It seems to me that this distinction must be kept clear if progress in the science is to be made. At every point, divergent conclusions are reached if the two view-points are merged. The distinction between statics and dynamics is, in a general way, the same as the distinction here made between the historical and the cross-section view. It is no answer to the Ricardian theory of land-rent for Carey to point out that historically, in new countries, the uplands are cultivated first, and the more fertile river-valleys later. Ricardo is talking about statics, and Carey about dynamics. Carey does not answer Ricardo, because he is talking about a different problem. The utility theorist especially has no right to leave the static view-point. All the elementary laws on which the utility theory is based are static laws. The law of satiety, of diminishing utility, is a static law, and the utility theorists are careful to point out that it holds only for an individual at a given time. It rests on nerve fatigue. Give the nerve time to rest, and utility does not sink. On the contrary, the dynamic law of wants is that wants expand. As old wants are satisfied, new wants arise, so that, in the course of time, marginal utilities do not sink—the competition of new wants forces up the margins of the old wants. Moreover, with time, tastes change, habits are formed, and the same wants may grow more intense—as in the case of olives or whiskey. All this has been seen by the creators of the utility theory. Thus, Wieser: "The want as a whole of course retains its strength so long as a man retains his health; satisfaction does not weaken but rather stimulates it, by constantly contributing to its development, and, particularly, by giving rise to a desire for variety. It is otherwise with the separate sensations of the want. These are narrowly limited both in point of time and in point of matter. Anyone who has just taken a certain quantity of food of a certain kind will not immediately have the same strength of desire for a similar quantity. Within any single period of want every additional act of satisfaction will be estimated less highly than a preceding one obtained from a quantity of goods equal in kind and amount." (Natural Value, p. 9.) A similar statement is in Taussig's Principles (I, 124), "In such cases, however, the tastes of the purchasers may be said to have changed in the interval. At any given stage of taste and popularity, the principle of diminishing utility will apply." Illustrations could be multiplied.
It is true that future marginal utilities come into the utility theory scheme, but they come in, not as future utilities, but as "present worths" of future utilities, or as "present anticipated feelings" in Jevons' phrase[100] suffering a discount, usually, in the process. But I am not aware of any writer among the founders of the utility school, who has sought to bring past utilities into the scheme. The past is dead. Its effects persist in the present only in present processes. A memory is a present psychological fact.
Consider further. Is it the prices of yesterday that determine the subjective value of money to an individual, if the prices of yesterday are different from the prices of to-day, and the individual knows it? In so far as we have the clear, intelligent economic mind, seeking its interests—and the marginal utility theory assumes this type of mind—the tendency is to bring all the factors in the problem into the present. If prices change slowly, so that the individual can count on essentially the same situation to-day that he had yesterday, doubtless he will not take the trouble to recast his value system. There is a tremendous lot of trouble in bringing about, in the individual's mind, the rational equilibration of values—trouble which the Austrian theory commonly abstracts from, but which should be recognized in the analysis, and accorded its own marginal significance in the scale. To throw the emphasis on inertia, however, and to assume that men do not readjust their margins to meet changed conditions, is to depart from the fundamentals of the Austrian theory. If the price-situation is a rapidly changing one, men do rapidly readjust their estimates of money. If money is fluctuating rapidly in value—as, say, during a time when there is depreciated paper money, whose future depends on military events, the adjustments may be very rapid indeed. I quote the following from the news columns of the New York Times, of April 4, 1914, p. 2: "Jaurez, Mexico, Apr. 3.—After the hysterical outbursts last night that greeted the news of the fall of Torreon, this city was preternaturally calm to-day.... The silent gentleman with the dyed mustache who spins the marble at the roulette wheel in the Jaurez Monte Carlo, conducted by Villa's officers for the benefit of the rebel treasury, seemed the only person who was not excited. When the crowd of players suddenly deserted him on the sound of the bugle call of victory, he gave the marble another whirl from sheer force of habit, but none returned.... In an hour, however, play was faster and more furious than ever, for holders of Constitutionalist money early realized that their currency had suddenly increased in value, and that they were somewhat richer than before." I do not question the fact, however, that men are slow in making calculations, and that society is often unconscious of changed conditions, and often readjusts less rapidly than occasion requires. There is a vast deal of inertia, of blind habit, of custom, etc. But emphasis on these factors is not marginal utility theory! Factors like these are emphasized by a functional psychology, and by a social psychology—not by an individualistic psychology which rests on the assumption of rational calculation. It is not past utilities that explain present subjective values of money when these subjective values are out of harmony with the present market facts, but rather present habits, present customs, present disinclination to readjust, etc. There is a big difference, psychologically, between the mental processes through which one arrived at one's present state of mind, and the present state of mind itself. The original "commodity utility" of the money metal, in the far away time before the money use affected its value, is surely no longer a factor. Certainly not on the basis of an individualistic psychology of the Austrian type. All the individuals who experienced that original utility are long since dead! Not even memories of the original utilities persist.
When writing the passage in Social Value, quoted above, I did not suppose that I was dealing with a notion that anyone else would ever take seriously. My purpose in discussing it was chiefly to throw into sharp relief the contrast between the historical and the cross-section viewpoints, and to make clear that my own theory was based on analysis of existing psychological forces. Since finding, however, that two writers for whose views I have so much respect have independently developed the same idea, and have taken it seriously, I have felt it worth while to give it this extended consideration.
