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Leading Facts Concerning Money
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The Measure Of Consumers' Wealth








In all stages of social development the economic motives that actuate
men remain essentially the same. All men seek to get as much net
service from material wealth as they can. The more wealth they have,
other things remaining the same, the better off they are, and the more
personal sacrifice they are compelled to undergo in the securing of
the wealth, the worse off they are. Some of the benefit received is
neutralized by the sacrifice incurred; but there is a net surplus of
gains not thus canceled by sacrifices, and the generic motive which
may properly be called economic is the desire to make this surplus
large. Except in a perfectly isolated individual life, there is
opportunity for ethical motives to affect men's economic actions.
Altruism has a place in any social system of economics, and so have
the sense of justice and the positive compulsion of the law. Altruism
does its largest work in causing men to give away wealth after they
have acquired it, but conscience and the law powerfully affect their
actions in acquiring it. These are forces of which Social Economics
has to take account; but the more egoistic motive, desire to secure
the largest net benefit from the wealth-creating process, is one of
the premises of any economic science. This involves a general pursuit
of wealth; but men seek the wealth for a certain personal effect
which comes from the use of it, and they measure it, when attained, by
means of this subjective effect.

How Specific Utilities are Measured

As the essential quality of
wealth is specific effective utility, we measure wealth by estimating
the amount of this quality, and it is always a consumer who must make
the measurement. He must discover the importance to himself of a small
quantity of a particular commodity. The hunter must find out how much
worse off he would be if he were to lose a small part of his supply of
game and endure some hunger as a consequence. In doing this he gets
the measure of the effective utility of any like quantity of game,
since any one specific part of his supply is as important as any other
and no more so. The estimate of the importance of such a supply of
food material has to be made in this specific way, by taking the
amount on hand piece by piece, and not by gauging the importance of
the whole of it at once.

Value the Measure of Specific Effective Utility

If any consumer
will estimate the importance to himself of a single unit of goods of a
certain kind, and multiply the measure so gained by the number of
units he is appraising, he will make a measurement of the value of the
total amount.

Values not based on the Importance of the Total Supply of Goods

It
is essential that the consumer, in determining the value of a kind of
goods, should not estimate the importance of the supply in its
entirety, since that would give an exaggerated measure. Measurements
of value are always made specifically, and single units of the supply
of goods are appraised apart from the remainder. The total utility of
atmospheric air is infinite, since the loss of the whole of it would
mean the total destruction of animal life; but the specific utility
and the value of air is nil, since no one limited part of the supply
has any practical importance. A roomful of it might be destroyed with
impunity. So the cereal crops of the world, taken as a whole, have
almost infinite importance, since their destruction would result in
universal famine; but each bushel of grain has an importance that is
relatively small. The loss of it would impose no serious hardship upon
the average consumer, since he could easily replace it. The value of
the crop is determined by the importance of one bushel taken
separately and by the number of the bushels. If we estimate the
importance of one unit of the supply of anything, express the result
of the estimate in a number, and then multiply this by the number of
units in the supply, we express the value of this total amount. The
total utility of it, on the other hand, is measured by the benefit
which we get from the supply in its entirety, or by the difference
between the state we are in when we have it all and that to which we
should be reduced if we lost it all and were unable to replace it. To
measure any such total utility we contrast, in imagination, our
condition with the full supply on hand and a condition of total and
hopeless privation, in so far as these goods and similar ones are
concerned.

This Method of measuring Wealth Universal

These principles apply
as well to the economy of a solitary islander of the Crusoe type as
they do to that of a civilized society. A Crusoe does not need to
measure values for purposes of exchange, but he has other reasons for
measuring them. It is for his interest to use his own labor
economically, and to that end he should not put too much of it into
one occupation and too little into another. When, by reason of a large
store of wheat on hand, the specific importance of it is small,--or,
if we use a common expression, when the utility of the "final
increment" of it, which a man might secure by making an addition to
his supply, is small,--he should divert his labor to raising goats or
building huts, where the utility of the increment of product to be
gained is, for the time, greater. The solitary man thus well
illustrates the act of the society which, in its own peculiar way,
sends labor from one department of industry where the "final utility"
of its product is small to another where it is larger. It is all done
by measuring the specific importance of goods.[1]

[1] For extended discussions of the relations of utility and
value the reader is referred to the works of Jevons, Menger,
Von Wieser, Von Boehm-Bawerk, and Walras. A study of
"effective" utility and its relations to value, by the writer
of the present treatise, is contained in the New Englander
for July, 1881.

