(7) Such an equilibrium picture leaves untouched the vital question which any theory must answer which means to be of practical use in concrete situations: what are the real variables in the situation, and what factors are constant? What causes are likely to produce changes in market prices? The individual-utility curves, which in Austrian theory are commonly treated as the only variables, except quantities of goods,—in the strict static picture there are no variables at all!—are really, when conceived of as individual, as growing out of the mental processes of each individual separately, the most constant factor in the situation. For, on the principle of the inertia of large numbers, each unit of which is moved by its own peculiar causes, changes in the utility-curves of one man will be offset by opposite changes in the utility-curves of another, and so the general system will remain much where it was. Of course, if a rich man changes his curve, a poor man's change will not offset it in the market, but this is to emphasize the distribution of wealth rather than the utility-curves. It is only when you get changes of a sort that the individualistic psychology, and the "pure economic" explanation factors, of the Austrians find no place for, that you can predict a change in the general price-system. It is only changes in fashion or mode, in general business confidence,[86] in moral attitude toward this or the other sort of consumption or production, in the distribution of wealth, changes in taxes and other laws—causes of a general social character—that you can count on to produce important changes in values. Of course, changes in the adequacies of supplies would be taken account of on either interpretation.
(8) The scheme under consideration gives no value concept which the economist can make any particular use of. It gives only ratios between marginal utilities in the mind of the same individual, and abstract market ratios. It gives no quantitative value, which can be attributed to goods as a quality,[87] a homogeneous quality of wealth by means of which diverse sorts of wealth may be compared, funded, etc. Such a concept is, however, necessary for the economic analysis, and Schumpeter is driven to creating substitutes for it of various sorts, notably Kaufkraft and Kapital. Kaufkraft, as Schumpeter uses the term, is not derived from marginal utility, but is an abstraction from the idea of money. It is not a quantity of money alone, nor even of money and credit, but is a fund of "abstract power," which depends not alone on the quantity of money and credit in which it is embodied, but also on the prices of goods.[88] This Kaufkraft is needed to give the causal "steam," the "motivating power," which the social value concept connotes, but which ratios in the market lack. Similarly, Kapital is conceived of as an agent, a dynamic force, distinguished from accumulations of concrete productive instruments, by means of which the entrepreneur gets control of land, labor and instrumental goods.[89] Other functions of the quantitative value are shouldered on a hard-worked and unusually defined concept, Kredit, which leads Schumpeter into certain "heresies"[90] regarding credit, which are mostly harmless in themselves, but which will arouse misunderstanding and opposition. "Præter necessitatem entia non multiplicanda sunt," and the social value concept, which covers by inclusion the notion of market ratio—market ratios being ratios between social values—and which does all the work that Schumpeter attributes to Kapital and Kaufkraft, and most of the new work which he attributes to Kredit, is to be preferred,[91] if only on grounds of intellectual economy. "Capital" is then saved for more usual meanings, and economy in terminology is also effected. Schumpeter also departs, as shown, from the abstract market ratio notion in erecting a causal theory of value, in which "marginal utility" is used as the equivalent of a quantitative value, and is traced by the Austrian imputation process back to the original factors of production. He even speaks of labor as having "utility," whereas labor,[92] unless used in domestic service, has, not utility, but only value.
In the marginal utility scheme above outlined there is no place for money, on the assumptions laid down. It is a scheme of barter relations. The utilities which come into equilibrium are not subjective-exchange-values, which, as Schumpeter, with Wieser, contends, are the only subjective values money has, but are real subjective use values—marginal utilities. The scheme, assuming as it does, perfect exchangeability of all goods, with infinitesimal increments in consumption, has no place for money. There really is no money service to be performed. Schumpeter, indeed, speaks of money as a mere "Schleier," which does not touch the essence of the phenomena, and such it is on his assumptions. In a similar situation, Professor Irving Fisher gives up the effort to find a psychological explanation of the value of money,[93] and offers the quantity theory as a mechanical principle, additional to the psychological barter scheme. Schumpeter, however, does lip service still to the need for a psychological explanation. His answer runs in Wieser's terms—indeed, he attributes it to Wieser. The Preis of money[94]—Schumpeter does not use Wieser's absolute value concept, but lets his value of money run in purely relative terms—the price of money in goods depends on the subjective value of money. This subjective value of money rests on the experience of each individual in making purchases—rests on the prices of consumption goods, determined by the relation between real income and money income. The circle is as clear as day.
Ludwig von Mises sees this circle, and tries to avoid it. In von Mises there seem to me to be very noteworthy clarity and power. His Theorie des Geldes und der Umlaufsmittel is an exceptionally excellent book. Von Mises has a very wide knowledge of the literature of the theory of money. He has a keen insight into the difficulties involved. He recognizes fully that, so far, the utility school has failed to solve the problem (119-120). His theory is as follows: Individual valuations (93) constitute the basis of the objective exchange value of money. But while for other goods, subjective use-value and subjective exchange-value are different concepts, for money the two coincide, and both rest on the objective value of money (94). This seems to be our old circle in unmistakable form, but Mises thinks he has an escape, as will later appear. No function of money is thinkable which does not rest on its objective exchange value. The subjective value of money rests on the subjective use-values of the goods for which it can be exchanged (95). Money, at the beginning of its money-functioning, must have objective exchange value from other causes than its money-function, but it can remain valuable, even though these causes fall away, exclusively through its function as general instrument of exchange (111). He gives no argument in support of this contention, but refers with approval to Wieser (loc. cit.), and to Simmel (Philosophie des Geldes, 115ff.). Hence, the important consequence that in the value of money of to-day a historical component is contained. Herein is to be found a fundamental contrast between the value of money and the values of other goods (119-120.). The individual valuation of money rests on the objective exchange value of money of yesterday. This individual value of money is the explanation, on the money side, of the objective value of money of to-day. Going back, step by step, you come ultimately to the subjective use-value of the money-stuff in its non-monetary employment—a temporal regressus. This opens the way to a theory of the value of money based on marginal utility. This avoids the circle of explaining the objective value of money of to-day by the subjective exchange value of money of to-day, which in turn rests on the contemporary objective value of money.
