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.