Part II

PART II THE INSTITUTIONS OF EXCHANGE Beside those works already mentioned in § 3 and § 16, should be added: Auspitz and Lieber, Unters. iiber die Theorie des P1'eises, 1888; Zuckerkandl, PheO'1'ie des Preises, 1889; and art. Preis in Hdw. d. Stw.; Lexis, Volkswi1'tschsl., 2nd ed. 1913,; Fisher, Mathema·tical Investigations in the Theory of Value and Prioes, in Transactions of the Conn. Acad., vol. IX, 1892; Osorio, Theorie mathe matique de l'echange, 1913; :Zawadski, 'Les mathe'matiques appliq'tt.ees (1, l' economio politique, 1918; EngHinder, Pragen des Preises, J. f. G. V., vol. 43: and, Gle'ichformigkeit von Preis und Nutzen" ibid., vol. 44; and, Bestimmungs grunde des Preises, 1921; Spann, TheoNe der Preisverschiebung, Z. f. Volksw., vol. XXII; Diblee, The Laws of Supply and Demand, 1922; Ely, Monopoli..Ci8.and Trusts, 1900; Weisz, art, Monopol. Hdw. d. Stw.; Jenks-Clark, The Trust Problem, 1922; Davenport, The Economics Of Enterprise, 1913; Liefmann, ]iartelle unrt Trusts, 4th ed. 1920; Cournot, Recherches sur les princip,es mathematiques de 1a theorie des rich esse's, 1838; Schiiffie, Die nationalOkon. Theorie derausschlies zenden Absatzverhiiltnisse, 1867; Edgeworth, La teoria pwra del monopolio, Giornale degli Economisti, 1897; Forchheimer, Theoretisches zum umvollstiindigoo Monopol, J. f. G. V., 32 Jahrg.; Payen, Les Monopols, 1920 (in Encyclopedie Scientifique); Clark, The Oontrol of Truists, 1912; Aarum, Okonomiske sam mcuslutninger med monopolistic stendens, 1921.

§ 30. EXCHANGE Foundations and limits of na·tural exchwn..ge-The exchange. of the weak economy-Exchange by the use of money-The chain of p'Glired eaJcihooges-Money. Exchange has been defined as the surrender of the superfluous for the necessary. The definition is too narrow; it applies only to the ex treme, most conspicuous case. Nevertheless, it comes close to the matter of which we treat, and forms an excellent starting-point whence to deduce the exact law of natural exchange. Each of the two pa.rties entering into a natural exchange desires to secure for him self superior value. Each surrenders something to which he attaches less utility-value than he does to the good or service which he obtains in exchange. He may even attach no utility-value at all to that which he offers if it is actually" superfluous" to him. Thus it must happen that the two parties estimate the two objects of exchange in a directly opposite manner so that both may be able simultaneously to receive 167 168 SOCIAL ECONOMICS better value by the same transaction. As we recognize this funda mental fact, we recognize the limits of exchange. There is an end to exchange, whenever one of the contracting parties ceases to find an advantage in the continuance of the arrangement, no matter how much the other may desire to go on with that which offers him an in crease in values. This limit must ultimately be reached since, ac cording to the law of supply, continued decrease of units increases the value of those which remain, while the continued addition of units lessens the value for all the supply collected. As soon as the marginal utility of all the units to be surrendered equals or exceeds that of those received, no further gain in value can be realized and continued dealings would become economically futile.

When thus formulating the law of exchange, we do not by any means say that the .association of exchange must be advantageous for all its members. We do not at all mean to contend that there is a complete harmony of interests. The law of exchange holds only in case it is economically completed; it does not, therefore, apply where there is external compulsion, fraud or error. In order that the law should hold, it must also be assumed that the contracting parties have full economic strength. Exchange by the· man of small means is typically· to be distinguished from the exchange of the nabob. The economic position of the poor man is characterized by an estimation of the needs of the future below the ;estimates of present needs. He will thus in exchange, also, be all too ready to content himself with an advantage of present value without taking into consideration that to obtain it he contracts for future performances that may involve altogether disproportionate, if not ruinous losses of value. The most obvious illustration is the usurious loan, where a present payment of money is exchanged for a future one, and an unscrupulous, wealthy creditor deals with a debtor who is poor because of careless habits, thriftlessness or misfortune. A similar illustration is 'presented by the contract of labor. Here the mercenary employer engages workers without the means of resistance, to render exhausting services at starvation-wages. We shall later discuss these two cases at length.

Here we only refer to them in passing, to show how the law of exchange is only too frequently not carried out according to its full import in the transactions of the poor. It is carried out equitably only when the lasting effects of the exchange have been correctly appraised at their economic value. In its beginnings, exchange is fortuitous. Neighbors accommodate each other by exchanging things which one of them needs urgently, while the other can spa,re them for the time being. Later on, exTHEORY OF SOCIAL E.CONOMY 169 changes are also made from land to land of commodities which nature produces bountifully in one locality, while in another they are wholly lacking. Little by little, men learn to adjust their acquisition to exchange; production is directed more and more to the preparation of values through whose sale increases of value may be obtained. The body of the old natural economy, consisting in the main of a juxtaposition of independent rural households, is transformed ever more and more into the economic community based on division of labor and exchange and employing a well established medium of ex change, money.

In order that this transformation may be accomplished, the early form of natural exchange must pass into the fully developed form of exchange by the use of money. In natural exchange both parties to the transaction give and acquire natural performances, meaning economic material ,commodities or the use of such, as well as personal services. In other words, each of the two parties surrenders and acquires natural values, material or personal. Where the exchange is effected by the use of money, the transaction is bifurcated. Men are satisfied in the first act of the enterprise to surrender the natural value of which they desire to dispose, in exchange for a counter performance which they receive vicariously in money, the permanent possession of which they do not expect to retain. The next, or second step is to layout the money in the purchase of the natural value which was the object whose ultimate acquisition and use in the house hold or in the economy of acquisitive trade was desired. In the first step, one receives in the form of money the advantage in value, which he wishes to secure; in the second only, does one realize it. In this process the parties change position, as they exchange; every vendor, 'becomes vendee; every vendee becomes vendor. Uninterruptedly 'thus, exchanging parties, link after link, join to form a never-ending 'chain; every pair of them is connected with the preceding and suc ceeding pair by one of the contracting parties.

The enormous advantage offered by money in the community of exchange is explained solely from the fact that it dissolves the entire turnover into .links of such individual transactions of one exchanging couple each. The effect of it is, that men, in their acquisitions, are never tied down to the one contracting party with whom they have just dealt. They are altogether unfettered and can with complete mobility turn to any other man who may have the stock required. Every individual may confine himself in a division of labor to the production of one single species of values; and yet, his means being sufficient, he can procure whatever he wants, because he may, in turn, 170 SOCIAL ECO'NOMICS deal with all the individuals who produce the values he desires. The entire sum of opportunities of exchange offered by a large community may be exhausted without more than two persons at anyone time having to deal with one another simultaneously. The exchanging parties go in pairs. Their intercourse may thus extend all over the world. Exchange may unite millions of human beings, of whom each will have to know his immediate predecessors and successors only. A society, having at its command only the form of natural exchange, would at all times, in order to exhaust all opportunities of exchange, be compelled to summon to a general council all its members, and thus get to the end of the matter. A proceeding so cumbersome could not be successfully carried out even in the small village.:..-mucb less in a large city, a populous nation, or in the world as a whole.

Money is one of the most perfect instruments which the human mind has devised and perfected. In the simplicity of conception, in the variety of its applications and effects, it may be most aptly com pared to the letters of the alphabet. These reduce the representa tion of spoken sounds to an exceedingly small number of simple symbols. By the combination of the latter the entire cultural wealth of a highly developed language may be expressed in images of sound waves. It is taken for granted that an instrument of such perfection as money could not in all its fullness have suddenly become an his torical fact. The selection of the precious metals among civilized peoples and their habitual acceptance by the masses represents a social growth of thousands of years. How the gradual rise and de velopment of an historical institution such as this must be conceived, has already occupied our attention. The succeeding pages of our exposition will have to dealexclusively with the actual phenomenon of money, as we find it.

As a matter of course, the organization of the social-economic whole, with its division of labor, does not set out from monetization. The impelling forces must issue from the economic body itself, and the development of the monetary form is merely a concomitant. The division of labor presupposes a highly developed technical art and the entire wealth of instruments of labor,which it requires and which it collects only very gradually, rising step by step to greater achieve ment. We see at once that a tribe of hunters, for example, can never rise to a very pronounced division of labor; all its members have to follow the same occupation, hunting, in order to subsist. If there is to be a fine division of labor, the work to be performed must be of a sort which can technically be differentiated and separated. The technical art of the Middle Ages was barely sufficiently developed to THE 0 R Y 0 F SOC I A L .E, CO NOM Y 171 result in division of labor in the larger cities; but, to this day, modern technical art is not sufficiently developed entirely to dissolve the rustic remnants of the self-contained household through a division of labor of the national economy.

The method of pecuniary exchange, employed at first to exchange natural values one against the other, is later on used also to acquire or surrender capital-funds or the use of such in consideration of the payment of money. Anyone desiring to exchange money-capital against some other form or against natural values will likewise make use of money as the medium of exchange. He, too,. will divide the en tire transaction into the two acts of sale and acquisition. The idea of exchange under the institution of money is consequently very broad; it includes not only the contract of sale of chattels and real estate, the lease of real property and the wage contract, but also loans and the related agreements as to credits, the contract of sale of obligations, securities and international exchange. The law of monetary exchange has to be formulated somewhat dif ferently from the expression laid down in the opening of our exposi tion concerning natural exchange. In every instance monetary ex change is only half of the natural exchange; consequently, only by this half can it meet with the conditions of the law of natural ex change: a second, subsidiary exchange of money will always be re quired to complete the transaction. We expect to lay down the more accurate formulation of the law of exchange, applying to economic monetary exchange, as we formulate the law of price. For the pres ent, we shall be satisfied to have shown that the gain of value, which it is intended to secure by exchange, is obtained'in the form of money by the first act of pecuniary exchange and is realized in the form of natural values by the second or supplementary act.

§ 31. THE MARKET The parties of the mOlrket-Supply and demandr-Quo'tations of the market The market-positrion of monopoly and competition; monopoloid positions in the m·(JJf'ket-Wares. As trade by exchange develops, markets come to be established where the parties habitually meet, who supply and who demand commodities. The parties supplying the market consist of those in dividuals who wish to surrender natural objects or money-funds in exchange for money; the bidders are those who wish to acquire nat ural values or money-funds in exchange for money. The parties of 172 S'OCIAL ECONOMICS the market always or nearly always conclude their agreements in pairs: one vendor on each occasion enters a legal agreement with one demander. Each individual contracting party, however, is con stantly under the influence of all the individuals of his own group and the opposing group. In this way the legal freedom of contracts does not lose its significance; it asserts itself in the market just as indi vidual freedom asserts itself under the aegis of social power. The market is a social institution, where the freedom of exchange operates as a freedom of choice; it grants liberty in the selection of the indi viduals to be dealt with, in the selection of the objects of exchange in which men deal and, up to a certain point, it grants liberty also in regard to the determination of the price to be agreed upon. The parties always retain the right to decide whether or not they will deal at the terms of the market. The market-price itself is not ar pived at by any individual exchanging pair; it is the result of the entire condition of the market, and can only be settled by pressure and counter-pressure of all the parties constituting the market.

Language, as ordinarily employed, means by the term, market, on the one hand the furnishings of the market-the market-square, the market-buildings, the entire institution of the market; but on the other hand it means also the sum of parties dealing in the market and the district represented by those who deal there. Theory does not concern itself with the equipment of the market; it looks upon the market as a social institution and understands by the term a regular communion between the parties who represent supply and demand for any given district. In the theory of the social· economy, the entire economic organism constitutes one market, within which, however, lo cal partial markets are to be distinguished. The magnitude of the supply and of the demand depends on the prices obtaining. The supply in the market.s is greater, the higher the prospective price; while the lower the price, the greater is the demand to be expected. This rule applies, at any rate, up to certain price limits, which the market only exceeds in exceptional cases. In all these cases, again, it is obvious that the quantities of goods supplied and demanded are not greater or less in definite. proportions to the prices quoted. It by no means follows that, prices being doubled, the supply of the products must be doubled as well or the demand re duced by one half. There can be no doubt but that the increase of the demand is determined, wholly or in part, by the gradations of the scale of needs involved in each individual case. The numerical ex pressions must follow a different law, for example, for necessities of life and for objects which gratify merely luxurious habits. When it THE 0 R Y OF SO CI AL ,E,C,ON 0 MY 173 comes to the supply, costs of production undoubtedly have their in fluence in determining prices. Thus, for example, as regards agri cultural products obeying the law of diminishing returns of the soil, the fluctuations of prices would occur according to a different stand ard from that applicable in the cost of industrial products. Ascer taining for every condition of prices the quantities of values of fered and demanded, we obtain series peculiarly constituted for each type of commodity in exchange. We will call these series, market indices; and we shall speak of supply-indices and of demand-indices.

The market-indices are of the utmost importance in the establish ment of prices. The effect of supply and demand on prices is exerted according to the standard of the market-indices; and the deduction of the establishment of prices from the market-indices may be said to be the problem of the theory of prices. The mathematical method has approached this problem by representing the market-indices in curves of supply and demand. For a long series of cases an exact expression is thus obtained, which could never be arrived at by any other method. We shall not employ the mathematical method in the theory of prices any more than we used it in the theory of the simple economy. Rather we shall direct our efforts to a description of the market-indices, sufficient to enable us to understand the whys and wherefores of the decisions of parties as to price. Theoretically, we have' to distinguish in the universal economic market as many varieties of partial markets as there are varieties of market-indices. One set of market-indices prevails in the produce market, others in the labor-market and in the market of agricultural or urban real estate. The most disparate from all others are the indices of the money-market, which is itself again subdivided into loan-market and stock-market. Each subdivision bas radically distinct indices.

In the markets where speculation enters, the indices of bona fide sup ply and demand appear side by side with speculative indices. The former are occasionally crowded out. The true supply appears from the existing stocks, the actual demand arises in the existing need; the offers thus constitute the portions of the stock brought to the market, the demand, the portions of the need influencing the mar ket. With speculation, on the other hand, multitudes of bids and offers· are created, which do not arise from existing amounts of stocks or needs. Both parties of the market, that of the supply as well as that of the demand, may have a monopolistic or competitive position. A monopoly is the exclusive control of supply or of demand by a single subject, as well as by a single will. This subject may be a single, 174 S,OCIAL ECONOMICS physical or juridical person or a plurality or multiplicity or such persons, who as in a kartell, a trust, ring, syndicate or coalition are united by contract. As regards its origin, a monopoly may be a natural monopoly, taking its rise. in some unique natural occurrence, say a spring of mineral or medicinal waters. It may be an acci dental monopoly, like a factory producing certain manufactures which have not attracted competitive enterprise. The mon.opoly may also be created bylaw, like the tax-monopolies of the state or like private monopolies in the. nature of a privilege, such as a patent, a copyright or franchise of any kind whatever. There are also ac tual monopolies created by agreements not recognized by law.

Competition is a condition in which a number of persons in riv alry with one another pursue identical aims of supply and de mand. By deflection of its meaning, the term may also be made to stand for this rivalry in trade itself. The monopolistic position secures to the parties a· far greater influence in the establishment of prices than the competitive position. Theory, therefore, will have to distinguish sharply between the two categories. In everyday practice as well as in scientific use, the term, monopoly, is frequently used inaccurately or improperly. Men often speak of a monopoly, meaning the superiority attaching to great power in the market, although this power may not by. any means exclusively control either supply or demand. In this sense they speak, for example, of the monopoly of capital or of a monopoly of the most advantageously situated realty in the centre or the city.

Advantageous positions in the market, approximating monopolies but not altogether amounting to such, we shall call monopoloid posi tions in the market. We shall examine later on what cases belong in this category. In all important markets of products, the commodities stand out in strong contrast to money. The wares exchanged in natural trans fer from producer to producer, in an exchange which was primarily fortuitous, did not have their origin in an expectation of exchange; they were produced by the· intending user for his own needs. Some chance event brought it about that the two parties to the transfer of possession found mutual advantage in exchanging as they did. Here both performances are in natural values. Their functions in the exchange are exactly alike; on one side as well as on the other, the good is also a payment. In the developed markets of products it is otherwise; there performances and counterperformances are differentiated. Just as the function of payment is accomplished ex-' clusively by money, so the natural commodity or service, for which THEORY OF SOCIAL ECONOMY 175 payment is surrendered, has changed its character. It has been prepared in the course of prolonged processes. Producers and deal ers with a division of labor have arranged for whatever is involved in its production.

The nature of merchandize is indicated in this description. Wares, or merchandize, are products which are prepared by pro ducer or dealer under a division of labor and in due course are destined to be disposed of; they are products in the way of trans mission to the ultimate purchaser, who does not expect to hand them on to others, but to use them in his trade or in his house hold. Differing from money, which is constantly being handed ont anew and which maintains its character in· the hands of every successive holder, wares, or merchandize, divest themselves of their character as soon as they reach the ultimate user. Owing to the fact that producers and dealers have to look forward to sales, the wares acquire a peculiar supply price, which is lacking in the case of the original natural exchange. The division of labor once re garded as complete, wares as such have no utility-value for their owner; he has to dispose of them, whenever he would make them yield value at all. In the case of wares which are continuously to be offered in the market, producers and dealers must, moreover, expect to recover completely the costs of production which they plan to incur. These costs should include at the least a moderate entre preneur's revvard, and will form an item in the supply price. This part, too, of the index of supply is most intimately connected with the production of commodities. Personal production not adjusted to exchanges need not, in case of an occasional exchange, insist on re fund of costs. It is otherwise in. the case of wares. wholly depending on exchange; .here a refund of costs must invariably be insisted on.

Wage-labor, up to a certain point, partakes of the character of wares. Ow ing to the division of labor and the economic stratification, the supplier of labor is dependent on the disposal of his labor just as much as producer and dealer are dependent on the disposal of their wares. Even more strongly than the latter, the lahorers-their personal condition being what it i8-are under all circumstances dependent on this disposal. Frequently, therefore, labor is spoken of as an article of trade; and the socialistic writers do so spe~k of it with particular emphasis, to make it clear that "labor-ware" 1 is completely sub· j ect to the merciless law of price of every market. The classical theory of wages, whose disciple socialistic theory has here become most unreservedly. 1 Trans. note: die "Ware Arbeit" might perhaps be more familiarly rendered as "labor as a commodity." Since Weiser evidently wants to distinguish "Waren," as merchantable products, from "Gtiter" which need merely possess utility, I use the more labored phrase.

176 SOCIAL ECONOMICS goes so far even as to transfer to labor, also, the supply price of the costs of production. The means of subsistence, indispensable or customary for the worker and his family, are then described as "costs of production of human labor." It is maintained that these costs influence the price of labor in the same way in which costs of production influence the price of products. We shall not now inquire what relations actually exist between the costs of preservation of the laborer and his wages, but without further investigation we shall be able to lay down the rule, that these costs of subsistence are not strictly an example of costs of production. Labor is not a product; it is not the result of a process comparable in any way to that of producing merchandise. In some respects its supply-index may closely approach that of the merchantable product. However, there is no doubt that it has unique qualities of its own, which distinguish it from the latter and require separate consideration. To speak at the start of labor as merchandise can only befog the true state of affairs. The phrase, "labor-ware," has been devised' as an indictment of the existing economic order; it will consequently have to be examined as such; but, entering upon its descriptive problem, theory will have to decline to consider it thus.

In the money-markets, the bonds or stocks offered for sale are also spoken of as wares. As a matter of fact, the securities offered to the public by the underwriting 1 banks are like merchantable prOducts, being carried for purposes of exchange from entrepreneur to purchaser. The banks, like producers, must see to it that they negotiate the sales, if they w,ould carryon their business successfully. Then too, the securities which are kept on hand for the purpose of sale by brokers and others, or which speCUlators accumulate in order to sell them, partake ,somewhat of the character of merchantable products. In this respect the two are much alike. However, securities after all do not possess in full the typical qualities of wares. Bonds are not products; more especially they have not the supply-index of the costs of production. It is also to be re marked that once a commodity is used in the household or in trade, indeed asa rule even before it has been actually used there, it may only he sold by the buyer at a low or very low price. On the other hand, s,ecurities are readily salable by everyone and in fact return often to the channel of exchange in the market. Neither have stocks and bonds the demand-index of products: it is only circuitOUSly that they supply a personal need, to which products cater directly or at any rate more immediately. Bonds, indeed, supply the "need of investment," which is not a need in the true sense of the word at all,but merely a desire to provide for future needs by the ownership of invested values which will yield a return in money. We see, thus, that there is good reason for the stock-market or the money-market generally to be distinguished from the produce market. Especially in theory the separation will have to be strictly insisted upon; the different market-indices for both groups of objects of exchange call for particular investigation of the formation of prices.

In the realty-market, it is not customary to speak of wares or merchandise. The indices of supply and demand are here too conspicuously different from those of commodity-products. In the rules to be laid down for the determination of prices, they are more nearly akin to the market-indices of investment-capital. We shall only speak of wares in connection with commodity-products. By 1 Emissionsbanken.

THEORY OF SOCIAL E,CONOMY 177 the market of wares, consequently, we mean the market of products, where producers and dealers are the offering or supplying parties. § 32. THE PROBLEM OF 'THE GENERAL DOCTRINE OF PRICES Price-Doctrine of prices and of income--Our assumptions for the general doctrine of prices---Olosed and open markets. In the developed money-economy, where exchange is effected ex clusively in consideration of a money-payment, price is defined as the amount of money given for an economic service by way of rec ompense for the exchange. Here the economic performance may consist in material or personal natural-values, or in any form what ever of money-capital. We can easily understand why the theory of prices has been considered from the very beginning as one of the most important problems of economic theory. The level of prices furnishes. the key to the distribution of the natural values com prising the social income to the individual households which con stitute the demand. Inversely, it also gives the key to the distribu tion of the money-income of the economy to the supplying individual economies. Over and above this it explains the circulation of the national wealth and, finally, furnishes the foundation for the cal culation of values in the economic process. The theory of prices pre pares us for the understanding of the economic distribution of goods, distribution of incomes and computation of value, and no economic theory, therefore, can fail to encounter the problem.

In its beginnings, theory did not do full justice to the importance of the theory of prices. Even to-day, many theorists confine its functions within too narrow limits. It was formerly, and is fre quently still the practice to look upon the price of products or of wares as the only one which concerned the theory of prices. This approach leaves the discussion of ground-rents, of contractual in terest on capital and of wages to the investigations, not of the theory of price but of the theory of income. There are good reasons to connect these subjects with the theory of the formation of income or the structure of acquisitive economy. Only by such reference can the particular market-indices be developed, which hold for land, and the use of the soil, capital and labor. But one must not over look the fact that ground-rent, interest and wages are not merely forms of income, but are special forms of price as well. The laws of rent, interest and wages are not independent laws; they are par ticular forms of a general law, known as the fundamental law of the .formation of prices. 'Ve, too, shall treat of the rent of land, 178 SOCIAL ECONOMICS of interest and wages in connection with the study of income and acquisition. In so doing, however, we shall bear in mind that this is supplementing the doctrine of prices by a special exposition for the great branches of income. In contrast with these special studies the doctrine of prices which is to be first laid down, may be designated as a general theory of price.

The task of deducing the fundamental law of the formation of prices and the law of price for products in the case of competition, monopoly and the typical monopoloid market conditions are assigned to the general theory of price. We shall confine our investigations at first to the markets of the natural exchange-values. Later we shall return to the market of moneyed capital. In dealing with the problem of the general theory of prices, we shall have to bring the idealizing assumptions, to which we resorted in the theory of the simple economy, somewhat closer to actuality. This will be done by the process of decreasing abstraction. 'Ve shall, however, do so only in so far as there is absolute necessity. The power of wealth is one of the decisive factors of the market. The stratification of wealth, as it exists in the social community, will therefore have its place in our assumptions. We shall, however, assume this stratification as given, and we shall not inquire further as to its origin.

We shall disregard in the theory of prices those social stratifications which arise from differences of personal aptitude and education. With the exception of the single case of usury, which we expect to neglect hereafter, we shall throughout assume model-economies, using the term to describe a social egoism which submits voluntarily to the dictates of law and morality. For the rest, let us state that, unless the contrary be expressly posited, we deal only with a normal course of affairs, free from errors or disturbances. The occurrence of market-panics or crises is not to be considered in these investigations except in passing; speculation we shall not have to mention until we reach the s'ection concerning the economy of acquisition. We shall first follow the process of the formation of prices under the assump tion of a closed market: i. e., a market in which the entire supply and the entire demand are brought together as on the exchange. Only later shall we consider the course of affairs in an open or disjointed. market. The latter is a market where the supply, demand, or both are locally dispersed; i. e., are dis tributed among ent'erprises or streets within a certain town, or among certain separated localities, within one national economy. The social economy is a disjointed or open market. The economic formation of prices would, therefore, be only incompletely described, were our exposition to stop with the assump tion of a closed market.

§ 33. THE FUNDAMENTAL LAW OF PRICE-FORMATION Price-formation by o'Ustom-The elementary market-indem for consumption value8--Jfarginal s'upply serries, effective and non-effective demand, the law of the marginal supply-The uni·versal price, the equitable price-Persona,l and social egoism in the pric'e-competition-The lower margin of prices. The assertion is sometimes made that prices are by no means in variably the result of the economic facts of the market but that prices THE 0 R Y 0 F SOC I ALE. C -0 NOM \Y 179 occur which rest upon custom only. The statement is not correct. The power of custom is never sufficient to perpetuate prices which are inconsistent with economic market conditions. At any rate, the proposition would not hold good, unless we assumed that sacrifices were being made to maintain such prices. On the other hand, it may be said of any price whatever, that up to a certain point it rests upon custom. For the market always connects the prices of to-day with the prices of yesterday; it requires the aid of the traditional prices, in order to. regulate its dealings. If it were possible that all dealers in the market should simultaneously lose the whole of their ex perience of existing prices, all dealings would be thrown into con fusion from which the market could not recover without incurring considerable losses. Every unexpected change of market-conditions, even for a small number of values, is accompanied by serious dis turbances. It is difficult to see how the continuously interconnected prices of thousands and thousands of values could be reestablished from the very bottom in an economic chaos that had been deprived of price. However, market-conditions invariably change only in the most gradual way. For many values, the conditions remain con stant during a long period of time. The earlier prices, then, con tinue to remain in force for these persistent values without opposi tion; and as this condition lasts, it may well seem that the prices are adhered to merely by force of custom. As a matter of fact, how ever, their validity continues because, in the very beginning, they were regularly' established and the facts which contributed in their formation, continue to exist without change.

Just as the market works out new prices from old ones, theory also at first contented itself to lay down a mere law of changes of prices. It was a signal progress when prices of products began to be ex plained from cost-prices. Such an explanation, however, is only partial. A complete explanation must start from a condition without any prices whatever; it will have to avail itself, moreover, of the aids of isolation and idealization, in order to bring within the bound aries of its assumptions the entire wealth of market-facts, which may not be otherwise comprehended. With such an end in view, we will start from the most simple market-index possible and deduce from it the law of price for a stock of wares in the competitive market. We ascertain this simplest market-index by conceiving a stock of consumption-commodities in isolation. It is the primary end of exchange, to meet the needs of consumption even in the most highly developed exchange-economy. The fundamental law of price must, therefore, be deducible from the occurrence of consumption-values.

180 SOCIAL ECONOMICS To isolate this case from all other facts, we assume a stock of con sumption goods ready for sale and for whose preparation no costs may be ascribed. In other words, we assume a supply, the cost of which is equal to zero. We thus completely disregard the factor of costs in the supply-index which we assume. We further .assume that the entire stock of goods, ready for sale, is intended for trade. The vendors are not able to use even the smallest part of it for their own consumption. Therefore the utility-value of these wares from the point of view of the vendors is also to be set down at zero and may be neglected in ascertaining the supply-price. We also dis regard the possible choice that is open to a monopolist to carryover an unsold portion of the stock. We disregard the possibility that all or part of the SliPply may be preserved for a later market or car ried to a different one. Therefore as regards time and locality, we assume a narrowly bounded, closed market in which the only effec tive motive of supply is the desire to sell at the highest price. The sale is to be effected subject to the condition that the entire existing supply be disposed of immediately. It should, however, be ex pressly remarked that this last assumption is not equivalent to re quiring that the entire stock be sold in bulk, in one unbroken quan tity. As in our earlier investigation, we assume here, too, not an indivisible total-stock, but a divisible supply which may be sold piece by piece, by units of weight or in any other units whatever.

The vendors will not be in a position to impose on the purchaser the condition, that he must buy the whole or leave the whole. It is left to the discretion of every buyer to name the quantities which he wishes to acquire; such is the rule of the free market, and under this rule we are bound to deduce the law of price. For the present we need not inquire by what standard the vendors are to appraise the sums of money which they receive. It will be sufficient to as sume that a sale is effected at the highest possible price, that the high est price is the most acceptable to the vendor and that those pur chasers are preferred, who ofter more money than others. The important factor in the supply-index, as here described, is the quantity of the stock offered. The price which the vendors are able to obtain for the quantities offered, depends for the rest exclusively on the demand-index. Had the purchasers little to offer, the vendors would have to be satisfied with little. The values which they offer are not of value to the sellers themselves. Only by the instrumentality or the demand do the goods become values at all. To express the situation metaphorically, it is first the demand which inscribes value figures on these goods.

THE 0 R Y 0 F SOC I ALE, C '0 NOM Y 181 The effective motive in the demand-index of consumers is the de sire of securing the greatest benefit from the sums of money which have to be expended. In a stationary economy, which is here taken for granted, the sums of money which have to be expended to defray the expenses of the household are taken from the income. Every consumer endeavors to turn his money-income into the highest pos sible consumption-values. Therefore in every case he strives to pur chase at the lowest price. But on the other hand, he must always allow for the competition of all the other consumers who, under some circumstances, will compel him to increase his offer to the highest permissible limit. To ascertain the margin for the highest offer which a man may be justified in making in a particular instance is an exceedingly com plicated problem. Every individual offer is influenced by the ex penditure which has to be incurred to meet other needs; all prices which the consumer agrees to pay in order to acquire consumption values are interconnected by the unity of the economy. In order to simplify the inquiry, we"shall, for the present, still disregard these complications which arise from the integration of the economy.

Under these conditions the highest offer which the consumer expects to make in the individual case will be indicated by the amount of money-income which he controls; aside from this, it will depend on the amount of the marginal utility to be secured by the purchase of the consumption-goods. This utility is conditioned by the state of his need, the degree to which it has been satisfied and the extent to which he has provided goods to meet it; every consumer appraises this marginal utility according to the rules of computation of the simple economy. If we assume that the need of all consumers is enti~ely unsatisfied and unprovided for; the highest offers will be made by those persons whose needs are most intense and who at the same time have the largest purchas.ing power. Last in order will appear the individuals whose needs are least intense and who com mand the smallest means. Those with relatively large incomes will be able to offer the same price for the satisfaction of less important needs as those who husband their smaller means offer to provide at least for the urgent needs.

The following illustration, wholly schematic in details, provides the simplest possible numerical expression for the demand-index of consumers. The consumer with strongest need and greatest ability to pay, K1 , may enter a maximum offer of 100 money-units, where he does not wish to acquire more than one unit of the stock; where he wishes to secure two units, he may figure for each of the two units a 182 SOCIAL ECONOMICS marginal utility and, therefore, a maximum offer of 90; when buying three, a maximum offer of 80 for each. The intending purchaser next in order, K2 , may figure for a single unit a maximum offer of 90; when acquiring two or three, he may appraise each unit re spectively at 80 and 70. K3, for the case assumed, may fi.gure 80, 70 and 60; K4 , 70, 60, 50. Starting from these figures, what shall we say that the prices must be? Let us first think in terms of what would occur at an auction-sale. At first the ,vouid-be purchasers will scarcely be inclined to give prices, equaling the highest offers that their calculations allow. They will endeavor to make their ac quisition with the lowest bid which market-conditions permit; only gradually will they raise their bids to the upper limit as they be come convinced that their end cannot be reached otherwise.

