CHAPTER I

THE CIRCULAR FLOW OF ECONOMIC LIFE AS CONDITIONED BY GIVEN CIRCUMSTANCES1

THE social process is really one indivisible whole. Out of its great stream the classifying hand of the investigator artificially extracts economic facts. The designation of a fact as economic already involves an abstraction, the first of the many forced upon us by the technical conditions of mentally copying reality. A fact is never exclusively or purely economic; other — and often more important — aspects always exist. Nevertheless, we speak of economic facts in science just as in ordinary life, and with the same right; with the same right, too, with which we may write a history of literature even though the literature of a people is inseparably connected with all the other elements of its existence.

Social facts are, at least immediately, results of human conduct, economic facts results of economic conduct. And the latter may be defined as conduct directed towards the acquisition of goods. In this sense we also speak of an economic motive to action, of economic forces in social and economic life, and so forth. However, since we are concerned only with that economic conduct which is directed towards the acquisition of goods through exchange or production, we shall restrict the concept of it to these types of acquisition, while we shall leave that wider compass to the concepts of economic motive and economic force, because we need both of them outside the narrower field within which we shall speak of economic conduct.

The field of economic facts is thus first of all delimited by the concept of economic conduct. Everyone must, at least in part, act economically; everyone must either be an “economic subject” (Wirtschaftssubjekt) or be dependent upon one. As soon as the members of social groups become occupationally specialised, however, we can distinguish classes of people, whose chief activity is economic conduct or business, from other classes in which the economic aspect of conduct is overshadowed by other aspects. In this case, economic life is represented by a special group of people, although all other members of society must also act economically. The activity of that group may then be said to constitute economic life, κατ’ ὲξoχἠv, and saying this no longer implies an abstraction, in spite of all the relations of economic life in this sense to other vital manifestations of the people.

As of economic facts in general, so we speak of economic development. The explanation of it is our object here. Before we turn to our argument, we shall provide ourselves in this chapter with the necessary principles, and familiarise ourselves with certain conceptual devices, which we shall need hereafter. Besides, what follows must be provided, so to speak, with cogs to grip the wheels of received theory. The armor of methodological commentaries I renounce completely. In this connection let it only be observed that what this chapter offers is indeed part of the main body of economic theory, but in essentials requires nothing from the reader that needs special justification to-day. Further, since only a few of the results of theory are necessary for our purpose, I have gladly used the proffered opportunity to convey what I have to say as simply and non-technically as possible. This involves the sacrifice of absolute correctness. I have, however, decided on such a course wherever the advantages of more correct formulation lie in points which are of no further importance for us. In this connection I refer to another book of mine.2

When we inquire about the general forms of economic phenomena, about their uniformities, or about a key to understanding them, we ipso facto indicate that we wish at that moment to consider them as something to be investigated, to be sought for, as the “unknown”; and that we wish to trace them to the relatively “known,” just as any science deals with its object of inquiry. When we succeed in finding a definite causal relation between two phenomena, our problem is solved if the one which plays the “causal” rôle is non-economic. We have then accomplished what we, as economists, are capable of in the case in question, and we must give place to other disciplines. If, on the other hand, the causal factor is itself economic in nature, we must continue our explanatory efforts until we ground upon a non-economic bottom. This is true for general theory as well as for concrete cases. If I could say, for example, that the phenomenon ground-rent is founded upon differences in the qualities of land, the economic explanation would be completed. If I can trace particular price movements to political regulations of commerce, then I have done what I can as an economic theorist, because political regulations of commerce do not aim immediately at the acquisition of goods through exchange or production, and hence do not fall within our concept of purely economic facts. Always we are concerned with describing the general forms of the causal links that connect economic with non-economic data. Experience teaches the possibility of this. Economic events have their logic, which every practical man knows, and which we have only consciously to formulate with precision. In doing so we shall, for the sake of simplicity, consider an isolated community; the essence of things, which alone is the concern of this book, we can see as well in this as we could in the more complicated case.

Hence we shall outline the leading characteristics of a mental picture of the economic mechanism. And, to that end, we shall primarily think of a commercially organised state, one in which private property, division of labor, and free competition prevail.

If someone who has never seen or heard of such a state were to observe that a farmer produces corn to be consumed as bread in a distant city, he would be impelled to ask how the farmer knew that this consumer wanted bread and just so much. He would assuredly be astonished to learn that the farmer did not know at all where or by whom it would be consumed. Furthermore, he could observe that all the people through whose hands the corn must go on its way to the final consumer knew nothing of the latter, with the possible exception of the ultimate sellers of bread; and even they must in general produce or buy before they know that this particular consumer will acquire it. The farmer could easily answer the question put to him: long experience,3 in part inherited, has taught him how much to produce for his greatest advantage; experience has taught him to know the extent and intensity of the demand to be reckoned with. To this quantity he adheres, as well as he can, and only gradually alters it under the pressure of circumstances.

The same holds good for other items in the farmer’s calculations, whether he reckons as perfectly as a great industrialist or arrives at his decisions half unconsciously and by force of custom. He knows ordinarily, within certain limits, the prices of the things he must buy; he knows how much of his own labor he must expend (whether he values the latter according to purely economic principles, or whether he looks upon labor on his own land with quite different eyes from any other); he knows the method of cultivation — all from long experience. From experience also all the people from whom he buys know the extent and intensity of his demand. Since the circular flow of the economic periods, this most striking of all economic rhythms, goes relatively fast, and since in every economic period essentially the same thing occurs, the mechanism of the exchange economy operates with great precision. Past economic periods govern the activity of the individual — in a case like ours — not only because they have taught him sternly what he has to do, but also for another reason. During every period the farmer must live, either directly upon the physical product of the preceding period or upon what he can obtain with the proceeds of this product. All the preceding periods have, furthermore, entangled him in a net of social and economic connections which he cannot easily shake off. They have bequeathed him definite means and methods of production. All these hold him in iron fetters fast in his tracks. Here a force appears which is of considerable significance for us and which will soon engage us more closely. Yet at this juncture we shall only state that in the following analysis we shall always assume that everyone lives in each economic period on goods produced in the preceding period — which is possible if production extends into the past, or if the produce of a factor of production flows continuously. This is merely a simplification of the exposition.

The case of the farmer may now be generalised and somewhat refined. Let us suppose that everyone sells all his product and, in so far as he himself consumes, is his own customer, since indeed such private consumption is determined by the market price, that is indirectly by the quantity of other goods obtainable by curtailing private consumption of one’s own products; and conversely that the quantity of private consumption operates on market price just as if the quantity in question actually appeared on the market. All businessmen are, therefore, in the position of the farmer. They are all at the same time buyers — for the purposes of their production and consumption — and sellers. In this analysis the workers may be similarly conceived, that is their services may be included in the same category with other marketable things. Now since every one of these businessmen, taken by himself, produces his product and finds his buyers on the basis of his experience, just like our farmer, the same must be true for all taken together. Apart from disturbances, which obviously may occur for all sorts of reasons, all products must be disposed of; for they will indeed only be produced with reference to empirically known market possibilities.

Let us drive this home. How much meat the butcher disposes of depends upon how much his customer the tailor will buy and at what price. That depends, however, upon the proceeds from the latter’s business, these proceeds again upon the needs and the purchasing power of his customer the shoemaker, whose purchasing power again depends upon the needs and purchasing power of the people for whom he produces; and so forth, until we finally strike someone whose income derives from the sale of his goods to the butcher. This concatenation and mutual dependence of the quantities of which the economic cosmos consists are always visible, in whichever of the possible directions one may choose to move. Wherever one breaks in and wherever one turns from this point, one must always, after perhaps a great but a finite number of steps, return to the starting point. The analysis neither comes to a natural full stop nor stumbles upon a cause, that is an element which does more to determine other elements than it is by them determined.

Our picture will be more complete if we represent the act of consuming otherwise than is customary. Everyone, for instance, considers himself a consumer of bread, but not of land, services, iron, and so forth. If we consider people as consumers of these other things, however, we can see still more clearly the way taken by individual goods in the circular flow.4 Now it is obvious that every unit of every commodity does not always travel the same road to the same consumer that its predecessor in the process of production travelled in the preceding economic period. But we may suppose that this does happen without altering anything essential. We can imagine that, year in and year out, every recurring employment of permanent sources of productive power endeavors to reach the same consumer. The result of the process is in any case the same as if this happened. Hence it follows that somewhere in the economic system a demand is, so to say, ready awaiting every supply, and nowhere in the system are there commodities without complements, that is other commodities in the possession of people who will exchange them under empirically determined conditions for the former goods. It follows, again from the fact that all goods find a market, that the circular flow of economic life is closed, in other words that the sellers of all commodities appear again as buyers in sufficient measure to acquire those goods which will maintain their consumption and their productive equipment in the next economic period at the level so far attained, and vice versa.

The individual household or firm acts, then, according to empirically given data and in an equally empirically determined manner. Obviously this does not mean that no changes can take place in their economic activity. The data may change, and everyone will act accordingly as soon as it is noticed. But everyone will cling as tightly as possible to habitual economic methods and only submit to the pressure of circumstances as it becomes necessary. Thus the economic system will not change capriciously on its own initiative but will be at all times connected with the preceding state of affairs. This may be called Wieser’s principle of continuity.5

If the economic system really does not change “of itself,” we overlook nothing essential to our present purpose if we simply assume that it remains as it is, but we merely express in so doing a fact with ideal precision. And if we depict a downright changeless system, it is true we make an abstraction, but only for the purpose of exhibiting the essence of what actually happens. Provisionally we shall do this. It is not contrary to orthodox theory, but at the most only to the customary exposition which does not clearly express our point.6

The same result may be arrived at by another route. The total of all commodities produced and marketed in a community within an economic period may be called the social product. It is unnecessary for our purpose to go more deeply into the meaning of the concept.7 The social product does not exist as such. It is just as little the consciously aspired-to result of systematic activity as the economic system as such is an “economy” working according to a uniform plan. But it is a useful abstraction. We can imagine that the products of all individuals form a heap somewhere at the end of the economic period, which is then distributed according to certain principles. Since it involves no essential change in the facts, the assumption is so far quite permissible. We can then say that each individual throws a contribution into this great social reservoir, and later receives something from it. To each contribution there corresponds somewhere in the system a claim of another individual; the share of everyone lies ready somewhere. And since all know from experience how much they must contribute in order to get what they want, having regard to the condition that each share involves a certain contribution, the circular flow of the system is closed, and all contributions and shares must cancel out, whatever the principle according to which the distribution is made. The assumption is so far made that all the quantities concerned are empirically given.

This picture may be refined, and made to yield more insight into the functioning of the economic system, by means of a well known device. We assume all this experience to be nonexistent, and reconstruct it ab ovo,8 as if the same people, still having the same culture, tastes, technical knowledge, and the same initial stocks of consumers’ and producers’ goods,9 but unaided by experience, had to find their way towards the goal of the greatest possible economic welfare by conscious and rational effort. We do not thereby imply that people would in practical life be capable of such an effort.10 We merely want to bring out the rationale of economic behavior irrespective of the actual psychology of the households and firms under observation.11 Neither do we aim at giving a sketch of economic history. Not how the economic process developed historically to the state in which we actually find it, but the working of its mechanism or organism at any given stage of development, is what we want to analyse.

