I wish to contrast the view I have been here presenting with that developed by Schumpeter, in his Theorie der Wirtschaftlichen Entwicklung. In Schumpeter's view, the division between statics and dynamics is much more than methodological. The phenomena of statics and dynamics are different phenomena. Statics is concerned with the influence of individual utility-scales, or utility-scales and psychic cost-scales, hedonistic phenomena. Dynamics is concerned with the influence of "energisch" (as distinguished from "hedonisch") factors. (Loc. cit., 128.) Most men are moved by hedonic considerations. Their economic activity tends toward the equilibrium described in static theory. Seeking to maximize satisfactions, and to minimize pains, they tend to get into the "best-possible" situation ("best-possible" under the "given conditions") and stay there. The "energetic" type of men, moved by motives like love of activity for its own sake, love of creative activity, love of distinction, love of victory over others, love of the game, etc., undertake activities which tend to alter the "given conditions" themselves, to alter the structure and technique of economic society, to introduce new ways of doing things, and so to break the static equilibrium. This last type of men is small in number, but tremendously important. Schumpeter's theory of value rests solely in an analysis of the hedonic factors mentioned, conceived of as individual psychological magnitudes. I have discussed his theory of value in the chapter on "Marginal Utility" in this book, and would refer to that discussion here. He makes virtually no use of the value concept there developed in explaining the causation of dynamic change, but instead, as I have pointed out in that chapter, invents new concepts, which do the work of the value concept, which he calls "Kaufkraft," "Kapital," and "Kredit," which do not rest on marginal utility, but rather on the activities of certain centres of economic power, particularly of banks.[594] His picture of economic evolution is that of a conflict between these static and dynamic forces, between "utility-curves" and the psychological factors of the "energetic" type, the former represented in a set of static price-ratios, the latter in a set of dynamic "powers," conceived of, not as sums of money (even though expressed in money-terms), but as "abstract power," which grows, not merely out of the individual psychologies of the entrepreneurs, but also, and primarily, out of the social influence centered in the banker. This power which the banker to-day supplies was in earlier periods supplied by the political power of the despot, and is distinctly a matter of social organization, and social control, an over-individual, social phenomenon, analogous to the "social value" which I have sought to put behind all prices, whether "static" or "dynamic." The dynamic man needs "power," either political or financial, to "force" the "static" men out of their accustomed ways of activity. They fear and resist him. He must coerce them. The contrast is thus sharply made between abstract price-ratios, resting on individual feeling-scales, and quantitative "powers," measured in money, resting on a social basis. Between the factors underlying static prices, and those underlying dynamic prices there is, thus, nothing in common. Statics and dynamics are concerned with fundamentally different phenomena.[595]
If my criticisms of the utility theory of value are sound, and if what has gone before in this chapter holds good, we must restate Schumpeter's contrast.[596] The static tendencies do not rest on any peculiarities of the psychological "stuff" from which static values are derived. They rest rather in the universal tendencies of all values, whatever the psychological factors behind them, to come to an equilibrium. The reason that values, whether they be the values of new and novel things, or the values of old and familiar things, tend to come to an equilibrium is that gains come from equilibrating them. When some values are too low, and some are too high, the opportunities for speculative gain are evident. Arbitraging transactions, as between different places, time-speculation, transferring labor and capital from one enterprise to another, increasing the supplies of some goods and reducing the supplies of other, changing land from wheat to corn, etc., etc.,—all these things are sources of gain, and they will be done, whatever the origin of the values involved. The new, dynamic enterprise, before it becomes actualized in concrete machinery, factory building, etc., and long before its income is actualized in money-receipts from the goods it is destined to produce, becomes an object of value. The value is a future value. But it comes into the present as a discounted present worth. As such it functions like any other value, tending to attract in its own direction the land, labor and capital necessary for its realization. It does not differ in its functioning from the present worths of future goods of familiar sorts.[597] It tends, after a process of reëquilibration—which Schumpeter, with his theory of crises, has done much to elucidate—to come into equilibrium with the older, "static" values, becomes itself a static value. Indeed, from its inception, it comes under the static, money measure. It enters at once into the scheme of static values and prices, even though it causes readjustment there.