If only one unit of the wares has been brought to supply the mar ket, K1 will be successful in the competition and will obtain the mer chandise. However, in order that this may happen, he will have to enter a bid that will exclude his most dangerous competitor, K 2 : i. e., an offer"higher than 90. The price consequently will move be tween 90 and 100; or more accurately, the price must be higher than 90 but cannot exceed 100. Let us assume the stock which the sup ply offers to consist of three pieces, all to be sold. In this event as high a price cannot be realized. K2 may in no event pay more than 90. Even K1 , if he is to buy more than one of the three pieces, will not be willing to pay over 90, because this would exceed the marginal utility which he has computed. He would be wiser to give up buying the second piece, than to pay more for it than its marginal utility to him. The price, therefore, must not exceed 90. However, it must be over 80, for it must be held above that "figure by K1 and K 2 who both are interested in shutting out their most dangerous competitor, K3 • At this price, then, K1 will purchase two pieces, K2 one piece.

If there are six units, all of which must be sold, K 2 will purchase three pieces, K2 ,· two pieces, Kg, one piece; the price will be above 70 without, however, exceeding 80. For every quantity offered, there is a "latitude given to price-formation. This is strictly cir cumscribed by the order of the demand-series, for only at a price within these limits is the demand able to absorb that quantity. At what point within the margins indicated the price will rest, depends on circumstances. Economic theory as such has not the means to distinguish between these circumstances, and consequently from the standpoint of the theory they must be called accidental. Only one exceedingly important condition will have to be mentioned: for all simultaneous exchanges in a closed market within the latitude of THE 0 R Y 0 F SOC I ALE CON 0 M ;y 183 price-formation the price must be the same. No vendor will be satis fied with a price, when the man beside him is able to obtain a higher one. No purchaser will pay a higher price, ,vhile some one at his el bow pays less. In the closed market, the law of equality of prices applies: or the same wares at the same time, there is only one price.

Expressed in general terms, the fundamental law of the price of commodities is the following: for all units of the supply of wares destined to be sold, the price is regularly fixed between the maximum ofter of the lowest demand-series that must be still admitted to trade in order that the entire quantity offered may be sold, and the highest offer of the next succeeding demand-series, which must be overbid in order that the higher series may be protected against their com petitors. The demand-series, admitted to acquisition, form the ef fective demand; those excluded, the ineffective demand. These terms, however, must not be interpreted in the sense that effective demand, by itself, determines the price; for the uppermost series of the in effective demand also plays an important part in the formation of the price. The two important series in the effective and ineffective demand may be spoken of as the last admitted and the first excluded demand-series, more briefly as the marginal-offer-series, or marginal series of .the demand. By the aid of this term, the law may be formulated in its most concise expression: for all units of mass, a single price will be set between the marginal series of the demand.

The traditional formula of the market, also to be found in earlier theory, that supply and demand determine the price, is not incorrect; it is merely inaccurate, if-as was the meaning originally-by supply and demand nothing more is meant than the quantities supplied and demanded. By contrasting the t,vo opposing quantities alone, the law of price could never be deduced; the exchange of the quantities is rigidly delimited only when the quantities, at least on the side of the demand, become vehicles of values. The decisive relations of value must thus be understood in connection with them, whenever supply and demand are to be made determining causes of price. The limits within which the formation of prices takes place, are frequently far apart in the case of scarcitY,-commodities. A comparatively small number of wealthy individuals constitute the effective demand for costly antiques. The outcome of the price-,war between these parties for an ardently desired work of art can hardly be anticipated. The prices here realized, vary in amount from sale' to sale by considerable sums, as fashion or the whim of the moment may sway connoisseurs one way or the other,or as means may be available to gratify expensive tastes of this sort. The prices which are realized are amateur-prices, and may be called fortuitous prices, in so far as there is wide room for the play of chance between the maximum offers, irrespective of the variations of 184 SOCIAL E C ON 0 M I C S circumstances which are decidedly subject to chance but by which collector~ determine these bids. However, it is incorrect to say, as did Ricardo, that prices of this sort are not subject to any law wh·atever. They are, strictly speaking, subject to the same law which applies to wares generally; the re ceptivity of the market decides their fate also, as it is limited by the order of the demand-series. The major distinction is that the latitude of movement is great.

For the bulk of the commodities which are not luxuries the demand-series are generally close together. At the same time, the economic bases for the computation of bids are not readily displaced. When, finally, we come to the goods that result from mass production, goods offered in large quantities for the use of multitudes of consumers, the series are so closely packed, the figures of offers so permanently fixed by steady requirements of subsistence and relations of income among the people at large, that they shade one into the. other imper· ceptibly and are subject to only very gradual fluctuations. The series of demand are here formed not by individual persons, but by classes of the people whose stratifications are shaded into one another. These series are interwoven into a network of narrowest meshe~, leaving to the formation of prices a scarcely per ceptible latitude of movement. For the bulk of commodities, the law of price may be condensed into the statement that the price follows the marginal offer of the effective demand, i. e., the lowest offer compelling acceptance, in order that the entire stock may presently be disposed of without a:p. unsold remainder.

The elementary law of price deduced for wares is as valid for all other consumption-values meant to· be sold like merchandize, as it is for consumption wares themselves. It holds especially as regards the price paid as wages for the services of domestic servants and as salary, remuneration or honorarium for superior personal services; it is valid for rent of urban dwellings. As the effect of the law extends thru consumption-values to all natural productive means without exception, and from these again to the investment and money-market, it may rightly be called the funda'mental law of price. The price, ascertained according to the fundamental law, holds uniformly for all individuals or persons desiring to exchange in the market; it is the universal and, thus, the common price. It is, however, the common price in a still broader sense: it is the resultant of general economic conditions. The most strictly individualistic school regards every departure from the common price as un economic, even when made with benevolent intent to ease difficulties for some weaker opposing party.

Where the general conditions are considered socially satisfactory and morally and legally correct, the general price is found also to be: the just, or equitable, price. No one does injury to the other in demanding the just and the common price; one and all, they can subsist under it. The general interest is well taken care of if, man by man, they adhere to it. The individual, cooperating in the establishment in the market of this 'price by looking out for his individual interest, protects at the same time the social interest; he fulfills a personal and a social duty; he contributes his share to the establishment. of the market-series -an establishment required, if we would observe the economic margin in the distribution of the commodities which is to be accomplished in the market. In this way the struggle of price-competition will be purged of objectionable elements and will cease to he a struggle at all at the height of social progress, but will become a cooperative endeavor of supply and demand to socially apTHE 0 R Y 0 F SOC I ALE. CON 0 M Y 185 praise stocks and needs. The freqUJently ruthless conditions of actual life will still continue to make it a struggle, a struggle, however, not fought out man toman, but group to group and class to class, in which the members of each class and group are personally satisfied with the advantage attainable by the groups and classes collectively.

The common and equitable price attains its true significance in the disjointed market. In the closed market on the Exchange where the total supply and the total demand of the wholesale trade come together, or at a public auction where all interested parties of the market meet, the correct common price is ascertained by means of the practical assertion of the personal desires of each participant in the market, provided only that in other respects the rules and regulations of the market are preserved. At an auction, for exam-pIe, the gradual overbidding of each other by the parties desiring to buy, will lead exactly to the ascertain ment of the marginal bid. The more extensive trade of social economy, how ever, is cared for in the dissociated competition of the open mar~ts, where the individual participants of the market are but loosely, if at all, in touch with one another. Were every individual here to follow his personal egoism only, then the struggle for the best price would break up into any number of single combats, where the stronger would too often find opportuniti1es of mercilessly exploiting the weaker. Competition in regard to prices would become a per sonal conflict, a conflict of unbridled, personal egoism; a social law of prices would _never assert itself. Thanks, however, to the way in which mankind has been trained historically to social egoism, the establishment of prices in the disjointed market does after all, as a rule, take place in the spirit of the price law. The exploitation of the individual case is not countenanced; men endeavor to ascertain the just, the common price; the multitude of individuals falls voluntarily into line, following the call of those "natural controls" which, step by step, have taken the lead in human affairs. Experience has gradually driven home its lesson, that the common price will best work out for the benefit of all concerned. But, in addition, historical powers of various kinds have lent their compelling inflUJence to secure this common price; moreover, the social nature of mankind is sufficiently receptive to recognize this price as just and to maintain it even where it is not directly demanded by the pressure of the com1petition.

Man is not fully educated to social egoisIn in any social economy today. This we must admit. In the smaller markets of earlier days, this altruistic education commenced; but after the good work had been accomplished with respect to these, larger and larger markets were added to the existing ones. These added new and more seductive temptations to personal egoism against which the morality of the average mortal proved insufficient. Now, since in the most advanced national economies the largest gains may be realized, it is there that the fiercest commercial struggles may be witnessed. It is in these that the greatest temptation is presented to grasp powers unthought of before and to use or abuse them at pleasure. Were we to attempt to confine ourselves in our assumptions to model-economies, entering the competition of prices subject to socially controlled egoism, we would find ourselves unable to explain these occurrences. They can ·only be eXiplained when by decreasing abstraction one finally comes to replace the assumption of social egoism by that of an unbridled personal egoism.

To deduce the law of price, we assumed that the consumption 'wares to be 186 SOCIAL ECONOMICS sold have no utility-value for the vendor personally. If now we modify this assumption and assign a position in the supply-index to the utility-value for the vendor, we shall find a lower limit established for the price, below which it must not be allowed to fall. The. vendor will have to test the price offered to him by the utility-value, of which direct personal use would always assure him. He will not be satisfied with anything less than a money-price whose use in exchange still. promises a gain over and above the utility-value. For this lower limit the same motive of gain of value asserts itself in money-exchange, which we have already disclosed for natural exchange; otherwise the fundamental law of price as deduced }'emains unaffected. In the case of industrial products this lower limit does not find its way into practical affairs. The industrial vendor, with scarcely an exception, has no intention of retaining part of his products for individual use; his personal conditions being what they are, he could frequently find no personal use for the products of, his trade, no matter how much he might wish to' do so. In any event, the quantity which he might wish to retain would always be so small as to be practically negligible. The lower limit is important even at this day for agricultural products, wherever agriculture has adhered to the old, natural-economic basis of production for 'personal use. In the determination also of the lower limit the intensit,y of the need is not alone decisive. WeaIth is also to be considered. A small land owner raising Tokay wine is not so situated as to retain for his own use any quantity whatever of this precious vintage. The margin of this man's domestic econo~y i,sso narrowly drawn,. that it will permit no such use. There would be a loss of value, compared with that which the economic use, of the money price promises to yield. ,Similarly, a wealthy manufacturer turning out cheap, crude mass-products will retain none of these for his own use. For his individual ~onsumption he demands luxurious commodities.

§ 34. THE STRATIFICATION OF PRICES Mass-value'S'--,J!edium-va,lues-Luxury-valu,es-The strat'ijied marginal utility. The law of price leads us to a most important deduction for the mutual relation of commodity-prices. This relation is determined not only by the marginal utility; it is also determined by the force of the demand of the marginal series. The consequence of this may be that the' difference in price is one entirely unequal to that in the marginal utility. It might even happen that the commodity of lower marginal utility obtains a much higher price. There are mass-commodities of the most general use which are brought to the market in such large quantities, that the purchasers of more ample means do not feel called to exert their purchasing ability to the utmost in order to fully cover their needs. Bread, for ex ample, is brought to the market in such large quantities that the consumption-needs of all strata of people can be supplied. The wealthier purchasers are able even to provide for their requirements to the point of complete satiety. Only the buyers of the most reTHE 0 R Y 0 F SOC I ALE, C ,0 NOM Y 187 stricted incomes are compelled to retrench according to their cir cumstances. The marginal series for all such goods are formed by the strata of lowest purchasing power. The magnitude of such prices is determined by these buyers. The wealthy buyer enjoys his larger means in such a manner that he is able to provide himself abundantly with many consumption goods for which he pays according to the standard of the poor. Should a higher price be charged to him for the same wares than to any other user, he will immedia.tely feel that he has' been imposed upon. He demands for himself the same price, the common price, that is demanded of any other purchaser. It is quite true to remark, that this man's wealth would not avail him, were he to be held to pay for all his wants according to his enhanced personal standard. Were the recipient of an income of 10,000 or 100,000 Crowns or Marks obliged to pay a tenfold or hundredfold price for whatever he buys, he would be no better off than the re cipient of an income of 1000 Marks or Crowns, by whose standards the common price has been· established. Pecuniary wealth is actual wealth only when it enables its owner to extend his enjoyments, as does natural wealth, beyond those of individuals of smaller means.

Contrasted with mass-commodities, we find the specific luxury commodities. These are commodities of the most infrequent occur rence that are not urgent necessities but are called for by needs of considerable refinement or, over-refinement with some earnestness of demand. Degenerate wealth is on the look-out for possessions suitable to gratify the desire of ostentation, because they are scarce, bee-ause they attract attention, because they differentiate their possessor from the multitudes who go without them. It matters not that, in all other respects, these commodities possess no qualities which would gratify refined sensibilities or artistic tastes. For articles of luxury, prices are offered according to a standard induced by the purchasing ability of members of the higher and highest income-strata who are bent on excluding the competition of all other rivals. Ever since the rise of American multimillionaires into a social stratum of their own, the prices of pictures by the old masters for which these men compete have been forced to figures, which the European nabob may not approach. If the rich buy salt and bread at a lower price than their individual average ability would allow, they are none the less forced to pay prices for diamonds which are above their average standard.

Midway between mass-commodities and the specific articles of luxury, we find certain intermediate goods, for which the marginal series are provided by the middle classes, while nothing or almost 188 SOCIAL ECONOMICS nothing can be taken up by the lower classes. For these intermediate goods, therefore, prices must needs be formed in keeping with the purchasing power of the middle classes. As in the case of commodities, we may observe this cleavage in the case of all natural values generally. In all natural markets that still exist besides the markets of products, mass-values are clearly distinguishable in their prices from values of comfort 1 and luxury. The prices, for example, that are paid for urban dwellings accord ing to location, are perceptibly graded according to the ability of their inmates to pay. One may best describe this phenomenon as the stratification .of prices. The greater the number of strata of income and wealth found in any economy and the more disparate the highest and the lowest strata in financial ability, the more conspicuous will be the stratifica tion of prices. Had all· the citizens of a state approximately the same incomes and assets, then the discrepancy of price between bread and diamonds-to revive the illustration of our earlier discussion would not be nearly as great as it is in fact. If economists have strained their ingenuity for an undue length of time· in the solution of this old illustration of the school room, the blame for the blunder is to be placed on the conviction that prices must necessarily be the expression of an . economic or social appraisal. Such futile efforts can never explain why society should attach so much more value to dia monds than it does to bread. To tell the truth, the price of diamonds is anything but an expression of the uniform social appreciation of diamonds; it is merely the expression of the appreciation of that definite stratum, peculiarly able to pay, which form the marginal series of demand for diamonds. The offers, by which the great mass of the population would be able to express its appraisal· of diamonds, are so low in comparison to the prevailing market-prices, that they open no prospects of corresponding purchases. The mass of the popu lation does not even attempt to introduce a demand; it does not even turn aside to inquire, what might be the bids .which it could possibly bring forward.

Price is a social institution, not simply because its magnitude is the result of a universal appraisal of value by society; it is so as the result of a social contest for the possession of the offered supply -a contest between individuals of varying appreciation and· varying 1 Trans. note: Jfittelwerten. has been stretched in translation because the recent discussion of standards of subsistence and of comfort for wage-earners seem to give a meaning to "values of comfort" that would not be conveyed by "middle values."

THE 0 R Y 0 F SOC I ALE, C '0 N 0 MIY 189 powers of demand. The maximum offer of the marginal stratum is decisive. Therefore price does not take its standard from the mar ginal utility as such, but from a stratified marginal utility. This is a standard that frequently differs widely from· that of a rational social appraisal of dependent need-values. In the theory of the simple economy, the assumption is directed to the utmost possible equalization of the margin of use. In our social economy where the stratified marginal utility is decisive, the satisfaction of needs is exceedingly disproportionate. Neverthele,ss, while public opinion considers private property itself, and its existing distribution, as just, this condition is not f.elt as an injustice. The stratified, common price will be considered a just price, while things .remain as they are. Only when the existing distribution of wealth or even private ,property is felt to be a social injustice, will this opinion call for review. Where unheard of prices are paid for luxuries, useless or extravagant in the extreme, public conscience is outraged and declares these to be immoral.

§ 35. THE DEMAND-INDEX OF CONSUMPTION AND" THE UNITY OF THE HOUSEHOLD The household's margin of expenditure, marginal expenditures OJfltd expenditure.~ of the narrower marginal utility-Relation between price and quantity demanded. We have deduced the general law of price by the illustration of a stock of goods, detached from the interconnections of the economy, and observed in isolation. As we recall the fact that all consumption values to be acquired for the household are related in the unity of the economy, the formulation of the general law of price, as we have laid· it down, requires an additional particularization. We can start from results already obtained in the theory of the simple economy. We came to the conclusion that the unity of the economy has for its effect the inevitable maintenance or observation of a general economic margin of use which is exceeded in the case of products of specific frequency, but is not attained by the specific scarcity-products and by the cost-products of narrower marginal utility. These results we now have to apply consistently for the in dividual households which in economic exchange supply themselves no longer by home-production but by purchases in the market. The conditions remain fundamentally the same; only general margin of domestic use presents itself in the particular shape of the general margin of expenditure. Every household, with the means at its com mand and the state of its needs, faces a general limit of expenditures, As regards specific frequency-values, this limit may be exceeded be cause men may provide themselves with these to the point of satiety, 190 SOCIAL ECONOMICS which lies below the general expenditure-limit. We shall designate expenditures of this sort, as expenditures of the wider marginal utility.

In cases of cost-value of narrower marginal utility and of specific scarcity-values, the expenditures must be stopped at a point of higher utility; we shall speak of these expenditures as expenditures of the nar rower marginal utility. The bulk of expenditures which may be ex tended to the general margin, we shall call marginal expenditures. In households in which the income barely allows a minimum of subsist ence, expenditures outside of those for the needs of existence cannot be incurred; outlays for subsistence are the marginal expenditures of such very modest economies. In households which can make "ends meet," the income is ample to satisfy fully these primary needs and to cover furthermore the entire subsistence considered suitable to the social posi tion. In this case, the mere needs of existence no longer determine marginal expenditures. The same rule applies with further increases of incolne to all needs which the lower income was already ample to sat isfy. The increase of income is applied to expenditures in other direc tions: for increased comfort, education and fashionable requirements.

Where expenditures are increased for the more simple wants, this will be· done. by advancing from the coarser to the more refined means of satisfaction, such as serve the preservation of life with greater convenience and with corresponding increase of enjoyable stimula tion. This explains the familiar fact that expenses for food and shelter form a larger proportion of the total in the case of smaller incomes than in case of medium and high incomes. On a par with the needs of physical existence, the mass of human beings appraises certain other needs, the satisfaction of which does not contribute to the preservation of life. But owing to the particular pleasurable stimulation which they afford, they are demanded with an insistence closely equaling that of the needs of existence. Of this sort is the craving for alcohol~c beverages or for tobacco. The expenditures for wine, brandy, beer and all manner of smoking-tobacco are con sidered altogether indispensable by many human beings. Even con sumers whose slender means force them to be satisfied with purchasing coarse qualities, strive----exactly as in the case of the needs of exis tence-to obtain full satiety; even cases of over-satiety, of immoderate and harmful enjoyment are not rare. Where these needs are fully satisfied, the expenditure for them with increasing income is not susceptible of increase as regards quantities consumed. If the ex penditure is increased, as is generally the case with the stimulus which these means of satisfaction exert, the increase is effected· by a re sort to finer qualities· at higher prices. The increases of income must THE 0 R Y 0 F SOC IA L ,E CON 0 M ;y 191 be very considerable if these expenditures, too, are to disappear from the series of marginal expenditures and to advance into the class of expenditures of the narrower marginal utility.

The index of demand for such consumption-values of the narrower utility limit is not developed according to the simple scheme that was used in the deduction of the general law of price. The dellland for these goods is constant within wide limits, or at least it is subject to insignificant changes. It may, therefore, happen that with a decrease in prices the demand-series. do not expand, that with rising prices they do not contract. To explain this situation more fully, we shall have to observe that advances of prices which consume a larger quota of the total income, must lower the buying power of the household, raise the general margin of use and necessitate retrenchment of all marginal ex penditures. In so far 31S the expenditures for the urgent consumption-values are themselves marginal expenditures, these, too, will have to be curtailed. Where this is impossible,as consumption has already been reduced to a mini mum of existence and cannot be cut further, the attempt will have to be made to shift the effect to the future either by resort to credit or by disposal of those ,portions of the available possessions which are least necessary. However, in 80 far as the expenditures for the urgent consumption-values are not part of the marginal expenditures but are expenditures of narrower marginal utility, it will be possible to maintain them in their accustomed extent. The retrench ment which must be effected will fall upon those goods more easily dispensed with, the actual marginal expenditures, unless indeed in these cases also it should be preferred to carryover the effect to a future day-by reliance on credit and the sale of property. A progressive economy has, in addition to these makeshifts, the opportunity of reducing its savings, thus likewise relieving the present at the expense of the future. In one or the other of these w-n,tys, the to.tal demand-index of consumption must, indeed, in its present or future shape be affected by changes of prices. In this broader sense, therefore, the old statement of everyday experience may be maintained, that the demand drops off whenever prices rise; it rises whenever prices fall.

At what point within the existing limits of movement the.pricefor consumption-values of narrower marginal utility will be set, is not now to be di.scussed; we shall return to this .problem when treating of cost-price and monopoly· price. § 36. THE FUNDAMEN'l'AL LAW OF THE CHANGE OF PRICE The law of supply, the law of demand-Ea;cesswe .supply an~ unsatisfied de mand-The orga.niza.tion of the m.fJtrket. The fundamental law of the formation of prices includes the fundamental law of the change of prices. We mean by change of prices, the transformation of prices induced by changed conditions of the market. This transformation will have to obey the identical law which controls the formation of prices itself. Price is bound to change whenever the decisive marginal bid changes. The condi19-2 SOCIAL ECONOMICS tions of supply and demand may give rise to the change, as the quantities offered or demanded in the market increase or decrease with accompanying fluctuations of prices. Whenever the change is due to the supply, the law of supply begins to operate. This corre sponds to the law of stock in the simple economy, which states that the prices must vary in the opposite direction to the change in the supply. This law, however, does not mean that the prices will also have to change in the same degree as the supply. Where the de mand initiates the change of price, the law of demand becomes opera tive, which corresponds to the law of the needs in the simple economy.

In this case prices are bound to change in the same direction-mean ing, again, direction only, not degree-in which the demand has moved. Chang'es in the demand may, again, be caused not only by changes in needs, but also by changes· in the stratification of incomes. (This is an important distinction, when contrasted with the law of needs.) Probably the latter occurs more frequently. The changes of needs are often themselves consequences of altered abilities of demand. It must be pointed out in this connection, that the effective demand of an entire population may increase or decrease in the aggregate, or the conditions of the individual social strata may be come relatively displaced, new income-strata coming into being or old ones disappearing. Many changes of prices have their cause in such displacements of social strata, which establish different stratified marginal utilities for numerous values.

The influence of fluctuations of price is different in the case of mass values," middle" values and luxury values, just as it differs for values of narrower marginal utility and marginal values. Mass values are the most stable, for they are affected by the families who form the broad base of the pyramid of stratified incomes. At the base the intervals between the groups are smallest and the groups themselves are largest. Since the upper income-strata embrace the fewest persons and their membership is subject to the most severe fluctuations, the costly scarcity-values are less stable, for the demand comes from the uppermost layers. The supply need be but little diminished, in order to break through the narrow layer of purchasers of the maximum purchasing ability and to encounter, perhaps in the very next stratum, rapidly decreasing purchasing powers. It is for reasons such as these that luxury-values are especially sensitive to crises which unsettle purchasing power and, on the other hand, that they are the most expressive index of increases of economic prosperity.

Such priees may be rapidly and enormously inflated, where newlyTHEORY OF SOCIAL :ECONOMY 193 won riches craves all manner of enjoyment and endeavors to grasp whatever tempts the vanity of the parvenu. As we have already said, the market invariably sets out from tradi tional prices. While the conditions of supply and demand remain unchanged, the traditional price precisely reflects the marginal offer, and distinguishes effective and ineffective demand; by it the market is maintained in balance. Those' individuals who are unable to pay ,the current price, stay out of the market. The admitted, effective demand knows the quantities of "'Values of anyone kind; its means will enable it to purchase at the going price. These parties have laid out their pl~ns of management with these facts in view; they feel assured that the supply will be sufficient to provide their wants to the accustomed extent, and thus they. confine their acquisitions to the most immediate needs. On the side of. the supply, men also feel confident that throughout the entire period of turnover they will succeed in making the expected sales, and that they will enter the next trading-period without carrying over a greater stock of unsold wares than a provident management must always have at its disposal.

Under circumstances like these, and while supply and demand re main in equilibrium, the trade of the market will continue to be transacted in due routine; no impulse will be given, which would bring about any change in price. ,No sooner, however, do changes take place in the proportions of supply and demand than, in a market which continues to maintain traditional prices, part of the supply becomes excessive or part of the demand, hitherto taken care of, remains unsatisfied. In consequence, a presSure is exerted which must lead to a change in price. This mechanism of excessive supply and unsatisfied demand will remain active until the appropriate price is settled, at which supply and demand again coincide. Let us assume that the demand increases; i. e., that at the established price a greater quantity is being demanded than hitherto. For example, at a price of 10, 100 units are still offered. Hitherto at this price 100 units were denlanded but now 120 are. Should the price remain unchanged at 10, an unsatis.fied de mand for 20 pieces would remain. At the existing price these would be as effectively demanded as the other 100. Such a result cannot settle the market.

The interests of the excluded effective demand and, fully as much, those of the supply forbid it. As soon as it is known in the market that the quantity demanded has increased, the demanders will begin to outbid one another. Sup pliers will hold back deliveries, until the weakest series of the demand are eliminated and a narrower selection of the effective demand has been. com pleted, at whose marginal offer the quantities demanded and quantities supplied balance. The same course of events will take place whenever the supply drops off.

194 SOCIAL ECONOMICS Let us reverse conditions: the demand drops off or the supply increases; for example, at a price of 10, 100 units are still supplied but only 80 demanded, or now as before, 100 pieces are demanded but 120 supplied. Were the old price maintained, a part of the supply must remain in excess. This remainder also was meant to be disposed of, but found no purchasers. This surplus might be an unsold balance of wares, for which buyers are wanted; unrented dwellings for -which tenants are sought; a number of personal servants, seeking employ ment. In so far as the sellers do not possess other outlets for the surplus-an eventuality which we do not wish to consider in this connection-they will have to lower the hitherto existing price. New series of less forceful demand, hitherto excluded, will be admitted, until with the establishment of a new price, the market once more recovers its equilibrium and actual supply and effective deml;l;nd ~oincide.

We find i;n the markets an habitual endeavor to discount changed conditions, without awaiting the automatic regulation of price by the mechanism of exces sive supply and unsatisfied demand. A price which is still maintained after the condition of the market has changed, is uneconomic; it is opposed to the interest of those sellers who sold 'prematurely at too Iowa price; it is harmful to the interest of that part of the demand which has bought prematurely at too high a price, or which, having decided too late to outbid others, is no longer able to buy. It may be noted that ~uch a. condition results in corresponding gains to the opposite party; but gains of this sort are accidental and are ob tained by chance prices. These profits are not as important as the protection of permanent interests. The latter may best be preserved, the plan of consump tion and production in the individual economies may be kept on the most businesslike basis and violation of the admissible economic boundaries may be most carefully avoided, where the greatest possible constancy of prices permits men to form estimates of operations for entire trade-periods of the production process or for entire periods of the domestic management; i. e., when such prices hold good in this way or, better still, are the same from period to period. A vendor who profits by every transient, urgent need of the demand, in order to extort exceptional prices, offends against the social spirit which should animate even the conflict of economic interests. His dealings are more nearly those of the usurer than the merchant. The trustworthy businessman endeavors irrespective of all chance occurrences of individual demand, to maintain constant prices based on the general market-conditions and holding, as far as possible, for considerable periods of time .

.From endeavors such as these, there is gradually developed in the various markets a sort of free organization which, subsequently, may become the basis for a . formally developed market-organization. As between producers-among whom in theory we class dealers as well-and consumers,' the first take the lead inside of this free organization. They' are destined to do so by their permanent business interest and by their superior market-experience. They originate the supply and for this reason may decide what quantities are to be offered to current consumption,and what quantities are to be reserved for future con tingencies. This fact enables these men to exercise the most effective influence on market-conditions. It· is within their province to conduct the market by establishing prices on a basis which can be permanently maintained. While changes of supply and demand occur within moderate limits, their experience of the market enables these parties to perform these functions. Little by little, THE 0 R Y 0 F SOC I A L ,E C ON 0 M Y 195 gradual displacements may transform the entire system of prices and large num bers of newly arising values may become embedded in the network of the old without the market being necessarily appreciably disturbed in any way. ' § 37. THE FORMATION OF PRICES IN THE DISORGANIZED MARKET Panic prices, Scare-p'rices, Cast-away prices-Formation of prices in an open mcwket-U swry-prices.

Whenever violent changes arise in the conditions of supply and demand, especially when they are unexpected, the free organization of the market fails to function. Then the decisive marginal offer must be ascertained by the pressure of the excessive supply and the unsatisfied demand. It may possibly not be found until after all sorts of variations which shoot beyond the mark. Whenever the disturbances are excessive, the organization of the market may be so deranged that the mechanism of the excessive supply and the unsatis fied demand breaks down and the decisive marginal offer may not be ascertained for some time. A market of this sort, we shall call a dis organized market. In the disorganized market, the marginal law loses its efficacy; the latitude of price-formation is greatly broadened. Chance-prices, above or below the position of the marginal offer, arise within these widened limits. To follow the course of events, we will assume the case which shows most clearly what happens in these circumstances; we will assume the case of a violent disturbance of the market, gener ally known as a panic. A panic of demand arises when consumers conditions are the same where the demand is by entrepreneurs-for any reason whatsoever fear that the supply of wares will fall short of covering the entire urgent demand. The panic will be especially acute, when existence-values are involved. The terrified eonsumers will grab for the nearest stocks of the wares that offer; the price is no longer bargained for by a uniform system. Every man takes care of himself as opportunity offers; buyers of more abundant means make use of their power, without waiting to see whether or not they might buy at the marginal offer of less wealthy competitors. Even the less wealthy purchasers. manage to increase their bids by concen trating their means as much as possible on the endangered existence values. In this way extremity-prices may be conceded far beyond a point which is justified by the true state of things. The panic of sup ply may be witnessed "vhen, in one way or another, an apprehension has been created that for one or the other group of wares, or even for an entire series of groups of wares, a sudden and catastrophic drop of prices is to be expected. The panic is intensified when the 196 SOCIAL EC ON OMI C S supply, as a matter of commercial self-preservation, is compelled to force sales. Stocks, which under different circumstances would have been held over for later disposition, are quickly thrown on the market in short order, just to unload them in any event. Possibly, on the other hand, the demand is induced to hold back by the identical con ditions, and thus to incr.ease the supply. As the proportions of sup ply and demand have become more unfavorable, the marginal offer will almost certainly be depressed, but the terrified vendors do not wait to see the marginal offer determined. Just as in the case of the panic of demand, the law of the single price is overthrown. Prices vary in rapid succession. Every seller strives to make sure of the nearest purchaser, and his. ambition is satisfied if he can sell at all, even at ruinous prices. In the case of wares which have no inherent value-in-use for the suppliers, no lower limit can be set for such a ca tastrophic drop in prices. The market, in the grasp of a· panic, not infrequently loses every. vestige of sound judgment ; under the influ ence of senseless rumors, the impossible may seem to become an accom plished fact. Once a few of the alarmists have set the example of sell ing at mad prices, the entire market may· follow in their train, with never a man left to stand off the stampede.