This analysis suggests, elaborates, and uses those conceptual tools with which we are all familiar by now. Economic activity may have any motive, even a spiritual one, but its meaning is always the satisfaction of wants. Hence the fundamental importance of those concepts and propositions which we derive from the fact of wants, foremost among which is the concept of utility and its derivative, marginal utility, or, to use a more modern term, the “coefficient of choice.” We go on to state certain theorems about the distribution of resources over the range of possible uses, about complementariness and rivalry among goods, and rationally we deduce ratios of exchange, prices, and the old empirical “law of supply and demand.” We finally arrive at a preliminary idea of a system of values and of the conditions of its equilibrium.12

Production is, on one side, conditioned by the physical properties of material objects and natural processes. In this respect it can for economic activity, as John Rae 13 has observed, be only a question of observing the outcome of natural processes and making the most of them. How much of the realm of physical fact may be relevant to economics cannot be stated once for all. According to the type of theory one aims at, such things as the law of decreasing (physical) returns may mean much or little in the way of specifically economic results. There is no relation between the importance of a fact to the welfare of mankind and its importance within the explanatory endeavor of economic theory. But we may of course, as the example of Böhm-Bawerk14 shows, be driven at any moment to introducing new technical facts into our apparatus. Facts of social organisation are not in the same class. Yet they stand on a par with technical facts in that they are outside the domain of economic theory, and mere “data” for it.15

The other side of the matter, the side on which we can penetrate much more deeply into the core of production than on its physical and social side, is the concrete purpose of every act of production. The aim which the economic man pursues when he produces, and which explains why there is any production at all, puts its stamp clearly on the method and volume of production. Obviously, no argument is required to prove that it must be determining for the “what” and the “why” of production within the framework of given means and objective necessities. This aim can only be the creation of useful things, of objects of consumption. In a non-exchange economy it can only be a question of utilities for consumption within the system. Every individual produces in this case directly for consumption, that is to satisfy his needs. And clearly the nature and intensity of the needs for this product are, within the practical possibilities, decisive. The given external conditions and the needs of the individual appear as the two decisive factors for the economic process, which cooperate in determining the result. Production follows needs; it is so to speak pulled after them. But exactly the same holds good mutatis mutandis for an exchange economy.

This second “side” of production makes it at the outset an economic problem. It must be distinguished from the purely technological problem of production. There is a contrast between them which we frequently witness in economic life in the personal opposition between the technical and the commercial manager of an enterprise. We often see changes in the productive process recommended on one side and rejected on another; for example, the engineer may recommend a new process which the commercial head rejects with the argument that it will not pay. The engineer and the businessman can both express their point of view thus: that their aim is to run the business suitably and that their judgment derives from the knowledge of this suitability. Apart from misunderstandings, lack of knowledge of facts, and so forth, the difference in judgment can only come from the fact that each has a different kind of appropriateness in view. What the businessman means when he speaks of appropriateness is clear. He means commercial advantage, and we can express his view thus: the resources which the provision of the machine would require could be employed elsewhere with greater advantage. The commercial director means that in a non-exchange economy the satisfaction of wants would not be increased, but on the contrary reduced, by such an alteration in the productive process. If that is true, what meaning can the technologist’s standpoint have, what kind of appropriateness has he in mind? If the satisfaction of wants is the only end of all production, then there is indeed no economic sense in having recourse to a measure which impairs it. The business leader is right in not following the engineer, provided his protest is objectively correct. We disregard the half-artistic joy in technically perfecting the productive apparatus. Actually, in practical life we observe that the technical element must submit when it collides with the economic. But that does not argue against its independent existence and significance, and the sound sense in the engineer’s standpoint. For, although the economic purpose governs the technical methods as used in practice, there is good sense in making the inner logic of the methods clear without regard to practical barriers. This is best seen in an example. Suppose a steam engine in all its component parts complies with economic appropriateness. In the light of this appropriateness it is made the most of. There would then be no sense in turning it to greater account in practice by heating it more, by letting more experienced men work it, and by improving it, if this would not pay, that is if it could be foreseen that the fuel, cleverer people, improvements, and increase in raw materials would cost more than they would yield. But there is good sense in considering the conditions under which the engine could do more, and how much more, which improvements are possible with present knowledge, and so forth. For then all these measures will be worked out ready for the time when they become advantageous. And it is also useful to be constantly putting the ideal beside the actual so that the possibilities are passed by, not out of ignorance but on well-considered economic grounds. In short, every method of production in use at a given time bows to economic appropriateness. These methods consist of ideas not only of economic but also of physical content. The latter have their problems and a logic of their own, and consistently to think these through — first of all without considering the economic, and finally decisive factor—is the purport of technology; and in so far as the economic element does not decree otherwise, to put them into practical effect is to produce in the technological sense.

Just as in the last resort expediency governs technological as well as economic production, and the distinction between the two lies in the difference in the nature of this expediency, so a somewhat different line of thought shows us first of all a fundamental analogy and then the same distinction. Technologically as well as economically considered, production “creates” nothing in the physical sense. In both cases it can only influence or control things and processes — or “forces.” We now need for what follows a concept which embraces this “utilising” and this “influencing.” They include many different methods of using, and of behaving towards, goods; all kinds of locational changes, and changes in mechanical, chemical, and other processes. But it is always a question of changing the existing state of the satisfaction of our wants, of changing the reciprocal relations of things and forces, of uniting some and disconnecting others. Technologically as well as economically considered, to produce means to combine the things and forces within our reach. Every method of production signifies some such definite combination. Different methods of production can only be distinguished by the manner of the combination, that is either by the objects combined or by the relation between their quantities. Every concrete act of production embodies for us, is for us, such a combination. This concept may be extended even to transportation and so forth, in short to everything that is production in the widest sense. An enterprise as such and even the productive conditions of the whole economic system we shall also regard as “combinations.” This concept plays a considerable part in our analysis.

But the economic and the technological combinations, the former concerned with existing needs and means, the latter with the basic idea of the methods, do not coincide. The objective of technological production is indeed determined by the economic system; technology only develops productive methods for goods demanded. Economic reality does not necessarily carry out the methods to their logical conclusion and with technological completeness, but subordinates the execution to economic points of view. The technological ideal, which takes no account of economic conditions, is modified. Economic logic prevails over the technological. And in consequence we see all around us in real life faulty ropes instead of steel hawsers, defective draught animals instead of show breeds, the most primitive hand labor instead of perfect machines, a clumsy money economy instead of a cheque circulation, and so forth. The economic best and the technologically perfect need not, yet very often do, diverge, not only because of ignorance and indolence but because methods which are technologically inferior may still best fit the given economic conditions.

“Production coefficients” represent the quantitative relation of production goods in a unit of product, and are therefore an essential characteristic of the combination. At this point the economic element is sharply contrasted with the technological. The economic point of view here will not only decide between two different methods of production, but even within any given method will operate upon the coefficients, since the individual means of production can to a certain extent be substituted for one another, that is deficiencies in one can be compensated for by increases in another without changing the method of production, for example a decrease in steam power by an increase in hand labor and vice versa.16

We have characterised the process of production by the concept of combinations of productive forces. The results of these combinations are the products. Now we must define precisely what it is that is to be combined: generally speaking, all possible kinds of objects and “forces.” In part they consist of products again, and only in part of objects offered by nature. Also many “natural forces” in the physical sense will assume the character of products for us, as for example in the case of electric current. They comprise partly material, partly immaterial things. Furthermore, it is frequently a matter of interpretation whether one conceives a good as product or as means. Labor, for example, is capable of being regarded as the product of goods consumed by the worker or as an original means of production. We decided for the latter alternative: for us labor is not a product. Frequently the classification of a good in one or another category depends upon the standpoint of the individual, so that the same good may be consumption good for one person and means of production for another. Likewise the character of a given good may frequently depend upon the use to which it is put. Theoretical literature, especially in earlier times, is full of the discussion of these things. We shall content ourselves with this reference. The following, however, is a more important matter.

It is usual to classify goods in “orders,” according to their distance from the final act of consumption.17 Consumption goods are of the first order, goods from combinations of which consumption goods immediately originate are of the second order, and so on, in continually higher or more remote orders. It must not be forgotten that only goods ready for consumption in the hands of consumers fall in the first order and that bread at the baker’s, for example, is strictly speaking only brought into the first order by combining it with the labor of the errand-boy. Goods of lower order, if not immediately the gifts of nature, always originate in a combination of goods of higher order. Although the scheme could be constructed otherwise, it is best for our purposes to rank a good in the highest of the orders in which it ever appears. Accordingly labor is, for example, a good of the highest order, because labor enters at the very beginning of all production, although it is also to be found at all other stages. In successive productive processes or combinations each good matures into a consumption good through the addition of other goods belonging to a greater or lesser number of orders; with the help of such additions it makes its way to the consumer just as a stream, helped by inflowing rivulets of water, breaks its way through the rock ever more deeply into the earth.

The fact must now be taken account of that when we look at the orders from below upwards the goods become increasingly amorphous; more and more they lose that characteristic form, those precise qualities, which predestinate them for one use and exclude them from others. The higher up we go in the orders of goods, the more they lose their specialisation, their efficacy for a particular purpose; and the wider their potential uses, the more general their meaning. We meet continually fewer distinguishable kinds of goods, and individual categories become correspondingly more embracing, as when we ascend in a system of logical concepts we come to continually fewer, ever thinner in content but ever wider in compass. The genealogical tree of goods becomes progressively thinner. This simply means that the further away from consumption goods we choose our standpoint, the more numerous the goods of the first order become which descend from similar goods of higher orders. When any goods are wholly or partially combinations of similar means of production, we say they are related in production. Therefore we can say that the productive relationship of goods increases with their order.

Thus, if we ascend in the hierarchy of goods, we finally come to the ultimate elements in production for our purposes. That these ultimate elements are labor and gifts of nature or “land,” the services of labor and of land, requires no further argument.18 All other goods “consist” of at least one and mostly of both of these. We can resolve all goods into “labor and land” in the sense that we can conceive all goods as bundles of the services of labor and land. On the other hand, consumption goods are a special class characterised by their capacity to be consumed. But the remaining products, that is the “produced means of production,” are, on the one hand, only the embodiment of those two original production goods, on the other hand “potential” consumption goods, or better, parts of potential consumption goods. So far we have found no reason, and it will appear later that there is no reason at all, why we should see in them an independent factor of production. We “resolve them into labor and land.” We can also resolve the consumption goods, and conversely conceive the original productive factors as potential consumption goods. Both views, however, are applicable only to produced means of production; for they have no separate existence.

