An Introduction to the Theory of Value

on the Lines of Menger, Wieser, and Böhm-Bawerk

Second Edition – 1910

by William Smart (1853-1915)

Chapter VI
Difficulties and Explanations

ITV-E2-6.1 A chapter may be devoted to answering certain doubts that naturally arise in the reader’s mind, and to disentangling some complications which hide the working of our fundamental law.
ITV-E2-6.2 I. Some goods are perishable, some durable; some are single goods, some are groups of separable elements; and, of these groups again, some are composed of homogeneous, some of very heterogeneous elements. Consequently there is a difference in the way in which goods give off their use, and the marginal utility is not always perfectly obvious.
ITV-E2-6.3 Thus the first warning we require to take to ourselves is that we must make sure what really is the good that we are valuing. In the illustration of last chapter, it was the sack of corn, not the individual grains of corn; it was, that is to say, a group of homogeneous elements considered and valued as a whole. Obviously this is a very different kind of good from, say, a horse or a piano. As durable goods the latter are, economically, a complex of all the services which they are capable of rendering during their lifetime as goods: their value, therefore, is to be determined by the least use to which their services, one year with another, are put, and not by the least use to which, exceptionally, they are put. Otherwise we should conclude that the utility which a hunting horse may sometimes put forth in drawing a plough, or that which a piano may render at the hands of a schoolgirl, are the marginal utilities determining the value of these goods.
ITV-E2-6.4 Neglect of this consideration led Schäffle [Online editor’s note: German economist Albert Schäffle (1831-1903). – RTL] to make the objection that, in desert journeys, the traveller’s skin of water, according to our theory, would be measured by the least use to which the water was put: that is to say, the quantity of water employed, say, in washing, would measure the value of the whole skin, while, practically, everybody can see that a good, the possession or non-possession of which meant life or death to the traveler, could not be measured by its washing value. The answer is that here the good which is being valued is the whole water-skin, not the individual drops of water: what measures its value is the amount of wellbeing that would be lost if the skin were lost. If, on the other hand, we were valuing individual cubic inches of water in the skin, or if we were valuing one skin among many, then Schäffle’s calculation would be quite right: that the least use to which the good being valued – the cubic inch or the skin – was put, determined the value of that particular good, the cubic inches or the skin.
ITV-E2-6.5 Similarly, if we ask what is the value of a water-supply to a city, we are putting a different question from “What is the value of the individual gallon of water?” The supply, as a whole, is the indispensable condition of a collective human want; the unit of valuation here is not the gallon, but the whole supply. So with the value of a mill stream. We must not confound it with the valuelessness of water as drinking water. What the miller values and pays for is the head of water, and on this the individual cups or gallons used for drinking make no difference. Indeed, we have here one of the exceptional cases mentioned in the beginning of last chapter, the valuation of a single good. The water-supply in the above illustrations cannot usually be put alongside of similar supplies and considered as a member of a stock. Its value is measured by the entire utility which it affords.
ITV-E2-6.6 A more difficult case is presented by the phenomenon of “capitalised value.” A quarry or mine which will be worked out in fifty years is valued at a sum much less than the sum of its fifty annual outputs. These annual outputs are seen in a perspective of value diminishing according to their remoteness in time. Say that the first year’s output is £100, the second (at an interest rate of 5%) will now be worth only £95.23, the third, £90.70, and so on. Adding these together, we obtain a sum which is very much less than £100 × 50, and we express it – conveniently if somewhat misleadingly – by saying that the capital value is so many years’ purchase of the annual rent. In other words, to determine the marginal utility of a durable good involves a calculation of the agio on present goods as against future.1
ITV-E2-6.7 II. One must guard against an easy misunderstanding of the expression Lowest Use. Most goods permit of two or more entirely distinct kinds of use: a book, for instance, may be read, or it may be used to light a fire. On the principles just laid down, one might think that it is the latter which determines the value of the book. There are two mistakes here. The first will be seen on referring to the terms of our cardinal proposition. It is the least use to which a good is put, and is, of course, economically put, that decides – not the possible uses to which it may be put. If we were valuing two exactly similar copies of one book, and if the only uses to which these copies could be put were, to be read or to be burned, then the value of each would be waste paper value.2 But this is an almost inconceivable supposition. Books are made to be read, and to enumerate lighting of fires among the possible uses of a book is to make the mistake already alluded to – of not being clear as to what is the good that is being valued.
