Much of what has been said of Davenport's "relative utility" theory may also be said of Wicksteed's. (Common Sense of Political Economy, London, 1910.) This is in many ways a remarkable book, characterized by excellencies of many different sorts. But it fails to present the utility theory in such a way as to avoid circular reasoning. Wicksteed sees the confusion of utility-curves with demand-curves, and protests vigorously and at length against it. (E. g., pp. 147-150.) He starts out by assuming money and a set of market prices. His earlier chapters are given to showing how the individual adjusts himself to the market, bringing his "marginal utilities" of various goods into harmony with the market prices. He recognizes that he has made these assumptions (pp. 130-131), and that he cannot use the results thus achieved as an explanation of the market prices. They are "our goal, not our starting point." But by pp. 161-162 he finds himself with the "suspicion" that nothing special or peculiar is to be found in the laws of "market or current prices—a phenomenon which it is obviously impossible to regard as ultimate, which demands explanation, and which we have not yet explained.... Much remains to be done, but we can already see that the preferences of each individual help to determine the terms or conditions under which the choice of other members of the community must be exercised. If you take the individuals of the community two and two it is clear that the marginal preferences of each determine the limits within which direct exchanges with the other can be entertained, and we must already have at least a presentiment that the collective scale is the register of the final and precise 'resultant' of all these mutually determining conditions and forces."
This seems to forecast Schumpeter's doctrine, but in the development which follows, we do not find it. The heart of his analysis of the causation of prices is in ch. vi, on "Markets." The "summary" which precedes that chapter again suggests Schumpeter's analysis—the notion of an all-embracing equilibrium. But when we get into the detailed analyses of the chapter we find nothing more than an exceedingly good account of the process by which supply and demand of particular goods, considered separately, become equated, through two-sided competition, and under conditions of monopoly. Instead of "relative marginal utilities," we see customers coming into the market with various money-prices in mind, and sellers trying out various money-prices—not marginal utilities, nor yet two or more marginal utilities in comparison with one another, but rather, money-prices, which, in the minds of the buyers may be supposed to represent "subjective values in exchange," based on both marginal utilities and objective prices of other things that enter into the budget, and which, in the minds of sellers, represent estimates of the prices which buyers may be induced to pay. Wicksteed does not transcend the circle. Finally, despite his caution to avoid the more glaring forms of the circle, and the confounding of demand-curves with utility-curves, and of utility with value, he does lapse into it in its completest form in expounding the Austrian doctrine of cost of production. "The only sense, then, in which cost of production can affect the value of one thing is the sense in which it is itself the value of another thing. Thus what has been variously termed utility, ophelemity, or desiredness, is the sole and ultimate determinant of all exchange values." (P. 391.) Here is the illicit leap from marginal demand price to marginal utility which all utility theorists make, sooner or later! It is true that costs in one place are reflections of demand elsewhere. But it is not true that costs in one place have any definite quantitative relation to utilities in another place!
When Wicksteed comes to discuss the value of money, he makes slight use of the notion of abstract ratios among relative utilities, and employs a concept which he has nowhere vindicated or explained: the value of money, as distinct from the reciprocal of the price-level, treating the value of money as something which can be directly influenced by sinister rumors affecting the credit of the Government, and which can be an independent cause affecting velocity of circulation, and the amount of trade done by means of money. Loc. cit., p. 623. See infra, our chapter on "Velocity of Circulation."
The only writers I know at first hand who have really thought the thing through, and avoided the circle in form, are Schumpeter and Irving Fisher. (Mathematical Investigations in the Theory of Value and Prices, Trans. Conn. Acad. of Arts and Sciences, 1892. See bibliographical note, supra, in this chapter.) I have given an exposition of Schumpeter, rather than Fisher, because the former has put the doctrine in non-mathematical form. In the text I have indicated the limitations of their doctrine. Fisher definitely avows the impossibility of applying the doctrine to the problem of the value of money. Purchasing Power of Money, p. 174. Schumpeter doesn't apply it to money, and when he tries to work out a utility doctrine of money, he lapses into the Austrian circle in a very obvious form. In later writings, Fisher also seems to forget the limitations imposed on utility theory in his earlier essay. In his Elementary Principles, ed. 1912, Fisher lists (pp. 408-409) a great multitude of factors that might affect the price of pig iron, and then says: "Back of these causes lie other causes, multiplying endlessly as we proceed backward. But if we trace back all these causes to their utmost limits, they will all resolve themselves into changes in the marginal desirability or undesirability of satisfactions and of efforts, respectively, at different points of time, and in the marginal rate of impatience as between any one year and the next." Here these marginal psychic magnitudes, which in the earlier essay appeared merely as surface phenomena, resultants of a total situation, proportional to prices, causes of nothing, merely symptoms of a completed equilibrium, are erected into atomic veræ causæ, the ultimate ultimates!