The question now arises, in what relation do the two original productive factors stand to each other? Does either of the two take precedence over the other, or are their rôles essentially different? We cannot answer this from a philosophical, physical, or any other general point of view, but only from the economic. For us it is only a question of how their relation is represented for the purposes of the economic system. The answer, however, which ought to be valid in the realm of economic doctrine cannot be valid generally but only with respect to a particular construction of the theoretical system. Thus the Physiocrats, for example, answered the first question in the affirmative, and indeed favorably to land — in itself perfectly correctly. In so far as they would express by their view nothing more than the fact that labor can create no new physical matter, there is nothing to be objected against it. It is only a question of how fruitful this conception is in the economic field. Agreement with the Physiocrats on this point, for example, does not prevent our withholding our approval from their further arguments. Adam Smith also answered the same question affirmatively, but in favor of labor. This also is not false in itself; it would even be proper to take this conception as a starting point. It gives expression to the fact that the use of land demands no sacrifice in disutility from us, and if anything were to be gained by it we might also appropriate this conception. It is true that Adam Smith clearly thought of productive powers offered by nature as free goods, and attributed the fact that they were not actually so considered in the economic system to their occupation by landowners. Clearly he thought that in a community with no private property in land, labor alone would be a factor in economic calculations. Now this is decidedly incorrect, but his point of departure in itself is not on that account untenable. Most of the classical economists put the labor element in the foreground — above all Ricardo. They could do so, because by means of their theory of rent they eliminated land and the determination of its value. If the theory of rent were tenable, then we could certainly content ourselves with this conception. Even as independent a spirit as Rae contented himself with it, precisely because he accepted that theory of rent. Finally, a third group of writers answered our question in the negative. With these we side. For us, the deciding point is that both original productive factors are equally indispensable in production, and indeed for the same reason and in the same manner.

The second question can again be answered variously, quite independently of the answer to the first. Thus Effertz, for example, assigns an active part to labor and a passive one to land. Why he does so is quite clear. He thinks that labor is the motivating element in production, while land represents the object on which labor manifests itself. In this he is right, but his arrangement gives us no new knowledge. On the technical side, the conception of Effertz is hardly one to be adopted, but this aspect is not decisive for us. We are only concerned with the part played by the two original productive factors in the economic deliberations and dealings of individuals, and in this connection the two show up quite equally. Labor as well as land is “economised.” Labor as well as land is valued, is used according to economic principles, and both receive equally economic consideration. And in neither case is there anything else involved. Since nothing else is relevant to our purposes with respect to the original factors of production, we shall put them on terms of equality. In this interpretation we agree with the other marginal utility theorists.

While we have nothing further to say about the productive factor, land, it is advisable for us to examine the other factor, labor, somewhat more closely. Passing over the differences between productive and unproductive labor, between labor used directly and indirectly in production, and, as likewise irrelevant, the distinctions between mental and manual and between skilled and unskilled labor, we must comment on two other distinctions which are significant in so far as we can start from them in order to make an observation which is essential for us. These are the distinctions between directing and directed and between independent and wage labor. What distinguishes directing and directed labor appears at first sight to be very fundamental. There are two main characteristics. In the first place directing labor stands higher in the hierarchy of the productive organism. This direction and supervision of the “executing” labor appears to lift the directing labor out of the class of other labor. While the executing labor is simply on a par with the uses of land and from the economic standpoint has absolutely the same function as these, the directing labor is clearly in a governing position in contrast to both the executing labor and the uses of land. It forms, as it were, a third productive factor. And the other characteristic separating it from directed labor appears to constitute its nature: the directing labor has something creative in that it sets itself its own ends. The distinction between independent and wage labor we can likewise trace to that between directing and directed labor. Independent labor is something peculiar precisely in so far as it possesses the function of directing labor, while for the rest it differs in no way from wage labor. If, therefore, an independent individual produces on his own account and also does executing work, then he splits, so to say, into two individuals, namely a director and a worker in the ordinary sense.

It is easy to see that the characteristic of being in a higher rank, the function of superintendence in itself, constitutes no essential economic distinction. The mere circumstance that ranks one worker above another in the industrial organisation, in a directing and superintending position, does not make his labor into something distinct. Even if the “leader” in this sense does not move a finger or contribute anything directly to production, he still performs indirect labor in the usual sense, exactly as, say, a watchman. Much more importance seems to attach to the other element, which lies in the decision about the direction, method, and quantity of production. Even if one allows that the above-mentioned higher ranking does not signify much economically — though perhaps a lot sociologically — one will still see an essential distinguishing feature in this function of making decisions.

But we see at once that the necessity of making decisions occurs in any work. No cobbler’s apprentice can repair a shoe without making some resolutions and without deciding independently some questions, however small. The “what” and the “how” are taught him; but this does not relieve him of the necessity of a certain independence. When a worker from an electrical firm goes into a house to repair the lighting system, even he must decide something of the what and the how. An agent may even have to take part in decisions relative to prices, the setting of the price of his article within certain limits may be left to him — but he is nevertheless neither “leader” nor necessarily “independent.” Now the director or independent owner of a business has certainly most to decide and most resolutions to make. But the what and the why are also taught him. He knows first of all the how: he has learned both the technical production and all the economic data concerned. What there is still to be decided only differs in degree from the decisions of the cobbler’s apprentice. And the what is prescribed for him by demand. He sets no particular goal, but given circumstances force him to act in a definite way. Certainly the given data may change, and then it will depend upon his ability how quickly and successfully he reacts to it. But so it is in the carrying out of any work. He acts, not on the basis of the prevailing conditions of things, but much more according to certain symptoms of which he has learned to take heed, especially of the tendencies immediately showing in the demand of his customers. And to these tendencies he yields step by step, so that only elements of minor significance can ordinarily be unknown to him. From this consideration, however, it follows that in so far as individuals in their economic conduct simply draw conclusions from known circumstances — and that indeed is what we are here dealing with and what economics has always dealt with — it is of no significance whether they are directing or directed. The conduct of the former is subject to the same rules as that of the latter, and to establish this regularity, to show that the apparently fortuitous is really strictly determined, is a fundamental task of economic theory.

Under our assumptions, therefore, the means of production and the productive process have in general no real leader, or rather the real leader is the consumer. The people who direct business firms only execute what is prescribed for them by wants or demand and by the given means and methods of production. Individuals have influence only in so far as they are consumers, only in so far as they express a demand. In this sense indeed every individual takes part in the direction of production, not only the one to whom the rôle of director in a business has fallen, but everyone, especially the worker in the narrowest sense. In no other sense is there a personal direction of production. The data which have governed the economic system in the past are familiar, and if they remain unchanged the system will continue in the same way. The changes which the data may undergo are not quite so familiar; but in principle the individual follows them as well as he can. He alters nothing spontaneously; he only alters what the conditions are already altering of their own accord; he removes those discrepancies between the data and his conduct which emerge if the given conditions change and people try to continue operating in the same way. Any individual can indeed act otherwise than our view assumes; but in so far as changes result merely from the pressure of objective necessity, any creative rôle in the economic system is absent. If the individual acts differently, then essentially different phenomena appear, as we shall see. But here we are only concerned with stating the logic inherent in economic facts.

From our assumptions it also follows that the quantity of labor is determined by the given circumstances. Here we append the consideration of a question which was left open earlier, namely the magnitude of the supply of labor existing at any time. How much a given number of men work is obviously not rigorously determined at the outset. If we assume for the moment that the best possibilities of employing the labor of all individuals are known, that there is, therefore, a strictly determined scale of such employments, then at every point on this scale the anticipated utility of every concrete employment of labor is compared with the disutility accompanying the employment. Thousands of voices from everyday life remind us that the work concerning our daily bread is a heavy burden, which one only undergoes because one must, and which one throws off if one can. From this emerges unequivocally the amount of work that a worker will perform. At the beginning of each working-day such a comparison naturally always turns out favorably to the work to be undertaken. The further one progresses, however, in the satisfaction of wants, the more the impulse to work declines and at the same time the more the quantity with which it is compared, namely the disutility of work, increases; so that the comparison becomes continually more unfavorable to the continuation of work, until the moment comes for every worker when increasing utility and increasing disutility of work balance each other. Naturally, the strength of both forces varies according to individuals and according to countries. In these variations there lies a fundamental explanatory factor in the shaping of personal and national history. But the essence of the theoretical principle is undisturbed by them.19

The services of labor and of land are therefore simply productive powers. The measurement of the quantity of labor of any quality certainly presents difficulties, but it can be effected, just as there would be no difficulties in principle in setting up some physical measure of the services of land however complicated the matter might be in practice. Then if there were only one factor of production, if for example labor of one quality could produce all goods — which is conceivable by assuming that all gifts of nature are free goods, so that no question of economic conduct with respect to them arises — or if both factors of production worked separately, so that each produced distinct goods for itself alone, such a measurement would be all that the practical man required for his economic plans. For example, if the production of a consumption good of definite value required three units of labor and another of the same value required two, then his conduct would be determined. In reality, however, this is not so. The productive factors practically always operate together. Now if, say, three units of labor and two of land were necessary to produce one good of definite value, but two units of labor and three of land to produce another, which alternative should the producer choose? Obviously a standard is necessary to compare the two combinations; a common denominator is required. We may call this question Petty’s problem.20

The solution of it gives us the imputation theory. What the individual wishes to measure is the relative significance of quantities of his means of production. He needs a standard with the help of which to regulate his economic conduct; he needs indexes to which he can conform. In short, he requires a standard of value. But he has such a thing directly only for his consumption goods; for only these immediately satisfy his wants, the intensity of which is the basis of the meaning of his goods to him. For his stock of services of labor and land there is in the first instance no such standard, and likewise none, we may now add, for his produced means of production.

It is clear that these other goods also owe their importance merely to the fact that they likewise serve to satisfy wants. They contribute to the satisfaction of wants because they contribute to the realisation of consumption goods. Therefore they receive their value from the latter; the value of the consumption goods, as it were, radiates back to them. It is “imputed” to them, and on the basis of this imputed value they receive their place in each economic scheme. A finite expression for the total value of the stock of means of production or of one of the two original productive factors will thus not always prove possible, because such total value will very often be infinitely large. However, it is not necessary for the practical man or for theory to know this total value. It is never a question of parting with every possibility of production, that is of existence, but simply of assigning certain quantities of productive means to some end or other. An isolated individual, for example, who could not produce (or live) at all without either of the original productive factors could state no finite expression of value for either. To this extent Mill is quite right21 when he says that the services of labor and of land are indefinite and incommensurable. But he is wrong when he goes on to say also that in the particular case one can never say what are the shares of “nature” and of labor in a product. Physically, indeed, the two will not allow of separation, but this also is not necessary for the purposes of the economic system. What is necessary for the latter every individual knows well enough, namely, what increase in satisfaction he owes to any small increment of each means of production. However, we shall not go more closely into the problem of the imputation theory here.22

In contrast to use value of consumption goods this value of production goods is “return value” (Ertragswert), or as one might also say, productivity value (Produktivitätswert). To the marginal utility of the former corresponds the marginal productive use (Produktivitätsgrenznutzen) of the latter, or, following the usual term, the marginal productivity; the significance of an individual unit of the services of labor or land is given by the marginal productivity of labor or land, which is therefore to be defined as the value of the least important unit of product so far produced with the help of a unit of a given stock of the services of labor or land. This value indicates the share of every individual service of labor or land in the value of the total social product, and can hence be called in a definite sense the “product” of a service of labor or land. To one not completely at home in the theory of value, these meagre statements will not convey what they ought. I refer the reader to J. B. Clark’s Distribution of Wealth, where the theory is accurately stated and its meaning elucidated,23 and merely remark that this is the only precise meaning of the expression “product of labor” for the purposes of a purely economic treatment. In this sense alone we shall use it here. In this sense also we say that the prices of the services of land and labor in an exchange economy, that is rent and wages, are determined by the marginal productivity of land and labor, and therefore that under free competition landlord and laborer receive the product of their means of production. This theorem, which is hardly a controversial one in modern theory, is merely stated here. It will become clearer in later amplifications.