The Utility of Producers' Goods

Consumers' goods have a direct
utility, which is a power immediately to serve a consumer. Instruments
of production, on the other hand, have indirect utility, since all
that they are good for is to help produce things that render the
immediate service. They have productivity, and this has to be
measured in determining their value. What we need to know about hoes
and shovels, hammers and anvils, spindles and looms, etc., is how much
power they have to create the goods that we want for consumption. Here
again the measurement has to be made in the specific way. The capital
goods have to be taken unit by unit if their value for productive
purposes is to be rightly gauged. A part of a supply of potatoes is
traceable to the hoes that dig them; but in valuing the hoes we do not
try to find out how much worse off we should be if we had no hoes at
all. We endeavor simply to ascertain how badly the loss of one hoe
would affect us or how much good the restoration of it would do us.
This truth, like the foregoing ones, has a universal application in
economics; for primitive men as well as civilized ones must estimate
the specific productivity of the tools that they use, and make hoes,
shovels, or axes according as the procuring of a single tool of one
kind becomes more important than procuring one of another kind.
Indeed, the measuring of the utility has to be done, as we shall soon
see, in a way that is even more specific than this; for the man has to
determine not only how many hoes he will make, but how good he shall
make them. The quality of each tool has to be determined in a manner
that we must hereafter examine with care. The earning power of capital
is, as we shall later see, governed by a specific power of
productivity which resides in capital goods.

Cost and Utility

A ripe consumers' good, in exhausting itself on
man, benefits him; but during the period in which it is being prepared
for use, when it is receiving utilities at the hands of successive
producers, it has an opposite relation to the men who handle it. In
making the material useful a man confines and tires himself. He is
willing to do it if the reward that he expects will more than pay for
the sacrifice, but not otherwise. Moreover, this sacrifice itself has
to be estimated specifically in a way that is akin to the method of
measuring utilities which determines the values of goods. It is
necessary for a man to gauge the sacrifice which is entailed on him,
not by his labor as a whole, but by a specific part of it. He finds
himself in the evening feeling the fatigue and the sense of
confinement which the day of labor has imposed and asks himself how
much it would burden him to work a little longer. If what he can get
by this means pays for the extra sacrifice involved in thus getting
it, he will work for the few minutes, but otherwise he will not. His
objection to a few minutes of additional work measures what we may
call the specific disutility of labor; and men, whether they be
primitive or civilized, are forever making such measurements. They
consider how much it will cost them to add slightly to the length of
their working day or how much it will benefit them to shorten it. In
this way they measure the specific disutility of labor rather than
the total disutility of it, since they do not gauge the relief that
it would afford to cease working altogether.

The Increasing Cost of Successive Periods of Labor

It is easy to
work when one is not tired, and the first hour or two of labor may
even afford a pleasure that largely offsets the burden that it
entails; but it is hard to work when one is tired and painfully
conscious of the confinement of the shop. Adding anything to the
length of a working day imposes on a man the necessity of working at
the time when the burden is greatest; and shortening his day, for a
like reason, relieves him of some of his most costly toil.

The Natural Length of the Working Day

Any laborer, as his work
goes on, hour after hour, is certain to reach a point at which it is
unprofitable to go farther. However greatly he may need more goods, he
will not need them as much as he needs rest and change. It may be that
he has worked twelve hours, and that, by working longer, he can
improve his wardrobe, his food, or his furnishings; but if he has a
tolerable supply of such things, he will hardly choose to add to it by
staying in the shop when his strength has been exhausted and he is
eager to reach his home.

Specific Cost at its Maximum a Measure of Specific Utility

Two
very important principles are at work whenever a man is performing
labor in order to create wealth. The more consumers' wealth he gets,
the less important to him are the successive units of it, and the more
do these successive units cost him. The tenth hour of labor adds to
his supply of food, but this addition is not as important as the
supplies that were already on hand. If we divide the supply into
tenths and let the man produce a tenth in each successive hour, the
first tenth, which rescues him from starvation, is the most important,
while the last tenth, which comes nearest to glutting his appetite, is
least important. This last increment, however, is produced by the
greatest sacrifice, for it is gained by making the working day ten
hours long instead of nine.



