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 No. 104. 
 
 AUSTRIAN THEORY 
 
 OF 
 
 VALUE. 
 
 BY 
 
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 Harvard University. 
 
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AUSTRIAN THEORY OF VALUE. 
 
THE AUSTRIAN THEORY OF VALUE. 
 
 In an article headed “ Boehm-Bawerk on Value and 
 Wages,” published in the Quarterly Journal of Economics , 
 October', 1890, I ventured to give some reasons for regarding 
 the marginal utility theory of value as insufficient and 
 unsound. Professor von Wieser, of the German University 
 of Prague, has presented a paper to the Academy, containing 
 a defence of the new theory.* In part his paper is a reply to 
 my objections ; in part it is a criticism of the classical theory. 
 I have read and pondered very carefully all that the learned 
 professor has so skillfully urged in behalf of the new doctrine ; 
 but I find myself wholly unable to perceive that, here or 
 elsewhere, a good case has been made out for it. With the 
 kind permission of the editors of the Annai<s, I propose to 
 review, as briefly as possible, the main points at issue 
 between the two theories. And, before entering on the 
 subject, I wish to say that there is so much that is good 
 and admirable, so much real light and instruction, to be 
 found in the writings of the Austrian economists, that it 
 would be a much more agreeable task to dwell on the points 
 in which I am in full agreement with them, than to call 
 attention to the errors into which they seem to me to have 
 fallen. Further, in the practical outcome, their theories, so 
 far as I see, do not lead to results that conflict with those 
 reached by the classical school. While differing as to our 
 modes of reasoning and our ways of stating our conclusions, 
 I am unable to perceive that the Austrian economists differ 
 in substance from the older school in their way of regarding 
 the practical problems that vex our time. Both schools are 
 at one in their rejection of the crude and shallow vagaries 
 that have been advanced from so many quarters of late, as 
 new economic gospel. While, then, we argue out, frankly 
 and fully, our points of theoretic divergence, we must not 
 
 * Printed in the Annals, March, 1892. 
 
 [348] 
 
The Austrian Theory of Vaeue. 13 
 
 forget our substantial agreement as to those weightier matters 
 which make economic theory worth discussing at all. I am 
 not without hope that the Austrian economists, on fuller 
 consideration of the whole matter, may see reason to modify 
 their present view as to the influence of marginal utility in 
 the determination of value ; and that the outcome of their 
 brilliant activity may prove to be, even in their own judg¬ 
 ment, not an overturning of the accepted doctrine, but a 
 needful improvement and illumination of a previously 
 neglected portion of it. 
 
 The points in controversy between the Austrian economists 
 and the adherents of the classical school are reducible, I 
 think, to these two questions: (1) What is the proper 
 definition of cost of production ? (2) How shall we account 
 
 for the observed correspondence between cost of production 
 and exchange value? The Austrian economists answer 
 these questions in a new way. If it can be shown that 
 their answers do not bear critical examination, we shall 
 have made a long step toward showing that the principle 
 of marginal utility has a much more restricted action in 
 relation to value than they have supposed. The questions 
 involved go to the very foundations of economic theory, and 
 call for much patient reflection on the part of readers as well 
 as writers. Let us first consider the question of the true 
 nature and necessary elements of cost of production. 
 
 I. THE CEASSICAE VIEW OF COST. 
 
 One who undertakes to defend the classical conception of 
 cost is under the disadvantage of not being able to give a 
 definition of cost that can claim universal acceptance among 
 classical economists. Dr. von Wieser seems to imagine that 
 we all agree with Ricardo in reducing cost, in the final 
 analysis, to labor alone. In that he is, of course, entirely 
 mistaken. We are practically unanimous in holding that 
 economic cost includes something more than mere labor. 
 Rut what the further element may be, how to name it and 
 
 [349] 
 
14 Annaes of the American Academy. 
 
 how to treat it, must be admitted to be unsettled questions 
 among us. This being so, it must be understood that, in 
 what I have to say as to this further element, I cannot lay 
 claim to a consensus of classical authority behind me. 
 