The preëxisting static values are themselves to be explained, not as growing out of individual feeling-scales, but as growing out of a complex social psychology, in which some men and groups of men have vastly greater social "power" than others. The preëxisting static values are of the same stuff as the dynamic values. But this has already been made clear.
The possibility of presenting an equilibrium picture of social forces, to the extent that those social forces submit themselves to the money measure, the possibility of applying the methods of static price-theory wherever pecuniary concepts may be carried, does not exhaust the possibilities of the static notion, at least as a schematic device. There are many social values, particularly in the legal and moral sphere, which do not readily come under the money measure, and where such measurements as may be made in money terms seem obviously inadequate. Of these values, as of all values, however, the law of equilibration holds. All tend to come into adjustment of a sort that will allow the maximum of values to be realized. Something of the exactness of the static method has recently appeared in a decision by a famous jurist, confronted with the fact of the conflict of two legal principles. Most judges would go on the legal theory that there can be no conflict in the laws of a single sovereign. Of course, we have courses in "Conflicts of Laws" in our law schools, but the subjects treated in such courses relate to conflicts, say, between the laws of New York and the laws of New Jersey. When a judge is presented with a case of conflict between two laws of New York, he will commonly feel it to be his duty to "remove" the conflict, by making distinctions, till the conflict is whittled away. Not a little bad law has thus originated! The law is "absolute." It knows no exceptions. It does not obey the law of diminishing significance. Of course, "de minimis non curat lex," but that means, not that there is a delicate margin, where the law ceases to apply, but merely that the law disregards trifles too insignificant to attract its attention at all. They are, in mathematical phrase, "infinitesimals of the second order," discontinuous with the interests of magnitude great enough to attract the attention of the law. There is little room in such a legal theory for notions of the sort discussed in this chapter to find place! But a different theory of the law is implied, and partly expressed, in a recent decision by Mr. Justice Holmes: "All rights tend to declare themselves absolute to their logical extreme. Yet all in fact are limited by the neighborhood of principles of policy which are other than those on which the particular right is founded, and which become strong enough to hold their own when a certain point is reached. The limits set to property by other public interests present themselves as a branch of what is called the police power of the State. The boundary at which the conflicting interests balance cannot be determined by any general formula in advance, but points along the line, or helping to establish it, are fixed by decisions that this or that concrete case falls on the nearer or farther side.... It constantly is necessary to reconcile and adjust different constitutional principles, each of which would be entitled to possession of the disputed ground but for the presence of the others." (Hudson County Water Co. vs. McCarter, 209 U. S., 349, 1908.) Here we have a scheme very like that of static economic theory! "The boundary at which the conflicting interests balance"—the margin where the curves of diminishing value of the two legal principles intersect! A plurality of legal values, in marginal equilibrium! Lacking a tool of thought so convenient as money has proved for the economist, the jurist finds trouble in making his margins precise. He is dealing with quantities for which he has found no common measure. There is no "standard or common measure" of legal values. Hence, most lawyers content themselves with qualitative reasoning, seeking to avoid the necessity of quantitative weighing and comparison of the factors in their problem by making distinctions of kind. Mr. Justice Holmes recognizes the necessity and the existence of legal quantities, and of making quantitative distinctions, i. e., distinctions of degree. He sees a generic essence common to the whole body of laws, such that marginal equilibria are possible and actual.
So far we have a static system of laws. But the same writer, in a later decision, has said: "And yet again the extent to which legislation may modify and restrict the uses of property consistently with the constitution is not a question for pure abstract theory alone. Tradition and the habits of a community count for more than logic." (Laurel Hill Cemetery vs. San Francisco, 216 U. S. 358, 1910.) As these traditions and habits of a community may change, so may the legal values change, and new equilibria need to be reached in a process of readjustment.