Let the hours of the working day be counted along the line AD, and
let us suppose that a man gets unit after unit of consumers' wealth,
as he works hour after hour, and the units grow less and less
important. The first and most important we may measure by the vertical
line AB. The second is worth less, the third still less, and the
last one is worth only the amount CD. This means that the successive
units of what we may call general commodity for personal use have
declined in utility along the curve BC. On the other hand, as the
man's labor has been prolonged, it has grown more and more wearying
and irksome. The sacrifice that it involved at first was almost
nothing, but the sacrifice of the succeeding hours has increased
until, in the last hour, it amounts to the quantity expressed by
CD.[2] As the man has continued to work, the onerousness of working
has increased along the ascending line AC until the point has been
reached where it is so great that it is barely compensated by the
fruits of the labor. The man will then work no longer. If he were to
do so, his sacrifice would become still larger and his reward still
less. Up to this point it is profitable to work, for every hour of
labor has brought him something so useful that it has more than paid
for whatever sacrifice he has made in order to get it. Beyond this
point this is not the case. The line CD represents the cost of labor
at its maximum, and it is this which acts as a measure of effective
utility and value.

[2] If we should try to describe all the possibilities in the
case, we should take account of the fact that a man may get a
positive pleasure from his first hour or two of labor and
construct a figure thus to express this fact:--



AC is the curve representing the sacrifice entailed by
successive hours of labor.



In like manner we should have to recognize the fact that the
utility of some kinds of goods may not reach a maximum with
the first increment, and should construct a utility curve to
express this fact. BC here represents the increase and the
following decrease in the specific utility of the supply of
an article of this kind.

The Coincident Measure of Cost and Utility

It now appears that the
line CD signifies two different things. It measures the utility of
the last unit of the man's consumers' wealth, and it also measures the
sacrifice that he has incurred in order to get it. These are opposing
influences, but are equally strong. The one, of itself, makes man
better off, while the other, of itself alone, makes him worse off. At
the last instant of the working day they neutralize each other, though
in all the earlier periods the utility secured is greater than the
sacrifice incurred and the net gain thus secured has kept the man
working.

The Point at which Utility and Disutility are mutually
Neutralizing

At a certain test point, then, production acts on man
in such a way as exactly to offset the effect experienced from the
consuming of the product. Man, as a consumer, has to measure a
beneficial effect on himself, and, as a producer, he has to measure an
unpleasant effect. He finds how much he is benefited by the last unit
of wealth which he gets for personal use, and also how much he is
burdened by the last bit of labor that he performs. If this sacrifice
just offsets the benefit derived from the final consumption, it is the
best unit for measuring all kinds of utilities. A man secures by means
of this final and most costly labor a variety of things, for if he
works up to this point every day in the year, he will have at his
disposal, say, a hundred hours of labor in excess of what he would
have had if he had worked a third of an hour less each day. The
product of this extra labor will be taken in the shape of goods that
are also extra, or additional to whatever he would otherwise have
secured. They will represent special comforts and luxuries of many
kinds. The values of these goods may be measured and compared by means
of the quantity of labor that the man has thought it worth while to
perform in order to get them. If he values one of them highly enough
to think it worth while to work for an extra period of twenty minutes
at the end of a day in order to get it, it may be said to have one
unit of value; and if he is anxious enough to get something else by
doing this on two successive days, this second article may be said to
have two units of value. The savage who, by working for an extra hour,
makes some improvement in his canoe, and by doing the same thing on
another day makes some improvement in his food, establishes thereby
the fact that he values these two additional bits of consumers' wealth
equally. If he uses ten hours of the same costly kind of labor in
making an addition to his hut, he proves that he values that gain ten
times as highly as he does either of the others. Establishing values
by means of such final costs is a process that goes on in every stage
of social evolution.