Every' scattered market, no longer unified by the sentiment of so cial egoism, is a disorganized market, where the law of the unity of price is ignored or, to say the least, encroached upon. In such mar kets the ranks of market-frequenters are' disrupted; local or temporal partial markets differentiate from the principal market, individual groups of persons or even single individuals detach· themselves from it, then and there. Market-e~perts or persons otherwise' favorably situated still take advantage of the common price; others must con tent themselves with aberrant prices 'which often are, more or less, prices of chance. The supply is able to exploit, by advances in prices, the necessities of the demand, increased locally, temporally or owing to personal interests. Conversely the demand is able to exploit the necessities of the supply by depressing prices, where the latter is com pelled to sell. A hackman, alone on the spot, need not observe the marginal offer, which would be established if the market were com plete. He is in a position to charge his passenger a higher price for a very urgent trip. The upper limit will be determined by the per sonal appraisal of the intending passenger. In a case of this sort, the hackman is by no means a monopolist; he does not control the entire market. He controls only this single passenger, who has been cut off from the entire market. The fare prescribed by law' in a case THE 0 R Y 0 F SOC I ALE CON 0 M ,y 197 of this sort, simply keeps the individual price in line with the common pric.e.

Usury, as practiced to~day, is a phenomenon of the disjointed market. The demand. for capital on the part of persons of insecure financial standing is not admitted to the general capital-market, even if, on account of the greater risk to be incurred, this demand should offer to pay a certain premium on the trans action. Lenders in the general capital-market want to ensure safety in extending loans. Loans to unsafe debtors, i. e., such loans as. are accompanied by risks, mU$t be negotiated with money-lenders who make such loans as a specialty. Insecure loans, therefore, constitute a partial market by themselves, which is almost completely separated from the general market. In itself, too, this partial market is again disjointed; it is scattered to such an extent, that it may scarcely be spoken of as a market at all, for competition is scarcely effective among usurious creditors. The debtor, ,when he first embarks in the usurious trans action, is anxious to keep the matter secret. In this way, he is cut off from the general market, is isolated; but later on, once enmeshed in his obligations, he will be further isolated by the dependence in which he remains to his creditor, until it has become. possible for him to discharge his debt. In the typical. cases of usury,' repayment is difficult; for in all these cases, the debtor is economically weak, in consequence either of having an economic standard below the average, or of personal distress so oppressive that even the average standard is not sufficient to avert it. The single, weak debtor on one side; the single, merciless credi tor of large means on the other: this is the pure form of usury. The 'creditor may press his demands to the utmost limit at which the debtor appraises his service. He may advance this upper limit higher and higher, the more ruinous he render the position of the debtor, who ultimately struggles for the preserva tion of the great values of his economic existence and his honor. Indeed, when it comes to the helpless debtor, the creditor is not bound by the latter's appr~isal. He has him completely in his power, and can dictate his conditions.

If he does not proceed to extremities at once, it is due more than anything to the fact that, after all, he wishes to preserve a certain appearance of considera tion. If help does not come from outside, either from other persons or other sources of means which relieve the debtor and enable him to effect the discharge of his onerous obligations, usurious transactions of this sort must end in the ruin of the' debtor. As they pass beyond the standard of the common price, the performances which the creditor may enforce, also pass beyond the common form of the price. The creditor need not be satisfied to raise the rate of interest. He may exploit the debtor by the most varied transactions and practices, while he retains him in his power owing to the entanglements of the indebtedness. In this way usury may, especially, become a usury of wages. The exploitation of the wage-laborer reaches its most dangerous stage when the laborer, in virtue of a debt with its attendant entanglements, becomes permanently dependent on the employer.

Usury of earlier times started from other. premises. The supply of capital wa,s small; the demand for loans, as a matter of. necessity or distress, was large; even the ordinary rate of interest was exceedingly high, and the interest 011 loans negotiated under stress was exorbitant. It is not· to be wondered at, if 19,9 SOCIAL EC'ONOMICS the usury-laws of those days were prompted by the idea that it was immoral to take any interest for money loaned. The transitions from those earlier times to our own has gone thru many stages of development, presenting to legislation in the course of events a variety of difficult problems. To-day a large, well or ganized capital-market exists. It may with perfect propriety be left to self direction because a common and just price is always being established auto matically in the course of its operations. The task of usury-legislation has there fore been greatly simplified. It would be a fruitful undertaking to trace the theory of usury under all the changing conditions of the market; however, we have to confine ourselves to the exposition of modern conditions.

So, too, extortion in corn, bread and foodstuffs generally, occurred in earlier days under market-conditions which' in the civilized communities of the present day are conditions of the past. It should be recalled in' this connection that the state and the city of the past had to confront different and more difficult prob lems than any presented to-day. The monopolistic and monopoloid control of the market was more easily established in the narrower conditions of the past. With the pressure of the constantly returning failures of harvests and years of famine it was' particularly obnoxious. The monopolistic or monopoloid con trol of to-day, attempted on the exchanges by pools, arises under different con ditions and leads to different effects which are not discussed in this connection. § 38. THE PRICE OF PRODUCTS 1. THE SUPPLY-INDEX OF COSTS Oosts of acquisition of the entrepreneur~Producer's costs-Money-form and natural form of costs of production.

There are markets for two sorts of products: lllarkets for final prod ucts ready for use and. for intermediate products which are those of higher orders, demanded that· by their aid final products of immedi ate ultimate usefulness may be· obtained. For the immediately useful, final products, the demand is created by the consumers; for the in termediate products, by the producers.-" Producers" is again used in the widest sense, which includes trade with all its auxiliary em ployments.-,-The producers' demand for intermediate products orig inates in the expectation that a demand by consumers will completely relieve the market of the ultimate products which are to be obtained by. the use to the intermediate goods. The standard of producers' demand, therefore, is to be found in the prices at which they expect to dispose of the ultimate products. From the prices thus expected for ultimate products, the producers by the aid of the rules of at tribution, compute the indices of demand for the intermediate prod ucts. On the basis of these indices the prices for producers' goods are calculated. We may confine ourselves to deducing the law of price for the decisive market of the ultimate products. As to the THE 0 R Y OFS 0 CIAL ,E C'ON 0 MY 199 price-formation for intermediate products we shall later, especially when discussing demand-monopoly, add a few remarks. In the fol lowing pages, when we employ the term, products, we mean to refer -unless otherwise expressly indicated-to the immediately useful ultimate products.

We find, in the market of the ultimate products, the same demand index of consumption with which we had to deal in deducing the fundamental law of price-formation. There is thus nothing further of interest to add with reference to demand. On the other hand, the supply-index is now fundamentally changed. Whereas we formerly worked with the simplifying .assumption of a fixed supply, we are now face to face with a variable supply, ever changing with the con ditions of production and the prospects of the market. The pro ducers determine the size of the supply to be brought into the market by a calculation of which costs are the foundation. This supply index of the costs will next have to occupy our attention. In ap proaching this problem we shall not at first distinguish the conditions of monopoly, competition and the intermediate monopoloid position. These positions of the supply in the market have their influence on price. But, for the present, it is not this effect which we desire to probe. 'Ve ,,,,,ish now to examine the computation of costs, which the supplying entrepreneur completes for himself, and we wish to de termine the concept of costs, which he employs in doing so. In this respect the market position has no influence whatever: the monop olist's .calculation is not essentially different from that of any other entrepreneur. It should be observed, however, that not only the pro ducing entrepreneur and the merchant figure in this way; everybody does it, who incurs costs of any sort for the sake of acquisition. The banker does so, no less than the contracting builder who erects houses for his own account or for the account of others, than the owner of houses who lets dwellings to tenants, or than the physician and the lawyer. What we have to say as to costs of production, properly speaking, applies to all these other cases of acquisition.

The multiform nature of the phenomenon of costs is also shown in the computations of entrepreneurs. These men compute on the basis of two different classes of costs. In conformity with their com putations we shall have to distinguish two concepts of costs. In a broader sense, the producer or other entrepreneur includes in the term, c.osts, the entire outlay of money to be taken into considera tion in calculating his assets or his profit or loss. This is his point of view when he seeks to determine the actual effect on his wealth of the costs he has I, incurred. All capital expenditures, especially all 200 SOCIAL EC·ONOMICS those for acquiring the necessary specific productive means, are charged to the capital account. The builder, for example, set~ down the purchase-price which he actually paid for the lot. In ,the profit and loss account, besides all individual expenses of production, should be entered the entire outlay for taxes and other like expenses, the cost of compulsory insurance of workers and the like, and further more the entire loss of receipts in money with which the producer should debit production. From this last point of view, therefore, interest on the entire capital employed should be reckoned at the ex isting rate of interest; for the producer would have realized the cus tomary interest in any other legitimate employment, and he would be the loser, did he not fully recover it ,in the production now car ried on. The same consideration will lead the producer to charge to costs also the entire average wages of management,which he has a right to expect in other similar enterprises; for again he would consider himself the loser, if some particular activity did not yield him this, income, or did not yield it fully. Costs of this character are most suitably designated as acquisition-costs of the entrepreneur.

They include the entire money investment which the entrepreneur has actually "put up" or, as the case may be, must regard as invested, in order to earn the gains. If we compare acquisition-costs with costs of production as defined in the theory of the simple economy, we are confronted by some striking contrasts. We find, in the first place, that among the ele mentsof cost there are included taxes,all the performances akin to taxes, and also average wages of management. The inclusion of taxes and performances in the nature of taxes requires no further com ment. As regards the wages of management, we shall have to defer more explicit consideration until the next section, where the theory of such income is to be discussed. For the present suffice it to say that, in its motives, the inclusion of the average wages of manage ment is closely akin to the in.clusion of interest at the customary rates. Several further contrasts, which we also find, are less obvious and demand explanation. We itemized the costs of the simple econ omy as natural expenditures, but in the costs of acquisition the com mercial money-investment is. put down; we formerly charged the so cially indispensable costs, but in the costs of acquisition. all c.osts ac tually incurred are charged; we finally charged only cost-produ:ctive means, but, in the costs of acquisition expenses also are charged for procuring specific productive means.

We' find the explanation of these contradictions in the narrower conc.ept of costs,whichhas to guide producing entrepreneurs in esTHE 0 R Y 0 F SOC I A L ·E CO NOM Y 201 tablishing the plan of production and in calculating, in connection with this plan, the prices which they will have to demand for the products in order to come out without losses. These costs, then, are the costs spoken of in commercial phrase as "producers' costs" of the entrepreneur. In the computation of producers' costs, the en trepreneur has to be guided thruout by the rules of the simple econ omy, for every individual enterprise is in itself a simple economy. Along with all other rules of the computation of utility, the rules of cost-computation have to be complied with. As we enter upon the consideration of the individual points just touched upon, we shall see that this in fact is the case. A practical computation of producers' costs, intended to serve as an accurate basis for the plan of production and the calculation of prices, must set out from the natural cost-expenditure. It is true that the entrepreneur estimates not only acquisition-costs, but pro ducers' costs as well in terms of money; but he cannot safely stop at the mere pecuniary expression. A producer, determined to effect savin,gs in costs, could never consider merely the amount of money expended for procuring the productive means. lIe would have to endeavor to make savings in the natural quantities used, whether elll ployed in production or laid out for plant. The producers have to check off accurately in terms of natural quantities, the outlay in ma terials and services. of labor contained in each individual product the special-costs, as men are accustomed to call them. For the general costs a more simple method of estimate is sufficient; they need not be specially computed in natural quantities for each product. Every requirement will be satisfied, if an appropriate quota for overhead is added to each monetary unit of the special cos.ts.

An accurate' computation of producers ' costs is not likely to stop at the actual costs; it will insist on determining the necessary costs. Producers, pressed hard by the competition, are by this fact alone impelled to operate with the lowest possible outlay of money that is necessary under the existing social conditio:J;ls,if they would not be driven from the field by their competitors. But even. the monopolist has this same impulse, for every unnecessary cost-expenditure means a loss, to suppress which an effort must be made. The profits will be largest where costs are reduced to the unavoidable minimum. What ever, over and above this imperative standard, has been used up by neglect or want of skill, should not appear in the accounts as cost; it is' to be reg'arded a loss which might have been avoided by proper methods, and therefore should not be c9nfusedwith the necessary costs.

202 SOCIAL ECONOMICS Finally, a producers' cost computation which would furnish an accurate foundation for the plan of production and the calculation of the prices of products, will have to distinguish between cost-productive means and specific productive means. The latter should not enter into the account. The prices for the cost-productive-means, for the generally used materials and services, the individual entrepreneur finds in the market as accomplished facts; to these he must accommo date himself. He should never start a type of production for which his computations show that the price to be realized for the products is insufficient to cover such price-expenditures with an added quota for overhead. He will not continue permanently an undertaking in which computation shows results of this sort. He will increase the limits of his production, add to its degree of intensity and bring more products into the market, when these costs drop; he will curtail his supply when they rise.

Specific productive means are differently dealt with. In every in dividual case, the entrepreneur has to determine by specific attribu tion, what price he may allow himself· to pay for these. For example, if he purchases land, he will have to ascertain whether a surplus will be left from the sale of its products, after deducting costs of cultiva tion and management. According to the amount of this surplus, he will estimate the price which he can afford to pay for the estate. .Tl.!e costs of cultivation and management which he counts on here, are costs in the narrower meaning, the produc.ers' costs; the surplus is the "specific" return. The purchase-price which the buyer pays for the land has its significance for the cost-account in the broader. sense of acquisition-costs; it will have to be considered, in order to ascertain how large the profit or loss·was as compared with a former distribu tion of assets or as compared with'~j~~rmer annual yield. The pur chaser loses,when he pays too high a)p'~rce; he gains, when he pays a lower price. The extent and intensity of cultivation are not gov erned by the purchase-price actually paid; any .IDore than the man agement of an industrial enterprise is by the price which someone pays for the stock of the concern. The extent of the enterprise is not broadened, simply because the price for land or for stock rises; it will not be contracted simply because the price drops. Just as the price of specific productive means ,has nothing whatever to do with the extent of their operations, it does not enter either into the produc ers' costs computation; it is, conversely, as a result of the producers' cost computation that the surplus is ascertained, which the yield returns beyond producers' costs.

THE 0 R Y 0 F SOC I A L,E CON 0 M Y 203 . In .this sense every producer, in his producers' costs computation, IS gUIded by the value-cost-Iaw. He appraises cost-products as com binations of their cost-elements, in that he places a money-value on the required natural cost-means plus overhead. The first of these values is derived from the quantities required and the existing prices. Thus the supply-index of the production-costs is determined. The cost-price, thus computed, establishes the lower limit of the supply price. BJelow this producers will not sell; nor 'will they permanently be satisfied with a lower price. As to this' conclusion all producers are agreed, no matter what their position in the market may be. We will later on endeavor to answer the question whether, under favor able. conditions of the market, they will not insist on a still higher price. We shall observe that the monopolistic position has· in this respect a decided advanta,ge in the market over that of competing supply.

In the case of specific products manufacturers consider producers' costs in their calculations in so far, that they determine by reference to them the degree of intensity with which they apply cost-means; they will always apply cost-means only in so far as the money expenditure required yields a corresponding money-surplus. On the other hand, the cost-expenditure, as such, never establishes the lower limit of their supply price. Producers will always go far enough in their demands to obtain, over and above the covering of costs, the largest possible monetary return for the contributing specific factors. The price of the cost-means, also, is deduced from the yield. In 80 far they are governed by the same conditions as the specific productive means. The de mand for all productive means, without exception, proceeds from a consideration of the probable physical yield and the anticipated prices of the products on the market. The quantities of cost-means, however, are so large, and their employ ment is 80 various, that the demand of each individual producer always coalesces with an extensive demand of other producers. It is thus largely deprived of its effect, although it is surely a codetenninant of price. The individual producer always has the impres,sion that he does not contribute in determining the price of cost-means. He regards this price as an established fact. With the specific productive means, quantities are smaller and methods of emplo~rment are much less numerous. Here, too, every producer thru his demand comeB in contact with others, often many others. Yet a general survey is much more easily obtained, and every producer recognizes that the price is a variable quantity which changes with the expected yield and is dependent on the price of the products. While, therefore, in his computation he figures the cost-means at the given price, he applies to the specific means the rule of specific attribution and attributes to them the excess or the remainder afte,r. covering producers' costs.

204 SOCIAL ECONOMICS § 39. THE PRICE OF PRODUCTS 2. THE .COMPETITIVE PRICE The law of cost-price-Competition of' the stro'ng and the weak-Super competition, disorganized competition-Personal and social effect of competition. A vendor, not under the pressure of competition, may' under certain circumstance.s find it to his advantage to withdraw part of his stock of wares from the market and to allow them to perish, unused. This is likely to happen, whenever their experience of the market leads ven dors to infer that, owing to the consequent shrinkage of the supply, prices must rise sufficiently to enable them to obtain for the rest of their stocks a larger gross return 1 than they could have obtained by the sale of the undiminished stocks. Competitive sellers can never af ford to do this. Each of them knows that his competitors alone would reap the advantage of his withholding wares; for these competitors would surely take advantage of the higher price, in order to throw as many of their wares as possible into the market. Prices would drop, and the businessman who had withheld his wares,would be left to lugubrious reflections. He would be compelled to dispose at disadvantageous prices of the· portion which he retained for sale.

This consideration will prevail upon the entire supply to seek its ad vantage in' the quantities sold. Each man will bend his efforts on selling whatever can be sold. The same reflection must apply to the progress of production. Competing producers feel constantly induced to exploit all personal and material means at their disposal to the limit, in order to increase production and to place upon the market the largest quantities of wares, appraised at the highest figures by the demand. They are in duced to suhserve the advantage of the purchasers with the same degree of care and skill, which the latter would bring to bear in their own, .individual interest. Indeed we are safe in saying, that by the pressure of competition they are brought to use a higher degree' of care and skill, than buyers would employjn their own behalf. In his own 'isolated household the peasant is more likely to persi~t in anti quatedmethods, no matter how much the art of the cultivation of the soil progress in the world beyond his barn. Possibly, the effort of re-learning, the uncertainties of innovations may deter this man; but even' he, unwilling to move another inch for his own sake, will feel compelled to adopt technical advances in the service of the market 1 Trans. note: GesamterlOs. I presume that Wieser has in mind a condition of constant cost when he says that attention is centered on total yield.

THE 0 R Y 0 F SOC I A.L ,E C ,0 NO M Y 205 demand, when to do otherwise would mean that he might be left be hind by his competitors, and deprived of the advantage of his sales. Those who have ability will strive to advance beyond the general ruck and will ever be eager to gain headway against their rivals, to wrest from them in the commercial conflict increasing sales. Com petition exacts from producers all their power and care, the best that· their talents and training allow them to give. The net result will decide in what quantities the. wares will .be of fered in the market by the competing producers. But quantities de termine price; for according to the fundamental law of the formation of prices, the price is determined by the marginal bid, which reflects the receptivity of the market to the quantities supplied. For the cost-products, the ,. law of price takes the special form of the law of cost-price. Under the pressure of the competition, all producers are held to conform in price to the law of cost-value which in their producers' cost computation they used for themselves. In its details, the process of price-formation is a somewhat different one, according' as the cost-products belong to the group for which marginal expenses are incurred or to groups of narrower expenditures.

In the case of cost-products which, for all purchasers, appear in the group of marginal expenditures,' the cost-law is upheld. By the pres sure of· competition, manufacturers are compelled actually to produce the entire quantity of wares, which market conditions allow. Pro ducers will not stop manufacturing, until the marginal bid, deter mined by the receptivity of the demand, coincides with the cost-price. Not until this condition of prices has been reached, will an equilibrium have been established in which the cost-elements in all their ,produc tive combinations are paid for at the same price.N ot until this oc curs, not while any products are being turned out whose sale price leaves higher remuneration for the cost-elements, will the pressure of competition cease to urge on an increase in the manufacture of these products. In the case of cost-products which fall in groups of narrower ex penditure for some or all purchasers, the cost-price is maintained without sufficiently increasing the quantities produced to bring' them for all purchas.ers into the group 'of marginal expenditures. In this way cost-products of fine quality, too, which are exclusively de manded by the wealthier strata of the population, become subject to the cost-law. Competition will never permit any vendor to profit by the higher appraisal of the wealthy and to demand higher prices of these people. Even where quantities can no longer be augmented, sellers will mutually undersell one another, until cost-prices have 206 SOCIAL ECONOMICS been reached. Where this price prevails, the entire effective demand has been satisfied. Even though all admitted buyers because of their higher appraisal were in a position to pay a higher price, a condition has been reached at which· the market is in equilibrium.

The effect of the price~cost~law in the economic exchange of the people is not quite the same as that of the value-cost~law in the simple economy of a unified society. In the latter, the line of utility cost coincides with that of the marginal· utility of the products. By a compensated beneficial utilization of cost-means, an equalization of marginal utility is effected in the entire field of productionally related cost-products: i. e., this ocours in so far as this equalization is at all possible with the existing arrangement of the need-scales. In the economy of exchange, however, the wealthier strata will always be able to provide themselves more abundantly, perhaps to full satiety, with cost~products, while the poorer ones will have to retrench. In this sense the law of cost-price does not operate to reach the highest, universal satisfaction of needs. In all other respects it operates, however, in the spirit of the social economic principle. By virtue of the price-cost-Iaw, the productive values, in spite of the individual and independent character of man agement, are unified and concentrated, and their apportionment to the individual branches of production takes place as by a social plan.

The spirit of a social economy is complied with, although there is not a unitary social management. The personal interest is expressed thru the mechanism of excess-supply and unsatisfied demand. The quest of gain by the producers and the pressure of competition, are in themselves sufficient to result in a social effect. The fact, also, that the strata best able to pay do not give their full, personal price but pay a socially conditioned cost-price, is a socially significant result insofar as it shows that the supply is not privileged to exploit in dependently the strength of the demand, but has to conform to the mar,gin established by the general condition of the market. The prices of specifie products are not subject to the cost-law. The owners of diamond-mines, for example, will not submit to diamond prices which merely cover costs, leaving. no residlle for the yearly ex ploitation of the mines. Despite mutual competition., they are not likely to depress the increased marginal offer, which the wealthier strata allow on the basis of their higher appraisal of the demanded precious stones-and thus by underbidding each other, come down to ,'rock bottom" costs. This lowest price could, after all, be reached by other ways, than the circuitous one of specific production. But the mine-owners \villfully exploit the opportunity of specific proTHEORY OF SOCIAL .EC,ONOMY 207 duction, in order to realize for the specific factor the highest price~ utilization which is obtainable in view of the quantity of specific products that can be produced.

It goes without saying that the law of cost~price, like the law of cost-value, is valid only for an undisturbed market in equilibrium. By changes of the supply, of the demand' and of the cost-rates, this law is frequently temporarily suspended. But there are movements of equalization constantly at work, if we assume the absence of fric tion, which in time will reestablish its validity. Whenever the supply has been increased unexpectedly or the demand has been unexpectedly cut down, or when the rate of costs has for some reason or other in creased, the entrepreneurs will not cover costs by prices. They will consequently reduce the supply until the market-price again meets the cost-price. In the converse case, when the supply suddenly drops off or the demand is unexpectedly increased, or when technical im provements or some other cause has depressed the cost-rates, the entre preneurs will obtain prices which exceed costs; then under the pres sure of the competition, the supply will continue to be increased until the market-price has again fallen to the cost-price. Otherwise, the tendencies of prices to change because of the increase of population and the progress of the technical arts, are the same in the exchange economy as in the simple economy which we have explained. We can, in this. respect, refer to our former expositions.

Competition has a more proximate and a more remote influence on the price of products. The more direct influence consists in the adaptations of price to cost, which take place in the market; the more remote is accomplished in the prOduction-process, as the personal performances of the competitors are pushed to their utmost attainable limit and the. costs are depressed to the lowest realizable standard. An investigation of this second, more remote effect has its place, properly, in tIle doctrine of acquisition ; but we cannot altogether pass it over in the theory of price. We must, at least, throw sufficient light upon it to correct the exaggerations of the classical formulation, which· have been carried into the doctrine of competitive price. Also our exposition has given undue weight. to the apparent effects of com petition on the progress of production. This is because our discussion has rested upon the idealizing assumptions which, so far, we have adhered to in our ·work.

To come back to everyday standards, we must now, by decreasing abstraction, familiarize ourselves with typical conditions of reality. We shall have to con sider more especially the social powers which largely rule the destinies of man. The exaggerations in the classical doctrine are due to the fact that its authors carried the idealizing approach into actual observations. They were possibly not even conscious of this and accepted the results of such idealized observation for unimpeachable truth. The personal performances are only intensified, or the costs reduced as much as the prevailing compulsory powers. permit. Under dif208 SOCIAL ECONOMICS ferent conditions, however, under rules abolishing the sway of the compulsory powers, men might possibly succeed in accomplishing a higher, a much higher performance. Thedoctrine of competition presupposes the model type of the strong individual.

It reckons on an enhancement of individual forces; it therefore deals with indi viduals who have an excess of power, individuals sufficiently free externally and 'of their inner nature, to direct their active forces under all circu~stances to the end of the greatest utility. The entrepreneur on a large scale, the master workman or the landowner, all p08sess the freedom of action which is here re quired, in a much higher degree than the state-employee, who is tied down hy rules and regulations; more especially in a higher degree, than the subordinate state-employee or the wage-laborer. Among the latter class of people, monotonous employment paralyzes the vital and active forces, rather than stimulates them; or a system of wages, opening no, prospect whatever, of advancement in life, may wholly deaden the stimulus of competition. The external freedom of action must be accompanied by a liberty of the mind and soul. Without this there can never be. the force to make decisions which ripen into action affecting not merely mate rial acquisitions but inner acquisitions, which shape the destiny and purpose of human life. This inner freedom is absent in all those who req~ire the conlpulsion of external command to ~xert their best efforts. It is lacking also in all those who find, their progress arrested by their ineptitudes. These last-named unfor tunates are in aU respects inaccessible to the stimulus of competition; unless, in rare instances, they react to it by efforts which consUme the last remnants of their abortive powers. How many'men are without the power to make what ever movements of adaptation may be required, when their accustomed op portunities of acquisition have been thwarted by excessive supply, or otherwise encroached upon. With the majority of men, force of habit is more powerful than the desire of acquisition;' so long as they are able, they stick to the ac customed place in life, rather than exert the effort required to gain new vantage points. The competition of the weak is aroused, not so much by the desire of advancement, as by the apprehension of defeat; driven by an over-excited fear, such competition easily loses all restraint and becomes disorganized super competition. The modern labor market exhibits the phenomenon of the disorgan ized super-competition of the enfeebled more strongly than the produce markets.

We reserve the detailed discussion of this subject to' our theory of. the wages of labor. Even, the strongest individual can only answer for his own performance. But productive success is dependent, not only on the individual's personal perform ance, but on the amalgamation of this performance with the sum of foreign elements: the performances of foremen, underlings and otherls in the production process, the actions of competitors, the attitude of the demand in the face of the total supply. Although the force of competition may impel one to improve his own performance to the point of perfection, he will still be the loser in the conflict for success, unless he' ha~ correctly foreseen the 'measures resolved on by various other persons, unless he has properly estimated the conditions of the demand and divined economic changes that still lie in the future. The more active, the more aggressive, the development of a national economy, the more difficult it will be for the individual to adapt himself to a new state of affairs.

Under the static conditions of agricultural enterprise, unaffected by the opera tions of foreign countries, while the home-market offers regular, increasing deTHE 0 R Y 0 F SOC I A L ·E. C ,0 NOM Y 209 mands, we find difficulties of these sorts fairly well excluded. The effects of com petition may be exhausted in that every man feels pressed merely to do his best in the zealous performance of his duties. Modern industry experiences the spur of competition in very different connec tions: new methods, new products, new territories, new points of departure, are constantly being offered for the dealer to choose from. Since he who is first on the spot is apt to fare best, since the most forceful may possibly succeed in dominating the crowd, the friendly rivalry becomes a deadly contest, ending at times in ruin and desolation. As afI'airs gain headway, the dangers of competi tion are increased; opportunities are carefully watched, and quickly crowded by the numbers of those who profit by them; favorable conjunctions of condi tions cannot but tempt to excessive production and, in connection with it, to overcom peti tion.

This excessive competition of the rich has sometimes more serious consequences for both the market and production than the competition of the poor. The un dulations arising from its disturbances are felt in much wider circles. They carry many dependent individuals and foreign economies into the collapse of the crises which occur as the penalties of economic extravagance. Only after enormous fluctuations and losses of values can quiet be restored by the mechanism of the excessive supply and unsatisfied demand. How many unjustified expenditures a nervously eager or apprehensive competition imposes on the economy of a people, even though things stop short of the extremes of overproduction and crises! Even in the narrow markets of European towns as they existed in the Middle Ages, tradesmen saw themselves compelled to unite in gilds, in order to protect themselves from the evil temptations of overproduction and overcompetition and to secure the continuance of a well-ordered market. Some mutual understanding of this sort is even more necessary in the wide markets of lllodern economy.

The classical masters announced their· theory at the time of the transition from the medieval traditional restrictions to the modern freedom of activity and move ment; they already felt the influence of the signal successes which accompanied the keen understanding of the principles of competition in the novel avenues of commerce. The high esteem in which they held competition, had its rise in the effects of the progress which was actually accomplished during the stirring events of the times. Nevertheless, they still frequently measured conditions and events by the old standards which had been handed down by men, living in the more quiet environment of the petty trader or. peasant. They had no correct idea of the dangers which accompany competition on an enormous scale. Their later followers, looking at the new world around them, should have known bet tel'; but in their pedantry they clung to the dogma, careless of the breadth and depth of the cleft which separated them from actuality.

The victor in the conflict of competition is such not merely by virtue of his personal efficiency. He is so by the aid of the wealth of external means, more especially the pecuniary means, which he disposes. In the smaller or moderate sized business-ventures, capital is of less importance. Individuality, when con trasted with capital, becomes strikingly prominent. Even in large enterprises, capital is not the only factor which decides the issue. The most forceful person alities first find in large undertaking an outlet for their full powers. However this may be, the greater number of the gifts are no longer able to stand up against the power of vast aggregations of capital. On a smaller scale they were 210 S OCIALE CONOMICS able to produce good results, but in the century of mammoth enterprises they no longer avail. Since the passing of the classical period, conditions have greatly changed in this respect as well. Huge combinations of capital have made enormous progress; they have ousted entire strata of individual owners and made armies of work men dependent on their will. The victory wllich they have won in this march of conquest over weaker competitors does not have the same social significance as that which pertained to victory in the competitive conflict under the condi tions of the earlier years. Formerly one was justified in saying that the conflict of competition performed a service of personal selection. This selection worked in the interest of society, when it elevated the efficient worker and lowered the indolent, the unskilful or otherwise incapable one. In the case of those producers who succumbed through no fault of their own, simply because changes of external conditions deprived them of their accustomed means of livelihood, the aid of the equalizing movement could then sa.fely be relied upon to enable them to turn to other employments, where their abilities would reestablish their chances of suc cess. Now, however, the revolutions of trade, brought about by the irresistible advances of mammoth capital, are mass phenomena. In the face of these changes the equalizing movement fails almost completely. The displaced multitudes can not easily, certainly not quickly, find employment under approximately equal con ditions; meanwhile these workers are handed over to abject misery, and more lamentable still their best powers may be scrapped forever.

With all these exceptions, competition none the less exercises so great an effect as, even under modern conditions, to entitle it to be classed among the most important social economic forces. In the strata of laborers and subordinate em ployees it is more limited. It asserts itself there only for a smaller number of ambitious individuals; but among the independent owners it affects all. Within each of these groups, it performs even to-day the functions of personal selec tion; peasant against peasant, master-mechanic against master-mechanic, large entrepreneur against large entrepreneur, each is weighed and measured, approved or condemned in the fierce struggle of competitive conflict. In no other of the great fields of human activity, where men strive for su premacy through rival efforts, do they find broader scope for self-assertion. In every other quarter, as far as the multitudes are concerned, rivalry with others excites only the titillations of a sense of honor. Men do not wish to be last; they wish to measure up to the average performance, in order to stand well in the eyes of their fellows. Only a few individuals with special aspirations wish to rise above this level; urged on by ambition and the love of ostentation, they would be in the van or possibly would be first in order thus to enjoy the en hanced respect accorded to the leader or to win for themselves the moral and material power which are the attributes of leadership.