The following point is also important for us. In reality, the individual uses this value of productive means with such readiness because the consumption goods into which they ripen are empirically familiar. Since the value of the former is dependent upon that of the latter, the former must change when other consumption goods than hitherto are produced. And because we wish to disregard the existence of this given experience, and to allow it to arise before our eyes, in order to investigate its nature, we must start from the point where the individual is not yet clear about the choice between the existing possibilities of employment. Then he will first of all employ his means of production in the production of those goods which satisfy his most pressing needs, and thereafter proceed to produce for continually less urgently felt needs. Moreover, at every step he will consider what other feelings of want must go unsatisfied in consequence of the employment of production goods for the wants preferred at the moment. Each step may only be taken economically provided that the satisfaction of more intensive wants is not thereby made impossible. So long as the choice is not made, the means of production will have no definite value. To each contemplated possibility of employment there will correspond a particular value of every increment. And then, which of these values will be definitely associated with any increment can only appear after the choice has been made and has stood the test of experience. The fundamental condition that a given want will not be satisfied before more intensive wants have been satisfied leads finally to the result that all goods should be so divided amongst their different possible uses that the marginal utility of each good is equal in all its uses. In this arrangement the individual has then found the arrangement which, under the given conditions and from his standpoint, is the best possible. If he so acts, then he can say that, according to his light, he has made the best of these circumstances. He will strive after this distribution of his goods and will vary every conceived or executed economic plan until it is achieved. If no experience is at hand, then he must feel his way step by step to this distribution. If such experience from earlier economic periods is already available, he will try to traverse the same path. And should the conditions of which this experience is the expression change, then he will submit to the pressure of the new conditions and adapt his conduct and his valuations to them.

In all cases there is a definite method of employing every good, hence a definite satisfaction of wants, and so a utility index for the individual increments of the goods which gives expression to them. This utility index characterises the place of each increment in the individual’s economy. If a new possibility of employment arises, it must be considered in the light of this value. However, if we return to the individual “acts of choice” which have been made and which result in this utility index, we find that in every case another and not this definitive utility is decisive. If I have divided a certain good amongst three possibilities of employment, I shall esteem it, when a fourth possibility arises, according to the state of satisfaction realised in the first three. For the division between these three, however, this utility is not determining, because it comes into existence only after the division has been decided on. But there finally emerges for every good a definite utility-scale, which reflects the utilities of all its uses and which gives it a definite marginal utility. For a means of production the same is given, as we have said, through its “product,” or, according to Wieser’s expression, through its “productive contribution.”

Since all production involves a choice between competing possibilities and always means the renunciation of the production of other goods, the total value of the product is never a net gain, but only its surplus over the value of the product which would otherwise have been produced. The value of the latter represents a counter-argument against the chosen product and at the same time measures its strength. Here we meet the element of costs. Costs are a value phenomenon. In the final analysis what the production of a good costs the producer is those consumption goods which could otherwise be acquired with the same means of production, and which in consequence of the choice of production cannot now be produced. Therefore the outlay of means of production involves a sacrifice, in the case of labor just as in the case of other means of production. To be sure, in the case of labor there is also another condition which must be fulfilled, viz., that every expenditure of labor must result in a utility which at least compensates for the disutility attaching to that expenditure of labor. This, however, in no way alters the fact that within the limits of this condition the individual behaves towards the expenditure of labor exactly as towards the expenditure of other productive resources.

Unsatisfied wants are, therefore, by no means without significance. Their impress is noticeable everywhere, and every productive decision must do battle with them. And the further the producer pushes production in a given direction, the harder this battle becomes; that is the more a particular want is satisfied, the less the intensity of the desire for more in the same line, hence the less the increase in satisfaction to be achieved through further production. Moreover, the sacrifice connected with production in this direction also increases simultaneously. For the means of production for this product must be withdrawn from ever more important categories of wants. The gain in value from the production in one direction becomes therefore continually smaller, and finally it vanishes. When that happens, this particular production comes to an end. Thus we can speak here of a law of decreasing returns in production. This has, however, a completely different meaning from the law of decreasing physical product, of which the validity of our proposition is independent.24 It is obvious that the economic law of increasing costs would finally operate, even if the physical proposition were not valid and even if its contrary were true. For the value of the investment to be made would eventually rise so much that the gain in utility accruing through production would vanish even if the physical amount of this investment progressively sank. If the latter were the case, obviously the condition of satisfaction of the wants of everyone would be at a higher level, but the essential phenomena would not on that account be different.

The consideration which producers actually give to the element of cost of production is therefore nothing but a way of taking account of other possibilities of employing production goods. This consideration constitutes the brake on every productive employment and a guide which every producer follows. But in practice, custom very soon crystallises it into a short handy expression of which every individual makes use, without forming it anew every time. With it the producer works in practice, adapting it to changing circumstances as the necessity arises; in it all the relations between wants and present means are expressed, in a large measure unconsciously; in it all the conditions of his life and his economic horizon are mirrored.

Costs as an expression of the value of other potential employments of means of production constitute the liability items in the social balance sheet. This is the deepest significance of the cost phenomenon. From this expression the value of producers’ goods must be distinguished. For it represents the — ex hypothesi — higher total value of the actually created product. But at the margin of production, according to the above, both quantities are equal, because these costs rise to the height of the marginal utility of the product, therefore also of the participating combination of productive means. At this point emerges that relatively best position which is usually called the economic equilibrium,25 and which, as long as the given data are maintained, tends to repeat itself in every period.

This has a very noteworthy consequence. It follows from it, first of all, that the last increment of every product will be produced without a gain in utility above costs. Correctly understood this is, to be sure, simply self-evident. But further, it follows that in production generally no surplus value above the value of producers’ goods can be attained. Production realises only the values foreseen in the economic plan, which previously exist potentially in the values of means of production. Also in this sense, not only in the above-mentioned physical sense, production “creates” no values, that is in the course of the productive process no increase in value occurs. The future satisfaction of wants, before production has done its work, is exactly as dependent upon the possession of the necessary means of production as it is afterwards upon the possession of the product. The individual will try to avert loss of the former just as energetically as of the latter, and renounce the former only for the same compensation as for the latter.

Now the imputation process must go back to the ultimate elements of production, the services of labor and land. It cannot halt at any produced means of production, for the same argument may be repeated for each of them. Hence, no product can so far show a surplus value over the value of the services of labor and land contained in it. Just as we previously resolved produced means of production into labor and land, so we see now that they are only transitory items in the valuation process.

Hence, in an exchange economy — for the moment we anticipate a little — the prices of all products must, under free competition, be equal to the prices of the services of labor and nature embodied in them. For the same price as is obtained for the product after production must have been obtainable beforehand for the complete set of necessary means of production, because exactly as much depends upon them as upon the product. Each producer must give up his total receipts to those who supplied him with means of production, and in so far as they were again producers of some product or other, they must in their turn pass on their receipts until finally the whole original total price falls to the purveyors of the services of labor and of nature. However, we shall return to this later.

Here we come upon a second concept of cost, that of the exchange economy. The businessman considers as his costs those sums of money which he must pay to other individuals, in order to procure his wares or the means of producing them, that is his expenses of production. We complete his calculation in that we also include in costs the money value of his personal efforts.26 Then costs are in their essence price totals of the services of labor and of nature. And these price totals must always equal the receipts obtained for the products. To this extent, therefore, production must flow on essentially profitless. That the economic system in its most perfect condition should operate without profit is a paradox. If we remember the meaning of our statements, the paradox vanishes, at least in part. Of course our assertion does not mean that if it is perfectly balanced the economic system produces without result, but only that the results flow entirely to the original productive factors. As value is a symptom of our poverty, so profit is a symptom of imperfection. However, the paradox remains in part. It seems obvious that producers do as a rule receive more than wages for their labor and rent for the land they may possess. Will there not be a general rate of net profit in the sense of a surplus above costs? Competition may wash away the particular surplus profit of an industry, but it could not destroy profits common to all branches of production. But let it be assumed that producers make such a profit. Then they must value correspondingly the means of production to which they owe it. Now these are either original means of production, viz. personal efforts or natural agents, in which case we are where we were before; or else they are produced means of production, in which case these must be correspondingly more highly prized, that is the services of labor and land embodied in them must be more highly prized than other such services. That, however, is impossible, since laborers and landlords can compete very effectively with these quantities of labor and land which were previously invested. Consequently, net profit cannot exist, because the value and price of the original productive services will always absorb the value and price of the product, even if the productive process is parcelled out among ever so many independent firms. I do not want to tire the reader too much, and have put in a later place further analysis which properly belongs here.27

This is not so opposed even to classical doctrine as it may seem to some readers. The cost theory of value and especially the Ricardian labor theory very strongly suggest the same conclusion, and some doctrinal tendencies such as the tendency to label all kinds of revenue, sometimes even interest, as wages are explained by it. If in classical times it was not expressly stated,28 it is first because the older economists were not very rigorous in recognising the consequences of their own principles, and secondly because our conclusion appears too blatantly to contradict the facts. Böhm-Bawerk was indeed the first who expressly said that the whole value of the product must in principle be divided between labor and land, if the process of production is to proceed with ideal perfection. This, of course, requires that the whole economic system be accurately adapted to the production undertaken, and that all values be appropriately adjusted to the data; that all economic schemes work harmoniously together and that nothing disturb their execution. Two circumstances, however, so Böhm-Bawerk proceeds, disturb the equilibrium between the values of the product and of the means of production again and again. The first is known under the name of friction. For a thousand reasons the economic organism does not function quite promptly. Error, mishap, indolence, and so forth become, in the well known manner, a continual source of loss, but also of profit.29

Before we pass on to the second circumstance alluded to by Böhm-Bawerk, let us insert here a few words about two elements which are of considerable significance. The first is the element of risk. Two kinds of risk may be distinguished, the risk of the technical failure of production, in which we can include the danger of loss from acts of God, and the risk of commercial failure. In so far as these dangers are foreseen they operate immediately upon economic plans. Businessmen will either include premiums for risk in their cost accounting or they will make outlays to guard against certain dangers, or finally they will take account of — and equalise — the differences in risk between the branches of production by simply avoiding the more risky branches until the consequent increase of prices in the latter offers a compensation.30 None of these methods of evening out economic risks, in principle, creates a profit. A producer who takes precautions against risk by whatever measures — the building of dams, insurance of machinery, and so forth — certainly has an advantage in that he protects the fruit of his production, but ordinarily he also has corresponding costs. The risk-premium is no source of gain for the producer— but at the most for an insurance company, which can make an intermediary’s profit from it, chiefly by combining many risks — for in the course of time it will be claimed by cases of need arising. And the compensation for greater risk is only apparently a greater return: it has to be multiplied by a probability coefficient, whereby its real value is again reduced — and indeed exactly by the amount of the surplus. Anyone who simply consumes this surplus will atone for it in the course of events. Therefore, there is nothing in the independent rôle often attributed to the element of risk, and in the independent return which is sometimes connected with it. The matter is different, of course, if the risks are not foreseen or at any rate are not taken account of in the economic plan. Then they become on the one hand sources of temporary loss and on the other hand sources of temporary gain.