Unlike Results of Creating Wealth and Using it Summarized

Wealth,
then, affects a man as a consumer in one way and the same man as a
producer in an opposite way. In the one case the effects are
favorable, and in the other they are unfavorable. At a certain test
point the two effects may be equally strong as motives to action, and
so may be said to be equivalent. The man is impelled to work by his
desire for a final unit of wealth, and he is deterred from it by his
aversion for the final unit of labor which he will have to incur if he
secures the benefit. If he performs the labor and gets the benefit, he
neither gains nor loses as the net result of this particular part of
his labor, though from all other parts of his labor he gets a net
surplus of benefit. It is natural to measure all such economic gains
in terms of sacrifices incurred at the test point where these are
greatest. This is the labor one would have to incur in order to add
the means of gratification to his previous supply of consumers' goods.

Minimum Gains offset Maximum Pains

Running through and through the
economic process are these two different measuring operations. Man is
forever estimating the amount of harm that wealth does him when he is
in the act of producing it, and the amount of good it does him when he
consumes it; and there is always to be found a point where the two
amounts are equal. It is the point at which gains are smallest and
sacrifices greatest. It is at this point that men measure values in
primitive life and in civilized life. How in the intricate life of a
modern society the measuring is done we shall in due time see; for the
present it is enough that we perceive the universality of the law
according to which value is best measured by the disutility of the
labor which is most costly to the worker. Organized societies do
something which is tantamount to this. It is as though the whole
social organism were an individual counting the sacrifices of his most
costly labor and getting therefrom a unit for comparing the effective
utilities of different goods.

How Primitive Man tests Value

It is a mistake to suppose that what
is essential in value depends on the existence of an actual market in
which things are exchanged for each other. In a market, it is true,
values are established and their amounts are expressed in ways that
cannot be adopted in primitive life. When we buy a thing, we help to
fix the value of it and of other things which are like it. The mere
ratios in which things exchange for each other in a market are,
however, by no means the essence of value itself. That is something
deeper and is one of the universal phenomena of wealth. Value, as we
have said, is the measure of the effective utility of things, a kind
of measure that every one is frequently compelled to employ, whether
he is making goods for himself or buying them from others. A producer
who has the option of making different things for himself needs to
know what variety of goods can be increased in supply with the
greatest advantage to himself as a consumer. Adding to the supply of
any one of them is getting a "final" or "marginal" unit of consumers'
wealth. It is something that is needed less than the things that were
already on hand. Without making such a comparison of the importance of
marginal units of different commodities he cannot use his resources in
the way that will do him the most good.[3]



The terms marginal and final mean essentially the same
thing, but the modes of conceiving it differ. When utilities
are thought of as supplied one after another, the last is the
least important. We may represent a man's enlarging
gratifications, not by such a mere series of quantitative
increments, but by an enlarging area. We may draw a series of
concentric circles, beginning with the smallest, and let this
central area inclose the most necessary forms of consumers'
wealth. When we draw a second and larger circle, we inclose
between it and the first one a zone which includes those
forms which come next in importance. By continuing to draw
circles we reach an outermost one which bounds a zone in
which are included the least important of the consumer's
acquisitions. These are the things which he gets with his
costliest increment of labor, and the things which lie beyond
the circle last drawn would not pay for the sacrifice which
acquiring them would cost. In the accompanying figure the
fifth zone includes these "marginal" forms of wealth.

How Isolated Men measure Final Utility

If a cave dweller possesses
a store of one hundred measures of nuts, he measures the final utility
and the value of this store in the manner which we have described. If
he were to be deprived of the whole stock, he might starve, but this
fact does not afford the basis of the value which he puts on the nuts.
He measures the importance of this consumers' wealth specifically. He
tests the effect of losing one measure and no more, and finds that he
could lose the single measure without suffering greatly. The
difference between having an appetite fully satiated and having it
very nearly so is not serious.



Let AD represent the savage's total supply of food. AB will
represent the utility of the first unit; CD of the hundredth. If we
supply the food unit by unit, the utility of the successive increments
will decline along the curve BC. When the man has a hundred units of
food, no one unit of it is worth any more than the last one, since if
any one were taken away, the last one could be put in the place of it.

The total absolute utility of the food is measured by the area
ABCD, but the total value will be represented by the rectangle
ADCE. The area EBC measures the surplus of utility contained in
the earlier units in the series.