ITV-E2-6.8 The second and more important mistake is that here we are presenting a case which is essentially different from the typical one given in last chapter. In the case of the peasant we are valuing one of a stock of five similar goods, and concluded that the use to which the fifth sack was put determined the value of the five. In other words, we had a stock of goods competing for employment. Now we have employments competing for one good, and, where a good or stock of goods is not sufficient for all possible employments, of course the only economical possibility is that the highest use, and so the highest marginal utility, should decide the value.
ITV-E2-6.9 III. It follows from what has been said that the value of a good is almost never measured by the utility it actually affords, – its utility to me, – but by a foreign utility. In our first illustration of the two biscuits, the utilities actually afforded by the biscuits were, the satisfaction of a man’s hunger and the satisfaction of a dog’s hunger; but the value of the particular biscuit which actually satisfied the man’s hunger was measured by the use of the biscuit to the dog. In modern circumstances, where the existence of money and the presence of stock permit of goods being instantly exchanged for other goods, we can – and do almost unconsciously – change the disposition of our resources so as to shift the loss (which will define our marginal utility) to the least sensitive part.
ITV-E2-6.10 Suppose that a thrifty housewife has laid in her winter stock of butter, and that by some accident it gets spoiled. Will she be likely to do without butter for the rest of the winter? She will, of course, replace the butter, and do without some comfort or luxury which she would otherwise have allowed herself. That is to say, she will shift the loss to the least sensitive part of her total expenditure. Some part of the total satisfaction must be given up, and this will always be the least in her particular scale. In the circumstances, the satisfaction she now denies herself indicates her least urgent want. Not – be it remembered – her last conceivable want, or her last actually felt want, but the last want that was satisfied when she had the means, or the first that was deprived of its satisfaction when she had to curtail her expenses; in short, the last want satisfied.
ITV-E2-6.11 Similarly, if I am calculating the loss of value which I suffer from a horse going hopelessly lame, I do not estimate it by the satisfactions of riding and driving I am likely to lose. I replace the horse by economising in other things – perhaps by doing without my summer holiday – and the value of the horse is measured by the “foreign” utility of the summer holiday.
ITV-E2-6.12 IV. There is a question which naturally rises out of all that has preceded. The value of goods is measured by the lowest, or least, or last use economically made of them: – What determines that this or that particular use is the last? In other words: What determines the level of the marginal utility? The answer is; – the relation existing between a man’s wants and the resources or provision he has to meet them. If his wants are few and his resources abundant, the marginal utility will be low, for here all the more urgent wants will be satisfied, and the only wants left to satisfy will be insignificant ones. The value of an additional sovereign to a rich man, for instance, is very small, simply because he has few wants that remain unsatisfied. The same is the case if wants are what we might call “weak”; to the plain liver, the value of the additional sovereign is perhaps as small as to the rich man. If, conversely, a man’s wants are many and strong, and his means scanty, the marginal utility will be high, and the sovereign will find wants, and urgent wants, waiting to welcome it. “It comes nearly to the same thing,” to quote Böhm-Bawerk, “to say Usefulness and Scarcity are the ultimate determinants of the value of goods. In so far as the degree of usefulness indicates whether, in its way, the good is capable of more or less important services to human wellbeing, so far does it indicate the height to which the marginal utility, in the most extreme case, may rise. But it is the scarcity that decides to what point the marginal utility actually does rise in the concrete case.”

ITV-E2-6.n1.1 1 The difficult subjects of capital value and interest on durable goods are fully treated in Böhm-Bawerk’s Positive Theory of Capital. See particularly p. 339.
ITV-E2-6.n2.1 2 Just as the nutritive value of the horse competed with its draught value during the siege of Paris.

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