The chief source of these gains and losses — and this is the second element that I wish to consider here — is spontaneous changes in the data with which the individual is accustomed to reckon. They create new situations, adaptations to which require time. And before that can happen a great many positive or negative discrepancies between cost and receipts occur in the economic system. Adaptation always offers difficulties. The mere knowledge of the changed state of affairs is not attained in most cases with the desirable promptness. To draw conclusions from the knowledge is again a big step, which meets many obstacles in unpreparedness, the lack of means, and so on. But often perfect adaptation relative to the formerly existing products is impossible, and of course especially in the case of durable producers’ goods. During the time which must elapse before they are worn out, such changes in conditions unavoidably appear, and this causes one of the peculiarities in the determination of their value which Ricardo considered in Section IV of his first chapter. Returns to them lose all connection with their costs and must be just simply accepted; their appropriate values are altered without the possibility of the corresponding supply being modified. Thus they become, in a certain sense, a special kind of returns and can rise above or fall below the price-total of the services of labor and land contained in them. They appear to the businessman in a light similar to that in which natural agents appear. We call them, with Marshall, quasi-rents.

However, Böhm-Bawerk points to a second circumstance which may alter the result of imputation and may prevent a part of the value of the product from being reflected in the services of labor and nature. This is, as is well known, the lapse of time31 involved in all production except the instantaneous production of primitive efforts to maintain life. Because of it, the means of production are not merely potential consumption goods, but they are distinguished from the latter by a new essential characteristic, the distance in time which separates them from goods capable of being consumed. The means of production are future consumption goods and as such are worth less than consumption goods. Their value does not exhaust the value of the product.

We are here touching upon an exceedingly delicate problem. But as its importance for the argument of this book is limited we shall only ask ourselves one question here. In the normal course of an economic system in which year in and year out the process of production follows the same route and all data remain the same, would there be a systematic undervaluation of means of production as compared with products? This question subdivides into two others: abstracting from objective and personal coefficients of risk, in such an economic system can future satisfactions be systematically and generally valued at less than equal present satisfactions? And in such an economic system, quite apart from the influence of the passing of time itself upon valuations, can what happens in the course of time establish these differences in value?

An affirmative answer to the first question sounds plausible enough. Certainly the immediate handing over of some gift is more agreeable than its promise for the future.32 This, however, is not the question here, but rather the valuation of a regular flow of income. If possible, imagine the following case. Someone enjoys a life-annuity. His wants remain absolutely constant in kind as well as in intensity throughout the rest of his life. The annuity is big and secure enough to relieve him of the necessity of creating funds for special emergencies and for the possibility of loss. He knows himself secure from responsibilities arising towards others and proof against sudden desires. No possibility of investing savings at interest exists — for if we were to grant this we should assume the element of interest beforehand and come dangerously near to circular reasoning. Now will a man in such a position esteem future instalments of his annuity less than those nearer in time? Would he — always abstracting from the personal risk of life — give up future more easily than present instalments? Obviously not, for if he did, that is if he gave up a future instalment for smaller compensation than one nearer in time, he would discover in due course that he had obtained a smaller total satisfaction than he might have done. His conduct would therefore cause him loss; it would be uneconomic. Such a course may nevertheless be taken, just as in other respects offences against the rules of economic reason frequently occur. But it is not an element of these rules themselves that they should occur.33 Of course most of the exceptions which we meet with in practical life are not “offences,” but are to be explained by our assumptions failing to fit the facts. However, where we find quite striking overestimation of present enjoyments, as particularly in the case of children and savages, what we have before us is merely a discrepancy between the economic problem to be solved and the economic outlook of the subject: children and primitive men know only instantaneous production. Future wants do not appear smaller to them; they do not see them at all. Therefore they will not stand the test of decisions which require a wider horizon. This is obvious; but ordinarily they have not to make such decisions. He who grasps the double rhythm of wants and means of satisfaction can perhaps in a particular case scorn the conclusion that a onesided displacement of either means loss of satisfaction, but he cannot reject it in principle.

But what of our second question? Cannot the process of production proceed in ways to which the assumptions of our typical case do not conform? Cannot the continuous flow of goods move sometimes more feebly, sometimes more strongly? But especially, must not the fact that a more fertile method of production demands more time affect the value of present goods, the possession of which alone makes the choice of it possible, and thus constitutes time a factor in the circular flow? The negative answer which we give to this question can easily be misunderstood and will only later acquire its full significance. I do not deny the importance of the element of time in economic life, but only look at it in a different light. The question of the introduction of more productive but more time-consuming processes and the question of how the time element affects it are quite distinct problems. We are not now speaking of the introduction of new processes, but of the circular flow which consists of given processes already in working order. And here the more fruitful method of production yields its results just as immediately as any other, no matter what the length of its period may be. A method of production will obviously only be called “more fruitful” if it gives more products than the sum of the less fruitful processes which can be executed in the same time by means of the same quantity of productive factors. Given the necessary quantities of labor and natural agents, production by this method will be repeated indefinitely without any exercise of choice, and the stream of products will be continuous. But even if that were not the case, there would be no underestimation of future products. For if the productive process turned out its results in periodic intervals there would still be no waiting, because consumption could adapt itself and run on continuously and at an equal rate per unit of time, so that there would be no motive for underestimating future products.34 I may quite well prize present goods more highly than future ones if their possession assures me more goods for the future. But I shall do this no longer and my present and future valuations must be equalised when I am assured of the richer flow of goods and my conduct has been adapted to it. “More” goods in the future are then no longer dependent upon the possession of present goods. We can also extend the example of our pensioner to this case. Suppose he has received hitherto a thousand dollars a month. Then he is offered, instead, twenty thousand dollars at the end of a year. Now, until the first year’s instalment falls due the element of time may make itself felt very unpleasantly. From the time it falls due onwards, however, he will see his position improved, and indeed he will estimate this improvement by the full addition of eight thousand dollars a year, and not by a part of this sum.

A similar argument applies to the element of abstinence,35 the necessity of waiting, and so forth. And here I refer the reader especially to the exposition of Böhm-Bawerk. For us it is only necessary to formulate our position precisely. This phenomenon also cannot be simply denied out of existence. But it is much more complicated than it has the appearance of being, and it is noteworthy that its nature and its manifestations have as yet found no penetrating analysis. Here also one must distinguish the process of creating a productive apparatus from the process of operating it when once created. Whatever the rôle of abstinence in the former may be — we shall have to speak of this repeatedly, first of all in the discussion of saving in the next chapter — certainly in the latter the necessity of waiting does not recur every time a process of production is repeated. One need not “wait” for the regular returns, since one receives them as a matter of course just when they are needed. In the normal circular flow one has not periodically to withstand a temptation to instantaneous production, because one would immediately fare worse by succumbing. Therefore there can be no question of abstinence in the sense of non-consumption of the sources of returns, because by our assumptions there are no other sources of returns than labor and land. Could not, finally, the element of abstinence play a part in the normal circular flow, because if it is necessary to the initial creation of the productive apparatus it has to be paid for afterwards out of the regular output of production? In the first place it will appear in the course of our investigation that abstinence plays only a very secondary part in the provision of the necessary factors; that, speaking concretely, the introduction of new methods of production requires on the whole no previous accumulation of goods. And secondly, considering abstinence as an independent element of cost involves in this case counting the same item twice, as Böhm-Bawerk has shown.36 Whatever may be the nature of waiting, it is certainly not an element of the economic process which we are here considering, because the circular flow, once established, leaves no gaps between outlay or productive effort and the satisfaction of wants. Both are, following Professor Clark’s conclusive expression, automatically synchronised.37 The theory of imputation explains the values of all individual goods. It only remains to be added that the individual values are not independent, but mutually condition one another. The only exception to the rule is in the case of a commodity which cannot be replaced by another, which has only such means of production as are incapable of substitution and moreover are not employable elsewhere. Such instances are imaginable; they can occur, for example, in the case of consumption goods offered immediately by nature; but they are a negligible exception. All other quantities of goods and their values stand in a strict mutual relation. It is expressed by their relation as complements, by the possibility of alternative employment, and by the substitutive relation. Even if two goods have only a single agent of production in common, their values are still connected; for the quantities and hence the values of both goods, depending upon the cooperation of this one agent, will follow the rule of equi-marginal utility with respect to the agent of production common to both. It need hardly be pointed out that the productive relationship resulting from the productive factor labor in particular embraces practically all goods. The determination of the quantity of each good and hence its value is under the influence of the values of all other goods and is completely explicable only by having regard to them. Therefore we can say that the values of individual goods for everyone form a value system, the separate elements of which are mutually dependent.

In this system of values a person’s whole economy is expressed, all the relations of his life, his outlook, his method of production, his wants, all his economic combinations. The individual is never equally conscious of all parts of this value system; rather at any moment the greater part of it lies beneath the threshold of consciousness. Also, when he makes decisions concerning his economic conduct he does not pay attention to all the facts given expression to in this value system, but only to certain indices ready at hand. He acts in the ordinary daily round according to general custom and experience, and in every use of a given good he starts from its value, which is given to him by experience. But the structure and nature of this experience are given in the value system. The values, as adjusted to each other, are realised by the individual year in and year out. Now this value system, as already mentioned, exhibits a very noteworthy stability. In every economic period the tendency exists to turn again into the former well-worn tracks, and to realise once more the same values. And even when this constancy is interrupted, some continuity always remains; for even if the external conditions change, it is never a question of doing something completely new, but only of adapting what was previously done to the new conditions. The value system once established and the combinations once given are always the starting point for every new economic period and have so to speak a presumption in their favor.

