeks by means of clothing to prevent the loss of heat already stored in the body. The latter group pertains to new or higher con ditions of life such as a starving man, for example, would experience when he receives nourishment. But such a distinction is both im material and inadmissible to economic theory. It enters too deeply into the nature of desire. Both economic theory and practice are concerned only with the outward manifestation of the instrument of satisfaction. Even the preservative needs are important only as they create a desire to use some object. Therefore theory will have to distinguish, precisely as does practice, as many kinds of need as there are principal classes of the means of satisfaction.

In economic theory the concept of use is closely related to that of need. But it employs this term also in away which diverges from ordinary usage. The term is expanded to signify every condition of the satisfaction of needs. Every act, by which needs are satisfied, is an act of use. Food becomes useful as it is consumed. But a work of art also possesses utility. The satisfaction of needs, without excep tion, may be compared as to relative importanee. So also the utility of all things may be compared as to relative amount. The broader concept of need, as embodied in daily speech, in eludes all cases where a motor stimulus is felt, one of those previously mentioned stimuli which accompany the exertion of force. For ex ample, one says of an industrious man that he feels the need of work ing. One refers to the need of talking in the case of a loquacious man. The need of freedom with its enormous power is also to be grouped among motor needs. In this instance the man desires to give vent to his forces by his own impulses, unhindered by the inhibitions of others and unconeerned with their commands. This desire has its ,source deep in the nature of the motor stimuli. themselves.

The motor need is satisfied in the expenditure of energy. In ex treme cases it is exhausted by fatigue. The economic need reaches a condition of satiety when a sufficient quantity of instruments of its satisfaction has been absorbed. There are several respects in which the usages of scientific and daily speech differ. The latter is often terse and restricted. Thus it refers to a need only as a ~trongly felt desire. But scientific termi nology may not allow this limitation. It is as much concerned with THEORY OF 8IMPLE E,CONOMY 2:3 the most easily supp:t:essed wishes as with the strongest desires. Even the most easily spared articles of luxury should be regarded as ob jects of human need. ,Furthermore, no economic distinction may be allowed between true and false needs, permitted and forbidden, or moral and immoral. These may be easily distinguished where one views them from the effect of their satisfaction. But this theory is concerned only with the impulses which such needs give economic action.

In the case of future needs a precise distinction must be made by the scientist. Occasionally in every day speech the foreseeing of such a; need is regarded as an actual need. Food is stored away and fields are tilled to meet a need for food tomorrow or during the ensuing year. Both these acts spring from the expectation of future need. But the need itself is plainly distinguishable from the antici pation. They belong in two separate psychological categories. The immediate need of food is the product of a physiological sensation of hunger which is accompanied by a desire to eat. But foreseeing the need of food is merely a state of mental unrest that is produced by the idea of a hunger which will be felt in the future. This idea is accompanied by a desire to make sure of food for future use. In this latter case the emotional excitement is frequently obscured so effectively that we are hardly aware of it. This is especially true whenever a regular provision for the future has become habitual.

Habit abridges motivation and renders its detail operation nearly subconscious. Provision for the future is thus apt to figure as a desire but without emotional foundation. It is sustained merely by considerations of utility. Only ,vhen the regular course of events is disturbed does the emotional agitation become sufficiently intense to be appreciable. In extreme cases it may amount to actual despair. Ordinary speech allows the term, need, to be applied whenever a desire exists which is founded on a felt want. Therefore we not infrequently have people speak of a need of the provision for future nourishment. But the effect of the satisfaction of these two "needs" is very different. The end of a present need of food is in consump tion. The" need of the provision of food" induces other acts. It urges a man to secure ample stores to provide means of satisfaction. It impels him to acquire goods and to control other individuals who are likely to render helpful services. It leads to a consideration of the more remote stages of production, of all that goes to cover the demand. If we may say so, the prevision of the need of food is far more voracious than hunger.

We owe much to this foresight which endeavors to provide for the 24 S 0 CI ALE CON 0 M Ie s. demand of the future. Indeed it is the primary agent which makes the adequate satisfaction of our needs possible. Wealth could never be acquired· without it. Except for it we should inevitably be sub merged by unknown future dangers in the form of enemy hosts and convulsions of nature. But the foresight may also become a heavy burden. It frequently hangs over the rich like a cloud and shadows the serenity of their days. From this shadow the unpretentious poor are free. If one calls needs insatiable, the indictment is directed in no small measure against the demands of an excessive foresight. Solicitude for the needs of others and the anticipation of future needs differ in their moral aspects. But psychologically they are to be grouped together. They are alike a state of emotional unrest. However, in the first case we break the egoistic shackles imposed by selfseeking demands. Thru our sympathies we become aware of the wants of others. This solicitude may be directed either to the immediate satisfaction of the needs of others or, by way of precaution, to the supply of outside demands. There is a group of persons who are scarcely aware of their wants. For example, little children and the sick often do not feel them. Thru a care for the needs of such people, th,es.e needs are drawn into that group of objects towards which economic action is directed. The will to provide for the stranger supplements the scarcely conscious need. It arouses the dormant need and gives it a strength that makes it comparable to a fully developed need in the sense of economic .doctrine. However, in this case one will must be supplemented by another. This may make itself felt by various disturbances.

Even the impulse to provide for the needs of others is not in frequently spoken of as a need: "it is a necessity of his nature to provide for others as. though he were providing for himself." This can only mean that the stimulus experienced is as strong as that aroused by an egoistic need. Here, again,., ·we have reached a point where scientific terminology must distinguish sharply in order to avoid the most serious misunderstandings. Selfseeking and sym pathy maybe separated only if the coarser, original stimulus of the need is distinguishable from the more .refined, derivative one of the care for others. What has just been said of foresight applies here as well: solicitude has a different emotional basis and pursues other ends than do the needs. On the other hand the narro\ver meaning embraces the common or collective need. This is a need which everyone, conscious of being a member of. a community, experiences precisely as; he does his own most intimate, personal need.

THEOR;Y OF SIMPL,E E,CONOMY 25 The name, "social need, " may be applied to this group. 'However, it is better reserved for the need which the individual experiences in regard to his position in society. Such are the desires of' recog nition, rank or distinction, of appreciation in whatever form,. even though it be only as to external observances. This social need is among the strongest felt by humanity. It rests upon a sound basis, even though it is occasionally censured by moralists. In its absurd excesses, it of course deserves the ridicule which it receives. But the position which a man occupies in society is among the important values of life. The development of the individual is largely depend ent upon it. In so far. as personality is of importance to society, social welfare must acknowledge a similar dependence. In a certain sense, however, every need is to be regarded as social.

The appraisal of even the purely individual need, which is the result of the most intimate desire, is influenced by society. In most instances one measures his personal demand by the standard of his' times and environment. The individual judgment is influenced by the social decision. This process is frequently carried to excess in order to avoid social disapprobation. A man may plunge into ex cessive disbursements to maintain outer show. These he endeavors to retrieve by curtailing his most intimate requirements. He feels that he must act thus for fear of losing caste and of being relegated to a lower social level. A further transition carries one from the desire to emulate to the keener effort of excelling his peers in outward show, in social distinc tion, in power. The result is a peculiar confusion of the personal and the common need. The ruler and the ruling classes see in them selves the embodiment of the pretentious of the commonwealth. They even inflate the standards under the influence of a personal craving: exaggerate them to an importance which the mass of the community do not feel except as a burden.

However, all these are manifestations which cannot be perceived in the model, social state. Nevertheless, they deserve notice in a syste matic exposition. § 5. GOSSEN'S LAW OF THE SATIETY OF NEEDS Th.e connection between inhe'rent values and the quantity of th~ means of satis faotian. No sound need is insatiable. The quantity of goods required to satisfy it completely is even smaller than might be expected. Con sider, for example, the desire for knowledge. The mental receptivity 26 S DC I ALE C ON 0 M I C S of the masses is· ordinarily very limited. Only a small minority aspires to better things. The great intellects whose aspirations are unbounded are few indeed. Even a Faustian intellect is satisfied by the known truth and is insatiable only in the sense that it searches in ever new directions and kindles new needs. There are degenerate needs that demand new sensual pleasures and constant change of refinement. Such needs are creative in aug menting methods of enjoyment. B'ut wherever man is influenced only by his own being, human nature prescribes narrow limits which cannot be permanently exceeded. Desires are only inflated to im measurable proportions when the social degenerations of vanity and love of fame are brought to bear.

We may accustom ourselves to measure that which we wish to obtain for ourselves as an excess over what others can achieve. When this standard is once established, demands are necessarily in finite. They are not related to man's inner nature but to the outer world. This statement is particularly true of the desire for power. This expands enormously as soon as it takes its standard from the de sire to exceed the development· of power· in neighboring communities or in the entire world. It is a mistake, however, to suppose that only the personal ambition of the men in power is unbounded. The thirst of an entire people for power may be boundless when driven by the passions of competition and actual warfare. Considering all cases, one must regard the emotions which lead to insatiable .desires as· exceptional. They do not change the general statement that applies to the remaining needs or to most men.W e may lay it down as the rule that the receptivity of the individual need is strictly limited, although· human needs may be insatiable in discovering new directions of desire.

The temporal extent in needs must also be considered. There are transitory needs and permanent ones. The former are generally induced by accidental circumstances. Needs may accompany only certain phases of a man's development· or they may cling to him thruout his life. Permanent needs may also be classified as periodic and continuous. The former are satisfied for a given space of tiIne and then arise anew. In the latter group are those which allow of interference and those whose satisfaction may be suspended over longer or shorter periods of time. It is not of particular interest to us to investigate the different varieties of these types. By far the greater number of needs-one may well say nearly all -are divisible: i. e., one satisfies them bya series of distinct acts. Bohm~Bawerk has called attention to the existence of indivisible THEORY OF ·SIMPL,E E,CONOMY 27 needs. He instances the case of the myopic patient who obtains com plete satisfaction by the use of eye-glasses. But in what follows we shall speak of divisible needs, unless other reference is expressly indi cated. Of this divisible group a few are so urgent that they must be satiated in order to sustain life. Man is asphyxiated where there is not enough air to breathe. In most cases, however, the gratifica tion may be suspended before satiety is reached. Such an act may result in a serious hazard to health or to mental and physical develop ment. In other cases no perceptible disadvantage follows. Some of the stimuli are dangerous to man and should not he fully satisfied.

One need hardly say that there are some desires which should be abso lutely suppressed. The gradual satisfaction of divisible needs takes place subject to a law. The recognition of this law has had the greatest influence on the progress of economic theory. We may call it the law of satiety. The process may be followed most plainly in the case of a need of food. Let us assume a man who is weak from lack of food. A por tion of food just adequate to save him from collapse is set before him. His desire for this nourishment is measured only by the in tensity with which he would cling to life. He consumes a second, identical portion and feels his strength returning. His craving in this case was great but of a less intensity than in the first instance. The same rem,ark applies to a third ration. We may assume that he now feels completely recovered. After this a fourth, perhaps a fifth portion may be desired and consumed with a feeling of physical c.omfort and complete satiety. There will be a still further decrease of the intensity of his desire in each case. With comparative rapidity a condition of satiety is reached. If food continues to be taken, the system will be surfeited. The body is no longer receptive. It re fuses additional nourishment. Desire turns into loathing and revul sion. There is no healthy need of which the same observation might not be made.

Continuous physical needs are also subject to the same law. A given weight of fuel raises the room-temperature slightly. It is intensely desired. Every succeeding equivalent unit is less urgently wanted. Finally the need is satisfied. Then comes a reversal of feeling as additional heat is generated. It ends in discomfort and an attempted protection against the heat. We may remind the reader of Menger's instructive example. He deals with the need of shelter and shows that the desire for each additional room is successively less. Finally additional space becomes .a burden. Sound mental needs are not excepted from this law. These are also subject to a de28 SOCIAL ECONOMICS creasing intensity as satiety is approached. Here, as elsewhere, the series closes in surfeit. There are few people who would wish to re read a book immediately after the first reading, or who would wish repetition of the same piece of music.' Continued repetition would be painful to everyone.

The applicability of the law is more difficult to estimate in the case of degenerative social needs and cravings for power. Unusually large outlays are often required for even the first partial satisfaction. Moreover, they are generally continuous and intolerant of interrup tion. In addition there are many which excite a stimulus to outdo the first feat. This calls for a constant increase of the outlay. All this gives the appearance of insatiability. But insatiability in this sense and the law of satiety, as we interpret it, are not contradictory. We may, however, entirely disregard the case of degenerate needs. They have no significance in the theory of the simple economy. The latter describes only the regular course of the economic process. One important exception must be noted. Individuals and society require time to correctly appraise a .new desire. Innovations first meet with resistance and are underestimated. When the masses later become interested, the appreciation is unreasonably high. Then, it would seem, there may come a set-back of public estimation. Finally, a sound mean is determined. New developments of this sort present an interesting problem to the social psychologist and historian. They need not be considered by an economic theory which is bent upon ascertaining the true current of the economic process. The latter presupposes the existence of customary needs that no longer over whelm man. It is only for needs of this sort that the law of satiety is formulated.

In general terms the law is to be formulated as follows :-In the case of every divisible need the first unit of satisfying goods is de sired with the greatest intensity. The use of further units is less in tensely desired. Finally, satiety is reached. B1eyond this point de sire is transformed into aversion. The size of the unit is conditioned by the nature of the need and the agent of satisfaction. Also one must decide whether the utilization of additional units is conceived of as taking place over a period of time.or as an aggregate at one time. One can hardly sufficiently appreciate the great significance of the law of satiety to the theory of economic value and price and, consequently, to economic theory in general. Our theo,ry first found a. solid foundation in this law. Be· fore it was discovered, theory had regarded the particular value of each need as homogeneous. For example, the need' of food with all its demands was treated· as a unit mass'. It was a need of existence. Thru the law of satiety THEORY OF SIMPLE ECONOMY 29 this general need. has been analyzed. It may be resolyed into various degrees of decreasing intensity. It passes from the extreme necessity of preservation to the zero-point of satiety. Since the degree of gratification that may be ob tained depends on the quantity of the means at our disposal, we see plainly the connection between the intensity of need-values and quantities stored up for uSe. Once this connection is known, a bond is established between the quantities of goods and ascertained degrees of value.

Bernouilli was the first to employ an observation of this sort in economic theory. However, he limited his deductions to the narrow field of the theory of probabilities. Bentham explained the law of satiety with his usual penetra tion; but, although he was one of the leading thinkers of England and his works were most widely read, his expos'ition made so little impression that it was speedily forgotten. Only in recent times has it again enlisted attention. Ben tham, it must be re,membered, did not draw from the law of satiety those de ductions with reference to the theory of economic value which constitute its scientIfic significance. He stopped at the traditional theory of value as it had been set up independently of the law of satiety. His exposition iB psychological. He did nothing with it for economic theory. The connection with the law of value was not recognized until Gossen. His formulation of the law of value is not entirely precise. His exposition of the law of satiety, in the main masterly, may still call for certain changes. None the less he must receive credit for discovering the law of satiety. Theory pays a debt of honor by naming the law after its founder. For some time his leader ship also was obscure. The law had to be rediscovered by later investigators.

However, this does not detract from Gossen's merits. Jevons, Menger and Wal ras each made the discovery independently. They turned the law to account in their theories of value. The following exposition is a sequel to the formulation which they gave the law. The certificate of its validity is better because a series of investigators, in substantial agreement, have settled upon it. § 6. THE DEGREES OF HUMAN NEEDS The tensional span and receptivity of needsl.- Vital needs and those of mere en joyment~· composite neef1s.-M easwring the intensity of needs-- Value of the need as an inherent value-Economio theory and valuation. A scale of satisfactions is obtained if all variations of the intensity of the need are noted as increased quantities of a particular com modity are used. This scale commences at the highest point for the first unit employed. If the record is complete, the lowest intensity is reached with the last unit just before complete satiation. The scale may indeed be continued beyond this point by annexing a negative section. On this one might record the growing aversion as over satiety increased. We shall call the highest degree on our scale of needs the point of maximum tension. The disappearance of stress is marked by that intensity which ace-ompanies the final desire as com..

plete satiety is reached. In our daily life we are accustomed to refer to indispensable and 30 SOCIAL ECONOMICS dispensable needs, to urgent ,and less imperative needs. This dis tinction is based on the magnitude of the particular need at the point of its greatest intensity. In the 'case of those referred to as indis pensable to existence, self-preservation depends upon their satisfac tion. The point of maximum tension is accompanied by the. greatest desire of which human nature is ever capable. It is not surprising that this point has been clearly recognized. Ordinary speech has found an expression by which such needs may be differentiated from the great mass. The point. of maximum intensity for those latter is frequently of a much lower order. Their satisfaction may often be neglected without harmful effect to our natures. In some of the cases, most men do not even seek gratification.

However, it is a matter of importance to the practical economy and, consequently,. to theory-to know the relative intensity as the tension is reduced. On this condition depends the prospect of the complete satiation of a particlllar need. In the case of the physical needs of existence, tension disappears rather high on the general scale. For example, water is essential to life. But the needs of the body are satisfied after a relatively small quantity has been absorbed. The connoisseur of wine, the habitual drinker and the drunkard have a longer range of desires of a lesser intensity. The same remark may be made of the need of food. The primary need concerns itself merely with consuming that food which is indispensable to self preservation. Tension is relaxed, at a high point. The stimuli due merely to gastronomy are of a different order. The disappearance of stress in the case of dispensable needs of luxuries, on the other hand, is often found at a low point in the general scale. For some of them this point has' never been discovered. Wholly degenerate needs, moreover, may be insatiable.

In order to measure the spread between the points of maximum tension and disappearance, one must construct an ideal, general, graduated scale of desire. The degrees on this scale must extend from the highest to the lowest appreciable desire of which experience shows human nature to be capable. Every individual scale of needs may be compared with this universal one. The magnitude of this tensional space is to be distinguished from rec.eptivity. The latter is indicated by the quantity of goods required to satisfy a need to the point where tension disappears. There'is a wide range in the intensity of the need of drinking water. The minimum is relatively high. The maximum tension, however, is much higher. Between the two points are a vast number of degrees. The receptivity of this need, on the other hand, is narrowly limited THE 0 R Y 0 F S IMP L E' E. CON 0 l\rl Y 31 when compared with that of the habitual drinker of alcoholic bever ages.

The arrangement or form of the scale will depend on the divisibility of the good yielding satisfaction. The quantity of water required to quench thirst is most minutely partible. If we may be allowed the expression, the satisfaction takes place in a constant flow. We may fitly speak of such needs as flowing needs. From these must be distinguished those whose unit of gratification is larger. These we may call "stepped" needs. The need of shelter is an example. The unit. is a single room. The desire for the first shelter is separated from that for a second unit, and this from that for a third by a com paratively large interval. Within this spread the scale of needs is not important in the case of shelter. As regards the form of the scale, two important groups of needs should be distinguished. The first of these includes the simple, health ful, vital needs; the second, those which are merely pleasurable.

There are all manner of transitional forms which link the two ex tremes. These we are not required to consider here. The first group includes all those needs which must be satisfied in order to ensure the sound. continuanc.e. of life. As a subdivision of this group those needs appear which are essential to preservation. These must be gratified to preserve life and to banish actual distress. But the sound needs of life are not thus narrowly limited. For their com plete satisfaction they demand that human nature-be catered to in such a manner as to result in strength and vitality. Even this grati fication still confines us to the needs of existence. This restraint, how ever, does not oppress us. Rather, it is felt as an impulse to pro gress still to be achieved. In the satisfaction of these primary needs the motor stimuli are strongly excited. The true joy of living is in duced thru the immediate connection of the pleasure of satisfaction and the even greater delight of the expenditure of force. The grati fication of the second major group, the merely pleasurable needs, does not lead to an increased excitement of the motor stimuli. When over done it leads to their deadening and ultimately to a dulling of the capacity of enjoyment itself. Their most lamentable outgrowths are the degenerative needs of luxurious desire.

Under simple conditions of life both classes of need are not infre quently directed to the same variety of goods. They may be dis tinguished only in the quantities demanded. The healthy need of food, for example, is satisfied with a quantity that appeases hunger and gives strength. The pleasurable need demands more, possibly to the point of gluttony.

32 SOCIAL ECONOM:ICS Where the art of living has been more highly developed, the two groups of needs are also distinguishable in the types of goods to which they are directed. Thus, the healthful need of food is satisfied by mQre simple means of nourishment. The pleasurable need seeks in tensified delights at the table. To the mere agents of appeasing hun ger it adds others which serve only to afford enjoyment. It may go even further and result in a search for pleasure which finds satisfac tion only in a general refinement of foods. The epicure· appeases his craving for food by consuming the most skilfully prepared viands. He quenches his thirst by means of carefully selected vintages. Even in satisfying the needs of self-preservation he is in search of ad ditional stimuli of enjoyment. The needs of existence and enjoyment coalesce to form a composite need. The progress of this composite is ultimately destructive of the sound basis from which the simple, vital need arises. As in this case, the needs of all other classes may be made to blend and form composite needs.

No other human impulse:s are so strona' as those arISIng from vital needs. That of self-preservation is constantly active in every individual who is adapted to his environment. Moreover, an impulse of self-development operates in the .strongest individuals and races. This awakens new needs. The latter give the motive for a broadening of the economy. Were it not for these eriginal im pulses which are constituents of our nature, nothing would endure and progress would be barred. Their very power, however, also becomes the source of endless evil. Those who face the miseries of life are thrown into a conflict which threatens to exhaust their powers of production in order to satisfy the needs of existence. Our im pulses always tend to overstep the boundaries of the permissible and the whole· some. Thu~ those who are placed above want may yield to the temptations to exc.ess, so impairing the capacity for enjoyment. Gross excess, is the vice of barbarism. True cultivation inculcates moderation in our simple needs, but it tends to increase our composite needs. These are harmful. They forestall the laudable sentiment of frugal contentment. They incite one to exhausting, ex cessive acquisitive efforts. But still more important, they lead to degeneration either directly or by the tempting, circuitous path of over-refinement. The de mand for the greatest possible measure of satisfaction exa.cts the constant in crease of the means of gratification. The. requisite is accumulated wealth whose acquisition governs the majority of men. For most men it becomes axiomatic that the more one is able to enjoy and the greater wealth one possesses, the happier he should be. This axiom was accepted uncritically by the early eco nomjc theory. Only in its later development has it come to appreciate the in evitably resultant evil a.rising from an uncontrolled striving after ever n10re riches.

In our theory of the simple economy we presuppose an idealized, model con dition. This is conceived of as perfect also in that the permiss1ible boundaries of desire are nowhere exceeded. It is assumed that thruout the entire structure THEOR:Y OF SIMPLE E,CONOMY a3 human activity is directed to wholesome, vital needs and to permissible needs of enjoyment. In every instance no excess of effort should be needed to satisfy them. Over-satiety should never be approa,ched. Subject to this assumption, the demands for an increase of satisfactions, greater productivity and more ex tensive possessions are wholly justified. Our scales of needs measure the significance of needs: i. e., the value which attaches to their satisfaction and the consequent condition of well-being. These scaleEt appraise the need-value according to the relative intensity of the desire. The criterion of this intensity is the action which is induced by the force of the value. Of two values,. that one is the stronger which most influences our prac tical decision. Such a decision is made in every instance where only one of two needs can be satisfied. The greater value is chosen even though the temptings of passion must be overcome. For this value which' we desire with the greater intensity 'is! by no means the one which we would "rather" have'. Generally, the most keenly desired are all those values which tend to preserve life. Those which embellish it are usually placed lower on the scale. One strives first to satisfy those needs which are accomlpanied by the maximum pain. Some may be suppressed without causing pain. Of these one is far less acutely conscious.

But it is precisely these latter which increase the joys of existence. Need-values are of a primary order; they have individual value. 1 Economic theory is as little concerned in their analysis, as in the analysis of the need itself. The proper appraisal and classification of the values of life is, the task of philosophy, ethic'S and religion. It is the practical art of living and knowl edge of life. The forms of this valuation should be described by a psychological doctrine of value. But so far as economic theory is. concerned these vital values are accepted as so many facts. It does not enter the endless discussion of their appraisal and revaluation. It does not even concern itself with the problem whether they are or are not subject to scientific determination and measurement. The economic value which engages the attention of economic theory is not an inherent value. It is a secondary magnitude. As we shall show later, it is derived from the transfer of the primary values of the satisfaction of needs to the economic means of gratifica.tion. This transfer is independent of the source of the primary value. Its laws must be capable of exact sdentific deter mination. If economic theory enters the discussion of valuations, it is in danger of losing its exact, scientific character. It is sure to maintain its strict, theo retical rigor so long as it describes only the transfer of primary value to eco nomic means of satisfaction. It may then go further and show the influence of this transferred, secondary value on economic transactions.

The conclusions which theory reaches in this manner, cannot be shaken by any revised appraisal of the social values of life. The results are compatible with any system of pfimary valuation. The economic principle of maximum utility, in the form in which it is to be presented by economic theory, is not inseparable from hedonistic philosophical views. There is no doubt that it may be harmonized with ascetic views. It merely states that goods must be em ployed so as to function in most perfect ,agreement with, or furtherance of' the aims of our existence. It postulates more than is implicit in any act of utiliza tion. It makes no attempt to determine what are the ends of existence and how they should be chosen. Neglecting all such philosophical ends, the economic principle of the greatest utility shows what rules of economic action result from 1 Eigenwert.

34 SOCIAL E CO NOM IC' S the fact that, in this action, we use means over which we have complete power in purposive employment. Economic theory explains the laws of economic valuation and trade in a man ner which differs conspicuously from that in which the natural sciences explain the laws of nature. The latter show a necessary connection of cause and effect, a compulsion. 1 Economic theory presents a sequence arising under economic pressure, a desideratum. 2 Economic valuation is that demanded by economic duty. Economio action is that demanded by economic necessity. For example, the formula of the law of value is not expressed by saying: "One's will is con trolled by a superior power. Therefore one must appraise every good according to the greatest utility obtainable from it." The formulation is rather: "Being a competent economic manager,· one must appraise goods in such and such a manner."

The theorist may easily seem to transgress the bounda~ies of his problem. He describes a theoretical obligation, a valuation which is· demanded. In so doing, he may appear to establish a controlling force over the person of a man. The position of pharmacology is analogous. The latter discovers that 'certain reme dies cater to the desire of the patient to regain health, that certain other agents induce death which he would escape. In the establishment of such relations as these, pharmacology is a descriptive science. With like purpose economic theory demonstrates that· a certain process of valuation and action results in the greatest gain, that another process does not. Nevertheless it must be admitted that economic theory may not hold to this point of view at all times. No assurance can be given that it will not swerve from such purely descriptive character. This description of economic action is intended to lay down certain· fundamental truths for the guidance of the science and art ,of politics. The latter in· turn should lay down rules or at least offer advice as to the method by which existing conditions ~an be improved or by which further evil can be prevented.

If the theory is to accomplish this purpose, it must aim to find a solution of such problems. From this point, politics may advance directly to further con clusions without a break in the thought ,. Our theory and politics are so in timately related that the student will never be able to guarantee that his valu ations of political aims have not influenced his theoretical opinions. All of us are too deeply interested in human problems to meet them thrnout with that serene indifference, which the scientist preserves as he ap.proaches the processes of the external world. However, the theory of the simple economy is saved from the temptation to adopt· partisan views by virtue of its narrower problem. All economically ac tive men are regarded as one. This mass is contrasted with the world of goods. Thus the theory adopts the point of view of the naturalist. There may be here no egoistic application of the principle of the greatest utility against the interests of fellow men. The theory establishes its one incontestable position in reference to the world of goods which offer to man the means of well being. The ideal point of view of the theory is a further advantage. This assumes a model state of affairs in which passion and weakness never mislead in the evaluation. The proposition that the higher yield is always the more advantageous may be granted under these conditions. It is part of the assump1 Ein M ussen.

2 Ein Sollen.

THEORY OF SIMPLE E,CONOMY 35 tion that this greater yield is not to be used to satisfy degenerate needs and, further, that it has not been acquired thru the exploitation of the worker. In both these respects the theory of exchange differs. On the one hand, par tisan interests are rampant. For example, the theorists representing the wealthy class and those representing the workers will have difficulty in agreeing upon the importance to the social economy of the dirHcting entrepreneur. They will not easily overcome the impression which their practical valuations exert on this theoretical view. Such appraisals, however, are formed under the influence of a partisan point of view. On the other hand hy a process of decreasing ahstrac tion the assumptions must be extended to include the general types of economic error which are experienced. It will not be true in every instance to say that the greater yield is more important than the lesser. Consideration must be given to the effects of excessive labor and undue pleasure upon the motor stimuli and the human capacity of enjoyment.

§ 7. THE ApPRAISAL OF FUTURE NEEDS Equating present and fu,turre needs-The rrule of the preserva,uon of economic reserves and the conservation of working force~Underestimation of the value of futu're needs as typical of the weak economy. A number of psychologists and economists maintain that, as human nature is constituted, future needs are appraised at a lower valuation than present ones. It is said that one habitually discounts the full inherent value which the future need will attain when it becomes actual. The deduction is greater, the more distant the day at which the need is expected to materialize. It is never certain that an antici pated need will become actual. The duration of human life is al ways uncertain. But the most important factor is that admittedly, as human nature is constituted, vital, present desires have greater power over us than the mere fanciful ideas of a desire which, we assume, may be felt one of these days.

Starting from this basis, Bohm-Bawerk developed 1 his famous theory of the interest on capital. The latter is not to be discussed in this place. At present we limit ourselves to a consideration of the manner in which a model social economy would value future needs. Is there not an economic' underestimation of future needs, if they are regularly appraised at a lower value than present ones 1 or, on the other hand, are they not over-assessed, if one anticipates without discount the entire future continuity of social life 1 Would not such 1 See, Positive Theory of Oapital: Excursus XI. We shall not follow him here into the field of psychological construction. In § 4 we. ,have described the manifestation of need so as to distinguish it from the phenomena most nearly akin to it. We would also remind the reader in this connection of our remarks concerning "prevision."

36 SOCIAL ECONOM.ICS. foresight with its endless burdens inevitably oppress men beyond endurance, if they were unable in some manner to free themselves for the demands of the present and the immediate· future? John Stuart Min in his treatise on political economy tells us of Indians in the Jesuit community of Paraguay. They were sent out to plow the fields but they killed the oxen harnessed to the plows. When they had eaten their fill, they left the 'meat to rot where it 'lay. They felt no concern for its preservation. A primitive people, so little appreciating the need of tomorrow as compared with that of today, is altogether' incapable of economic prog ress. Civilized peoples could never have reached the present stage of advancement, if they had lacked the desire and power to maintain for future times the particular capacities for the satisfaction of needs, which they had attained. Efficient economy requires that the future satisfaction and need shall not be deemed less important than the vividly experienced desire of the moment. It is essential that every strong person or people shall maintain a sense of enduring values.

They may not be impaired by passing solicitation. After all, the actual requirements of production are such that we need not burden ourselves excessively on their account with the cares of the future. The conditions to which we are here subject, are quite different from those which obtain in the household. In our house keeping there is a given, determinate stock of goods which is measured by our income. This must meet our needs until additional income accrues. Accordingly the stock has to be apportioned to the needs of months, weeks and days. But in production the problem is an entirely different one. The needs recur periodically. At the same time the human capacity for work is regenerated. Thus period after period secures that additional income which may be applied to the satisfaction of needs. True economy, therefore, in the absence of disturbing influences, may assign the cares of the future to the future and its income.

There is a necessity of considering an economic policy beyond the current period only when special risks are foreseen, when more rapid economic progress is aspired to, or when other changes in accustomed incomes and expenditures are planned or expected. Even as regards such extraordinary incomes and expenditures, however, it is never advisable to over-emphasize future events too largely. Here, too, the reestablishment of the equilibrium may largely. be left to itself. Regular incomes and expenditures need never be adjusted for other than the current period. Depending upon the period on which the computation is based, the next year or month or week no longer THEORiY OF SIMPL,E E,CONOMY 37 occupies one's attention. The'more remote future does not vanish gradually in perspective as one endeavors to provide for the morrow. All one tries to do is to appraise clearly the nearest period. To this one adjusts his economic care.

When it comes to more distant contingencieS', it is enough that work ing powers and economic capital be maintained unimpaired. To a certain point man's working efficiency is protected from excessive strain by his very nature. Fatigue hoists the danger signal. That part of the capital stock which depends upon the inexhaustible forces of the soil is also, by its nature, permanent and unassailable. To be sure, in other respects the stock is constantly being consumed -and must be reproduced again and again. Economic, foresight is thus confronted with numerous problems that are not easily resolved. All of them, however, are included within the rule that the capital stock must be preserved. Those men who follow this precept and at the same time husband their working efficiency, also comply as a matter of course with the rule which en joins that for all future times an identical state of well-being shall be preserved. One provides for the future roughly. He does not bur den his imagination with ideas of the individual cases of future needs.

It is of course true that the man does not thus overcome for all time the temptations of immediate desires. The man has not lived who has not succumbed to the latter on one occasion or another. The frivolous and the improvident surrender to them with unbroken regu larity. Perhaps even the average man might not be able to resist, if, like Robinson Crusoe, he were to find himself entirely isolated. But human beings never are so entirely isolated. They live in society. In social communion they receive those psychological re straints which sustain them. Each man feels his steps controlled by his family, his associates and his surroundings. Others do not feel the temptations which he feels. They do not appreciate the excuses by which he endeavors to exculpate his uneconomic surrender. It is the urgency of the desires which he pleads in extenuation of the fault. His critic'S see the error into which he has fallen. They condemn him without mercy. So far as may be in their power, they seek to inter fere by prohibitions, penalties or other measures which they hope may hold him to the performance of his economic duty. The rules of economic life are creations of society, just as are the laws of property.

The individual forces called into play to carry these laws into effect have also been socially trained. Here is one of the situations in which the purely individualistic theory misses fire in confining man to his own self and his most, per38 SOC I ALE CON 0 M IC S sonal aims and resources. The preservation of the capital stock is not the sole concern of the temporary owner. It is of interest also to the family, the children, the brothers and sisters or more dis tant relatives who may be claimants in case of the owner's death. Thus in the older systems of jurisprudence the disposition of the fam ily estate required the consent of the family. Today this consent is dispensed with in most cases. The explanation of this change may be the greater maturity of our economic judgment. It is thus allow able, without risks to the property in most cases, to vest in the in cumbent the power of disposition. In former times the church and local authorities vied with each other in promulgating laws regulating undue consumption. Today sumptuary laws and all related laws of the past have fallen into disuse. The power of social custom is now sufficient in most cases to hold within bounds all such luxury as is calculated to .endanger future well-being. Large groups of people today are conscious of a sentiment which induces a reasonable limi tation of personal expenditure. They feel that one's substance is to be preserved, lest one incur the reproach of managing his :rffairs negligently. As a further restraint on parents there is added the care of children. Their future is to be provided for. A smaller number of productively employed persons feel a solicitude for the future of the poor and needy. This solicitude may even embrace the great concerns of the nation and humanity at large. Altruism carries the day against egotism. It secures to human foresight beneficial re sults beyond the length of the individual's life. In many cases the insecurity of man's life may contribute· a large share of his solicitude for the future well-being of his children. It is not to be forgotten that even parental love is controlled by social forces which keep it alive and intensify it.

One may thus safely say that it is a sound maxim· among all peoples of normal development to appraise alike the present and the future. It is generally observed by most individuals of such a people. Every where and at all times careless managers and spendthrifts are to be seen side by side with individuals who are anxiously making exces sive provision for the future. The latter begrudge to the present those enjoyments which might readily be permitted. Beyond this group are to be found the most extreme aberrations of avarice. The great~r number of mankind, however; steer a middle course between these two extremes. Thus when economic theory lays down the rule that present and future should be kept equally in· mind, it is not de scribing an unrealized ideal. Rather, it realistically portrays the normal, sound type. It is a fitting application of our theoretical THEORY OF SIMPLE E"CONOMY 39 method that this balanced condition is idealized only in disregarding individual disturbances, which can probably never be entirely avoided in actual life.

None the less the undervaluation of future needs is sufficiently widespread to demand theoretical consideration. This condition is the source of the improvi dent loan negotiated by the spendthrift. Far more important than this group are those who suffer under the pressure of circumstances. The management of their affairs is influenced by these errorS. Loans negotiated by individuals and even by the state in distress are liable to such undervaluation of the future. So also is the supply of labor and its wages among the poorest strata of the popu lation. Those who have subsistence only for the day will always consume what they have. They will justifiably relegate to the future the needs of the morrow. Undervaluation of future needs is a widespread characteristic of the weak economy. The theory of the simple economy treats only of the idealized, strong type. However, the theory of exchange considers gradations of power. It would not complete its analysis if it did not give an appropriate amount of attention to the weak economy. In the appropriate place, therefore, we shall return to a consideration of the latter type.

§ 8. COMMODITIES Utility~Latent commodities and commodity-element~Complementary quali ties-Natural commodities and those of civilization-Material goods and per sonal services. Bohm-Bawerk, Rechte und Verhiiltnisse vom 8tandpurnkte der volksw. Gilter leh'J1e, 1881; Wieser, article, (Jut, in Hdw. d. Stw. (and also further literature in the same source) ; Ammon, Objekt and Grundbegriffe de~ Theoretischen National okonomie, 1911; Weyermann, NationalOkono'Yi'llischeBegriffentwicklung des Ver mogens u,nd Volksvermogens, zu,g'leich Beitnag zur volkswirtschaftlichen Gilterlehre, Jahrb. 'f. N., 1911. The means of satisfying man's needs are found partly in nature. In part he derives them from his own forces. Some of the natural factors exercise tremendous power in their furtherance of economic ends. These are not subject to human interference. The sun is an example. But some of these factors are part of man's natural en vironment and may readily be controlled by him. They are thus fitted to be materials of economic activity and are especially conspicu ous in the human economy. We speak of them as commodities.

Commodities are thus to be defined as useful objects subject to man's power of disposition. The theoretical concept of utility is as broad as the idea of use. It embraces every quality that is calculated to bring about the satisfaction of need, or that merely prepares it effectively. The· fruit of the soil, which we consume, is useful; the soil which produces it is also useful. A work of art has utility; it satisfies the need which craves beauty. But those things are not considered as commodities, whose usefulness man has not yet discov40 SOCIAL ECONOMICS ered and which have consequently not yet been subjected to his power. One may call them latent commodities. An enormous advance in the possession of goods may be made within the shortest space of time merely by an increased knowledge of nature which enlarges our familiarity with its stores. Akin to latent commodities, are those goods whose utility is known but of which man has so far never been able to avail himself effectively because he lacks the power or apparatus to do so. To understand this condition fully, it is necessary to comprehend clearly one point: no commodity possesses utility of its own nature. Menger has ac curately stated that all goods are fundamentally complementary.

Their effectiveness can only be assured thru the use of other goods. Thus, food will preserve life only if thirst can be quenched with water or some other beverage. The complementary relationship of the means of production is even more intimate. Materials without tools or without workers, workers without materials and tools can accom plish nothing. They are useless. If one, none the less, says that they are useful, he can only mean that he expects the missing element to be added. Some goods we know to possess useful qualities, but they cannot be usefully employed at present as the complementary agents are lacking. They may be called commodity elements. Where the means of mining and transporting coal do not exist, it is a com modity element. Even the existence of these elements in such un usable form is of considerable economic importance, for they may at tain their full estate as commodities without other adaptation than the addition of the complementary goods. The soil of the desert will always remain sterile. B:ut the fallow virgin soil of a newly settled country will yield enormous crops, as soon as the population has in creased sufficiently to cultivate it.

Few goods are offered by nature ready for man's immediate use. She is more generous of those agents which enable him thru his labor to fashion satisfying commodities. Such agents also go ultimately to the gratification of needs. They too are commodities; productive goods they are called. Primitive man was able to apply his labors effectively to only a small number and variety of such goods. Their acquisition was so uncertain that only an insignificant number of human beings could be maintained-and these in only a primitive and precarious fashion. Step by step human ingenuity devised new varie ties of these useful commodities. Goods of civilization have been added to those of nature. They were newly contrived. The materi als in· them rendered much more· efficient service to Our satisfactions. With less inconvenience they were directed to a far more extended THEORiY OF SIMPLE E"CONOMY 41 series of needs. They added subsidiary uses to their principal one.

The result may be seen in the services of many classes of goods. Food does more than nourish the body in a rude and primitive way. Clothing is more than a bodily. protection against cold. Houses give more than shelter. Each of these goods in its own fashion satisfies the demand of sanitation, of decency, of our sense of beauty, com fort, convenience and social consideration. The crude, natural good yields a simple satisfaction. This is often attended by many dis advantages and hazards. The commodity of civilization yields, if one may so express it, a refined, complexly composite satisfaction. In times of degeneration this is carried to extremes of exquisite pleas ure. Man's progress in the produetion of pleasurable goods has beeome possible only because of the increasing supply of commodities of civ ilization which have made growing demands upon his inventive spirit and his energy. The present enormous accumulations of capital are to be regarded as an outgrowth of civilization. These alone have given man access to the gifts of nature. The latter can be fully utilized only by means of such capital because nature is more lavish in her offerings of commodity-elements than of finished goods ready for use. Thus agriculture and cattle-raising utilize products of the soil most of which are lost to the hunter. He can use what the earth brings forth only in so far as it has served to nourish the game which he kills. The most sudden increase in man's possession of goods has occurred when the complementary capital goods of civilization have been added to the commodity elements found in the soil. It was only in the course of this process that the natural wealth of the soil, of which one likes to speak, became true wealth. Measured in terms of potential accomplishment, a country which lacks capital is a coun try of poverty.

We regard the useful objects of external nature merely as things. Some exception is made in the case of animals. We feel somewhat differently disposed towards them as their exhibitions of life remind us of our own vital feelings. But the other ohjects are nothing more to us than mere means of satisfaction. Such objects are essentially distinguishable from personal services. These may also be employed as agents to the satisfaction of our needs. 'They may be used directly as personal or social services, or they may be employed indirectly as productive services in the manufacture of material goods. We are not only at liberty but are bound to make use of such services as means to our economy. No scheme of economic organization would be complete without them. Nevertheless, a fully 42 SOCIAL ECONOMICS developed moral sentiment will always distinguish between personal services and inanimate, useful things. Over and above the chara.cter istic of utility, a second and essential one may be discerned in personal services. Expediency alone should not be allowed to determine this use. They must never become mere agents of. gratification, for their employment is at the same time a personal experience. They live.

They embrace vital aims. When goods are drawn into the sphere of the economy, they are entirely absorbed by it. Thus their des tiny is determined forever. But personal service should never be thus entirely spent. It should always retain an independent, living significance. The inherent value of the satisfaction is reflected in the goods which yield it. Personal services also have a value that is derived from their useful effects. But beside this they carry an independent, vital value which must never be allowed to die. Such services should be cherished and allowed to bear fruit. Commodities, as things, are controlled by the owners. But the worker should never he subjected to the employer to a degree that destroys the former's right of self determination. The economic importance of labor is so great that it is perfectly true that those· in power have always had designs on it. The history of mankind is replete with accounts of the struggles to obtain first the personal freedom of the worker and later the freedom of labor itself: as yet, these struggles have nowhere been ended.

In the theory of the simple economy actual conditions are idealized. It assumes the perfect relationship in which labor is legally and ac tually free. The technical ability of men and their willingness to work-the latter fact is not to be overlooked-have been remarkably increased in the course of the development of our civilization. One may be bold enough to be confident of further progress. Like the historical liberation of latent commodities and commodity elements, the release of the latent productive energies of the race is a social process which has taken place in continuous waves. Great periods of discov ery and invention, of technical progress and advances in organiza tion are interrupted by others in which the development is slower. A static period may intervene. There may even be retrogression. In the course of all great changes crises occur. This is true even when the change represents an improvement of conditions. Human beings fail to observe proper proportions. Thru feverish activity they strive to reach the allowable upper limit and often overstep it. The theory of the simple economy disregards all these phenomena of THEORY OF 8IMPL,E E"CONOMY 43 change. It assumes a given, habitual state of economic efficiency.

This is a static condition which has reached an equilibrium. § 9. BUrLDING UP THE SIMPLE ECONOMY Free goods and economicgoods--oonsumption and management-The economic principle--Production and the technical arts-Productive stages and stems The relatiO'Y1J8hip of prod,uction. The traditional division of economics into Production and Con sumption is not theoretically serviceable. Economic theory has much to say of production and has said it often. Of consumption it says nothing, or just enough to veil its silence. Consumption, in the broadest sense of the term, is the destruction of commodities, par ticularly that which arises in the utilization of goods. In a narrower sense in contrast with production, consumption means that using up of commodities which takes place as needs are satisfied. There is also a further meaning of the term: the satisfaction of needs brought about by consumption, or merely the satisfaction itself.

But economic theory has never been interested in the physical process of consuming commodities. It will never treat of this. It is equally indifferent to the manner in which the satisfaction of needs, as such, may be made most complete. Economic theory regards it as the task of the moralist, physician or artist to teach which enjoyments are morally permissible, healthful or artistically valuable. Com modities are the agents of material pleasures, but it is no function of economic theory to show how these goods may be most delicately pre pared. Those who are adepts in the practical art of living are the proper instructors in such matters. Consumption' as such, the satis faction of needs as such, is not an economic act at all. It is precisely under those conditions in which goods are most abund ant that their consumption ,has no economic importance. Assume, for example, that nature were to supply' man with goods ready for use in the plenty of an ideal paradise. There would be no economy at all. The existence of the present extended economic organization is contingent upon the fact that there are few commodities that are available without stint, few of the so-called free goods. Within the narrow confines of urban life there is hardly one which is free to aU except the air. In some localities beyond the urban centers water is accessible in natural plenty. So is arable land in sparsely settled countries. If all other goods which men apply to their needs were accessible under equally favorable conditions, they would no more 44 SOC IAL E C ON OM IC 8 regard consumption as an economic act than they do breathing and drinking where air and water exist in superfluity. To have economic consumption, the mere act of using up a good must be joined to an other element which gives the act an economic character and marks the commodities as economic goods.

There is a conflict of opinion in economic theory as to the precise ,'something" by virtue of which commodities become economic goods. The connection is clear only in the case of what may be called "rarity commodities. " These form an exceedingly small group. Their sup ply cannot be augmented, certainly not appreciably so. In this class one finds works of art of unusual merit, particularly those which are legacies of old art-periods. However, most economic goods are ob tained by systematic production and are turned ·out in quantities. These masses are large absolutely. Even in relation to human needs they are not small. Articles of food or all the various widely used necessities and utensils of the household serve as illustration. There are two opinions as to what constitutes the distinguishing characteristic of this principal group of economic goods. Oneholds that in the case of these commodities also, man is subject to the pres sure of a not wholly adequate supply, although there is no scarcity in the true sense of the word. The other maintains that in this instance man incurs the inconvenience of labor in order to produce such quan tities as are needed. The first opinion is founded on economic quan titative relationships and might fitly be called the quantitative theory.

However, the utilitarian theory is an even more apt name, because, as we shall later show, it deduces the origin of economic relationships and of value from utility which is a function of quantity. The second statement is the labor theory. The contrast of these two opinions pervades the entire theory of economics. The spirit of the economy is a radically different one, according as the origin of the organization is traced back to one source or the other. Our study has not advanced sufficiently to allow this difference to be explained in detail at this point. \Ve may not yet even define more accurately the economic quantitative relationship which the utilitarian theory presupposes. For the present we shall have to confine ourselves to setting up the quantitative relationship in a general manner. From this foundation we may ascertain the economic element of consumption. He who does not command sufficient goods to consume without any restraint, must husband his resources. In a twofold sense he is obliged to be saving. First, he must not leave unused any part of the means at his disposal nor of their useful content. He must THEORY OF 8IMPLE EI,CONOMY 45 realize from them the largest degree of utility which can be ob tained without harm. In the second place he is forced to accept the even more momentous task of choosing between alternative uses.

His choice must be a use which satisfies aneed of maximum intensity. Invariably the more important uses are to be selected, the less im portant ones passed over. It would be an error if he were to apply his means to the less important satisfactions while compelled to deny himself the more important ones. Choice is guided by the rules of morality, a sense of beauty, con siderations of hygiene or good taste. In most cases there are added the admonitions of economic prudence. Not until these are applied is there economic ,consumption. Consumption becomes an economic act when it is accompanied and controlled' by a consideration of the available means. To consume means to partake of. Where goods are free, one may partake of them without restraint. There is no need of economizing. But where they are available in limited amounts and the maximum total satisfaction is to be derived from their use, one is held by econolnic foresight to the rule of sparing enjoyment, to the curtailment of those present pleasures which desire would lead one to seek.

Economics may better be divided as Economic Management and Production than as Consumption and Production. Economic management is charged with the economic direction of consumption. As has been pointed out, this involves securing the most important satisfactions with the means available and barring the less important ones. Economic management is also charged with the duty of preventing the loss of economic goods thru deterioration or in any other manner. Therefore such goods must be suitably stored and protected. The personal· services which are required for this management, must also be administered economically. The same principle applies in public management to public services. It is the task of production to furnish the "household" with those goods which are lacking at any time. Free goods are never objects of production. Under some circumstances, however, they may be used as means of production which are all the more effective if they can be obtained in free abundance. Human labor is an indispensable fac tor of production, as the latter always consists in applying labor to certain material factors in order to obtain new commodities. Hu man labor, however, can never itself be an object of production.

When man trains his power of labor, he does not produce in the strictest sense. He may be largely guided in such efforts by consid erations of economic expediency. But labor is not merely a common46 SOCIAL ECONOMICS place means to an end. It is part of life. Each act of learning is a significant personal experience. In both economic management and production the aim of the eco nomic principle is the same. This is the attainment of the maximum utility which may be realized under given, narrowly limited condi tions. The producer must make an economic selection of his prod ucts. He must carefully consider his economic, productive agents. From a quantitative point of view, they must be· protected from loss and deterioration. Furthermore, full advantage must be taken of their useful content, in so far as considerations of permanence will allow. In the case of the worker, consideration of his personal life may indicate somewhat narrower limits of exploitation.

The art or knowledge of the most effective methods of exploiting the useful content of productive goods is called technology. In its high est development this becomes a technical science. The control of the technical process is among the economic duties of the. producer. But one should distinguish in production between the technical and the economic characteristics. Up to a certain point there is the same contrast here as exists between economics and consumption. There are technical arts in which there is no economic calculation. The artist, for example, does not ask the price of canvas and paint. R,egardless of these he pursues his work, looking only to the <Esthetic effect. So also the man of wealth may perform experiments without counting the expense, if the enjoyment of research is all he seeks. Inventive genius is moved in the first instance by non-economic forces. Faced with a diffi,cult technical task, the inventor is subject to a ten sion that finds release in experimentation. He gives only secondary consideration to the question: will the new technical achievement pos sess commensurate utility. Thus his technically penetrating mind will often gladly deceive him by arbitrary assumptions and unfounded expectations concerning economic difficulties. In all these cases which have been considered, the technical achievement is due in large part to the motor stimulus which seeks discharge. If all production were relieved of consideration of the amount of the productive means re quired; if it were aUto become merely a happy exercise of power and audacity such as is found in play, in sport, in art or in science, the technical process of the production of commodities would be as little an economic .act as is the process of .their. pleasurable consumption.

But as a matter of fact the controlling motive of production and also of the technical arts is to be found in purposive, economic desire. In by far the greater number of cases the technical plan and the con trolling calculation of the available economic goods are interwoven THEORY OF SIMPLE E"CONOl\1:Y 47 from the start. One of the triumphs of the technical arts is the subjugation of want thru the attainment of the maximum, realizable efficiency. Technology is engaged for the most part in economic ,creation. Thus each step must be weighed in economic terms. The technician errs not only economically but technically when his cal culations are confined to his immediate ends. The problem which he faces is not completely solved; he does not gain his end by the simplest means. Hence it follows that he does not achieve those maximum results which are his goal. His calculations must be well considered in every aspect. Profits and losses must be accurately entered as they arise at various times or in various phases of his operations.

The technical arts have made an almost endless variety of goods accessible. But economic theory needs to insert in its outline of production only a few indis pensable details of these advances. The first essential is the a,rrangement of the stages of production. We may keep Menger's apt designation of orders. The most important group to meet our needs are those goods which are supplied to the household for daily use or en joyment. This includes food, clothing, shelter and furniture. From the point of view of the satisfaction of our needs this group may be considered as the first order. From the technical standpoint such goods fall in the last stage as ulti mate products. In this sense they are spoken of in the market simply as prod ucts. All other commodities, the production goods which are required for crea tive purposes,may be classed together as goods of higher or more remote orders.

Machinery, raw materials and land will serve for illustration. Most of this group are themselves obtained by production. They are pro~ duced productive commodities. 'Vhen one contrasts them with the materials from which they were created, they are products. In contrast with the goods which they serve to' produce they are productive commodities. Thus it is that the group of goods of the higher order must be divided into subclassifications. A genealogy of production may be arranged in second, third or even higher or ders. In tracing this history one starts from tbe ultimate product and falls back upon those goods which might be regarded by the consumer as partly fabri cated. From these one passes to the goods which served to form them. Ulti mately one reaches the raw materials and the primary forms. The final, most 'remote order consists of those goods which, like land, are provided by nature without the assistance of man.

This stratification of production is not complete if it concerns itself only with the material organization of the fabricating process in its narrow sense. One must include all other stages which are essential to the process. Thus the trans portation of goods from the place of manufacture to the place of use must be included. The development of the means of transportation increases the series. The provision of the modern highways of transportation is an enormous proc ess. It calls in itself for a large number of stages. Furthermore, productive labor is complementary to the material goods. These services must be included in the series of orders. The farmer'S' labor in cultivating the soil, for example, ah.uld occupy the same stage as the soil itself, as the plow which he uses or the seed which he plants.

48 SOCIAL ECONOMIC'S But productive efforts are always to be regarded as of the highest, most re mote order. They are not themselves produced. Their source is, therefore, not to be particularly mentioned in the genealogy. Economic theory must also observe the productive stems. As we shall use this term, it is intended to convey the picture of aU the dependent commodities and their relationship to the generating, productive element. It embraces all such goods down to the ultimate products. In this sense there is a coal-stem which starts with coal and embraces all products in whose manufacture coal is con sumed. So also there is an iron-stem and another of unskilled labor. There is a horizontal relationship as well as this vertical one. To describe this we shall use the shorter term, productive relationship.l Every product is thus related to every other commodity that has some stem-element in common with it. Thus there is a horizontal relationship between all products of the stem of coal, of iron or of unskilled labor.

The technology of modern production is exceedingly complex. It has given this productive relationship an extraordinary extent. Modern production com bines in each of its numerous stages a variety of productive elements into or ganic and inorganic compounds. In this way every product has numerous stem elements and thru these it derives a great number of collator ally related branches. .A product of iron is presumably also one of coal,unskilled labor and an entire series of other productive elements. It is simultaneously related to many stems. In as many directions as there are stems, there are productively related goods. Let us imagine a complete genealogy of production. It will show both the vertical and horizontal relationship of all productive goods and all products. One may trace in such a chart the functional organization of production: i. e., the course which production follows. But the chart shows more than this. It shows also the paths followed by the productive calculation in forecasting the plan of production. The practical labor of production starts in the remotest order to end with ultimate products. The calculations of the producer, on the other hand, move backward from the ultimate products. From these he traces the course to the necessary productive elements. From these in turn the full extent of the productive relationship may be traced in order to strike a proper balance.

In practice such a calculation would almost inevitably be erroneous. In each individual case the paths to be traversed are too diverse. The individual pro ducer includes in his calculation the ready-made results of the market. These are formed on the basis of calculations of all other subjects of the economic process. In a social model-state this entire calculation would have to be bound together as one. Our idealizing method allows the assumption that this enormous task is being faultlessly performed. Economic theory is not forced to trace finer distinctions in this genealogy than to differentiate three elements: personal labor, the cultural formation of capital, and land, the gift of nature. Furthermore it should separate "cost-productive means" (see § 15) from other productive goods. Starting with these assump1 Produksions verwandschaft: Production-relationship is a better translation but is so lacking in euphony that productive relationship, relationship of pro duction and (as a verb) productively related have been used synonymously thruout.

THEORJY OF SIMPLE EI,CONOMY 49 tions, one may interpret all the basic relations and may solve all the fundamental problems of the simple economy. But this simplicity makes it all the more necessary to give a careful explanation of the fundamental theory of labor, of capital, of land and also of the important concept of the "cost-productive-means." Before passing to these considerations, however, we must end our discussion of the structure of the simple economy by showing the unity which is implicit in the manner by which it is built up. § 10. THE UNITY OF THE ECONOMY In. reference to establishing an "economic statics"-The maintenance of GIn "eoonomio equilibrium" or an "economic level"-General, narrower wnd broader margins of uSe'--Marginal needs-The economic principle and marginal use. Unless there be a natural economic residue, it is obvious that every individual economy based exclusively on exchange must form a unit.

In the last analysis its current receipts are summed up in a single figure of money-income. This gives a definite expression to the inner unity. The expenses of the household are to be met from this income in such it manner as to proportion each item of expenditure to. the ,general economic situation. There is unity in point of time as well; for each period there is to be a fair balance of receipts and expend itures. The natural, simple economy is entirely detached from exchange. It therefore lacks the connecting medium, money. Nevertheless the unity persists. Such unity is given by the domestic, economic produc tion which foreshadows the magnitude of the entire economy. This production is unified in the labor of the producer. All the products belong to the one stem of this labor and are thus bound together. The producer seeks the most economical exploitation of his forces. This purpose connects all resulting products. Any change in the con ditions affecting a single group of products must influence others thru the common factor of labor; for it follows that, as more or less effort is applied in one direction, less or more of it is available in others.

,Modern economic production is social. It is also externally unified by the medium of money and the market. But is there also an internal unity 1 This social production may be analyzed into thousands and millions of individual establishments. Thus owners are legally inde pendent of one another. Each man is guided by his own individual interest. The unifying purpose, that is obvious in the household, is lacking. If we were to assume in the theory of the simple economy that we are describing a social process directed by a single intelligence, it might almost appear that we had idealized conditions beyond allow50 SOCIAL ECONOMICS able .limits. One might raise the question, may one simplify where multifariousness is of the essence 1 However, despite its extren1e differentiation and manifold contrasts, the economic process of today is actually a whole. I t is not a unit in the true sense of the term; and yet it functions with an all-embracing homogeneity which ill.ay be idealized and represented as unity. This condition is founded in production. All productive stems are related to one another. The products of the stem of unskilled labor are more than the products of labor. A similar statement may ·be made for those of the soil. Both groups belong to other stems as well and are productively related to their products. Some· products have all stems in common, fully related products one might call them. A table and a chest made by a carpenter of the same kind of wood and other ma terials thruout are examples. Others are only partially related; they have only certain stems or some one stem in common~ But it would scarcely be possible to name one product which h~s no such connection with anyone of the many other goods in use. There may be specific instances of products which have no stem in common. But in such instances one finds some third commodity which establishes an indi-· rect relationship bet,veen the first two because they both have some stem in COUlmonwith it. The intimate affiilation of productive groups, all of which ultimately coalesce into one all-embracing productive body, is fittingly described by their accepted designation, branches of production.

Owing to this general unity, every considerable change in supply 1 or demand that occurs ,vithill one sten1 will communicate its effect to all the others as well. All productive branches of which unskilled labor is a constituent will be affected, it the number of such workers is diminished. The influence, however, will be broader than this. In directly, most or all other branches will be coneerned. Materials and other goods to which labor may be applied, will be set free in the branches which are directly affected. This release will modify con ditions wherever the same materials are habitually used. If the primary impulse be sufficiently strong, its effect may be communicated to the most remote branches of production. A far reaching adjustlTrans. note: Wieser is usingVorrat thruout Part I. It clearly stresses physical volume. Later he uses Angebot to introduce the concept of quantity at a price. In the English, "supply and demand'; often loses some of its physical significance. The translator tried to use "stock" for Von"at. It is still retained occasionally. However, Wieser has used so many terms that are not common in English, that it seemed wise to drop any unnecessary deviation from common usage.

THEORY OF SIMPLE E,CONOMY 51 ment will be made. The entire plan of production will require careful revision to reestablish the realization of the greatest possible total, utility. Such movements will be greatest in those branches most nearly related to the first one affected. The disturbance must extend in all directions, however, if the initial impulse is sufficiently strong. A number of mathematicaleconomistshave perceivedthis unity and have been led to try to exalt economic theory into au economic statics/ This would· conceive the economic organization as a unitary system moved by some inner law. It strives always to maintain an inner equilibrium. Wherever this is disturbed, the' organization endeavors to reestablish it by compensating movements. In this sense, too, one hears of levels of econolllic action, of housekeeping and of production. This static conc.eption is· useful to economic theory: it stresses most forcibly the unity of political economy. fIowever, it threatens to introduce the methods of mathematical physics, which are not suited to the subject-matter of economics. There is a further and even more serious risk that by the use of this method heterogeneous,. though associated, ideas might creep in. In its most extreme form, this statics would treat theory like a physical science of economic goods; it would nearly eliminate the active impulse of the economic sense of mankind. But even when it does not go to these lengths, it simplifies its assumptions concerning man in his activities and concerning goods and needs in such a manner as to allow the deduction of a condition of perfect equilibrium. In so doing, however, it contradicts the facts of experience. No adjustment is ever effected 2 which tends to .es tablish a condition of strict equilibrium, a perfect level. This ap proach to economic theory, however, is barred by two additional facts, even if one disregard the disturbances which arise in human volition.

The first of these .is found in connection with a study of goods. It is the diversity of natural wealth in terms of commodities. In southern countries the grapevine flourishes, but wood and coal may be more scarce. The population of such a country may well cultivate the vine more assiduously and enjoy its product more freely than some 1 See ~~urlan, article Economic Equilibrium, in, Hdw. d. Stw. for an excellent summary. 2 Trans. note: The translator has frequently taken the liberty of omitting the adjective, "economic," which appears in the German text. If one be meticulous, it is probably necessary to reassure the reader constantly that the statements made apply only to economic activity~ To avoid endless repetition, the trans lator has taken it for granted that the reader assumes that the statements apply only to economic life. This particular statement should read "ever effected in economic life."

52 SOCIAL ECONOMICS. northern people. They may also fail to protect themselves in their houses so thoroughly from the rigors of winter months. But one is scarcely entitled to censure them for a neglect to adjust the satisfac tion of their needs economically; their conduct is regulated by the circumstances. They adjust themselves to prevailing conditions; they enjoy abundance where they find it and suffer privations where the means of satisfaction are but sparingly offered by nature. In the face of such diversities in the accessibility of goods it would be a most uneconomic utilization of commodities if a strict adjustment were made. Where there is pronounced scarcity of one item, the margin of satisfaction will have to be closely drawn. It will come relatively high as measured on the general scale of desire. In the case of excep tionalabundance the margin will be. more extended, in contrast with the bulk of goods whose utilization is more narrowly confined by their productive relationships.

Rather than to economic equilibrium, theory should turn its atten tion to margins of use. We shan endeavor to distinguish a general margin from a narrower and a wider one which may be 0 bserved where commodities are either scarce or abundant. In the household this is the margin of domestic use; in production it is the productive limit. In both these instances the same three types of margin are to be distinguished. The second obstacle to the static approach deals with the scale of needs. Even if one were to assume that goods were evenly distributed in all localities, it would never be permissible to reach the same point of satiety for all needs. The graduations of such seales are not exactly commensurate. On any general scale of desires the tension induced by the simple needs of life is completely relaxed at a much higher point than is the case with mere pleasurable needs. For those who have ample means to gratify the latter generously, the satisfaction of the former ceases at a point much higher than the general margin of use. All those needs whose point of relaxation is at or below the general margin of use we shall call marginal needs. In so doing, as might be expected, we presuppose the point of their highest tension to be above this limit. They thus admit of economic satisfaction. In the case of graduated needs, the upper grades may fall above the margin of use, while the lower ones may be excluded from economic satisfaction.

The doctrine of an economic statics does not recognize any· of these facts. It disregards both the values of a condition of scarcity and .of superabundance. It looks upon all needs as marginal needs in a con stant state of flux. This simplification is a great aid in the THEORY OF SIMPL,E E,CONOMY 53 understanding of certain fundamental economic relationships; but it obstructs the solution of other problems which, as we shall see later, are of no inconsiderable importance and, as much as others, demand theoretical explanation. With this statement we may proceed to a more accurate formula tion of the economic principle of the greatest possible utility than we have so far been able to offer. This demands tha.t the use of economic goods shall be as extensive as is consistent with their actual occurrence and with the relative intensities, of the dependent needs. The general margin of utilization is to be established so that it shall include the greatest possible number of degrees of utility. Complete satiety is to be obtained for all more narrowly bounded needs. But, further more, the narrower margins of use, of scarcity values, as well as those of abundance, are to be indicated so as to allow for the most extensive gratification possible. The maximum total, satisfaction is the decisive factor in every individual instance. Each economic means of satis faction is to be disposed of in such a manner as will add the greatest utility to the otherwise assured total. No use is to be countenanced so long' as some alternative disposition would result in a more beneficial effect.