Von Mises, like Wieser, needs an absolute value of money in his thinking. He does not call the concept by that name, but, following Menger[101] speaks of the "inner objective value of money" and the "outer objective value of money." (Mises, p. 132.) The latter is the purchasing power of money, a relative concept, exactly expressed in the price-level. The inner objective value of money is designed to cover the causes of changes in prices which originate on the money-side of the price relation alone.[102] This inner objective value of money performs the same logical function in the theory of money that the absolute social value concept of the present writer does, even though the psychological explanation lying behind it is very different.
Von Mises considers the quantity theory at length, noting a number of defects in it, chief of which is the fact that it has no psychological theory of value behind it, that it does not account for the existence of the value of money, and at most gives a law for changes in a value whose existence is taken for granted. The details of this criticism, however, need not be here presented. The quantity theory is to be treated in detail at a later point of our study.
The writer who has most definitely stated the relation of utility to the functions of money, is David Kinley (Money, ch. viii). He would explain the value of money, by (a) its utility as a commodity, and (b) its utility in the money-employment, the employments reaching a marginal equilibrium. The utility of the money metal in its commodity use calls for no analysis. But what is meant by the utility of money as money? Where the writers so far discussed have denied that money as money has any utility, Dean Kinley finds a utility in the money-function itself: money facilitates exchange, and exchange, by transferring goods from those who do not need them to those who do need them, increases the utility of those goods. Money, as money, thus produces utility.[103] The utility of money is the extra utility which comes into being by virtue of its use, as compared with what would exist in a state of barter. The marginal utility of money is the utility of money in the marginal exchange—the exchange which would be effected by means of barter if money were any more difficult to procure. The marginal utility of money, then, is not the whole of the marginal utility of the good for which it is exchanged, but rather is the differential part of that utility which is created by means of the use of money in exchange. The marginal utility of money, thus, appears in separate services of money. Money is a durable good, which gives forth its services bit by bit. The value of money is based on these separate services, it is "the capitalized value of the service rendered in the marginal exchange."
This conception is, it seems to me, much truer to the spirit of the general marginal utility theory than the theories of Wieser, Schumpeter, or von Mises. If the utility theory at large were valid, the application here would be valid. To Dean Kinley's conception of a marginal utility of the money service, I offer simply the objections which I offer to the utility theory at large—objections indicated in what has gone before, and in my Social Value. The application of the capitalization theory to the value of money I have already discussed in a previous chapter, and shall again consider in the chapter on "The Functions of Money."
I conclude that the marginal utility theory has not solved the problem of the value of money. The reason, however, is simply that it has not solved the general problem of value. The marginal utility theory, in so far as it seeks to make marginal utility the cause of value, is circular. The effect of a given man's wants upon the value of the goods he wants depends, not on the marginal intensity of those wants alone—a penniless prisoner may desire a marble palace ever so intensely without affecting its value—but also upon the value of the wealth possessed by the individual who experiences the wants. But this is to explain value, not by marginal utility alone, but by value as well—a circle. Or, if we leave the standpoint of absolute values, and look at the matter in terms of prices, the same situation presents itself. The price which an individual is willing to pay for a good depends on his income,—which commonly rests on prices—and on the prices he has to pay for other goods which enter into his budget. His price-offer, expressive of the marginal utility of a horse to him, is made with consideration of the price of a buggy, of harness, of feed, of the wages of the servant who cares for the horse, the price of a barn, and of the other things that the possession of the horse involves. And not these alone: less immediately, but still vitally, his whole budget enters. Higher prices for theatre tickets or for food or for clothing will reduce his price-offer for a horse. Further, his price-offer for the horse will be tremendously influenced by his opinion as to the permanent market price of horses. He will not be willing to pay a price for the horse which he cannot expect to get back if he should decide later to sell the horse. The direct influence of market price on individual demand-price is very great indeed. Marginal utility (subjective use-value) very frequently gives place to subjective value-in-exchange in the determination of an individual's marginal demand-price—which means that the market controls the individual instead of the individual controlling the market. With sellers, it is generally subjective-exchange-value, rather than marginal utility, that determines supply-price-offer. The sellers, in so far as they are producers, have little need for the great mass of their stocks. They will sell them, rather than keep them, at almost any price. The reason they ask high prices is simply that they think the market will give them the high prices. The individual price-offers, in the aggregate therefore, presuppose the whole market situation—presuppose a general value and price system already fixed and determined. Each individual price offer presupposes many other prices, though not, of course, the whole market. Since, then, much of the market situation is assumed in the determination of each particular price, by the Austrian method, it is obviously circular reasoning to think that the determination of each price separately by this method will supply data for a summary of the market situation as a whole. In the one form in which the utility theory avoids a circle,—that presented by Schumpeter, and discussed in an earlier part of this chapter—it is not a causal theory. Marginal utility is not a cause of market prices, but rather, marginal utilities and market prices are alike resultants, effects, of more fundamental factors. No writer[104] who has presented the utility theory in this form has tried to apply it to the value of money, and even if it could be so applied, it would not give a causal explanation of the value of money in terms of marginal utility. In most of the efforts to apply the utility theory to money, the circle becomes so obvious that one marvels that able theorists should for a moment fail to see it.