I find this particularly interesting, since it employs a device which had once suggested itself to me as a means of escape from the Austrian circle, but which reflection led me to abandon. I have discussed the whole matter in my Social Value, and therefore venture a quotation from that book.[95]
"How are we to get out of our circle:[96] The value of a good, A, depends, in part, upon the value embodied in the goods, B, C, and D, possessed by the persons for whom good A has 'utility,' and whose 'effective demand' is a sine qua non of A's value? The most convenient point of departure seems to be the simple situation which Wieser has assumed in his Natural Value.[97] Here the 'artificial' complications due to private property and to the difference between rich and poor are gone, and only 'marginal utility' is left as a regulator of values. But what about value in a situation where there are differences in 'purchasing power'? How assimilate the one situation to the other?
"A temporal regressus, back to the first piece of wealth, which, we might assume, depended for its value solely upon the facts of utility and scarcity, and the existence of which furnished the first 'purchasing power' that upset the order of 'natural value,' might be interesting, but certainly would not be convincing. In the first place, there is no unbroken sequence of uninterrupted economic causation from that far away hypothetical day to the present, in the course of which that original quantity of value has exerted its influence. The present situation does not differ from Wieser's situation simply in the fact that some, more provident than others, have saved where others have consumed, have been industrious where others have been idle, and so have accumulated a surplus of value, which, used to back their desires, makes the wants of the industrious and provident count for more than the wants of others. And even if these were the only differences, it is to be noted that private property has somehow crept in in the interval, for Wieser's was a communistic society. And further, an emotion felt ten thousand years ago could scarcely have any very direct or certain quantitative connection with value in the market to-day. Even if there had been no 'disturbing factors' of a non-economic sort, the process of 'economic causation' could not have carried a value so far. It is the living emotion that counts! Values depend every moment upon the force of live minds, and need to be constantly renewed. And there would have been, of course, many 'non-economic' disturbances, wars and robberies, frauds and benevolences, political and religious changes—a host of historical occurrences affecting the weight of different elements in society in a way that, by historical methods, it is impossible to treat quantitatively.[98]
"What is called for is, not a temporal regressus, which, starting with an hypothesis, picks up abstractions by the way, and tries to synthesize them into a concrete reality of to-day, but rather, a logical analysis of existing psychic forces, which shall abstract from the concrete social situation the phases that are most significant. This method will not give us the whole story either. Value will not be completely explained by the phases we pick out. But then, we shall be aware of the fact, and we shall know that the other phases are there, ready to be picked out as they are needed for further refinement of the theory, as new problems call for further refinement. And, indeed, we shall include them in our theory, under a lump name, namely, the rest of the 'presuppositions' of value.
"Our reason for choosing a logical analysis of existing psychic forces instead of a temporal regressus—instead, even, of an accurate historical study of the past—is a two-fold one: first, we wish to coördinate the new factors we are to emphasize with factors already recognized, and to emerge with a value concept which shall serve the economists in the accustomed way—it is illogical to mix a logical analysis with a temporal regressus. But, more fundamental than this logical point, is this: the forces which have historically begot a social situation are not, necessarily, the forces which sustain it. The rule doubtless is that new institutions have to win their way against an opposition which grows simply out of the fact that we are, through mental inertia, wedded to what is old and familiar. We resist the new as the new. Even those who are most disposed to innovate are still conservative, with reference to propaganda that they themselves are not concerned with. The great mass of activities of all men, even the most progressive, are rooted in habit, and resist change. When, however, a new value has won its way, has become familiar and established, the very forces which once opposed it now become its surest support. Or, waiving this unreflecting inertia of society, as things become actualized they are seen in new relations. What, prior to experiment, we thought might harm us, we find beneficial after it has been tried, and so support it—or the reverse may be true. The psychic forces maintaining and controlling a social situation, therefore, are not necessarily the ones which historically brought it into being."[99]
Since the foregoing was written, I have found that another theorist, Professor Alvin S. Johnson, had also given consideration to the same idea, as a means of escape from the Austrian circle. Professor Johnson refers to the notion briefly in his review of Social Value (Am. Econ. Rev., June, 1912, p. 322), holding that the doctrine is logically tenable, though rejecting it on psychological grounds. "The value of a thing newly created can be explained only with reference to values antecedently existing." That there is a continuity in the value system, as in the whole social-mental life of men, I should be the last to deny. But it is not the antecedently existing values, as antecedently existing, that give value to the new piece of wealth. The antecedent values function only as persisting, as contemporary social forces. We do not find the motivating power of existing values in the ashes of burnt out desire! It seems to me very essential to distinguish the two methods of approach to the problem. It is possible to state a historical sequence—if you know it,—showing how values have historically come and gone. But for an equilibrium picture, of the sort that our price theory demands, where there is a mechanical balancing of contemporary factors (as in Marshall's balls in the bowl illustration), such an account is of no use. Existing social forces have their history. But, at a given moment, they are what they are, and what they were at a different time adds no ounce of weight to the power they now exert. If a quantitative account of value is called for—and price-theory is essentially concerned with the measurement of values—we must bring measure and measured into contemporary balance. The historical account is one thing; the cross-section analysis is another. "Static theory" is a mechanical abstraction from the organic cross-section picture, which, by making it superficial, is able to make it exact.