In economic competition, however, even with the man of the people, it is not merely the desire for honor which is kindled. Material success as such attracts a large share of the aspirations of individuals. As the conflict grows more heated, the end of material prosperity becomes the object-not infrequently the more cherished object-of human desires; honor is left to fight its own battles. The common man does not wish merely to imitate, the leader by instinct does not wish merely to walk in the foremost ranks; the one, by his imitation, would assure his acquisitions; the other, by his leadership, would increase his material gains. Frequently enough, we all know, the struggle is one for material THE 0 R Y 0 F SOC I A L ,E CON 0 MY 211 existence. Although it is true, that competition only exalts the achievement which may be personally controlled and which tIle individual builds up in the economic process of production, yet so far reaching a personal operation is a social fact of the utmost importance. As regards the personal achievement of the leaders, this, in every sphere, becomes the model which others imitate; thus leaders, exalting themselves, exalt the type of their group. In judging the exist ing individualistic economic order it is necessary to consider the manner in which competition selects successive leaders and educates the masses through the agency of these leaders. No economic order, without suffering very great disadvantages, may dispense with the use, in one way or another, of the supreme power of com petition towards social success.

§ 40. THE PRrCE OF PRODUCTS 3. THE MONOPOLY OF SUPPLY Restricting the supply-The classification of demand-The monopolistic com putation of costs, especially in the case of joint costs-The monopoly of the market-The monopoly of p1'oduction-Unified ind'ustries. Pure monopolies are very unusual. Possibly only the unified in dustries of states or of self-governing bodies possess that exclusiveness which satisfies the concept of a pure monopoly. Private monopolies, on the other hand, are usually so situated as to lose the character more or less of the ideal monopoly and to transform it into the monopo loid type. We would not, however, for the present, anticipate the investigation of the monopoloid type. We would only remark that in the following pages we have selected copyrights or patents, kartels or railroads as illustrations, by which to explain the formation of monopolistic prices, leaving it to later enquiry to ascertain whether or not in all these institutions the monopoly character has not been encroached upon by certain other characteristics.

The monopoly of supply will have to be distinguished from the monopoly of deluand. Weshall first take up the supply-monopoly, by far the most frequent type and the only one, as a rule, known as monopoly pure and simple. The monopoly of supply, precisely like the competitive supply, conforms to the fundamental law of the formation of prices. It does not enjoy any special advantage in this respect, for the supply monopolist has anything. but the power to dictate prices according to his discretion. He, no more than others, can overcome the weight of the decisive marginal bid. However, his controlling position in the market certainly gives him a number of opportunities to influence the market, so that the marginal-offer occurs at a higher figure.

212 SOCIAL ECONOMICS The most conspicuous advantage which he enjoys, is the power to restrict the quantities of his supply. Experience will soon teach him at what level he should maintain the quantity of supply, in order to obtain the ,greatest total price by the most advantageous combina tion of quantity and of price. For the present we will disregard the factor of costs which must naturally be carried into the combination. In so far as the monopolist allows himself to be guided solely by the inherent law of monopoly, he will decide in favor of the combination most advantageous to him, with little regard to the fact that the demand may fare better or worse. It is by no means impossible that the monopolist's advantage coincide with that of the demand; his total gains may be highest, when he sells the greatest quantity. Pos sibly this may be the rule. B'ut it may also be, that with smaller sales he may have larger profits. In the history of commerce we find nu merous examples of a monopolistic policy which went the length of destr.oying stocks, already transferred to the market, in order to secure larger gains. The gradations of the scales of needs in com bination with the stratifications of effective purchasing power deter mine whether more is to be gained on the part of the monopolist by the factor of quantity or by the factor of price. Where the need scales or the stratification of the purchasing-power are laid out in abrupt gradations, an increase of the quantity beyond the point of abrupt change will materially injure the price-conditions. Themo nopolist will, therefore, prefer to confine himself to the smaller sales.

Where need-scales and purchasing power change very gradually, larger sales .will be more advantageous to him. The result will be the same, when the monopolist, rather than de cide on quantities and then wait for the price-determination of the market, does things the other way and decides on the pric.es to be attained, awaiting on his part the market's action in respect of the quantities to be taken up. For very good reasons, the second method is the one generally determined upon, the calculations being more transparent. His experience of the market will soon teach the mo nopolist on what quantities of sales he may count with a certain definitely settled price. The monopolist has the further· advantage of being able-up to a certain point-to split up the market. In this way, he frees himself from the law of the single price, which confines competition for the entire quantity sold to the marginal offer of the least ~ffective pur chaser. The monopolist divide.s the entire unified market into partial markets, graded according to ability to pay. He uses the quantities sold in the markets of the better ·paying purchasers in such a manner THE 0 R Y 0 F SOC I A L ·E CO NOM Y 213 as to secure the higher prices that· the larger marginal bid allows.

Such a procedure may be designated as classification of the demand. By way of illustration, we may mention the case of the publisher who makes use of his exclusive copyright to first publish a small edition at high prices for bibliophiles and for all those purchasers whose demand, for one reason or another, is more than ordinarily active. This publisher, later on, after the group of those most eager and best able to buy has been exhausted, gets out an enlarged edition, meant for the general public and sold at reduced prices. In the case of newly introduced patented articles, the same procedure, is frequently re sorted to. In all instances of this sort, the demand is temporally split up by strata of decreasing marginal bids who buy one after the other. But under some circumstances the monopolist may also suc ceed in dividing the market into partial markets, existing side by side. This enables him to benefit similarly by the marginal offers of the various strata but to reach them simultaneously. The publisher might, for example, issue a costly edition de luxe in a limited number of copies, and beside it, a cheap popular edition in large numbers. of copies. When the administration of the tobaeco-monopoly catalogues the various grades of tobacco which they offer to the people, it accom plishes a classification of the demand similar to the one here described.

It subdivides the demand, according to strata of marginal offers ex pected, by adjusting the qualities offered, according' to the individual classes of smokers, and by so grading the prices as to get the most from every purchasing class according to their means. The classifica tion of the demand is a most effective tool of monopolistic policy. In another connection, we shall still have to deal with an additional variety of the classification of the demand, that is much used. The monopolist is not bound by the law of the single price. Neither, therefore, is he bound by the la,v of cost-price, in which the single price of the cost-means asserts itself. It is combinations of these latter prices which are paid for in the products. In his internal calculation he obeys, like any other entrepreneur, the law of cost value; he appraises the cost-products as combinations of their produc tive elements. However, he enjoys the advantage of not being bound by this fact to reach the same conclusions as regards quantity of pro duction and price, as competitors would reach. He can arrange mat ters so as to differentiate his cost-products from the unified market of productivemeans, and to sell them as specific products at a price exceeding the cost-price and leaving him a greater profit than the average wages of management. In the case of those cost-products for which marginal expenditures are incurred, the monopolist accom214 80 C I ALE CON 0 M I C 8 plishes his purpose by reducing quantities. He will not push produc tion to the limit of expenditure, or else the marginal offer would stand at the cost-price, leaving no snrplus,gain. With specific scarcity products, the monopolist, wishing to get back more than the costs of acquisition, will reduce production still further than already made necessary by the scarcity involved. On the other hand, in the case of cost-products which come within the narrower expenditure-zones, he need not retrench either production or consumption. He may pro duce quite the same quantity which would be produced in free com petition, and may' still realize a price above producer's costs, as he utilizes the differential between cost-price and the higher appraisal of the demand. Thus, for example, 'large gains may be realized from monopoly of salt without appreciably reducing the consumption of salt among the population. Articles,which fall in the zone of mar ginal expenditures for large parts 01 the population and therefore with every increase of prices show considerable falling off of sales, are thus not desirable llS state-monopolies; they do not allow of a large monopoly profit, or they only allow it subject to marked cur tailment of consumption, which' is felt· as anti-social.

The freedom enjoyed by the monopolist as regards the law of, costs, gives him an additional advantage in the treatment of joint costs of production. We shall endeavor to explain the rather complicated conditions by an illustration, selecting for this purpose the process known as "dumping" often practiced by kartels. A kartel, enjoy ing in its own country a rather generous protective duty and thus en abled to uphold high monopoly-prices, is in the position to sell abroad very cheaply, to underbid competition there and to effect large sales. The high monopoly-profits of its home-trade make this possible. As against foreign competition, the combination h8.s the advantage that at home it is not tied down by the law of cost-price. In the domestic market, therefore, it can obtain prices which cover not only the special expenses for the products' sold at home but also the entire general or overhead expenses, leaving profits over and above, these items. For the products sold abroad, the combination may there fore, be satisfied with prices computed without overhead but which, nevertheless, still leave a profit and add to the total gain. The pro ducers with which the combination competes in the foreign markets, cannot make such prices-assuming that they do not operate thru a monopolistic organization but are subject to the full pressure of the competition-because in order to get out whole, they have to recover on each unit a proportionate share of the general expen·~~ which is THE 0 R Y 0 F SOC I A L ,E C '0 NOM Y 215 part of the producers' costs. In view of the unity of his manage~ ment of production, the monopolist is able to build a more flexible price-structure than competition makes possible; with him one price supports the other. In this way in each instance he demands the highest price which can possibly be obtained. He makes his calcula tion of prices serve the classification of demand. He utilizes the lat~ ter more effectively by increasing his sales and controlling an ex~ tended, classified market.

Whenever "dumping" takes place, the anti-social effect of the mo nopoly becomes most pronounced at home; the home-market is griev ously over-charged and its consumption may be curtailed. However, it should not be overlooked that the foreign country is being offered a lower price and, in connection with it, larger quantities for consump tion, than free competition would be able to bring forward. Only be cause the kartel is in a position to offer these advantages, can it succeed in making a conquest of the foreign market. Looking at the matter more closely, we shall recognize in the monopolistic method of combining cost-aecount and market-classification, the application of the rule to the conditions of commercial intercourse which, in the theory of the simple economy, we have deduced for the treatment of the joint costs. Just as, in this way, the simple economy suceeeds in realizing the highest possible total-gain, so the monopolist reaches the same results. He is guided in this matter by his "instinct" of acquisition, because by the highest possible gain he expects to arrive at the best possible utilization of price; but to attain this end, he is after all induced to use a method which enhances the utilization of the social productive forces beyond what free competition by itself could achieve.

There are circumstances, when the utilization of the price, which may be accomplished by the method here described, is in fact de manded socially. We find the most significant illustration in railroad tariffs and in the traffic-rates of former days on the great inland canals which were the forerunners of the railroads. The separation or gradation into passenger-classes in European day-coaches is a classification of the demand, established for the purpose of exploiting the greater price-paying ability of those passengers whose social po sition obliges them to avail themselves of the expensive carriages. The classification of freight rates amounts to the same thing; its ob ject is to thrive on the higher ability to pay of individuals who dis close their financial means by purchasing wares of higher specific prices. The lower rates for mass-wares of lower specific value are 216 SOCIAL ECONOMICS made possible by partially relieving these goods in the computation of costs, bringing in only the special-costs.. This system, also,. of establishing tariffs for exploiting the demand may be misused in an anti-social enhancement of profit, but under some circumstances there may be no other means of securing· the profitableness of large enter pris.es which is required in order to attract investment. It is a sys tem which realizes the highest obtainable prices. The construction of railroads and the opening up of inland-canals would never have been possible in their full extent, had not the administrations of these institutions adhered to the rule, "charge what the traffic will bear."

So far we have only considered those effects which are peculiar to a monopoly of the market. The present trend to enterprises of vast dimensions attracts attention more and more to the effects of an ex clusive control or monopoly of the process of production. The pri mary meaning of the term, monopoly, indicates the position occupied by the sole vendor. A derivative use of the term to describe the posi tion of the sole producer is certainly alIo·wable. Exclusive c.ontrolof the process of production is especially advantageous wherever large scale industry is distinguished by increasing returns. Competitive enterprise tends to the individual small plant in most industries. 'Thus in these cases, while his attention is focussed on his personal ad vantage, the monopolist serves the best interest of society as well by a better utilization of productive forces. lIe produces more goods than competitive enterprise would and sells them for a lower price.

The latter statement follows· from the marginal law. However, he may not sell as many goods at. as Iowa price as he would sell, were he to renounce monopoly profits. Ample capital will be available to expand production, for the increased yield that is anticipated attracts large aggregates of capital which prefer to turn to the largest enter prises. The tendency to expansion becomes most effective in what might be properly called single-unit enterprises, where the entire mechanism of administration is one unit. The Postal Service furnishes an excellent illustration of what we mean. Were the unified network of the Postal Service of any modern state to be divided into a number of locally distinct and independent enterprises, the result would be an unnecessary increase of labor and increased expenses of transfer and accounting. In the face of single-unit administration, the principle of competition becomes utterly abortive. The parallel network of another postal· organization, beside the one already functioning, would be economic.ally absurd; enormous amounts of money for plant and THEORY OF SOC I A LE CO NOM Y 217 management would have to be expended to no purpose whatever. It will be far more advantageous to enlarge the facilities already exist ing and to increase the working force, trained in their duties by years of experience. For the single-unit methods of business, monopoly is the unavoidable fornl. We shall not now ,endeavor to ascertain by what means the state might interfere to remedy abuses, where the private monopolist employs inequitably the great power placed in his hands by single-unit economic enterprises. It would surely turn out to be a mistake, were the attempt made to find remedies by ad mitting free eompetition.

The opposition between the interests of the entrepreneur and the social economy is conlpletely eliminated in the case of a state or any other public monopoly. The entrepreneur interest of public cor porations coincides with the general social interest; the administra tive monopoly is not directed to monopoly-gains and the monopoly profits realized by the state in taxes, inures to the benefit of public receipts. Whether, indeed, the state and the other public corporations are suited to the successful conduct of production is a different ques tion altogether, but it is one which we cannot take up in this con nection. The classical doctrine looks upon monopoly as anti-social, as accompanied by temptations to handicap production, and as tolerating prices which exceed costs and therefore unduly burden the demand. It is further insisted that the monopo list feels his wealth to be secure and lacks the incentive to progress which is established by vigorous competition and stirs the most vital forces of a people.

It is finally added that the monopolist may possibly not command adequate capital; while competition, just as it sets in motion all personal resources, also brings forward those of a material kind to whatever extent they may be available in society. However, all this argument is logical only if we assume that the process of production is amicably disposed towards competition. In no event do the conclusions fit the conditions of the single-unit enterprises. They cannot even be applied to large-scale undertakings without considerable restrictions. The classicists were influenced in their judgment by the conditions of their times. In their day smaller and medium sized enterprises predominated; the tendency to large and very large dhnensions and its full significance could not yet be discerned. Having denied the state's calling, as well as that of public corpora tions generally, to the conduct of economic enterprises, they likewise failed to observe the important form of the public single-unit enterprise. Moreover, they persistently examined only the pure forms of monopoly and of competition~ The modern trend to production on a large scale has called into being numerous novel, intermediate, rnonopoloid forms, which to-day are far more important than either of the pure forms. The classical formula, unconditional approval of the social competition and absolute repudiation of the anti-social monopoly, can no longer do justice to the institutions of to-day.

218 SOCIAL ECONOMICS § 41. THE PRICE OF PRODUCTS 4. THE DEMAND-MONOPOLY Socialist doctrine maintains that capital exercises a monopoly of demand in the labor market. Were the contention well founded, the monopoly would be one of extreme importance. The proofs, however,' which can be adduced as to cases of demand-monopoly, are of far less importance. Without precluding later examination of the socialist contention, we may avail ourselves of the. theoretical proofs offered in its behalf as ready auxiliaries in formulating a general theory of the monopoly of demand. We shall have to think of the demand-monopolist as an entre preneur, who is the sole would-be purchaser of certain productive means. As regards the competing supply he is not bound by the fundamental law of price. The upper limit of the price allowed by him is established by his appraisal. This appraisal, according to every rule of attribution, the monopolist effects as to the desired productivemeans on the basis of the expected price of his products.

He need not, however, offer the whole of this price; he may depress it until he reaches a lower limit fixed by the conditions of the supply. At this limit he encounters a resistance which he is unable to over come. In case of the wages of labor, this limit might be established by the lowest standard of subsistence-a problem which we do not now wish to approach; in other cases it is established by the value-in use, possessed by the wares for the suppliers; in the case of cost products it is fixed by the costs of production. . In its application to products, then, these explanations do not promise great possibilities of success to the demand-monopoly, at least, not in so far as cost-products are concerned. If the monopolist is compelled to pay costs-prices to producers, it is plain that they re ceive the very. price which they have a right to expect if there is full competition of the demand. Wherein, then, consists the superior advantage of the monopoly Y In order to answer this question, and do justice to the circumstanc.es, we shall first have to introduce some explanatory remarks.

The demand-monopoly is at all times accompanied by a monopoly of supply. Thus, for example, the state in its tobacco-monopoly com bines the two institutions. The administration of the monopoly does not admit in the home-market, other purchasers of raw tobacco; it combines ~ith a monopoly of the supply of tobacco-products, which affects the consumers, a demand-monopoly, affecting the domestic THE 0 R Y 0 F SOC I A L ·E, CON 0 MY 219 tobacco growers. A further illustration is found in the actual demand-monopoly of a sugar-combine by virtue of its monopoly of supply. In this case, no other Concern can make use of the sugar beets, and hence n.o other concern is likely to demand them. It seems impossible to imagine a combination of circumstances, where a demand-monopoly doe~ not also amount to a monopoly of supply; for t?e producer, controllIng the demand for certain elements of produc tIon, controls, as a natural consequence, also the productive utilization of these elements.

In the case of cost-products, the demand-monopolist, as such, ac tually has no particular advantage over free competition because, as has just been shown, he cannot depress the price below cost. On the other hand, he need not relinquish to those who supply his raw ma terial, any portion of the monopoly profit that accrues to him from the implied monopoly of supply. Those who sell to him have no share in the gains which he realizes thru the sale of his cost-products at specific-product prices. The cost-products, sold by these parties to the monopolist, do not also acquire the characteristics of specific prod ucts; their prices continue to be cost-prices. In the general run of cases, at any rate, these would be the results. There may be circumstances, to be sure, when the demand monopolist will have to consent to allow to his predecessors certain advances in. price, in order to make sure of obtaining the quantities required for extensive production, and also the qualities .of which ne is in need. .A manufacturer of beet-sugar, for example, could not count with absolute certainty on receiving from the ,competition of beet-farmers the full quality and quantity of sugar-beets which he re quires. The beets cannot be transported long distances; consequently the manufacturer's demand is met by a small group of individuals.

To ensure a full supply for all his needs, he will have toofIer larger indueements by increased prices. To this extent, he will be willing to relinquish a certain portion of his monopoly-gains to his prede cessors; these will fare somewhat better, than. they could otherwise expect. The arrangement is to the advantage, also, of the monopolist; for he makes sure of the full benefit of his supply-monopoly. An even stronger effe,ct is produced by the monopoly of demand in the case of specific products. The demand-monopolists is in a posi tion to buy specific products at cost-product prices, getting paid for them, when he sells, at specific prices. Should a diamond-combine possess either the right or the exclusive power to sell di~mon?s to the public at large, obtaining their diamonds from the mInes, It would never need to pay the diamond-mine owners at the specific diamond220 SOCIAL ECONOMICS prices; they would soon offer prices, but little exceeding their costs.

The demand-monopoly here interposes a restraining influence in the process of specific attribution, and prevents benefits from accruing to predece.ssors of the monopolist, the primary producers or others, from the specific advances paid by the consumers. In the state tobacco monopoly this effect is particularly conspicuous. I-Iere, the monopoly gain would be materially reduced, had not the state made sure of the supply of domestic tobacco under monopolistic conditions. Were for eign countries permitted to compete for domestic plants, it would force up the price of the finer qualities, the price of such plants as thrive only in particular soils and possess specific character. By virtue of its monopoly of demand the state is able to procure the products of the better classes of soil as well, at prices which do not reimburse the tobacco-planter for more than the costs. A monopo listic counterorganization of the .supply would be required, in order to preserve the balance of forces and to secure for the precursors in the· productive process an equitable share in the specific prices.

§ 42. THE PRICE OF PRODUCTS 5. THE MONOPOLOID INSTITUTIONS The flbvored .'lpecific market positions-The monopoly of administration-Tax monopoly-Private monopolies regulated by the state (patents, 'lJInit-industries regulated by the state) -The conflict of competition in the large soale enterprise ~Kartel8-T1'u8t8. Numerous intermediary forms occur in. great variety between com petition and monopoly. In their details they are of such diverse ar rangement that, with the instruments at its command, theory could never expect to explain their entire array. It is, however, competent 'to discuss those types which. have solidified sufficiently to booome fa miliar to everyday experience. To describe these types is one of its problems. We shall go as far in our description, as is demanded by the doctrine of prices. It will be our object to exhibit in each type, the share attributable to the element of competition or, as the case may be, of monopoly. .

The popular idea of a monopoly, current alike in theory and in practical life, embraces·· in fact every favored market position. We have already referred to the fact that the favored portion of large aggregates of capital over against the body of laborers is frequently designated as a monopoly. Similarly, all more favored specific supply-positions are customarily designated as monopolies. Ricardo, for example, speaks of a monopoly of agricultural soil; and to-day THEORY OF SOCIAL .EC·ONOMY 22'1 we hear of a monopoly of desirable urban locations, and even of a general monopoly of urban land. Both expressions are improper. Monopoly is a favored position in the market; but not all favored positions in the market are monopo lies. The owners of the superior classes of soil do not realize a monopoly-gain. Their gains are realized in the conflict of competi tion, aocording to the law of the highest costs. They have neither the monopolistic power to curtail production, nor the desire to do so.

Their interest impels them, rather, to as intensive an economic man agement as possible, in order to achieve the maximum increase of the yield. As we shall later on see, urban ground-rent is no more en dowed with a monopolistic character. The price of urban rents of realty is a competitive price: if urban speculators form monopo listic rings and seek their advantage, possibly, in restricting' all building-operations, this is a matter by itself. This is precisely the case, when it comes to industrial "rents," benefiting an industrial enterprise which competes with others, and thus enjoys advantages in the conditions of production. To not one of these rents does the theory of monopoly apply. The theory of specific attribution is all that is required for these, and it may be applied to the special facts of the classes of soil, urban locations and industrial conditions. The monopoloid institutions which we shall have to examine, are of a different sort. They have in fact traits of monopoly; they confer monopolistic power. But at the same time they are subject, in other directions, to the pressure of competition or are otherwise restricted.

They are, as we have said, intermediate forms, lying midway between monopoly and competition. Neither the theory of pure monopoly nor the theory of pure competition, least of all the theory of attribu tion, will do them entire justice. As an intermediate form of this sort, we mention first the so-called imperfect monopoly, comprehend ing not the total, but only a considerable portion of. supply and demand. But there are also true mixtures of the elements of mo nopoly and competition. Frequently they take rise in simple external coincidence. For example, a }i,artel may produce simultaneously for the home-market, which it controls monopolistically, and for the for eign market, where it is subjeet to competition. A railroad may pos sess a monopoly for certain sections of its route, which are not serv.ed by any other road, while for other points it is under competition. Again, a factory besides. monopolized, patented articles may produce others under competition. Mixtures of this sort may, as we have seen from the practice of "dumping," have great practical and even theoretical importance, but it will be best to distinguish them from 222 SOCIAL ECONOMICS the monopoloid institutions proper. In the case of the latter, mo~ nopoly and competition do not simply coincide externally, but one and the same institution unites both forms intrinsically. Thus a new problem arises for theory, a problem for which no solution can be offered by the theory of the pure forms.

Among monopoloid forms are to be mentioned all the public mo~ nopolieswhich are carried on by the state and the municipalcor~ porations. State monopolies as well as tax-monopolies are monopo~ loid. The state, it is true, exercises in the tax-monopoly the highest monopoly power, in order to secure the highest monopoly-gain;. the prices which the state dictates, are monopoly-prices. B:ut the power here exerted is not to be used oppressively; it is subjected to the con siderations of just taxation, not to mention the fact that it is ex ercised for the benefit of public revenue. In the administrative mo nopoly, the interest of administration is supreme. Where the state reserves the monopoly for certain administrative institutions, it does so with the intention to combine the full production-monopoly with the market-monopoly, in order to carry out the principle of the single-unit management, which permits the greatest social achieve ment with the smallest outlay. But the state does not set up monopoly-prices; it does not seek monopoly-gains. The state would simply cover costs, and may possibly exact not even this; the state may take something less than costs, in the interest of the administra tion, if such proceeding should seem required. We find, in the postal service, this type of monopoloid institution very clearly illustrated.

Among monopoloid forms are further to· be men.tioned the private monopolies, recognized by statute for the sake of the advantages ac cruing through them to the general, public interest, and which are at the same time restricted by law so as to prevent the abuse of monopoly power. There are two types of these monopolies. One is shown in the patent-right of the inventor; akin to this is the author's copyright and a few other forms. The other type appears in the private sin.gle-unit enterprise, regulated by the state. The patent-right is granted to the inventor, in order to bring his technical leadership; his talents and genius into the service of society. By ceding to him the monopolistic utilization of his innovation, the community endeavors to encourage him in introducing inventions. At the same time, how ever, his monopoly is of limited duration, in order that (ultimately) society may sueceed to the ·unlimited enjoyment ·of the invention.

His invention is the successful outgrowth of a rivalry with others who were experimenting in the same direction as he. Social currents have carried him to his goal. Therefore, after a suitable period of THE 0 R Y 0 F SOC I A L :E C ,0 NOM Y 223 grace, his achievement is once more thrown into the arena of free com petition. The original grant is made on one condition, that the in vention be put into actual use. The regulated private single-unit en terprise, as shown most plainly in the privileged bank of issue or the state-controlled private railroad, takes the place of the administration monopoly, wherever good reasons exist for preferring private to public management. It still secures for society the advantage of single-unit operation. The type is closely akin to the administration-monopoly; provided only that, beside the general interest, the acquisitive interest of the private enterprise be protected, a proviso which, when it comes to details, may lead to all manner of straits. Let us point out, for example, the state-guarantee for private railroads and the remaining rules of the concessional right, or the state's share in the profits of private banks of issue. The development of private monopolies, recognized by the state, has surely not reached its. end. New types may arise, or the old ones may be transformed. The possibility is not excluded that kartels or trusts, to-day not yet recognized legally or possibly even opposed by law, may perhaps at a future day, when their interests have been brought more nearly into keeping with the interests of society, be legally confirmed and at the same time re strictively regulated. It may then be that one or the other point of view of the two types, here described, will be transferred to these institutions also.

There are, finally, still to be mentioned those monopoloid forms which, owing to their actual power, maintain themselves, although legal recognition has been denied to them. Of these monopoloid institutions, only kartels and trusts are to be discussed in the theory of the price of products. Rings or pools exert their influence pre eminently by the power of large capital; the large exchanges are the spheres of their activity. There, they do not always deal with prod ucts, but very frequently with securities. Even when they are inter ested in products, they do not influence production itself. They are exclusively monopolies of the market, and it seems best to discuss them in connection with speculation on the exchanges. Of trade unions we shall have to treat in the theory of the wages of labor. In that connection, too, the preliminary problem will have to be discussed, whether or not the coalitions are in any sense monopoloid institutions.

Kartels and trusts are the creations of large scale enterprise. The smaller and medium sized establishments are too numerous in the economic markets of the world to be combined effectively by contracts. The very large enterprises on the other hand, owing to their com paratively small numbers, enjoy, beside their other advantages, the 224 SOCIAL ECONOMICS further and very important one of being able to organize themselves by contract. At the start, organization was employed only in order to regulate mutual competition, to obviate the injuries of over competition; only subsequently has there been organization for the purpose of effecting monopoly-earnings. The advantages of organiza tion are so great that the combinations can dispense with the recog nition of governments, so long as they are firmly enough knit to gether by the interest of their members. The state, should it wish to oppose them, would even have to employ drastic powers in order to do so effectively. The large-scale enterprises are all the more in need of organization, inasmuch as the conlpetitive conflict is a greater menace to them than to the small and medium-sized enterprises.

The large number of these latter types has, in the mutual conflict· of competition, no further end to serve but to keep the struggle alive. Only a sluall number of conspicuously active, efficient businessmen posse.ss the impulse to expand. Here, however, their restricted means set a limit to their ambitions, and their development can never en danger the existence of the host of others. Should a single one of a thousand plants double or treble its business, the rest of them will scarcely be appreciably affected· in their output. On the other hand, should one of a hundred or of ten industries double or treble its busi ness, the effect for all the others will be, not merely noticeable but injurious and possibly disastrous. No sooner has an industry of large dimensions abundant capital at its dispo.sal, than it finds itself in a position still further to achieve its aims by the conflict of com petition. Possibly it may endeavor entirely to oust its competitors and to, seize their plants. The conflict of competition is an aggressive one. Should the fear once arise among these enterprises that war is to be 'waged in this fashion, they will, one and all, immediately have to come to the attack. A general, fierce conflict will flare up, from which there will be no escape but the destruction of the weakest by the strongest or else a universal understanding and contractual compromise. Events of this. sort have given rise to kartels and trusts and determined their nature, oscillating between competitive conflict and monopolistic unification.

Of the two monopolistic institutions which we shall now have to discuss, the kartel is the less fully developed. So long as its ends remain confined simply to the prevention of overcompetition and to the protection of the cost-price, there is here in fact no monopoloid institution to be described. A combine, thus restricted, is a mere form by which to make sure' of the regulation of competi tion. 'But when once the power of the karlel in preventing the underselling of the sound competitive price has been experienced, it is easy to take the next THE 0 R Y 0 F SOC I A L .E. C ·0 NOM Y 2·25 step and attempt to sell above it. The fully developed combine works out this principle, so as to create an effective market-monopoly that is complete in every respect. All the business concerns of the market offering the same product, or at least by far the greater number of such enterprises, are induced to join in a oommon method of market procedure. The kartel thus is enabled to determine the price like a monopolist. On the other hand, even the fully developed combine does not expect to create a production-monopoly; it restrains its members in the independent management of their industries just in so far as is necessary to ensure the effect of the market-monopoly, by agreeing upon the quantities which each establishment is to be allowed to produce. Possibly in connection with this agreement, there will be a division of productive labor, calculated to reduce costs of production. In the main, however, each associate is left to the independent conduct of. his affairs. In this way, a considerable latitude is left open to the functioning of competition. Here we again find an explanation of the fact that the kartel is never agreed upon, except for rel3ttively short periods of time. The owners of works which are capable of higher development, hope to secure a more favorable quota on the renewal of the agreement; or they may possibly retire altogether from the deal, unless lllore favorable concessions are made to them.

Under some circumstances the germ of competition, which still lies within the kartel, may again be aroused to full strength. The dissolution of the combine may follow. In such a period of active, technical and organizing progress and of the increase of capital as the present, the impulse of competition will remain active even outside of the kartell. The latter. will never be able to prevent the formation of new enterprises sufficiently strong to carryon the conflict of com petition, at least up to the time when they will have forced an entrance into the combine on favorable terms. In these periods of great capitalistic-technical advance, also the effect of competition on the personal selection of the leaders remains active in the sphere, narrow though it be, whence the large enterprises of capitalistic origin derive their leaders. In periods, such as these, the combine must be looked upon as a monopoloid institution, where competition asserts itself with its most effective forces by the side of the monopoly. During periods of the quiescence of technical art, of organization and of augmentation of capital, the combine may contribute its share in the deadening of the last remnants of every incentive to progress. Just as the corporate monopoly, during the period of the decadence of the mechanical trades, became odiously apparent so the kartell, during similar periods, may strive exclusively to use or abuse its monopoly of the market, while not a trace remains of the socially beneficial use, which was to have been expected of the measure when independence of management was ac corded to its members.

The trust is, in itself, much more firmly unified than the combine. The trust develops under .economic conditions when the tendency of production to large scale operation is especially effective, and when the unification of large enter prises is accompanied by suc:h advantages of production, that independent man agement no longer remains lucrative. \Vithout depriving its lnembers altogether of their .legal independence, it unites their enterprises, actually, into a single unit-enterprise. The management of aU the united plants is directed by one central \supervising body; and the lay-out of the works, also, is unitarily' art ranged; the most effective, broadly designed, technical methods are universally employed; works, producing at too great disadvantage, are closed. The desire for unification goes so far as to attempt to unite all stages of the production226 SOCIAL ECONOMICS process from the obtaining of raw materials to the distribution to consumers, in all cases where returns may be increased by such combination. The steel trust will find its advantage in making sure of the mines of ore and coal; the oil trust will cut out intermediaries, in order to increase profits, to sell directly to retailers and to consumers. Railroads and steamship-companies will be drawn in, so as to make sure of the traffic-lines. In this concentration of forces the mammoth-bank especially must not be missed. The latter turns in the money-funds by which plants and management are to be expanded; by which competitors, predecessors and successors are to be bought out or overwhelmed in the conflict of competition; and thru which the structure of the giant-enterprise is crowned by security issues, realizing the increased gains in their cash-value.