This stability is indispensable for the economic conduct of individuals. In practice they could not, in by far the majority of the cases, do the mental labor necessary to create this experience anew. We also see, in fact, that the quantity and value of goods in past periods partly determine the quantities and values of goods in the following ones, but this alone does not explain the stability. The salient fact is obviously that these rules of behavior have stood the test of experience and that individuals are of the opinion that on the whole they cannot do better than go on acting according to them. And our analysis of the value system, the geology, as it were, of this mountain of experience, has also shown us that actually these quantities and these values of goods are explicable, given the wants and the horizons of the people, as rational consequences of the given conditions in the surrounding world.

This empirical way of acting in the individual is therefore no accident, but has a rational basis. There is one kind of economic conduct which, under given conditions, establishes the equilibrium between means on hand and wants to be satisfied in the best way possible. The value system that we have described corresponds to a position of economic equilibrium whose constituent parts cannot be altered (if all the data remain the same) without the individual’s having the experience that he is worse off than before. In so far, therefore, as it is a question of adapting himself to the conditions and of simply complying with the objective necessities of the economic system without wishing to change them, one and only one particular way of acting commends itself to the individual,38 and the results of this action will remain the same as long as the given conditions remain the same.

Assuming the reader to be familiar with the general theory of both competitive and monopolistic exchange and prices, we may notice in passing that the ubiquitous possibility of exchange will naturally alter everyone’s system of values. The fundamental theorem, according to which units of resources are distributed among possible uses so as to yield equal marginal satisfactions, will of course still hold. In an exchange economy we may express it by saying that for all households prices must be proportional to marginal utilities of consumers’ goods and that for all firms prices of producers’ goods must be proportional to their marginal productivities. But a new phenomenon presents itself in the fact that products will be estimated by their producers no longer according to any “value-in-use” which they might have for them, but according to the utility of those commodities which producers ultimately acquire for them.39 Everyone’s scale of valuation of his products, and hence everyone’s scale of valuation of the means of production he may happen to have, will be composed of the scale of valuation of the goods received in exchange or bought with the income derived from selling the services of those means of production. The most advantageous way of performing these operations will be found by experience, and every commodity or productive service will be valued accordingly.

All the innumerable exchanges which we can observe in an exchange economy in each period constitute in their totality the external form of the circular flow of economic life. The laws of exchange show us how this circular flow is explicable from given conditions, and also teach us why it does not alter so long as these conditions remain the same, and why and how it changes in adapting itself to changes in these conditions. Under the assumption of constant conditions, consumers’ and producers’ goods of the same kind and quantity would be produced and consumed in every successive period because of the fact that in practice people act in accordance with well-tried experience, and that in theory we regard them as acting in accordance with a knowledge of the best combination of present means under the given conditions. But there is also another connection between the successive periods because every period operates with goods which an earlier period prepared for it, and in every period goods are produced for use in the next. We shall now, to simplify the statement, express this fact by assuming that in every period only products which were produced in the previous period are consumed, and that only products which will be consumed in the following period are produced. This dovetailing of the economic periods does not change anything essential, as may easily be seen. According to it, every consumption good requires two economic periods, neither more nor less, for its completion.

Now we shall classify the exchanges which are necessary to carry out this simplified economic process in every period. First, we discard those which are carried out merely in order to hand on again whatever is so received. Theory demonstrates that such exchanges must exist in great numbers in every trading economy, yet these purely technical transactions do not interest us here.40 Then there is the exchange of the services of labor and land against consumption goods, which occurs in every trading economy. No doubt this class of exchanges embodies the bulk of the economic system’s stream of goods and connects its source with its mouth. But laborer and landlord sell their productive services, which only yield their product at the end of each period, for consumption goods which are already on hand. Further, they sell their productive services for consumption goods, even though some of their services go towards the production of producers’ goods. In every period those services of labor and land which are not already embodied in means of production to be employed in the period under consideration are exchanged for consumption goods which were completed in the previous period. Whatever in this assertion is contrary to fact serves merely to simplify the exposition and does not affect the principle. It is clear who possess the services of labor and land before this exchange. But who constitute the other party in the transaction? In whose hands, before the exchange, are the consumption goods for paying for the services? The answer is, simply those people who need the services of labor and land in this period, that is those who wish to transform the means of production produced in the previous period into consumption goods by the addition of more services of labor and land or who wish to produce new means of production. Let us assume, for simplicity’s sake, that both categories do the same in all periods to be considered, that is keep on producing either consumption goods or production goods — which conforms to the principle of a trading economy with division of labor. Then we can say that those individuals who produced consumption goods in the preceding period give up a part of them in the present period to workers and landlords whose services they require for the production of new consumption goods for the following period. Those individuals who produced production goods in the preceding period and who wish to do likewise in the present will give up these production goods to the producers of consumption goods in return for those consumption goods which they want in order to acquire new productive services.

Therefore workers and landlords always exchange their productive services for present consumption goods only, whether the former are employed directly or only indirectly in the production of consumption goods. There is no necessity for them to exchange their services of labor and land for future goods or for promises of future consumption goods or to apply for any “advances” of present consumption goods. It is simply a matter of exchange, and not of credit transactions. The element of time plays no part. All products are only products and nothing more. For the individual firm it is a matter of complete indifference whether it produces means of production or consumption goods. In both cases the product is paid for immediately and at its full value. The individual need not look beyond the current period, even though he always works for the next. He simply follows the dictates of demand, and the mechanism of the economic process sees to it that he also provides for the future at the same time. He is not concerned with what happens further to his products, and he would probably never begin the process of production if he had to follow it to the end. Consumption goods in particular are also only products and nothing more, products to which nothing more happens than their sale to consumers. They form in nobody’s hands a “fund” for the maintenance of laborers, and so on; they serve neither directly nor indirectly further productive ends. Hence every question of the accumulation of such stocks disappears. How such a mechanism, which, once adjusted, continually maintains itself, comes into existence is another question. How it develops is a different problem from how it functions.

It follows, again, that everywhere, even in a trading economy, produced means of production are nothing but transitory items. Nowhere do we find a stock of them fulfilling any functions, as it were, in their own right. No claim on the national dividend is made by them beyond wages and rent for the services of labor and land contained in them. No element of net income attaches finally to them. No independent demand issues from them. On the contrary, in each period all the consumption goods on hand will go to the services of labor and land employed in this period; hence all incomes are absorbed under the title of wages or rent of natural agents.41 Thus we come to the conclusion that the process of exchange between labor and land on the one side and consumption goods on the other side not only supplies the chief direction of the stream of economic life, but that under our assumptions this would be the only one. Labor and land share the whole national dividend, and there are just as many consumption goods on hand as are necessary to satisfy their effective demand, and no more. And this is in accordance with the ultimate pair of data in economics: wants and the means for their satisfaction. It is also a true picture of that part of economic reality of which we have been taking account so far. It was mutilated by theory and from it a great number of fictions and sham problems were artificially created — including the problem of what is the “fund” out of which the services of labor and land are remunerated.

The organisation of an exchange economy therefore presents itself to us in the following manner. Individual businesses appear to us now as places of production for the requirements of other people, and the output of the whole production of a nation will in the first place be “distributed” among these units. Within the latter, however, there are no other functions than that of combining the two original factors of production, and this function is performed in every period mechanically as it were, of its own accord, without requiring a personal element distinguishable from superintendence and similar things. Thus, if we suppose that the services of land are in private hands, then abstracting from monopolists there are no people with any claims upon the product except those who perform some kind of labor or place the services of land at the disposal of production. Under these conditions there is no other class of people in the economic system, in particular there is no class whose characteristic is that they possess produced means of production or consumption goods. We have already seen that the idea that somewhere there is an accumulated stock of such goods is absolutely false. It is chiefly evoked by the fact that very many produced means of production last through a series of economic periods. However, this is not an essential element, and we alter nothing fundamental if we limit the use of such means of production to one economic period. The idea of a stock of consumption goods has not even this support; on the contrary consumption goods are generally only in the hands of retailers and consumers in the quantity necessary to meet the requirements of the moment. We find a continuous flow of goods and a continuously moving economic process, but we find no stocks which are either constant in their component parts or constantly replaced. It also makes no difference to an individual firm whether it produces consumption or production goods. In both cases it disposes of its products in the same way, receives, under the hypothesis of completely free competition, a payment corresponding to the value of its land or labor services, and nothing else. If we choose to call the manager or owner of a business “entrepreneur,” then he would be an entrepreneur faisant ni bénéfice ni perte,42 without special function and without income of a special kind. If the possessors of produced means of production were called “capitalists,” then they could only be producers, differing in nothing from other producers, and could no more than the others sell their products above the costs given by the total of wages and rents.

From the standpoint of this interpretation, therefore, we see a stream of goods being continually renewed.43 Only for a single moment is there anything like a stock of certain individual goods; moreover one can actually speak of “stocks” only in an abstract sense, namely in the sense that goods of a certain kind and quantity always appear through the mechanism of production and exchange at definite places in the economic system. Stocks in this sense are comparable to a river-bed rather than to the water which flows through it. The stream is fed from the continually flowing springs of labor-power and land, and flows in every economic period into the reservoirs which we call income, in order there to be transformed into the satisfaction of wants. We shall not enlarge upon this, but only observe shortly that it involves accepting a definite concept of income, namely Fetter’s, and excluding from its scope all those goods which are not regularly consumed. In one sense the circular flow ends at this place. In another sense, however, it does not, for consumption begets the desire to repeat it and this desire again begets economic activity. We shall be pardoned if we have not in this connection spoken of quasi-rent as we ought to have done. More serious at first sight appears to be the absence of any mention of saving. Yet this point will also be explained. In any case, saving would not play a great part in economic systems displaying no change.

