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peculiar substitution of goods, due to sound prudential considerations. Those goods which can most easily be dispensed with must always stand ready to fill the breach which may at any time be made at a more important point. In the case of our peasant with the sacks of corn, the cause and the consequence of the substitution are very easy to understand. But in highly developed economic relations, important complications take place, since the substitution of goods will extend in various directions beyond the supply of goods of the same species.

The first complication is that due to exchange. If the only winter coat I possess be stolen, I shall certainly not go shivering and endanger my health, but I shall simply buy another winter coat with twenty dollars which I should otherwise have spent for something else. Of course, then, I can buy only twenty dollars' worth less of other goods, and, of course, I shall make the retrenchment in goods which I think I can most easily dispense with; i. e., whose utility, as in the foregoing example, is the least; in a word, I shall dispense with the final utility. The real thing, therefore, which is dependent upon whether or not I lose my winter coat is the satisfactions that are most easily dispensed with, the satisfactions which, in the given condition of my property and income I could have procured with twenty dollars more; and it is upon those other satisfactions, which may be very different in nature, that, through the workings of substitution by exchange, the loss, and with it the final utility dependent on it, is shifted.'

If we carefully follow out this complication we shall come upon one of the most important of theoretical problems: viz., upon the relation between the market price of given goods, and the subjective estimate which individuals set upon those goods according to their very

1 Böhm-Bawerk, Grundzüge, pp. 38 and 49; Wieser, Der natürliche Werth, 1889, pp. 46 et seq.

various wants and inclinations on the one hand and their property and income on the other. I will merely remark in passing that the complete solution of this problem requires very subtle investigation, which was first undertaken by the Austrian economists, and I will proceed to show the results which they have obtained. According to their conclusions, the price or “ objective value” of goods is a sort of resultant of the different subjective estimates of the goods which the buyers and sellers make in accordance with the law of final utility; and, indeed, the price coincides very nearly with the estimate of the “last buyer." It is well known that Jevons and Walras arrived at a similar law of price. Their statement, however, has considerable deficiencies, which were first supplied by the Austrians. It was the latter who first found the right way of escape from the circulus vitiosus in which the older theory of price as dependent upon supply and demand was involved. Since it was undeniable that, on the one hand, the price which can be asked in the market is influenced by the estimate which the buyer sets upon the goods, but, on the other hand, it is just as undeniable that in many cases the buyer's estimate is influenced by the state of the market (as, for instance, the final utility of my winter coat is materially less when I can replace it in the market for ten dollars than when it costs me twenty dollars); the theorists who found a more exact psychological explanation necessary for the law of supply and demand in general, have usually allowed themselves to be beguiled into reasoning in a circle. They more or less openly explained the price by the estimate of the individual, and, vice versa, the estimate of the individual by the price. Of course, such a solution is not one upon which a science that wishes to deserve the name of a science can rest. An attempt to get to the bottom of the matter was first made by the Austrian economists by means of the subtle investigation of which I have spoken above.

1 As, for example, in Germany, the highest authority on the theory of price, Hermann; cf. Böhm-Bawerk, Grundzüge, pp. 516, 527.

A second interesting and difficult complication of the substitution of goods is due to production : viz., given a sufficient time, the goods whose substitution is under consideration could be replaced by production. As in the former case the goods were replaced by the use of money, so in this case they can be replaced directly by the conversion of materials of production. But, of course, there will be less of these materials of production left for other purposes, and just as surely as before the necessary diminution of production will be shifted to that class of goods which can be most easily dispensed with, which is considered least valuable.

Take Wieser's example: If a nation finds weapons necessary to the defence of its honor or its existence, it will produce them from the same iron which would otherwise have been used for other necessary, but more or less dispensable utensils. What, therefore, happens to the people through the necessity of procuring weapons is that they can have only somewhat less of the most dispensable utensils which they would have made of the iron; in other words, the loss falls upon the least utility, or the final utility, which could have been derived from the materials of production necessary to the manufacture of the weapons.