Enterprises of this sort may be referred to as total-enterprises; 1 they take ad vantage of all opportunities· of gain, which offer in any direction whateve,r Their last aim must be to expand until all the essential means of the production process are securely under their control, as regards quantities required, as well as prices to be paid. At the height of its power, it would seem, the trust would tolerate neither predecessors nor successors in the production-process, receiving other than cost-prices for their pains; all specific gains would have to be reserved to the trust exclusively; and wherever danger might exist of predecessors or successors organi~ing monopolistically on their part, the trust itself would have to gain possession of the means of the production-process. The steel-trust, itself owner of its ore-and coal-mines, is in this way more effectively protected, than it would be by a demand-monopoly, because the latter could always be met by a supply-monopoly of the ore-and coal-mines. The advantage, accruing to the trust from its total-enterprise, is so great that under some circumstances, it may renounce the monopolization of production and market. While a steel kartel would have to combine all or nearly aU steel-works, in order to obtain power by a market-monopoly,a steel-trust may well leave a very large number of works outside its combination, and still realize its profit. A trust is enabled by its unitary organization to employ the most effective production-methods and to work thruout at the least outlay of costs. At a price, which barely covers the costs of competing enterprises, it earns an industrial rent, leaving a profit which could never be exceeded by an effective monopoly. A trust of this sort does not enforce monopoly-prices; neither does it require them; the com petitive price, determined according to the law of highest costs, is favorable enough for the trust. A trust of this sort will exert extreme pressure on com peting enterprises; by the magnitude of its supply and the lowness of its costs, it will crush the competitors who work under the most unfavorable conditions, but who had hitherto still been admitted in their supply. The trust cannot set the price quite so high, as it might have done monopolistically, even though the price is determined by the law of highest costs. None the less, the market price will still leave a considerable surplus over and above trust costs. In a case of this sort, there is no monopoly, possibly not even a monopoloid institu tion, unless we should wish to suggest by the term the enormous dimensions of trust-industries, which far exceed the conditions of ordinary competition, and in their further development lead -quite possibly to a monopoly. Certain par tial markets, however, it must be remembered, may be controlled by a trust of this sort, monopolistically or monopoloidically. Once a trust has reached 1 Trans. note: "Gesamtunternehmungen"-The ordinary English term is verti~ cal trust or combination.

THE 0 R Y 0 F SOC I A L ·E CO NOM Y 227 such an extent that, like a kartel, it embraces the great majority, or even all, of the plants, it has become a distinctly monopoloid institution of the highest power, or, in fact, a true monopoly.' To judge it properly and estimate its effect, we shall have to inquire, how nearly it approaches the characteristics of the single-unit enterprise, in its completeness. A trust which despite the unitary organization of its productive service, has not yet become a full single unit-enterprise, operates like an enlarged kartel; it operates like it, in the first place, by the control of tIle market. But it increases its gains by the advan tages of production, which it offers. At the same time, the trust is subject, like the kartel, to the -intermittent influences of the competition, and as to the duration of its existence dependent on conditions of trade. The individual en terprise of which the trust is composed, are qualified by the remnants of legal independence which they have retained, to re-assume their independence in fact, if the interest of competition should be revived. A trust, conducting a true single-unit enterprise, on the other hand, unites to the monopoly of the market a production-monopOly; and governmental rules would be required to subdue its power and reduce it to the lower level of a monopoloid institution.

How far the development of trusts has progressed towards the single-unit enterprise, must remain matter of empirical enquiry; by the instruments of theoretical enquiry, the problem cannot be approached. From facts which have become familiar to popular experience and hence do not call for specific investi gation, it can only be concluded that in the United States, where the trusts originated, the development rests on peculiar conditions which are not relevant for European states and which in course of time may not be relevant in the United States either. The uninterrupted influx of immigration creates a vast increase of the demand, for the satisfaction of which, enormous new plants have constantly, to be built. These establishments, are from the very beginning, planned for the most effective technical utilization. Without suffering the im pediments of antiquated plants, the entrepreneurs are, moreover, in the fortunate position of drawing on industrial, virgin treasures of the soil, and to exploit any number of productive conditions which have not yet been specifically pre judged as to their merits; the extraordinary specific enhancements of value of fered within the scope of these establishments, planned as they are for maximum requirements, fall into the laps of the bold organizers of the trust. It may well be doubted, whether the great .units of organization, which are the order of the day, will permanently nlaintain themselves, after once industry will have been compelled to utilize to better advantage the scattered local values, and to look more carefully after the minor advantages in individual cases. In our day, when the trusts are still in the process of growth and development, the force of their leaders is greatly to their advantage; but, even here, a doubt may be permitted, whether later on other conditions may not develop. Today at any rate, it must be insisted on that the effect of the personal selection of leaders, usually ascribed to competition, is most strikingly illustrated by the trusts. The trusts are creations of men of extraordinary abilities in practical business pursuits, men who possess the insights, the knowledge, the energies, required to plan and organize the giant enterprises of modern commerce and industry. The rise of these. great leaders is, to be sure, coincident with the downfall of others, more numerous perhaps, for the ranks of independent entrepreneurs are greatly cut down by the trusts. We must, however, not ignore the fact that the organizers, heading these great enterprises, are compelled to surround themselves, for their 228 SOCIAL ECONOMICS achievements, with a staff of collaborators, who are required for the enormous tasks of keeping things going. It must, furthermore not be overlooked es pecially, that among the most essential gifts of leaders is the one of properly estimating the abilities of fellow-workers. The selection of subordinates, by the organizers and general managers of these great industrial enterprises, is more effective than any that could be brought about by other means.

§ 43. PERSONAL (SUBJECTIVE'). VALUE-IN-EXCHANGE Price le'Vels-Value-in-exchange and value-in-use--Perrsonal exchange-Value of m,oney-Value of yield in exchange-Acquisition value-Exohange value a.ndl the law of exchange. The formation of price relates all prices which exist in the market at anyone time. In the widest sense of the term they may be re ferred to as related prices. The relationship is established through demand and supply. In the case of supply the prices of all products and all productive means, both material and personal, are harmo nized by the unity of production. The individual productive proc esses are related through all orders. by the connections through the productive stems. In the case of cost products the relationship is clearly expressed in the law of cost. According to the latter, the prices of products are established as combinations of their productive elements or vice versa. But also the prices of specific products and specific productive means are firmly knit together by th.e law of specific attribution as regards all other prices. From the side of the demand, the relationship is established by the fact that every house hold is itself a unit, and that all households enter into competition in the market and are subject to the law of the single price. In the estimates of every income group,. the quantities and prices of different articles are appraised against each other. These estimates of the groups result in a stratification of prices which are mutually condi tioning. Thus every new price is fitted into the frame,vork of old prices both on the part of the supply and the demand.

The sum of all prices prevailing in the market is shown· in the general price level. No single individual has the practical op portunity of inspecting the whole of the general condition of prices. Only a narrow section of the general situation falls under the personal observation of an individual in the course of his acquisitive activity or of his consumption. The judgment, "this is cheap, this is dear," is founded primarily on the personal experience of the individual. He compares present prices with other prices which he has known elsewhere or at other times. This judgment does not acquire gen eral significance· until it is concurred in by all social groups or the greater number of these.

THE 0 R Y 0 F SOC I A L ·E, CON 0 M ,y 229 A. new evaluation is suggested by this appraisal of the level of prices. It is one which has not yet occupied our attention in the theory of the simple economy. It is the value which is referred to economically as value-in-exchange. Exchange value is an institu tion arising out of economic exchange; in it we find the value which is attributed to objects because of the exchange relations which they bear to the economic process. Two forms of value-in-exchange are to be distinguished; they are usually called subjective and objective exchange-value. We will do well to adopt neither of these terms. They merely obscure the true state of affairs. We shall speak of the first as personal exchange-value, that which arises in the private economy; and of the second as social economic exchange-value. Let us first examine the former. It is the fundamental one. The latter is deduced from it.

Personal exchange-value is itself deduced from the utility-value of the simple economy. It is an indirect utility-value derived from the fact that in exchange one object is received or surre~dered for another, the utility of which is then set up as the measure of value. Thus, for example, goods whose utility the vendor himself cannot enjoy have a mediate utility-value through those goods which he ex pects to procure through their agency in exchange. Utility-value may be distinguished from exchange-value; the former is experienced without reference to exchange and is spoken of as value in use. All utility-value of the simple economy is use-value. It is customary, however, to reserve this term for consumption goods which are eval uated directly by their individual utility; it is not usually employed for the indirect forms of utility-value in the simple economy, for yield-value or cost-value.

The law of personal exchange-value may best be explained by the illustration of money. Everybody appraises money according to its value-in-exchange-----in so far, at any rate, as the intention is to employ it as money, without regard to the qualities of the metal of which it may be composed and which may be made available for other uses by melting the coins. In order to determine the personal exchange value of money a man resorts to the general price level which ob tains in the market of which he has knowledge. On the basis of this level the plan of domestic economy is organized in such a way as to expand the margin of expenditures as far as his available money allows. The use-values of those goods which constitute the marginal expenditures of an individual econonlY, give to that particular econ omy a measure of the personal exchange value of money. More briefly, the margin of use of the household determines the per230 SOCIAL ECONOMICS sonal value-in-exchange of the unit of money. The total needs to be provided for by the individual household and its total supply of money find expression in the marginal utility of the household. This stock of money is, as a rule, determined by the owner's income, at least in so far as no part of it is reserved for other than domestic use. In exceptional cases, of course, the fund is also enlarged by resort to credit or even by an encroachment· upon permanent pos sessions. Finally, certain needs may be satisfied directly by natural utilization of property, as is the case with the owner of a dwelling house which he occupies as a residence.

In the personal exchange value of money, the law of marginal utility is extensively employed. While the marginal utility of a stock of wares is found upon the scale of the special need which the particular goods satisfy, the marginal utility of money is ascertained from the sum total of the needs to be provided for in the economy. When these needs increase, the personal appraisal of money according to the law of needs is also increased and the marginal zone of per missible expenditures is narrowed. When the income is increased, then, according to the law of supply, the personal value of money is lowered. The higher the income, the more slowly the value of money will be lowered as the income increases. In a household advancing from the first to the second thousand of income, from the level of a minimum of existence to succeeding levels, the personal value of money drops amazingly; the scales of basic needs pass with com parative rapidity from the point of highest tension to that of relaxa tion. A brief inspection of the management of the household in this case at onc.e shows the observer the particular plane on which it stands. From the ninth to the tenth thousand, the decrease of the money-value, although perceptible, is already less marked. Th~ investigator must be keen in order to discern the income level. From the forty-ninth to the fiftieth, or from the ninety-ninth to the hun dredth thousand the decrease of money value becomes less and less noticeable; the marginal zones become broader and broader, and it becomes increasingly difficult for the observer to distinguish grades of satisfied desires.

The personal exchange-value of money is the basis for the personal exchange value that is attached to natural values in the single econ omy. The producer or the laborer appraises his performance accord ing to the monetary return or wage which he expects, and these, in turn, according to the marginal value which he sets on the unit of money. Consumers also, in certain cases, are in a position where the value of their goods is an exchange value. The most striking example THE 0 R Y 0 F SOC I A L E. CO NOM Y 231 is the case of so-called consumer's rent where the wealthier purchaser buys commodities in the market at a price determined by the poorer marginal purchaser. If a buyer of this sort loses, the commodities purchased, he doesn't lose the anticipated utility; his loss is con fined to the costs of acquisition, the purchase price, which he must ex pend again. Consequently he does not evaluate the object by the value-in-use which is determined by its particular individual utility but by its acquisition-or exchange-value which is determined by the costs of acquisition. A similar condition exists in all cases where com modities falling in the narrower zone of expenditure can be replaced by curtailing marginal outlays. The value here estimated by the owner is simplified according to the law of costs and balances with the amount of the pecuniary sacrifice needed for reacquisition.

The exchange-yield-value is a peculiar mixed form of value. It is the value of the yield ascertained by capitalizing the pecuniary return realized by the sale of the products of a factory, the crops of land or the rent of a dwelling. All these are here appraised in antic ipation of their sale, according to their value-in-exchange. The intention is not, however, to sell the factory, the land or the dwelling. They are therefore valued,' as in the economy of natural exchange, on the basis of the capitalization of their yields. The exchange-yield value is one of the bases for the computation of the exchange-value of the factory, land or dwelling in case it is desira ble to dispose of them; but the two values are likely to be exceedingly disparate. The nature of personal exchange-value is like that of value-in-use from which it is deduced. Both are true utility-values and subject to the la"\v of marginal utility. At all times it is a matter of circum stance which of the two forms governs in the individual case. Money performing its unique function only in exchange, is always appraised according to its exchange value. Natural values within the inner sphere of the economy in which they are to perform their service are always appraised according to value-in-use, except in those cases of which we have just spoken where acquisition-value is used. These goods are likewise appraised according to value-in-use whenever they &re purchased in the market for use in the household. As soon as conditions change so that it is desirable for the housekeeper to sell these natural values, value-in-use ceases to apply and value-in exchange controls. Thus, for example, an impoverished nobleman will be compelled to dispose of precious family portraits at their value-in exchange which he has hitherto been in a position to ignore. The producer appraises products intended for sale at their value-in exchange. Only where it is his practice to retain part of the products 232 SOCIAL EC,ONOMICS for use in his own household will he have, to compare value-in-use and value-in-exchange in order to determine accurately the margin of sale and natural use. The peasant-farmer, for example, should never sell any part of his crops which yields' a greater utility when it is consumed at home than could be obtained by using its sales-price for the acquisition of other values.

During the period of natural economy, value-in-use was the current economic value in most cases;, only an, insignificant part of the prod ucts was prepared with a view to realizing exchange-values. How ever, the development, which led to production with division of labor under the regis of monetary exchange, has gradually received its impetus from the fact that in an ever increasing number of house holds and for a growing quantity and variety of products value-in exchange manifested itself as the true economic value. All this great economic change proceeded under conditions where the personal exchange-value remained supreme. Each of the thousands and mil lions of participating individual economies looked at all times to value-in-exchange to ascertain to what extent it had better adapt itself to the body of the economy with its division of labor. The entire structure of social, economic production may be traced back to the individual actions induced by this value-in-exchange. In all production and other acquisitional pursuits, which are definitely accommodated to monetary exchange, value-in-use has become prac tically obsolete; incomes and expenditures are computed exclusively in exchange-value.

Personal value-in-exchange is deduced from prices. At the same time it reacts on prices and exchange generally. It is an indispensable adjunct of the market. Were value-in-use the only instrument in exchange available for a comparison' of values, a monetary economy would scarcely be possible. Money would possess no value at all aside from its material value which is of little importance in exchange. It would simply be an order to hand out one or more of the thousands of imaginable things which men, for purposes of ac quisition or domestic use, have to obtain from the market. But no one of these choices would stand out prominently in men's interest; an endless effort would be required to keep them all in mind at all times and not to succumb to the constantly recurring temptation to seize the first that might offer, not as the result of intelligent choice but simply because it was ready to hand.

Money, as we all know it, is more than such a mere order for the future de livery of values. It is saturated with exchangeable value and becomes, there fore, itself a living value. Indeed one might be tempted to say that it is a concentration of values and reflects at once all the values of the market for whose' acquisition it offers the means. We do not merely feel that money has value; we feel even the numerical magnitude of its value. A sum of ] 0 Marks, 100 Crowns, 1000 Francs, is a d~finite symbol of e'conomic power to THE ORY OF SO CI AL E CON 0 MY 23'3 the German, Austrian or Frenchman. When the entrepreneur arranges his or ders or the housewife plans her .. purchases, the value of the money which they are about to expend is a constant monitor which advises prudence and a consideration of the limits which· are dictated by economic principles under existing conditions. Every economic value is an appraisal of needs still to be· experienced. This anticipation of needs which are to arise combines the ideas of the means and ends to be served. The latter are kept in view during the entire time which separates procuring the means :from the attainment of the ends. Exchange value is the form which involves the longest period. It still maintains the in terest of an individual economy in all its widely scattered relations with an economic whole, even where value-in-use does not. Value-in-exchange anticipates the increment in use value for the sake of which the exchange is undertaken. It associates the expected value with the money income which is available for the household; with the wares from the sale of which this income is to be derived; and also with the sums of money from the gross produce, which are again used :for acquisition in order to finish new wares and obtain new prospects of gross yield and net income.

"Then the gain in value-in-use is finally obtained, for the sake of which exchange has been resorted to, it no longer comes as an unexpected increment. A man sees in it the realization of the antecedent value-in-exchange. He would be disappointed and would consider himself a loser if the exchange-value did not result in an accretion in value-in-use. The formula for the law of natural exchange with whose deduction we opened our investigation of the institution of economic exchange therefore requires further explanation along this line. So also does our exposition of the fundamental law of the formation of prices. In order to arrive at a radical theoretical explanation we deduced this law by assuming an economic condition without prices. As a matter of fact, how ever,prices are always made by starting with those already established. The formation of prices thus is always aided by appraisals· of exchange-values which are founded upon previous market experience. In a· quiet market, producers refuse every sale whose proceeds fail to bring the accustomed personal exchange value of the wares, and consumers make no acquisitions whose use-value is not equivalent to the custonlary exchange-value of the amount involved in the price.

In such a market, the exchange-value invariably determines the price, or, con versely, price is a realization of exchange-value. Price-formation by custom, therefore, is in truth the formation of prices by exchange-value. Ina dis turbed market where prices have to be formed anew the appraisal of exchange value as indicated, by the old prices also serves; it confines the functions of the market to the determination of· the changes which are necessary in existing appraisals. § 44. ECONOMIC (OBJECTIVE) VALUE-IN-EXCHANGE What is the so-called·objective or social economic value-in-exchange? We shall postpone answering this question as regards the extraordi narily complicated case of money until we enter upon the contin uous exposition· of the value reiations of money; as regard8 wares 234 SOCIAL ECONOMICS and other natural values our ans,ver can be couched in few words. When the market price for certain wares is 100, all sellers without exception set the exchange value at 100, for they will all agree that the anticipated price measures the exchange-value. So far there is nothing personal about their appraisal. The personal characteristic is first introduced when each vendor appraises the price against the background of his particular circumstances. This statement throws light upon the facts which create a social economic exchange-value.

The latter,by the universal confirmation of all parties interested, is the first step in their appraisal of exchange value. It precedes the personal evaluation of money. This first step is not a mere prediction concerning the price; it is a true appraisal. When we say that cer tain wares have an exchange-value of 100, we do not merely state its market price; we wish to indicate the position which it occupies in the market by virtue of the fact that its price is 100. All the effects which originate in the simple economy from utility value take their rise in the social economic process from the exchange value which· is here discussed. The costs which may be incurred in production are controlled by it. It forms the foundation of the attri bution of yields to the actively employed productive agents. Amounts of income are stated in this value. It is subject to discount and capitalization. It fills the accounts of production and acquisition from beginning to end. It may properly be spoken of as social economic exchange value, as the general social value, for it is the basis of the social economic process. All individuals taking part in the latter make exclusive use of this price in all matters related to this process.

In daily intercourse economic exchange value has completely over shadowed both personal exchange-value and utility-value. It is this to which men refer when they speak of value pure and simple. When one asks what certain goods are worth, he expects and is given the figure for their market value. It is easy to understand that this value, uniformly the same for all persons interested, should obscure in common parlance all personal valuations. There is a social accord in regard to this value and its numerical expression which is clear and unequivocal. Compared with it, all other expressions of value are matters of sentiment, having standards which .are personally ex perienced but are not readily susceptible to accurate interpretation. Theory at first received its concept of value, like all of its fundamental ideas, from the interpretation and speech of daily intercourse. As in the other cases, so here the meaning of the term was taken as that. of its most popular use. No attempt was made to enter into the more deeply hidden motives which THE 0 R Y 0 F SOC I ALE, CO NOM Y 235 condition personal action but are only suggested in the popular phrase. In this way theory obtained its contrasting concepts of i'objective" and "subjective"

exchange-value. To tell the truth, there is no "objective" exchange-value. In one sense possibly the term may be justified: in other connections also we speak of that which is subjective, but at the same time common to many, as objective, in contrast to that of which the single individual is the subject. But not even in this sense is the term wholly justified, for objective exchange-value is not quite universal. It never holds for those persons who do not wish to take part in the exchange because the price, as it stands, is either too high or too low for their personal valuation. "Objective" exchange-value is the uniform result of the valuation of all those who take part in the exchange at the indicated price. These are the parties who in the case under consideration start the economic process. The classical s~hool gave no further attention to the i'subjective," the per sonal exchange-value. It was assumed that the effects of this value were ex hausted within the private economies and that these did not concern the doctrine of the social economy. Only the objective exchange-value was considered worthy of scientific investigation. Only to this form was economic importance attrib uted. Thus we find here one of the great truths of which but half the signifi cance was grasped by the classical school-a result which barred the progress of these men toward the full truth. The effect of i'objective" exchange-value is truly economic, but its roots are bedded in the subjective estimates of in dividuals, grouped to determine the result. The individualistic school re duced everything in the social economy to individual effort and fully recognized the concert of individual action in economic endeavor; yet it failed to realize one truth, that economic action is the confluence of individual valuations. This is the fundamental reason that the classical doctrine of value and of price could never finally solve its problem.' The theory of value and of price must penetrate to the personal sources in order to complete its task.

§ 45. THE CONCLUSIONS OF THE '~ERAL THEORY OF PRICE Price-margin and price-law-The law of price and-the law of 'Value. Before we proceed, it may be well to summarize the results of our investigations of the formation of price which lead in .many direc tions. The process of the formation of prices is much more diverse than that of the appraisal of values in the model simple economy, because of the introduction of many new factors. In the former case money is used. Many legally independent individuals participate. These persons exercise varying degrees of power which are conditioned by the stratification of income, social class and market position. But whatever new elements we have had to introduce into our investiga tion have not brought with them any new forces. Even the new element, money, is merely an instrument to effect the exchange move236 S OC I ALE CON 0 M Ie s ment of natural values. When the· social resultants of prices are analyzed into their component parts we arrive at the personal valua tions of the interested parties. Each such valuation obeys the law of the simple economy. The diversity of power is evidenced only in the strength with which this personal interest may be displayed. If we neglect for the present truly usurious price,the personal valua tions of the parties to the supply and the demand erect impassable barriers to the formation of prices above and below certain limits.

Precisely as in the case of the simple economy, all objective facts which influence price, quantities as well as costs, must act through the agency of these personal valuations in order that the transaction have true significance, order and standard. The share of each individual in the formation of the .resultant prices is often infinitesimal and might almost be. eliminated. But is this exceptional where average human beings cooperate in perform ing social functions Y At all times the individual is lost in the multi tude although the latter actually is effective only through the indi viduals of which it is composed. The individual feels bound by the objective facts, cost or prevailing prices; he helps in binding the .ties and thus contributes in drawing the knots more tightly. In the beginning of economic intercourse, the valuations of the ex changing parties leave a broad margin for the formation of price.

The law of value establishes firm limits for prices; but price as yet has no well established law of its own. A rigid law of price has two prerequisites: the crystallization of a matured trade and a series of demands that are at least sufficiently homogeneous so that the decisive marginal bid for any particular quantity may be definitely ascer tained, at least in the zone of marginal expenditures. However, it should be remembered that this law holds good only under a well regulated competition which assigns to everyone his proper position. A disjointed economic market is firmly adjusted only when the social interest of the community is established and forces all individuals~ irrespective of direct competitive compulsion, to reach decisions which conform to all the existing social conditions. The law of price is derived from the law of· value of the simple economy. The important featureof each of these laws is not identical with that of the other. In the simple economy, the marginal utility is socially ascertained and .determines value; whenever the economy is regulated by this value, the sum of the partial utilities thus secured must be the greatest possible. But price is also an outgrowth .of power. On the part of the demand, because of the greater financial strength of the wealthy the decisive price is subject to the law of THE 0 RYO F SOC I AL .E, CON 0 M Y 237 stratification and takes its standard from the stratified marginal util ity. On the side of the supply, financial power as well as personal efficiency decides the competitive conflict. Victory in this contest, therefore, does not merely indicate a social selection of the fittest.

The cost-price of competition is not yet the common price. It does not correspond to the lowest social costs that might be realized, because it does not correspond to the highest attainable social yield, nor to the greatest massing of common force. Under modern conditions in the field of large-scale industry, eompetitive conflict leads to unifying mergers. In all fields of large enterprise today, there are institutions ·which are usually called monopolistic. 'fhey should, however, more properly be called monopoloid, because the elements of monopoly which one finds in them are interspersed with those of competition. The enormous productive forces of such enterprises depress the cost factors of price and thus far inure to the social benefit. But the accompanying excess of power and the compelling force of capital in "big business" relieve the men in power from the necessity of rigid conformity of price to costs. It enables them to obtain a resultant price which decreases the ,general utility and yields excessive profits to them personally.

A new form of value, value-in-exchange, issues from prices and establishes the standard for the economy' of private enterprise. As personal exchange-value it gauges the movements which connect in dividual private economies with the social economy. It thus supple ments value-in-use, which harmonizes the inner affairs of the individ ual economy. As economic exchange-value it measures the movement of the· social economic process. In both forms exchange value carries out the law of price. Its effect, therefore, like that of price should lie between utility and power. § 46. CREDIT The individual credit-transactions-The advantage of exchange for the creditor and debtor-The nature of credit-The distinction between property and assets. For the doctrine of credit and money, the following are still to be men tioned: Knies, Geld 'ttnd Kredit, 2nd ed. 1885; Wagner, art. Kredit und Bank wesBn, Schonberg; and, Theor. SocialOkonomik, II, 1909; Jevons, Mechanism of Exchange, 13th ed. 1902; Walras, Theorie d.e la Monnaie, 1886; Hertzka, Wesen des, Geldes, 1887; Menger, art. Geld, Hdw. d. Stw.; Wicksel, Geldzins una Oiiterpreise, 1898; and, Vorlesungen iiber NationalOkonomie, vol. II,· 1922; Wieser, Der Geldwert und seine geschichtUchen Veriinderwngen, Z. f. V., XIII; and, Der GeldtC'ert und seirn·e Veriinderungen, Sch:r. d. V. f. S., vol. 132; Laughlin, Principles of Money, 1903; Walsh, The Fwndamental Problem in Monetary Science, 1903; Helfferich, Geld, 6th ed. 1923; Komorzynski, D~e 238 SOCIAL ECONOMICS nat. ok. Lehre vom KredU, 1903; Himmel, Philosophie des Geldes, 3rd ed.

1920; Knapp, Staa·tUche TheoNe des Geldes, 3rd ed. 1921; Spiethoft', Quan, titiUstheorie, 1905; and, Lehre vom ](apital, e. d. VI; Altmann, Zwr deutschen Geldlehre, E. d. VI; Fisher, Rate of Interest, 1907; }'isher-Brown, Purchasing Power of Money, 3rd ed. 1913 (German by Ida Stecker, 2nd ed. 1922) ; Bendixon, Wewen des Geldes, 2nd ed. 1918; and, Geld und Kapital, 3rd ed. 1922; Mises, Theorie des Geldes und der Umlaufsmittel, 1912; Hildebrand, Wesen des Geldes, 1914; Anderson, The Value of Money, 1917; Englis, Die wirtschl. Theorie des Geldes, Archiv, vol. 47; Liefmann, Geld und Gold, 1916; Guyot-Raffalovich, In flation et Deflation, 1921; Doring, Die Geldtheorie:n seit Knapp, 1922; Moll, Logik des Geldes, 2nd ed. 192,2; Heyn, Probleme des Geldwesens, zum Inflations problem, Weltwirt8'chl, Arehiv, 19'17; also, Ueber Ge.ldschiJpfung und Inflation, 1921; Soda, Geld und Wert, 1909; K. Elster, Die Seele des Geldes, 1920; and, Zur Analyse des Geldproblems, Jahrbuch f. N., vol. 54; Kaulla, Die Grwndlagen des Geldwertes, 1920; Stephinger, Wert und Geld, 1918; Diehl, Fragen des Geld wesens, 2nd ed. 1921; Schlesinger, Them·i.e der Geld-und Kreditwirtschaft, 1914; Lexis, art. Papiergeld, Hdw. d. Stw.; .Altmann, art. Q,uUlilrtitiitstheorie, Hdw. d.

Stw.; Palyl, Die Streit wm die staatl. Theorie des Geldes, 1922; Schumpeter, Das Sozialproduct und die Rechenpfennige, Archiv, vol. 44;; Cassel, Das Geld problem der Welt, vol. I, 1921, vol. II, 1922; Keynes, Traktat aer Wiihrungs poUtik, 1924; Hahn, Volk'lmrtschl. Th.eorie des Bankkredites, 1920; Bortkiewicz, Das Wesen, die Gren~en und die Wirkungen des Bankkredites, \Veltwirtschl. Archiv, vol. XVII; Beckerath, Kapitalmarkt und Geldmarkt, 1916; Hilferding, Das Finanzkapital, Marxstudien, vol. III, 2nd ed. 1920; F'isher, Senses of "Capital," Economic Journal, vol. VII; Marshall, Money, Credit and Commerce, 1'923; Hawtrey, Currency and Oredit, 2nd ed. 1923. Money and credit, as the significant elements of the exchange economy, are frequently associated with each other in daily speech. It is true enough that even in the natural economy in transactions be tween neighbors and even in wider circles business is occasionally transacted on a credit basis. However, it is not until money capital is created in the monetary economy and forms an easily transferable instrument, that the credit economy develops. The development is within the money economy; .credit transactions are an institution of exchange.

'rhe fundamental credit transaction is the loan. From this have radiated a series of kindred transactions, borrowing, lending, irregu lar 1 deposits, annuity purchases and others which we need not discuss here. The receiver of the sum lent incurs the obligations of a debtor. Usually he is bound to repay the principal after a definite time and in all cases he must pay interest.-The loan without interest cannot be discussed here.-This interest is the price paid. for the loan of the principal. The sum of money thus received the borrower treats as his own. Thus he gains control of a corresponding portion of the money 1 irreguHire Depositum.

THE 0 R Y 0 F SOC I ALE. CON 0 M ry 239 economy. At the same time, however, the sum lent remains part of the assets of the creditor. Both before and after the loan he owns its equivalent value. In an economy without credit, an owner's property and assets coin cide almost completely. He may put down all his possessions at their full value as. his wealth; if we neglect the unimportant exception which would have to be made in the case of easements and obsolete services for the period of grace, he must pay the price agreed upon. A.s a rule he will at this time have completed the economic process which started with the purchase of natural values. There remains another important case of composite credit transac tion: the assignment of a demand or, as the case may be, the discount of commercial paper'. The assignee pays out a sum of money which becomes the property of another. In return he requires a right of demand. In these respects he is in the position of a creditor who makes a loan. The assignor or endorser of a bill who receives the amount of money as his property is not a debtor. A.t least he does not incur an initial liability, although he does guarantee the paper.

The principal debtor is to be found in a third person who is not a party to the contract at all but is already obligated. The advantage to the assignor lies in the fact that he receives payment of his demand against the third party before it is due and may therefore renew his economic activity at an earlier date than would otherwise be possible. A credit transaction is always an exchange and obeys the same law as the surrender of natural values for money. The relationship is less obvious in the case of the composite credit transactions; it is perfectly apparent in the case of the simple type of the loan. Supply and demand are contrasted in the loan market just as they are in the market dealing in natural values. The supply seeks and the demand offers a money price for a certain perrormance. It is a matter of indifference to the theoretical interpretation that the performance does not consist of natural values.

