The Place of Science in Modern Civilisation, and Other Essays

by Thorstein Veblen

All the analysis and reasoning here set forth has an air of undue tenuity; but in extenuation of this fault it should be noted that this reasoning is made up of such matter as goes to make up the theory under review, and the fault, therefore, is not to be charged to the critic. The manner of argument required to meet this theory of the "natural law of final productivity" on its own ground is itself a sufficiently tedious proof of the futility of the whole matter in dispute. Yet it seems necessary to beg further indulgence for more of the same kind. As a needed excuse, it may be added that what immediately follows bears on Mr. Clark's application of the law of "natural distribution" to modern problems of industry and public policy, in the matter of curbing monopolies.

Accepting, again, Mr. Clark's general postulates—the postulates of current hedonistic economics—and applying the fundamental concepts, instead of their corollaries, to his scheme of final productivity, it can be shown to fail on grounds even more tenuous and hedonistically more fundamental than those already passed in review. In all final-utility (marginal-utility) theory it is of the essence of the scheme of things that successive increments of a "good" have progressively less than proportionate utility. In fact, the coefficient of decrease of utility is greater than the coefficient of increase of the stock of goods. The solitary "first loaf" is exorbitantly useful. As more loaves are successively added to the stock, the utility of each grows small by degrees and incontinently less, until, in the end, the state of the "marginal" or "final" loaf is, in respect of utility, shameful to relate. So, with a change of phrase, it fares with successive increments of a given productive factor—labor or capital—in Mr. Clark's scheme of final productivity. And so, of course, it also fares with the utility of successive increments of product created by successively adding unit after unit to the complement of a given productive factor engaged in the case. If we attend to this matter of final productivity in consistently hedonistic terms, a curious result appears.

A larger complement of the productive agent, counted by weight and tale, will, it is commonly held, create a larger output of goods, counted by weight and tale;[26] but these are not hedonistic terms and should not be allowed to cloud the argument. In the hedonistic scheme the magnitude of goods, in all the dimensions to be taken account of, is measured in terms of utility, which is a different matter from weight and tale. It is by virtue of their utility that they are "goods," not by virtue of their physical dimensions, number and the like; and utility is a matter of the production of pleasure and the prevention of pain. Hedonistically speaking, the amount of the goods, the magnitude of the output, is the quantity of utility derivable from their consumption; and the utility per unit decreases faster than the number of units increases.[27] It follows that in the typical or undifferentiated case an increase of the number of units beyond a certain critical point entails a decrease of the "total effective utility" of the supply.[28] This critical point seems ordinarily to be very near the point of departure of the curve of declining utility, perhaps it frequently coincides with the latter. On the curve of declining final utility, at any point whose tangent cuts the axis of ordinates at an angle of less than 45 degrees, an increase of the number of units entails a decrease of the "total effective utility of the supply,"[29] so that a gain in physical productivity is a loss as counted in "total effective utility." Hedonistically, therefore, the productivity in such a case diminishes, not only relatively to the (physical) magnitude of the productive agents, but absolutely. This critical point, of maximum "total effective utility," is, if the practice of shrewd business men is at all significant, commonly somewhat short of the point of maximum physical productivity, at least in modern industry and in a modern community.

The "total effective utility" may commonly be increased by decreasing the output of goods. The "total effective utility" of wages may often be increased by decreasing the amount (value) of the wages per man, particularly if such a decrease is accompanied by a rise in the price of articles to be bought with the wages. Hedonistically speaking, it is evident that the point of maximum net productivity is the point at which a perfectly shrewd business management of a perfect monopoly would limit the supply; and the point of maximum (hedonistic) remuneration (wages and interest) is the point which such a management would fix on in dealing with a wholly free, perfectly competitive supply of labor and capital.

Such a monopolistic state of things, it is true, would not answer to Mr. Clark's ideal. Each man would not be "paid an amount that equals the amount of the total product that he personally creates," but he would commonly be paid an amount that (hedonistically, in point of "effective utility") exceeds what he personally creates, because of the high final utility of what he receives. This is easily proven. Under the monopolistic conditions supposed, the laborers would, it is safe to assume, not be fully employed all the time; that is to say, they would be willing to work some more in order to get some more articles of consumption; that is to say, the articles of consumption which their wages offer them have so high a utility as to afford them a consumer's surplus,—the articles are worth more than they cost:[30] Q. E. D.

