In general, none of the polished tools of the economic analysis,—neither cost of production, the capitalization theory,[61] nor the law of supply and demand,—is applicable to the problem of the value of money. The reason is that they get their edge from money itself. The razor does not easily cut the hone. It is to this fact, I think, that we owe the widespread and long continued vogue of a theory so crude and mechanical as the quantity theory. In the next chapter we shall show that the utility theory of value—which we shall not recognize as a polished tool!—has also failed to give us help in explaining the value of money.
CHAPTER V
MARGINAL UTILITY AND THE VALUE OF MONEY
A good many writers have attempted to apply the marginal utility theory to the value of money. Among these, I may particularly mention Friedrich Wieser, Ludwig von Mises, Joseph Schumpeter, and, in America, David Kinley, and H. J. Davenport.
The marginal utility theory is ordinarily merely a thinly disguised version of supply and demand doctrine. As usually presented in the text-books, we have an analysis of the phenomenon of diminishing utility of a given commodity to a given individual, illustrated by a diagram, in which the ordinates represent diminishing psychological intensities. Often a money measure is given to these diminishing intensities, and the curve is presented as the demand schedule of a given individual. Then, with little further analysis, a leap is made to the market, and it is assumed that the market demand-curve, of many individuals, differing in wealth and character, is a utility-curve, and value in the market is "explained" by means of marginal utility. I need not here repeat my criticisms of this procedure.[62] It gives simply a confused statement of the doctrine of supply and demand. The analysis of utility which precedes the discussion of market demand is wholly irrelevant, and merely mixes things up. That such a conception is of no use in solving the problem of the value of money has been sufficiently indicated in the chapter on supply and demand.
Sometimes the contention is made that money is unique among goods in having "no power to satisfy human wants except a power to purchase things which do have such power."[63] This contention, in Professor Fisher's view, precludes the application of the marginal utility theory to the problem of the value of money, and he makes no use of marginal utility in his explanation. Indeed, in the passage from which this quotation is taken, Professor Fisher says that the quantity theory of money rests on just this peculiarity of money. Not all writers who contend that money has no utility per se, however, have felt it necessary to give up the marginal utility theory as a theory of money, as we shall later see.
On the other hand, writers of the "commodity school" (or "metallist school"), writers who see the source of the value of money in the metal of which it is made, can apply the utility theory readily to the value of money, making the value of money depend on the marginal utility of gold, or the standard metal, whatever it is. To the writers of this school, it is incredible that anything which has no utility should become money. Money must be either valuable itself, or else a representative of some valuable thing. The value of money comes from the value of the standard of value, and that value may, so far as the logic of the situation is concerned, be as well explained by marginal utility as the value of anything else. Typical of this view is Professor W. A. Scott's discussion in his Money and Banking[64], though the emphasis there is not on marginal utility as the explanation of the value of the standard, but on the value (conceived of as an absolute quantity) of the standard as essential to the existence of money, and the performance of the money functions. Professor Scott attacks vigorously and effectively Nicholson's exposition of the quantity theory,[65] where the assumption is made that money consists of dodo-bones (the most useless thing Nicholson could think of). Most quantity theorists would share Nicholson's view that dodo-bones would serve as well as anything else for money—or, to put the thing less fantastically, that the substance of which money is made is irrelevant, that the only question is as to the quantity, rather than the quality, of the money-units, and the quantity of the money-units, not in pounds or bushels or yards, but in abstract number merely. For writers who seek the whole explanation of the value of money in its monetary application, and who see that money, qua money, cannot administer directly to human wants, the view that Professor Fisher expresses, namely, that money has no utility, and is unique among goods in this respect, seems on the surface, to have justification. On the surface merely, however. Money is not unique among goods in being wanted only for what it can be traded for. Wheat and corn and stocks and bonds and everything else that is speculated in is wanted, by the speculators, only as a means of getting a profit[66]—they are remoter from the wants of the man who purchases them than the money profit he anticipates. Ginsing, in America, has value, though consumed only in China. And there are people, particularly jewelers, who often want money as a raw material for consumption goods. The difference is at most a difference of degree—and of slight degree indeed in the case of such things as bonds, which count on the "goods" side of the quantity theory price equation, but which really are in all cases remoter than money itself from human wants. Money really stands, for the purpose in hand, on the same level as any other instrumental good.[67] It does not give forth services directly, as a rule. Neither does a machine, or an acre of wheat land, or goods in a wholesaler's warehouse. Exchange is a productive process, an essential part of the present process of production. Money is a tool which enormously facilitates this process. It has its peculiarities, no doubt. One of them is—and money is not unique in this as will later appear—that it must have value from non-monetary sources[68] before it can perform its own special functions, from some of which it draws an increased value. But there seems to me to be nothing in the contention quoted from Professor Fisher, to justify setting money sharply off from all other things, or to justify the view that marginal utility is inapplicable to the value of money, if it be applicable to the value of anything at all that is not destined for immediate consumption. I do not believe that the marginal utility theory is valid for any class of goods, not even those for immediate consumption. Where marginal utility theory is,—as in the conventional text-book expositions—merely another name for supply and demand theory, it is, as already shown, not applicable to the value of money, and it is useful in the surface explanation of market-prices of goods. But where marginal utility theory really seeks to get at value fundamentals, it is precisely as valid for money as for goods of other sorts—invalid, in my judgment, in both places, and for the same reasons in both.
Among the writers who would apply the utility theory to money, while still insisting that money, as such, has no utility, are Wieser, Schumpeter—who accepts Wieser's theory in its main outlines—and von Mises, who develops a notion very different from that of the other two.