The exchange value of every quantity of a commodity for every individual depends upon the value of the goods which he can procure and actually intends to procure with it. As long as the latter is undecided, this exchange value will undoubtedly fluctuate according to the possibilities conceived at the time, and likewise it will alter if the individual alters the direction of his demand. Yet, when the best employment in exchange is found for any good, the exchange value remains at one and only one definite height, given constancy in the conditions. Obviously, taken in this sense, the exchange value of any unit of one and the same commodity is different for different individuals, and indeed not only in consequence of the differences, firstly of their tastes, and secondly of their economic situations as a whole, but also thirdly, quite independently of these facts, in consequence of differences in the goods which the individual exchanges.44 But the relation of the quantities in which any two goods are exchanged in the market, or of their reciprocals, the price of each good, is the same for all individuals rich or poor — as we said before. That the price of every good is connected with the prices of all other goods will only become quite clear if we reduce them all to a common denominator.45

Let us now introduce this denominator of price and medium of exchange and let us choose gold for the rôle of “money commodity.” While for our purposes we require very little of the familiar theory of exchange and hence could treat it quite briefly, we must go rather further into the theory of money. But here also we shall confine ourselves to those points which will be significant for us later, and we shall consider even them only so far as is necessary for what follows. Therefore we shall leave on one side problems which will not crop up again in this book, for example the problem of bimetallism or of the international value of money. And theories whose merits lie in directions which we shall have no opportunity of following, we shall replace without scruple by simpler or better known ones, provided they will serve us as well, even if they are in other respects much more incomplete.46

Experience shows that every individual values his stock of money. And in the market all these individual value-estimates lead to the establishment of a definite exchange relation between the unit of money and quantities of all other goods, in principle just as we asserted earlier of other goods. From the competition between individuals and between possibilities of employment there issue, under given conditions, as many definite “prices” of money as there are other goods. These prices of money — an expression which is completely defined by the preceding statements and which we shall often use in what follows — are, therefore, like any other price, founded upon individual value-estimates. But upon what do these rest? The question obtrudes itself, because here in the case of money we have not the simple explanation which for any other commodity lies in the satisfaction of wants obtained by the individual from his consumption. We answer the question after Wieser:47 the use value of the material commodity of course provides the historical foundation upon which money acquires a definite exchange relation to other goods, but its value for every individual and its price on the market may and actually do move from this basis. Of course it is obvious that neither the individual marginal utility nor the price of gold as money can deviate from its individual marginal utility and its market price as a commodity. For if this happened, a continual tendency would exist to remove the difference by coining gold from the arts or by melting down gold coin. This is correct. Only it proves nothing. Because a commodity fetches the same price in two different uses it cannot be concluded that the one use determines the price and that the other simply follows it. On the contrary it is clear that both employments together form the value scale of the good and that its price would be different if one ceased to exist. The money commodity is in this position. It serves two different possibilities of employment, and although the marginal utilities and the prices must certainly be equal in both if the good can move freely from one to the other, yet its value is never explicable from the employment in the arts alone. This becomes especially clear if we imagine that the whole stock of money commodity is coined, which would indeed be possible. Money would even then have value and a price, but the above explanation would obviously break down. The suspension of coinage on the one hand and the prohibition of melting on the other likewise offer us examples from experience of the independent character of the value of money.

Therefore the value of money as money can be completely separated theoretically from the value of the material. To be sure, the latter is the historical source of the former. But in principle we can neglect the value of the material in explaining a concrete instance of the value of money, just as in considering the lower course of a great stream we can neglect the contribution to its volume which comes from its source. We can imagine that individuals receive, in proportion to their possession of goods, or more correctly to the latter expressed in prices, an allotted portion of units of some medium of exchange without use value, for which all goods must be disposed of in each economic period. Then this medium would be valued only as a medium of exchange. Its value ex hypothesi can be only an exchange value.48 Every individual, as we asserted earlier of all goods produced for the market, will value this medium of exchange according to the value of the goods which he can obtain with it. Every individual will therefore value his money differently, and even if each expresses his value estimates of other goods in money, these estimates will have a different significance from individual to individual even if they are numerically equivalent. In the market, it is true, every good will have only one price in money, and also there can be only one price of money in the market at any moment. All individuals calculate with these prices and meet on common ground at this point. But only superficially, for while equal for all, the prices have a different implication for each; they signify for each different limits to the acquisition of goods.

How is this personal exchange value of money formed, then? At this point we shall link up the theory of money with what we have just said about the flow of the economic process. We see at once that according to our conception, personal exchange value must go right back to producers’ goods. We said that producers’ goods are transitory items and that they involve no independent formation of value in an exchange economy. We said also that no stream of income flows to those who possess them at any time. Therefore there is no occasion here for the construction of an independent personal exchange value of money. As in the economic process, so in the money calculations of the businessman produced means of production are transitory items under our assumptions. These individuals will not esteem money according to its personal exchange value, since they procure no goods for their own consumption by means of it but simply pass it on. Hence we cannot seek here for the determination of the personal exchange value of money; on the contrary the exchange value which is reflected in these transactions must originate elsewhere. Hence, only the primary stream of goods remains, only the exchange between services of labor and land on the one hand and consumption goods on the other. Solely according to the values of the consumption goods which can be obtained with money does one value one’s stock of money. The exchange between money income and real income is therefore the salient point, is the place in the economic process where personal exchange value and hence the price of money is formed. The result is now easy to state: the exchange value of money for everyone depends upon the use value of the consumption goods which he can obtain for his income. The total effective demand in terms of goods in a period serves as the value scale for the units of income available in this economic process. Therefore, under given conditions, there is for every individual an unequivocally determined value scale and definite marginal utility of his stock of money.49 The absolute magnitude of this stock of money in the economic system is irrelevant. In principle a smaller total performs the same service as a larger. If we assume the existing quantity of money to be constant, then there will be the same demand for money year in and year out, and the same value of money will emerge for every individual. Money will be so distributed in the economic system that a uniform price of money emerges. This is the case when all consumption goods are disposed of and all services of labor and land paid for. The exchange between services of labor and land on the one hand and consumption goods on the other is divided into two parts: the exchange between services of labor and land and money, and that between money and consumption goods. Since the values and prices of money must be equal on the one hand to the values and prices of consumption goods and on the other hand to the values and prices of services of labor and land,50 it is clear that the essential lines of our picture are not altered by the insertion of intermediate links, that money only performs the function of a technical instrument, but adds nothing new to the phenomena. To employ a customary expression, we can say that money thus far represents only the cloak of economic things and nothing essential is overlooked in abstracting from it.

At first sight money appears as a general order upon different quantities of goods51 or as we may say as “general purchasing power.” Every individual regards money first of all as a means of obtaining goods in general; if he sells his services of labor or land, he sells them not for definite goods but, as it were, for goods in general. If one looks more closely, however, things take on a different aspect. For every individual values his money income really according to the goods which he actually obtains with it and not according to goods in general. When he speaks of the value of money, the range of goods he customarily purchases floats more or less plainly before his eyes. If whole classes of buyers were suddenly to change the expenditure of their incomes, then obviously the price of money and also the personal exchange value of money would undoubtedly have to change. Ordinarily, however, this does not happen. In general, a definite plan of expenditure is adhered to as being the best, and it does not change quickly. This is why, in practice, everyone can normally reckon with a constant value and price of money and he need only gradually adjust them to changed conditions. Therefore, one can also say of money what we said earlier of all other goods, namely that for every part of the existing purchasing power there lies ready somewhere in the economic system a demand for it, a supply of goods for it, and that the bulk of the money, just as the bulk of the means of production and consumption goods, goes the same way year in and year out. Here too we can assert that we change nothing essential if we imagine that every individual piece of money travels exactly the same route in every economic period. This relation of real income and money income also determines the changes in the value of money.52

We have so far considered money solely as a circulating medium. We have had in view the determination of the value of only those quantities of money which are actually used for the movement of the mass of commodities periodically. Obviously there are also in every economic system, for well known reasons, non-circulating quantities of money, and the determination of their value is not yet explained. For so far we have not learned of any employment of money which necessitates an accumulation beyond the measure that enables the individual to pay for his current purchases. To this point we must return later. We shall not go into it further here, but content ourselves with having explained the circulation and determination of the value of those quantities of money which correspond to the chief exchange transactions which we have depicted. In any case, in the normal circular flow, which we have in view here, no holding of important stocks of money for other purposes would be necessary.

We have also neglected another element. Purchasing power is employed not only to carry out the exchange of consumption goods against the services of labor and land, but also to transfer the possession of landed property itself, and furthermore purchasing power itself is transferred. We could easily take account of all these elements, but they have an essentially different significance for us from that of those which we can analyse within the framework of our present argument. We may only briefly point out that within the continually recurring economic process which we have been describing there would be little room for these things. Transfers of purchasing power as such are not necessary elements of this process. It rather flows along as it were of its own accord and in its essence makes no kind of credit transactions necessary. We have already pointed out that no advances are made to laborers and landlords, but that their means of production are simply bought from them. This is not altered by the intervention of money, and an advance payment of money is no more necessary than an advance of consumption goods or means of production. Obviously we need not exclude the case in which individuals obtain purchasing power from others and transfer to them in return a part of their original productive powers, land for example. Such is the case of borrowing for purposes of consumption, to which no special interest attaches. Similarly, as we shall show below, in the case of transfers of labor and land in general, and therefore we can say that money has, in the circular flow, no other rôle than that of facilitating the circulation of commodities.

It may also be added that for a similar reason we have not spoken of credit instruments. Of course not only a part but the whole of the exchange process can be settled by such credit media. It is not uninteresting even to imagine that, instead of actual metal money, only, say, bills of exchange circulate. For example, this teaches us that the assertion about an original necessity of money’s having a commodity value does not mean that the particular money commodity must actually circulate. For indeed nothing more is necessary to put money in a fixed relation to the values of other goods than that it should be connected with something of definite value. The economic process could, therefore, be carried out without the intervention of metal money. Anyone who supplies services of labor and land would receive a bill for a determined amount of monetary units, then buy consumption goods with it, in order to receive again in the next period — if we adhere to our conception of the identity of the routes travelled by money periodically — the same amount of units in the shape of another bill of exchange. Assuming smooth functioning and general acceptability, such a medium of exchange fills the rôle of money perfectly, and because it does, it will be valued by individuals just as metal money, and change hands at the same “prices” expressed in commodities. This is true even if there is never any question of redemption, but simply of a continuous process of claims to legal tender being offset against each other. There will therefore be a demand for this medium of exchange, which will under our assumptions always be met by a corresponding supply. But since we have seen that the price of the unit of metal money simply mirrors the price of consumption goods and hence of production goods, it follows that the price of our hypothetical bills of exchange will do the same. Hence they will be negotiated at their full nominal value, or, in other words, will always be at par. For no motive exists to allow a discount. This argument teaches us in a somewhat more practical manner than an earlier has already done that no interest would appear in the economic system under our assumptions, and that therefore the logic of economic things as here described does not explain the phenomenon of interest.

But apart from this, there is no reason for us to occupy ourselves further in this place with credit means of payment. If credit instruments only replace some already existing metal money, then their use will not of itself produce any new phenomena. If a particular exchange transaction is settled year in and year out by means of such credit instruments, then the latter play the same part as the corresponding amount of metal money would and there is no incentive so far to the sudden introduction of credit into the circular flow, which we should have to consider. For this reason, but also because the element of credit will later become very important for us and because we want very much to contrast this sharply with the function of money described here, we shall assume that our money circulation so far consists only of metal money53 and indeed, to simplify matters, of gold. In order to keep the two elements separate, we shall in general understand by money only metal money. And we include this concept, together with such credit instruments as do not simply replace previously existing quantities of money, in the concept of means of payment. The problem of whether “credit means of payment” are money will be dealt with later.54

Thus, corresponding to the stream of goods there is a stream of money, the direction of which is opposite to that of the stream of goods, and the movements of which, upon the assumption that no increase of gold or any other one-sided change occurs, are only reflexes of the movement of goods. With this we have closed the description of the circular flow. For an exchange economy as a whole there is the same continuity, and under the same assumptions, the same changelessness as for a non-exchange economy — continuity and constancy not only of the processes but also of values. It would indeed be a misrepresentation of the facts to speak of social valuations. Psychic values must live in a consciousness, hence if the word is to have any meaning at all they must be by nature individual. The values with which we have to do here carry meaning not with reference to the point of view of the whole economic system but only to that of the individual. The social fact, here as in all valuations, is in the circumstance that individual values are interrelated and are not independent of each other. The totality of the economic relations constitutes the economic system, just as the totality of social relations constitutes society. If one may not speak of social values, there is yet a social value system, a social system of individual values. These values are interrelated similarly with the values within the individual’s economy. They operate upon one another through the exchange relation so that they influence and are influenced by all the values of other individuals.55 In this social value system all the conditions of life in a country are mirrored, in particular all “combinations” are expressed in it. The sediment of the social value system is the price system. It is a unit in the same sense. To be sure, prices do not express a kind of estimate of the social value of a good. Indeed they are not at all the immediate expression of a definite value, but only the results of processes which work under the pressure of many individual valuations.


