[97] Bk. ii, ch. vi.
[98] "Cf. Davenport, Value and Distribution, 560. 'For, in truth, not merely the distribution of the landed and other instrumental, income-commanding wealth in society, but also the distribution of general purchasing power ... are, at any moment in society, to be explained only by appeal to a long and complex history [italics mine], a distribution resting, no doubt, in part upon technological value productivity, past or present, but in part also tracing back to bad institutions of property rights and inheritance, to bad taxation, to class privileges, to stock-exchange manipulation ... and, as well, to every sort of vested right in iniquity.... But there being no apparent method of bringing this class of facts within the orderly sequences of economic law, we shall—perhaps—do well to dismiss them from our discussion....' [Italics are mine.] It may be questioned if the 'orderly sequence' is worth very much if it ignore facts so decisive as these! It is precisely this sort of abstractionism which has vitiated so much of value theory. Most economists slur over the omissions; Professor Davenport, seeing clearly and speaking frankly, makes the extent of the abstraction clear. We venture to suggest that the reason he can find no place for facts like these within the orderly sequence of his economic theory is that he lacks an adequate sociological theory at the basis of his economic theory. A historical regressus will not, of course, fit in in any logical manner with a synthetic theory which tries to construct an existing situation out of existing elements. Our plan of a logical analysis of existing psychic forces makes it possible to treat these facts which have come to us from the past, not as facts of different nature from the 'utilities' with which the value theorists have dealt, but rather as fluid psychic forces, of the same nature, and in the same system, as those 'utilities.'"
[99] Of course, we do not mean to question the immense light which history throws upon the nature of existing social forces.
[100] Theory of Political Economy, 4th ed., p. 34.
[101] Art. "Geld," in Handwörterbuch der Staatswissenschaften.
[102] Cf. Helfferich, Das Geld, Leipzig, 1903, for the same terminology, pp. 485-486.
[103] Exchange creates values. It does not necessarily create utilities. Wheat going from a famine-stricken part of India to a place where it will sell for higher prices does not gain in utility thereby.
[104] A possible exception to this general statement might be made for Professor H. J. Davenport, who would insist that his version of the utility theory is based on "relative marginal utility," rather than on marginal utility in Böhm-Bawerk's fashion. No critic has been more merciless than he in the criticism of the Austrian confusions of demand-curves with utility-curves, etc. But it is not clear to me that Professor Davenport has freed himself from the general doctrine that he criticises. I am not sure that he would accept Schumpeter's version of the Austrian theory as correct. It may be possible to read Schumpeter's doctrine into chapter 7 of Davenport's admirable Economics of Enterprise, but it is not clear that one could read it in the chapter! That individual price-offer depends on the marginal utilities of alternative goods, in comparison with the marginal utility of the good in question, Davenport does emphasize. But the complication that not merely the utilities of alternative goods, but also their prices, have to be taken into account, and that this involves circular reasoning when an effort is made to give a summary of the whole system of prices by means of individual utility calculations, he does not, so far as I can see, grapple with. He summarizes the thing on p. 104: "The steps, then, are from (1) utility to (2) marginal utility, thence to (3) the comparison of marginal utilities, and finally to (4) price-offer." He takes no account here of the complication that the third step is in large degree a comparison, not of marginal utilities proper, but rather, of "subjective values in exchange." Yet just in this lies a vital difficulty of utility theory, in so far as it attempts to explain causation. Moreover, Professor Davenport is seeking to explain the causal relation of utility to demand, the old Austrian problem. The explanation of demand is, indeed, the problem with which all theories of value must come to terms, if they are to be of any use. As we have seen, Schumpeter's schema has no bearing whatever on the explanation of demand, or on causation of any sort. Schumpeter's scheme leaves money out, and demand-curves run in money terms. Davenport's scheme assumes money—and "purchasing power." (Loc. cit., 91.) We have seen in the chapter on "Supply and Demand" that the notion of demand and supply involves money and a fixed absolute value of money. Professor Davenport is thus doubly assuming value, the thing to be explained! Laws of "relative marginal utility" developed on the assumption of money, and in abstraction from changes in the value of money, are not likely to be of service when the problem of the value of money itself is taken up. On pp. 95-96, Davenport comes closest to Schumpeter's doctrine, saying that "the total situation is directive of each individual in it," and that there are "mutual reactions," such that particular facts are both effects and causes, illustrated by the last person who jumps on a crowded raft—does he sink the others, or do they sink him? This recognizes the complexity of the problem, but it is not clear that it even purports to do more than that. What is called for is a definition of the essential elements in that "total situation," with precise statement as to what is assumed constant and what is allowed to vary, and an analysis of the "mutual reactions," with a starting point and a terminus ad quem,—an equilibrium in which "mutual reactions" cease to trouble with their endless circle! Schumpeter's schema, though meeting criticism on other scores, does meet this logical test, but Davenport's does not appear to do so.
It is interesting to note that Professor Alvin S. Johnson, in his review of the Economics of Enterprise, concludes that Professor Davenport, instead of meaning by "relative marginal utility" anything of the sort that Schumpeter has in mind in his equilibrium picture of all utilities to all individuals, really has an absolute value in mind. (Quarterly Journal of Economics, May, 1914, pp. 433-436.) There is much in Professor Davenport's book to justify this interpretation.
Professor Davenport's application of "utility" to the problem of the value of money will be found on pp. 267-275 of the Economics of Enterprise. The general discussion of money and credit in the Economics of Enterprise has been exceedingly illuminating to me, and my indebtedness to it will appear in the present book.