 There are obviously two ways of looking at cost. We 
 may regard productive industry from the standpoint of the 
 employing class, and think of cost as measured by their 
 payments. Or, secondly, we may think of the whole com¬ 
 munity as exerting itself in appropriate ways for the produc¬ 
 tion of commodities, and may think of these necessary 
 exertions as constituting the r eal cost of the things produced. 
 The first of these views we may call the employer’s view 
 of cost; the other has been called the economic or scientific 
 view. The first step toward a correct conception of cost is, 
 in my opinion, to get clear ideas as to the difference between 
 these two views. Some discussion of the matter is made 
 necessary in the present case, because Dr. von Wieser fails 
 to apprehend the classical account of economic cost, and 
 adopts, on his own part, a view that is closely allied to, if not 
 at bottom identical with, the employer’s conception of cost. 
 
 The employer looks on cost of production from a purely 
 personal standpoint. For him cost is a question of payments : 
 of outlay for necessary buildings, machinery, materials and 
 labor. By careful book-keeping he can tell with approximate 
 accuracy how much each unit of product costs him. With 
 this as a basis, he can readily tell how much profit can be 
 made by selling his product at any given price. And this, 
 I need hardly say, is his primary interest in the whole 
 question. In his view cost is lowered quite as effectually 
 by a fall in the wages of his laborers as by an improvement 
 in machinery, or the discovery of more prolific sources of 
 materials. Cost is raised, in his estimation, when for any 
 cause his own necessary outlay is increased, even though 
 the whole increase go merely to swell the rewards of others 
 engaged, equally with himself, in the production of the 
 commodity. 
 
 [350] 
 
The Austrian Theory of Vaeue. 
 
 15 
 
 The mass of mankind has clearly an interest in the cost 
 of production of commodities that finds little recognition in 
 the employer’s way of looking at the matter. The economic 
 view of cost must recognize this interest. It can do so only 
 by taking the broadly human point of view : by ignoring 
 the division of men into employers and laborers, and making 
 cost of production a question of the whole exertion or sacri¬ 
 fice men have to undergo in order to produce the various 
 commodities they need. In this view we are to direct our 
 attention solely to the process of production itself, ignoring 
 wholly the arrangements men have made between themselves 
 as to the ownership of the product when completed, or the 
 individual compensations for shares borne in the total cost 
 of it. We are to have no thought of employers as such, 
 but only of the labor of direction and oversight; no thought 
 of hiring and wages, but only of laborers exerting them¬ 
 selves in appropriate ways for the production of enjoyable 
 commodities. From this point of view we should say that 
 anything which affects the ease or difficulty of the whole 
 task of producing each commodity, affects its cost of produc¬ 
 tion ; and that nothing does affect the cost of production, 
 which does not affect the ease or difficulty of the whole task. 
 
 As between these two views of cost, I can hardly imagine 
 an economist hesitating in his choice. The one is limited 
 and artificial. It seems to regard production as, primarily, 
 a field for making profits. Further, as the individual erm 
 ployer commonly manages but one stage in the whole pro¬ 
 cess of producing each commodity, this view has the defect 
 of not taking the whole process into account in considering 
 the cost of production. The other view is as broad as 
 production itself. It brings us face to face with the original 
 elements of cost in the very nature of the productive process. 
 This, it is needless to remark, is a point of no small import¬ 
 ance for scientific purposes. If we accept the employer’s 
 view of cost, we rest on payments between man and man, 
 which doubtless have reference to share? borne in the 
 
 [351] 
 
16 Annals of the American Academy. 
 
 natural cost of production, but are at best only business 
 valuations of this or that fraction of the natural cost. If, 
 on the other hand, we base our theory of cost on the diffi¬ 
 culties of the productive process in itself, we are in no 
 danger of finding that our assumed elements of cost are, in 
 fact, resolvable into more simple and fundamental elements 
 back of them. 
 
 What, then, are the ultimate elements of the natural cost 
 of producing commodities ? All agree, I think, in regarding 
 the necessary labor of all sorts as the chief element; though, 
 as we shall see presently, the Austrian economists ask us to 
 count, not the labor itself, but the “ value ” of it, as a con¬ 
 stituent of cost. English and American economists, so far 
 as I am acquainted with their views, differ only as to the 
 range or extension to be given to the term labor as an 
 element in the cost of each commodity. Some of them 
 seem to have in mind only the labor applied at the last stage 
 of the process in each case. When, for example, they speak 
 of labor as an element in the cost of production of coats, 
 they seem to think only of the tailor’s labor, and perhaps 
 of the weaver’s also. But it is difficult to see how such a 
 limitation of the term is to be justified. Certainly, if we 
 look at the nature of production as a whole, we shall find 
 no reason for making any difference, in this regard, between 
 the labor of the tailor and that of the spinner, or of the 
 dyer, or of the wool-grower. Unless we are prepared to 
 say that coats can be made without wool, and without 
 woolen yarn, we are in all reason bound to include all these 
 labors as parts of the labor of producing coats. Nor is this 
 all. Unless we are prepared to say that wool can be spun 
 into yarn without spinning machines, and that yarn can be 
 woven into cloth without looms, w r e are equally bound in 
 reason to include in the labor of producing coats the labor 
 of providing requisite machinery for carrying on the various 
 parts or stages of the whole process. What good reason can 
 be given for stopping short at any point in the whole process, 
 