There a;re certain analogies between this performance and that of the lessor who surrenders to the lessee the use of an estate. However, we must not overlook the fact that the debtor cannot "use" the /money as such throughout the period of the contract. In order that it give him any economic service at all, he must pay it out. Further more it is not accurate to say that the creditor surrenders to the debtor the" disposition" of the sum loaned. This expression is open to mis interpretation: the performance of the creditor is not confined to the surrender of money to be used on only one· occasion. He is bound by the terms of the contract over the full period of the loan. The debtor, 240 SOCIAL E CON OMICS by receiving the initial right of disposition, is enabled ror the entire period to continue an economic proc.ess which, in the absence of the loan, he could not have begun or continued. In the case of commer cialcredits this process is one of acquisition. The merchant turns the money into wares and these again into .money ; the manufacturer or primary producer executes not only the market transfers demanded by his business but also transformations thru natural production in many complementary combinations. The debtor who resorts to a consump tion loan is enabled to maintain his domestic plant which may be nec essary to his own life, that of his family or their social position.

·The· more accurate .. theoretical interpretation of the advantage in value obtained from loans by commercial·· or domestic borrowers ,ve shall have to reserve for the theory of interest on capital. For the present· it is clear that debtors may reasonably anticipate an exchange advantage from loans. This accomplishes our immediate purpose. Creditors who wish to secure such a benefit by lending money at a specified rate of interest rather than by using it them.selves· in the economic process, may lack the ability to .engage in business as inde pendent entrepreneurs; they may have neither· the desire nor induce ment to do so. Again, they may he entrepreneurs who do not wish to enlarge their plants by further investment but who desire even less to consume their savings in the household. Therefore on the part of both demand and supply there are sound premises for a mutually advantageous exchange, provided it is well considered on both sides and is the result of true freedom of choice. However, the necessity and inexperience of the bor'rower, as well as his improvidence and extravagance, may turn this exchange transaction into an instrument of serious and lasting injury. This menace is greater only in the case of the sale of labor.

It is customary to contrast credit and cash transactions. The opposition is usually defined by saying that in the case of the latter performance and counterperformance take place together, while with the former the counter service succeeds the service by a considerable interval of time. However, this statement does not clearly explain the nature of the credit method of doing business. If the repayment of the principal is regarded as the counter performance, the perpetual state debt which gives to the creditor no right to demand repayment cannot be regarded as a credit transaction. On the other hand if the periodic payment of interest is considered as the counterperfor mance, these payments appear to be unduly small returns in contrast with the initial service of paying over the principal. This temporal interpretation also does not sufficiently distinguish credit transactions from leases and contracts of labor in which the service and counter-service do not coincide in point of time.

THE 0 R Y 0 F SOC I A L ,E C '0 NOM :Y 241 One would therefore be forced to classify leases and contracts of labor with credit transactions; indeed the interpretation handed down in the German text book does just this. Here the objection arises that by their practical nature these contracts are· separated by a wide chasm from credit transactions. The text-book itself departs from its concept of these transactions as soon as it embarks on the discussion of the policy, organization, laws and effects of credit. At no point in. this discussion is there further reference to the other type of dealings. The analysis always turns exclusively upon the loan and the other leading forms of receiving and granting credit which we have discussed. The essence of credit lies in the fact that for an adequate consideration. th.e control of· property is surrendered while its ownership is reserved. For a speci fied or unlimited period the creditor enables the borrower to engage in economic activity with means which remain the property of the creditor while the debtor becomes the ostensible owner. This is the creditor's performance. The counter performance, or price, is the interest suitably adjusted to the length of the agreement. Repayment of the principal is not the counter-service, any more than is the return of leased property to the lessor. In many respects con tracts of lease and credit are analogous; but, even aside from the fact that the tenant for a term of years' is not the full owner, it must be remembered that the extent and importance of tenancy are less significant than those of credit.

Credit has always been of considerable economic importance. With the modern accumulations of capital, its importance has become enormous. In individual cases, the period agreed upon' is often short. But because. of the fact that new transactions are being constantly undertaken credit has a decisive influence upon the economic organization of property and ownership. There are many individuals who derive more or less important additions to their other income' from the interest on capital which they have accumulated by saving. Side by side with these, the tremendous power of wealthy capitalists and great banks has come to the fore. Most businesses, though they differ widely in size and purpose, employ outside capital as well as their own. As they thus insure increased earnings for themselves, they likewise augment the national income. The rise of efficient entrepreneurs and the selection of financial leaders are greatly encouraged by the institution of credit. Credit is used innumerous economies to make an adjustment of the present and future. In the manage ment of the commonwealth, this is most marked. We all know that the ad vantages of credit are not to be obtained without risk to the weaker economic organizations, without dangerous opportunities for the abuse of credit and without threatening ruin in the wake of panics and crises. Modern develop ment has plunged large classes of the people into the servitude which arises out of excessive indebtedness. Not the least important cause of the burden of taxation which bears so heavily upon the weaker economies is the monstrous size of the public debt.l 1 Trans. note. It must be borne in mind throughout this book that little change has been made in the text since the first edition which was written before the war. This statement would be even more strongly phrased if Wieser had been considering more particularly the post~war conditions.

242 SOC I ALE CON 01\1 IC S § 47. THE MEANS OF PAYMENT BY CREDIT The efjec"ti of credit in increasing money:· commercia~ paper, 11Inseoured notes', transfers by check-Cash reserve, secondary re.9erves, commercia~ coverage Economizing the use of money through credit: balancing tke account. Taking certain things for granted, men have become accustomed to accept money demands arising out of c.redit transactions as pay ment in lieu of money. This occurs on a large scale in highly devel oped commercial intercourse. Thus in addition to the fundamental significance of credit which it has attained in distinguishing ownership and wealth it has acquired a further and scarcely less important one. It has increased to an extraordinary extent the media of circulation of the social economy and in this connection has signally elaborated the methods and institutions of payment. There are three forms of substitutes where the evidences of credit transactions pass for money: commercial paper or the bill of exchange, banknotes and checks. The last two as credit instruments are not covered by cash to the face value. It is unnecessary for our present purpose to elaborate the details of their various established forms.

It will be sufficient to describe the type so far as to explain the service which they constantly render in the financial adjustments of the community. Commercial paper, as contrasted with other demand drafts that share with the latter the rigors of legal proceedings and the right to issue executions, is· distinguished in offering an additional security in the personality of the debtors. The business man making an ad vance has, as a general rule, a sufficient insight into their earning capacity to estimate correctly their right to credit. The short period for which the commercial bill is generally drawn gives a fair pre sumption that the responsibility of the drawee is not likely to become less up to the day of maturity. B'ut these are not the only advan tages to be considered. Commercial paper is more than a bill of ex change drawn against a merchant; it grows out of a business transac tion. Thus in addition to its legal guarantee it carries an internal commercial guarantee.

If, for example, a bill representing merchandise is drawn on a business man who buys a quantity of goods on credit, the time which the bill is to run is fixed so as to enable the purchaser to sell the wares and collect the proceeds. The proceeds furnish the fund out of which the bill may be paid-the commercial protection. The high value which attaches to this internal coverage which a commercial change receives by the mercantile transaction described, is shown by the fact THEORY OF SOCIAL EC,ONOMfY 243 that a good demand may be discounted as it stands on the books. This may happen even though no bill has been drawn against it so as to bring it under the rules of bills of exchange. This discount ing of open-book accounts has increased greatly of late. To be sure, only a draft accompanied by all papers may be used as a means of payment. In the business circles in which a bill of exchange is issued it is regarded as so certain that a good commercial bill will be honored when due, and the due-date is so near that the money demand which it represents is looked on itself as money. As the phase runs the bill "is money," and in these circles it is used by way of payment when actual cash payment is not desirable or convenient.

The larger the number of hands through which the bill has passed, 'the better its currency becomes. The increased number of endorse ments increases the security which it offers asit widens the commer cial circle in which the bill is recognized. Nevertheless, this circle is very small when it is compared with the whole of the national" econ omy. As the period for which it is drawn is short, the time during which it may remain in circulation is exceedingly limited. The bill, when taken up, ceases to function· and new dealings in merchandise are required to create new bills of exchange which may again be put in circulation. More important still is another condition to the use of bills of ex change. The draft or aeceptance which is to function as payment, does not, in fact, serve as payment in full. Should payment not be made when the paper is due, the final holder may fall back on his pre decessors. Each man thus resorted to may again have recourse to those before him. Not until the bill has been actually honored and paid, does the payment, which was supposed to have been made at its original delivery, become final. Until then, the payment is considered conditional. A bill of exchange is thus only a provisional means of payment, not a conclusive and final one such as is afforded by money itself.

"Unprotected" banknotes are notes for which no metallic equivalent of their face-value is held under government authority: i. e., such notes as the bank of issue, which we shall typify by the central bank for the entire national economy, places in circulation without always holding metallic or cash reserves in readiness for their full redemp tion. Notes which are issued only within the amount of the metallic reserve have no theoretical interest for us in this connection. For large payments they are more convenient than metallic money which is coined in smaller units. They may be more conveniently and in244 80 CIAL E CON 0 MI C 8 expensively safeguarded, counted and shipped. They are therefore a practical substitute for coi~ed money which they represent. But this substitute substance, if one may so call it, does not in any way increase the total amount of money in the country. It circulates in lieu of·the coins. The latter may at any time again take its place, for the notes must be redeemedin lawful money at sight on the demand of any holder.

On the other hand notes issued without cover .of metallic coin are a peculiar means of payment by credit. They are added to the actual stock of metallic money and increase this "cash' , effectually. This supplementary money, as it might be called, is of the utmost impor tance to the financial condition of a country~ We shall have to dis cuss this money now at some length but we must warn our readers that externally this supplementary money cannot be distinguished from the substitute substance discussed in the last paragraph. It is the essential basis of the legal status of the two types of issue that they are indistinguishahly connected. Each confers on the holder the right to demand redemption. Of no individual note can it be confidently said "this is" substitute money" or "this is supple mentarymoney. " In practice every note passes at its face value. However, as it may be safely assumed that all the notes issued will never "be simultaneously presented for redemption, it is deemed suffi cient to keep on 'hand a fund only in such proportion to the total cir culation as experience has shown'to be necessary. Over and above this fund, the bank of issue "holds a secondary reserve to supplement its cash, i. e., the so-caUed "bankable reserve. "This fund consists of those demands from its approved credit transactions, from loans arising in the business of the' bank of issue or, more simply, "the B'ank. " This type of reserve consists of well-rated commercial drafts at short sight which the bank has discounted. The ingenious com bination of these two reserves enables every bank to make good the promise of redemption given to the holders of the notes. In the first place it may use its cash reserve to redeem the notes presented.

Then at the" shortest notice, by".cashing its demand represented by negotiable paper and kindred investments, it may obtain funds to 'redeem the rest of the notes also in so far as the notes themselves are not presented in repayment of the loans. Thus all notes issued by a well-managed bank, the supplementary as well as the substitute circulating-media, can be used to obtain their face value in money and are accepted in all transactions as money. In the case of money the mass habit of" acceptance has become his torical. This is quickly transferred to the notes of a central bank THEORY 0 FS 0 C I A L ECONOMY 245 even without any legal enactments which enforce their acceptance or establish compulsory rates of exchange. It is unlikely that anyone would refuse"to receive such notes in payment for in so doing he would be regarded as indulging in" unbusinesslike chicanery. If the bank fails to observe the rules of protecting its notes, there will in the long run be a reaction which impairs confidence in the bank's' notes even with the general public. But so long as the bank conducts its business with due regularity, the public and the entire business com munity receive and payout the notes without so much as a thought of the cash reserve or the secondary reserve; or frequently without even having heard of these.

When the mass habit of acceptance once attaches to a note, it ceases from a practical point of view to be a mere demand for the payment of money. It becomes money, and practically," therefore, the coun try's total fund of effective money is augmented by the amount of the supplementary money. This statement requires a restrictive explanation. This increase of the country's capital is not permanent. Notes which are paid out in discounting loans are subject to a law which has been called after its discoverer "Fullerton's law. ,,. When the credit granted by the bank expires the bank either receives back its note, or, if repayment is made in cash, an amount of cash which covers the note remaining in circulation. The notes which the bank issues in discounting commer cial paper are no longer lived than the" draft or acceptance itself. If they continue to circulate they are at any rate no longer uncovered notes. They come into existence when the draft is discounted; they die when the draft is honored. The payment of a draft gives to the bank a fund to cover the bank's note. During periods of slackening business activity" when few drafts are offered for discount the supple mentary fund decreases and vice versa.

The notes" take the place of the draft which is deposited by' the bank's cashier. Fundamentally, therefore, they are nothing more nor less than transformations of the draft which fit it to perform the functions of money. Drafts or acceptances are in amounts of uneven denomination; the notes of the bank are in round and convenient sums. Commercial paper is timed; notes are payable to the bearer on demand. The former appreciates in value, the nearer the time for its presentation and payment; the latter, as is the case with money, are not affected by the lapse of time. The former circulates only in its own narrowly restricted sphere; the notes of a central bank whose solvency is universally recognized are adapted to circulate throughout the entire national economy. Finally commercial paper is a means of 246 SOCIAL ECONOMICS only provisional payment. Notes are a means of final and conclusive payment just as is money. Should the commercial paper in place of which the notes were given, not be honored, the bank will fall back exclusively on the drawers and indorsers. The bank notes are in no wise affected and no one who has made .payments by their instru mentality accepts any secondary liability. Why should he 1 The note is not, like the draft or acceptance, an individual promise to pay; 1 it is as representative as the money of the realm. It is national currency 2 as it should be in order to qualify as ultimate service for money through the mass-habit of use.

In most of its characteristics the "uncovered" ban.k check is the· opposite of the unprotected note. Before explaining the check in de tail we shall have to discuss a term which is not now in general use in precisely this form. The Austrian postal savings hank in its organ ization typifies the centralized clearing house arrangement. By the English method the parties draw in the first place on their bankers and these subsequently balance demands and counter demands in the clearing house. This method is substantially the same as the former, but its explanation is more difficult and does not give as clear a view of the relations which it is our object to disclose theoretically. The centralized clearing bank accepts deposits of money. The creditors of account dispose of those funds by transfer checks. Pay ments are effected by debiting the account of the payer and crediting that of the payee. The arrangement amounts to the old exchange or giro trade on the greatly enlarged scale of a bank which operates over the entire national economy. As little theor~tical interest attaches to that part of the deposit which is covered by cash on hand as does to notes covered by cash reserves. There are certain practical ad vantages in paying by check, but the country's media of exchange are not enlarged by drafts against cash on hand. But at this point the clearing bank avails itself of the experience of the bank of issue.

Knowing that it is unnecessary to hold in readiness the entire cover age, it uses a certain portion of the funds entrusted to it for suit able investments which· produce interest and enable it to allow a moderate interest to the depositors. This is an additional induce ment towards increasing deposits. To the entire extent of these in vestments, the depositors renounce claims against a cash reserve and accept the secondary reserve in its place. Therefore just as we distinguish between the covered and uncovered notes we shall. have to distinguish between the credits which are pro 1 ein Einzdpapier. 2 ein Massenpapier.

THE 0 R Y 0 F SOC I A L ·E CO NOM Y 247 tected by metallic reserve and those which are covered only by the bank's investments. This distinction is without significance so far as transfers are concerned. Just as the notes of a well-managed bank of issue are accepted in daily exchange, whether they are covered by metallic money or approved security, and just as they form a homo.. geneous mass enjoying equal rights and used with equal effect without regard to the manner of security; so the credits of a well-managed clearing bank are looked upon as a· homogeneous mass to be disposed of hy transfer with identical effect without ~egard to the manner in which they are secured. But since the funds deposited are returned to economic circulation to the entire extent of the unsecured credits, it follows that to this extent the· funds do double service and the media of exchange of the country are increased just as they are by "un secured notes."

In many respects the clearing bank facilitates payments more effec tively than the bank of issue. It is an improvement on earlier methods that the transfer takes place in the bank's accounts rather than by counting out and shipping funds. It is a further improve ment that the balances, by the transfer of which payments are effected, at the same time yield a moderate rate of interest to creditors. In this wa.y the method of clearing resumes a characteristic of the bill of exchange which was altogether lost in the case of the note, the representative of the bill of exchange. On the other hand, people must agree that their balances cannot be withdrawn at will, but their withdrawals are subject to certain short notice. This, too, is an im provement. While in the case of a bank note, the holder has a right to insist that it is payable on demand, payment by check has advanced beyond this stage. Depositors in the bank pay by money demands which cannot be withdrawn immediately but only after a trifling delay. Once the bank's patrons feel confident that payments are im mediately effected by a transfer on the accounts, it is a matter of little importance that the withdrawal of~ funds is restricted by short notices.

In this respect also the cheek revives a quality of the bill of exchange which is. used by way of payment but subject to a certain number of days of grace. However, owing to the superior guarantee which the check receives in the combination of cash reserve and approved security, it surpasses the bill of exchange in effecting definitive or conclusive payment. The amount of the unsecured balances, to the extent or which money does double· work, fluctuates as elastically with the monetary require ments of trade as· does the amount of unsecured notes.. In periods with large financial requirements, the bank will increase its loans.

248 SO CIALE CON 0 MI C S As the requirements drop off, there' takes place a return flow of bank funds which is quite analogous to that described by the law of the re turn of bank notes. The clearing method has developed much more rapidly than that of the use of notes. It has profited by the experiences of the latter and from the start has been in a much higher degree a matter of fore thought and conscious purposeful organization. The charter and by laws of' the clearing bank regulate the legal effects of every event ill all its details; the parties submit voluntarily to the established regula t.ions and state legislation has little need of interference. Much de pends on the extent to which the public makes use of the institution of banking. It is one thing when only large business houses lend their support. It is quite another when smaller concerns and, outside of the business world, the public, .properly speaking, participate. The checking system is not well adapted to the needs of.·workers, small traders, petty officials and the like. These classes have the disposal of only small sums; they receive their incomes at· short intervals and consume them as soon as they come in; they reserve no funds. How ever the system is well suited to the middle classes in easy circum stances. Not only in England but in many other' countries it has found' ready adherents among these classes.

The use of payment by-eheck is fairly widespread as compared with the sphere of the use of notes as it was rigidly regarded by the older schools. Originally the note was intended only for the larger com mercial t.ransactions. It was not even thought desirable that the notes should :find their way into the tills of petty traders and they were therefore issued only in higher denominations. Transfers by check, on the contrary, are made among the customers of the bank down .to the smallest amounts, and· are just as careful in effecting domestic payments as business transfers. Where the checking system ihasonce taken root, its sphere of usefulness is wide enough to give rise to a mass habit. The strength of this habit is such as to place the individual under the spell of a universal practice. In the last instance it is this which creates for the check' the quality by virtue of which it operates with the public at large as definite payment. It is the possibility of' accomplishing this feat on so large a scale which gives the checking system the firm position in the public estimation which it now enjoys. The methods of the clearing bank by which guarantee of. payment is established' are after all a secondary con sideration. It. is true that under present conditions the gnarantees cannot be dispensed with; the entire .checking system would be shaken to its foundation if the security of the reserves were to be found THE 0 R Y 0 F SOC I A L .E CO NOM Y 249 insufficient. Confidence in the bank·would be lost and balances would be withdrawn in large proportions. The checking system would be at an end. But while the credit of the bank is maintained, all these considerations have little weight; the public is guided:fi.rst of all by the fact that these transfers have universal currency.

What in England and continental Europe is known as the Lombard business, in the course of which loans are grallted on securities listed on the stock exchange, is looked upon, like the business of discount, as lending on approved security. vVhen prudently managed, it actually offers a real secondary re serve, as the sums loaned may be withdrawn on the shortest possible notice. But it lacks that guarantee which arises from the connection with a business transaction, notes are placed in circulation without the support of new natural values to balance the face value of the obligation. For good reason therefore the Lombard business is confined to a narrower field. If it is transacted on too large a scale it must inevitably interfere with the smooth working of the institution of money. Over and· above the important result of adding materially to the ready money in any country, the institution of credit affects the methods of payment in still another way by minimizing the specific acts of payment. However, under present conditions this proves to be of. far less importance. Between merchants with a regular and lasting business. connection which leads to ob ligations of payment on either side, actual payment may be simplified by mutual credits and debits and a periodic settlement. Such adjustments minimize not only the acts of payment but also the means on both sides. Means of payment need· only be held in readiness for. the balances· which· are not other wise cancelled. On the whole if we disregard settlements on the Exchange, the method of balancing accounts has not gone much beyond the limits of com mercial business intercourse. Clearing house settlements on the English system which reach enormous dimensions are not co~sidered in this connection; they merely supplement the checking system and are wholly unnecessary with a cen tralized organization. We have already discussed their effect in our exposition of the checking system.

Finally the institution of credit also admits of arrangements by which the trans-shipments of paper or metallic money can be done away with. Costs of transportation are thus saved and other considerable advantages secured with out essentially influencing the structure of the economic community comprised of those who pay and are paid. It is therefore not necessary for us to discuss this feature at the present time. In the theory of the world economy, we shall have to discuss a function of credit of greater importance. Precisely as money itself has been evolved, so the method of payment by credit has been developed largely by the tendency to experiment which is con sta.ntly manifested in the practical affairs of life. The task of theory is in the first place directed to a summary explanation of the significance of those things which have been worked out in detail by human ingenuity and skill.

Theory has contributed to the practical shaping of results mainly by criticism which it is able to offer because of the breadth of its knowledge. In this spirit it dictates the necessary safeguards whenever the aggressive impulses of prac tical .life tend to pass the limits of prudence. Theory is a conservative rather 250 SOCIAL ECONOMICS than a progressive element. With scarcely an exception theoretical criticism has been too cautious; so far developments have gone beyond the limits indicated by the rigid discipline of the schools. There can be no doubt that in the future also the practical quest will point out and attain methods which are still pro scribed though they are destined to lead to the creation of media of pay ment bolder and more extensive than any we now dare fancy. § 48. THE NATIONAL ECONOMIC COMMUNITY OF PAYMENT Payment-Price-payments and payments by assignment-Original anti derived iJnoomer-Th.e equation of suppVy and· dern.wnd-N atwraZ and manetOlry forms :.Per8Jofnal balwnces of wares and of. payments.

The economic coucept of payment is presupposed in the phrase, means of payment by credit. In attempting to define·this concept,so important to an understanding of the institution of money, we shall assume an undeveloped economic condition where there are no credit media and the only means of payment is ready cash. At first we shall also assume for the sake of simplicity that we are dealing with a static economy which obtains the same social income year in and year out through a frictionless, undisturbed process of production and acquisi tion and which distributes this income to its members by similarly frictionless sales. We shall first examine the effects on the institution of money resulting from change, friction and disturbances in produc tion, acquisition and the market. We shall then pass to changes in the value of money. Payments in money may he made irrespective of exchange as well as a result of an exchange. Those made under the latter condition may be classified as payments made for natural values and those for money or capital. In our analysis we must begin with payments made for natural values. It is through these that all other payments receive their significance. II money were not able to buy natural values, it would be absurd to lend money and collect taxes.

The exchange of natural values for money is a necessary conse quence of the division of labor in the economic process which has brought in its train the money economy. While the domestic produc tion of the old natural economy resulted in a natural yield from which the household was immediately supp~ied, production ina monetized economy gives a natural yield to every individual of which he may be able to use little or none in his household. These products and the other natural values turned out in the process of acquisition must first be sold in the market to yield a money income. This, finally, must be changed into the natural income which leads to the satisfac tion of needs in the household.

THE 0 R Y 0 F SOC I A L .E C -0 NOM Y 251 Acquisition is considered complete as soon as a money income has been obtained from the sale of the finished natural values. Turning the money income into natural income offers no further acquisitional difficulties; the essential problem here is to observe correctly the margin of use of the household. It thus happens that this purchase, although it also requires a certain market experience, is looked upon as a problem of the household where the ultimate preparation of the commodities for consumption is presumed to take place. In disposing of his products for money, the producer effects a transition from the narrow field of his particular process-a limita tion imposed by the division of labor-to the entire wealth of values in the market. He surrenders the natural form of a specially condi tioned product for which the market possesses only a limited capacity of acceptance. In return he receives money, the general medium of exchange, which enjoys a mass-habit of acceptance and by which he isleft to a gre,ater or less degree master of the market. He may now come forward in the market with his demand. It is this shift from a restricted to a general command of the market that is significant in the concept of payment. In this sense payment is a monetary per formance in exchange.

The process of production in the money economy leads to continu.:. uous sales not merely of consumption goods that· are ready for use and are being transferred to the household, but also of material and per sonal productive means that are used in production and must be re placed. In the case of these sales also a concrete natural service is surrendered in exchange for the universal medium of exchange, money. Payment is made in money. Once the position of money as a· means of payment is established in the market of natural values, the development of the money economy leads to other types of· payment in order fully to profit by the power money confers in the natural market. Loans and credits in the money and investment markets are examples. The payment of money gives to the borrower, according to the amount of the loan, a general market control. By the payment of interest and the re;.. payment of the principal sum, he returns this control to the creditor.

Credit transactions are made in the general means of payment, money. Therefore anyone may become a creditor who receives payments of money through any method of acquisition. Anyone who has to ma,ke money payments may become a debtor. Similarly anyone may fulfil his credit obligations who has received payments of money from some source. The payments of public taxes are also made in money. In a natural' 252 S OCI AL E CON 0 MI C S economy circumstances require' the payment of natural taxes. The state therefore is confined in its expenditures to the primitive natural values offered by the domestic production of its subjects. A tax paid in inoney gives to the state a control of the entire domestic and foreign market in proportion to the, amount of the tax. On the other hand the performance of the tax bears less oppressively on both burghers and peasants as soon as their acquisitional activity is adjusted to yield money incomes. The same is true of the payment of fines and damages in money: it is most effective for the collecting party and least burdensome in the age of the money economy for the person paying.

Those payments which are made without involving any return from the" beneficiary: liberal gifts of every description, donations, alms and foundations are most effectively made in money. There may be special reasons that make a natural performance desirable; it is pos sible that the particular natural form which is ultimately desired mary be represented in the fund from which the donation is made. But if the gift is' executed in the universal medium of payment, it allows the beneficiary the most unrestrained selection of natural values. The same remarks apply to properties to be placed in social enterprises. Finally in the insurance business the payment of premiums "and the recovery of damages call for a transfer of money; indeed wherever the money economY.prevails, such, transfers cannot be differently' con ceived. Payments are classified into two·great groups: price payments and payments by assignment.

Price payments are the monetary consideration for natural values in the market. Strictly speaking,the term includes the payment of interest by a debtor, as interest is also a price; but we shall not con sider it as a price payment, for it does not embrace the particular characteristic of price payment which involves the sale of natural values. Price payments are the auxiliary movements by which in the economic process of sale the principal movement of natural values is maintained. The title, which qualifies men to receive payments of price, is the fact that they ,have' surrendered natural values which have been introduced to the economic process of the nation for ex change. We shall call payments by assignment all those which are made under any title outside the market of natural values. In' part they are payments in consequence of contracts: loans' and· other credit ar rangements, contracts of partnership or other association, insurance agreements, and those of gift., These contracts again.are made either THE 0 R YO F SOC I A L .E, C ,0 NOM Y 253 for a consideration or gratis. Some of these payments are founded on legal obligations as in the payment of fines, damages or taxes. The primary purpose of a payment by assignment is to transfer the control over the market of natural values, which the possession of money confers, from the existing owner to another. In the further course of transactions the purpose is so extended as to transfer also the power to make payments by assignment, be they with or without con sideration, ,by contract' or imposed by law. The creditor transfers his power' of payment to the debtor; the latter returns it to the credi tor. The taxpayer transfers his power to the community, the donor to his beneficiary, the member of an association to the society and the insured to the insurer. ',In sonle cases there is' a return from insurer to insured. It is not an easy matter to find one collective name to describe all these payments originating in so many different titles.

The name, payment by assignment, may be, the most suitable that could be agreed upon. We ,think then of the party paying as the as signor who surrenders a certain general market control, considered as money, to an assignee. An especially important group of, such payments are those discharging a debt which the party bound by contract or law makes in performance of his obligation. We shall later see that the state bases its control of money-matters mainly on the sovereignty which as legislator and judge of last resort, it exer cises concerning the regulation of the payment of debts. The income, 'acquired by participation in the process of production and acquisition, is spoken of as original income. In our science the term is used in several other meanings, but it is this meaning in which it is probably most aptly accepted., The original income is made up of the price;.payments which men receive for the surrender of natural values, formed by their economic activity; we mean by the transfor mation of a natural form into the money-form. Original income is acquired by the farmer, the mine-owner, the manufacturer and every other industrial producer, the merchant, the freighter, the landlord, the physician, the lawyer, the priest, the military officer and the of ficial of the state. Such income is acquired not only by the inde pendent, individual entrepreneur. Every other person, performing some part in the process of acquisition and production, also receives it: the partner in any business-enterprise, the stockholder, and fully as much the wage-laborer or the owner of realty, leasing his real estate.

In 'contrast with the original income we find the derived income, earned directly in money -form. Derived income is received by the creditor, the banker, the mendicant who lives on alms or the charity 254 SOCIAL ECONOMICS of the public, the beneficiary of an annuity. The income also of the state and of other. commonwealths received in taxes and dues of all kinds is derived income. It is paid out of the money-income of the citizens whose income is correspondingly decreased without the com pensating exchange of any natural value, althou,gh the community attends to the task of procuring out of this income the natural values, employed in the administration of government. So long as the assumption of an undisturbed static economy is maintained, the principal movenlent of natural values· must always balance with the auxiliary movement of price-payments. More ac curately, the sum of natural values offered by the participants in the processes of production and acquisition must be equal to' the sum of the money values at the disposal of buyers. Put most briefly: there invariably exists an equilibrium of supply and demand. In a static economy, functioning without progress or retrogression, there must more especially be an equilibrium between money income and natural income, i. e., between the money income and those natural values which are being consumed in the households. This proposition we shall now have to prove.

Let us first assume that all income is original income. In this case we may feel assured that, whoever has brought a natural value into the mechanism of production and acquisition and received a price payment in return, may, in a static economy, count on finqing a natural counter-value of corresponding magnitude offered in the mar ket. The purchaser received the natural value by paying a price. But in order to obtain the money with which to pay, he must himself have placed a similar natural value in the economy. In the process of exchange, there are a series of successively linked pairs. In order to obtain the monetary commodity, each successor in this chain-those both near and remote from the pair under consideration here-had to bring forward a natural value. Somewhere, this chain of exchanges finally breaks as certain persons have not yet brought their wares into the economy. They wait for the successor on whose demand they will bring forward their goods. In·a static economy, the ·farmer, selling grain, will find somewhere in the market, the industrial products which he is seeking, offered by producers, who are in quest of his demand, in order to· obtain by sale the means of payment which they themselves are in need of, in order to push their own demands.

When, finally, the last excessive supply and the last uncared-for de mand have met and effected an exchange, the ring is closed in the series constituting trade. In the static economy, the demand-as far as the supply is concerned-does not come unexpectedly; supply THE 0 R Y 0 F SOC I A L .E C ·0 NOM Y 255 and demand, by long continued relations in the market, have adjusted themselves to each other. The demand is expected in advance, and it thus exercises an effect equivalent to an order. The natural values, of which the demand is in quest, have been prepared by the supply in quantity and quality as desired, enabling the parties to effect the exchanges of the market in easy routine and without friction. In a static economy, the equation of supply and demand is by no means interfered with by the influence of assignment payments or of derived income. By such payments only the individuals are changed, who make up the demand; persons with derived income take the· places of those with original income. A producer may waive the right to receive from the market for his own consumption the natural values to the receipt of which he has become entitled by the products turned in. He may prefer to loan the price realized to a debtor. In this case, the debtor will exercise the demand, and his demand will operate as an order, as soon as the market has become accustomed to it. The . reverse is true when the debtor proceeds to the payment of interest and repayment of principal. He can do this only through natural values which he prepares or which, in more complicated cases, a new creditor, some other provider of funds or his predecessor in the production process has turned in for him. Whenever the state col lects monetary taxes, which are paid from original or derived in come, the citizens, in paying, make over to the tax-collecting govern ment their expectations or opportunities of obtaining market-supplies.