Notes

1 This title is chosen with reference to an expression used by Philippovich. Cf. his Grundriss II. Bd., Introduction.

2 Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, henceforth cited as Wesen.

3 Cf. Wieser, Der natürliche Wert, where this point was worked out and its meaning elucidated for the first time.

4 Cf. A. Marshall (Principles, bk. VI, as well as his address, “The Old Generation of Economists and the New”), for whom this conception plays the same part.

5 Most recently expounded in the work on the problem of the value of money, Schriften des Vereins für Sozialpolitik, Reports of the Session of 1909.

6 Cf. Wesen, bk. II.

7 Cf. on this point especially Adam Smith and A. Marshall. The concept is almost as old as economics and, as is well known, has an eventful past which makes it necessary to use it with caution. For connected concepts cf. also: Fisher, Capital and Income; A. Wagner, Grundlegung; and finally, Pigou, Preferential and Protective Tariffs, where great use is made of the concept “National Dividend.” Note also his Economics of Welfare.

8 This method is due to Léon Walras.

9 As every reader of J. B. Clark knows, it is strictly speaking necessary to consider these stocks, not in their actual shapes — as so many ploughs, pairs of boots, and so on — but as accumulated productive forces which can at any moment and without loss or friction be turned into any specific commodities wanted.

10 There is, therefore, misunderstanding in the objection so often levelled at pure theory that it assumes the hedonistic motive and perfectly rational conduct to be the only forces actually at work in economic life.

11 Psychology, to be sure, comes in later on in order to explain actual conduct and its deviations from the rational picture. Our argument in the following chapters turns largely upon one class of such deviations—force of habit and non-hedonistic motives. But this is another matter.

12 I may refer here to the whole literature of the marginal utility theory and its successors.

13 Cf. the edition of his work by Mixter under the title The Sociological Theory of Capital. The powerful penetration and originality of this work may still repay perusal by the modern student.

14 His law of returns increasing with the length of the period of production seems to me the one successful attempt to introduce the element of time explicitly into the equations of production.

15 For this, as for other reasons, the sharp distinction drawn by J. S. Mill between production and distribution seems to me to be less than satisfactory.

16 These “variations” are very clearly and neatly expounded by Carver, The Distribution of Wealth.

17 Cf. K. Menger’s Grundsätze and Böhm-Bawerk’s Positive Theorie des Kapitals.

18 This was particularly sharply emphasised by O. Effertz. When one reflects how one-sidedly the classical economists emphasised labor, how closely this was connected with some of their results, and that really Böhm-Bawerk alone achieved complete consistency on this point, one must recognise Effertz’ emphasis of the matter as actually an important service.

19 For details cf. Wesen, bks. I and II. Obviously the principle is valid only for a given outcome from effort, that is an unequivocal result, such as real wages per hour.

20 Petty put this problem incidentally in his work Political Arithmetic, which also contains, as is well known, many other germs of later theoretical analysis.

21 Principles, ed. Ashley, p. 26.

22 Cf. K. Menger, Wieser, and Böhm-Bawerk, who first treated the problem. Cf. also Wesen, bk. II, and my Bemerkungen zum Zurechnungsproblem, Zeitschrift für Volksw., Sozialpol. und Verw. (1909). We are not concerned with the more difficult problems which arise out of the theory of marginal productivity, and need not, therefore, refer to its present, and much more correct, form.

23 Misunderstandings arise especially from an inadequate comprehension of the marginal concept. Cf. on this Edgeworth’s article “The Theory of Distribution,” in the Quarterly Journal of Economics (1904), particularly his reply to Hobson’s arguments against Clark.

24 In thus turning away from the law of physical decrease we take a decisive step away from the system of the classical economists. Cf. my essay, “Das Rentenprinzip in der Verteilungslehre,” Schmoller’s Jahrbuch (1906 and 1907). Further: F. X. Weiss, “Abnehmender Ertrag,” in the Handwörterbuch der Staatswissenschaften.

25 Cf. Wesen, bk. II.

26 Personal labor services are, so to speak, “virtual expenses,” as Seager appropriately said; cf. his Introduction to Economics, p. 55. Every businessman who calculates at all correctly now includes the rent of his own land in his expenses.

27 Cf. Chapter IV, and especially Chapter V.

28 Lotz, for example, did this, even if he turned aside from the perception in very weak fashion; see his Handbuch der Staatswissenschaftslehre. Very plain suggestions are to be found in Smith.

29 Cf. Böhm-Bawerk’s exposition, Positive Theorie des Kapitalzinses, 4 ed. pp. 219-316.

30 Cf. Emery, quoted in my essay, “Die neuere Wirtschaftstheorie in den Vereinigten Staaten,” Schmoller’s Jahrbuch (1910), and Fisher, Capital and Income.

31 For the element of time in economic life Böhm-Bawerk is the most important authority. W. S. Jevons and John Rae come next. For a detailed working out of the special element “time-preference,” Fisher’s Rate of Interest is relevant. Cf. also the treatment of the time element by A. Marshall.

32 However, it may be mentioned that even this fact is also not so clear and simple; on the contrary, the reasons for it require analysis, which shall be given briefly below.

33 My objection is well expressed by the most eminent living exponent of the element of underestimation of future satisfactions, Professor Fisher, when he introduces the term “impatience” for it. Irrational impatience, like error and so on, undoubtedly exists. But it is no element of the normal course of things.

34 Immediately after the harvest corn is of course cheaper than later. This fact is, however, explicable by storage costs, by the actual existence of interest, and by many other circumstances, all of which change nothing in our principle.

35 The chief authors are Senior and — on the other side — Böhm-Bawerk in his Geschichte und Kritik der Kapitalzinstheorien; and most recently the American writer McVane. Cf. also the article “Abstinence” in Palgrave’s Dictonary and the literature specified there. For the carelessness with which this element is often treated, Cassel, The Nature and Necessity of Interest, is typical. Our position is near to Wieser’s Natürlicher Wert, and John B. Clark’s Distribution of Wealth. Cf. also Wesen, bk. III.

36 Fisher’s treatment of the same subject (Rate of Interest, pp. 43-51) is vitiated by his considering time discount as a primary fact the existence of which is almost self-evident.

37 Clark, it is true, attributes to capital the merit of bringing about this “synchronisation.” As will appear, we do not follow him in this. I emphasise once more: outlay and return are automatically synchronised with one another under the accelerating and retarding influence of profit and loss.

38 This is universally recognised, indeed, only for the cases of free competition and unilateral monopoly in the technical sense of both words. Yet it is sufficient for our purposes. And it has been shown of late that Cournot was not wrong, after all, in holding that there are important cases of determinateness even in the field of “monopolistic competition.”

39 This is what the Austrians used to call “subjective exchange value.” Readers who are familiar with the history of theoretical discussions of the last fifty years will recall how this phenomenon gave rise to an indictment of circular reasoning implied, as many opponents of the Austrian theory held, in any argument which tries to explain prices of producers’ goods by “ utility.” To-day, it would hardly be worth while to go out of our way in order to show why this objection fails.

40 Cf. Wesen, bk. II.

41 The first fundamental theorem of the theory of distribution lies in this statement.

42 A construction of Walras. It is true, however, that interest exists as an income in his equilibrium system.

43 Sharply separating “funds” and “flows” and making the separation fruitful constitute one of the merits of the too little appreciated book of S. Newcomb, Principles of Political Economy. In contemporary literature the point is particularly emphasised by Fisher. The circular flow of money is nowhere more clearly described than in Newcomb, p. 316 ff.

44 I mean: in consequence of the differences in taste and in the total economic situation, each individual values differently even the same goods which other individuals likewise exchange. But the individuals also exchange different goods.

45 Cf. Wesen, bk. II.

46 The reader will find the leading features of my ideas on money and its value in “Das Sozialprodukt und die Rechenpfennige,” Archiv für Sozialwissenschaft, Bd. 44 (1918). The concept of money employed there is an entirely different one.

47 Schriften des Vereins für Sozialpolitik. Reports of the Session of 1909. On this see Mises, Theorie des Geldes und der Umlaufsmittel, 2 ed., and earlier, Weiss, “Die moderne Tendenz in der Lehre vom Geldwert,” Zeitschrift für Volksw., Sozialpol. und Verw. (1910). To Professor von Mises’ book the reader may also be referred in case he should suspect that the above argument implies circular reasoning. Although it does not, the author wishes to state that he would not now consider this way of introducing the element of money to be satisfactory, even within the limits of the purposes of this chapter.

48 Money will be esteemed for its exchange function. And this is obviously analogous to the function of means of production. If one conceives money simply as “bene istrumentale” (as do many Italians) the matter is clearer.

49 With a given technique of the market exchange and given habits of payment. Cf. on this Marshall’s Money, Credit and Commerce or Keynes’ Tract on Monetary Reform, and also Schlesinger, Theorie der Geld- und Kreditwirtschaft.

50 We are considering here for simplicity’s sake, I repeat, an isolated economic system, since the inclusion of international relations would complicate the exposition without contributing anything essential. Similarly we are considering an economic system in which all individuals reckon perfectly in money and are connected with each other.

51 This conception is to be found as early as Berkeley. It has never been lost, and J. S. Mill more recently gave it currency. In contemporary German literature it is found chiefly in Bendixen. It contradicts neither the quantity theory, nor the cost of production nor the “balance” theory.

52 Cf. Wieser, loc. cit.

53 The quantity of “metal money” in such an economic system corresponds not only to a definite price level, but also to a definite rapidity of circulation of money. If all incomes were paid yearly, then obviously a greater amount of money would be required, or all prices must be lower, than if they were paid weekly. We assume this rapidity of circulation to be constant, since we quite agree, within the limits of this argument, with Wieser when he says (loc. cit., p. 522 f.) that changes in the rapidity of circulation, like the quantity of the credit means of payment, are not independent causes of changes in the price level, since they — it is better from our standpoint to say “in so far as they” — are induced by commodity movements. Cf. also Aupetit, Théorie de la monnaie; Del Vecchio, “Teoria della moneta,” Giornale degli Economisti (1909).

54 Cf. on the concept of “purchasing power,” amongst others, Davenport, Value and Distribution.

55 There is general interdependence between them. Cf. Wesen, bk. II, for more extensive details on this point.