 [352] 
 
The: Austrian Theory of Value. 
 
 17 
 
 or for excluding from our definition of cost any part of the 
 labor that contributes, directly or indirectly, to the final 
 enjoyable commodity, a coat? The fear that we may seem 
 to say that labor is the sole element of cost, and may thereby 
 concede a dangerous advantage to the disciples of Karl 
 Marx ? Surely not. Science can have no fears; must 
 accept all the facts just as it finds them. L,et us, then, 
 when we name labor as an element in the cost of production 
 of any commodity, admit freely the whole labor of all sorts 
 from beginning to end. 
 
 If, then, we use the word labor in our definition of cost, 
 understanding it to include all the labor, wdiat further burden 
 or sacrifice is there that men have to undergo in the produc¬ 
 tion of enjoyable commodities? All reasonable men perceive 
 that there is a further element; the difficulty is to agree as to 
 its precise nature. The more common practice of English 
 and American economists, in recent years, has been to regard 
 the abstinence of the capitalists as the other element. I have 
 elsewhere given some reasons for thinking this practice to be 
 inadmissible.* As Dr. von Wieser seems to agree with me 
 in rejecting abstinence as an element in cost, I need not here 
 repeat those reasons. If we only look at the processes of 
 production as they go forward, we can hardly fail to recognize 
 the missing factor in cost. The whole process of producing 
 nearly every enjoyable commodity is very far from being a 
 single and simple exertion of labor. It is, in most cases, a 
 series of operations, necessarily extending over a considerable 
 stretch of time. Partly, this is due to nature’s way of doing 
 her share of the work ; she takes time to mature the fruits 
 of human labor. Not all the men in Europe could produce 
 a grain of wheat, or a quarter of beef, or a pound of wool, 
 by a month of assiduous labor: nature has her own way of 
 yielding such things, and it is a way that takes time. In 
 part, also, the delays of production are due to men’s own 
 
 * Quarterly Journal of Economics, July, 1887 ; also iu my “ Working Principles/’ 
 P- 387. 
 
 [353] 
 
18 Annals of the American Academy. 
 
 need of time for doing their share of the work ; very largely 
 they are due to the fact that so great a proportion of the 
 whole labor of producing things has to be applied to the pre¬ 
 paration of the natural agents, to the erection of necessary 
 buildings, the making of requisite machinery, etc. It is 
 patent on the very face of things that the industrial system of 
 a civilized country represents an enormous mass of labor 
 already expended, which has not yet produced its full enjoya¬ 
 ble result. It is equally clear that the maintenance of such 
 a system requires every day the expenditure of great quanti¬ 
 ties of labor in ways which, by the nature of the case, must 
 be long in yielding enjoyable returns. 
 
 Now, if men w T ere quite indifferent whether they got the 
 enjoyable"products of their labor to-day or years hence, this 
 need of time in production would not be burdensome ; the 
 whole natural cost of production would then consist of labor 
 alone. But human beings are very far indeed from being 
 thus indifferent. So far as the necessities of life are con¬ 
 cerned, of course delay is impossible : actual wants must be 
 supplied now. But when actual necessities are provided for, 
 desires for material comforts, almost as urgent as absolute 
 wants, clamor for immediate satisfaction. This human im¬ 
 patience for speedy enjoyment of good things makes the 
 necessary slowness of production a burdensome feature 
 of it. Indeed most men seem to shrink from the necessary 
 waiting even more than from necessary labor itself. They 
 are ready enough to work for immediate returns, but the 
 distant natural return for productive labor fails to attract 
 them. They are not willing “ to labor and to wait.” 
 