It is interesting to contrast this with a yet more recent statement by a philosopher who has undertaken a defence of the utility theory of economic value, Professor R. B. Perry, in the Quarterly Journal of Economics, for May, 1916. Considering the contentions of the present writer that many general social causes, in addition to the individual utilities concerned with consumption, are needed to explain changes in the values of goods, such as changes in fashion, mode, in general business confidence, in moral attitude toward different sorts of consumption, in the distribution of wealth, in taxes and other laws, Professor Perry says: "If the Austrian School has neglected this, then it needs to be corrected. But the essential contention of that school remains, so far as I can see, unaltered; in that these changes work through individuals and have their point of application in a more or less rational comparison of needs made by the individual buyer or seller. Whatever affects these individual schedules on a sufficiently large scale will affect prices. But to ignore the individual channels through which these forces pass, is elliptical." (Pp. 469-470. Italics mine.) Now I call attention to several points in the foregoing. First, I would contrast it with the doctrine quoted from Professor Fisher's Elementary Principles. Where Fisher puts the utilities far back in the realm of ultimate causation, making them the source from which spring all the proximate social causes which might affect the price of pig iron (such as "a trade war," "a change in fashion," a "change in incomes," "decreasing foresight," etc., loc. cit., p. 409), Professor Perry would make individual utility schedules the final focal point, toward which converge, and through which pass, all the causal forces, however richly explained by antecedent social factors, which affect prices. The utility theory of value means all things to all men!
But a second point with reference to Professor Perry's doctrine. It is perfectly true that all social activities are the work of individuals. Society is nothing apart from the individuals who make it up. To think of society and the individual as separate and antithetical is a fallacy which I have criticised in detail in Part III of Social Value. The social value theory does not mean that there are social forces which do not run through individual channels. This is not to accept the notion that individuals are really, in their psychical nature, isolated monads, however. There is a functional unity of individual minds, and no individual can be understood in abstraction from society. But this view is as old as Aristotle. I have not contended that prices can change apart from the mental activities of individual men, working upon one another. So far there may be no issue with Professor Perry.
But there is a big issue when he contends that all the causation is focussed in individual utility schedules, and in a more or less rational comparison of needs made by the individual buyer and seller. This is demonstrably erroneous. Let us assume, for example, that utility schedules of every individual New Yorker remain unchanged, but that, through a change in the law (the work of individual men, under the influence of their own individual emotions and ideas, of, say, ethical character), incomes in New York City are equalized. Hold rigidly to the assumption that there are no changes in utility schedules. Will there not be, none the less, a radical readjustment of prices? Will not the prices of Riverside palaces and steam yachts sink and the prices of things which the poor esteem rise? The utility-curves of the erstwhile rich, assumed to remain unchanged, no longer count for so much as before in the market. The rich cannot go so far down their curves in the consumption process as before. The poor, or those who had been poorest, now count for more in the market. They can lower their margins. In other words, the forces affecting the distribution of wealth, in so far as they are legal and moral in character, at least, may affect the price-situation, without altering utility schedules. Some social factors, as changes in mode and fashion, will work through the utility schedules, but others will not. One big variable affecting prices which need not, in idea, at least, affect utility schedules at all, and whose main influence is anyhow not directed through them, is the volume of business confidence. This factor we shall analyze in our discussion of credit, infra. Professor Perry thus escapes only part of the criticism which we have made (Social Value, pp. 45 and 56) of the Austrian theory: (1) that it abstracts the individual from his vital contacts with other individuals, and (2) that, within the individual mind thus abstracted, the Austrians make a further abstraction, taking as relevant only the interests concerned with consumption of economic goods, summed up in the utility schedules. The second criticism applies to Professor Perry as well. Men's total interests are not summed up in utility schedules, and do not affect prices exclusively via utility schedules.
It may be noticed, also, with reference to Professor Perry's discussion that he has misconstrued the Austrian theory in conceiving it as an analysis of an historical process, with a beginning and an end, instead of a static picture, in which preëxisting individual factors come into equilibrium. (Loc. cit., 475.) He seeks thus to avoid the Austrian circle, but as we have shown in the discussion of von Mises in the text, this way is not open to the Austrians.
Able and penetrating though Professor Perry's discussion is, on the psychological side, it fails, I think, to take adequate account of the complexities with which the economist and sociologist must deal.
In general, I find no version of the utility theory of value which is defensible, and, above all, no effort to apply it to the value of money which has met with success.