From this point, again, the way leads to one of the most important theoretical principles, which under a certain form has long been familiar. This principle is that the value of

1 Austrian literature on the subject of price: Menger, Grundsätze der Volkswirtschaftslehre, p. 142 et seq.; Böhm-Bawerk, Grundzüge der Theorie des wirtschaftlichen Güterwerths, Part II., Conrad's Jarhbuch, N. F., vol. xiii. p. 477 et seq., and on the point touched upon in the text, especially, p. 516; Wieser, Der natürliche Werth, pp. 37 et seq.; Sax, Grundlegung der theoretischen Staatswirtschaft, 1887, pp. 276 et seq.; Zuckerkandl, Zur Theorie des Preises, 1889. I will not lose this opportunity to refer to the excellent account given by Dr. James Bonar, some years ago, of the Austrian economists and their view of value in the Quarterly Journal of Economics, Oct. 1888.

Der natürliche Werth, p. 170.

those goods which can be reproduced at will without hindrance shows a tendency to coincide with the cost of production. This principle comes to light as a special case of the law of final utility, occurring under given actual conditions. The “cost of production” is nothing else than the sum of all the materials of production by means of which the goods or a substitute for the same can be reproduced. Since, then, as above pointed out, the value of the goods is determined by the final utility of their substitute, it follows that so far as that substitution can be made ad libitum, the value of the product must coincide with the final utility and value of the materials of production, or, as is usually said, with the cost of production.

As to the final cause of this coincidence the Austrians have a theory quite different from the older one. The older theory explained the relation between cost and value to be such that the cost was the cause and final cause, while the value of the product was the effect; it supposed the scientific problem of explaining the value of goods to be satisfactorily solved when it had appealed to cost as the “ultimate regulator of value.” The Austrians, on the contrary, believe that herein only half, and by far the easier half, of the explanation is to be found. The cost is identical with the value of the materials of production necessary to the manufacture of the goods. Cost rises when and because the materials of production (fuel, machinery, rent, labor) rise; it falls when and because the value of the materials declines. Hence, it is evident that the value of materials of production must first be explained. And the interesting point is that when the explanation is carefully carried out it leads us to see that the value of the completed product is the cause. For without doubt we place a high estimate upon materials of production only when and because they are capable of furnishing valuable products. The relation of cause and effect is, therefore, exactly the reverse of what the older theory stated. The older theory explained the value of the product as the effect, and the cost—that is, the value of the materials of production-as the cause, and thought no further explanation necessary. The Austrian economists found: ist, that the value of the materials of production needs, first of all, to be explained; and, 2d, that after this explanation is made, and after the net of complicated relations is untangled, the value of the materials of production is seen in the end to be the effect, and the value of the product the cause.

I know very well that this thesis will seem strange to many readers at the first glance. I cannot here attempt to demonstrate it or even to guard it against certain misapprehensions to which it is liable. I will call attention to only one circumstance. In the case of certain materials of production, whose true causal connection was for special reasons easy to see, the old theory recognized the principle; as, for instance, in regard to the value of the use of land, which is expressed in rent, Adam Smith observed that the price of the products of the soil is not high or low because rent is high or low; but, vice versa, rent is high or low according as the price of the product is high or low. Or again, no one supposes that copper is dear because the stock of the mining companies is high; but obviously the value of the mines and the stock is high when and because copper is dear. Now, just as well might the water of one river flow up hill while that of the river beside it flows down, as that in the case of different sorts of materials of production the causal connections should run in opposite directions. The law is one and the same for all materials of production. The difference is only that in case of certain materials the true relation of cause and effect is very easy to see, while in others, owing to manifold obscuring complications, it is very hard to see. The establishment of the law for those cases also, when deceptive appearances had led to the opposite explanation, is one of the most important contributions of the Austrian school.

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