 These two sacrifices, that of labor and that of waiting, seem 
 therefore to stand on the same level as elements of cost of 
 production. They are both demanded by the very nature of 
 production and the physical laws under which it must be 
 carried on. They are both simple and primary sacrifices, not 
 in the least due to any merely business arrangements between 
 men, nor can they be evaded by any human contrivance. 
 
 [354] 
 
The Austrian Theory of Value. 
 
 19 
 
 Further, I think it is easily demonstrable that, taken 
 together, these two sacrifices constitute the whole cost of 
 producing commodities. It could be shown by experiment 
 if need be. Given men who have the requisite knowledge, 
 the requisite idea, production of all sorts is possible for them, 
 if only they are ready to work, and to wait for the natural 
 product of their work until the process of production yields 
 it. Nothing more is needed, because nature’s terms demand 
 nothing more. If this be true, are we not justified in saying 
 that the original and ultimate elements of cost of production 
 are labor and waiting ? * 
 
 The relation of natural cost to employer’s cost must be 
 obvious to every one who bears in mind the feature of modern 
 industry that goes under the name of ‘ ‘ combination ’ ’ of 
 labor. In truth the whole industrial system is a scheme of 
 combination of labor. Nearly every commodity is a product 
 of many different kinds of labor, combined and converging 
 toward the final enjoyable result. The employer who stands 
 at the closing stage, and is to own the commodity when com¬ 
 pleted, must of course pay for the labor and waiting that have 
 already been devoted toward obtaining the product. This 
 he does in the form of buying materials and machinery. The 
 price he pays stands to him as cost. But it is a cost of acquisi¬ 
 tion, not the natural cost of producing the things bought. 
 Strictly, the cost to him is the labor and waiting he spent for 
 the thing he gives in exchange. The true cost of production 
 of the commodity he is himself engaged upon, is the sum 
 total of the various bits of labor and waiting contributed by 
 all the persons who take part, directly or indirectly, in the 
 production of it. The arrangements and payments these 
 persons make among themselves in consideration of the part 
 each bears in the whole burden, do not affect the nature 
 of the burden itself. That remains, through all their 
 
 * Dr. von Wieser assumes throughout his paper that I reduce cost of production 
 to labor alone. 1 hope that what is said above will make clear to him that he has 
 misunderstood me in this respect. 
 
 L355] 
 
20 
 
 Annals of the American Academy. 
 
 arrangements, the two-fold task of necessary labor, followed 
 by necessary waiting. 
 
 These considerations help us to see the exact function of 
 abstinence in relation to production. The abstinence of 
 capitalists comes into play to provide savings wherewith to 
 pay wages, in advance of the natural yield of labor, to those 
 who are unable or unwilling to submit to the long waiting 
 demanded by the nature of production. Since wages are no 
 part of the true cost of production, neither is abstinence ; for 
 abstinence has no function except to supply the means of pay¬ 
 ing producers in advance of the natural rewards of their 
 exertions. 
 
 II. THE AUSTRIAN VIEW OF COST. 
 
 The Austrian economists seem to me to have made, as yet, 
 no serious or systematic study of cost of production. It was 
 hardly in the nature of things that they should do so. 
 Classical economists dwell on cost because their whole sys¬ 
 tem rests on it. But with the Austrians the case is different. 
 They have no use for the doctrine of cost. They had 
 indeed to find room for it in their system, because it could 
 not be wholly ignored ; but it seems to hold there the posi¬ 
 tion rather of a foreign substance than of an essential ele¬ 
 ment in the fabric. Dr. Karl Menger, the pioneer and 
 acknowledged leader of the school, has not yet, so far as I 
 am aware, incorporated any doctrine of cost into his treat¬ 
 ment of value. Dr. von Boehm-Bawerk, and those other 
 members of the school who discuss the action of cost, assign 
 to it a very subordinate place. They admit the tendency of 
 value to conform to cost, but explain this tendency as merely 
 “ a special case within the great law of marginal utility.” 
 A law of costs, as an independent and controlling principle, 
 they do not seem to admit. Marginal utility they hold to 
 be the primary and universal law governing the value of 
 all valuable things. Their only concern with cost is to 
 reconcile it with this other and greater law. If, now, it 
 can be shown that they have thus far failed in effecting this 
 
 [356] 
 
The Austrian Theory of Vaeue. 
 