The Motive for measuring Values in Primitive Life

Even the cave
dweller would have to measure values, and would thus have to apply the
principle of final utility, because he would need to spend his limited
productive energies in the way that would do him the most good. When
he is nearly satiated with food, he needs other things more than he
does food stuffs. If he has secured so much of one product that any
additional amount that he may get by an hour's labor would be of less
use to him than what he could get of some other product by the same
amount of labor, it is important for him to change his occupation and
produce that thing of which an additional unit--which will perhaps be
the final unit of this more desirable article--has the higher degree
of usefulness.

Final Utility and Labor Cost

On the supposition that a small store
of roots and nuts were incapable of being replaced by any amount of
effort and that no other food were to be had, the utility of it would
be indefinitely great, since the man's life would depend on this one
increment of food alone. A man would value that life-sustaining good
for what it would do for him and without any reference to the amount
of work he had performed in order to get it, or to the amount he would
have to perform in order to get another store like it. On the
supposition that by labor the man could replace this essential supply,
the effective utility of it would be gauged by the sacrifice he would
have to make in order to replace it. The effective utility of any unit
of a good that an hour's labor will produce can never be more than
enough to offset the disutility of a marginal or final hour of labor;
and thus even a single unit of replaceable food stuff, even when it
stands alone and constitutes the whole supply, is valued according to
the cost of getting another one like it. A man will prize it according
to his dread of the sacrifice involved in getting the duplicate. If he
gets this by adding an hour of labor to his day's work, this fact is
an evidence that the importance of the original supply of the food is
measured and expressed by this personal cost of replacement; and as
any similar quantity in a large supply of food can be duplicated by
the same amount of labor, it appears that, by a standard based on
cost, the effective utilities of all units are equal, that of each
one is measured by the "disutility" of an hour's labor and that of the
whole supply is this amount multiplied by the number of units that
this supply contains.[4]



Although we may use the terms final utility and effective
utility in a way that makes them nearly interchangeable, it
is clear that the qualities for which the two terms stand are
by no means identical, and that effective utility must be
studied in any complete analysis of value. In distinguishing
final utility we assume that the units of the supply of goods
of a particular kind are furnished one by one, and we measure
the absolute utility of each unit. The line AB measures the
absolute utility of the first unit supplied. This
measurement does not take any account of the cost of
replacing this unit, for it does not recognize the
possibility of replacing it. What is estimated is the
absolute importance of the service which this first unit of
the article renders, on the supposition that, if this first
increment of the supply were wanting, the service would not
be rendered at all. It is, in like manner, the absolute
utility of the successive increments supplied which declines
along the curve BC. DC measures the absolute utility of
the final increment, and the area ABCD the total absolute
utility of the supply. If the goods can be reproduced by
labor, the total effective utility is less, since it is
measured, as we have seen, by the amount of sacrifice which
the replacing of one lost unit would entail multiplied by the
number of units in the supply. It is the amount expressed by
the area AECD which is the amount of the value of the
goods, since measure of effective utility and value are the
same, both in the case of a single unit and in that of a
total supply.

We have discovered two reasons why the effective utility of
any one of the earlier units is equal to the absolute utility
of the final one. The first reason is that, if any one of
them were lost, the final one would be put in the place of it
and the consumer would suffer no loss except what would be
entailed by going without the last unit. The second reason is
that if the consumer should lose any one of the earlier
units, he could replace it by the same amount of labor that
would replace the final one. We have seen that the line DC
of the figure expresses not only the absolute utility of the
final unit of goods, but the disutility of the labor of
reproducing it or of reproducing any other unit. The cost of
replacing the whole supply is expressed by the area AECD,
on the supposition that the units are replaced, one at a
time, by means of labor performed at the end of several
working days when the sacrifice is greatest. Total value is
thus quantitatively equivalent to total effective sacrifice
of replacement, as well as to total effective utility. If,
by adding a brief period to the length of one working day, a
man can make good the loss of one unit of the goods, by
adding the same period to the length of a number of working
days, he can make good the loss of the total supply. For
simplicity we assume that the man's physical condition
remains unchanged, and that an extra hour of labor at the end
of any one day costs him as much as it would at the end of
any other.

