Similar criticism applies to the law of distribution, to the Classical doctrine of wages, interest, and rent. The way the Classical writers treated of these questions was extraordinarily naïve. Take the question of rent. You just subtract from the total value of the product wages, interest, and profit, and you are left with rent. Or take the question of profit. In this case you will have to subtract rent, if there is any, then wages and interest, the other component elements, and what remains is profit. Böhm-Bawerk wittily remarks that the saying that wages are determined by the product of labour apparently only amounts to this—that what remains (if any) after the other co-operators have had their share is wages. Each co-partner in turn becomes a residual claimant and the amount of the residuum is determined by assuming that we already know the share of the other claimants![1106]
The new school refuses any longer to pay honour to this ancient trinity. It is impossible to treat each factor separately because of the intimate connection between them, and their productive work, as the Hedonists point out, must necessarily be complementary. In any case, before we can determine the relative shares of each we must be certain that our unknown x is not reckoned among the known. This naturally leads them on to the realm of mathematical formulæ and equations.
All the Hedonists, however, do not employ mathematics. The Psychological school, especially the Austrian section of it, seems to think that little can be gained by the employment of mathematical formulæ. Some of the Mathematical economists, on the other hand, are equally convinced of the futility of psychology, especially of the famous principle of final utility, which is the corner-stone of the Austrian theory.[1107]
For the sake of clearness it may be better to take the two branches—the Psychological and the Mathematical—separately.
II: THE PSYCHOLOGICAL SCHOOL
The feature of the Psychological school is its fidelity to the doctrine of final utility, whatever that may mean.[1108] The older economists had got hold of a similar notion when they spoke of value in use, but instead of preserving the idea they dismissed it with a name, and it was left to the Psychological school to revive it in its present glorified form.
It must not be imagined that the term is employed in the usual popular sense of something beneficial. All that it connotes is ability to satisfy some human want, be that want reasonable, ridiculous, or reprobatory. Bread, diamonds, and opium are all equally useful in this sense.[1109]
Nor must we fall into the opposite error of thinking of it as the utility of things in general. Rather is it the utility of a particular unit of some specific commodity relative to the demand of some individual for that commodity, whether the individual in question be producer or consumer. It is not a question of bread in general, but of the number of loaves. To speak of the utility of bread in general is absurd, and, moreover, there is no means of measuring it. What is interesting to me is the amount of bread which I want. This simple change in the general point of view has effectively got rid of all the ambiguities under which the Classical school laboured.[1110]
1. The first problem that suggests itself in this connection is this: Why is the idea of value inseparable from that of scarcity? Simply because the utility of each unit depends upon the intensity of the immediate need that requires satisfaction, and this intensity itself depends upon the quantity already possessed, for it is a law of physiology as well as of psychology that every need is limited by nature and grows less as the amount possessed increases, until a point zero is reached. This point is called the point of satiety, and beyond it the degree of utility becomes negative and desire is transformed into repulsion.[1111] Hence the first condition of utility is limitation of supply.
So long as people held to the idea of utility in general it was impossible to discover any necessary connection between utility and scarcity. It was easy enough to see that an explanation that was not based upon one or other of these two ideas was bound to be unsatisfactory, but nobody knew why. As soon as the connection between the two was realised, however, it became evident that utility must be regarded as a function of the quantity possessed, and that this degree of utility constitutes what we call value.