 21 
 
 reconciliation, we shall have good reason for doubting the 
 validity of their claims on behalf of marginal utility. That 
 this can be shown I have no doubt, because it seems clear 
 that cost, as they treat it, is not true cost at all. 
 
 Their definition of cost, to begin with, involves their 
 theory of value. The cost of every commodity consists of 
 the ‘ ‘ value of the means of production ’ ’ used up in produc¬ 
 ing it. By means of production, according to Dr. von 
 Wieser, we are to understand such things as ‘ ‘ common 
 hand-labor, coal, wood, the commonest metals;” also land 
 of the ordinary sort. Observe that, in his view, human 
 labor is not in itself an element of cost; it is only its value 
 that constitutes cost. But since, according to the Austrian 
 theory, value is simply another word for marginal utility, 
 and since mere means of production, such as labor, coal, 
 iron, etc., have no direct utility of their own, they have no 
 value of their own. They can be used, however, to produce 
 useful commodities; they have, therefore, a derived or 
 ‘ ‘ attributed ’ ’ utility equal to that of their potential pro¬ 
 ducts. The value thus acquired by the means of production 
 constitutes and measures the cost of the commodities they 
 are used to produce. For production does not merely create 
 value ; it also destroys value.* The elementary means of 
 production, such as iron, coal, wood and common labor, 
 have manifold uses. When any part of the general stock of 
 them is applied to the production of any given article, as, for 
 example, a kitchen range, the same part cannot be again 
 used for producing nails or horseshoes or iron palings. 
 Thus, “each productive process costs , and it costs exactly 
 as much as the value which the material and labor required 
 would have produced if rationally applied. ”f 
 
 This view of cost seems to me to be radically insufficient. 
 It seems to say that the cost to us of what we produce is the 
 loss of what we might have produced instead of it; that the 
 
 * Von Wieser, “ Der naturliche Werth p. 167. 
 
 f Von Wieser, “Theory of Value,” Annals, Vol. ii, p. 618, March, 1892. 
 
 [ 357 ] 
 
22 
 
 Annals of the American Academy. 
 
 cost of the kitchen range consists in the lost value of the 
 nails, horseshoes and palings we might have produced with 
 the labor and materials that have been put into the range. 
 That way of looking at cost seems to me to verge on the 
 fanciful; to be, at all events, lacking in the simplicity and 
 directness that ought to characterize a scientific definition. 
 It has, however, other defects that are more serious. It has, 
 in the first place, all the defects of the employer’s view of 
 cost. It asks us to forget those features of production that 
 men necessarily feel as burdensome and costly. The irk¬ 
 some human exertions necessary to the production of kitchen 
 ranges are not to be thought of as elements of cost. It is 
 only the attributed value of those exertions that is to be 
 taken into account. But the value of human labor, as the 
 Austrians expound it, is simply the value of its potential 
 product. Putting their two propositions together, we have 
 the unavoidable result that the cost of commodities, as they 
 explain it, is simply another word for the value of commodi¬ 
 ties. Cost and value, as they treat them, become indis¬ 
 tinguishable. They set out with a value for each commodity 
 fixed by marginal utility. The value so fixed for the com- 
 modity, or for the marginal member of each related group 
 of commodities, fixes the value of the means requisite for 
 producing the commodity. The value of the means consti¬ 
 tutes, in turn, the cost of the commodity. But, in this 
 circling and doubling, we obviously do not get beyond value 
 —do not touch true cost at all. We deal only with the 
 relations between wages, the values of machinery, partly 
 wrought materials, etc., and the value of the completed 
 product. All that the Austrian economists have urged as 
 to these relations may be both true and important in its 
 proper place. But it seems to me clear that no part of 
 it can be received as reaching the subject of economic 
 cost. Value may be a consequence and an evidence of 
 cost of production; it can never be itself true cost to the 
 producer. 
 
 [358] 
 
The Austrian Theory of Vaeue. 
 