How Primitive Man measures the Productivity of Labor and
Capital

There is a truth relating to producers' wealth that
resembles the truth that we have just stated with regard to consumers'
wealth. The more consumers' goods of one kind a man has, the less is
the value that any one of them has to him. The more producers' goods
of a given kind a man has, the less is the efficiency that any
particular one of them possesses as an aid to labor. The last bit of
bread serves the man himself in a less important way than does the
first, inasmuch as it gratifies a want that is less intense; and the
last implement of a given kind--the last hatchet or spade or
arrow--helps him less in his productive operations than did the first
one. On the one hand, we have the law of the diminishing utility of
successive units of consumers' goods, and on the other hand, we have a
parallel law of the diminishing productivity of successive increments
of producers' goods.

The Necessity for measuring the Productive Powers of Capital Goods
even in Primitive Life

Now, it is necessary for every producer,
though living in the simplest possible manner, to measure in some way
the efficiency of the last unit of each kind of productive instrument
that he uses. He has, let us say, a certain number of hatchets and of
arrows, and he can produce one hatchet with the same amount of labor
that would produce an arrow. Now, if a hatchet will do more good than
an arrow, he will direct his energies to the making of the hatchet. It
is important that any producer should bring the final units of the
different parts of his equipment to a certain uniformity of producing
power. He must not go on adding to the stock of implement No. 1 when
implement No. 2, which could be had by the same expenditure of labor,
would do more good; nor must he add to the stock of either of these
after he has acquired such a supply of them that the first unit of
implement No. 3 would be of greater importance. Measuring the
efficiency of producers' goods is necessary in the case of every one
who creates wealth at all, and such measurements reveal the fact that
the more producers' goods of one kind a man has, the less is the
productive power that resides in one of them.[5]

[5] The law of diminishing returns of successive units of
capital goods is based on the same principle as the law of
diminishing returns of capital, but it is not identical
with it. We shall see, in due time, how a permanent fund of
producers' wealth actually grows and why each new unit, as it
adds itself to the fund, creates a smaller income than did
its predecessor.

The Foregoing Truths Universal

All the general facts which have
been thus far stated hold true wherever wealth is produced. They do
not presuppose the facts of a division of labor and a system of
exchanges, and they do not even require that there should be any
social organization. Men in the most primitive tribes and even men
living in Crusoe-like isolation would create wealth by labor aided by
capital. The essence of that wealth would be effective utility, and
the measure of this, which is value, would be made in the specific way
that we have described. The varieties of capital, the distinction
between capital and capital goods, and the law of diminishing
productivity of such goods would appear in the most primitive
economics as well as in the most advanced. These are by no means all
of the facts and principles which are thus of universal application.
They are merely a few of the more important and may serve as a
foundation or a "Grundlegung," for further study. If we should extend
our list of general and basic truths, it would quickly appear that the
incomes that have been treated as rent and the various surplus gains
which are analogous to rent are universal economic phenomena which it
would be not illogical to discuss in the preliminary part of this
treatise. What has been stated, however, concerning the laws of
diminishing productivity of successive units of producers' wealth,
concerning the diminishing utility of successive units of consumers'
wealth, and also concerning the increasing burdensomeness of
continuous hours of labor, presents the essential principles on which
all rents and quasi-rents rest. It is best to study the applications
of these principles as they are made in a civilized state.

Universal Economic Truths independent of the Special Facts of
Sociology

This first division of economic science borrows none of
its premises from sociology, for the truths which compose it would
abide if there were no society in existence. Basic facts it takes from
Physics, Biology, Psychology, Chemistry, etc. Facts concerning man,
nature, and the relation between them are material for it, but
relations between man and man come into view only in the later
divisions. There, indeed, they do come into the very foreground with
results which immeasurably enrich the science. What we may call the
socialization of the economic process we shall have next before us,
and we shall find it full of critical problems involving the future
well-being of humanity. Industry is carried on by a social organism in
which men are atomic parts and to which nature has given a
constitution with laws of action and development. We have first to
study the nature of this industrial organism and the mode in which it
would act if it were not subject to any constitutional change; and
later we must study it in its process of growth. The economic action
of a society which is undergoing no organic changes is the subject of
Social Economic Statics, while such changes with their causes and
effects constitute the subject of the science of Social Economic
Dynamics.





Next: The Socialization Of Industry

Previous: Varieties Of Economic Goods



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