In the more complicated cases, the transfers of market-certificates, ac complished by assignment payments, are very numerous. Thus, for example, the mechanic in debt may pay to the creditor-bank, the bank to the depositor, the depositor to the state, the state to its creditors, and from these the series may be similarly continued. But numerous as the shifts may be, the equation of supply and demand will always have to continue to exist in the market of natural values, where the economy is a static one; neither the quantity of natural values sup plied, nor the amount of the sums of money giving title to demands, undergo any change whatever. We can summarize the result of our investigation in the phrase that the closed enonomy is, for the entire people, a community of payments. By a universal habit of thought, we picture economic organization as a community of production and acquisition; but we shall have to think of it as well as a communityof payments, a communitysettling the mutual claims which arise in the process of sale. With the aid of the universal means of payment, money, the necessary service is per formed in a surprisingly simple manner and without the need of a 256 SOCIAL ECONOMICS superior management. .As long as every individual, in making price and assignment-payments, looks strictly to his own interest, the or derly settlement of affairs is assured. 'Every individual is a member of the community of acquisition who is ready to turn in a natural value, and who thus disposes' of -the natural form; he also is a part of the payment-community who disposes of the money-form. Sales are made as members of the two communities come together in exchange, two by two. In the exchange they change roles, the supplying prede cessor acquires in place of the natural form, the money.;form; the de manding successor in-place of the money-form, the natural form.

'This interchange of natural form and money-form in connection with the equation of supply and demand is sufficient to discharge in due routine the service of the community of payments. No one can achieve the control of the money-form, who ha.s not himself or through another turned in a corresponding quantity of natural values; no one can aspire to the control of the natural form, who has not surrendered a corresponding quantity of values in the money form. It is his personal loss, when one of the contracting parties errs and surrenders a .greater value in the one form than he receives in the other. The equation of values in the total, however, is not affected by this error, for what he overpaid becomes the gain of the other party to the contracteAnyonewho does not wish to employ the authority, conferred by the possession of the money-form, personally to withdraw natural values, will probably perform one or the other act of assignment-payment; he will lend out money, give it away or fulfil his public or private obligations to pay, -and thus surrender his position in the community of payment to one or the other assignee.

The free-trade school has-as far as international commerce is concerned maintained that, in the long run, wares can only be paid for in wares. As we shall see later on, the position does not hold good for the foreign trade of an individual country; it does hold good in a closed economy or in the whole of the commerce of the world. But we shall have to change somewhat the mode of formulation; rather than of wares, we shall have to speak of natural values, generally; and we shall have to substitute a more appropriate phrase for the term "paid," for in every instance payment can only be made, in money. The true meaning of the statement is that the money-values, available for the demand of natural values, are ultimately derived from the sale of natural values which the supply has carried' into the economic process. Thus formulated, the proposition coincides with the equation of supply and demand.

The equation of supply and demand does not hold good -for a single section of a closed economy any more than it does for the commerce of a single nation with foreign countries. The sum of the products which the farmers of a closed state sell, does not necessiuily coincide with the Bum of products and other natural values, which they 'acqufre _for production and for domestic THEOR YOF SOCIAL ECONOMY 257 use. It will, even with entirely undisturbed economic processes, coincide with the latter only on the assumption that the original income of· the farmers has not been reduced by the· payment either of interest on indebtedness, of taxes or any other assignment-paynlents. An agricultural enterprise, heavily in debted and burdened by taxation, will withdrawirom the economy a much smaller quantity of products, than it has itself raised and carried into the social fund. On the other hand,· the group of capitalistic investors, who live entirely from derived income, will be able in its domestic economy to supply itself abundantly with means of enjoyment of every description, without itself producing natural values of any kind. These· men find their natural needs supplied by the values brought to the market by their debtors to cover their payments of indebtedness. It may· be the capitalists do not take out the very natural values brought into the· general market by their personal debtors.

Nione the less at some place in this market corresponding values must be found prepared. What we have· now explained as to individual sections of. the national economy, applies equally to every individual economy. The natural values, coming and going in an individual economy, need not· by any means be equally balanced. The personal balance of natural values Of, as the case may be, the personalbal ance of wares, may be a credit or a debit balance. It will be a credit balance when more natural values, or wares, are sent out; a debit balance, when more come in. When. thus interpreted, the personal balance of wares of the farmer, largely in debt, will be a credit balance; the personal bahince of wares of the capitalist, a debit balance. These are ways of speaking which do not corre spond to the personal relations; and still we adopt them, because since the days of the Mercantilists, they have been habitually used in our science for national and universal economic relations. We shall have to discuss them further in our theory of the economy of the world.

As we speak of a personal balance of wares, we may speak of a personal bal ance of pa.yments. This is the balance of moneys received and paid out in the individual economy or of the payments which, during the economic period, should come in and go out. In a properly conducted 'individual economy, the. personal balance of payments can never petmanently be either a credit or a debit balance. Those who receive larger payments than they are willing to expend in the conduct of acquisition or in the domestic economy, will payout money for some kind of invest.ment; they will purchase securities of some kind, bonds, stocks or real estate; they will make a liquid deposit in banks; or they will turn part of the funds over to other individuals by liberal acts. The banks, on their part, will not permit funds to lie idle, which have been deposited with them; the.y will again place them in circulation by means of their loan-and credit transa,ctions. The hoarding of large sums of unused money, forming a treasure or thesaurus, as was the former practice, will find no advocates under modern conditions. No one will for any length of time so shape his personal balance of payments, as to carry a credit balance in the sense of taking in more money than, in one way or the other, he pays out. On the other hand, however, no properly conducted economy will so fashion its behavior as to' produce a debit balance by becoming bound to expenditures greater than anticipated receipts.

To cover expenses which unexpectedly disturb the equilibrium, and which can not be met from regular receipts, extraordinary measures will have to be resorted to, by availing oneseU of credit, proceeding to· sales or omitting other 258 SOCIAL ECONOMICS intended expenditures. Rather than speak of credit and debit balances, we should speak of the favorable or unfavorable formation of the balance of pay~ ments. The favorable formation is one where payments come in after a manner which always supplies sufficient funds to meet expenses; the unfavorable are those wheradifficulties arise because payments become due before the funds re quired to meet them have been realized. Even in an household of small income, the balance of payments may be favorable, where affairs are well managed and certain reserve~funds kept in readiness; while in an economy of large .income it may be unfavorable temporarily or even habitually, where things are ill man aged and large obligations are assumed, which go beyond the available cash resources.

It is difficult to grasp correctly the relation of money~form and natural form. The· practical point of view for obvious reasons sees first of all the money-form; it looks not upon the whole, but upon things aepresented by the private in terest of the individual whose access to the wealth of the market is secured by the money-form. The scientific mode of thought, on the other hand, insists logically upon the hnportance of the natural form. Here, all individual aspects have· to be united into a total representation, exhibiting the natural values as the nu cleus of national wealth. However this lnay be, science has not, after all, won its insights without itself becoming ensnared in errors of exaggeration; and it has on occasion announced its axiom as though the natural form were the key to all verity, and the money-form were of no import whatever. Socialistic criticism went to even greater lengths. It thought to have found in the money form and in the necessity of transforming the natural form-the community form as Marx called it-into the .money-form, which in an eternal circulation is retransformed into the natural form, the source of all exploitation. The correct view is probably the view which holds that, as long as there is. an econ omy of exchange, the social institution of the money-form cannot be dispensed with; its service in the process of sale may assuredly still be elaborated by more perfected arrangements,. but in no way may be replaced.

§ 49. THE.DEVELOPED FORM OF MONEY The money-form and credit-Natural, monetary and credit economies-Defini tions of money. The economic' community that arises through exchange did not stop with the original form of, monetary payment. The introduction of credit and more especially the adoption of media of payment by credit has greatly extended the scope of the money form. In the first place credit operates by deferring payment in ready money and substituting book accounts. When sales are made on credit, the vendor surrenders his position in the acquisitive commu nity to the purchaser. The latter. gains possession of the wares; the former cannot reenter the market until he has been paid. If we eliminate the possibility that the vendor may protect himself by taking a mortgage or bond, the transaction is wholly at his risk. If the THE 0 R Y, 0 F SOC I ALEC ,0 NOM Y 259 purchaser fails to make the promised payment, the seller loses his position in the economic community. So long as the account remains open the transaction is incomplete; there is as yet no money income because the· vendor is in possession not ·of money but of a demand for money. For the latter no habito£ general acceptance has been established. Such credits are therefore always confined. to a narrow circle in which the personal· and business relations of the parties are such that the creditor can scarcely decline to accept the risk of the transaction.

In those cases where debits and credits. are balanced on the books the use of money is dispensed with and as a means of payment money is economized. It is still used as an instrument of computation. The prices and interest are computed in money and the balance in terms of money is carried forward to a new account. The development of demands for money, which may be used in wider spheres as means of payment by credit, is more important than open book accounts. As typical forms we have become acquainted with commercial paper, drafts, bank notes and checks. Neither of the last two is secured by a full cash reserve. These have all been amply described and we need only summarize their relation to the form of money. A draft· is a provisional means of payment used in restricted business circles mainly to effect price-payments. It has grown out of the needs of commerce that receives its numerical value from the size of the commercial transa~tion covering it. It is an ac cessory means of payment which supplements money. It does not, however, actually become money but always remains a demand for money.

The "unprotected." note is a transformation of the draft. It is made to serve more perfectly as money; it is a means of definitive payment, supported by the general habit of acceptance. Suitable for larger payments in all fields of the national economy, it is issued or withdrawn in amounts equivalent to the commercial transaction which it covers. But even the note is only an accessory means or payment; it augments money but never completely displaces it. To be sure, in the mass habit of acceptance the note has individuality; one might say that it has a "calI:' to independence. It has a double basis: on the one hand it is a demand for money which presupposes money; on the other hand, through the general habit of acceptance, it has be come fundamentally independent of money and stands "on its own." In a closed economy, which needed to· give no· attention to payments in foreign trade, it is not only possible but probable that the note would have achieved this independence in practice.

260 SOCIAL E,C ON OMIC S On the whole the same statement· is true of checks. In' all civilized countries the sphere in which checks serve as money has become so large that we may properly speak of a mass habit of using checks which might. be' strong enough to establish the, check independently of metallic money. We are not concerned here with possible develop~ ments; our object is merely to describe actual conditions. At. present the note. and check are only accessory media of payment. They sup plementmetallic money to the extent of the needs of commerce: i. e., according to the commercial values which secure them. With these limitations notes and checks do service as money in their own fields with precisely the effect of money. The recipient of a note or check becomes a memherof,a limited but· still extensive community of payment. To an amount equalling his receipts he commands the money form and is able to make payments with full effect. .The trans action closes with the receipt of the note or check; a monetary in co~e is received by the man who is paid and who gains a position in the acquisitive community that formerly was the payer's.

The process is most clearly seen in the manner in 'which payments are effected on the central clearing bank. The bank unites. its de positors •into a community of payment. .It enters on its books the values of which its· patrons dispose in monetary terms. Payment is made by transferring a claim to the payee according to the amount of the credit. But does not the simple act of payment in ready money accomplish the same thingYA coin is a material token of value whose temporary possessor is enabled to pay. The note is a transitional form between the original-one may almost say the primitive or naturalistic -coined form and the refined money-form of the bank-book. It re sembles the coined in that it must be physically transferred; but the trained eye of the modern observer sees these notes as precursors of the bank-book. They are merely the loose leaves of an unbound bank book; their use prepares the way for' the coming development.

The credit economy is frequently explained as being in the same manner a development of the money economy'as the latter is of the natural econ9my. This is'a mistake. The transition from the natural to the monetary economy is by far the greater. .There is a fundamen tal difference between the active agents in the two, 'and hence in the effects· of economic activity. In the natural economy the individual household. must rely upon itself and its forces. The process of pro duction is carried on within the limits fixed by the scanty natural re sources of a household. There are· no intermediaries between produc tion and consumption. In the money economy all workers separate production and other' acquisitive activities from consumption by two THE 0 R Y 0 F S 0 CI ALE CON 0 MY 261 intervening acts: a transfer of the natural form to the money form and of this back into the former. This external opposition has the greatest material consequences. Through these two transfers the way is opened to the development,· first, or the division of labor which re leases an enormous social productive force, and second, of the com munity of payments which distributes the socially prepared values.

Not until the rise of a monetary economy did the great, far-reaching national economy originate. The establishment of the credit system did not introduce a funda mentally new set of conditions; it is not even desirable to speak of a special credit economy. What men refer to as the credit economy is merely an extension of the money-economy; it might be called the credit-and-money-economy. By means of loans and ~redits in their various forms individuals other than those, owning property are given control of the property. In particular the group of entrepreneurs is renewed. By means of payment by credit the form of money is expanded; developing natural values offer a commercial security and themselves furnish the means of payment which facilitate .their sale. Thus the avenues of production are enlarged. These are great results but they rest on a monetary economy within which they. function.

According to these explanations any general means of payment, in exchange or outside of it, is money. A means of payment gains universality historically as soon 'as a mass· habit, of use has attached to it. Specie is independent money, money at its best, that on its own account may find universal employment. Bank notes and checks are accessory to this true money. A commercial draft has no general acceptability; it forms the transition to demands of various kinds for money which are accepted as payment by special agreement in each particular case. The term, general means of exchange, that appears in many definitions is too narrow. It does not include payments by assignment and fails to em phasize sufficiently the effect of price-payments. The much used designation, circulating medium, does not properly limit the concept, for a commercial draft also becomes a circulating medium as soon as it is frequently endorsed.

Formerly the explanation was frequently inserted in the definition of money that is "the means of preserving values for the future." Even today this statement, which is a last remnant of the mercantilistic theory of money, is made. But the wealth of the future would be ill conserved if there were not also enduring natural values and' sources of value. The durability of money is assuredly an important consideration, for future economic organizations will need means of payment; but.··it· ·is hardly necessary to add that in all future periods the natural forms of wealth will be developed by the side of the monetary ones. Finally, it should be mentioned that for anticipated and also for unexpected future payments a cash reserve should be established that is proportioned to one's means. The continuing .organization of credit accumulates the reserves ·of individual economies in the banks and thus effects aconside;rable saving in the monetary material.

262 SOCIAL ECONOMICS In many definitions, money, having been declared a medium of exchange, is also set up as a standard of price. This addendum is superfluous. Money could never be a practical instrument of paying prices, if it were not qualified to measure them. With far more propriety money has been described as a measure of value. But the idea which it is desired to convey, may be more suitably expressed in another way. What the phrase is intended to indicate is that money is used to sym bolize values in other transactions than those of exchange. This happens when a later exchange is foreseen, as for example when an official appraisal precedes a sale at public auction. The same thing happens where no sale at all is expected to follow, as for example where the exchange-value of the yield is determined. At the end of this section we expect to take up again the applications and significance .. of computation in money; provisionally let us say that money is indeed the general instrument of appraisal in the processes of private economy.

Money is affected more radically by paper money than by the means of payment by credit. Paper money does not supplement but ousts specie. Ex ternally it is of the same form as the bank note, but essentially it is in no way kindred to the bank note or other forms of credit media. Its origin is not in credit but in the edict of the state, establishing a nominal value. When .we come to discuss the nominal value of money, we shall also go into details as to paper money. § 50. THE ECONOMIC [OBJECTIVE] EXCHANGE VALUE OF MONEY, OR THE VALUE OF MONEY The Ooncept-The law· of its formation, its, historical conditioning and COflt tinuity. Theory.is not likely to unravel the· problem of the value of money in a satisfactory manner until it has grasped the concept of the money form and of the expanded form of money. The older theory was bound to fail when approaching this problem, if for no other· reason than that it never succeeded in defining these concepts and hence could never determine the" quantity" of 'money which determines its value.

In the older theory this quantity was the material stock of money. Actually it should be represented by the entire sum of the income of the economy which is available under the expanded· form of money. A wealthy man who disburses his large income by checks drawn on his bank is unlikely to appraise the value of money.by the standard which would be· set merely· by the sum· of cash which heha ppens to carry at any particular time. As regards the personal exchange value of money, this is so apparent that any further discussion may scarcely be expected. But the conditions governing the value of money in the national economy are different and a more careful. analysis is re quired in order to shed light· upon the concept· of this value and the THE 0 R Y OF S OCI AL ECO N O.M Y 263 law which governs it under the amplified form of money. In prac tical life it is the social economic exchange value of money which men have in mind when they say that money is worth more in one place than another or that it is worth more now than it formerly was. In this connection also, the prevailing scientific interpretation follows the procedure of daily experience. It accepts the value of money as it is objectiv{}lydetermined and refers to it as the objective exchange value.

The same statements which we have ascertained to be true in connec tion with the objective determination of natural values hold good also in respect to money. The value of money is not an objective value; it is the general cross-section of the subjective or personal valuations of money; it is the value as to which all persons· are agreed. We define this value as the significance which all parties concerned attach to money in the economic process under the general price level. More is predicated in the value of money than the mere fact of a general level of prices. Not only is it stated that the goods which are being sold in the market are held at particular prices; it is implied that because of the general price level, money has a certain significance for everybody in the economic process. This significance of the value of money is more clearly experienced when economic changes affect its purchasing power than under conditions of perfect stability. The statement that money has risen or fallen in value does not merely in form us that the general price level has gone up or down, and that things are cheaper or dearer; it gives us to understand that simultane ously with the general change of prices, money has taken on a dif ferent v~lue for everybody. In this statement it is predicated that the relation of the unit of money to that of utility has changed; that in order to cover the same marginal use, more or less money has to be expended. When more units of money have to be surrendered to se cure the same degree of utility, the value of money has. declined, and vice versa. When a general rise of prices has the effect that the pro visioning of all households has to be curtailed, or when falling prices enable it to be expanded, the exchange value of all commodities has risen or fallen, while that of money need not be affected at all.

Accordingly we may define the value of money more accurately as the significance attaching to a unit of money becalise of its relation to a unit of utility. All factors which contribute tothe determination of the general price level influence the value of money. But there are other circumstances which determine the ratio in which units of money are equated to the price level of a unit of utility. These should also be considered. In the final analysis, the general price level is· al ways determined by the sums of the values which make up the supply 264 SOC IALE CON 0 MI C S and demand in the market of natural values. On the .side of the supply, these consist in .all the natural values offered for sale. On the part of the demand we find the sums of money which are available for price payments. It is a· matter' of indifference in what particular monetary form these amounts exist. Sums which are available in bank notes or checks as· well· as in commercial· paper are all to be counted~, No less are those amounts which are credited and carried tQ an open account. These all inflQ.encethe formation of price. Of all the prices paid in the market, those payments made for consump tion goods are decisive for the exchange value of money; it is from these that the prices of productive' means are del"ived. In a static economy, with neither progress nQr retrogression, the money income is all used for the purchase of the consumption values necessary for the households. Thus we arrive at the brief .expression that in a static· economy, the general level of prices is .determined by the newly produced natural consumption values on the one· side and the mone taryincome on the other.

Payments by assignment do not influence the exchange value of money. They have no other effect than that they bring about a change in the individuals who are entitled to dispose of the money. The national income is neither immediately increased nor diminished by them. Indirectly, however, more remote. effects may arise and may result in appreciable. modifications of the national income because of the influence of these payments upon the distribution of· the social in come. The number of units of money to be used to express a unit of utility cannot be predetermined. They may he many or few. As a ;matter of fact, the. value' of money has been .quite diverse both at various times ,and in different localities. It is invariably a matter that is historically, determined. At "any given time every economy finds the value of money· determined by prior development. .During a new period the development proceeds continuously from this condi tion with historical precision. No matter what factors operate on the side of natural values or of money to influence the general price level, they always operate fr'om the basis of a preexisting level of prices. The existing price structure is never changed simultaneously in .all its parts .. ·. New·facts affect only individual·prices. Momentous influences on the price level accumulate little 'by little with the cease less occurrence of new events which· affect ever new .sections of the market. In a particular case the·· parties to a transaction compute a new price from the one with which they are familiar. "Ifsuch alid such things cost so and so much, then I shaUhave to ask this or that price for my wares"; or, "I can only pay such and such a price": THE 0 R Y 0 F SOC I ALE C ·0 NOM Y 265 thus any formation of prices is popularly worked out. When the conditions of the market are more disturbed, the new prices will de part more rapidly and in larger numbers from the old ones; but no matter· how great the disturbances of the price level, even at times when they lead to a violent upheaval of the value of money, the leap to the new value always proceeds from the basis of the old value, his torical continuity is maintained.

The theory of the value of money must start from the service of money, just as that of the value of wares starts from their serviceability. The pre vailing doctrine has failed to do so; it fell into the error of drawing the exchange-vahle of money too closely to the pattern of that of wares. It has sought to construct the closest possible parallel between the· two. Just as the exchange-value of goods was founded in their money-price, so the exchange value of rnoney was to be found in the "goods-price" of money. By this phrase they meant the quantity of goods which are to be obtained for money or rather for a unit of money. Properly speaking, however, money has no price. We pay prices in money. It is only in the primitive exchange of the natural economy that each of the two commodities transferred is the price of the other. :Furthermore it was held that for both goods and money supply and demand are determining. This is also mistaken; as far as money is con cerned neither the concept of stock nor of need applies to it in the same sense in which it applies to wares. The theorists were therefore' compelled to resort to all manner of modifications of the two concepts, changes which were more or less forced. It was recognized that the credit substitutes also influence the "stock of money." Obviously the extent to which specie and credit sub stitutes are used is also. important, and the idea took root of appealing to a third factor of the supply as well, the rapidity of the circulation of the monetary symbols. But specie, credit media. and rapidity of circulation are only the elements for the auxiliary movement of money; the prevailing theory never succeeded in assembling the elements in the one concept of money income.

In connection with interest on capital we shall have to discuss the particular sense in which the money market speaks of the value of money. § 51. THE MONETARY MATERIAL AND THE B'ULLION VALUE OF MONEY UOUns, standard of coinage, price of coinage-The material wnity 01 inter national monetary systems~Bullionist theory, money· made, of valueless ma terials. Among all civilized peoples and for. a long period a mass habit of use has attached to the precious metals. These metals do not satisfy all the requirements of a perfect money. As we shall show later money is subject to a variability of value because the quantity of money in circulation depends on the fluctuating productivity of the mines. This detracts from its usefulness as money. Aside from· this 266 SOCIAL ECONOMICS consideration coined money is excessively bulky for large payments. Credit instruments are particularly convenient media of payment in these cases; they perform the service with scarcely any difficulty and almost without expense. On the other hand the pr'ecious metals do possess in high degree.the quality of divisibility which is important in minting. They have greater durability than most other monetary materials. Moreover they have purity, lustre and a high bullion value due to their scarcity: all qualities that were particularly im portant in the beginning of the monetary economy and that are not to be overlooked today. Ultimately the historical force which was invoked by the use of precious metals among the most advanced peoples determined the dominance of these, metals over all other monetary materials. Unity of the monetary systems is essential to an unchallenged functioning. Thus the backward economies were forced to adopt the material used for money by the nations controlling world commerce unless they wished to be isolated from the money economy of the world. The. ousting of silver and the transition to the gold standard, which most advanced nations have accomplished with the last decades, is to be traced back to this cause. However, it is not part of our task to describe these events which are not adapted to purely theoretical exposition but demand extensive materials that may only be collected by empirical methods of investigation.

In the following analysis we shall take advantage of the right to adopt the method of theoretical simplification. We shall assume a condition in which the money of a country consists exclusively of gold and requires no supplementary coins or small change. As before, we shall disregard all international relations and assume a closed social economy entirely dependent upon its own resources. While a certain amount of the gold· which is held in reserve to secure the payment of notes may be uncoined, the gold destined for circulation is coined. Only for large transactions is gold in bars used. Our next problem is to· explain the significance of the coined form of money. The standard of coinage determines. the number of units of money: i. e., pieces of money, to be coined from a unit weight of bullion. Thus 1395 ,Marks are made from one German pound 1 of fine gold in ten and twenty mark pieces, or 139.5 ten mark pieces or 69.75 twenty mark pieces. Applying the standard of coinage of the Austrian crown to the German pound (the law expresses it in the kilogram of fine gold), 164 ten crown pieces or 82 'twenty crowD 'pieces are ob1 Trans. note: ZOllpfund. The customs union adopted a. unit equalling a half kilogram.

THEORY OF SOC I A LE CON 0 M Y 267 tained. Accordingly the bullion content prescribed by the coinage law is 1/69.75 of a German pound for a twenty mark piece and 1/82 for a twenty crown piece. The technical process of coining is so accurately controlled that this content can actually be adhered to except for altogether insignificant variations. Since the coinage law provides that every coin must be accepted at full value, whose depar ture from the. standard does not exceed certain narrowly defined limits of error, the twenty mark piece and the twenty crown piece are to be held equivalent to 1/69.75 and 1/82 German pound of fine gold respectively. To this extent,· then, the well known definition of Goldschmidt for a standard coin applies to the gold coin: i. e., "a bar or ingot of precious metal legitimized or approved by the state as re gards purity and fineness." The stamp of the unit on a twenty mark or twenty crown piece, not too greatly worn, is evidence that it contains the quantity of gold prescribed by law.

From this point of view the form of the coin is a mere matter of authorization whereas the true worth of the coin, the bullion value, is determined by the metal content. The latter would also seem to give its essential nature to the coin. However, all of this fails to en lighten us fully as to the significance of the coin as the standard money. Certain controlling provisions of the coinage law have not yet been. considered. The state reserves the exclusive right of coinage. No one other than the state may impress upon the material the mark which makes it money. No other evidence of the money content than the impress of the state is permitted. To what other authority could a function so important to the regular course of affairs be entrusted without in curring the risk of grave abuses Y It is true that in earlier days even the government did not always prove deserving of the confidence to which they pretended. Only too frequently they shamefully abused the right of coinage by debasing currency and later by issuing worth less paper money in order to increase revenues. However, for a con siderable time now in all modern countries the function of coinage has been recognized as an important duty which every government has faithfully discharged. Wherever this stage of development has been reached the restriction of the right of coinage to governmental author ity has been upheld in the recognized interest of the public.

Similarly all people have a common interest in the legal enforcement of the validity of the currency created by the state. Once the state creates money that shall serve as legal tender, in which all payments shall be made except those for which a contract stipulates payment in a different kind of money, the monetary system has reached a stage 268 SOCIAL ECONOMICS of the greatest possible simplicity. The state then protects all indi viduals against the chicane of those who would refu'se to receive the universal: means of payment in settlement of their demands. The power of the state to give currency to its coins gives the legal basis for the mass habit of. acceptance which always forms about every well administered domestic currency. Whenever foreign coins or bars of gold are to be' used in particular cases, special agreements to thisefIe.ct are required; the universal means of payment is to be found exclusively in the form of the familiar domestic coin which it becomes almost impossible to dissociate from the idea of money.

Every people who recognize a specialized monetary system come to regard the precious metal itself merely as merchandize. They look upon it as nothing more than the material of which money is made, and respectit as money only when it is coined. The public at large and even the great majority of business men have become so thor oughly accustomed to the coined form of money and .repose such confidence in the official coinage, that they take little thought of the material content of the coins. This is true more especially as fe,w who use them know accurately the precise quantity of gold each coin should contain. However if the currency should again be debased as in· former' times, it would soon come to pass again that the fineness of the material would be tested and the wejght verified on the jeweler's balance. With the present historical background, the magic of .the coin form nowhere goes to the length of making the material of the money: a matter of indifference.

That the coin has never attained this position despite the govern mental privilege is explained by a section' that is incorporated in every system of coinage regulations. This· section supplements the restriction by virtue of .which the right of coinage. inheres· in the state alone. Every private individual has the right to have coined f01"' his account gold which he delivers to the government mints. For the monetary material. which he .surrenders, he receives the amount of money determined by the standard of coinage. In most countries a brassage charge is· made for this service; but there are coinage laws which meet the public need to the' extent of coining gold free of all charges. It might be held that this transaction between the state and a private individual consists in an exchange of wares for money. In. fact it is customary to speak of the" coin-price" received by the ·indi vidual from the state, but in truth there is no exchange, and there is no price in this transaction. The two parties do not meet as supply and demand and no trace may be found of the determinations of value THE 0 R Y 0 F SOC I A L .E CO NOM·Y 269 which accompany an exchange. All that happens is that the mechan ical process of minting, which as a rule the state performs for itself, according to the monetary standard, is now performed at the request of a private individual. A bar of gold is turned in, weighing one German pound and is divided into 69.75 or 82 pieces which the state fashions into the form prescribed by the coinage regulations and des ignates as 20 Marks or 20 Crowns. These names are simply state ments of the amount of the fine metal content. They do not express an exchange value, and, as we shall see later on, do not in the proper sense establish a nominal value. The concept of the value coins, which we all automatically associate with their names, arises exclu sively from their value in exchange which is formed socially in the market. Even where the name of the coin is a direct derivative of its weight, as, for example, the Pound which occurs in so many la~guages, the exchange-value concept is immediately associated with the weight name. The former so impresses everybody that it inevitably trans forms the weight name into a value name. This term of value re mains current even after the coin has long since relinquished the mere semblance of its original weight.

The governmental prerogative of minting is largely compensated for by free coinage for private aecount, and by the effect which the exercise of this right has on the value of the coin. If this right did not exist and the state were negligent in theprocess of coining for its own account, so that it supplied less than the number of coins re quired for trade, then the value of money would necessarily rise, perhaps to a marked degree above the value of the bullion. The re verse condition, that with over-abundant coinage, the value of money would fall below the value of the bullion content, can never become a practical fact. It will be seen at once that as soon as the depreciation of the money became noticeable, people would. withdraw money from circulation and melt it up in order to take advantage of the higher value of the metal. By the right of free coinage the determination of the quantity of money is left to private individuals. Dealers in precious metals and speculators will recognize. opportunities to realize a profit from differences which may arise between the price of the coin and the price of the metal. The expenses which arise in these manipulations irrespective of brassage, such as transportation, loss of interest and the like, are small. The coin price will probably always be the most important component of the market price. Though the fluctuations of supply and demand exert their influence in the money market and the metal market, the market price of gold is never able to depart widely from its coin price. On the other hand, the dis270 SOCIAL ECONOMICS parity which may arise between. the two· prices when the right of free coinage is abolished may be seen in the fall of the price of silver since the cessation of its free coinage.

The result of· our investigation of the significance of the coin form, may be summarized in the conclusion that in principle money and the monetary material are to be distinguished, but that in practice the values of money and· bullion coincide wholly, or almost wholly. The right of free coinage has important effects in the international money economy. International monetary systems are kept apart by the jealously guarded independence of the state coinage laws and by the historically trans* mitted diversi ties of the standards of coinage. On the other hand they are united by the homogeneity of the monetary material in all countries which are on a gold standard. The value of money by virtue of the right of free coin age is held in agreement with the value of gold in the world market save for trifling fluctuations and departures. Thus a condition is brought about in* ternationally by the material identity of gold which after all closely approaches complete monetary unity in the essential effect of constancy of values.

rrhe more accurate and detailed exposition of these relations properly be longs in the theory of world economy. In the closed social economy, another problem demands our consideration. If the relationship between bullion and money is such as we have represented it to be, the question must be raised in what manner the value which is transferred to money from its material is related to the exchange value which it deriyes from its service of the pay ment of prices. The relationship of bullion and money being such as we have shown, it would seem that money derives its value from the value of the monetary material. But we have deduced the exchange value of money from another source, namely from its service in the payment of prices. Does this not in volvea contradiction? There is in fact no contradiction; the two ideas may be shown to be en tirely con~istent. The resultant force of two streams from different sources establishes the value of money. It is a compound of the value in uses which the bullion acquires fromit~ manifold industrial employments-its use for pur poses of ornament, for utensils and, technical services of every description..:. and of the exchange-value which it derives from functioning as a means of pay ing prices. Each of these two streams, the use service of the material and the service in payment of the money, flows independently. It is the same con* dition that one encounters so often of a commodity receiving a direct use value from its consumptive employment in the household and acquisitive-or yield value from .its assignment to production.]'or instance when a landowner himself consumes a part of his crops and sells another,his valuation will be determined by both uses. The decisive marginal utility is ascertained by balancing the services against each other. The same conditions hold in the case of money; its value is the resultant of the joint force of the effect pro* duced by the service of· the coin as a medium of exchange and by the industrial uses of the gold.

This joint resultant is noticeable in the value of gold as well as in the value of money. The value of ,gold is increased because of the fact that it satisfies THE 0 R Y 0 F SOC I ALE CON 0 M Y 271 not only industrial but also monetary demands. The value of money stays in close accord with the value of gold which is thus ascertained. Under pres ent conditions the monetary use is the more important of the joint forces, since far more gold is coined than is used industrially. We may go still farther and insist that each of the two uses is sufficiently independent so that it would continue even though the other should disappear. The practical use of gold would not cease, should the minting of gold be discon tinued. No more would its use as money end, if the state were to prohibit its industrial use and were to seize all gold for coinage. In both cases an enormous disturbance of values would follow, as occurs whenever the conditions of demand are fundamentally displaced. The disturbance would be greater if its use as money were to cease, because this employs the larger quantity of the metal; but in either case after some time a regular series of values would be re established on the new basis.