 23 
 
 We have only to consider the case a little to perceive the 
 incongruity of the Austrian doctrine. The value of iron, 
 for example, according to their view, is not only due to its 
 fitness for making iron wares, but is fixed by the value of 
 those wares (or of the marginal member or portion of them). 
 Yet, when we proceed to develop this value of iron, by 
 appfying it to any of the uses which give it value, its value 
 is at once transformed into cost. Iron has value, because it 
 can be turned into ranges, nails, and ten thousand other 
 things; but iron wares cost, because iron is valuable for 
 making them. This seems a strange conception of cost. If 
 we put it in another form, its strangeness becomes even more 
 striking. Dr. von Wieser tells us that “cost is . . . 
 
 measured by utility alone.” That is to say, iron wares have 
 utility for us ; and iron, as a material for making them, has 
 a derived or attributed utility equal to that of its potential 
 products. But when we proceed to avail ourselves of this 
 utility of iron, by actually converting it into any of the useful 
 articles for the making of wdiich it is so well adapted, its very 
 suitableness for our purpose becomes an item of cost to us. 
 Its utility is at once advantageous and burdensome to us ; 
 burdensome and costly precisely because, and precisely so 
 far as, it is advantageous to us. 
 
 Probably, Dr. von Wieser, seems to himself not to have 
 maintained any such absurdity as this. In fact, he gives no 
 sign of having considered cost in the general sense at all. 
 His sole interest in cost is limited to the obvious necessity of 
 establishing a modus vivendi of some sort between it and 
 marginal utility ; and, he seems to have too easily concluded 
 that he had sufficiently dealt with cost when he had devised 
 a treatment which applies, with an appearance of logical 
 consistency, to the comparative costs of the various commod¬ 
 ities to the employers. Cost, as he treats it, is made up of the 
 value of those means of production that have manifold appli¬ 
 cations, such as iron, coal and common labor. The import¬ 
 ance of manifold applicability as a quality of ‘ ‘ cost-goods ’ ’ 
 
 [359] 
 
24 
 
 Annals of the American Academy. 
 
 is readily seen. Dr. von Wieser evidently perceived the 
 incongruity of asserting that the utility of iron for the 
 making of nails, can be an item in the cost of production of 
 nails. In his book on “Natural Value” (p. 168), he 
 expressly guards himself against seeming to maintain this, 
 by explaining that the value of any material which has but 
 a single use, does not enter into the cost of the resulting 
 commodity. The value of the commodity is indeed, here as 
 in other cases, carried back by attribution to the means of 
 producing it; but the value of the means does not, in this 
 case, hold the relation of cost to the commodity. Here at 
 least we can wholly agree with him. The strange thing is 
 that his conclusion as to this case, had not led him to 
 question the validity of his reasoning in the case of materials 
 having manifold applications ; had not raised a doubt in his 
 mind whether utility can be in any case a true element of 
 cost. 
 
 For how, on his system, does he wish us to conceive the 
 cost of the whole group of related commodities, in the 
 production of which any given material of manifold applica¬ 
 tion comes into play ? When he speaks of the value of iron 
 as an item in the cost of production of nails, he asks us to 
 think of the utility of iron for the production of axes, ranges, 
 pots, and the many other iron wares. If the cost of pro¬ 
 duction of axes be in question, we are to think of the 
 utility of the requisite iron for the making of nails, etc. 
 But how of the cost of axes a?id nails, and all the other iron 
 products ? He will not, I suppose, deny the existence of 
 cost in this general sense for all iron wares. How would he 
 have us express it? What are its elements? Is it not 
 obvious that the utility of iron holds to the whole group of 
 iron products, precisely the same relation that the utility of 
 the single-use material holds to the single resulting commo¬ 
 dity ? Is there not, therefore, the same fundamental objection 
 to counting the utility of iron as an item in the cost of nails, 
 as there is to counting the utility of Johannisberger grapes 
 
 [360] 
 
The Austrian Theory oe Value. 25 
 
 in the cost of Johannisberger wine ? Can utility be cost in 
 any case, if we are to regard cost as something burdensome, 
 and not merely as a blessing under a wrong name? It 
 seems to me clear that it cannot be, and that Dr. von 
 Wieser’s effort to reconcile the marginal utility theory of 
 value with the observed tendency of cost to control value, 
 has fallen a good way short of success. 
 