But further, in this view, and in the view of the best students of jurisprudence in general, the legal values are not an insulated, self-contained system. In the sentence last quoted, Justice Holmes sees their root in a total social situation. And it is easy to show that economic values, in particular, are part of that social situation out of which legal values derive their power. Legal values enter into economic values. Economic values enter into legal values. And between legal values and economic values are marginal equilibria. There is a vast social system of values, legal, economic, moral, religious, etc., in constant dynamic change, but tending also to static equilibrium. Changes at any part of the system compel readjustments throughout. The process of equilibration is often slow, but slow or rapid, smooth or violent, it is in constant process. For the further elaboration of notions like these, I refer again to my Social Value. Here, as in the narrower economic sphere, we have men and institutions whose chief activity is concerned with the manipulation and control of these values, with effecting the readjustments, and bringing about the reëquilibrations. They have their appropriate tools and technology. Money and credit are merely part of a much wider system concerned with social control and social adjustment!
To summarize: The problem of this chapter has been to harmonize statics and dynamics, the "theory of wealth" and the "theory of prosperity," "normal" and "transitional," and similar notions, commonly held to belong to different spheres, and to be incapable of reduction to common terms. A number of such contrasts have been passed in review, and numerous illustrations of the various types of contrast have been given. It is the contention of the present chapter that the most fundamental of these contrasts, and the one which gathers up the meaning of most of them, is that between the theory of value, and the theory of price. The theory of value is dynamic, is concerned with the phenomena of prosperity and depression, is realistic enough to deal with transitions and readjustments; the theory of price is static, and rests in the notion of accomplished equilibrium, abstracting from the problems of friction and transition. The reconciliation comes from two angles: on the one hand we have generalized price theory, showing that in large measure the phenomena with which value theory, theory of prosperity, dynamics, deal come under the money measure, are made "static" by "discounting," and by the application of accounting principles; that this tends to be more and more true as knowledge grows more accurate; that "statics" means especially quantitative, as opposed to merely qualitative, thinking. We have shown further that the static schema is applicable even where the money measure is inapplicable, and even beyond the economic sphere, as illustrated by a recent decision of Justice Holmes. The other angle of approach was to universalize value theory, dynamics, theory of prosperity, by showing that all prices, whether "static" or "dynamic" have the same fundamental sort of explanation, that value is always a matter of social psychology, and never a matter of mere individual psychical magnitudes, or of "material fact." This is not to deny that physical facts have their bearing in the scheme: (a) they are among the objects of value, even though not the only objects, and (b) material facts, technological, physiographic, and biological, are the basis on which human nature rests, out of which it has developed, even though human culture including social values has increasingly emancipated itself from immediate dependence on them, and has acquired a partially independent movement of its own. The effort was not made to reduce mind and matter to common terms, but the case was rested in an irreducible dualism, and the causal influence of non-mental factors on the value-scales themselves cannot be measured by the static scheme. The static scheme, assuming the value-scales, gives a precise answer as to the influence of the quantities of physical objects on the marginal values. The significant fact about the values with which dynamics, theory of prosperity, etc., deal is that they are the values of immaterial social relationships and institutions, in large part, which are concerned with the problems of social adjustment and control, with affecting equilibria in the economic sphere, with overcoming the friction and effecting the transitions from which static theory abstracts. This is a phase of production quite as important as the physical activities of laborers or machines. It has its own technology, appropriate to its problems. In particular, money and credit are part of its tools. Since its problems are to control men's minds, it uses psychological forces. Where the mechanic uses a storage battery, charged with electricity, to move material things, the technologist of economic readjustment employs a dollar, charged with social value, which is power over the action of men. It is as a bearer of value, in form adapted to the problem, that is in highly saleable form, that the dollar functions. It is the psychological significance of the dollar, and not its physical qualities per se, that enables it to do its work. The physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. Given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment.