CHAPTER XXIX

THE AUSTRIAN SCHOOL, AND ESPECIALLY THE DEVELOPMENT OF SUBJECTIVE VALUE THEORIES

MANY of the earlier economists show a general recognition of the fact that utility is essential to value. Subjective factors, too, were more or less recognized. These economists were, however, inclined to take utility and the demand based upon it for granted. It was a matter of course with them. This is especially true of the English, less true of the Germans, and least so in the case of Say. As has been seen, Gossen, Jevons, and Walras developed this aspect; but Gossen remained almost unknown, while contemporary with Jevons there arose a school of Austrian economists who carried on this line of development with a broader and deeper analysis. The "Austrian School" so analyzes utility as to base a comprehensive theory of value upon subjective elements. Their reasoning they apply to the valuation of the factors of production, with the result that they have developed a notable theory of capital and interest. In these points they stand as critics of the Classical School.

The Austrians and their Value Theory. Carl Menger laid the corner-stone for the Austrians with his Grundsätze der Volkswirtschaftslehre, 1871,1- the same year in which Jevons' Theory appeared. Menger felt that economic theory had fallen into disrepute with many scholars, and he sought to restore it to its place of honor by freeing it of inconsistency

1 Other writings:

Untersuchungen über die Methode der Sozialwissenschaft, 1883.

Die Irrthümer des Historismus, 1884.

Beiträge zur Währungsfrage in Oesterreich-Ungarn, 1892.

Die Übergang zur Goldwährung, 1892.

and basing it upon more fundamental laws of causation. All things, he says, are subject to the law of cause and effect. In economics the human want is the fundamental thing. Things which have the capacity of being placed in causal connection with the satisfaction of human wants are utilities. To bring an object into the sphere of economic causation four conditions are necessary: (1) a human want, (2) such properties of the thing as make it capable of being placed in causal connection with the satisfaction of this want, (3) the recognition of this causal relationship by man, (4) the power to dispose of the thing so that it can actually be applied to the satisfaction of the want. With such analysis Menger sought to arrive at ultimate causes, and to explain value which he regards as the heart of economic theory - from the economic activity of the individual, that is, from his exchange contracts. Although some recognition is given to the influence of society, according to Menger, value is an individual phenomenon: it is independent of society and law. He defines value as "the significance which concrete goods or groups of goods gain for us through the fact that in the satisfaction of our wants we are conscious of a dependence upon the disposal of them." In opposition to cost theories, he maintains that value rests on utility and (relative scarcity.

2

Goods are divided into different classes, or "orders," according to their nearness to the consumer.3 Thus bread is in the first order; flour in the second; wheat in the third. Goods of the last description are of the "higher order," and their value is reflected back from those of the "lower order ": wheat has value because and in so far as men want wheat bread to maintain life and well being.

` Differences in value are due to the different estimations which men put upon the satisfaction of various wants. The value of a concrete good, or of a certain aggregate, at the disposal of an economic man is equal to the significance of the least important want satisfactions yielded.

Grundsätze, p. 3.

2 Ibid., p. 78.

3 Chap. I, § 2.

Always, where there are the bases for an exchange between men who are actuated by economic motives, certain limits are set by the quantities of exchangeable goods which are deemed equivalents by the parties; and these quantities, which in a subjective sense are equivalents, differ with different individuals. Within these limits price is determined. If A estimates 100 units of grain at 40 units of wine, and B estimates 80 units of grain at 40 of wine, an exchange can take place, the price in grain lying somewhere between 80 and 100.1

Over and over again Menger repeats his statement that value and the measure of value are subjective and dependent on wants. The quantity of labor or capital expenditure involved has no direct or necessary connection.2 In a primeval forest one may chop wood till doomsday without making that wood valuable, while a diamond picked up by chance has great value. Nor does the cost of reproduction solve the matter; for there are many goods which cannot be reproduced, and many others, like out-of-date clothes, whose value is less than that of the agents of their production.

3

The next important step in the development of the Austrian theory comes with the publication in 1884 of the Ursprung und Haupt-Gesetze des wirthschaftlichen Werthes (Source and Principal Laws of Economic Value) by Wieser. He built upon Menger, applying his theory to the phenomena of costs, and deepening the psychological analysis.

Wieser's complicated statement of what gives economic value to a good may be translated thus: (1) If things are capable of producing useful effects (aside from things of indifference, and perhaps those which are harmful); (2) if their supply does not equal the employment for them; (3) if they allow encroachments by men which, when economic, increase their usefulness, and, when uneconomic, decrease it; (4) if all subjective suppositions which complete these objective ones agree; (5) and if, then, the existence of the good, its utility, and other external circumstances are perceived; (6) if the need for it is not only

1 Grundsätze, p. 176.

2 p. 120.

3

Cf. above, pp. 241, 244.

distinct, but also its satisfaction is desired; (7) and if the purpose is formed to do the economic acts which show themselves practicable while shunning the temptation to uneconomic action, then will the interest be transferred from the expected economic uses to the goods, and become associated with them, i.e. then the goods receive economic value.

"The value of a single good out of a store is determined by the interest in that useful service which is the least important among the most important ones afforded by the store." For Jevons' "final utility" he substitutes the term, Grenznutzen (marginal utility), which has since become so generally used.1

In explaining the value of the factors of production, Menger had held that the decisive thing is the portion of the return which would be lost through the loss of a factor. This theory Wieser differs from. In his Natural Value (1889) he bases such value upon the "productive contribution" of the factor a theory of imputation. He uses the principle of complementary goods, and argues that "the elements that are bound up may alter, and this fact makes it possible for us to distinguish the specific effect of each single element," 2 by comparing a number of equations.

It would seem that while Wieser's scheme is useful in an illustrative way and may be used for measuring the value of production goods, it is lacking when it comes to the more fundamental problem of determining their value. It does not explain causes or points of fixation.

Meanwhile, what becomes of the idea that it is the cost of these elements of production that determines the value of the product? This Wieser denies, though admitting that costs have an indirect and partial effectiveness. It is his idea that only men's interests, based on utility, induce them to estimate value at cost.

To use his own words:

"If we ask why products thus produced- neither under 1 It will be remembered that Thünen developed a marginal productivity theory, and he used the word Grenze (margin) in connection with it. See above, pp. 286 f.

' p. 87.

nor over costs - have value, and why they have definite amounts of value, we shall doubtless find that they have themselves alone to thank for it. They create it out of their utility, taking into consideration the amounts produced. The circumstance that costs of a certain value have been expended in making them is of no consequence as regards their value. The cost value does not determine the use value; the use value exists of itself, and sanctions the cost value." 1

Cost is "sanctioned" by use value, is, in fact, nothing but a complicated form of value in use.

But, as just intimated, costs are admitted to "affect" values. Though not consistently followed, the idea appears to be that the anticipation of value (utility?) gives costs themselves a value. Then the "value of costs "2 may even determine value of goods, either indirectly, by regulating supply, or directly, in individual cases, by communicating their own value to the good." The Austrian School does not in any way destroy the idea of cost or the law of cost, it only endeavors to combine both with the general idea of value and its general law, and to explain them in this way." 3

Wieser's explanation of the existence of the old notion concerning costs is ingenious and interesting. Just as the value of a mineral spring depends on the utility of its water, so iron, coal, and labor derive value from the utilities produced. But here, any one unit of commodity reflects so small a portion of its total utility that it seems that the process is reversed, and that the commodity derives its value from the elements entering into its production. The individual capitalist, for example, if his means of production have other applications, finds them evaluated in the general market, and he tends to regard the situation as one in which the value of his wares must replace his expenses of production. But, argues Wieser, the buyers of his wares pay only according to their estimation of their marginal utility. All that cost does is to limit the supply put 2 Ibid., p. 176.

1 Natural Value, Smart's ed., p. 177. 3 Wieser, “The Theory of Value” “ Ann. Amer. Acad., II, 620 (1892).

(A Reply to Professor McVane),"