The initiated may fairly doubt the soundness of the chain of argument by which these heterodox theoretical results are derived from Mr. Clark's hedonistic postulates, more particularly since the adepts of the school, including Mr. Clark, are not accustomed to draw conclusions to this effect from these premises. Yet the argument proceeds according to the rules of marginal-utility permutations. In view of this scarcely avoidable doubt, it may be permitted, even at the risk of some tedium, to show how the facts of every-day life bear out this unexpected turn of the law of natural distribution, as briefly traced above. The principle involved is well and widely accepted. The familiar practical maxim of "charging what the traffic will bear" rests on a principle of this kind, and affords one of the readiest practical illustrations of the working of the hedonistic calculus. The principle involved is that a larger aggregate return (value) may be had by raising the return per unit to such a point as to somewhat curtail the demand. In practice it is recognised, in other words, that there is a critical point at which the value obtainable per unit, multiplied by the number of units that will be taken off at that price, will give the largest net aggregate result (in value to the seller) obtainable under the given conditions. A calculus involving the same principle is, of course, the guiding consideration in all monopolistic buying and selling; but a moment's reflection will show that it is, in fact, the ruling principle in all commercial transactions and, indeed, in all business. The maxim of "charging what the traffic will bear" is only a special formulation of the generic principle of business enterprise. Business initiative, the function of the entrepreneur (business man) is comprehended under this principle taken in its most general sense.[31] In business the buyer, it is held by the theorists, bids up to the point of greatest obtainable advantage to himself under the conditions prevailing, and the seller similarly bids down to the point of greatest obtainable net aggregate gain. For the trader (business man, entrepreneur) doing business in the open (competitive) market or for the business concern with a partial or limited monopoly, the critical point above referred to is, of course, reached at a lower point on the curve of price than would be the case under a perfect and unlimited monopoly, such as was supposed above; but the principle of charging what the traffic will bear remains intact, although the traffic will not bear the same in the one case as in the other.

Now, in the theories based on marginal (or "final") utility, value is an expression or measure of "effective utility"—or whatever equivalent term may be preferred. In operating on values, therefore, under the rule of charging what the traffic will bear, the sellers of a monopolised supply, e.g., must operate through the valuations of the buyers; that is to say, they must influence the final utility of the goods or services to such effect that the "total effective utility" of the limited supply to the consumers will be greater than would be the "total effective utility" of a larger supply, which is the point in question. The emphasis falls still more strongly on this illustration of the hedonistic calculus, if it is called to mind that in the common run of such limitations of supply by a monopolistic business management the management would be able to increase the supply at a progressively declining cost beyond the critical point by virtue of the well-known principle of increasing returns from industry. It is also to be added that, since the monopolistic business gets its enhanced return from the margin by which the "total effective utility" of the limited supply exceeds that of a supply not so limited, and since there is to be deducted from this margin the costs of monopolistic management in addition to other costs, therefore the enhancement of the "total effective utility" of the goods to the consumer in the case must be appreciably larger than the resulting net gains to the monopoly.

By a bold metaphor—a metaphor sufficiently bold to take it out of the region of legitimate figures of speech—the gains that come to enterprising business concerns by such monopolistic enhancement of the "total effective utility" of their products are spoken of as "robbery," "extortion," "plunder"; but the theoretical complexion of the case should not be overlooked by the hedonistic theorist in the heat of outraged sentiment. The monopolist is only pushing the principle of all business enterprise (free competition) to its logical conclusion; and, in point of hedonistic theory, such monopolistic gains are to be accounted the "natural" remuneration of the monopolist for his "productive" service to the community in enhancing their enjoyment per unit of consumable goods to such point as to swell their net aggregate enjoyment to a maximum.

This intricate web of hedonistic calculations might be pursued further, with the result of showing that, while the consumers of the monopolised supply of goods are gainers by virtue of the enhanced "total effective utility" of the goods, the monopolists who bring about this result do so in great part at their own cost, counting cost in terms of a reduction of "total effective utility." By injudiciously increasing their own share of goods, they lower the marginal and effective utility of their wealth to such a point as, probably, to entail a considerable (hedonistic) privation in the shrinkage of their enjoyment per unit. But it is not the custom of economists, nor does Mr. Clark depart from this custom, to dwell on the hardships of the monopolists. This much may be added, however, that this hedonistically consistent exposition of the "natural law of final productivity" shows it to be "one of those universal principles which govern economic life in all its stages of evolution," even when that evolution enters the phase of monopolistic business enterprise,—granting always the sufficiency of the hedonistic postulates from which the law is derived. Further, the considerations reviewed above go to show that, on two counts, Mr. Clark's crusade against monopoly in the later portion of his treatise is out of touch with the larger theoretical speculations of the earlier portions: (a) it runs counter to the hedonistic law of "natural" distribution; and (b) the monopolistic business against which Mr. Clark speaks is but the higher and more perfect development of that competitive business enterprise which he wishes to reinstate,—competitive business, so called, being incipiently monopolistic enterprise.

Apart from this theoretical bearing, the measures which Mr. Clark advocates for the repression of monopoly, under the head of applications "to modern problems of industry and public policy," may be good economic policy or they may not,—they are the expression of a sound common sense, an unvitiated solicitude for the welfare of mankind, and a wide information as to the facts of the situation. The merits of this policy of repression, as such, cannot be discussed here. On the other hand, the relation of this policy to the theoretical groundwork of the treatise needs also not be discussed here, inasmuch as it has substantially no relation to the theory. In this later portion of the volume Mr. Clark does not lean on doctrines of "final utility," "final productivity," or, indeed, on hedonistic economics at large. He speaks eloquently for the material and cultural interests of the community, and the references to his law of "natural distribution" might be cut bodily out of the discussion without lessening the cogency of his appeal or exposing any weakness in his position. Indeed, it is by no means certain that such an excision would not strengthen his appeal to men's sense of justice by eliminating irrelevant matter.