§ 11. TlIE THEORY OF' PRODUCTS The assumption th.at prod'ltOts may be augmented at willr-The eoonomio qualflr titative relation of p>roducts-M arginal products, products of narrower and wider margins of use, products of relatively abundant ocourrence. We have now reached a point at which we may pass from the descrip tion of productive relationships and the unity of production to the economic quantitative relation of products. This will be described in its various forms. The classical doctrine interprets the fundamental economic rela tions of products in terms of the labor theory. Ricardo, who is taken in this connection as in many others to represent this school, admits the factor of scarcity in the case of a few types of product which can 'be produced only in limited quantities; for example choice wines, the, grapes for which only develop well in certain localities. In the case of most g'oods ,vhich are obtained in the regular course of pro duction, however, he asserts that there are no definite, ascertainable, quantitative limits. It is only necessary that "we stand ready to ap ply the labor which may be required." To this day the German text book speaks of "goods augmented ad lib." 1\1:ost industrial products are classed among these. .Agricultural products are not, of this type as their production is limited by specific conditions of the soil.

54 SOCIAL ECONOMICS Ricardo and the German text-book here 'confuse the technical and economic possibilities of increase. This occurs because they adhere to the view-point of the simple economy_ For this reason they fail to grasp the facts of the general relationship of products and the unity of production, which are conspicuous only when the economy is seen as a social whole. Of course it is technically possible to produce clothes, shoes or many other manufactures in quantities so great as to over-supply the existing need. However, any such increase is eco nomically precluded. It conflicts with the principle of the greatest utility. Clothes and shoes may be produced in excess of the need only by simultaneously decreasing the manufacture of other productively related goods. This means that things which are not suited for use and are therefore useless, are turned out at the expense of others which could be used and would consequently affect an increase in available utilities. One may not assume that clothes or shoes can be made in unlimited quantities without compelling a retrenchment in related lines. If such an assumption were made, it would lead log ically to the statement that mass-production maybe· indefinitely ex panded where there are no specific, restraining conditions and "we stand ready to apply the required labor." This is utopian. It con tradicts all experience. The latter shows beyond a shadow of doubt that the total stock which may be produced is always less than are total needs.

It is a matter of common observation that households which com mand large or even moderate incomes are abundantly supplied in point of many needs. Complete satiety is often effected. Such fam ilies have accumulated stores that assure such gratification in the event of all but the most extraordinary disturbances. Even in the case of lower income groups, where actual poverty is not present, the most urgent needsare usually fully satisfied. In these cases there are suf ficient quantities of coarse food to allay hunger and to preserve strength and health; enough clothes and shoes to afford protection from cold; an adequate supply of all the other necessaries of life to keep things going, though it may at times be scantily. It is not a utopian dream to assume that such a condition obtains in times of peace in countries of fertile soil. Here, in the familiar saying of Henry IV, every peasant has his pullet in the pot.

And yet in all these cases where the supply is adequate to allow complete satiety, the· quantities involved are held in economic propor tions. One and all are husbanded under the pressure of economic foresight. None of them should be used thoughtlessly or without THEORY OF SIMPL,E E;,CONOMY 55 weighing consequences. Were this not done, one of two things would occur: either the particular needs involved would not be fully satisfied, or, if the losses were to be recovered by subsequent acquisition, a shortage would result in productively related goods.. If any ap preciable portion of these goods were to perish unused, the total ob tainable utility would always be reduced. This economic proportionality is not confined to cases of distress, poverty or insufficient means. It extends to all cases where an as sured superfluity does not prevail. It applies to all products which cover needs with high margins of use as well as to all those which, measured by the general margin, satisfy marginal needs.-The latter group of goods we shall call marginal products.-But there is a quanti tative proportion even in the case of those abundantly supplied goods whose margins of use. are low; even· these may not be obtained at pleasure. They are still well within the universal bond which holds productively related goods. In the case of this group the community is more favorably situated only in so far as nature more generously rewards the means employed than she does in regard to the mass of products. These goods may be obtained with relative ease, but there is no absolute excess of supply.

Where the entire scheme of production is correctly planned, all products without exception preserve quantitative economic proportion ality. An excess of supply at any point could only occur when, thru error or some disturbance, more had been produced or become avail able than human needs call for. Great improvements in productive methods have been made but they have never been able to change this condition. These industrial advances have made it possible to increase production during prosperous times more rapidly than popu lation grows. The quantitative relationship of goods is thus im proved not only for the rich but for broad strata of the population. But so far mankind has not even approximated a condition in which an indefinite production of goods could be ensured by the mere will to labor. The theory of products must be sustained by a theory relating to the agents of production. All the mistakes into which the theory of value and price have fallen, have had their origin in some error or lapse of thought in regard to the elementary relations of the economy.

The more circumspect and mature the preparatory investigations of the fundamental relations of productive agents, the more precise and clear will be the consequent theory of value and price. We begin with the theory of labor.

56 S OC I AL E C ON 0 M I C S § 12. THE THEORY OF LABOR Labor theory and the theory of labor-The onus of labor and the economic prin,· ciple-The economic quantitative relation of labor. J. Shields Nicholson, Principles of Political EcofJ,omy, 2nd. ed. 1902; Patten, Theory of Prosperity, 1902; Whitaker, Labor Theory of Value, 1904; Salz, Ar beitswert und Arbeitsleid, Z. f. V. vol. XX. The contrast of the theory of utility and the labor theory runs thruout economics. It becomes sharpest in the doctrine of labor. The labor theory traces the source of economics and the measure of value back to labor exclusively. In its exposition, the theory of labor is the core. The significance of the labor theory was vastly increased when the socialists discovered the scientific foundation of their system in the classical presentation. The theory of utility gives a far less unique position to the doctrine of labor which stands side by side with theories of capital and of land.

Labor is the dominant force in production. It selects the ends. As a court of last appeal it determines the standards of production. It directs the natural forces involved in the productive process. Cap ital and land are at all times merely the tools of the worker. He is the producer. By worker is meant, of course, not only the wage worker but everyone who actively furthers the process of production in any manner. All products are exclusively those of the worker and in this sense are wholly labor products. Is this statement true, however, in any sense? Are not the· products at all times also those of the soil which contributes in bringing them forth? Is it possible that the popular term, ," fruits of the soil," is entirely absurd? Furthermore, are they not also all products of cap .. ital, which lends its aid 1 Must we not recognize land and capital by the side of labor as active factors in production?

Carried to its logical conclusion, the labor theory returns the answer that all production is due to labor alone. Land and capital cannot be accepted as factors of production. The account of costs has only those of labor to consider. The entire system of the labor theory has been rigidly constructed to establish the proposition that all costs of production are to be shown to be ultimately the outcome of labor. C'apital is to be' eliminated from this reckoning by showing that it is only a special manifestation of labor-it is true that Ricardo here actually makes a reservation in favor of the interest on capital. The reservation shatters his entire artificial system.-Land is to be elim inated by the theory of ground-rent. Ricardo has made this a part of his system in order to show that land is never an element in the THEORY OF SIMPLE E,·CONOMY 57 account of costs nor in the calculation of prices. We shall not be able to examine these assertions until we come to the theory of capital and the theory of land. We shall be able to dispose of them finally only with the doctrine of productive attribution.

The scope of our immediate inquiry is narrower. We shall disre gard the significance of land and capital and try to determine what feature confers an economic character upon labor as such. To this end our assumptions are so formulated as to bring labor under con sideration as a single economic factor . We make the idealizing as.. sumption that all the material aids at labor's command are furnished in such superfluity that they need not be husbanded. Imagine a Crusoe lording it over more land than he can possibly cultivate by his individual efforts. Let him be providentiaJly endowed with tools and other capital goods in such abundance that he can never be em barrassed by a shortage of such commodities. Let us assume that he has to take account of nothing but the efforts of his two hands. Let us then ask in what way he will have to make an economic disposition of his labor power. The explanation offered by the labor theory is surprising from the beginning. When examining land and capital it constantly empha sizes the superior creative power of labor. But as soon as labor is examined in isolation, this falls wholly into abeyance. It is not the creative power and the joy of accomplishment which is dwelt upon, but the toil and danger,. the burden of labor, the encroachments on "peace of mind, freedom and happiness" which work, according to Adam Smith, inflicts on the laborer.

Truly, this condemnation of the burden of labor is well founded. Any labor whatever, when continued under compulsion without rest, results in fatigue. The latter grows until the motor stimulus is no longer felt at all and a feeling of aversion appears. In the end even the strongest effort of will cannot overcome this revulsion. If the over-exertion continues beyond this point, it brings in its train serious injury to bodily health and vigor. The burden of labor has given human intelligence as well founded a motive for economic management as that which results from the useful .. ness of commodities. If labor were to be performed in every instance with the joyful alacrity which accompanies the overflow of individual energy, productive labor would have no more economic character than exists in the case of the consumption of part of an inexhaustible supply. Flllly as much as the pressure of the economic quantitative relation is essential to the explanation of the economy by the theory of utility, the pressure of fatigue resulting from exertion is necessary to 58 SOCIAL ECONOMICS the labor theory. In production economic activity is no more a liber ated enjoyment of active effort, than it is in consumption an un restrained enjoyment of means of satisfaction. In either connection there is care and a solicitude .for future needs.

Human happiness demands that the burden of labor be reduced to a minimum. Thus the labor theory gives a convincing explanation of all those acts which the theory of utility explains by resort to the economic. quantitative relation. This is true not only of labor itself but of the products of labor. If men ,vould reduce the burden of labor to a minimum, they must conserve the working power and c.onse quently also the products of that labor. All of them are called upon to make an economic selection of products, the objects of their efforts, and to preserve and use in the most careful manner those goods which have been acquired thru their work. Everyone is familiar thru his general experience with the manner of motivation in· all its ramifica tions. The labor theory thus appealed to facts amply evidenced in daily life. This accounts for the promptness of the scientific recognition of the labor theory. It afforded a convincing explanation of a series of the simpler economic relationships long before the theory of utility had been sufficiently elaborated to be consistent with the most conspicuous experiences of economic life. Indeed they were the keenest minds who turned in the early days of our science to the labor theory. It was in this direction that the greater probability of success then lay.

It was only when it became apparent that despite the most strenuous efforts no complete explanation could, be expected from this quarter that investigators felt compelled to renew their attempts by means of the theory of utility. To estimate correctly the influence which considerations of the burden of labor or of utility may exert in a given case, it is necessary to recognize one· fact· clearly. In any particular instance only one influence or the other is decisive. They never act jointly. Let us illustrate by the simplest possible exa~ple the fundamental idea of the labor theory. Let us aSSUme that by years of application an author has completed a large and important work in manuscript. He will of' course wish to preserve this document to the best of his ability. In this wish he will be prompted either by the" motive of labor" or by the" motive of utility." In no case will he be moved by both. Considerations of utility would govern him, if he felt that the manuscript could never be duplicated if it were lost. He would fear that the loss might deprive him of the fruits of his labors; in terms of the theory of utility, he THE 0 Ri Y 0 F S IMP LEE CON 0 M Y 59 would lose certain utilities. But in case he· felt that he had the power to replace the manuscript if the need arose, the loss would not be ir reparable. However, it would necessarily involve rewriting that which was once finished. In this act there would be no renewal of his earlier creative enthusiasm. All that he would experience is the rep etition of an onerous task which he might well wish to avoid. Speak ing generally, the creative labor involved in any particular instance either can or cannot be repeated. In the first case the interest in the conservation of the product is due to a desire to avoid the re newed burden of labor. Where the effort cannot be repeated, one economizes to avoid loss thru the destruction of utility. Both mo tives cannot govern for it is obvious that .labor cannot be repeatable and non-repeatable at one and the same time.

Speaking from an economic point of view, work may be duplicated where the means of labor are present in superabundance. It cannot be repeated where this quantity. is of economic proportions. The labor-motive, then, applies in cases where labor is to be had in abund ance. Considerations of utility control .when it is economically limited. 1 Utility gives little concern, where labor is abundant. The utility which is derived through work may always be obtained, if one is will ing to incur the required effort. But for all that utility does not cease· to be considered. It is this consideration· which excites the de sire and induces work. But under the condition here assumed it does not excite economic foresight. One is confident that he can procure whatever he may want. Furthermore, economic foresight would never be aroused, if labor were performed without travail and risks. All of the requirements of the economic principle are satisfied when the particular benefit is derived with the minimum, necessary burden of labor. Naturally, such utilities as are less than this burden must be abjured.

On the other hand where the total quantity of labor is limited, the amount of the benefit which may be derived from its expenditure is also limited. For the sake of these utilities alone one must economize. The degree of foresight which will be exercised is contingent upon the resulting benefit. Expenditures of effort are· graded according to the utility which will result from the outlay. The burden of labor 1 Trans. note: The translation should read "remains within economic quantita tive proportions." This term which Wieser uses frequently. is clumsy in Eng lish. There is no simple, exact synonym. The translator will oecasionally sac rifice perfect precision to gain ease. Where there can be any doubt as to the context, he will return to the IQnger.phrase.

60 SOCIAL ECONOMIC'S does not cease to receive active consideration; but under the assumed conditions it does not excite economic foresight. The latter has already been awakened by attention to the dependent benefits. Neither does it intensify this foresight, for the burden which is ac cepted is never greater than the anticipated benefit. In most cases it is much less. Considerations of this burden are purely personal and accompany productive labor. Much of the· happiness of human life depends on the manner in which this burden is borne. However, it only indirectly influences economic foresight as the supply of labor would be greater and there would be less pressure from the quantita tive proportion if labor could be performed without fatigue. We must now examine the economic proportionality of labor itself. The ultimate solution of our problem lies at the bottom of this analysis. The history of human economy begins with an excess not only by natural forces, which lie fallow in uncultivated soil, but also of hu man forces, which are dormant for want of economic employment.

In the earliest periods' the forceful peoples found an outlet for the desire for action in wars and the excitement and hardship of the chase. Effeminate peoples perished in idleness. Both groups had labor-power greater than could be economically employed, Yet both lived a precarious existence of· privations and hardships. Then came a change. The workers were slowly trained in skill in the arts. Little by little the complementary capital wealth grew. With these two conditions the opportunity of employment and the demand for labor increased. Finally the existing quantities of labor became less than the potential demand. The increasing scarcity of labor is not indicative of decay. It is rather a sign of increasing wealth. In the transitional periods adolescent society is happiest. It is in these that educative and economic ease originate. The overflowing volume of national vigor has not yet been exhausted by the burden of productive labor. Dur ing later periods this condition changes. When the population be comes enormous, the requirements for the preservation of 'life be come more and more difficult for the multitude, notwithstanding 'all industrial progress. ,The burden of labor becomes more and more oppressive.

In all highly developed economies labor is proportionately so un favorably situated that the utmost efforts are demanded of the workers. All experience indicates that in no such nation can the pro ductive efforts of the workers be so increased that such acts may be repeated. The quantities of labor are on the whole as little "augTHE OR Y 0 F8 I MP LEE, CON OM Y 61 mentable at will" as the products are. Where production has mis carried, those acts will be repeated which are indispensable to the re placement of urgently needed goods. Thus the work of agricultural lcultivation will be begun 'anew when an unfavorable winter destroys the seed. But such repetition is only possible by curtailing the amount of labor that would otherwise have been applied in some other direction. By virtue of the bonds of productional relationships the economic process is a unit. If labor once becomes interwoven vvith the economic quantitative proportion, any particular change in its application will be felt in every other section of the process. There are everywhere workers seeking employment who are unable to find it. There are idlers in plenty and productive spheres not fully operative. None the less it is certain that even an organization which succeeded in placing all laborers at work would not result in a large enough influx of labor to offset the loss that would result from an adequate relief of unduly burdened workers. There is an urgent cry in our times for a reduction of this load which presses upon the masses. This would seem to furnish ample proof not only of the fact that labor has be come interwoven with the general economic quantitative proportion but also that the relationship of available labor to demand has become most inauspicious.

The advocates of the labor theory like to select their illustrations from the scenes of the early beginnings of an economic organization. They picture the rUde conditions of tribes who live as hunters, fishers or in other primitive fashion. This choice is not purely accidental for it is only in these early his torical periods that labor has that quantitative proportion which is an esse.ntial presupposition to a convincing presentation of the labor theory. The reader can follow the argument when he is told that the economic consideration of a tribe of hunters concerns itself with the quantity of labor necessary to kill the game: that, for example, a beaver is regarded as twice the value of a deer, if on the average it takes twice the time to kill a beaver. The reader understands this because the modern man also is not unfamiliar with the motive of work. To be sure, labor which is economically employed no longer furnishes an opportunity to understand this problem; but even today there are plenty of activities which function under such conditions as revive the labor-motive. Those tasks with which a man busies himself in his leisure hours, when he is free from the pre occupation of his business" are often of this sort. To many extra-economic activities the strict concept of available supply and demand cannot be applied simply because they are non-economic. The, labor-motive is applicable in these cases now as heretofore. Because of the experiences which all of us have under these conditions, we become familiar with this motive and learn to measure our cares by time-duration and other conditions which obtain while we are subjected to the burden of labor. The labor theory gains its convincing effect by an ap peal to such non-economic phenomena as these. By this means it lays bare to 62 SOCIAL ECONOMICS our understanding the economic relations ofa bygone age. In the economic conditions of today it no longer finds support.

St:rictly the labor theory is valid only for services performed under stress. It does not embrace work which' is cheerfully rendered as a result of the creative impulse, that stimulus which' makes the genius. The theory has no place for labor in the highest sense of greatest efficiency and merit. Even in the case of that work to which it does apply, the mere measure of the burden sustained is not sufficient; the useful effect of the activity is frequently greatly in excess of the inconvenience suffered. On the other hand a theory, which derives the economic standard of labor from a measure of the useful effect, embraces all types of work. .It includes the highest as well as the lowest kinds, those services most gladly rendered as well as those most oppressively felt, as long as they fulfill their economic end. This theory gives to each variety the position 'which it should hold. It recognizes labor as the force which has relieved the pressure of the economic. quantitative relation and which has won the advance from the precarious margins of early"

times· to the proud condition of modern abundance. It thus does ample justice to the economic effect and creative force of labor. § 13. THE THEORY OF CAPITAL The contrast of capital and land-The oomplete process of Produotionr-The service of direct production and capital reproduction-Materials, too1,g.-..-Thecon· cept of capitat, capita;l goods and fractional capitals-The service of capital in the progressive economy-Improvements Vn and increases of capital-Oapital and labor. Menger, Zur T,heor·ie des ICapitals, J. f. N., N.F., vol. XVII; Landry, L'in· teret du capital, 1904; Irving Fisher, Nature of capital and. income, 1906; Spiet hoft', Lehre vom Kapital, E. d. K.; Bohm-Bawerk, Einige strittige Fragender Kapitalstheorie, 1900; and, Zwr neuesten Literatur iiber Kapital und ](api talzins, J. f. V., vol. XV and XVI (in this connection see Clark's Entgegung and Bohm-Bawerk's Replik, vol. XVI); Jacoby, Streit um den Kapitalsbegriff, 1908; Fetter, Economic Principles, 1915.

All references in the theory of the simple economy to the nature of capital must be such as will meet the approval. not only of the sup porters of the existing order but also of the most radical apostles of socialistic views. To accomplish this, it is necessary to eliminate from the current, practical concept every reference to the pecuniary form of capital and to private property. Every suggestion of capital istic power and exploitation of workers must be banished. The con cept must therefore refer ~xclusively to. natural economic capital, the indispensable aid to all effective' production. Thus when we use the term, capital, in the theory of the simple economy, reference is made to this narrower, natural form. The producer is accustomed to the use or money as a medium or ex change. He is not familiar with the concept of natural capital. In TI-IEOR,Y OF SIMPLE ECONOMY 63 his speech, as in the accounting of his business, he adheres at first. to the monetary form of capital. And yet the natural form is by no means unknown to him. On the contrary it is the core and sub stance of his idea, where money represents the economic transactions.

Re is fully' conscious of the manner in which the natural form is transcribed into pecuniary terms. Therefore we shall find that all the facts necessary to describe natural capital are available in daily experience and ·in practical concepts of· capital. Natural capital consists of capital goods. The relation of the two is essential to an understanding .of the latter. Therefore we shall not be in .a position to define accurately the nature of such a com modity, until we shall have formed a definite notion of the nature of capital itself. Our inquiry will start with a .determination of the oc currence of capital. Then we shall endeavor to formulate the con cept. Finally we shall return to the exact meaning of the term, capital commodity. In their occurrence capital goods are essentially distinguished from land and other natural goods which are offered to man in the earth and above it, in the water or in the atmosphere. The inventory of the farmer is made up of animate and inanimate objects. That of the industrialist comprises raw materials and manufactured articles, tools, implements and machinery. These are all the work of man and are fashioned as the result of historical development. Capital goods are the products of civilization. To this extent they are correctly designated by the traditional term, produced means of production.

It is quite correct to regard the soil also as a cultural product, as it is fashioned step by step by the human hand. Cultivation of the soil isan accurate description of the manifold labors of leveling, drain ing and clearing and of the never-ending detail of annually repeated planting. These do more than affect the surface conditions. They become an integral part of the soil itself and transform its nature. Nevertheless it is obvious that one may not properly speak of the soil as a produced means of production. Cultivated soil is the som·ewhat changed,natural commodity. But. in its substance it is always too homogeneous and pristine to be considered the result of human labor. On the other hand dwellings, buildings for agricultural and in dustrial use and industrial improvements· of all kinds show the char acteristics of produced means of production. So also does every cap ital commodity, which is attached to the soil in the course of economic pursuits, provided it does not coalesce with the soil so completely as to lose its identity but rather maintains the latter in such a manner as to require economic care. All goods of the latter sort are in .their 64 SOCIAL ECONOMICS nature essentially detached from the soil. They resemble ore taken from the ground or fruit when it has been gathered. They are clearly distinguishable as products of human industry.

As products, all capital goods are under the pressure of economic quantitative proportionality. Thus it is possible to increase the supply of this or that particular commodity beyond existing needs, but one is bound by the economic principle to observe in each case the limits imposed by the given, total wealth. However, just as the quantitative relation is not necessarily one of want, scarcity and rigid restraint, so in the case of capital wealth also this is not to be ex pected. The enormous accumulations of capital during the past century do not nullify the economic nature of this wealth. So long as the utopian assumption is not realized and capital wealth does not 'guarantee unlimited affluence, such goods will have to be treated as economic commodities. Capital goods are produced by man. Therefore they are perishable. They cannot perform their productive services as constantly as· can the enormous natural forces and stores. The latter are practically in exhaustible and even in cultivated soil retain an almost undiminished effect. We do not mean to say that perishable constituents may not be held by the soil also. Much of that elemental content, which pro vides the fertility of the soil, may be destroyed. Ore is nowhere so plentiful that mining operations may not exhaust it. However, after aU spoils have been allowed for, there· still remains in the ground an inexhaustible substance of· natural matter which human agencies and even the most powerful natural forces cannot destroy. Confining the theoretical concept of land to this substance, we may appropri ately contrast the economic characteristics of the soil and of capital goods. by describing the former as inconsumable, the latter as con sumable.

The periods of time, over which capital goods are consumed in the course of this productive service, differ greatly. Those which make up liquid capital disappear during a single act of utilization. The effective service of coal, for example, cannot be delivered except as it is burned. This group also·. includes such raw material as is trans formed in the course of manufacture into a differently constituted commodity. Thereafter such material is dropped from the raw material inventory of the business, just as the burned coal· was dropped, in order to reappear on another page of the account in its new form. Goods constituting the permanent or fixed capital are more durable. Tools and machinery are examples. ,Under some cir cumstances they admit of repeated use for many years; but even the THEORY OF· 8IMPL,E E,CONOMY 65 least destructible of them is suhject to appreciable deterioration in comparatively short periods of use. In the course of this service they are ultimately, within a practically calculable period, eompletely de stroyed. Such destruction should be allowed· for in every painstaking economic account.

Everyone of the individual capital goods is consumed as it is em ployed; but in its totality capital is inconsumable. While constantly undergoing changes in its constituent components, it is constantly being renewed. This statement brings out the. essential truth of the theory of capital. It focuses our theoretical interest. So far the ex position has been merely introductory to this axiom. None requires more careful consideration than the latter. It is not necessary to demonstrate the fact that capital, as a whole, is not consumed. This is universally acknowledged. It is confirmed by' daily ·experience in all cases in which human enterprise extends to a sufficient number of capital goods so that the total effect of this capital may be appreciated. This has been so at all times. It is a condition which will continue so long as the existence of capital is not so extraordinarily altered as to tear asunder the interconnection of the whole economy. Should the present economic order be dis placed by a socialistic one, the newly established economic com munity would take into consideration the inconsumability of natural capital in precisely the same manner in which the man of affairs does so today. In fact the phenomenon would be ever more clearly apparent than it is at. present, for the capital would not be broken up into many individual holdings but would be concentrated under one embracing control.

From time immemorial everyday economic experience has taught that men can find or make consumable goods through whose utility they may satisfy their needs. In like manner it establishes the fact that the race is able to produce production goods, which aid in forming other products, and also to reproduce those goods which have been used up in productive service. In agricultural pursuits there is an interweaving of capital and the vital organic processes of plant and animal. It is in the flow of this life-process that capital is repeatedly renewed. The capital consumed in industry is always being replenished from agricultural or mineral raw materials. These types of primary production themselves receive the means of maintaining the current from industry. Furthermore history demon strates not only that capital is renewed but also that there is an ex pansibility of capital wealth to which no definite limit may be as signed at present.

66 SOC I AL E C ,0 NOM I C S While it is unnecessary to make further efforts to prove the inconsumability of capital, there is considerable difficulty involved in an accurate and consistent theoretical expression of all its de tails. To accomplish this purpose, we shall have to distinguish, more nicely the services rendered by capital. In the first place, capital aids in the production of new consumption goods; secondly, it fur thers the reproduction of consumed capital commodities. In both cases one must distinguish two types of capital goods; raw material and the tool, are the outstanding respective illustrations. Thus we shan designate goods' of 'the first group as material commodities or materials, and those of the second as work goods or tools.! "Materials" are exclusively liquid capital. The latter term is highly significant in suggesting the productive service performed. The productive movement terminates in the household. Toward this goal the materials are carried in the current of production from one stage of development to the next, like the waters of a river flowing from one level to another towards the estuary. Raw materials are supplied' by primary production. In each successive productive stage they receive their useful composition and form as other materials are integrated with them or their outer shape is changed. Even after they are in the form of ultimate products, further manipulation and change will probably be necessary to make them ready for household use. They will have to' be transported from the place of manufac ture to that of use. In those cases where they have been massed in wholesale quantities to facilitate productive service, they must be separated into smaller units which are adapted to the convenience of the household. The goods may also require ripening in storage as is the case with wine.

In the exchange economy those activities, which succeed formative production, are distinguished from, and no longer mentioned as pro duction properly speaking. These activities belong for the most part to commerce, the mediator between production and consumption. In the simple economy, such a distinction is uncalled for. The formative process, which gives the ultimate form, and the succeeding activities, which enhance its readiness for consumption, perform one and the same service from the economic point of view. Each fulfills its task 1 Trans. Note: Stoffguter and Werkguter are probably better rendered by the longer terms.. Particularly Werkgiiter is inaccurate in the shorter, term, "tools." "Material commodities," however, is also unfortunate in English as it suggests a contrast with services. In this section the shorter terms are used to Anglicize the text. Later in the book, where the terms are used only occasionally, the translator reverts to the more awkward phrases.

THE OR:Y OF SIMPLE E,CON OMY 67 and carries the materials one stage nearer to consumption. The "material commodity" 1 does not become a consumption good or one of the nearest order until the very moment at which it is turned over to the household ready for use. Until then it remains a capital com modity, one of a more remote order. As such its relation to the consumption good is that of a productive commodity to a product. It is the function of the tools to maintain the flo,v of the materials from level to level. "Tools" are for the greater part standing or fixed capital· goods. They. include not only tools but machinery and the manifold implements of production, industrial buildings, and other improvements, means of transportation and store-houses. It is only in exceptional cases that the "materials" of liquid capital are used jointly with these tools. Coal or nrewoodare examples of materials whose complementary use allows a realization of the forces of the tools.

Again the term, fixed capital, suggests aptly theuse to which these tools are put. They have a constant. position in the order of com modities. From this station they serve to bring about the changes in the materials which are required to advance these goods to the next stage. They are not bodily incorporated in the material. There fore they do not move with the flow of the liquid capital. Neverthe less they are to be regarded as productive commodities in relation to the products of all succeeding stages down to the final· product which is ready for consumption. It is partly due to their· influence that the movement is communicated to succeeding stages and that the series terminates with the ultimate products which are ready for use. The organization, which is essential to the reproduction of capital in a fully developed economy, is exceedingly far reaching. It requires its own raw materials, 2 such as ore, timber and lumber. Its own liquid capital is maintained. This is evolved from these raw mate rials thru a long series of manufacturing and transportation processes until the goods are at last ready for their productive service. This division of the economy has its own enormous capital in tools and auxiliary materials. These goods,·which have been manufactured, are 1 Trans. note: In several places the translator has used quotation marks to call attention to one of Wieser's phrases where the term might have been mis taken in rapid reading. This is never done if there can be any suggestion from the context that Wieser is quoting.

2 Trans. note: A clause is omitted in which' a new name is suggested for this group: "die wir als Werkstoffe bezeicknen konnen." Such word building, in which Werks'toffe are contrasted with ltVerkguter but are a special case of Stoffgiiter, does not lend itself to intelligible English.

68 SOCIAL ECONOMICS turned over to the predetermined stage in one of the two sections of the productive process: (translator's' note.) i. e., to the service of capital reproduction or the manufacture of consu,mption goods. Many of these commodities are carried back to· the remotest stage of the reproduction process. For example, the finished elevator may be sent back to the very mine from which the ore was supplied that is embodied in the contrivance. All tools and auxiliary materials of this reproduction process are also related to the ultimate, consumable goods as productive commodities. In the genealogy that is traced back from the ultimate products these tools should be placed among the progenitors. Accounts should be so drawn as to show the pro portion of their participation in the final result. The two functions of reproduction and immediate production obey, like the entire productive activity, the law of the unity of the econ omy. The demands of "economic statics" would not be fulfilled if the preparation of such materials and tools were not brought into equilibrium. A productive scheme, which looked only to the prep aration of raw materials, would be as foolish and self-contradictory as another planning. only the production of machines. From the highest to the lowest stage in planned production, there should be proper proportionality. The quantities of raw materials obtained must be calculated to supply materials to all succeeding stages as fully as the given circumstances allow. There should be no obstruc tion in the transition from one stage to another because of which some materials, already obtained, would have to remain unused.

The quantity of tools and auxiliary materials, set aside for each stage, should be such that it is always fully employed. At the same time this quantity must be adequate to ensure an adequate, constant flow of materials without avoidable interruptions. If these condi tions are fulfilled, there should also be the greatest possible temporal regularity of productive services. In some cases, however, natural conditions may be such that tasks pile up at certain times, while at others men and capital goods are under-employed or idle. Espe cially in agriculture the total duration of the productive process and of its individual phases from seed to harvest is so strictly controlled by nature as to permit of but little adjustment of operations. Wherever unified planning controls the two important sections of production, capital will have to gain its ends in a manner similar to inconsumable lands. Its substance must be maintained undimin ished by the process of uninterrupted change involved in consumption and replacement. Man culls the fruits of the land year after year.

THEOR:Y OF SIMPLE ECONOMY 69 So also he should be able to secure periodic uses of consumption goods from the productive process. We shall later resume in detail the discussion of the employment of capital. At present we must formulate the concept of capital which is to be deduced from the facts presented. Capital in terms of the simple economy, i.e., natural capital, is to be defined as the aggregate of all capital goods which are sys tematically used in the complete process of production. We feel bound to repeat expressly that the latter process includes not only such capital goods as are assigned to the immediate service of pro duction but also those that are used in capital reproduction. A simple economy, which was unable to reproduce its capital, would be most grievously disappointed in its expectations. It would soon be recognized that certain commodities, which had been con sidered capital, actually were not such, since they were consumed in use and not replaced. If the stores of coal in the earth and now subject to human control were to be used up and if they could not be replaced by the discovery of new deposits or by the adaptation of new elementary forces, human economy would suffer the most de plorable calamity of its experience.. Man would then have consumed his coal-capital. This could only result in bankrupting the enormous mass of capital and labor to which coal is a necessary complement.