The prevailing bullionist theory follows a different reasoning. According to this theory the bullion value of money is equivalent to the use-value of the monetary material. When the exchange-value of money coincides with the bul lion value, it shows simply the use-value of the bullion. The current bullionist theory could not conceive of money made of valueless material; it holds that money could surely never measure the value of commodities if in its own material it did not possess value. However, this constantly repeated argument is not conclusive. It is true that worthless money could never be a standard of value in commodities; it would therefore be useless as a standard of value. But it does not follow that money is worthless merely because it is made of worthless material. The material of paper money is as nearly worthless as can be imagined. Paper money is useless in foreign countries and does not serve as money in international transactions.

Yet, despite the worthlessness of its material, the history of almost every coun try shows that it is fitted to perform the function of money in the markets of natural values and therefore to measure .the value of commodities. As soon as a circulating medium has gained general acceptability, it also acquires exchange value whether the material of which it is made has exchange-value or not. Paper money for which the mass habit of acceptance has been historically formed is given and received not merely as a symbol of value, as a mere order to deliver natural values, but exactly like metallic money itself it becomes a vehicle of individual value. As soon as the general public is assured of the universal acceptability of paper money, each of the individual economies participating in the general traffic attaches its personal exchange-value to the money by the same rules that determine the exchange-value of metallic money; on the basis of the generally adopted appraisal of its exchange-value, paper money will acquire a social economic exchange-value exactly as· does metallic money.

It may possibly also be objected that every exchange-value presupposes use value and that therefore money must also have use-value if it is to have exchange value. This argument also is inconclusive. A means of transportation does not need to have any other use than the carriage of goods in order to possess exchange-value. No more does money, the means of transportation in the traffic of value as it might be called, have to convey use by virtue of its material composition in order to have exchange-value. It is sufficient, if the money facilitates the circulation of other things which have use-value. As we have shown in an earlier connection, the prevailing doctrine denies it~ 272 SOCIAL E CON 0 MI C S own principles if it develops a theory of its own of the exchange-value of money. If money-value were always riveted to the use-value of the monetary material, what influence could the facts of the demand for money, rapidity of circulation and quantity of credit substitutes still exert?

The kernel of truth in the bullionist theory is this: the use-value of the precious metals was significant during the period of the adoption of money. Had silver and gold not been esteemed as materials for ornament, for use in utensils and the like, these metals would never have been selected to serve as media of eLXchange in trade. Metallic money had to plead its cause to traffic by its material value, in order that the mass-habit of use could attach to it. By virtue of its material value it inaugurated its service as money. But once the mass habit was formed, the historical aid which was indispensable to its in troduction could drop out without endangering' its further use as money and its fitness for use as an exchange value. Once this money-value is acquired, in his torical continuity it becomes the basis on which the money-value of the future will further assert itself and will continue its course.

§ 52. THE NOMINAL VALUE OF MONEY The nominal value of small change and silver-coin-The nominal v'alue of th.e banknote and the check-The nominal value in chan [les of 8tandard~Deba8e ments of ooin-Paper money-](napp's Hstate theory of money," and nominalis,m. The monetary unit, the declared standard money, is insufficient to fulfil the requirements of trade. Over and above the means of pay ment by credit, it is everywhere supplemented by other sorts of coins. We find as such the commercial coins, small change and the current silver money. We shall not have to discuss here the commercial coin, which is intended for foreign trade. Small change and current silver are used exclusively in internal dealings; they are constituents of the monetary system of the country. The small change, made of base metal or of silver, is intended for small payments which cannot be made in the larger coin. Small change is composed of fractional coins. As such it must be in deter minate proportions to the unit of the standard money. The regularity of payments throughout the country would be seriously impaired, should this token money be subject to fluctuations of value in terms of the standard coin. For the purpose of regulating this value, the state issues a denominational value-order, declaring how many frac tional coins are to be computed to the standard coin; the order directs that the fractional coins have to be accepted in smaller payments, up to a certain amount, in this proportion.

To enforce the denominational value-order, it is necessary to issue small change below value, i. e., with a bullion content or value, lower than the denominational value specified in the coinage law. If small change were brought out at full value, there would be danger of the THE 0 R Y 0 FS 0 C I ALE C'O N 0 MY 273 coins becoming excessive in value with the smallest rise of the market price of their metal. This, then, might tempt the, public to withdraw them from circulation and melt them down. The issue below value has the further advantage that the coins are of more convenient form, while the state realizes a profit, which can be conveniently used in covering the considerable expense of coining. The right of free coinage cannot be granted in the case of small change. The decision to coin these must be left exclusively to the state, otherwise the denominational value could not be maintained.

If private persons might give orders to coin, the value of the coins would always be reduced to costs, i.e., metal value plus expenses of coining. Silver currency is an intermediate form between small change and standard-money. A.s the best known illustrations, the thaler in Ger many and the silver gulden in Austria may serve. We have here an historical result of the peculiar circumstances under which the coun tries on a silver standard and double standard accomplished during the last decades the transition to the gold-standard. This transition was accomplished by a severe drop in the price of silver, which made the rejection of the old stores of silver standard-coins the source of such amazing losses, that it was decided to retain such remaining bullion as could not be immediately transformed into small change. This was done by the express retention of the traditional, compulsory acceptance law of historical origin. By a different method, the United States of A.merica have obtained their silver currency; but it is not part of our task, and cannot serve our purpose" to enter into details of this sort. A.ll that we can wish to accomplish, is to deter mine the concept of this silver currency. Now, as heretofore, pay ment of even the largest sums of money may be lawfully offered in this money .as well as in the standard. The seller or the creditor is bound to accept this payment. As' a matter of fact, to be sure, it is never used for really large payments, but only for such as rise only slightly above the level of those in which small change is used. For the rest, these coins are legally, too, placed on a level with small change; their coinage for private account is barred-and the state goes even further, renouncing for .itself as well all ·further coinage.

The coinage-Ia-w accords to them the nominal value of a fractional coin. Although issued in its' day as of Iull value, this current silver has become depreciated by the drop in the price of the metal. Its nominal value has been taken over from the old relation existing between gold and silver before the silver crisis, and stands high above the money-value.

274 SOCIAL ECONOMICS The nominal value of· small change. and of silver currency is to be defined as the value established by the· state for the fractional· coin in terms of the money-unit. But the command of the state does not by itself accomplish the end. Should the state issue more fractional coin than the traffic can absorb, the state's edict would never be able to uphold the denominational value. The ultimate source for increased denominational value of the fractional coins is to be found in the socially established exchange ..value of the standard-money to which they are allied by the· universal practice, regulated by government. In their increased denominational value, they participate in the value producing effect of monetary service, which has created the exchange value of the standard-money. This is the same effect which maintains the exchange-value of the gold money high above the level at which the gold price could maintain itself, were gold to derive its value solely from its industrial uses. . It is also the same effect as that to which paper-money, similarly prepared from worthless material, owes its value in the last instance.

The nominal value of banknotes and checks signifies something very different from that of the fractional coin. Banknotes and checks are not worth. less than face value; their nominal value is placed at par,· the amount at which they are to be taken up. Every well administered bank of issue or clearing-bank maintains the nomi nal value, without being directed to do so by some supporting govern mental command. There are .many countries where banknotes, un aided by obligations which have been legally imposed, remain in cir culation at full face value;· certainly in the case of checks a compul sory rate of exchange has never been considered. The monetary standard has no nominal value. It does not even ad mit of such a concept; for there is no higher money to which it might be subordinated, like a fractional coin, by a law to that effect. Nor is that notion of. a nominal value, which is peculiar to the payment by credit instruments, presently to be redeemed, to be applied to the metallic standard. The currency legislation,which establishes com pulsory acceptance of the standard money, does not set its nominal value. Even such an edict would fail to operate in the case of price payments, where parties are always at liberty to agree upon the sort of money in which the price is to be paid and, in case they decide to pay the price in standard money, are free to. agree upon the price.

The state has no power to control the exchange-value of money; the only way to bind it to a constant norm would be by market-legislation. The state would have to make the hopeless attempt to fetter by law THE 0 R Y 0 F SOC I ALE CON 0 MY 275 the prices of all things or the general price-level. In. the case of assignment-paynlents the parties also are at liberty to determine the species of moneY,as well as the amount to be paid. This is not true in the payments of debts which do not call for especial kinds of money. The creditor is bound to accept payment in standard money. But even here the compulsory acceptance of the gold standard coins does not in point of fact carry a command regarding value; the law declares nothing further than that the l\fark or Crown pieces, issued by the state, are the coins in which the debt of Marks or the debt of Crowns may be legally discharged. A broader intention thus to en hance the value of either Mark or Crown is wholly foreign to the law.

In countries with a double standard it is necessary in the interest of unity and the stability of the monetary system. to bring the standard gold and silver coins into a firm relation of nominal value to each other. It would never do to permit their relative value to depend on the fluctuations of the market prices of gold and silver. As to the value of the standard money as a whole, nothing is determined by this edict of nominal value either. Just as regard to the certainty of transactions demands that the monetary system should possess homogeneity in itself, so it renders imperative the preservation of unbroken unity in the transition from standard to standard. With every change of the standard, whether it be in the metal employed or the standard adopted, it is indispensable that the value be regulated by laws, which the unit of the new standard money is to possess in comparison with the old.

There must, especially, be provisions as to the manner in which obliga tions, demanding the old standard, are to be fulfilled in the new standard. The relation of the two standards to each other should be so regulated, that neither the party making nor the party receiving pay ment is detrimentally affected. The law fixing the nominal value in the case of change of standard, should never have the effect of inereas ing the value of coins, as it does in case of fractional currency. With a mere change of the coinage standard, the relation is to be computed accurately according to the ratio of the weights of the old and the new coin; in case of change of the standard metal-and similarly in case of change from paper money to metallic standard-the proportion will be taken to aid the computation, which exists between the old standard and the foreign standards employing the newly selected standard metal. The test of the correct computation of the relation is that the market prices in the new money remain in exa~tly the same rela tion as the old market-prices.

276 SOCIAL E CON 0 M Ie s Debasement of coinage in former times introduced changes in monetary standards with the intention of obtaining a pecuniary gain for the state. A coin of less weight was issued under the same name as the old coin, subject to a law fixing the nominal value so as to place it on a par with the old and heavier coin. The power of the state is equal to the task of enforcing a law of nominal value for those payments which the state itself makes to dependent officials and military men; it is equal to the task of enforcing it in the case of the payment of debts to its own creditors, as well as in case of the payment of debts in private inter course; the judge, called upon to decide the question in litigations, is bound by the state coinage law. But as against the market, the state proves powerless; price-payments are beyond the jurisdiction of the state, they are exclusively con trolled by the agreements of the parties of interest.

When a sovereign state finds itself without the means of defraying expenses and issues irredeemable paper-money, it adopts the outward form of banknotes; but the nominal value attached to its symbols of mone'y is not secured by cash reserves or approved evidences of indebtedne,ss as in the case of banknotes. The nominal value of paper-money is the value which the state decrees for its notes in terms of the standard metallic money; it designates the number of units of metallic money for which the state's note is to be accepted in payment. What has just been said in regard to the debasement of coins applies to the effect of this law fixing nominal value. The state can enforce it in payments to its em ployees, and it can also enforce it in payments of debts. But it can never main tainan order of this sort in the market of natural values. Let us confine ourselves' to the exchange-traffic of a closed economy. We dis regard all speculative influences to which the rate, of exchange of paper-money in the international markets is sulJject. This is influenced by the probability of ultimate redemption, a condition which we do not feel called upon to discuss at present. It is quite clear that in such an economy the formation of the exchange-value of paper money in the market is controlled by exactly the same law as the exchange-value of money generally, and that the e:ffect of an exces sive issue of paper-money must be essentially the same as that of an excessively augmented production of the precious metals. When the state increases its emissions of paper money in rapid succession to enormous sums-as happens in times of great financial stress-the depreciation of paper-money must result even more rapidly and in a higher degree than has ever occurred through the depreciation of metallic money. The effect on the national economy will, there fore, be much more ruinous. At short intervals of time the exchange-value of money will be lowered again and again, just as the individual economies have barely adjusted their plans of acquisition and expenditure to its limits. Those who have just been confidently na,med among the wealthy, will perhaps be wealthy no longer; those who to-day were able to meet their obligations, will perhaps not be able to meet them tomorrow. Numerous and momentous displacements in acquisitions and possessions will take place. They, necessarily lead to disas trous disturbances of the entire national economic process.

The evil results of experiments which have so far been made with paper money, issued as a sovereign state's signal of distress, prove absolutely nothing against paper-money in itself. In its own nature, paper-money is by no means of uncertain or fluctuating value; it becomes so only by the circumstances under which it is ordinarily issued. If once the state should issue it, no longer in its THEORY OF SOCIAL iE,CONOMY 277 own immediate and selfish interest, but solely in order to substitute a well regulated monetary s;ymbol for the costly, inconvenient hard money, which de pends so much ort the results of the production of the precious metals, the effect twill be an entirely different one. If the owners of the notes but feel assured that in seeking to purchase commodities they will not be exposed to loss· from the face-value of their paper, the old prices will still be asked in every sale.

The reappraisal of all market-values to fit a new standard, on the part of all buyers and sellers without exception, is an exceedingly complicated and labori ous process which the market is not overready to undertake. Experience has shown in many places that the mass-habit of acceptance for emergency money of the state is easily enough formed-in this direction the power of the state proves exceedingly effective-and that at first, so long as the state's emergency money is issued only in moderate amounts, no higher domestic prices will be contracted for in paper than those in metal had been up to that time. Nor vlould the market be revolutionized even later by a well regulated body of paper-money. The notes would take over the exchange-value of the coin, in the place of which they would appear. They would retain this value without being exposed to the disturbances which, to-day, have their origin in the production of the precious metals.

That state-controlled paper-money has not already successfully occupied its position in the economic and financial world, may be explained from the fact that money must serve its purpose as a means of payment not only in domestic but also in foreign commerce. 80 far in the commerce of the world, only gold has historically acquired this mass-habit of acceptance. It is this fact which secures to gold, for the present, the controlling position also as domestic money. Gold money, as a free, social institution, has prevailed beyond the buundaries and the oppositions of states. These have so far made a common regulation of paper-rr.loney .impossible, and will possibly prevent it for a long time, if not forever. All the states which have been forced to issue emergency money and whose citizens become accustomed to the use of paper-money, would surely have preferred, when they proceeded to the stabilization of the disordered monetary system, to regulate paper-money as such, rather than assume the enormous bur dens incidental to the resumption of the metallic standard. But the losses, threatening the national economy from the isolation of its monetary system, are the greater of the two evils. The costly, inconvenient coin, affected by the fluctuations of the production of precious metals., is the less objectionable evil because it best secures an international constancy of values; it is thus prefer able to the best regulated paper-money, confined to a single· state.

Knapp's "State Theory of Money" starts from the fact that the original "pen satoricaP' payment by weighing the metal has been abolished in every country, and that men pay everywhere by surrendering imprinted pieces, invested· by the authority of government with authoritatively definite validity in units of value. Re calls this "charta!" payment; by the side of which prevails "giral" payment or transfer of a credit on some central office.. Money involves "chartal" pay ment. In order that legal regulation should be able to confer on money a definit,e validity in units of value, the idea. of value-units (~Iark, F'ranc, Rubel, Pound Sterling) must have been formed during the period of pen satori cal pay ment; the legal regulations must have set out from this concept. .At the present stage of development, the Mark can no longer be defined as the 11395 part of a 278 SOCIAL ECONOMICS pound of fine gold. It has to be defined in the sense of the German coinage legislation, as the third part of the earlier unit of value, the German Thaler.

The manner in which the state settles the value of money is by determining the basis on which units may be used in the payment of debts, especially in, pay ments made to the state itself. Knapp's nominalistic theory, contrasted with the bullionist theory, is an im portant advance. He finds that fundamentally the historical value-unit of a developed money has become independent of the metallic basis; and he succeeds in setting up a broader concept of money, surpassing that of bullion or cash. For monetary policy, too, this theory is of importance. Kna,pp declares the state bound to regulate the system of payments; bound, especially, t<J steady the rate of exc'hange of the state's domestic currency, in its intercourse with im portant adjoining countries. He decides, that, for this purpose, the state has mea,us at its disposal which,' according to the strictly bullionist theory, must be barred.

The advance of Knapp's nominalistic theory is, however, counterbalanced by the narrowness to whiCh it restricts the problem of the theory of money. I{napp is satisfied when he has discovered that the historical value-units of money have been formed; he makes no attempt whatever to explain how they could have been formed. As far as he is concerned, at any rate, the fact that money possesses value deserves no further consideration; all he knows is, that there are prices, and levels of prices. But how-it must be asked-can the concept of a value-unit be understood by anyone who cannot explain how money be comes valuable? And what do we learn by a price-level, symbolized by mone)r, if weare unable to evaluate the sums of money which are paid out as prices? As little as K.napp is able to explain how money has historically attained the standard of its value-unit, is he able to explain how the value~units, which have arisen historically, continue to change; neither can he explain in any way whatever the meaning of the changes which have occurred. To this extent, his theory, with its self-imposed limitations of enquiry,' is indeed anything but an advance on the old bullionist theory, which stated the problem of the value of money with its fluctuations of value. Despite inadequate theoretical foun dations of the latter theory, it nevertheless made important contributions to the solution of his problem. A satisfactory theory of money will have. to unite both points of view; it will have to recognize the way in which the value of money is historically conditioned, detach it from its metallic basis, and dis close the final law of its social formation and change.

The theoretical shortcoming of Knapp's theory shows itself also in the prac tical application, made by himself to monetary policy. He overestimates the power of the state's determination of the nominal value, originating in the legal system of the state. The state can never succeed in finally settling, as regards other countries, the rate of exchange of its money; the state canIlot maintain the nominal value of an excessive issue of paper-money. At this day there ex ists no full-fledged 5ecurity for the money-system of any country, other than its being made to rest on the gold-basis, which alone has hitherto historically won the mass-habit of acceptance throughout the world. The power which the state exercises over money by virtue of the determination of the nominal value proves, as regards the effect in world-economy,. too feeble. By its value in the com merce of the world, money shows itself to be not an institution of" the state but of society, which the state must be held to regulate on the basis society affords.

THE 0 R Y 0 F SOC I A L ·E CON 0 M Y 279 § 53. THE LAW OF CHANGE IN THE VALUE OF GOLD '1 1 he change of the general p1-ice level-The depremation of money-M oney-value and C1:,edit-crises- H .A.ppreciation of money" and "general overproduction/' The changes in the value of money which we shall now have to discuss are exclusively those of its exchange-value. Changes in the use-value of the monetary material and in the rate of interest, "the price of the use of money," "as it is generally called, only indirectly influence the value of money. The direct effect of the value of the material is so insignificant that we need not further discuss it; that of. the rate of interest we shall consider in its appropriate connection. We need not speak at all of nominal value. Under normal conditions the state is not called upon to label the standard money with a nominal value which is intended to fix its value and to affect the exchange value of money.

Every change in the value of money presupposes a change in the general price level, but not every general shift in prices points to a change in the value of money. A progressive rise of the general price level-a similar distinction would have to be made for the process of a progressive reduction of prices-may be accompanied by such a marked reduction in the supply of goods that the public has to curtail its consumption of the daily necessities as well as its total consump tion. But a progressive rise of the general price level may also occur while the margin of supply for the mass of the people relnain un changed; more than this, the margin may possibly be extended at this time. There is an essential difference between these two conditions of rising prices. In the final analysis the first affects the natural values. The second affects only money. The first arouses a deeper and more general anxiety; the second affects only individual groups of people and excites a theoretical rather than a personal interest. The rising prices which are at present to be observed in all directions, may pos sibly be a resultant of the two causes.

Scientific explanations are agreed as to the practical aspect of the two conditions. They are at variance as to the terminology to be used in presenting the problem. A large number, probably the ma jority of economists speak in both cases of a change in the value of money, distinguishingthe change of money-valueitself from that of the supply of commodities. However, as we shall immediately see, the distinction does not wholly coincide with the opposition of the two conditions. Before defining our attitude in the matter, we shall 280 SOCIAL ECONOMICS enter upon a more accurate investigation of the actual course of events. The most frequently discussed and the most obvious case of change in the value of money is the shrinkage of value or depreciation of money, as it occurs in consequence of an increase of the available amount of standard money. Excessive production of the precious. metals or excessive issue of paper money will both alike lead to de preciation. The equation of supply and demand is disturbed by the increase in the quantity of money. The demand, which originates with the money form, increases, but the supply of natural values remains the same. Neither the gold miner who has struck an exceed ingly rich deposit or the state which issues paper money in huge quan tities are under any compulsion to introduce beforehand into the economic organism natural values in equal amounts which would pre pare the ground for their demand. They appear as purchases in a market which they have never entered as sellers. Therefore they do not meet ready sellers without disturbing the market. Their demand may possibly contribute to an enlargement in production and to an increase in the supply. However this possibility is another matter which we shall presently consider in another connection. For the present let us simplify our investigation by assuming that production is incapable of development-or is capable of only slow growth. Under such conditions the newly added .. demand can only be satisfied as it 'secures a part of the supply by outbidding the earlier demand. The prices of those articles to which the new purchasing power is directed will rise. In further sequence the prices of all those goods will rise which are demanded by the sellers who have been thus enriched. If the quantity of new money which is thrown into the market is suffi ciently large, the entire general level ofprice.s must ultimately rise.

Within the restricted area of a mining district which is scantily sup plied with commodities· the increase of the demand in times of abun dant yields will be strongly felt and will rapidly exert marked effects in increasing prices. In the broad world markets during short periods of time, the effects are less perceptible, for the significance of the an nual increment of gold, however great, is sman when contrasted with the enormous monetary income of the entire world. However, when the metallic supplies remain large during a longer period of time, their effects will be felt by virtue of a summation of the annual in crements even in the world market. The multiplication of commercial paper of banknotes and checks does not act to depreciate the money market, for all these means of payment by credit are the outgrowth of the monetary requirements of THE 0 R Y OF SOC I A L ,E'C ON 0 MY 281 increased commercial intercourse; their appearance does not affect the equation of supply and demand. The well managed bank does not force its credits upon commerce. It extends its discounts only so far as the business would offer acceptable commercial drafts. The amount of the new means of payment which it issues on discounting a draft is limited by the quantities of products which have been freshly introduced into trade. Credit media come and go with the movement of commodities in business ; they sublimate the natural values and are their companion values in monetary form. They afford one of those surprising examples of free, individualistic, yet .social institutions which are more perfectly adjusted to the general interest than would be possible through the most thoroughly considered, purposeful con trivances of the state. The voluntary organization of credit has achieved what no regulation of state-contrived monetary systems has heretofore been able to attain: a standard which receives its quantita tive norm from the service of money itself. Banks and the large business houses whose commercial paper the banks discount are the ,guardians of this standard. The volume of minted gold money which is valid in all modern states is determined by the manifestation of the spirit of enterprise in mining operations. Nowhere has this been sub jected to the monetary system; it is not even being attempted. Great as the disturbances in the economy of the world may be as a result of the decreasing value of .gold, entrepreneurs will continue to mine gold' as long as in so doing they realize personal profit. In contradis tinction, credit-money fulfills the spirit of the institution of money as enlightened statesmanship would determine it. The latter would provide for impounding the gold obtained from the mines in order to hand it over to trade and to reappropriate it as the needs of com merce may demand.

It must be admitted that the voluntary reorganization of credit is not always equal to the magnitude of its task. It has often hap pened that the possibilities of credit have been abused. Although men have learned much in the school of experience, such abuse is likely to recur frequently. The great profits derived from rapid and extensive improvements in production tempt new enterprises which too rapidly exceed the limits fixed by commercial opportunity. Credit is then extended to the products of overproduction which lack the fundamental inner qualifications by which credit is merited. The ease with which means of payment are magically procreated by an in cautious administration of the credit system seduces the spirit of en terprise, especially when accompanied by declining rates of interest and carries enterprise farther and farther into the labyrinth of over282 SOCIAL ECONOMICS production. Once credit is thus misapplied, the equation of demand and supply is interfered with. The frantic demand of entrepreneurs, operating with unsecured means of credit, enhances the price of pro ductive means. These increased cost-prices raise the price of products as well. Then, when overproduction ends in crises of liquidation, the balance of supply and demand is disturbed in the opposite direction; there remains a supply of goods for which there are no buyers and the edifice of high prices collapses. The fabulous rise of prices is succeeded by a precipitate drop, with economic after-effects which may be devastating and of long duration, until finally the equilibrium of supply and demand is reestablished.

The process of depreciation through an increase of metallic currency or paper money runs a different course from start to finish. Its progress is without ebb. It moves slowly, sometimes exceedingly so, without the strain of violent disturbances; but its effect on the mone tary system is more lasting and more deeply rooted. There is no section of the nation '8 economy which does not suffer change, for money is the instrument which binds together all individual economies. The abuse of credit and overproduction after all affect only certain groups directly, and even mediately are not likely to make themselves felt in all directio:q.s. By the depreciation of money all prices are affected. The prices are permanently increased; the· value of money is permanently changed. Because its value becomes unstable, money functions with constant friction. The plan of all private and public economies is adjusted to the presupposition of the constancy of the value of money; money is given and received by those who assume that in the future it will have the same purchasing power as it has here and now. When this assumption proves incorrect many expecta tions remain unfulfilled, numerous economies are disorganized and more than one is ruined. The groups who suffer most severely un der such conditions are those drawing fixed incomes: officials, wage earners, pensioners and annuitants who are unable to increase their capital. These men can no longer meet their accustomed expenses; they must reduce their demand, and this in turn reacts on the in comes of those whose Cllstomers they were.

Depreciation of money may result not merely from an inflation of the currency but also from changes with respect to goods. In the theory of changes of value and price we have already had occasion to discuss the effects which may result from the operation of the law of diminishing returns with regard to the value and price of products of the soil. Our explanation must now be amplified. In our earlier discussion we pointed out that the market follows one course when the THE 0 R Y 0 F SOC I ALE CO NOM Y 283 effect of the law which increases costs is compensated or even over balanced by advances of industrial technique or accumulations of capital and another when this is not the case. We shall now have to distinguish these two cases. The development is more favorable under the first set of condi tions. To be sure the historical continuity of price-formation will lead from increased costs of production to increased prices for the products of the soil. The latter are important constituents of the gen eral price level, which will therefore rise. The prices of raw mate rials which the soil supplies, enter as elements of cost into their fin ished products. Similarly the cost of subsistence enters into the prices of products, in so far as it influences the rate of wages. Everything will be more expensive, but the marginal utility of food and expenses generally will not be raised. Despite the increased expenditure of money, men will be able on the average to provide for themselves as abundantly or more so than they did before; the per capita budget of goods will not have decreased. If we assume that a hundred weight of wheat was formerly sold for 10 units of the standard money, its price will now be higher, perhaps 12 units. However, since the per sonal margin of use has remained the same or has even been lowered, the larger price is the expression of the same or a lower marginal utility: i. e., the value of money must have fallen, since the same unit of utility is expressed in more units of money. On "the side of com modities" the value of money has changed.

In the second case the price for products of the soil will rise but the per capita volume of the means of sustenance is also changed. It will fall and the margin of use will be higher. If the price of a hundredweight of wheat rises to twelve units as in the first case, al though the relationship of price and quantity is the same, conditions will have changed radically in that the hundredweight of wheat rep resents a different number of units of utility. In all households the unit quantity of food is represented by a higher marginal SUm in the scale of needs and thus an exact foundation for arithmetical com parison is lacking; the increased degree of intensity of the new mar ginal use cannot be arithmetically compared with the older and lower one. Only one thing is clear: the average personal appraisal of a hundredweight of wheat, i. e., its general subjective economic evalua tion is higher. B;ecause this is so the conclusion will be reached that the increased price level is an adequate expression of the changed value of goods. Change has occurred, not in the value of money but in that of wares. Indeed it is not proper to say that the value of money has declined when the price of wheat rises in a transitiou from 284 S 0 CI ALE CON 0 M I C S a' period of ample supply to another with a restricted· supply and. a higher rate of marginal expenditure. On the contrary, precisely because money indicates the changed value of goods and the altera tion of the general price level, it has shown itself to be an accurate and stable measure of price. Money under these conditions is analo gous to the column of mercury in the thermometer which shows itself to be a reliable gauge by registering a higher index with a rise in temperature.

But if the ratio of agricultural products to population becomes permanently and to an increasing extent unfavorable, the entire struc ture of the national economy must be shaken. Under these conditions, an increasing proportion of the productive means must be devoted to raising the fruits of the soil which are indispensable to the main tainance of life. Industrial technique will not be able to effect further advances. It ,vill even become impossible to maintain the established technological procedure because productive means will have to be withdrawn in greater and greater quantities from industry and turned over to agriculture. Large numbers of individuals will be deprived of their means of earning a livelihood. The total national income will be lowered in both its monetary and its natural forms. Gradu ually the entire economy of the nation will collapse; its capital will be consumed, yields reduced and industries will be forced to resort to a less intensive 'use of. capital. All this will be accompanied by progressive thinning out of the population and subsequent upheavals of the price-level and the value of money. The course of these latter events, however we shall not trace in our present investigation.

It has become customary to contrast depreciation with the appreciation of money. As the former is the result of an increase of money, so the latter is popularly held to be the result of glutting the market with commodities, until the need of money exceeds the available amount of this medium. Under these conditions it is thought the prices of all commodities and the general price level must fall and the value of money must rise. One may well imagine conditions in which there would be no' demand, supported by an adequate supply of money, for the abundant and newly manufactured products and natural values. Even the resort to credit, and payment by means of credit media might not be suf ficient to raise the demand to the extent of the supply. Hence producers would have to cut their selling prices in order to dispose of their stocks. This doctrine of the appreciation of nlOney originates in the fact that its authors have misunderstood, or, at any rate, not altogether properly interpreted the idea of the "need for money." It goes without saying that we cannot impute to the discoverers of the quantitative theory the gross blunder of deducing the demand for money 1 from a "need" 2 for money in daily life. But we are 1 Geldbedarf.

2 "Geldbediirfnis.

THE 0 R Y 0 F SOC I A L ,E, C,0 NOM Y 285 safe in maintaining that their doctrine of the appreciation of money was largely dictated by their leaning in the theory of the value of money excessively to the pattern of the theory of the value of goods. Especially they draw too close an analogy between the concepts of the need of money and that of goods. The appreciation of money of which they treat is the exact counterpart of the law of demand applicable to natural values just as depreciation is the counter part of the law of supply. As a matter of fact the need of money is nearly akin to the need of commodities. In the monetary economy, everyone meets his personal need of goods by first covering the need of money. The latter, like the former, is also influenced in the final analysis by the magnitude of the needs and the law of satiety. On the other hand it must not be forgotten that the monetary need is also determined by the historical value of money. Those who speak of the appreciation of money misjudge the power of this historical value for which every business man makes allowance in calculating his costs and prices. The appreciation of money would thwart the anticipations of every business man, would depress all sales prices and would decrease or wipe out all expected profits. Should it go still further, it would become impossible to recoVer costs incurred and would bring in its train a universal crisis which would be more ruinous than any crisis engendered by overproduction in particular industries. Is it possible to believe that such a crisis will break upon the commercial world just as a general progress in all phases of produc tion and of the preparation of values is being effected?

An old doctrine asserts correctly that a condition of "general overproduction" cannot arise. Partial overproduction is possible inasmuch as a particular type of production may be excessive, passing the general limit and reaching a point at which sales cannot be affected for the surplus product. "General overpro duction" is inconceivable. .A condition which would seem to warrant the use of this term would not be overproduction at all but would be a general produc., tion of surplus. The increased volume of products would bring with them in creased sales, "wares being paid. for by wares," natural values exchanging for other natural values. Where natural values increase in adjusted proportions there will be no difficulty in arranging for payments without provoking crises. Money will circulate more rapidly as sales are more numerous than before. Means of credit payments will be better organized as all improvements in their organization have been made under the increasing pressure of the need of money.