Take production, for example. How is it that under a system of free competition the value of the product is regulated by its cost of production? It is because a competitive régime is by every definition a régime where at any moment one product may be exchanged for another of a similar character, the similarity in this case being simply the result of a certain transformation of the raw material. The law of substitution is operative here, and the reason why cost of production regulates value is that the cost of production at any moment represents the last interchangeable value.
The same is true of consumption, as we can see if we only watch the way in which each of us distributes his purchases and arranges his expenditure. There is evident everywhere an attempt to get the best out of life—to get all the enjoyment which our different incomes may be made to yield; here spending more on house-room and less on food, there curtailing on amusement and extending on charity, until a rough kind of equilibrium is reached where the final utility of the last exchanged objects—or, if another phrase be preferred, the intensities of the last satisfied needs—are equal. If the coin spent in purchasing the last cigar does not yield the same pleasure as the same coin yields when spent on a newspaper, the newspaper will in future probably take the place of the cigar. Consumption seems really to be a kind of exchange, with conscience for mart and desires as buyers and sellers.[1116]
Nor is the realm of distribution even beyond the reach of the utility theory. Its application to the problems of interest, wages, and rent is largely the work of American economists, especially of J.B. Clark. It is quite impossible for us to give an exposition of the subtle analyses in which the quarterly reviews of the American universities take such a delight, and which undoubtedly afford a very welcome relaxation in an atmosphere so charged with pragmatism and realism. But we must just glance at the theory of wages. Wages, like other values, must be determined by final utility. But the final utility of what, and for whom? The final utility of the services which the worker renders to the entrepreneur. Following other factors of production, the final productivity of the workers will determine their wages. That is, their final utility is fixed by the value produced by the marginal worker—no matter how worthless he may be—who only just pays the entrepreneur. The value produced by this almost supernumerary worker not only fixes the maximum which the employer can afford to give him, but also the wages given to all the other workers who can take his place, i.e. who are employed upon the same kind of work as his, although they may produce much more than he does; just as in the case of the 100 glasses of water the least valuable glassful determines the value of all the rest.[1117]
Thus is the productivity theory of wages at once confirmed and corrected. But this time it is the productivity of the least productive worker, of the individual who barely keeps himself. No wonder the theory has lost its optimistic note. Somehow or other it does not seem very different from the old “brazen law.”
The rate of interest follows a similar line—the marginal item of capital fixing the rate. It is even more true of capital, which is more completely standardised, with the result that the principle of substitution works much more easily.[1118]
Rent is treated at greater length in the next chapter.
Gradually we begin to realise how the observation of certain facts apparently of a worthless or insignificant character, such as the substitution of chicory for coffee or the complete uselessness of a single glove, enabled the Psychological school to propound a number of general theories such as the law of substitution and the doctrine of complementary goods which shed new light upon a great number of economic questions. There is something very impressive about this deductive process that irresistibly reminds one of the genie of the Thousand and One Nights, who grew gradually bigger and bigger until he finally reached the heavens. But then the genie was nothing but flame. It still remains to be seen whether this is equally true of the Hedonistic theories.
III: THE MATHEMATICAL SCHOOL[1119]
The Mathematical school is distinguished for its attachment to the study of exchange, from which it proposes to deduce the whole of political economy. Its method is based upon the fact that every exchange may be represented as an equation, A = B, which expresses the relation between the quantities exchanged. Thus the first step plunges us into mathematics.
However true this may be, the application of the method must necessarily be very limited if it is always to be confined to exchange. It is, however, a mistake to suppose that this is really the case, and one of the most ingenious and fruitful contributions made by the new school was to show how this circle could be gradually enlarged so as to include the whole of economic science.