More accurately speaking, man would discover that this complemen tary wealth, which had been considered capital and which constituted perhaps the largest part of capital wealth, was indeed not capital at all. Instead it was a complementarily associated sum of produced production goods, capable of being converted into a definite, limited quantity of products. But since it was incapable of reproduction, the economy would not be able continuously to obtain consumption goods beyond the aggregate of this sum. From this concept of capital may also be derived that of the capital commodity which we seek. The latter is an individual com modity of the total capital of the simple economy. It is a produced productive agent, systematically employed in the process of pro duction. We must needs add an important qualification. The commodity must be integrated in the continuity of the entire process. One which has been torn out of this continuity is no longer a· capital commodity.

Let us assume that a hunter and trapper, searching the northern snowfields for spoils of the chase, loses touch with his ship and his companions. He saves only his gun and a small store of ammunition.

70 8,0 CI AL E C'ON OM I CS He ~ill make an entirely different use of these than that originally planned. He knows that when his last bullet is spent he can no longer maintain life. Those few bullets which are left must be so used as to afford the greatest possible number of means of self-preservation. The gun ceases to be a capital commodity in his eyes; he uses it only asa productive means by which to secure a certain limited quantity of goods by which to satisfy his personal needs. As the last shot is fired, the gun's usefulness ends and it ceases to be a commodity at all. On the 'other hand, when handled by a hunter who remains in touch with a social economy, the gun in connection with the ammunition serves as the means ,of its own reproduction. The hunter-uses it to kill game in amounts over and above those required by his personal needs. He turns his bag in at a trading post and from this station he again replenishes his ammunition. The gun, whenever it becomes useless by deterioration, is similarly replaced.

A number of capital goods, complementarily united and systemat icallyused in their appropriate relation to the total capital of the com munity, is fractional capital. The stock of capital goods of every independent industrial plant and of every department of such a plant is fractional capital. One ,can go still further in the sub division of the varieties of capital and distinguish working-capital from capital improvements. Both of these are fractional capitals; the former is the sum of the liquid capital goods in a' plant or its departments; the latter is the sum of the fixed capital commodities. In practice such fractional capital is 'regarded simply as capital and is invariably' so designated. The concept.. of the total economic cap" ital of society is so large that it cannot be grasped within the limits of individual. vision. Practical life, therefore, is not familiar with anything but the notion of fractional capital. This is called capital without qualification.

Theory must see beyond fractional capital. The latter does not possess the essential marks which are demanded even' in the practical 'idea of capital. It is not simultaneously a means of production and reproduction. The undiminished fractional capital cannot be re produced from itself. It is even more impossible to detach an en.. during benefit from it alone. All these effects are only generated in the economic continuity of all fractional capitals. Theory, therefore, must transcend the practical concept and establish a scientific one which brings together 'in one unity all the various fractional capitals. So far our exposition has presupposed a static economy which shows neither progress nor retrogression. For an advancing economy the presentation must be modified.

T ]1 E 0 R: Y 0 F S IMP L· E EC 0 NOM 1 71 In a progressing social economy capital is not only constantly re-created; it is augmented as well. New capital is earned and added to the original total; re placement is supplemented by the creation of new capital. The most effective gain would be realized were this increase at the same time an improvement, an elaboration of numerous and superior forms of capital goods. In an advanc ing economy both the increaSe and repla.cement, of capital are accompanied by improvements. In place of the deteriorated older forms, more modern and ser viceable ones make their appearance; capital reproduction becomes the renewal of capital. The increase of capital, like capital generally, is tope regulated in the use to which the product is to be put so as to conform to the law of economic unity. Such increase should not be confined to anyone stage of the process of produc tion, although it may be advisable to begin at a single stage. The 'beginning may therefore be made by building more eflicientmachinery. In such a case, however, it will be necessary to provide auxiliary materials by the time the machines are ready for operation. It is only thru a larger supply of materials that it is possible to utilize the increased capacity made available by the machines. Large increases of wealth result in increased capital in all branches of production. The introduction of machinery in one branch of industry produces capital and labor for related branches of industry as well as for agriculture and the economic process generally.

In a static economy capital is used only to bring forth consumption goods. In a progressive society it is also used ,to bring about, an increase ofprodnctive commodities. Where this increase involves an improvement of capital as well, the latter in an advanced period of the economic life will be of a materially different composition from that at the start. As a matter of history, human labor was at first but scantily assisted by capital; a small number of simple auxiliaries had to suffice in obtaining the desired articles for consumption. At first such goods could only be obtained somewhat after the manner in which hunters and fishers seize wild life. The earliest capital wealth consisted of the total stores of game and fish and the rude implements and weapons required. The reproduction of the implements was performed in the greater part thru labor which was aided by only the most meagre supply of the simplest tools. The controlling capital goods were, to be found in the collected stores which secured to the hunter or fisher the leisure which he required for the reproduction of his appliances. It represented enormous progress where greater quantities andvarie ties of auxiliary materials were added to the capital possession with the advent of the industrial arts. Not until much later Were "tools" more elaborately developed.

The farther the development progresses, the more of such capital is allied to the labor of the human hand. The activity of the worker is being confined more and more to the direction of an apparatus which forms the product without intermediary or which generates also the motive power. The dimensions of this machine become larger. It grows more durable. Its composition becomes more complex and its performances more stupendous. Vast investments of capital in the form, of an extensive plant are added to the tools which a single worker wields. To keep this plant running an army of cooperating workers is em ployed under the direction of leaders or a. staff of leaders. It is of especial importance to the theory of capital to remember that capital in its simultaneous increase and. improvement is applied to more and more re72 SOCIAL EC·ONOMICS mote stages of production. Agriculture first cultivates the most accessible fields.

It passes to more·' and more distant ones at later periods as the settlement of new countries or the discovery of new cpntinents opens new opportunities. ,so in dustry goes farther and farther abroad with its raw materials and establish ments. It seeks first the richest deposits, the most efficient forces. Just as agriculture penetrates deeper and deeper strata of the soil, so production at all times explores more and more inaccessible stages. The advances of natural science make latent commodities available. By the aid of complementary wealth and an improved technology new commodity-elements may be used. In many instances nature is more lavish of her concealed and inaccessible treasures than she is of those which lie open and at hand. The greatest advances of produc tion are made by the penetration of new realms and the extension of industry. In order. that these advances may be more effectively exploited, every stage in this progression must be supplied with capital. Thus each advance in produc tion is parallelled by an expansion of capital stages. An intermediate series of processes is developed which give access to the region in which the gifts of nature are offered in greater abundance. Thus the period of time required by the production process becomes longer. This extension is accompanied by a similar one of the period during which capital is employed, unless indeed the progress of the technical arts should reduce the duration of production 'periods just as it elsewhere reduces the cost of production. As production becomes more highly developed, it extends through a greater number of stages. It operates with the aid of many more capital goods and much more labor. It therefore demands proportionately' greater expenditures than primitive and simple production which is adjusted to a rapid discharge of finished goods. The advanced methods, however, tap more abundant natural resources and the total yield is therefore greater.

There can be no doubt that advances in production cannot continue in definitely. At one point or another a limit will be reached. Both the ancient world and the Middle Ages .exhausted their capacity for progress. The present era of progressive scientific technology will also reach a point at which further progress is barred. Some distant age may then possibly start from new funda mentals of knowledge and once more advance towards the ultimate goal, until mankind shall arrive at the point where further efforts are unavailing. F'or the present and the calculable future, however, our knowledge of nature· opens possi bilities which may secure an increasing reward to the application of productive labor and of an enlarged and improved capital equipment. This prediction pr~ supposes that civilized peoples will not improvidently exhaust their natural capital resources of coal and ore but will succeed in providing ample compensa tions for the enormous consumption to which mineral deposits are being subjected. • The labor theory, more than any other, is forced to reconcile its statements with existing capital resources. A theory, which explains all economy from the standpoint of labor, finds a serious drawback in the important service rendered by capital. An attempt must be made to eliminate the latter. As we know, the labor theory fails to solve its problem when it comes to the fully developed economic organization. It would make a similar failure in the case of primitive economy, if it were not able to express all capital in terms of labor. By two methods it has sought to eliminate the factor of capital. It has advanced the doctrine that all capital in its effect may be reduced to labor. Furthermore it THEOR:Y OF SIMPLE E,'CONOMY 73 has contended that, as regards its origin also, capital is the outgrowth of labor.

The first of these assertions starts from the fact that human labor is partiall~ replaced by capital. A large share of the effort,which rested on workers per sonally, is assumed by capital. There are many cases in which a practical de cision must be reached as to whether a given result may be more effectively achieved thru the a'pplication of capital or of labor. However, the two factors are not interchangeable at all points where one or the other is used. Capital can never render the directing service of labor. No more can labor, substituting merely its own efforts, dispense with raw materials. Only the services of di rected labor and "tools" compete to a certain extent; for the rest each of the two factors has its own particular function in production which it alone can assume. The second point is of fa.r greater significance. It starts from the fact that ca'pital is an historical product, the outgrowth of human effort. Does this mean that it is the result of human labor and nothing more ? Partizans of the labot theory are untiring in devising vivid illustrations, meant to exemplify this idea.

They speak of capital as the "embodiment of labor," "labor performed in ad vance," "gelatinous labor," "labor in the pluperfect" and the like. One of the advocates of this theory explains in a most attractive manner the historical process by which he contends mankind, little by little, amassed the capital wealth of today. A stone of peculiar formation, a piece of wood of unusual consistency and shape or a lump of meadow-ore may have· furnished the first tools by which prehistoric men seconded their labors. Such objects made possible the construc tion of other more suitable tools. By the aid of the latter even more appro priate ones were perfected, until finally the progressive development made avail able the perfected machinery and all other tools of the modern technic. The effective use of these tools had drawn into their service masses of raw materials and other material commodities.

If one were prepared to accept this historical account a's substantially cor rect, he would indeed be· justified in tracing the origin of capital back to the efforts of labor. The first simple tools were man's original indebtedness to happy accident. However, they need scarcely be considered; the contributing natural forces, as we know, are not appraised economically. If it were prac ticable to repeat this historical development and to create capital goods, as they are needed, by the mere concert of labor and free nature, one might be com pelled to say that capital may be resolved into labor not merely because of his torical analysis but also because of the practical conditions of the economy. Where do we find this pr'esupposition confirmed? How could the capital com modities be produced as they are needed by every advanced productive process, particulady by those of today, if they were not at hand a large inventory of capital goods handed down from earlier periods ? Capital, though due to hu man effort, though historically it may be the product of labor, has become aJn independent factor of production in the practical economic organization. Labor and free nature alone are no longer sufficient to create it. It is' a productive factor sui generis / practice and therefore also economic theory have to take into consideration its unique. nature.

There is still an uninterrupted flow of literature on the theory of capital. In this connection we refer to the monumental work of Bohm-Bawerk, Oapital and The Interest on Oapital, already mentioned in our introductory summary. The first part of this work, "History and critique of the theories of interest on capital" (4th ed. 1921), contains a history of the dogma which may be called a 74 SOCIAL EC·ONOMICS classic and which stands unequalled in economic science. In the second part, "Positive theory of capital" (4th ed. I, 1921; II, 1921), we are most interested in this connection in the equally painstaking and lucid exposition of the con· troversy regarding the concept of capital. The fact that new definitions of the concept of ca:pital are constantly being proposed may only be explained by the assumption that the traditional, defini· tions have failed to be entirely satisfactory. The chief reason for the search for those elemellts,which are operative in our daily thinking but are not yet sig.

nificantly expressed in theory, is the remoteness of the scientific formulation of the concept from that of daily life. We shall return to and conclude this! con sideration, when we reach the discussion of the money form of capital. At pres· ent we would only emphasize the fact that the relation which we have established between the capital" commodity or fractional capital and total capital is meant to facilitate the transition, to the idea of everyday speech. This relationship entirely resolves the conspicuous contrast between the total, which is a perma nent fund, and the good which is consumed. Because of this relationship it is seen that the individual commodity, considered as a part of the whole capital, must necessarily receive the standard of its use from the entire productive plant. The latter is constantly held to the task of replacing again and again all those portions which are consumed in use.

We are not so far in accord with Bohm-Bawerk's expositions of the function of capital in production. We see capital as an independent factor of, production. Bohm-Bawerk recognizes only labor and nature as such factors. He looks upon capital as an intermediate product of these two. He makes an extensive exami nation of round-about production. (See in the 3rd edition especially the incisive investigations on this subject.) He contrasts a scheme of production, which is devoid of capital and is directed immediately to obtaining consumption goods, to "capitalistic" production. The latter works in a more round-about fashion. It mingles labor with more remote and primitive antecedents of the desired commodities, until finally after several or possibly many intermediate steps the means of satisfaction are ready for use. These expositions coincide essen tially with our own views, which deduce the productivity of capital from the fact that' the latter affords to man the possibility of resorting to the more re mote stages for the natural treasures there deposited. We would not use the term, round-about, to describe this use of capital. The term suggests the idea that the selected paths of production have been needlessly protracted: a meaning which it is not intended to convey. From an economic point of view the pro ductive process falls back upon more distant stages only in so far as conditions can there be seized which promise increased yield with the maturity of skill and of the available means.

§ 14. THE THEORY OF LAND Classes of land and soil forces-The law of d1.minishing returns, from land The possibility of increase· of land and of capital .. Diehl, Erliiuterungen zu Ricardo'S Grundsatzen der Volkes'Wirtschaf't, 1905; Oppenheimer, Ricardos Grwndrententhcorie, 1909; E'sslen, Das Gesetz des abnehmen!l-en Bodenertrages 1905; Waterstradt, D'as Gesetz 1,om ab.nehmend'en Bodenertag, Thiinen-Archiv, vol. I ; Ballod, Die Productivitiit der Landwirtschaft, THEORY OF SIMPLE EtCONOMY 75 ISchr. d. V. f. S., vol. 132; Weisz, article, Abnehmender Ertrag, Hdw. d. S:tw., 4th ed. The theory of interest must be preceded by a theory of capital. So alsO' that of rent must follow one of land that sheds light on the fundamental economic relations of land. The latter are far more easily understood than are those of capital and of labor. At any rate the relations of the great mass of favored parcels of land and soil qualities are very prominent; if one may use the simile, they tower like mountain peaks above the general level of the economy indicated by the relationships of capital and of labor. No matter how little one may realize the conditions which de termine the general level, everyone observes the relative elevation. It is this which accounts for the fact that the classical school, although unable to give a satisfactory theory of capital or of labor, nevertheless laid down an entire series of important truths regarding the theory of land. It is because of this fact that the teachings of Ricardo are significant. It is for this reason that his work has survived to our day in preference to any other part of the classical theory and con tinues to receive an enduring recognition as authoritative doctrine.

However, it goes without saying that also Ricardo's thought requires careful verification. The latter will ultimately put his doctrines in an entirely new light. Like Ricardo, we shall give our attention mainly to agricultural land. Whenever we speak simply of land, it is this variety which is referred to. The peculiar conditions O'f urban property can be most conveniently discussed in connection with urban rent. We cannot examine this yet in our theory of the simple economy. At first glance the quantitative relations of land seem to be en tirely different from those of the other two factors of production. The economic proportionality of capital holds from the moment of its first appearance through every succeeding period. Man. produces it with the limited means at his dispO'sal. There have been both improvements and increases of capital. It is this fact which explains how it has been possible in the course of historical development to increase capital wealth more rapidly than population has grown.

J..Jand, however, exists in the beginning and during long ages that follow in quantities which greatly exceed every conceivable need of 'mankind. It is adjusted only slowly to the economic quantitative re lation as the demand for it increases. To this extent land is akin to labor; for the latter has also been gradually adjusted to quantita tive proportionality. But while the working forces of mankind increase as rapidly as the number of human hands and the skill of 76 SOCIAL ECONOMICS the workers, the amount of land available on the earth can hardly be increased in practice. It would therefore appear that at the apex of historical development the quantitative relations' of the soil will become an insurmountable barrier to the further increase of the human race and advance of civilization. The picture of these contrasts changes on closer examination. A.gricultural land is not a homogeneous mass. It is not all equally suited to a particular use. Even within these variations of kind there are different degrees of fertility. We shall therefore have to grade this soil for types of use and for fertility. The latter task is of far the greater theoretical importance. The richer the soil, the greater the yield which is returned for a given expenditure of capital and labor. There are, however, not only gradations of fertility; there 'are also differences of accessibility to the markets as measured in the cost of transportation. The latter reduces the net yield quite as much as do the immediate costs of production.

Ricardo, has correctly appreciated the starting point for the theory of .land. He neglected differentials of market distance, but the di vision of the soil into classes gave .him the skeleton on which to build his doctrine. He also approaches the problem judiciously, in so far as he endeavors to show things in their historical genesis. In this way one gains a much clearer view of the interconnections of the prqcess than when one is .confronted with the completed. phenomenon. In this respect we shall follow his example. Such a procedure does no violence to our method, for it is not necessary to desert the paths of daily experience. We disregard all chance variations that· occur historically. In our idealizing process it is only necessary to assume a gradual, continuous growth of population. The experiences of daily life are wholly adequate to be a guide to the interpretation of the consequences of such an occurrence; this increase and its conse quences are as obvious to our generation as they were in the past.

The first condition which we must assume is one in which the number of persons living on the land is so small that not even all the most fertile and best located acres have to be cultivated. Under such an as:sumption lands of this class are still to bereg'arded as free goods. The supply is greater than the demand for them. Strictly speaking, one may not even regard inferior grades of land as commodities. It is true that they possess natural fertility. How ever, the complementary means of labor and capital are lacking to make use of such soils. The entire available supply of these two factors is turned to the cultivation of the best class, for it is here alone that they are sufficiently rewarded. This statement disreg'ards THEORY OF SIMPLE EICONOMY 77 the fact that these lands may be used in hunting or in some nonagricul tural employment. The inferior lands are only commodity elements.

Together with the latent commodities ·of the undiscovered land they constitute the reserves for the future. It is only little by little that the populatipn increase necessitates bringing the remaining tracts of the best land under cultivation. At the end of this process such land enters the economic quantitative relation and becomes an economic commodity. Thereafter lands of the second class enter the sphere of the economy. They are recognized as commodities. They are cultivated at first as free goods and later, as soon as all tracts have been absorbed, as economic goods. The de velopment of succeeding grades takes precisely the same course. In the case of every newly comprehended class these two phases must be recognized: the first, the free condition; the second, that of economic proportionality. It is possible that in the individual case the transition may be so rapid that the two periods cannot be dis tinguished. Notwithstanding this practical fact, the theory of land must take into consideration all phases which must be passed thru and must also set down the formulre for the course of each. In countries with an old civilization the fertile lands have all long been cultivated and carried into· the quantitative relation. Even most of the lands of the Western Hemisphere have been made productive.

But even today there are unexhausted reserves of virgin, free land. From this historical reflection the theorist is led to the important conclusion that from the point of view of'the practical economy land also may be increased. Moreover, the increase is not yet ended. The geographer may regard the quantity of land as unchangeable, for the portions, which are added or lost in historical periods by natural forces, are negligible when compared with the whole. But the econ omist has a different angle of vision. Only the lands known to man need be considered by him. Even within the boundaries of this dis covered territory, he need take notice only of the economically avail able land. It is only of this latter portion that practical economy takes account and economic theory must so define its concepts as to have them interpret practice. There are two different processes by which the· expansion of agri cultural land takes place. In part it results from discoveries, con quests, migrations and settlements or from improved means of trans portation. The latter method may have such vast consequences and may be accompanied by such great increases of yield, as to place the social conditions and economic relationships on an entirely new foun dation. Under different circumstances the expansion takes place by 78 SOC I ALE CON OM I C S the increase of population and a consequent increase of the available means of capital and labor. When the latter process occurs,it is usually accomplished under the law of diminishing returns. The best adapted land is always selected and cultivated before others. The later expansion consequently can avail itself only of lands which yield a more scanty return to both capital and labor, unless indeed new land of greater fertility is opened up by grading or drainage or unless agricultural methods are improved and bring about other uses and different subdivisions of the land.

In the course of historical development there has been an actual increase of' the' cultivated area and also of the number of qualities of the soil which it has been found possible to utilize on different parcels of land. In large part this has been due to the progress of agricultural methods. It became possible especially when man learned to replace the exhaustible elements and could thus turn to full account the inexhaustible reserves. But even without any im.. provement of agricultural technique men have been forced by the pressure of needs resulting from an increased population to apply more capital and labor to the land, wherever it was in any way pos sible to command these factors. Experience has shown that this proc ess still utilizes some of the reserve soil-content. In order to carry out any agricultural enterprise to the best advantage, some' minimum expenditure of lahor and capital is necessary. The extensive systems demand less; the intensive ones more. However, within broad limits either type admits of an increased application and rewards this ex penditure with larger yields.

These gains, however, are subject to the lawo! diminishing returns. The simplest theoretical expression of this relation is obtained, if the forces of the soil are conceived of as grouped in strata. The latter' are related to one another in the same manner as are the classes of agri cultural land. The extension of cultivation to include the less favored strata takes place in the same manner in which resort to less favored areas takes place. Every increment, which is added to the minimum necessary expenditure, is applied to less productive forces which re~ spond with a less remunerative return. Our inquiry has shown that historically, both the quantity and qualities of the soil are capable of increase and improvement. But it has further shown that in the regular course of events the increased yield is obtained under the law of diminishing returns. This state .. ment must be modified to allow for changes due to progress. Usually, however,. this law will not permit the increase to be for the better; it knows only increases for the worse. Even the latter is denied to THE 0 R Y 0 F S IMP LEE, CON 0 1\;1 Y 79 a people which is chained down within its national boundaries, which has already brought all agricultural land under cultivation and whose civilization· is so unprogressive that it cannot raise new capital to increase production. There have been long periods of this sort in history. Under the pressure of such conditions agricultural progress languished. There are conditions in which the soil may be robbed of its destructible elements and may completely lose its productivity.

So far this has not been the case with ambitious nations. They have always succeeded by advances of all sorts in opening up new reserves of virgin soil and of soil-qualities. Thus the operation of the law of diminishing returns has been set aside for a certain period. The possibilities of progress do not seem to be at an end. Should the attempts to produce artificial fertilizer from the nitrogen of the atmosphere be successful, we would find ourselves on the threshold of new and extraordinary prospects for agricultural progress. Even bolder fancies foresee the day when man's food will be gained directly from atmospheric nitrogen. At one bound this would shake free the trammels of the soil. The technique of food production would be revolutionized. The whole process of provisioning mankind would be capitalistically industrialized. It is not for theoretical enquiry to judge in how far technical pos..

sibilities of this sort may be realized. We have to content ourselves with a reference to the second half of the nineteenth century. In this period civilized nations increased their capital wealth in a degree that was without precedent. But the advance in the control of ~the soil was of scarcely less significant proportions. The law of diminishing agricultural returns did not show its ominous influence for many decades. An increase of population has been possible such as the world never before knew. It is only in the most recent times that the advances in the settlement of the soil have lagged behind population increase and that the pressure of the agricultural law seems again to be felt. In contrast with these facts the improvement and augmentation of capital continues. Even without further progress of the industrial technique it is destined to continue while mass production can find scope for extension and while it yields increas ing returns.

The fact that capital is assembled by human agency, while the soil is a gift of nature, makes itself felt with all· its advantages and disadvantages thruout our entire economic development. Man does not control the soil quite to the extent to which he controls capital which he made to serve his purposes. He finds himself in his economy constantly depending on the gradations of the natural supply. He can no more completely abolish distance and the diversities 80 SOCIAL ECONOl\1ICS of fertility, peculiar to the Boil, than he can" equalize all elevations of the ground. As regards .land, therefore, the gradations of soil-classes 1 must remain important even to the most highly developed economy. As a rule progress is only possible according to the law of diminishing returns: i. e., by falling back from the better upon the inferior classes of land. On the other hand there still remain, beside the better grades which have already entered the economic quantitative relation, the inferior classes, of the natural wealth, which are pro vided in free abundance.

In the case of capital, progress is accomplished by entirely different means. Only to the most limited extent is an effort made to utilize more effectively the still hidden, unused, reserve forces, in existing capital goods. The more advantageous' way is l~ft open, and will probably remain so for a long time, of obtaining 'a larger yield thru the simultaneous improvement and increase of the capital commodities. But for all this, there is probably no chance of our ever raising capital, the narrowly bounded creation of human effort, beyond its economic proportionality and thus of securing the abundance of a free good. Ricardo saw clearly· most of the important facts of the theory of land. More especially he did not fail to note .the juxtaposition of indigence and afflu ence. But he was absorbed in the labor theory and did not succeed in giving the appropriate theoretical expression to the facts of his observation. He did not know the concept of the economic quantitative, relation. Thus, where an absolute excess of free reserves of soil does not exist, he goes too far and speaks of a monopoly of the soil arising from scarcity. It is true, that the best classes of those soils which are devoted to the cultivation of the least widely scattered varieties of products,' for example vinelands, approach the relation of scarcity; but. in the other nledium and lower grades and in those devoted to the most widespread types of cultivation land exists, 'like ca.pital and labor, in absolutely and relatively great quantities. Ricardo does not recognize that capital and labor also occupy a position in the economic quantitative relation.

Thus he accentuates too sharply the contrast of land to the two factors, capital and labor. In his presentation ground-rent has the malicious appearance of depredation and the future of agricultural life is clouded by, far too somber shadows.' ' The relations between Ricardo's theories of land and price are of especial importance. Thruout, he sees capital and labor alone as· the elements in the computation of costs. He never considers land in this connection. Hence the curious contradiction that he, who speaks of the monopoly of the soil, always presupposes in his theoretical deductions the superfluity of the qualities of the soil. The consequence is that his theory of price is as incomplete as his theory of land. In both instances he disregards cases where the most important soil classes have come into the economic quantitative relation. It is true that land, even when the latter condition has come to pass, as a rule occupies a very different position in the computation of costs fr6m that of capital and labor. For the most part it is not an immediate element in the computation at all. This circumstance, however, cannot be, explained from the theory of the soil as such. It arises from the opposition of "cost-productive 'means" and "specific productive means," variously related to the contrast of 1 Trans. note: In this discussion soil:'classes includes both groups, which Wieser has discussed-inferior lands and inferior qualities in a given tract.

THE 0 R Y 0 F 81 M P LEE, CON 0 M Y 81 land to capital and labor but not coincident with it thruout. For this rela tion an explicit exposition is imperative and to this we shall now proceed. § 15. COST PRODUCTIVE MEANS AND SPECIFIC PRODUCTIVE MEANS COST PRODUCTS AND SPECIFIC PRODUCTS Special scarcity products 01' product8 of superabunaance-M arginal cost prod uots and products of narrower marginal use-Cost, the predo'lrllinating character istic of capita~ and labor-The predQminantly specific charaoter of ~and and capita,l investments. What we know in everyday life as costs of production are those pecuniary outlays which the entrepreneur must make in order to re alize the gains of his venture. Obviously, however, the expression of costs in the form of money covers a natural form of cost which we must be able to present without a remainder in a non-monetary, simple economy. For example, one may speak of the economic costs of cultivating land in a sense which is altogether independent of pe cuniary expression and which will demand consideration asnluch in some future socialized state as it does today. The natural costs in this case consist of the two natural measures: the services of labor and the capital g'oods required. Nevertheless, there are certain capital commodities and services which do not possess the characteristic of cost, just as there are certain uses of land in which the latter has a cost character. Thus the work of the entrepreneur lacks this charac teristic, while the plot of formerly agricultural land on which one erects an urban dwelling must surely be set down among the costs of building. One and the same productive good may be placed among the costs in contrast with certain productive agents but not in contrast with others.

We shall call cost-prod ucti vemeans-or briefly cost-meansc-those productive agents which have to be placed among costs. The others we shall call specific productive means. Let us first determine with precision the phenomena to which these two terms are to be applied. As this is done, the significance of the distinction will be most effec tively brought out. Cost-means constitute the bulk of all productive wealth. Their available quantity determines substantially the yield which may be realized and the general extent and the general intensity of produc tion: i. e., the general margin of production. Cost-means are never rigidly confined to one special type of production. They are dis tributed over the entire productive process in such a manner as to make possible the highest possible total yield. Only such productive 82 SOCIAL ECONOMICS agents, therefore, as possess variegated· qualities of usefulness can figure as cost-means. Furthermore these goods must be available in large enough quantities so that their usefulness may find an outlet in many directions. Each of them belongs to numerous productive stems. With even more connecting strands they form the large net work of the production-relationship. Through them the individual branches of production are bound together. Productive and economic unity depends upon them. If all productive agents were cost-means, the yield of the individual branches of production would be almost completely equalized.

The remaining productive goods have certain specific qualities which distinguish them from cost-means. Consequently, those branches of production where their influence is decisive are distinguishable in their yield from the principal mass in which each branch is balanced against the others. The most conspicuous of this specific group are those which are remarkable for the pronounced scarcity of their oc currence. A spring of mineral water which has specific remedial virtue is an illustration. But even objects which occur more abund antlyare to be regarded as specific productive means, provided they may be applied to only one use or a limited number of uses. Thus cinchona-bark is important only in the manufacture of quinine. It would retain its specific character, even though it were obtainable in large quantities. As in the case of the soil, even objects of frequent occurrence and somewhat far reaching usefulness may rank as specific productive means. Even when the settlement of new countries is begun, when land is still so abundant that only the best tracts are cultivated, land does not have the character of a cost-commodity. At the same tilne, although capital wealth is strictly limited, the agricultural capital goods are to be classed as cost-commodities. After all the service of fertile land is permanently confined to agricultural production, while capital is important from the very beginning for all branches of production. The universality of its use is its distinguishing char acteristic even during the early period of inadequate supply. :E'er tile land, therefore, determines the extent only of agricultural pro duction. Capital, in contrast, gives the general measure of the ex· tent of all production. So long as land may be had in superabund· ance, agriculture may be carried beyond the general productive margin set by available quantities of labor and capital. Later, when land, in contrast with needs, is more scarce, it depresses agricultural produc tion below the general level. In either case it gives to agricultural products a specific margin of use. This will be different from the THEOR,Y OF SIMPLE ECONOMY 83 general margin and will deviate in the direction of abundance or scarcity.

In the manufacture of some products, therefore, both specific and cost-means must be applied. These thus acquire a specific character and may be referred to as specific products. Where the specific pro ductive means required for such. products are peculiarly plentiful, the latter should also be. The quantity of the products ·will be scanty, when the supply of the means is meagre. We shall call the former specific frequency-products, the latter specific scarcity products. Furs have a specific character when the animals which furnish the skins are being killed in great numbers, as·well as when they have commenced to be rare. Under the first condition the hunters, who bring in the skins and use them as well, will be liberally supplied far beyond the general margin of their households. Under the second conditions furs will have become expensive. Only the wealthiest families will be able to purchase them. Even these families, unless they are extremely rich, will be able to acquire skins only in an amount that is within the margin of the general domestic economy.

Those products, whose creation requires only cost-productive-means, may be called pure cost-products or, more simply, cost-products. The latter are provided in a much more equalized supply than specific products. But even for this type the general margin of use cannot be exactly maintained. In an earlier connection (§ 10) we saw that the diversity of the points of relaxation is an obstacle in the way of complete equalization. This condition can be attained only in the case of the marginal products which serve fluid marginal needs. Special limits apply to cost products which have a narrower marginal use, for example, the graded needs; but these products do not for this reason lose their cost character. They may always be distinguished from specific products by the fact that it is only the latter which are governed by special conditions of production that preclude adherence to the general margin of use. The cost-products are adjusted to the general level of production, while specific products characteristically stand out either above or below these general limits.

In my earlier investigations I have not made use of the idea of specific pro~ ductivemeans and products. I have, made shift with the too narrow concept of "monopoly commodities," emphasizing their specific character. (See, N aturral Valu,e, § 30.) Neither have I used the idea of cost-means. In this connection I confined myself to "cost-commodities." I hope that the terms selected for the broader notions are not found objectionable from considerations of the pro prieties of our speech. If one adheres to the definitions laid down, it follows that labor and capital 84 S 0 CI ALE CON 0 M I C S goods must almost always be regarded as cost~productivemeans, and that land is usually to be classed with specific productive means. Human labor can he applied to a great variety of uses. When all its accom plishments are considered, it has universal applicability. No product can be turned out without labor, which is the connecting element between all goods.

In the early periods of economic activity the primitive, crude use of human strength naturally sharply limited its applicability. But in such an age the labor of each individual might have been called a universal agent. As nearly as one could tell, each person was qualified to perform all the simple tasks which were then called for. The development of the manual arts has resulted in innumerable subdivisions. Today unskilled labor has somewhat retained the ancient universality; it finds, application almost everywhere, though' only as an auxiliary. As such, however, it has uniformity, the typical characteristic of the original la.bor. There is no trace of qualitative individualization in such labor. The gradations are only in the quantitative performance of individuals or groups of workers. There are differences in the services rendered by the strong and weak, the experienced and inexperienced, the industrious and indolent. These differences, however, may be reduced offhand to a common measure.

The case of skilled labor, which is trained in a particular trade, is different. The training requires considerable time and not inconsiderable expense. As a result there is no easy transition from one group to another. There is no longer an unrestricted communication between groups. Personal preference, the outgrowth of habit, frequently makes the flow still more limited. Nevertheless, even for skilled trades a certain equalization takes place in manning the different groups. The experienced mechanic cannot easily change his trade, but the ap prentice is less hampered in his decisions. He is readier to turn from the over-manned trade and to adopt one which is less congested. However, in the theory of the simple economy we may disregard unhesitatingly all difficulties of this sort. In our idealization we may assume a condition of complete equalization which gives the maximum effect to the cost-character of labor. We may do this not merely for the skilled em'ployments of the regular mechanic but for others-requiring even higher qualifications. It is merely necessary that more persons be trained to them. A properly specific character is likely to be shown only in connection with rare technical feats which demand exceptional talents and a pronounced inner impulse. This is the case with the highest performances in art, science or. other social fields.

Capital goods are produced productive commodities. It is this fact which confers a cost character upon them in almost every case. Their production is adjusted to the greatest possible equalization. Only those goods have a specific character whose production is conditioned by natural circumstances and is con tI'olled but little, if at all, by human intervention. The more complete such control is, the more pronounced is the cost character of the capital good. "Tools" are destined to aid human labor by raising its productivity or by replacing labor. They are the "means of labor" in the narrower Sense. They have been variously affected by the diversity of human labor. They frequently possess a more marked cost character than do raw materials. But this character is peculiar to all of the latter whose production is controlled in any equalizing manner. Coal is the most indispensable auxiliary material of machines. It has the same manifold applicability as machinery. So also has iron and wood. The THEORY OF SIMPLIE E,CONOMY 85 different machines, tools and other workshop comnlOdities are 'precisely adapted in their finished state to a special use; they are thus individualized. But when these goods are systematically produced in the regular course of the productive process-a necessary assumption to the theory of the simple economy-they are distributed over the entire process in an equalizing manner. Thus they gain the character of cost means.

It is only for exceedingly large investments of capital that another assump tion is required. Commodities of this sort represent an extraordinary invest ment of capital. In the simple economy these goods will be available only in isolated cases. Older, but still workable plants are not likely to be immediately sera pped, as soon as technical progress has made possible larger and more efficient ones. In our day of technical transitions large investments of capital possess a specific character. They are not as widely scattered as are the cost-productive means properly speaking. Land is not the creation of nlan but a gift of nature. Therefore its produc tive effect is less equalized. The immobility of land results in the fact that the location, at which the effect will take place, has been fixed for every tract. This fact alone precludes complete equalization. In the case of gold it is in variably found as the pure element, but each individual mine is subject to peculiar conditions of productivity, exhaustibility and geographical location. Of course not all varieties of capital goods have the same uniform quality as gold.

In general every species embraces obvious differences of quality. Nor is e:very gold mine, every vineyard and every acre of arable land an isolated type. Within the various classes of land groupings may be made according to productivity,. But as a rule the differences of quality are less pronounced in the case of capital goods than in that of land. Capital goods are consequently more uniform, more nearly of a type, than land. As the three productive factors act jointly, there fore, labor and capital usually are the typical cost-means and land is the typical specific productive means. To be sure, in any particular instance the question will always be which of the productive agents involved is the more widely used and the more generaHy available. If we examine Ricardo's theory of rent again, we shall see that he correctly recognized in the special case of land and the cost of its cultivation the marks of the specific position and computation of costs. The significance of the con trast, however, is not exhausted in the theory of ground rent; it extends to all lfields of the computation of value and the determination of prices. The' group ing of the productive agents into land on the one hand and labor and capital on the other is most intimately related to the' division into specific ''I and cos:t means. The two classifications, however, do not coincide completely.

The division of the productivre agents according to their specific or cost char acter, in connection with the similar classification of products, gives an exhaus tive, objective foundation for all the principal problems of economic accounting. To these problems we shall now turn our attention. § 16. MARGINAL UTILITY IN THE ISOLATED HOUSEHOLD AND THE FUNDAMENTAL LAW OF THE ECONOMIC COMPUTATION OF UTILITY Komorzynski,Bestimmung der naturl. Hohe der Gute-rpreise, Z. f. Stw. 1869; and, Der Wert in der isol. Wirtschaft, 1889; Bohm-13awerk, Grundzuge der The86 SOCIAL EC·ONOMICS orie des w. GiUerwertes, J. f. N., N. F.; vol. XIII; and, Dor letzte Maszstab des .Giiterwertes, Z. f. V., vol. VII; Sax, Die neuesten Fortschritte der nat. ok. Theorie, 1888; Dietzel, Die klassische Werttheorie und die Theorie vom, Grenz niutzen, J. f. N., N. F., vol. XX and 3 F. vol. I (in this connection see Entgegnun gen, by Bohm-Bawerk, vol. XXI, or 3 F., vol. III; and also by Zuckerkandl, vol. XX); Smart, Introductio·J1. to the Theory of Value, 1891; Wicksell, Ueber Wert, Kapital und Rente, 1893; Ricca-Salerno, La Teoria del Valore, 1894; Ehrenfels, System der Werttheorie, 1897; Cassel, Grondriss eitnO'r elementaren Preislehre, Z. f. Stw., vol. 55 or 57; Berardi, Utilita limite costo di riproduzione, 1901; Furlan, Oewni su U<na generalizzazione del concetto d'ofe7/imita, Giornale degli Econo1nisti, 1908; Urban, Valuation, its Nature, its Laws, 1909; Mayer, \Untersuchungen zu dem Grundsetze der wirthschaftlichen Wertreahnung, Z. f.

Volkstw., N. F., vols. I and II; Moeller, Die sozialokonomis'che Katagorie des lVertes, 1922; Keilhau, D'ie Wertung'slehre 1923; Meinung, Zur Grundlegung der allgemeitnen Werttheorie, 2nd ed. 1923. We now pass from the theory of economic organization to that of value. The latter will occupy our attention to the end of this section. The most important, recent contributions to the theory of value are contained in the bibliography at the head of this section. This list supplements that one of systematic works which was inserted earlier. As we have stated before, the entire classical theory and a ·large part of the modern theory of value has been deduced from the phenomenon of value-in-exchange. Our method con trasts with these and follows the example of the Austrian school in the de duction of the most general features of these laws. To achieve this, the fol lowing exposition is intended to show that the laws of value are fundamentally those of the computation of utility. These latter laws must be obeyed in every economic system, so long as the pressure of economic proportions compels mankind carefully to consider utility.

Karl Marx maintains 1 that value in exchange "makes sGcial hieroglyphs of all the products of labor." In his presentation value in-exchange is a "fetish," a "mystical characteristic" of goods, a "perceptible sense-transcending thing. 2 fIe expresses the opinion that this "mystery of the form of goods," this "mysticism of the uni verse of wares," would necessarily disappear in the economy of a Crusoe, in which there is neither exchange nor value in exchange, and also in a communistic economy of the sort an "association of free men" would establish. ' 'All relations between Crusoe and the objects which constituted his self-created wealth" were "simple and transparent." Similarly in the economy of an association of free men or, to use our phrase, in the simple economy of a people "the social relations of men to their work and the products of their work would be transparently. simple in production as well as in distr~bu tion."

1 Oapital, chap. § 4. "The fetish character of merchandise and its secret." 2 "Sinnlich iibersinnliches" Ding.

THEORY OF SIMPLE E,CONOMY 87 Karl Marx errs in these statements. The economy of a Crusoe or of the free, socialistic state of the future does not become trans parently simple through the elimination of exchange and value-in exchange. In both cases appears the problem which gives rise to the peculiar difficulties of the theory of value. This relates to the economic computation of utility. The classical theory and older theories in general failed to see that such a problem existed. It is only here and there that one finds isolated remarks and observations which suggest that the question might be raised. In general there has been a perfect accord with the ideas just quoted from Marx. It has been supposed that the execution of the law of the economic principle, by which the maximum utility is sought; will be found to be "transparently simple." Consequently it was regarded as a waste of words to lay down rules covering the practical computation of util ity. Endless pains, however, were taken to discover the laws of value and of price.

The theorists completely overlooked the fact that laws of the com putation of utility are actually observed, that these constitute the immediate basis of laws of value and price and that the latter cannot possibly be explained except by familiarity with the former. Every reckoning according to value-in-exchange is fundamentally a com putation of utility. It can only be understood as such. Once the latter laws are explained, the interpretation of the former 'will no longer offer excessive difficulties. The ordinary exchange of goods will have no mysterious elements when the secrets of the economy of a Crusoe, of an individual economy, are explained. The laws of the computation of utility, which are followed by every person, are obscure. It is only with difficulty that their theory may be comprehended. The controlling factors are deeply hidden in human desires. People live in an already fully organized economic environment. Everyone therefore finds his motivation in actual con ditions. He learns through daily experience to follow such impulses.

The fact that he has actually behaved in a rational manner does not necessarily qualify him to give a theoretical explanation of his trading. In order to succeed in this difficult task he must accurately recall in full detail the scene within which he moved, confident of his success. He must live over the activities induced by his desires and yet he may not experience the desires. This process rendprs him liable to make the most bewildering mistakes. It is one thing to act understandingly; it is another to appraise oneself and one's surround .. ings as an outsider.W e have in this contrast the difficulty-if you would have it so, the secret-of all economic theory. We need expect 88 SOCIAL ECONOMICS to find no other· secret or mysticism inherent in the wares. as such. The penetration of· the secret which is peculiar to the laws of the computation of utility, requires that the methodological aids of ideali zation and isolation be most completely invoked. Let us therefore assume an isolated household. The latter will be simplified by ideal ization to admit only the consideration of utility. All influences, which might be exerted by labor, by production generally· or by ex change, will be barred. In this assumed household all consumption goods used are available as though there were no question as to how they were obtained: i. e., the relations incident to their acquisition have no influence in the management of the economy.

By way of illustration let us consider the conduct of sailors on the high seas. We shall assume that owing to some accident their supply of drinking water is beginning to run short. In this connection their most important duty is well-considered selection of the uses which are still permissible. Several uses· which were allowable when water was more plentiful must be abandoned. Heretofore some water may have been used for animals aboard the vess,el and for kitchen and laundry purposes. Henceforth it must only be used to quench the thirst of human beings. Daily rations are assigned for each legitimate remaining use. The. amount in each case is carefully determined by an organization of the demand. The process of as signment is guided by the one controlling idea of safeguarding the greatest possible utility. If one assumes that the same scale of needs covers all permitted uses, the rations must be assigned in such a manner as to curtail gratification .in each instance at precisely the same margin of satiety. Where, on the other hand, the scales are of unequal gradations, the act of satisfaction naturally ceases at dif ferent limits; but no allowance can properly be given for a satisfac tion of lower intensity while one of higher intensity may still be obtained through some other use. Those needs which fan below the permissible margin of utilization must be rigidly excluded.

In modern theory the term, "margin of utility" is used to designate the degree of utility at which satisfaction is arrested. This margin is measured by the lowest of the most important uses that can be gratified by the available stores. The utmost utilization of the supply and the most careful scrutiny of the needs is presupposed. The margin in dicates the lowest partial use at which a unit of an existing supply may still be economically employed. All less important uses are for bidden; their adoption would result in loss. All greater or equal uses are permitted. More than this,· such employments. should be made; otherwise the full utility which can be obtained will not be realized.

THEOR,Y OF SIMPL,E ECONOMY 89 The margin of utility is also significant for those units of the supply which are utilized above the margin. Let us assume that ten tons of water have been stored on the vessel. One of these is kept in readiness in one of the boats against an extreme emergency. The crew will save themselves by means of this boat if the vessel sinks. This ton of water has been reserved for the most urgent need. However, so long as the ship is not in danger only the marginal utility is de pendent upon this ton. At present it may be replaced by another. Let us assume that by some accident this ton is destroyed. Another will be placed in the same boat to be ready in case of need. The loss sustained by the crew through the loss of the particular ton of water is confined to the marginal utility of the water. The case would be the same should any other of the ten tons be lost. So long as each of these is considered singly, and the remaining stores last, only the marginal utility is. dependent upon the particular ton in question.

The original assignment contemplates various useful effects according to the special disposition which shall be made of: the concrete units of the store. However, no matter what the difference in useful effect, only the marginal utility is dependent on the single unit where the latter alone is affected. The assumption of accidental loss to which we resorted just now in our illustration, is best calculated to explain the distinction be tween the affected utility and the dependent or conditioned utility. But we must not stop at this. The regular plan of the household is not laid down with a view to this assumption. It must be re membered that the accidental loss is a disarrangement of all calcula tions. The expectation is that all uses shall take place in accordance with the established dispositions. If the theoretical argument is to be conducted in accordance with practical economy, we must assume that all events take the regular systematic course of the forecast.

We have to disregard altogether the accidental loss; it may never be assumed. We must always bear in mind the ends to which the economic purpose of the household is directed. Furthermore, the actual environment with all the conditions which have influenced the plan of management, must be constantly remembered. Above all else we must clearly understand the relation between management and consumption. A theory which fails to distinguish between these two will never be ahle to interpret correctly the meaning of the economy or of its rules of computation. In a former connection (§ 9) we explained in some detail that it is the economic duty of the house holder in the use of the means at hij3 disposal to husband these in the face of the temptations to consumption which are the outgrowth of 90 SOCIAL ECONOMICS present desire. Through these means the highest total benefit must be permanently secured. An economic scheme which enforces the performance of this duty permits, under any circumstances, only those uses which do not fall below the margin of utility. To ac complish this purpose the plan will always compute all units of the consumable supply according to the measure given by the margin of utility. This will be done not only for those units which are meant to secure the marginal utility but also for the others through which even the highest satisfactions are to be obtained.

This is the rule which is actually adhered to by the domestic con sumer. The truth of this statement may be seen most clearly in observing the computation by the consumer in the case of goods bought for household use. The appraisals which have controlled the choice are unmistakably standardized in the numerical expression of the prices allowed. The example is daily repeated in innumerable instances that consumers measure all their purchases according to the margin of utility. Each unit of a given store is computed and paid for at the same amount and for each of them the computation and payment is not higher than the marginal utility. It would be altogether uneconomic to pay a higher price for anyone unit; such a purchase had better not be made at all. It is not only the ex perienced business man who reckons in this fashion; everyone does so. The housewife of the proletarian does so when she buys in ad vance the week's bread for her family. She would never dream of appraising one loaf higher than another nor of paying more for any loaf than the benefit which accrues to her through its acquisition.

Her purchases of food are destined to preserve the life of her family. The magnitude of this service may hardly be measured. And yet she does not comput~ the value of the food according to this great service which it is expected to render, but rather each unit is measured according to the greatly inferior standard of the marginal utility. It seems paradoxical to say that without exception all the units of a particular supply are computed at the marginal utility. It is also true that most theorists who have otherwise adopted the doctrine of marginal utility, do not agree with it in this respect. The objection is raised that alternative and cumulative computation are not dis tinguished in this statement. The possibilities open to the commander of a company of soldiers are analogous to those available to the house holder. The former may pick anyone of his men to act as file-leader, but he can never simultaneously make file-leaders of all the soldiers.

So also the householder may alternatively select any single unit of his supply for the. marginal use, but this employment can never simultaneTHEORY OF SIMPLE E,CONOMY 91 ously be filled by all of the pieces. But how can a theory which ac cords only alternative validity to the law of marginal utility explain the purchases of the laborer's wife? In her buying she appraises every loaf of bread at the same value. In so doing she follows the example of every purchaser in the open market; she does what he does and will do now and at all times. A theory o£ marginal utility which restricts itself in this way does not pass in its explanation be yond the case of the accidental loss. It describes nothing essential to the regular course of the economy and renounces at the start every attempt to explain the elementary facts in the formation of prices. Anyone who is not prepared to admit that the marginal utility is cumulatively valid for all units deprives the theory of marginal utility of its most important application.

The paradox is easily explained. The statement that all units of a store of goods are to be computed cumulatively according to the marginal utility ceases to appear paradoxical when we interpret it as economically active men would. The theorist may not be .per mitted to inject a meaning which is not confirmed in practical life. The housewife buying the bread needed by her family is aware in her own way that she is fully performing her economic duty when she appraises all the necessary loaves at equal values. There is' noth ing absurd in her conduct. The theorist is at fault if the formula which he establishes for her actions makes these appear inconsistent. He has failed to devise the proper expression for .their rational significance. The highest possible utility is also included when the computation at the marginal utility embraces all units. The marginal utility must be observed cumulatively for all units in order that the economic margin of use shall be reached at all points. This could not be ensured if the application were made only to the last remain ing units of our stores, the "file-leaders" of the supply. In any event, there is an apparent paradox only for those persons who fail to keep in mind the nature of the service rendered in consumption by the computation of utility. To repeat, its task is not in the least to find motives for consumption as such. Desire gives the direct motivation. The purpose of the computation is merely to exercise a painstaking supervision of consumption, which shall repudiate all de sires which fall below the admissible margin of use. It guards the margin of use at all points by preserving unimpaired the marginal utility.

The application of an appraisal by marginal utility is limited to physically divisible stores: i. e., to such as consist of homogeneous por tions of matter that admit of separate disposition. However~ it does 92 SOCIAL ECONOMICS not apply to masses or other entities ,vhich form inseparable units either because of the natural qualities of the goods or the intentions of those who may dispose of them. .A. dike may serve as illustration. It efficiently protects an island from the incursions of the sea only while its entire length is unbroken. .Another case in point is afforded by the monopolistic vendor who refuses to sell his stores except as a vvhole. The purchaser is thus faced with the alternative of buying everything or nothing. In all cases where aggregates are treated as units, the dependent utility is the total utility. which may be realized from the aggregate. The dike must be preserved intact, if the safety and total utility of all the stores and economic goods, which benefit the islanders, is not to be jeopardized. .A. tidal wave, which should break through the dike and destroy the stores of goods, would surely wipe out the entire utility that was to be obtained from the harvested supply. This total utility embraces a series of values, which reach from those highest ones inherent in the preservation of life to the marginal utility of the existing store. The latter, however, is an in considerable magnitude in comparison with the former. The crops themselves fall in a different category so long as the economy follows an undisturbed course. They are regarded as a divisible store. The more finely divisible they are, the more carefully the plan for their utilization is laid down. The plan will provide for dispositions down to the smallest quantities.

It goes without saying that these remarks do not imply that the available quantities do not influence the scheme of the economy. A plentiful harvest and a failure of crops lead to different plans of management. Similarly under ordinary conditions the partial quan tity in the framework of the whole will always be the object of regular dispositions. The stores are regarded as sums capable of separation into parts. The latter are to be disposed of by numerous contem poraneous or successive acts. But at all times such dispositions are to be made in proportions which are well balanced with reference to each other. Similar considerations govern the detailed utilization of the available masses of personal services. This is also done in accordance with the standards presented by the general circumstances. Personal services also are susceptible to subdivision. Whatever state ments may be made concerning divisible stores apply to services, sav ing, very naturally those restrictions which are to be made in view of their personal character. In what follows, whenever we speak of stores, the term always includes the available quantities of personal services unless special exception is expressly taken.

We shall make no mention in the theory of the simple economy THE 0 R Y 0 F S IMP LEE, CO NOM y 93 of the relations governing masses and other economic wholes. They are scarcely of importance in the regular course of the private economic process. Later, in the theory of the social economy, when we discuss monopoly, and still more in the theory of the state economy, we shall have to turn our attention to those pro blenlS. We shall be able to show that valuation in the economy of the state is distinguished in numerous cases from private valuation in that the former regards the total utility while the latter takes for its standard the marginal utility. In the following examination of the economic computation of utility, we assume throughout the typical relations of the private economy, dealing with stores. which admit of separation into parts. The rules which we deduce are the rules of the typical private partial computation.

This being presupposed, the fundamental law of the economic com putation of utility may be stated to be that all units (fractional quantities, pieces) of a stock should be reckoned uniformly at the marginal utility. We shall refer to this law as the law of marginal utility, or, more briefly, as the marginal law. From the latter, it follows that every divisible stock should be economically valued as a multiple of the marginal utility. The mul tiple corresponds to the number of units (fractional quantities, pieces) . When a stock consists of ten units, each with the marginal utility n, the sum of the units is to be computed as 10 n. This is not a new law, but only a different formulation of the marginal law. It is important because in it we have to key to the understanding of practical economic computations as. it is generally practiced. We shall consider it more fully in our final exposition of economic cal culation.

The marginal law establishes the basis for all other rules of the economic computation of utility. In the isolated household, two of these require special attention whenever changes occur in the quantities of the stock,l or as the case may be, of the demand. We shall designate these as the law of supply and the law of demand. First then, let us consider the law of supply. Where needs remain the same and the supply increases the computed marginal utility must be lowered. We may assume in the illustration already employed that a hitherto unopened compartment of the ship, discloses an additional number of tons of drinking 1 Trans. note: Throughout this section "stock" may be replaced by "supply," "need" by "demand"; in some places the change has been made. Since later what is clearly, "supply" is rendered by "Angehot" and is evidently distinguished from "Vorrat" as used in this section, it has seemed wise to use "stock" to con vey an idea of physical volume.

SOCIAL ECONOMICS water. In such a case it would probably be permissible to increase the daily consumption of this water by uses which until then were forbidden. Where needs remain the same and the stock decreases, as let us say, by the loss of a number of tons, the computed marginal utility must necessarily· rise. Employ ments which up to that event were allowable must afterwards be excluded. As against these instances, take the case where the computed marginal utility remains unaffected: where the reduction of supply comes about only in the course of the regular use of the commodity as satisfaction is obtained for the ex pected needs. Needs and supply are reduced coincidently. To return to the example of the ship: the stock is ten tons; the journey is to occupy ten days. The daily consumption will be one ton of water. On the first day one of the ten tons will be computed at exactly the sanie rate as will obtain on the second day for one of the remaining nine tons, or, as on the last day, for the final ton. When the ship reaches port and takes in neW' stores in the same proportions, the marginal utility will be unchanged as before. A house hold experiencing month after month the same income and the same needs will, in the regular course of events, have to deal with the same marginal utility.

On the first day of the month it draws its income and anticipates the needs of the entire month. The marginal utility which is computed at that time will not differ from that of the last day when what remains of the income is ex pended to defray the needs of the last day. These cases are no exception to the law of supply. The latter takes cognizance merely of changes of stocks when the needs remain the same. It maintains that when this latter con dition is fulfilled, the computed marginal utility changes in the opposite direction to the variation of the supply. The law of stock corresponds to the law with which the market has been familiar, that prices vary in the opposite direction to changes in the supply. The law of stock forms the theoretical basis for the explanation of the law of supply. On the other hand, the former finds its confirmation in the latter, which is demonstrated by experience. But for this very reason we may ask if the marginal law does not find empirical confirmation. The law of stock is derived from the marginal law. Then, if the latter law is established, is not the general theory of marginal utility also confirmed Y We must insist on these contentions all the more, since it is precisely in the explanation of these market experiences that the older formulations of the theory of marginal utility failed to satisfy. In its earliest forms the theory started from the total utility re alized or else from the usefulness. Therefore, it was unable to explain the market phenomenon involved in the fact that the more abundant the harvest, the lower the degree of the computed utility; the scantier the harvest, the higher the utility.

In the theory of marginal utility the object of economic computation is the unit in the framework of the supply. The marginal utility is the signifi cant magnitude of utility by which the unit is measured. All difficulties disappear for this theory. The computed marginal utility of the unit of grain is bound to be lowered when the harvest is more plentiful; it must rise when the harvest is scanty. There are occasionally cases in which, as stocks in crease, not only the marginal utility of the unit is lowered but also the product of the marginal utility and the number of units is decreased. It may happen, for example, that this product is less in the case of an abundant har vest than in the case of a meagre one. One of the most earnest advocates of THE 0 R Y 0 F S IMP LEE, CON 0 M Y 95 the older theory said that such instances were a crWJJ vera for the theory. But it is now possible to offer a consistent explanation of these cases also. The situation in such an event is just this: because of the course followed by the scale of needs the marginal utility of the unit decreases more rapidly than the num~ ber of units increases.

The explanation of the law of demand offers no further difficulties. This law deals with variations of the computed marginal utility which are caused by variations of the demand while the supply remains the same. These changes invariably take place in. correspondence with the variations of demand. The computed marginal utility rises and falls with the magnitude of the needs. The latter term is not used here to describe the sum of the needs, or that quantity of means of satisfaction which is needed to cover completely all re quirements. A narrower meaning of the term is used. This is the so-called "effective demand," and embraces those needs which could be covered in any event by the stores provided. Only variations within the limit of effective demand exert an influence upon the degree of the computed marginal utility. Variations of those impulses which urge inadmissible satisfactions are immaterial. In the illustration already used, we may assume that the supply of water on the ship has fallen so low that only a small quantity may be allowed to the crew for drinking purposes. All other uses are barred. In this case it will be a matter of entire indifference to the computation of utility what changes take place in regard to the need of prohibited employments.

In a much quoted passage in the Wealth of Nations, Adam Smith explains that value-in-use and value-in-exchange are to be carefully distinguished. Things possessing the greatest value-in-use often have little or no value-in exchange, and vice versa. Nothing is more useful than water; but nevertheless it has scarcely any purchasing power. On the other hand a diamond is nearly devoid of use-value, and yet, as a rule, a large quantity of other com modities can be obtained for it. These considerations determined Adam Smith to abandon the theory of utility in favor of the labor theory.l However, would he not have made a different choice had he been familiar with the fundamental law of the economic computation of utility? <Smith assumes that water is a free commodity. In such a case the utility of water is not to be computed economically. Free goods are available in such abun dance that no one need stint "..himself for economic reasons in making use of them. Economic foresight sets no limit to their employment. They possess no marginal utility for the obvious reason that every fractional use which may be demanded can be filled. The available stocks of diamonds are small.

Diamonds are rare in the true sense of the term. It is therefore in full agree ment with the law of the economic computation of utility that a comparatively high marginal utility is accorded to them. This may be higher than the one computed in the case of food stuffs, for example, where these are available in large quantities. It must be admitted that the entire difference which may usually be pointed out between the prices of diamonds and of food stuffs, is not explained by these remarks. Other conditi.ons of the market must also be considered, which for the present we are not able to discuss. Still, even here, we may assure the reader that it does not appear to be a hopeless problem to explain the phenomenon of the high price of diamonds from 1 See Book I, Chap. IV. Smith, to be sure, does not consistently adhere to the labor theory.

96 SOCIAL ECONOMICS the theory of utility. However this may be, the fundamental law of the eco nomic computation of utility is essential' to theory. This law holds for the simple economy of the individual. Without its aid no theory will be able to explain the factors which go to make up the price of diamonds or any other prices. There is no exception to the statement that all prices are the outgrowth of personal computations of utility on the part of the demanders. § 17. MARGIN AL UTILITY IN IDEALIZED PRODUCTION The marginal utility of products and productiv'e mearns-The cum'lltlative compu,tation of ma1"ginal utility in production. We wish to formulate our assumptions so as to simplify our state ments as far as possible with regard to idealized conditions of pro duction. We assume, then, that we have at our disposal the· personal services necessary to production. This supply of labor seeks an out let for its creative energy. It is fresh. It will not be necessary to conserve human effort either because of its quantity or from con siderations of the effects of the burden of labor. We shall further assume that iron is the only productive agent to be used. There are 1000 units of this material that will be used to produce ten different kinds of product. Each of the latter requires the same amount of iron: one unit of iron will produce one unit of any product. The final assumption which we m'ake is that the same scale describes each of the ten needs which are served by different products. The question to be answered is: by what plan will production be organized in this case so as to realize the maximum utility 1 Under these assumptions it would be a mistake. to devote the 1000 units of iron to anyone product. It would even be a mistake to provide a larger proportion for one product than for another. One may assume that the increment of utility due to the hundredth prod uct is 10. It follows from Gossen's law that the added utility due to the use of more iron to produce an additional unit must be less than 10. Since this particular use of the iron means that only 99 units of some other product can be manufactured, the gross loss of utility' must be more than 10. By the same reasoning, the further one carries the practice of favoring one product at the expense of the other. the greater is the utility sacrificed and the less the utility gained. The total utility therefore declines. This will be a maximum when the 1000 units of iron are equally distributed to all products: i. e., when the production of each of the ten fractional quantities is adjusted to 100 units. In other words the most favorable scheme of THE 0 R Y 0 F S IMP L, E E, CON 0 M Y 97 production will be established through a calculation involving the marginal utility. Each type of production will be stopped as soon as the marginal utility, 10, has been reached.

This accounting is fundamental and controls the scheme of produc tion. However it would be incomplete if it were confined to a con sideration of the various products. It must also be extended to embrace the masses of productive supplies. The productive stock is kept on hand in order to be transformed into products which are to yield a utility increment. However, every such transfer diminishes the quantity of the productive stock and thus results in a loss of utility. Both the utility increment yielded by the products and the loss of utility due to the disposition of the productive agent must be considered by economic foresight. If the expression may be per mitted, the controlling economic account is kept by double entry: it sets down the increment of utility against products and the loss of utility against the productive means. Both computations are made according to the marginal utility. In our example, one unit of iron has a marginal utility of 10. No technical transformation of the iron could therefore be permitted unless the resulting product yielded the marginal utility, 10. It is not sufficient that the producer is aware that iron, being likely to aid in turning out useful products, is itself useful. He should also know the exact measure of the utility which is assured to him by his stock of iron, according to prevailing circum.stances. Then, just as he infers the usefulness of iron from that of its products, he will deduce the amount at which the utility of iron is to be computed from the amount by which the usefulness of its products is measured. Both the iron and its products must therefore be computed according to the marginal law. In general, a series of productive means are expected to yield a series of products.

The anticipated marginal utility of the latter is imputed beforehand to the former series. The marginal law states that all units of a stock are to be computed cumulatively according to the marginal utility. This cumulative computation must therefore apply to both products and productive means. The total available supply of iron is thus to be reckoned as 1000 X 10, or 10,000. The stock set aside according to schedule for each fractional mass of products is figured as 100 X 10, or 1000. The sum of these ten masses is therefore also reckoned at 10,000. The cumulative computation in the economy does not even have the semblance of a paradox in production. It is obvious that this method of appraising the masses insures adherence 98 SOCIAL ECONOMICS to the most advantageous productive scheme, and that, moreover, it is the simplest process of estimation that could be devised under any circumstances.

To simplify the factors, we assumed but one ieries of productive means in our illustration. As a matter of fact there is always a large number of such series in a developed industry. There are as many series as there are productive stems. The marginal law holds for each of these. However, in the discussions that follow, we shall continue to simplify and shall speak collectively of the marginal utility of only one series of productive agents. We shall contrast this with the marginal utility of the products. Only in so far as it may be come necessary to follow up the computation within the system of the produc tive classes do we propose further to analyze productive utility. As for the other idealizing assumptions, we shall dismiss them one by one and resort to others which more nearly duplicate the actual facts of production. Hitherto we have assumed only a single mass of productive cost means. \-Ve shall broaden the assumption to show the joint action of land, capital and labor. 'Furthermore, we ,shall differentiate specific-and' cost prOductivemeans. So far we have considered only cost products. We shall now speak of specific products also. In place of the simplest quantitative relation between productive means and products we shall grade the cost-norms. In stead of uniformly graded scales of needs we shall take account of scales which are variously graduated. Finally, the element of time is to be in troduced to replace the time-neglecting course of production which has been discussed. We shall have to distinguish permanent productive goods from those which deteriorate while in use. In these connections we shall have to speak of the law of costs, productive imputation, computation of net yield, rent and capitalization. The doctrine of the computation of utility will thus broaden and deepen into the theory of economic computation.

§ 18. THE LAW OF THE COST OF PRODUCTION IN THE SIMPLE ECONOMY The 'lJ,sual and the scientific concepts of costs of production-The two series of individual utility and cost utility-Th~ law of the cost of production and the basic law of the computation of utility-Inter-connected costs of produ\ction -Quality products. The business man contrasts profits and costs. As he looks at the use to which wares will be put, he regards them as goods meant to bring in profits. As he considers their source, he thinks of them as. products whose manufacture involves cost. The comparison of profits and costs runs through the whole of the accounts of production. The business man's constant endeavor is to obtain the largest profit at the lowest cost. He will never incur greater outlays than he anti cipates can be recovered through the resulting utilities. However his practical experience never aids him to solve the problem of the manner THEORY OF SIMPLE E,CONOMY 99 in which the two magnitudes which he is constantly comparing are, in the last resort, fit objects of comparison.

Theory received its notion of costs from practical life, a classic illustration of the relations obtaining between economic practice and theory. The concepts inherent in the customary language of the market are the beginnings of all economic theory. This fact gives a potent influence to market parlance. This is not of itself an evil; rather it is of incalculable advantage to scientific reflection. It pro vides direct guidance to the deeply buried treasures of daily ex perience. .A wealth of experience has heen brought together in the generally current ideas of profits and costs. The influence of ordinary speech becomes a menace to theory only when its concepts are ac cepted uncritically and when scientific inquiry stops short there. The business man is a keen observer, but his field of vision is often narrowly bounded. He is apt to consider only that side of the economy which lies within the range of his practical interests. On the other hand the theorist must grasp the unity of all the phenomena of the economy.

The concepts of profits and costs are also ultimately in close con tact. Their full. significance is only realized when their intimate connection is understood. But looking closely at the matter, is not this significance at least suggested in the current idea of costs? The language of every civilized people is rich in meanings which may be felt although they are not expressed in detail. This is the case with the term "costs." As one uses it he receives a suggestion of the idea which forms the link between costs and profits. Anyone gifted with a keen feeling for living speech may uncover the connec tion by following the associations aroused by the word. Thus' , costs' , furnishes a classic example of the greatest service performed by the language of living men to scientific thought. It points to the av~nue by which we may enter the wordless wisdom of our deepest experi ences. Whenever the business man speaks of incurring costs, he has in mind the quantity of productive means required to achieve a certain end; but the associated idea of a sacrifice which his efforts demand is also aroused. In what does this sacrifice consist ~ What, for exam ple, is the cost to the producer of devoting certain quantities of iron from his supply to the manufacture of some specific product? The sacrifice consists in the exclusion or limitation of possibilities by which other products might have been turned out, had the material not been devoted to one particular product. Our definition in an 100 S-OCIAL 'ECONOMICS earlier connection made clear thatcost-productive-means are pro ductive agents ,vhich are widely scattered and have manifold uses.

As such they promise a profitable yield in many directions. But the realization of one of these necessarily involves a loss of all the others. It is this sacrifice that is predicated in the concept of costs: the costs of production or the quantities of cost-productive-meansrequired for a given product and thus withheld from other uses. It is thus shown in what respects costs and profits may be com pared. The yield is the individual utility 1 of the particular product. In costs one includes the more remote gains which. are promised by the available cost-productive-means in the utility of all other goods which may be produced. Thus we have, if we may say so, a cost utility, an iron-utility, and a labor-utility. The business man, com paring the profits of one product with its cost, compares in truth two masses of utility. He contrasts the particular amount of utility peculiar to a single type of product and the general mass of utility of all products of the same stem. Costs of, production and yield are not actually in thorough-going contrast. The yield is the utility of the individual products. The costs of production determine the general yield in the series of productive means. Whenever economic produc tion functions with a minimum of costs it results in the maximum utility.

In the idealized example of the stock· of iron, the productive mar ginal utility of the cost-means, the cost-utility, coincides exactly with the individual marginal utility of all of its products. The marginal utility of iron and also of every product is equal to 10. Conse quently, whenever production is carried on according to the original scheme, the outlay in costs is exactly counterbalanced by the realized utility. Actually the two series do not by any means always com pletely coincide. There are many deviations which arise partly from temporary disturbances and partly from permanent conditions of pro duction. For the present we shall confine our attention to the latter. We here recall the results of earlier stages of our investigation. We ascertained (§ 10) that production can never be carried to an exact state of equilibrium; that even the preparation of pure cost-products 1 Tr.ans. note: Eigennutzen. This may perhaps best be rendered as ahove.

The translator first used "inherent utility." This waS' discarded because it al ready has a definite meaning-or lack of meaning-in economic theory. Wieser does not mean to maintain that there is inherent utility in this rejected sense. As the phrase recurs frequently it is possible that in one or two passages the word "inherent" is left. If so it should be read as syn~onymous with individual particular-u tili ty.

THE 0 R Y 0 F S IMP L, E E, CON 0 M Y i01 can never be brought entirely to one "level" as the diversity of the scales of needs forms an insurmountable obstacle. We then spoke of a "general margin of use," indicated for every economy by its avail able means. We added that the individual cost-products can only be made to approach the general limit of use in so far as the gradations of the individual seales of needs permit. From this point of our inquiry, let us now proceed further. The illustration of the iron-supply and the products of iron, of which we have just made use, will again serve our ends; but we shall have to supplement it for the present purpose. We had assumed ten varieties of product, the marginal utilities of which were equally rep resented by 10. In addition to these, let us now bring forward an other group of products, the scale of needs of which is not to influence the marginal utility of 10. Let us further assume that, over and above the original 1000 units of iron, 200 more are available. These are destined for the erection of two iron bridges to connect sections of a city separated by a river. Each of the bridges will require an outlay of 100 units of iron. Let the utility resulting from the erection of the first bridge be so large as to exceed considerably the outlay of 1000, ascertained by multiplying the required iron-units by the mar ginal utility. We will assume it to be 2000 or 3000. This is equiva lent to 20 or 30 for each unit of iron. A second bridge, also, is to yield a utility in excess of the outlay of costs. We will assume this to be 1500, or 15 for each unit. A third bridge, however, would yield only 500, or 5 for the unit of iron. It would follow that a third bridge must not be built. Its yield of utilities would not compensate for the costs to be incurred. Assuming these figures, the general margin of use of the iron-unit is 10. It is determined by those types of production which can be extended .exactly to the marginal utility, 10. Designating these as marginal productive 'processes and their products as marginal products, we may define the "general margin of use" as the limit, determined by the marginal utility of marginal products. The striking economic characteristic of the product, "bridge," is that it is not a marginal product. We shall speak of all products of this sort as products of a narrower margin of utility, and of the production processes as those of the narro,ver margin of utility. For marginal products, the marginal utility and utility-cost coincide; for the particular product" bridge" they do not. Here the individual marginal utility is higher than the utility-cost.

By what standard, then, is a product of narrower marginal utility to be computed, economically 1 Should it be by that of the higher 102 SOCIAL ECONOMICS individual marginal utility, or according to that of the lower utility cost? This is the crucial point. Conditions surely might be con ceived in which the individual marginal utility would supply the standard. If one of the bridges is carried away when the ice breaks up, the loss sustained until the bridge is reconstructed, is to be com puted according to the full measure of its marginal utility of 1500. This measures the damage during the entire period. If the second bridge also should be destroyed, the damage sustained should be computed according to the still higher standard of utility of 2000 or 3000 that is dependent on its preservation. In case of war, victory and even the safety of the country may depend on the possession of the two means of crossing. ·Under these conditions, sacrifices will possibly be made for their defence, far exceeding the standard which would have formed the basis of an appraisal in time of peace. Thus, in the press of battle one may offer "a kingdom for a horse," al though in the ordinary routine of economic work, the utility of a horse is not appraised at an extraordinary figure.

The routine economic computation, however, is neither concerned with an estimation of the damage resulting from an unforeseen loss nor with an appraisal induced by the unusual vicissitudes of war. Economic computation is effected solely for the purpose of establish ing a scheme of production of use in the economy. The resulting numerical values are only such as· these ends require. Further pos sibilities, beyond the sphere of the economic current of affairs, are disregarded. For these purposes it is quite adequate to confine at tention to the standard of the utility-costs. Thus, in our example, the two bridges are appraised as structures, each of which calls for an outlay of 100· units of iron whose marginal utility is 10. This figure is an accurate measure of the utility which is significant in the regu lar course of the economy. This proposition we now expect to dem onstrate. In order that our illustration may be more in keeping with the multiform variety of actual conditions, we shall abandon one of the idealized assumptions. We shall no longer assume that the same simple cost-rate and the same regular scale of needs applies to the ten species of products other than the bridges. The great variety of iron-prOdUCts which modern industry turns out are of the most di verse sizes. They demand very different quantities of iron, from the finest wire to enormous blocks. The scales of needs to be served are as variously graded. Our illustration was devised so as to show only for the bridges a divergence of the inherent marginal utility and the THEOR,Y OF 8IMPL,E E,CONOMY 103 cost-utility. F'or all other iron-products these were assumed to coin cide. But probably the reverse is a better description of actual con ditions. Only for comparatively few kinds of products do the two series .coincide; for the greater number they· diverge. In other words, the number of production-processes of the narrower margin of utility is probably greater than that of the marginal production processes.

However that may be, the iron-products of the narrower margin of utility, as explained in our illustration for the bridge, will have to be appraised not at the individual higher marginal utility, but only at the lower cost-utility. Could this be otherwise? The fundamental law of utility-computation, the marginal law, demands like computa tion for all like units. As it is valid for the stocks of commodities of the first order in the household, this law is valid for the stocks of com modities of higher orders in production; all units of iron in the crude state are to be computed alike. No matter what the finished products into which they are to be turned, they will have to be estimated, unit by unit, according to the productive marginal utility, the measure of which is determined by the marginal utility of the marginal products. But could the iron, turned into finished products, be estimated differently, when used according to plan? Entering every iron-product fashioned according to schedule in the account of the economy as the product of the number of iron units and the mar ginal utility of the iron-unit, we obtain an arithmetic expression that corresponds exactly to the correct scheme of production and is all the more advantageous, inasmuch as the arithmetic expression is extremely simplified. Even in planning the scheme of production we need not endeavor to carry out in all cases with punctilious accuracy the rather difficult appraisal of the individual utility. It answers every purpose for example to ascertain that the usefulness of both a first and second bridge is larger than the utility cost. The exact numerical expres sion of the general margin of utility will have to be accurately calculated. But if it is once established that the individual utility equals at least the utility cost, the remaining calculations may con fidently be completed by the numerical expression of the utility cost.

That this manner of computation is correct, can be shown by prac tical results. It extends to the entire output of human economic activity, to every employment of materials, wherever these are economically permitted; it bars all those that are economically barred. If we now also abandon the idealizing assumption that merely the raw material, iron, need be computed economically, and broaden the 104 SOCIAL ECONOMICS assumption so as to include the entire array of cost-productive means as objects of economic computation, efforts of labor as well as cost commodities, we. shall reach the same result even under this greatly extended assumption. Cost-products are always to be regarded as compounds of the cost-elements required for turning them out in the regular course of economy . Just as, technically considered, they are allotropic modifications of their component elements, they will have to be accepted as such arithmeti cally. 1 This is the Production Cost Law of the simple economy. We must perfect it by an explanation in order to introduce the factor of dura tion of time in production which our ideal outline has hitherto neg lected. In order that our inquiry be complete in all respects, we must still answer the question as to how the productive yields should be re distributed to the cost-means which have worked together in earning them. As to both these problems, we shall have to defer the sup plementary investigation just as we shall have to introduce the law of computation for specific products later on.

The law of the cost of production of the siimple economy is ob served by every individual producer, even in a fully developed social econonlY. Every producer in his accounts computes the cost products which he turns out as compounds of the productive elements required to get them ready. The formulations in which the market traditionally predicates the law of costs, as well as the older, theoreti cal interpretations, do not by any means completely reproduce the computation which the producers actually follow. They stress cost quantities, quantities of required cost-units, but they find no expres sion for the manner in which the cost-units themselves are to be esti mated. Our formula gives complete expression to the cost-law in that it also points out the standard by which the cost-units are to be computed. The productive marginal utility of the cost-unit is the standard; it is deduced· from the marginal utility of the marginal products. This complete expression gives the cost-law its correct meaning . It is not a new law; it merely transfers the fundamental law of the computation of utility to the widely ramified conditions of the relationship of production. It traces products back to the productive stem-elements, and it· computes the latter· at the beneficial yield which they promise in the case of their most profitable employ ment. There is a much smaller number of stem-elements than of variations by which they may be compounded and therefore of kinds of products. Thus the calculation according to costs results in a much 1 v. Wieser, The Source oj Value, p. 152.

THE 0 R Y 0 F S IMP L, E E, CON 0 M Y 105 more simple expression than the calculation according to the individ ual utility of the products. As we have already shown, the calcula tion according to the marginal utility is much more simple than the calculation according to total utility; the computation according to costs is another step towards simplification of the economic account. We are accustomed to speak of joint costs of production or, as the case may be, joint products. Waste products and by-products offer the most familiar illustration. Both are obtained in the course of the manufacture or a principal product: waste-products, without re quiring an additional expenditure of any kind; by-products on the other hand, still necessitating a moderate, though possibly small, productive outlay. The peculiarity of either class of goods is that the supply is built up without any immediate regard to needs. As many waste-products are accumulated to be disposed of as the in crease of the principal product brings in its train. When it comes to by-products, their special costs will naturally have to be charged to their account. This account is to be arranged so as to exhibit how principal costs and subsidiary costs are balanced by the yield in principal products and by-products. The subsidiary costs will never be the more significant.

In a broader sense, all those products are to be classified as joint produ:cts which are obtained under one system or operations. For all these, certain general expenses. are joint expenses: certain plant costs and costs of operation which are to be distinguished from special costs, as they arise separately for individual products. There are various transitions between general expenses and special expenses. The general expenses are joint costs and have to be apportioned among all products of the output or its subdivisions, as the case may be. The apportionment is to be made with the aim of realizing the greatest total benefit that can possibly be secured. Let this general proposi tion suffice for the present; all details will be taken up later on in connection with the· doctrine or prices. There are numerous quality-products which are obtained by em ploying specific productive means of special quality. Possibly, how ever, the superior quality is due only to intensified additions of cost means, for example, by using a greater number of hours of labor.

Quality-products of the latter kind are cost-products; they are 'Com positions of the same kind of cost-elements as the cruder products, but the required expenditure for cost-elements is greater per unit. An economy of more limited means will have to content itself with the cruder products which satisfy the principal need less fully and are subject to many inconvenient and injurious counter-effects. An 106 SOCIAL ECONOMICS advanced economy, having at its command more abundant stores of materials as well as a larger supply of labor, increases its satisfac tions not only by making nlore but also better products. For both types of progress the law of satiety holds. The added productive elements, in the one case as in the other, are employed with decreasing utility. In both cases they serve a decreasing need. Over-satiety may finally result, on the one hand, by increasing the acts of satisfaction to exceed healthful limits; on the other, by an over-refinement that leads to degeneration. This observation is im portant inasmuch as it traces the quality of products to cost-quan tities, and thus broadens the field within which the cost-law has va lidity and simplifies the economic account.

§ 19. CHANGES OF COSTS AND THE COMPUTATION OF UTILITY Temporary disturbances of production-Decreasing costs-Technical progress and the law of supplyI ncreasrilng costs-Diminishing .. ret1lll""ns from land and inoreasing industrial returns-The law 01 the cost of reproduction-The law of mamimum costs. Under all conditions changes of cost bring about changes of price. It is this fact which is largely responsible for the opinion that prices are chiefly responsible for costs, an opinion that is widely held in business· circles and has thus been communicated to theorists. As a matter of fact this is not an immediate relationship. Costs, and con sequently their changes, can only affect prices in so far as these factors influence the computation of utility. Therefore the effect on prices of changes in costs can only be understood when one com prehends their influence on the computation of utility.

Changes .of costs are due to a variety of causes. In part they are the result of changes in the actual conditions of supply and demand; in part of changes occurring in the technique of production. Not infrequently both of these are contributing factors. First, as regards the changes of demand' and supply, there are minor fluctuations which frequently occur but never exert a very appreciable influence. But at times there are also more extensive changes which occur so rapidly that production cannot be immediately adjusted to them. Such changes disturb production, demoralize the relationship of one branch to another, and may possibly for some time sever such connections entirely. Under these conditions, utility-cost may be partially or completely displaced; the individual utility gains independent promi nence. For example, when war suddenly breaks out, the need of fire-arms unexpectedly becomes pressing. If part of the store of THE 0 R Y 0 F S IMP LEE, CON 0 M Y 107 weapons is seized by the enemy, the interconnections of the produc tion relationship will be practically destroyed. For· the time being, those weapons which are ready for use will no longer be regarded as products: i. e., as compounds of their elements. They will be con sidered as commodities of a given kind which are· to be appraised at their higher, individual utility. However, it will be observed that in such a case an extreme tension is set up between the utility-cost of iron and of the other productive elements on the one hand, and the in dividual utility of weapons on the other. This tension gives a strong impetus to extend production and once more to increase stocks. Costs will be incurred which had never been allowable in other circumstances, until finally the disturbance will be overcome and an equilibrium re established between the results of the two methods of computation.

An opposite type of disturbance may also occur, due· to the sudden falling-off of needs or the unexpected inflation of available stocks. In cases of this sort, the individual utility of existing products will drop below the margin of costs. It is likely that an effort will be made to restore an equilibrium between the two computations by stimulating consumption. When durable products are involved, a considerable falling-off of demand will of necessity lead not only to a temporary retardation of production, but to its permanent cessation. For exam ple, in a city whose population has greatly decreased, new dwellings are not likely to be built so long as those already erected are habitable. These older habitable houses will no longer be appraised as compounds of their cost~elements, but rather according to the lower standard of their marginal utility which fails to compensate for the costs of construction.

The changes in the technique of production are of two kinds. On the one hand there is the progress of the technical arts which lowers the rates of cost. On the other hand, .production may be carried on under less favorable conditions at higher rates, as may happen where an increase of population necessarily leads to increased needs. It is easy to trace the effect of limited technical progress ,vhich lowers the cost only for minor groups of products. The number of cost-units by which the affected products must be computed will be reduced. Simultaneously, savings will be made in cost-means. At the same time production may perhaps be extended, thus increasing the need of cost-means. .As the one or the other effect predominates, certain movements are started to restore an equilibrium with reference to other products. Such displacements in one segment of the produc tive process will always be insignificant and will scarcely exert an appreciable influence on the computation of the utility of related 108 SOC I AL E CON 0 M I C S products. It is otherwise with technical progress of general signifi Icance. The employment of steam power in the factory economy has lowered the rates of cost for a long series of products. Railroads have had an even wider influence which has extended to all products in inland transportation where rivers and canals were not accessible.

Should the airship become the vehicle of transportation in the future and surpaHS the railroad in efficiency and cheapness as the latter surpassed the turnpike, it would have a momentous effect in an equally extensive sphere. Such far-reaching technical progress has manifold influences on the computation of utility. It directly lowers the costs of many products. According to the law of supply, it depresses the marginal utility of the cost-unit, for an increased quantity of products can now be manufactured. In this way technical advances also affect products whose costs are not lowered. These may likewise be produced in larger quantities owing to the depression in the margin of use. Finally, by the law of costs these improvements affect even products of a narrower marginal utility whose ,costs are not lowered and which are not produced in increased quantities. A general advance in prices is accompanied by the same broad ef fects in an inverse order. -Not only the cost rates of the directly affected products, but the appraisal of the cost-units is increased.

Furthermore the general margin of use is raised for other productive processes as well. This may even extend to all economic production. For example, let us assume that no cheaper source of power has been discovered to take the place of steam, that the best coal mines have been exhausted, and that producers have been forced to resort to inferior deposits which may be worked only at greater cost. Such an occurrence will seriously curtail the efficiency and extent of the world's productivity and the possibility of supplying its needs. It will find expression not merely in a far-reaching increase af the most important costs but also in an enhanced computation of all cost units. It will consequently result in an extensive shrinkage of the economic margin of use of the war ld. The influence of the changes of costs on the computation of utility extends also to stocks of products which are retained from a period when the old rates were valid. When technical improvements are made, a certain lapse of time will of course always be required until the new methods can be completely applied. But even if one grants this, where the accumulated earlier stocks were very large the' re duction of costs may have a certain anticipatory effect. In using the stocks, the new line of marginal utility is prepared for or approxi mated. When the transitional period is passed and the qualities of THEORY OF BIMPLE E,CONOMY 109 the old products and the new are the same, probably no distinction will be made. All products are appraised alike at the new reduced rate of cost; or, as one may also put it, the determining consideration in the case of the older products is not their original cost but rather the cost of their replacement or reproduction. This law of the costs of reproduction will probably not require further demonstration.

It goes no further than to say that the controlling factor at all times is the lowest expenditure which is required by industrial conditions. Diversities in cost rates appear not only in consequence of chang'es in cost, but also, technical conditions remaining the same, as the result of the different external conditions to which establishments are sub ject. Such diversity need not be considered in connection with the computation of utility. The best adapted classes of land yield their produce at lower cost than the medium and inferior ones. However, no matter on what land the crop is produced, so long as it is of uni form quality, it is invariably appraised at the same rate. The high, est of all these rates of cost is the controlling one, where the outlay for cultivation is still economically required in order to meet the out lay for the demand. In this sense one may speak of a law of highest costs. When, on the other hand, in consequence of negligence, want of skill, want of knowledge, or indolence, excessive costs have been incurred, these are not decisive in the computation. They are not , ,required, " they do not correspond to the highest attainable degree of exploitation, or, in the familiar expression of Marx, to the social average degree of skill and intensity.

All the propositions which have now been deduced with respect to changes of costs are already familiar in their effect on price. It must be borne in mind that they come into playas regards not only the price but also the computation of utility. Concretely they affect the price by means of the computation of utility. Like all other products, capital goods are also subject to the law of the costs of reproduction: i. e., they are tobe appraised at the small est expenditure which the technique and actual conditions of the period require. A fully developed technology beyond doubt requires capital goods for the production of other capital commodities. The attempt of the labor theory to explain capital as a mere product of labor (see closing remarks of section 13) is inconsistent, therefore, with the law of the costs of reproduction. Historically extinct methods of production exert as little influence in the appraisal of capital as of any other product. A theory which falls back on such methods completely abandons the current trend of economic thought.

110 SOCIAL ECONOMICS The law of diminishing returns from land is an illustration of a widely felt increase in cost that occurs frequently in practice. It is possible that the general advance of all prices which is now so universally complained of in all countries of the world is to be traced to the fact that this law, after pro longed suspension, has again become effective. It may be that the food re quirements for the enormously increased population of our period are be coming such as can no longer be met by resort to new lands. Even were this law not the universal rule in agriculture, and if all outlays on the soil were rewarded by equal yields, the production of foodstuffs for an increasing popu lation would still require an increase in the absolute costs. .such an increase would only be possible without corresponding retrenchments, where the capital of the people is growing proportionately.

The law of diminishing returns from land becomes more burdensome as it increases the relative per capita costs. Only in countries where the growth of capital proceeds at least in equal proportions with the increase in popula tion, can the onerous effects of the law be overcome. The effects of the operation of the law on the appraisal of agricultural and industrial products may be most clearly shown bY' a numerical illustration. For the sake of simplicity let us select our facts so as to confine all agricultural production to the one product, wheat. We shall assume that up to the period contemplated by our example, an addition of ten cost units was required in order to reap one hundred pounds of wheat. For the future, to feed the larger population, eleven units will be required. Let us start with the most un favorable combination of circumstances : the increase of capital is not suffi ciently large to supply the entire additional outlay, and wheat is a marginal product. Hitherto. wheat .has had a marginal utility of ten, which has ex actly corresponded with the required outlay. The expenditure of eleven units will not be permissible until the marginal utility· of wheat has risen to eleven.

In other words, where conditions are of the sort assumed, an increase of pro duction is only allowable where there is at the same time a corresponding re duction of the quantity of wheat per capita, and where therefore, food consump tion per capita has decreased. At the same time, all other marginal production will have to be curtailed proportionately. The standard of living of the middle classes will therefore also be lowered as regards the use of a number of in dustrial products. If wheat is not a marginal product but is one with a narrower margin of use, the conditions are more favorable. Let us say that the marginal utility is twelve. In this case, the increased outlay of eleven will be allowable with out of necessity reducing per capita food consumption. The outlays required for increased cultivation will be withdrawn from marginal industrial produc tion to which they would otherwise have been directed. The fact that the productive marginal utility must now be appraised at a higher figure will be felt only in the curtailed supply of these industrial products.

Finally, let us assume the most favorable circumstances: the universal in crease of wealth is large enough to provide the additional outlay for cultivation even without curtailing marginal industrial production. The law of diminishing returns from land will not result in an increase of the appraisal of the cost units. Its effect will be confined simply to an alteration of the proportions in which agricultural and industrial products are valued. The former will thence forth be subject to a higher comparative computation, since their costs are rising, THEORY OF SIMPLE E,CONOMY 111 while those of the latter are falling. The alteration of this relationship will be all the greater, the more extensively the progress of industry allows it to function with increasing yields. § 20. THE PROBLEM OF ATTRIBUTION OF YIELDS The complementary quality of lwoductive mean8-The creative force of labor a·nd the "produot of la·bor"-Apportionment of yield and distribution of inoome -The rela.tion of juridiaal and economic attributiorn to the causal ne(JJus~ The variability of productive interrelations-Menger's attempted solutiolJ1r Final statement of the problem.

The factors of production are complementary. Neither capital, land nor labor, unsupported by other forces, produces a yield. That which the soil brings forth without cultivation as the spontaneous gift of nature, is uncertain and extremely scanty. The" fruits of the soil" which are not "products of labor" disappear in contrast with the returns drawn forth by the hand of man. But even so, the mere garnering of the fruits, whenever it is continuously per formed, involves labor. This is clear in the case of hunting and fish ing. It is especially true that mining is a laborious acquisition of the products of the earth. In order to fashion the simplest products, labor requires raw materials. When the results of labor are to be increased, it must be reinforced by tools. In an advanced economy there are numerous stages of technical manipulation and transporta tion for every product, that extend from the recovery of the raw material to its delivery into the hands of the consumer. Every product thus absorbs the effects of almost innumerable means of production. When one speaks theoretically of the three productive factors, land, capital and labor, one gives a collective designation to the three comprehensive groups into which the thousands and thou sands of productive means may be divided.

In order to direct production systematically, the producer must be able to judge in any given case the extent to which the yield is the result of anyone of the many jointly active productive means that have been used. He must be able to apportion the joint product among the cooperating factors. Practical production is constantly engaged in this task. There is no doubt that it can perform the task with any degree of accuracy that may suit its purpose. Great in dustries with a world market have precise methods that facilitate such calculation. It is not necessary that such large scale endeavor be involved in order to ascertain what every laborer, machine and new plant brings in. Ever since there has been such a thing as an econ112 SOCIAL ECONOMICS omy, the problem of the attribution of yields has been presented and has been solved in an appropriate manner. We cannot conceive of its being absent in the economy of a Crusoe. There are traces of a consciousness of this problem in the development of the most primitive races of hunters and fishes. If the future ever witnesses the rise of a socialistic economy, the problem will be equally present. The solu tion will have to proceed along the same line of trial and error which has characterized the method of a Crusoe or of an early race of hunters and fishers.

In § 12 we have already seen that the three factors of production are by no means coordinate. Labor is the directing force. It commands the complementary material factors which are merely its tools. The latter are dead instruments, while labor, conscious of its ends, is creative and is the living force. In this sense one may say that labor alone is the producer. One may confidently add that land and capital are merely the conditioning prerequisites to production by labor. In this sense one may also adopt the familiar statement that every product is fundamentally a labor-product. It would be a serious blunder, however, to assume that in the prac tieal economy the entire productive yield should be ascribed to labor alone. In practice, cognizance will always be taken of the fact that the amount of the yield is dependent on the extent to which the creative worker is aided by material instruments. The worker himself distinguishes the more and the less effective aids.. Whenever he thus feels that a greater or smaller proportion of the yield is dependent on such instruments, only a remainder of the total product may be allotted to the reward of his .labor .1 1 In those industries in Germany in which relatively the most capital is used the pecuniary, per-capita yield is about 4000 Marks. [Trans. note: These are of course pre-war references.] In others where relatively less capital is used the yield is roughly 2000 Marks. It is obviously inconclusive to explain the dif ference in yield of 2000 Marks as the mere product of the labor employed in the industries using a large amount of capital. Even in the second group of in dustries the entire yield is not to be set down as the product of labor. Only a portion of the yield may be attributed directly t:o labor. The residue, disregard ing the share of the entrepreneur, must be attributed to the capital employed.

No entrepreneur could make any other calculation without incurring serious loss. Even the model social state will have to adhere to this rule. The labor-theory itself does not conclude that. the full amount of the yield of labor is to be attributed to the share of the labor immediately employed. It partitions the yield. That portion, which the entrepreneur reserves as the share of capital, it imputes to the indirectly employed labor: i. e., such labor as is represented in the capital which, in the terms of the labor-theory, is itself a product of labor. Economic practice refutes this proposition. (See § 13.) TH,EORY OF SIMPLE E,CONOMY 113 Even should a socialistic labor-party at some distant day succeed in enforcing its demand that the social income be distributed only among actively employed workers, the problem of apportioning yields would still retain its importance. The distribution of income and the attribution of yield are two entirely distinct problems. Es, sentially the socialist demands that land and capital, as necessary instruments to labor, be not held as private property but be under the control of the socially organized working community. The shares of the income which are realized by land and capital are not to be distributed to private appropriators, least of all as personal income to non-workers. B'ut in the socialistic economy as well as any other it is essential to systematic, economic conduct that these shares be accurately ascertained.

On the other hand, although we may admit that land as well as capital has contributed its share of the yield, this does not supply an argument against the essential demand of socialism. It is not legitimate to conclude from this fact that land and capital should be private property and should form the basis of private incomes. The problem of the attribution of yield is a problem of the inner organiza tion of the economy. It has a place in every economic code and is therefore consistent with all of them. It is a problem of the simple economy. As such, it should be above the wranglings of party ani mosity. Once the true nature of the problem is admitted, however, it is evident that the socialist party loses one of its most effective argu ments. If it is conceded that land and capital have no share in the yield, one must also concede that all incomes received by landowners and capitalists go to them at the expense of the workers who created the yield. So long as such conditions obtain, there can be no name other than exploitation to describe these incomes. To this extent, then, the partisans of private property have strong reason to wish to demonstrate that land and capital are also entitled to share in the yield. The theoretical defence of private property in productive means would be untenable and should have no prospect of success, ifit were found to be true that all earnings are produced by labor, For practical purposes capital is not purely a product of labor. It is impossible to eliminate the factor, capital, from the field of practical economy. The theory is correct in the assertion that from the share of the yield which is imputed in the first instance to capital a certain amount must be attributed to the labor which was used in the production of the capital. However, there will al ways remain a residual which cannot be traced back to labor but must be credited to capital as such.

114 SOCIAL ECONOMICS and that the problem of the apportionment of yield, non-existent in the simple economy, had only been raised by the greed of the wealthy classes. The economic theory of business enterprise 1 has nevertheless given little attention to the problem. This may be explained by the fact that the great proponents of business economy, the classicists, advocated the labor theory. Being economists of business enterprise they have not carried the labor theory to its logical consequences. This task was reserved to the socialist investigators who found their most useful weapon ready at hand in the classical labor theory. How;. ever, they were so deeply impressed by the labor theory that they were unable to make proper approach to the problem of the attribution of yield. Only in Ricardo's theory of rent is an especially obvious instance of attribution discussed. 'Vhen on superior soil with the same labors of cultivation a better crop has been raised than on in ferior land, one may readily see that the· credit for this excess belongs not to labor but to the condition of the land. Consequently it will always be spoken of as the excess product of that land. In this case the sequence of fact did not escape the acumen of Ricardo. However, he did not penetrate to an understanding of the full extent and significance of the problem of attribution.

Until most recently those economists of business enterprise who advocated not the labor theory but the theory of utility, have had little success in approaching the problem. They had scarcely reached a scientific comprehension of the elementary ideas of the theory of utility. The problem of attribution was set aside with a solemn dec laration of its insolubility. And truly, taking the problem as it was stated, it had no solution. These writers attempted to point out for each of the productive means employed, the physical share to be ascribed to it in the formation of the product. This method of stat ing the problem might have been all very well if the art of production consisted merely in an external combination of materials, as flour, salt and spices are put together to make bread. Even with the sim plest assumption, it is impossible to do justice to the labor forces which mix the ingredients. How could one expect to account for all the many formative forces which alter materials without adding new elements to their substance, or which transport finished goods from one place to another' A correct statement of the problem must be made in accordance with economic practice. The problem of the partitioning of yield is not practically dependent on the discovery of physical causality but 1 die burger Hehe Oek~onomie.

THE 0 RY OF 81 M PLE E·C 0 NOM Y 115 on economic imputation. Juridical science, within the sphere of its subject matter, has long exploited the idea of attribution and its causal nexus. This legal doctrine furnishes a model which economic theory need only have followed in order to state its problem. The judge cannot condemn anyone who has not in some way or other contributed to the criminal result: i. e., is not connected with the criminal event by causal nexus. This connection is by no means sufficient to establish the degree in which one is responsible for the crime. Only such persons may be condemned as are of sound mind and have acted with that degree of criminality which creates penal responsibility in the case before the court. The judge must exercise care that no link is missing in the chain of facts which establish the causal nexus. However, he need enter no more deeply into the con nection of events than the proceedings require. He will be satisfied, for example, if a medical expert testifies that the poison used was capable of causing death. The question by what bodily changes death was caused, so important to the scientific pharmacologist, will not con cern him at all. As soon as the judge has established the causal nexus and the presumption of sanity, he is bound to attribute the entire re sult to the accused. This is true even though he may know very well that the accused could never have accomplished it alone without in struments and without the peculiar contributing circumstances. The criminal may have >made use of a third person now innocently impli cated in the causal nexus. It is possible that the unsuspecting victim of the crime was himself induced to follow a course of conduct which accomplished his ruin, and therefore formed part of the· causal nexus.

These connections may have been widespread. Many causes and in dividuals may have operated. However, the judge pronounces the perpetrator alone as the responsible agent to whom the result must be attributed. A decree of this sort is not in the least illogical. It does not pur port to be a proposition concerning the causal nexus. It does not say that the perpetrator alone did commit, or could have committed, the deed without the aid of tools or the other persons of whom he made use. It says that among the many contributing factors the perpe trator is the only responsible agent. He is the only one whom the judge can punish in order to carry out the intention of the law and to satisfy the end of .punishment. It may be that in this instance the decree of the judge is necessarily different from that of the philanthropist, the moralist or the statesman of broad views. The judge is controlled by ends which are pointed out in the law and by the purpose of punishment. These other 116 S OC I ALE C ,0 NOM I C S critics pursue different ends. They may acquit the accused of all culpability, laying the deed at the door of entirely different individ uals or social classes that the law does not reach. It is even possible that they hold the state itself, the maker of the law, responsible. Each man starts from the same facts and follows the identical causal nexus.

Each of these observers logically reaches a different attribution, for each has particular ends in mind. The problem of attribution is necessarily that of selecting from among the multitude of agents and causes those particular ones which are determining, and therefore practically decisive as regards the end in view. No branch of human activity including economic production could accomplish its ends without resorting to the process of attribution. The attention of economic inquiry should not be confined to the causal nexus. The analysis should neither endeavor to penetrate the series of causation more deeply than is demanded by practical interest, nor should it stop at the threshold of the intricacies of this causation. In the case of production the problem is to throw sufficient light upon the causal nexus to move from it to the practical problem of attribu tion. Numerous causes are contributing factors. Productive impu tation will select only those which come into the sphere of influence of the practical economy. It disregards all those causes which were effective during an earlier but terminated period of production. It disregards all those ,peculiar to other fields of human life as, for exam...

pIe, to politics or to general social conditions, important as these may be in their reaction on the general social organization. It does not consider those elements of nature which may not be dominated' by man, as sunlight and the sun; or even those elements which are sub ject to human control but may be used in superabundance as free goods. It confines itself altogether to existing economic commodities and services. The attribution of the entire productive effect to these goods is not illogical nor does it falsify the facts. The method merely confines. it self, as attribution always does, to those causes which are of practical importance for the purpose in hand. The farmer does not feel called upon to determine what general causes brought forth his crops. It is only .important that he know which of the causes were practically and economically significant. He is fully justified, therefore, if he does not attribute any share in the fruits of his land to the free air above his field, although the air is undoubtedly an active and even indispensable factor of the thriving condition of his crops. With good reason he attributes the entire yield to the economic productive means which could never have produced the result by themselves. In prac ..

THEOR,Y OF SIMPL,E E,CONOMY 117 tice these are the only important causes among the many which stand in a causal nexus to the yield. They are the only ones which he as a producer is interested in controlling. When the producer begins to partition the yield among these various significant factors, he must consider the causal nexus and attribution separately. He will not speculate too deeply concerning the former. He will center his at tention on the important relationships, and once more will turn to attribution. It would be a hopeless task for the farmer, in the illus tratio.n used above of the better grade of land, to attempt to determine by physical analysis of the crop the effects of the soil, the labor, the seed, the manure, the plow and all the other tools. His purpose is sufficiently served by a determination of the fact that equal outlays return larger yields from the better grades of soil. He will probably attribute this entire excess of yield to the qualities. of the superior soil, although he well knows that this addition to his crop is. not merely a fruit of the soil, but is fully as much the result of labor, seed and other capital goods which he used. Under such circumstances, the practical cause of the larger harvest is the superior soil, and hence the farmer's ,reasoning leads him to act correctly. Any other course would be mistaken. The owner would lose in the sale of his land if he disregarded the larger yield of the best soil and placed the price as low as that which he would fix for the poorest.

The partitioning of yields is an act of attribution. .AE such it is neither more nor less than a computation of utility. Until now we have examined the latter act subject to the simplifying assumption that every good renders its service in isolation. In the theory of at tribution we must examine the laws of the computation of utility for the more complicated case of productive goods whose services are rendered jointly. It is easy to deduce the law of attribution in the case of the larger yield from the good soil. But how is the yield of poorer grades to be imputed to land, capital and labor? In general, in what manner is a typical yield to be apportioned to the jointly active productive means? One of Menger's great achievements is that he stated the problem of the ap portionment of yields so as to make its solution more probable also in the general case. He has shown that productive means are complementary. How ever, the proportions in which they are used are not rigid. Were land, capital and labor always associated in the same proportion, it would be impossible to determine the share of each with practical certainty. No further statement could be confidently made than that the three productive factors, when com bined in typical proportions lead, as total cause, to a certain result. However, 118 SOCIAL ECONOMICS the effect to be ascribed to each partial cause could not be determined. It would even be improper to speak of a partial cause. The case would be exactly that of the familiar illustration of the shears, which Mill uses in his LOlgia when he endeavors to explain the concept of cause. Provided they must always be combined in the same proportions, land, capital" and labor would act in con junction like the two cutting edges of the shears, .as a single indivisible cause.

But this assumption does not give a true picture of actual life. Far from it, experience shows that the three factors are combined in endless variety in pro~ duction. Each of the productive means has most diverse uses with the com plementary productive means. It must therefore be possible to determine from the differing yields of these variations, the particular effect for which one factor is responsible as a partial cause. It is true that Menger has not succeeded in finally disposing of the problem of attribution. He failed even to state the problem correctly, for he never grasped the full significance of the concepts either of attribution or of the computation of utility. He proceeds as follows: experience demonstrates that when a single productive unit ceases to function, all other elements of a pro ductive combination are not necessarily thrown out of action. It may happen that they continue to work together and produce a reduced yield. It may be that the lost unit is replaced by another. Such a substitution leaves a gap at some other point in the productive process. It may also be that it is con sidered more advantageous to break up entirely the combination originally planned and to apply the units thus saved to other productive combinations.

The yield of the latter will be increased, although the incre'ase may not fully compensate for the yield of the abandoned combination. If ten units of each of ten different elements are combined to give a yield of 100, the entire yield does not depend on anyone unit.-Such a supposition would make the solution impossible.~Every single unit has only a determinate, partial yield dependent on it. This condition seems to offer a basis for the apportionment of yield. On closer examination, however, we conclude that the desired result cannot be achieved in this manner. This is most clearly recognized in the fact that entirely different results are arrived at according to the element selected for elimination and the number of the eliminated units. We also find on further reflection that Menger's method always leaves an unapportioned residue. The plan of production must be adjusted to the most remunerative variation. There fore any alteration must give a smaller yield. The difference may indeed be trifling as between the most profitable and the next best combination. It must, however, be finite or the first combination would not have been chosen. At all events the difference must never be wholly neglected theoretically.

Menger's controlling idea is that practical economic accounting starts from the probability of accidental loss. Actually the computation of utility is never connected with this· assumption. If it were to start from this assumption, the marginal law and the cumulative attribution of, marginal utility might be charged with an internal contradiction. It always rests on the assumption that the most beneficial result is expected and actually will be realized. In any event, nothing is decided in reference to the computation of utility by varia tions of inferior yields which are not part of a determinate scheme. Neither has the difference between the yield of the originally planned combination and that of the next most profitable combination any significanee in the computa tion of utility. When the most favorable combination as planned promises a THEORY OF 81 MP LIE E·C 0 NOM Y 119 yield of 100, it is entirely immaterial whether the next obtainable yield be 99, 98, 50 or 1. Attribution must start invariably from 100. No deduction may be allowed from thifi amount in the rate at which the jointly active productive means are calculated. These must' be computed at the marginal yield which they promise when most fully utilized. This law is not invalidated by the necessity of an apportionment of the yield. The problem of the attribution of yields is to be so stated that no residue is left unapportioned.

§ 21. COMMON AND SPECIFIC ATTRIBUTION OF YIELDS Marginal coot products--Cost-products of narrower marg'inal utility-Specific products-Specific yield-Degrees of intensity and specific attri,bution in the case of land and of specific capital good's. Schumpeter, Bemerkwngen uber das Zurechnungsproblem Z. f. V., vol. XVIII; Broda, Die Los'Urngendes Zurechnungsproblems, ibid., vol. XX; Aftalion, Les trois notions de la productivite, Revue d'Econ. pol., 1911; Mohrmann, D'ogmen,ge schichte der Zurechnungslehre, 1914; Hefendehl, Das Problem der okon. Zu reohnwng, 1922; Landauer, Grundprobleme der funktionellen Verteilung des wirtschaftlicnen Wertes, 1923; and, Dcr Meinun.gsstrClit zwischen Bonm-Bawerk una Wieser uber die Grtt.ndsiitze der Zurechnungslehre, Archiv. vol. 46. In the problem of attribution as stated in the above terms the only satisfactory solution must be in accord with the following condi tions. In the first place, the entire yield which was anticipated in the productive plan must he accounted for without any remainder, when it is referred to those goods which were used in its production.

Secondly, each of the productive goods must be credited according to the degree to which it contributed as a practical cause in obtaining the yield. These two conditions may be condensed into one statement: the entire yield realized as expected under the scheme of operations must be attributed without a remainder in the measure of the pro ductive contribution. The latter is the absolute amount of the in creased yield due to the contribution of an individual productive means. It may also be represented as a part of the total yield. This is simpler. When an agricultural undertaking has produced a certain number of bushels of wheat the imputation must show the part to be attributed to the soil, to capital goods and to labor. This share is differently computed for cost products and specific products. In the case of pure cost products, the yield is obtained only from cost-productive-means. In the case of specific products it is also to be reckoned for specific-productive-means. The first type of attribution we shall call common, the second specific attribution. The formula of common attribution is the only difficult one to obtain.

The application of this formula to specific products is simple. Again 120 SOCIAL ECONOMICS in the case of common attribution, the difficulty is confined to marginal products. It is easy to apply the method to products of a narrow marginal utility. . Let us assume that a table is a marginal product of the two pro ductive means, wood and labor. The marginal utility of the table is n; 20 l hours of labor and 10 w of wood are required. So long as these are our only data, the attribution of yields cannot be carried out. There are two unknown quantities land wand only one equation. Let us assume that a chest is another marginal product of the same two goods. If it happens that the expenditure is the same in this case, i. e., land 10 ware required, then the marginal utility n is probably correct. We would be no nearer the solution of our problem, for there would be no new equation, but only a repetition of the first one.

However, if marginal products of these goods are found in which the ratio of the two quantities varies, or for which new equations may be formed by combining the two productive means with other cost-means, the case will be different. There is no doubt that such equations may be found. There are many more variations of the cost-elements, labor, wood,coal, iron and others, than there are types of cost element. The problem of attribution is solved if this is so. A definite magnitude may be computed for land w. Thus we shall be able to ascertain the amount to which 20 land 10 w participate in the yield. Just as we are able to make these theoretical calculations, the producer has a basis on which he may find the solution of his particular problem through trial ,and error. Once the amount is determined by which cost-elements participate in the utility of marginal cost-products, the cost law determines the rate of computation for these elements in the case of products of nar rower marginal utility as well. As we know, whenever the regularity of production is undisturbed, these elements are to be calculated alike for all products.

This same value applies to the cost-elements in the case of specific products as well. The utility-cost thus ascertained is to be deducted from the inherent marginal utility of the specific products. The residual yield is to be imputed to the contributing specific factor. This residual we shall call the specific yield. It closely approaches the net yield, but as we shall show later the two do not completely coin cide. When there are several jointly active specific factors, they are first compared as to the degree in which they possess specific char acter. The yield attributable to the most specific factor is a residual found by first determining the yield due to those of less specific char acter and then subtracting this amount. This latter amount is deTHE ORYOF -SIMPLE E,CONOMY 121 termined as in the case of cost-means. The less specific its character, the more numerous are the possible combinations of a given factor.

Therefore there are always equations by which its utility in other connections may be determined. By far the most conspicuous example of attribution is the specific variety. For this reason it was the first to be observed by theory, just as it engages the closest attention in practical life. Ricardo's theory of rent is a theory of specific attribution for· agricultural land. In his time land was the. most striking specific good. His theory is necessarily defective, because he had no general theory of attribution nor even a theory of the computation of utility for agricultural prod ucts. Nevertheless he recognizes clear ly the fundamental concept of specific attribution. He deducts from the gross crop an amount which covers the expenses of production and puts down the remainder as the yield of the soil. In practice, attention is first directed to those cases of specific at tribution in which the imputed yield is largest. Scarcity-commodities furnish cases of this sort: the best agricultural land, and centrally located, urban land particularly. Analogous cases may be found in the manifold monopolistic relations of the market, but we do not deal with these in the theory of the simple economy.

In these cases the absolute amount of the specific yield, that is the result of specific attribution, is large. What universally attracts even more especial attention is that these absolute amounts are still further increased as the productive yield is increased. This increase is often so large as to take an ever greater share of the total increment. For this reason the customary statement of specific attribution in the mar ket emphasizes the fact that the entire excess of yield over and above costs is to be attributed to land or to the otherwise favored factor. This statement disregards another aspect of specific attribution. In contrast to the specific scarcity-product is the specific product which occurs in superabundance. Favorable as attribution generally is in the case of the former, it is unfavorable in the case of the latter. So long as the population is small and land is therefore relatively abund ant, only the residual is attributed to it as its share of the yield.

Specific scarcity leads to increased intensity of production.. The latter in turn influences the numerical expression of attribution. Before we may ex plain this interrelation, we must explain the meaning of intensive production as such. The contrast of intensive and extensive production existSi only for specific products. Technical improvements and the increasing abundance of the means of production lead in the case of cost-prOducts to the production in greater 122 SOCIAL ECONOMICS numbers of more elaborately combined and more costly manufactures. The crude furnishings and decorations of dwellings give way with progress of the arts and increasing wealth to more numerous, more tasteful, more costly and substantial belongings, in the creation of which considerably more material and labor are consumed. However, one speaks of intensity of production only where specific productive means are being used as well as numerous cost-means.

Intensive production develops when once needs have grown so considerable that certain important groups of specific means, especially land, become rela~ .tively scarce. At the same time there must be an increased productive wealth which permits the use of larger masses of cost-means to overcome the obstacle to the production of goods entailing the use of specific scarcity-goods. So long as the specific goods are relatively abundant, production remains extensive and the costs incurred are proportionately small: i. e., the quantity' of cost-means to be used with the specific unit is negligible. The peculiarity of intensive pro duction is that the quantities. are large and constantly growing. In any given case the most desirable degree of intensity may be determined mathematically. In every case the cost-means must return the general marginal yield. The added utility of the yield must at least equal the added costs before an increase in the degree of intensity by further expenditures may bB per mitted. If this condition obtains, a further outlay is not only permissible but is obligatory, inasmuch as the yield of the total production is thus increased.

As a consequence, the amount attributed to the specific factor may possibly be lower because the residual yield, attributable to the specific factor, may be decreased. In a coordinated economy this fact would dese,rve no consideration, for in such an economy the decisive factor is the general welfare. With these explanations let us show by the classic illustration of land the relations existing between degree of intensity and specific attribution. Where there is a real scarcity of land, the amount of the outlays is ab~ solutely small. Production has to be stopped at a point at which additional outlays would still bring good returns. The differential between the utility cost and the marginal utility of the products is still great. On the other hand, in view of the fact that the marginal utility of the products is large, a small part of the yield is adequate to cover costs. Therefore a proportionately large part is attributed to the specific factor, land, and the unit of area is consequently appraised at a high value.

Conditions are somewhat similar where relative scarcity obtains. In this case, however, there is a relaxation in the restraints on the absolute amount of the expenditures. Where there is relative scarcity of good vineyards, there will still be relatively intensive cultivation of the grapevine. It may be less intensive than in the best localities. None the less an effort will be made to obtain the greatest possible benefit that inheres in the' differential between the utility-cost and the inherent utility. The more widely distributed the superior soil is, the lower the marginal utility of the crops will be because of their larger quantity. The costs which may be incurred per unit of area will be smaller. A larger proportion of the total crop will be required to cover the costs and a smaller excess may be attrib· uted to the land. The excess will be still smaller if land is relatively so abundant that people may enjoy the fruits of the soil in a degree that approximates the general margin THEORY OF 8IMPL,E E·CONOMY 123 of use. Even under these conditions there will always be a surplus above that which is needed to meet costs, for the cost-means in combination with the soil will be made to yield more than they could have yielded alone.

If land is so abundant that crops are harvested in greater amounts than are in accord with the general margin of use, agriculture will be conducted alto gether extensively. It is assumed that the quantitative relation of the crops is merely more favorable than the general quantitative relation of cost products, not that the harvest has lost its economic character. The admissible costs per unit of area will be very small. The mal'ginal utility of the crop will be very low and a comparatively large amount of the yield is necessary to balance the utility of the cost-unit. The residual product to be attributed to the land will be small. Moreover, as the marginal utility of the product is low, the residual will be appraised at a low rate. Still there must always be a remainder so long as land is not available in superabundance. The entire yield is needed to defray costs only when land is a free good.

The application of cost-means will be only most extensive as the marginal utility of the crop is extremely low. There may be certain parcels of land preeminently favored by location or fertility that remain in the economic quantitative re lation by the side of the free land. The surplus yield of such parcels is to be attributed to them. If they were more intensively cultivated, their yield would be increased. For such land the outlays bring larger returns. What has just been illustrated by reference to land holds for all specific goods. Where specific capital goods are concerned, a new condition is involved; they are themselves specific products. Specific attribution must not stop with the capital commodity; it must go back from these to the specific productive means to which the specific character of the capital is due. If these means are themselves capital goods, specific attribution must continue still farther back until a factor is reached which is not itself a product, ,as in the case of diamond mines. In the economic theory of exchange we shall have to bring this idea to bear also on performances of labor and on market conditions which by legal provisions or for other reasons have a specific character. In the case of capital investments whose specific character inheres merely in their size, the specific attribution acts as an incentive to further increase of investments until they lose specific character and become mere cost-products. This impulse will overcome, in the course of time, the hindrances which oppose the extension and increase of such investments.

The Austrian school has, it is true, taken up the term used in my treatise, The Origin of Value, as well as the idea 'of attribution developed in Natural Value. It has not done so, however, without energetically controverting the suggested formula of a solution. (See especially the inCisive criticism of Bohm Bawerk in ]£xcursus VII of the fourth edition of his Positive Theory.) It will be impossible to attempt here to refute his objections in detail. They demand extensive argument. However, I am confident that I shall be able to main tain my positions which are now embodied in more circumspect phrase and sup ported by more precise demonstration. The manner in which I now distin guish common and specific attribution itself reduces the contrast of our views. My present formula of specific attribution closely approaches the solu tion of Bohm-Bawerk. However this may be, I adhere to the opinion that specific attribution alone is inadequate; it must be supplemented by common attribution.

124 SOCI.L~L ECONOMICS § 22. THE ECONOMIC COMPUTATION OF UTILITY The value of needs as inoo'mputable magnitudes of intensity-Marginal utility, the arithmetio u,nit of the eoonomy-The computation of costSI, units of, oost, units of utility-The compu.tation of 'u.tility for specifio products-The com putation of utility in case of disturbanoes and changes in th.e econlOmy-The "antinomy" of the oomputation of utility. The primary values of needs cannot be computed or reduced to a common standard in multiples of which they luay be ,represented. They have no objective numerical magnitude but have only degrees of intensity. The latter may he compared, but only in relative terms: i. e., greater, less or equal. These degrees of intensity do not have a relationship to some unit in terms of 'which they may be numerically expressed as multiples or fractions. In the comparison of these in tensities there is only a feeling that there is a greater spread between one pair of magnitudes than between another. This feeling gains more definite expression only in so far as the observer's perception of the distance traversed in passing from one intensity to another involves a greater or less number of intermediate degrees. Thus, for example, one is not able to say how much greater the stimulus of an extreme sensation of hunger is than that of a simple resthetic pleasure. How ever, one may estimate the divergence by reviving the experiences and finding a more definite expression of the spread in a comparison of each with a series of stimuli all of which are less intense than hunger and more intense than the msthetic pleasure.

The human economy, however, is able to appraise its services with precision even in the midst of a universe of need-values. The funda mental law of the computation of utility states the fact that a divisible stock of goods is to be considered economically as a sum of units each of which is computed by the marginal utility. The units of mass are at the same time units of utility; when mass is computed, there is a simultaneous computation of utility. A mass 1 of 200 when compared with one of 100 is to be appraised at twice the latter. Practical de cisions which rest on such an estimate, which is not only approximate but exact, are well advised. It goes without saying that this estimate does not answer the question: how do the satisfactions derived from the 200 units compare with those afforded by .the 100? However, it is not within the province of the economic computation of utility to measure these satisfactions. This computation merely points out the 1 Trams. note: Wieser uses Teilmasse,. partial or fractional mass. Where no confusion can arise the translator drops the qualifying word which is not cus~ tomary in English economic text·s.

THEORY OF SIMPLE E,CONOMY 125 limits to which satisfactions may proceed. If one computes the quantities at his disposal within this limit, he will be dealing with true magnitudes and will still he fulfilling the task of economic control. One of the doctrines of a modern school of philosophy is the econonlY of thought. There is scarcely any other illustration of this doctrine so apt as this method of COlllputation. As men bring to bear just that measure of foresight which corresponds to the marginal utilIty, they proceed according to the principle of least exertion. An economic· selection of need -values is most accurately made by deter mining the limit to which the satisfaction of needs may be pushed. Through this delimitation all values are included that are economically required, all improper ones are excluded; "what lies above is good, what lies below is bad. "1 What a saving from the temptations of in terest this represents. We make sure of existence, health, strength and comfort. We need be carefulonl:y to conform to. the margin of comfort to which circumstances permit us to advance. How greatly this also simplifies the appraisal of the economic means used in secur ing the need-values. The entire" surplus-value" of need-values is ig nored, as it is beyond the marginal utility. It is not necessary in every case to gage the intangible magnitude of the individual values.

The marginal value is strictly adhered to. All adopted values are reduced to this common measure which. has the extraordinary ad vantage of subjecting them to an objective, arithmetic computation. The law of marginal utility is valid for all divisible stocks of goods. It derives its full significance from the laws of cost and of attribution. Because of the laws of cost we recognize all cost-products as combina tions of their productive elements. In so doing the law reduces all cost-products-even those which are not produced to stock but only piece-meal-to the divisible productive supply of goods. In a static economy each cost-product is a multiple of the units of cost of which it is composed. This multiple is a function of the required rate of cost. The units of cost for their part, however, are arithmetically comparable because they may be reduced through the law of attrihu tion to the COUlmon unit of utility of the luarginal products.

In this way, for purposes of practical economic accounting or more .especially for computations of cost, the masses of different cost productivemeans and cost-products at the disposal of a people becolne one great stock of goods. The magnitude of this supply maybe ex pressed in any units of cost: in units of labor or indirectly throngh these in units of utility. When each cost-productive-means and cost1 Ursprung des Wertes, p. 131.

126 SOCIAL ECONOMICS product is set down as the sum of the units· of utility which it con tains, one obtains the arithmetic foundation for a plan of production and management. This plan may be closely drawn, for it determines the limits of productive activity as well as of consumption. The dedi cation to a particular type of use of even the smallest part of the total supply is included. Criticism falls before the success of such an account; the figures are not, as some may think, a more or less inac curate approximation of a comprehensive expression of value, but are an arithmetically correct statement of the units of mass which are at the same time units of utility. The greatest difficulties are found in explanations involving specific products, for their marginal utility may be either greater or less than the general margin of use. Let us assume that marginal cost-products have a utility of n. In this case specific products of absolute or relative scarcity have a marginal utility of more than n for each unit; the marginal utility of those of relative abundance is less than n. The spread between these two utilities cannot be directly measured in numerical terms; these are primary need-valueS' and defy compu tation.

In practice, hO'wever, a way has been found to obtain numerical expression for these cases as well. This method attains its objective accurately. Its success demonstrates it to be strictly according to mathematical rule. In practice the numerical values are obtained from the quantities of the products in the various utility-series in volved. Let us assume, for example, that sable furs are goods of relative scarcity, that ordinary· country wine is one of relative abun dance and that wheat-bread is produced in such quantities that its con sumption takes place, like that of a pure cost-product, exactly at the general margin of use. Under such circumstances it is impossible to :find a direct numerical expression for the relation of the primary values involved in owning a sable coat, satisfying a craving for wine and allaying the hunger which is appeased by bread. However, one may determine exactly the quantity of bread or units of wheat whose utility is equivalent to that of the sable coat or of a gallon of wine.

For degrees of intensity, as for other things, the condition of equality may be determined. This process gives the correct numerical expres sion from the reduction of specific products and productive means to the general arithmetic unit of the economy. Again the serviceability of the figures confirms their accuracy; by such calculations the plan of production and management may be laid out to suit conditions. More especially they will demonstrate the extent to which cost-means are to be applied to specific production. When 100 gallons of country wine THE 0 R Y 0 F S IMP LEE, CON 0 M Y 127 equal 50 units of utility of the general account of the economy and also equal one sable coat, the standard is established according to which cost-units may be expended for a sable coat or a gallon of wine. When production is disturbed, the connection between productively related goods and stems is more or less impeded. It may even be completely broken down.

In such a case, cost-products become, if not absolutely isolated goods, specific products of relative scarcity or abundance. During the continuation of the disturbance such goods are subject to the..same type of arithmetic computation that permanently characterizes specific products. Changes in cost which are confined to rates of cost influence the computa tion of utility only in so far as thereafter the products affected are computed with a greater or less number of units of cost. Changes, which are so extensive that the marginal cost utility is itself raised or lowered, affect primary values and displace the unit of the account. As a rule changes of this sort take place gradually. Single products, then more, and finally all cost-products fall away from the former general margin of use. Practical accounting finds an exact expression for all changes of this sort, for the relation in such a case is no different than that established on principle in the case of specific products.

At all times one may calculate the quantity of goods which under the new conditions of utility is equal to the unit of the former series. When an economic period has become a matter of history, the situation is changed. In times of transition people invariably have a consciousness of the primary need-values. These feelings they wish to preserve. They cling especially to the conspicuous magnitudes of value, the standards by which all others are compared as they arise. In the !case of a dead era this means of transition to the present is lacking, just as it is lacking when we compare the economies of different countries. As a result, numerical data of the economy lose their practical meaning because the consciousness of the unit to which they have reference is not preserved. Even the loss to the national wealth and income, which is occasioned by an unusually great catastrophe, is scarcely susceptible to numerical expression.

At all events the expression will be imperfect when the sum of the quantities of destroyed units of utility is accepted as a multiple of the arithmetic unit which is used in calculations during normal periods. The economic account presup poses a divisible stock of. goods; but the quantity of commodities lost in an elementary catastrophe is experienced as a whole. The construction of the account arises from the practical tasks of the economy. When it is separated from these, it loses its meaning. The figures lose their exact value; at best they are approximations. A numerical expression which indicates that social resources have doubled between two periods does not actually furnish a standard to measure the proportionate change in the satisfac tion of social needs. This proportion can never be expressed numerically; an exposition of this change must abandon arithmetic and resort to a detailed descri ption of human existence.

Even in the practical economy there are exceptional instances in which com putations according to the marginal utility will fail. These are the cases which have frequently been observed to illustate the paradoxical nature of value-in128 SOCIAL E'CONOMICS exchange. In commerce there are examples of vendors who seek through the destruction of part of their stocks to augment the yield of their sales. In the same way a nlOnopoly may restrict output .in order to raise the net yield. In such instances the increase in the price of the unit of goods more than com~ pensates for the decrease in the number of units. The total yield is greater where the quantities sold are smaller. A vendor who is able to determine the amount of the stock of goods is able to further his own· advantage by injuring the social interest. The assumptions of the simple economy are so ira.med as to demand the domination of the general interest. A paradox that arises in the opposition between personal power and social interest is therefore excluded. Yet even in the simple economy there are such glaring cases of this sort that the semblance of paradox is apt to arise. This mystery is most easily solved if we presuppose the· extreme case in which a method of production makes possible an increase of stocks to the point of superabundance. Let us assume, for example, that by driving an artesian well or opening up a copious mountain spring it is possible to provide a town with pure water in superabundant quantities. If the principle of marginal utility' were strictly' adhered to, such an enterprise· would never be started; a superabundant stock of free goods has a marginal utility of zero.

But will such a consideration deter the public from incurring expenses ,for such an enterprise? Surely not. The undertaking guarantees the greatest possible benefit. The public will realize this benefit irrespective of the fact that the utility which results can not be computed. It will be seen that the comp'uta tion according to marginal utility does not simplify matters in this case, as it usually does in others. Rather it leads one astray. Hence the more com plicated computation of total benefit will be resorted to. This is precisely the state of affairs where we examine all other cases of ap parent paradox. Whenever the. increase of the supply, computed at the marginal utility, leads to a lower numerical expression,· the reckoning by marginal utility ceases to simplify and the plan of production must be drafted on the basis of total utility. Marginal utility may be used as a basis for calculations where the larger stock still gives a larger product. It is inapplicable when the product is smaller.

Cases of the first kind are altogether too general; the latter are exceptiollal. Human economy has so far approached superabundance too rarely to attain or even approximate complete satiety. Whenever satiety is approximated it is generally because of some chance event, an over-abundant harvest or a succession of such crops. In the industrial branches of production, which are more thoroughly controlled by technical art than agriculture, it is possible to bring costs and yields into closer adjustment. Constant technical advances allow greatly increased yields in these fields, but needs on the other hand are multiplied by the continued increase of population. Therefore we have to con tent ourselves with achieving a gradual amelioration in the average conditions of material well-being. This explains why there is scarcely ever any pra.ctical doubt that the computation according to marginal utility is confirmed in the success of the method. It has become a habit of thought among business men to such an extent that they look upon it positively as the unassailable method of economic computation. They stare in astonishment if its use in exceptional cases miscarries.

THEORY OF SIl\fPLE E,CONOMY 129 § 23.. NET-YIELD AND THE PRODUCTIVITY OF CAPITAL Yield-Gross-yield, costs of renewal, net-yieldr-Attribution for renewal af capital and the net-earnings-General percentq,:ge of accretion-Physical and anithmetical productivity of capital. In the simple economy we call the yield that quantity of goods which results from productive exchange. It must be in a form more nearly ready for consumption than the productive agents used in the process. It is distinguished from those additions to wealth which take place merely by entering into possession, as when we find things or take new land for pioneer cultivation. It likewise differs from in creases in the appraisal of utility which may occur in the case of old possessions ; and finally from improvements on old possessions by means of valuable additions. Contrasted with all these different ad ditions of utility, the yield is conspicuous by the permanent or repetitive nature of the act through which it is acquired, and conse quently offers the means for that continued satisfaction of needs which is demanded by human nature. It must be conceded that even with such productive exchanges as take place only once, we must speak of a yield. The gains from a single hunting or fishing excursion are a yield. The mine that will be exhausted as it is worked produces a yield. But, as a rule, production is meant to be of some duration, and when we speak of a yield pure and simple we assume that it can be obtained recurrently over a considerable period of time. In the process of reckoning this yield this factor is taken into consideration; the account is periodically closed according to intervals of time which correspond to the periods of exchange.

The yield may be referred to the whole of economic· production, to single branches of it, or to a single. subdivision of a branch. More especially it may be. referred to the individual factors which are jointly active in production. In this latter sense we speak of the yield of land, of capital and of labor, meaning the amount· to be attributed to the individual productive factors owing to their productive con tribution. In deducing the rules of attribution, we have disregarded the rela tionships arising from the duration of production. In this direction we have now to supplement our exposition. We shall be chiefly concerned with the attribution of the yield of capital. There is· little more to say about the attributions of yield for land and labor. In the simple economy the yields of land and labor appear as net 130 SOCIAL E'CONOMICS yields, i. e., they may be permanently received without requiring that a portion be retained towards· the renewal of its sources. In the case of land this relation is established because the theoretical concept of land has. been confined from the beginning to the unconsumable, in exhaustible qualities of the soil. The consumable quality of the soil possesses, as regards its use, the character of capital. Whatever part of this quality is. consumed by production demands renewal like any consumption of capital. The renewal of the force of labor is, in the case of a vigorous people,adequately procured by births and the train ing of labor. The losses because of sickness, accident, age and death are compensated for, if not exceeded by, births. In order to preserve health and vigor, the individual laborer must naturally care for the reestablishment of his personal efficiency; but this process may by no means be brought into the same category with capital renewal. Labor is not a product in the sense of economic science and the expenditures which the laborer incurs in order to preserve health and vigor are not productive expenditures. The food and other means of subsistence which he consumes are not productive commodities, they are con sumption goods. Or to be more exact, they are productive: goods only so long as they are kept stored in quantities at the end of the manu facturing process, and change. to consumption goods as soon as they are placed at the disposal of the laborer for consumption. This ends the introductory production-process, and the new one does not begin until the laborer starts anew series of performances. The inter mediate period of consumption does not by any means initiate a new production-process; it is a concern of the household and of personal life.

In contrast with labor, capital, as we know, is not only a productive means but is itself a product. We know, too, that in the former capacity it is consumed, and that as a product it must therefore be constantly renewed so that the capital sum may remain unchanged and permanently capable of further production. We also know that capital, while serving directly as a means of production, must at the same time reproduce itself. Consumable productive means employed solely in the service of direct production are not employed as capital. Let us assume that a tribe of nomads, having made one attempt at agriculture, tilling and planting, decided to reap the one crop and wander on. In this case the seed has been·used, .not as capital but as ,asimpleproductivemeans. The entire crop has been consumed. No portion of it has been preserved to replace the seed consumed in plant ing and to become seed for· a new harvest. In employing the entire yield as a net yield and consuming it, we gain the advantage of meetT 1-1 E 0 R Y 0 F S IMP LEE, CON 0 M Y 131 ing immediate needs. But, on·· the other hand, we lose the greater utility of having our capital become a source of permanent yields. An economy aspiring to enduring service must distinguish between gross yields and net-yields. It must lay aside sufficient reserves to entirely renew its capital, treating only the residue as net-yield. To consider the present and the future as of equal importance is one of the re quirements of economic management. The satisfaction of future needs must not be jeopardized by conditions of production inferior to those of the present. Thus the complete renewal of capital is a demand of a rational economy. If an increasing population must be provided for, provision should be made to enlarge the net-yield absolutely in order to maintain the per capita supply at the same level. An efficient people wanting to advance economically will go even further in its demands; it will enlarge the capital reservation sufficiently to increase the individual provisioning.

The expenditures required from the gross-yield to renew the capital consumed are called costs. They do not coincide with the costs of production, hence we shall speak of them by the differentiating name of "renewal-costs." They form only a part of the. costs of produc tion which include other very important elements. But they go be yond the costs of production in so far as they concern the specific capital as well. Net yield may be defined as the residue left after de ducting renewal-costs from the gross-yield. In a static economy, by which we mean one which perpetuates itself but does not progress, the bulk of the gross-yield nlay be divided into two groups: those goods for capital renewal, and those which constitute the net-yield. The latter consists exclusively of consumption goods devoted to the cur rent use of the household. The former are capital goods. In a pro gressive economy two classes may be distinguished in the net-yield itself: consumption goods, and capital goods destined to inc~ease capital. Therefore in such an economy the gross-yield is divided into three classes.l Those goods intended for the renewal and increase of capital are both obtained by reservations from the gross-yield. The former is reproductive saving; the latter is progressive saving. The formation of both masses may be called capital formation. However, it is customary to use this term in a narrower sense; i. e., it refers to the new accumulations that constitute the increase of wealth.

It goes without saying that the division of the gross-yield is already 1 Trans. note: "We will call them for brevity's sake renewal-mass, con sumption-mass and augmentation-mass." The sentence is omitted from the text because the brevity of the German compound does not seem desirable in the English translation.

132 SOCIAL ECONOMICS provided for in the plan of production. In forming· this plan we may decide what means are to be devoted to reproducing or aumnenting the capital stock, and what to the service of immediate production. After production is finished and products have received their per manent shape, it is usually too late to change the application of these means. Cases like the one of the seed,. already discussed, which is available both for the immediate preparation of bread and for a new planting, are exceptions. Ordinarily the natural consumption good cannot be used for production as. well, and vice versa. In its com pleted shape, .its use is already determined. A machine can only be used as a machine. It is no longer available for consumption. Con sUluption goods are available only as such and are useless for any thing else. However, the latter may be turned over for consump tion more or less slowly.. The'more rapidly they are dispatched, the sooner will the new production-process have to be set on foot; the more slowly they pass into employment, the longer will be the period over which the current production-process may extend.

,The renewal of capital is a matter of universal interest to every economic body. It is necessary both for the safety of capital and the welfare of the laborer. The model social state will have to insist on it, as does the capitalistic entrepreneur. The axiom that costs of renewal must be deducted from gross-earnings in order to find net earnings, is sure to find the united assent of all· parties. However, the account as it is kept by the capitalistic entrepreneur shows the peculiarity of placing the renewal-mass exclusively to the debit of capital and of attributing to capital a share in the net earnings as well. Is this method of attribution in harmony with the laws of com putation of the simple economy? Will the model· social state have to adopt similar methods of computation ~According to the theorist's reply to this question, he will take his stand on the subject of interest on capital, a problem on which opinions diverge more widely than on any other in ou'r theory.

We answer it here altogether in the sense of the capitalistic entre preneur.A share of the net-earnings has to be, attributed to capital, i. e~, with orderly economic management the share of the gross earn ing attributed to capital must be sufficiently large to completely pro vide for capital-renewal and to leave a surplus over and above this. This rule is deduced with logical rigidity from the meaning of attribu tion. It would be inconsistent if capital,playing its partin securing the net earnings, were not to receive its share in the attributions of these earnings. Only if capital goods "vere free, would they not be entitled to the attribution. But capital goods, in the regular course THE 0 R Y 0 F S IMP LEE, CON 0 M Y 133 of ,events, are never free. They invariably exist in the economic quantitative proportion. Every individual· capital good and every appreciable portion of capital must therefore be r~cognized as an im portant contributing cause in securing a portion .of the net earnings.

If capital did not even contribute enough toward the product to justify its own renewal, it would surely not tempt one to incur further expense for its preservation. A producer, appraising its services at so Iowa figure, would surely be wise to imitate the example of the nomad tribe who devoured their seed when their agricultural venture did not suit them. A producer of this sort should no longer treat capital goods as capital goods. He should look upon them merely as productive goods,employed once and not again for productive ex change, their entire proceeds being used up as net earnings. Every economic management in renewing its capital recognizes the truth that capital is not to be regarded as a simple productive means. but as an indispensable tool for gaining net earnings, and that it must accord inglybe granted a share· in the net earnings. The sinlple productive good, which is susceptible· of productive transformation but is used up in· the process, also acts productively.

The result of the transformation is attributed to it. Capital is pro ductive in a higher sense: it may be continuously transformed. .As a result of this process a share of the gross earnings is attributed to it which exceeds capital renewal and leaves residual net earnings. When we speak in the following pages of productivity, we mean in variably this higher productivity of capital by which, despite its con sumability, it attains the enduring quality of the non-consumable land and produces a yield like that of land. The productivity of economic capital is primarily physical. The gaps torn in its broad expanse by the use to which it is put are phys ically filled up by renewal. Thus the complete body of capital by which social economy initiated production is finally replaced. A physical net yield is also available. This productivity maybe shown arithmetically as well. Numerical expression may be given to the mass of utility units at which the capital was to be computed. when it was introduced· into· production.

In like manner the number of utility units may be shown for the attributed volumes of goods that comprise .the gross yield, the re placement fund and the net yield. From these figures the ratio of net yield to capital may be reckoned. The coefficient thus obtained we will call the g'eneral percentage of increment. It is the numerical expression for the degree of the calculable productivity of capital. Every part of the social economic capital participates in the pro134 SOCIAL ECONOMICS ductivity of the whole. It will answer every purpose if we illustrate the process· in a stationary .econom.ywhere the entire net yield consists of consumption goods. The same principle that holds in this simple case will also obtain for the complex conditions of the progressive economy which receives its net yield both in consumption goods and ~apital goods. Let us simplify our assumption as much as possible and presuppose the exclusive use of cost capital. For the present we shall neglect the specific capital to which we shall later return when we discuss the details of the appraisal of capital.

The physical productivity of capital goods can never be directly observed. The gross yield which is attributed to it for its productive contribution always consists of goods of the next lower order. r:l:'hese are not suited .to the physical replacement of the goods of higher order which have been consumed. Thus the yield attributed to capital goods of the second order is in terms of goods of the first order, i. e., consumption goods; to capital goods of the third order, goods of the second; to capital goods of the tenth, those of the ninth. To illustrate this, let us remind the reader that in the manufacture of sugar a certain quantity of coal is consumed, and that a particular amount of the consumption good, sugar, is attributed as the gross yield to this coal-capital. The gross yield attributed to the mine hoist used in the mine where the coal is obtained is expressed in terms of coal. Phy sically, neither the coal consumed nor the deterioration of the machinery can be replaced directly out of the attributed mass of sugar or of coal.

When the process has been systematically conducted, however, the number of units of utility of the attributed mass of sugar must equal the number of utility units of the coal consumed, plus the general percentage of increment. .A. similar relationship must exist between the deterioration of the ma,chinery and the coal attributed to the machine. If these relationships do not hold, the processes have not been conducted systematically. Hereafter they will have to be ex tended or curtailed sufficiently to bring the account into conformity with the general trend of production. If this result cannot be achieved, then the use in question must be abandoned. In a· model social economy, the responsible manager ·of each section who acts in harmony with the general scheme of production must be able to demonstrate arithmetically the same transformations which the entrepreneur now effects by means of exchange, in order to defray from the gross yield the renewal of capital and to obtain a net yield which shall furnish him with the means of obtaining consumption goods which are needed in the household. It is true that in a model THE 0 R Y 0 F S IMP LEE, CON 0 M Y 135 social economy the responsible director of operations will not receive the proceeds as his own personal income; they will inure to the social group. In no event will the natural values be transformed into money. None the less, they will have to be computed with the utmost accuracy. The manager of a sugar refinery in the model social state will be responsible for an adequate gross yield so that he may credit the coal account with an amount to cover the consumption of coal debited, and may return a net yield out of which consumption goods may be assigned. In a similar manner, in the case of the coal mine the ,account will have to close with a credit against which con sumption goods may be issued from the net yield.

These rules apply with equal for,ce to all capital goods which are used in the service of reproduction. It makes no difference how re mote the order may be. Capital reproduction for its own sake would be absurd. There must be a suitable net yield. Otherwise all efforts devoted to it would be vacuous, mere labors of Sisyphus. The capital goods used in reproduction must be recognized as significant causes in the acquisition of corresponding quotas of the consumption goods which constitute the net yield. In the final accounting, the share at tributed to all capital goods collectively must be sufficiently large to exhaust the entire renewal mass and, moreover, to divide without re mainder the entire net yield when taken in connection with the amounts attributed to land and labor. § 24. CAPITAL COMPUTATION Interest and the interest rate-Oomputation of capital-substanoe-Interest and cost-computation-Discount and capitalization-Rent, interest on capital, rent of land.

Because of the arithmetically calculable productivity of cost-capital its net yield maybe expressed as a ratio of the original capital.' When the productive scheme is followed, this ratio in the case of each ag gregation of capital or of each capital commodity coincides with the general percentage of increment. The net yield of the cost-capital is called interest on capital or simply interest. The economic ratio of net yield to capital, the general percentage of increment as we have called it, is the rate of interest. There are other relationships which may be expressed numerically and which start from interest. The appraisal of capital is derived from its interest. The exact economic control over the use and period of use of capital is based on interest.

136 SOCIAL ECONOMICS This accurate appraisal of capital is essential to every individual enterprise today. It will be equally indispensable in the model social state. The problem of capital appraisal is far more complicated than that of evaluating .the simple consumable productive commodity. In the case of the latter the yield is consumed as a whole. The yield there fore offers a uniform base ·for the evaluation of the productive com modity. In the case of capital goods the gross yield is divisible into a renewal fund and the net yield. These two portions serve different purposes. As the purposes differ, they must be held apart in the ap praisal. In practice. there are two methods of appraising capital. The re sults coincide although the starting points of the computations are distinct. One method starts with the net yield. This is multiplied or capitalized according to the prevailing rate of interest. This method is employed in the case of specific capital and also of land.

The other is used for cost-capital; in it the amount of the capital substance is determined by deducting the net yield from the gross yield. This second procedure is the fundamental method; that of capitalization is derived from it. Capitalization alone would be unin telligible were it not for the second method, that of discount. At first in our explanation we shall assume the simplest conditions and speak only of circulating capital. The case of the capital stock of coal used in a sugar-refinery, which we have just discussed, may serve as an illustration. We shall assume that the gross yield of sugar attributed to the coal amounts to 105 units. We shall further assume that the cost of the coal is equivalent to 100 units and that the general percentage of increment ··of the economy is 5. Under these assumptions the gross yield of 105 units is apportioned so that 100 units go to replacement and 5 units are treated asnet yield. The capital suhstance is therefore set down as 100, a figure indicated stock by cost and yield. The attributed gross yield might be less than 105 units so that less than 100 units would remain after deducting the general percentage of increment. It might be more than 105 units with the opposite result. Either. of the latter two conditions would indicate that coal production, the refining of sugar or both were out of line with the general process of production. It would then be necessary either through expansion or retrenchment to bring about a closer adjustment to the general level.

We indicated in our deduction of the law of the appraisal of productive means that the utility-yield of the products is the basis of THEORY OF SIMPLE E,CONOMY 137 evaluation. Is it not contradictory if we figure the yield in our il lustration at 105 and the capital at only 100? How may we justify the separation of the yield into two parts, the net yield and the. re placement fund, of which only the latter is added to capital? We account for this condition as follows: when deducing the former law, we took for granted the case of the simple productive means. With such goods the yield is destined solely for consumption and is to be attributed in full to the productive agent. Now we are dealing with capital. In the latter case the account must allow for. the fact that the gross yield is composed of two constituents which· serve dis tinct economic ends. Were the gross yield to be accounted for as a whole it would have to be credited in its entirety either to renewal or net yield.

Both such acts are inconsistent with the deliberately planned ends of production. In the first case the gross yield is entirely charged off to renewal; no net yield could remain. But a consumable product is the end of production. In the second case there would be no re newal of capital. We should have to content ourselves with treating coal as a simple productive means whose productive power is spent in a single process. Such a procedure would make it impossible to se cure capital yields in the future. It would even end the power to draw yields from labor or land, both factors which are dependent on the complementary aid of capital. Net yield has been defined as the remainder of the gross yield after the replacement fund has been deducted. Do we not now involve our selves in a contradiction when by an inverse operation we deduct the percentage of increment from the gross yield in order to find the re newal mass 1 Is this not arguing in a circle 1 This question also may be answered. The renewal mass is not an unknown magnitude. Irrespective of the fact that it is fixed by un numerical coincidence of cost and yield, it is even physically per ceptible. .As soon as the gap in capital, occasioned by the act of production, has been covered by physical replacement, the net yield is shown as a physical excess which may be separated from th,e capital substance. The determination of the net yield establishes the general percentage of increment which brings the physical excess, at all points where capital is used, into equal proportions with the capital sub stance. It is not a violation of the rules of logic to appeal in the theoretical explanation of any particular case to the general per centage of increment. There is a mutual relation: in general the rate of interest is established by the productivity of cost-capital in aU em138 . SOCIAL ECONOMICS ployments; on the other hand in each particular case a net yield is demanded which coincides with the generally obtainable rate of interest.

The rate of interest is nothing more nor less than an expression of the marginal productivity of capital. It indicates the utility cost which might be obtained by other uses of cost-capital. The practical businessman, therefore, obeys the law of marginal utility when he demands the established rate of interest from his capital. Every use of cost-capital is uneconomic which does not give net earnings ade quate to cover the established rate of interest. It ties up capital in a manner that is less beneficial than conformity with the general marginal utility demands. The converse is also true; moreover such use is not only permissible but obligatory. If capital is not employed according to this rule, the maximum utility is not attained. Conse quently interest on cost-capital, like capital itself, is one of the pro ductive elements in the formation of cost-products. When men figure interest as one of the costs, they attain the maximum utility as regards the quantity of capital to be used and the period of its employment.

They calculate in accord with the spirit of economic accounting. The model social state could scarcely permit itself to figure in any other manner. The coal-capital just examined was studied under the simplifying assumption of a static economy. Furthermore, in the illustration, coal was liquid capital of the second order. In the case of :fixed capi tal and higher orders or of progressive and retrogressive economics the accounting is more complicated but the fundamental idea is the same. In every individual case a net yield is insisted upon which ac cords with the general rate of interest, the amount of the capital used and the period of ·its employment. The gross yield is always to be separated into net yield and replacement fund. The latter figure coincides with capital costs in the regular, undisturbed course of af fairs. It gives the measure for capital appraisal. The renewal of liquid capital, which is completely consumed in a single process, .al ways takes place at one time. The renewal of fixed capital which withstands repeated employment has to take place gradually. The amortization is adjusted to the length of time required for wear and tear to complete its work. The details of the computation do not con cern us. They do not in any way affect the principle of the method of capital appraisal.

rrhe computation of interest and discount are correlated. Assume that the productive use of 100 units of capital will yield 105 units at the end of a year. Then 105 units, which are an anticipated income T II E 0 R Y 0 F S IMP L. E E, C 0 NO M Y 139 due in one year, cannot be entered on the books today as 105. In stead they will be set down at 100, for their economic effect is com pletely counterbalanced by 100 present units. The 5 units to be added are placed to the account of anticipated interest. They must be deducted when the present capital value is determined. A de duction to be made from a future receipt of goods because of the expected interest is called discount. It is made according to the stand ard of the establjshed rate of interest. The discount is therefore larger as the productivity of capital increases, smaller as it' decreases. During periods which exceed the ordinary duration of capital transformation, interest has to be compounded.

Discount is not confined to cost-capital. Whenever the present value of goods to be' received at a future date is determined, a de duction from the future value must be made. This is especially true of such receipts as are expected· in the future from land and specific capital. From discount we derive the practical capitalization of land and specific capital. Let us first take up the more simple case of land in order to then pass on to the more complicated conditions of specific capital. In the capitalization of land the anticipation of an endless series of net yields is presupposed. Capitalization gives finite expression to the infinite series by multiplying the annual yield by 100 and dividing by the rate of interest. When the rate of interest is 5 per cent, for example, the annual yield is multiplied by 20. This formula of capitalization equals with mathematical accuracy the discounted value of .a perpetual annuity. The later the date that the yearly increment is due, the smaller is its present value. The result is that the yields in the more distant years no longer count in the present, and a finite expression is .obtained for the infinite annual series.

The result of the capitalization of land points the fact that the value of land is equivalent to that of a cost-capital producing an identical yield. There is no other way in which to give numerical expression to this value. The method of discount used in ascertaining the value of cost-capital cannot be used directly for land. In the case of the latter there is no gross yield that may be split into a replacement fund and net yield. There is only an indivisible net yield. Never theless an adequate appraisal is indispensable in the case of land; occasions constantly arise in which property is to be disposed of, and a numerical expression must he available. What figure is better suited to this purpose than that determined by capitalization at the established rate of interest? Granted equal security and the same future conditions, why should it be assumed that a different ratio ex140 SOCIAL ECONOMICS presses the relationship between the substance of land and capital and their respective net yields? The disposition of the property involves the disposition of the future yields; the substances should therefore be so computed as to maintain an equal ratio to their yields. This rule is followed in practice, as the same rate of capitalization is adopted if other conditions are equal.

Fundamentally the procedure is the same in the case of specific capital. It is merely somewhat more complicated. The yield of specific capital maybe divided into two parts: one is the same in char acter as the yield of cost-capital, the other partakes of the qualities of the yield of land. Let us take as an illustration an investment of capital that consists exclusively of cost-capital goods. However, be cause of its unusual magnitude this investment has a specific character so long as no one succeeds in establishing another like industry of the same dimensions. .From the yield of this plant the gross earnings are first to be distinguished and attributed to the cost-capital. This gross figure is .composed of that of the replacement fund and the net yield. The latter is the product of the capital substance and the established rate of interest. Owing to the increased productivity of the specific capital, there may remain an excess yield which we have called the specific yield and which is a net yield. This excess is capitalized. The sum of this capitalized value and the amount of the cost-capital is the estimate of the total capital of the establishment.

The methods of discount and capitalization established the economic account and extend it to cover anticipated yields. The appraisal of ex pectations is accomplished by the same simplification, economy of thought and mental relief which we have already discussed in the fundamental law of the computation of utility. .The law of marginal utility disregards the entire surplus utility which is included above the margin. Just so the method of capitalization and discount eliminates all the infinite prospective yield by the deduction of discount. This infinite series is a surplus from the point of view of the present. It may be disregarded because practically the yields are included by the finite expression of present value. In the never ceasing flow of time the present is engulfed in the past and the future becomes the present. The figures of future transactions now diminish in perspective. But as time passes they gradually assume the full proportions of present values and a new· set of figures, hitherto so remote as not to engage men's foresight, comes into view. The greater the productivity of capital, the lower are the present values by which future receipts are anticipated. The shorter also is the period of years for which we have to calculate, for we must allow for more rapidly unfolding productive T If E 0 R Y 0 F S IMP LEE, CON 0 M Y 141 effects. Conversely when the productivity of capital declines, the series of years is prolonged and future yields are anticipated in the present by greater values.

We should, however, always aim in our appraisal at a complete equalization of present and future needs. Discount is not resorted to because the future need-value as such is appraised at a lower figure. It is used because, owing to the productivity of capital, a lower estimate in the economic account of today is accorded to goods which will satisfy identical future need-values. The net yield of land and of specific capital is not known as in terest but as rent: ground-rent and capitalrent. In the exchange economy the name, "rente," 1 is employed for all incomes by per manent title not directly based on labor. For example, we speak of life-annuities, alimony and old age or accident annuities. The dif ferentiation of rent and interest corresponds to an exceedingly im portant material distinction. In the case of interest the computation starts from the capital. Interest is predicated as a certain quota of capital, the ratio being determined by the marginal productivity of cost-capital. In the case of annuities the computation proceeds in the inverse direction: given the amount of the annuity, its present capital value is a multiple determined by capitalization at the established rate of interest. As the rate of interest rises, the capital value of a fixed annuity drops, and vice versa. Physically there has.,been no change in the capital substance or its yield. Interest is an element of com putation of cost; rent, the result of specific attribution, is a· surplus over costs of production. Only in exceptional cases, in which one specific productive means is contrasted with another of even more specific character, is rent also added to costs. Finally, inasmuch as interest is attributable to costs while rent is a specific surplus over costs, the law of the movement of interest and rent must needs .be different. The rate of interest varies directly with the marginal productivity of cost-capitaL Rent has an opposite behavior; it must be higher, the lower the interest costs which are to be deducted, and vice versa.

These contrasts are suggested in the traditional names of interest and rent. However, it required a prolonged period of critical in1 Trans. note: In English the continental term,· "rente," is seldom used. It is never compounded as it has been in the German text. In the latter there is perfect continuity from this· sentence to the next in which the author speaks of Leibrente, A lim,entationsrente, etc. In the translation the sentence defining "'rente" is unrelated to the following one unless one bears in mind that a life annuity is a "life-rente," etc.

142 SOCIAL ECONOMICS vestigation for theory to discover explanations for these oppositions which are disposed of with such unerring certainty in the practical use of the terms. Current speech has shaped the two terms and enriched their meaning. In so doing it has given invaluable aid to theoretical enquiry. How often theory has departed from the ohvious path of >10 explanation to which the meaning of the traditional terms pointed in the clearest manner! We may well doubt that the true solution of the problem would ever have come to light had it been left to the unaided and independent efforts of the technical investigator. It is probable that the entire structure of the practical economic account would have defied scientific exposition. The structure is admirable both in the simplicity of its fundamental idea and in the wealth and ramifications of its application. The creative expressionism of practical life in vested this structure with traditional names that became instrumental in disclosing its meaning.

For the literature of interest on capital, as for that on the theory of capital, we refer to Bohm-Bawerk's Oapita,l and Interest (Part 1. History and Critique). The leading ideas of Bohm-Bawerk's personal theory of interest and their in fluence on the present position of theoretical investigation are adequately treated inSchumpeter's exposition (Epochen der Dogmengeschichte una Methoden geschichte.) Our view is fundamentally opposed to that of Bohm-Bawerk in the matter of the appraisal of future needs (§ 7) . Bohm-Bawerk also has· raised fundamental objections to our views concerning the attribution of capital yield which were already developed, although in less detail, in Natwral Valu,e. We cannot consider these now in all their details. The essential positions have been under review, especially where the computation of yield for capital goods is contrasted with that for simple and consumable productive means.

Under the assumption of the, simple economy only a portion of the phenomenon of interest may be examined: i. e., the so-called natural interest of productive capital as drawn by the owner of capital when he is himself the entrepreneur. Contractual interest on loans and especially consumptive interest are absent. These forms we shall not have to discuss until we reach the theory of exchange. § 25. ECONOMIC VALUE The significance of the economy-Primary need.-value and the derivative value of goods-The narrower concept of economic partial value--"Values"- Value in 'Use and value in emchange. The theory of the simple economy has shown us elearly the significance of human economy when the influence of power is elimi nated. The economy arises whenever the means for the satisfaction of needs exist in economic proportions. Its object is to secure the highest utility that is possible under the pressure of this proportionalTHEORY OF SIMPLE E·CONOMY 143 ity. From this practical end, applied reason has deduced all the manifold and complex rules of appraisal: the marginal. law, the laws of supply, of demand, of costs, of common and specific attribution, and of capital appraisal. In each method there has been the presup position that value is rigidly subjected to arithmetical processes, that the estimate of partial masses may be based on the multiplication of mass and the value of the unit. By trial and error, through thou sands of years of experience, practical wisdom has formed the rules of computation which it adopts. An admirable structure has resulted, rich, yet rigidly self-contained. It is easy to see why the inquiring theoretical mind could not readily grasp its full significance.

As the economic computation of utility has been explained, one sees in it an achievement of the human mind. Thus the accountant who is employed by others and who is unaffected by any active interests of his own, attends to his functions and calculates faithfully the rela tions involved between goods and the labors performed upon them. Whenever ownership is real, that is, when gains and losses are per sonal, it is so because the owner infuses the vital feelings of personal interest into his computation of utility. The significance of the lat ter process expands and it becomes an estimate of living values. The laws to which we submit are none other than the laws of the com putation of utility. Thus in acquainting ourselves with these laws we have fulfilled the mission of the theory of value· as regards the simple economy. There remains but the task of completing our exposition by a formal definition of the concept of economic value.

We define it as the value which is assigned to units or groups of commodities and of labors employed in economic transactions. In economic valuation we associate the primary need-values with the ideas of those goods and labors which in economy are recognized as their practically important causes. The primary need-values are felt in personal experience. We transfer from them derivative, sec ondary values to the material goods of the economy. The existence of these goods is really a matter of indifference to us when they are considered merely as things. At the same time we recognize that our life is dependent upon them and that the abundance of primary values which may meet our need is dependent upon the abundance ·of these goods. A similar interest attaches also to labor, over and above the interest which inheres in it as a personal experience. Labor is seized upon as a material means to an economic end.

The laws of economic value are those which we obey in economic transactions when we attach our interests to goods and labors.

144 80 C I ALE CO NOM I C 8 Economic value is a material value ; back of it lies an egoistic 1 love of external things. The name is well adapted to emphasize this es sential feature which arises in economic pursuits. Predicating value as an attribute of the means of satisfaction emphasizes the close as sociation between the experience. of an estimate of value and the simulta:neous concept of the means of satisfaction. Inasmuch as the deduced experience of value is designated by the same name as the primary one, no doubt is left of the subjective origin of the term. In .the market one speaks not only of value but also of "yalues." Material goods or any other objects of exchange which are valuable are spoken of as "values." We too shall employ the term in this transformed meaning to speak collectively of all objects having eco nomic value. We shall particularly embrace within this term all economic goods and services for which a different collective name is not already available. Such a' name is distinctly needed in order that qualities may be assigned to these objects which they jointly possess as vehicles of economic value.

All rules of the computation of utility value ,vhich we have deduced in the theory of the simple economy are observed in the computa tion of exchange value as it is universally practiced. Whenever we disregard the stress of economic power we shall find that the utility value of the simple·· economy is precisely the same economic value which functions in the transactions of economic exchange. To this extent, then, every economy in computing according to value in ex change complies with the original aims of economy. If there should ever be an economic order which was able wholly to eliminate the in fluence of power, it could not dispense with utility value and the rules of its computation. If it should do so it would be disqualified for the performance of economic duties. Civilized peoples possess treasures of economic culture in the practical rules for the com putation of utility value. They could not possibly dispense with the aid of these rules.

Utility and labor are the respective central themes of the utility theory and the labor theory. Both arrive at a subjective interpretation of value. In the latter theory the primary force is a desire to avoid the pain of labor. From this is deduced a value, an interest in the products of labor whose possession is the means of avoiding the pain of labor. The subjective nature of value is even clearer in this case than when utility is seen as the central motive. The utility theory ·runs the danger,of being inveigled into considering not only the use and usefulness of goods, which are its proper concern, but or regarding value as a natural or indispensable quality Q;f goods as such. Strenuous efforts have been 1 Interesslerte.

THE 0 R Y 0 F S IMP LEE, CON 0 M Y 145 necessary to correct the errors which are apt to accompany this objective treat ment. It is Menger's fundamental definition to which all succeeding achieve ments of economic theory trace their origin. It was he who formulated the subjective interpretation of value. He defines the value of goods as "the im portance attached to concrete goods or! quantities of goods because of a conscious dependence upon them for the satisfaction of our needs." Our own definition is broader than that of Menger in so far as it includes not only goods but labors. Otherwise it is narrower, resting only on economic value proper. Menger defines the value of things generally. We define a partial value that is correlated with economic transactions. Continuous efforts are required to use the available partial quantities according to the plan of the economy. The distinction is so important that we must explain it in more detail.

In the regular course of economic processes we deal with sums of commodity and labor-units. The instances are rare in which some elementary catastrophe involves the existence or non-existence of large aggregates of goods. Practical conditions may also call for offhand decisions in which details and particulars cannot enter but which involve such aggregate masses. More frequently govern ments find themselves in positions where fundamental decisions are called for as to measures of public economic policy. However, the quantitative relations most familiar to men engaged in \economic pursuits are those which call for the appraisal of partial utility. 'Value which is thus economically associated with the idea of commodities and labors is the arithmetic partial value of the units. They have this value in mind and refer to it alone when they speak economically of value, pure and simple. The estimates of value that are expressed when large aggregate masses of goods are considered in bulk are undoubtedly also expressions of egoistic ma terial preference. They are subject to the law of dependent utility. However, the quantities involved often differ greatly from those for which partial values are practically computed. These quantities are not connected with the ideas of goods and labors. Usually we do not regard these computations as estimates of value at all. We contrast them as expressions of general interests with the narrower economic value. \iVhere, for example, we estimate the value of a rail road, we customarily adopt only the pecuniary value of the yield to give ex pression to \the partial value. All those other interests, military, political, economic, which inhere in the railroad are separately distinguished from the purely commercial value. This happens when we say that the construction of a railroad cannot be justified by its commercial value but is necessary for other reasons.

In the computation of partial values the interconnections of the productive process become most prominent: the relation of costs to profit, of yield to pro ductive means. They present the most important task to economic calculation. Therefore they are most strongly associated with the concept of goods. The re lation to need, though always suggested, is less prominent in this presentation. ,For this reason in the regular course of production the estimates of value are compared not directly with the relation to need but with units of cost or yield. The relation of the last two to need, however, are never wholly lost to view. When Menger defines the value of goods as the significance which commodities gain because of the satisfactions of needs which we feel to be dependent upon them, he passes somewhat beyond practical f consciousness. In the latter the subjective origin of value is not as clearly prominent, as the definition might lead 146 SOCIAL ECONOMICS us to assume. Our definition is more in accord with practice. It makes economic value somewhat more distinctly objective. It does not exclude the re lation to the primary need-value but emphasizes it only slightly. The "signif icance of economy" of which we speak points in the first instance to the extern~l relations of the economy.