 There are other features of his treatment that seem equally 
 objectionable. Why, for example, does he ask us to begin 
 our computation of cost with the value of coal, iron, wood, 
 etc. ? Coal in its native seam has no value; neither has 
 iron in its original beds of ore. Nature does not give us 
 coal in the furnace-room, nor iron in the form of pigs, 
 nor wood dried and ready for the hand of the joiner. But 
 neither does she hold her supplies of any material at a value 
 against us. Men can have every material freely for the 
 mere trouble of taking it. I cannot but regard it as a grave 
 defect in Dr. von Wieser’s treatment, that he does not begin 
 his computation of cost at the beginning of each process of 
 production. He seems to say that the labor of mining and 
 smelting iron ores is no part of the process of producing iron 
 wares. He takes up the reckoning of cost of iron products, 
 when the process of producing them is already well advanced. 
 What sound reason is there for throwing out of account the 
 earlier labors in each process? Are they not a true and 
 essential part of the process, entitled in every way to as full 
 recognition as the labors of the later stages ? Dr. von Wieser 
 may perhaps have held that he gives those earlier labors 
 sufficient recognition as elements of cost, when he includes 
 the value of the materials they have produced. Here, how¬ 
 ever, we meet again the difficulty already pointed out; 
 namely that value and cost are not interchangeable terms. 
 If it be allowable to blot out, in our computation of cost, 
 any part of the exertions by which commodities are pro¬ 
 duced, substituting in their place the value of the materials 
 or machinery they have prepared, then I see no good reason 
 
26 
 
 Annals of the American Academy. 
 
 for stopping short in the substitution at the point selected by 
 Dr. von Wieser. If it be legitimate to do it at all, there can 
 be no valid reason for not carrying it out to the end, 
 and dropping labor and waiting out of the account alto¬ 
 gether. Indeed, on Dr. von Wieser’s method I think it 
 would not greatly matter. If the element of cost be not the 
 labor itself, but the value of it, or the value of the other 
 thing or things it might have produced, then it does not 
 seem to matter which course, or what combination of both 
 courses, we choose to follow. Either proceeding robs cost 
 of all independent significance ; turns it into a mere reflec¬ 
 tion of value, and reduces cost in the general sense to a mere 
 empty phrase. 
 
 This last consideration, even if there were no other objec¬ 
 tion to Dr. von Wieser’s method seems to me decisive 
 against it. On his plan it becomes impossible to estimate 
 cost of production in the broad sense in which it is connected 
 with human welfare and progress. The reduction of cost 
 that has been effected by general improvements in the arts 
 of production, finds neither expression nor recognition in 
 his vocabulary. How, for example, does he propose to 
 express the fact that all commodities are lower in cost to-day 
 than they were a century ago ? He cannot say that men 
 get commodities with less labor now than they did then, and 
 therefore cost has been reduced; for he makes the ‘ ‘ value 
 of labor” the constituent of cost, and the value of labor 
 has risen as its product has increased. On reflection he 
 must perceive, I think, that his procedure fails to recognize 
 cost in its true form. What he has chosen to dignify with 
 the name of cost of production is in reality, on the most 
 favorable interpretation, only a sort of disguised form of em¬ 
 ployer’s cost. At best it can give but a clue to the present 
 comparative costs of the various commodities to the employers 
 who carry on the final stage in each productive process. 
 What these pay out for labor, materials and machinery, has 
 indeed reference to costs endured by those to whom the 
 
 [362] 
 
The Austrian Theory of Vaeue. 
 
 27 
 
 payments are made ; but to confound these payments with the 
 true elements of cost which they reward, is in my judgment, 
 only to introduce confusion into the very heart of our science. 
 
 Professor von Wieser thinks it a fatal defect in the classi¬ 
 cal treatment of cost that it makes no mention of capital, or 
 the consumption of capital as an item of cost distinct from 
 the requisite labor and waiting (or abstinence). He argues 
 that, since we have the use of old capital even in procuring 
 the materials wherewith to make new capital, we cannot 
 eliminate the factor ‘ ‘ capital ’ ’ from the computation of cost. 
 But I fail to see the force of his objection. Classical econ¬ 
 omists agree in regarding the cost of capital as a part of the 
 cost of the commodities it helps to produce. Dr. von Wieser, 
 I venture to believe, will not contend that this is an erroneous 
 proceeding. The only question, then, is as to the proper 
 mode of including this portion of the total cost of commodi¬ 
 ties. Dr. von Wieser would have us mention it specifically 
 as an item of cost different from, and in addition to, the 
 requisite labor and waiting. A little reflection will convince 
 him, I think, that there are decisive reasons against that 
 course. When the classical economist has named the neces¬ 
 sary labor as an element of cost, he is bound to include all 
 the necessary labor from the beginning to the end of the 
 productive process. Now the requisite capital being itself 
 produced by labor, and this labor being already included in 
 our definition under its own proper name of necessary labor, 
 we would be guilty of double counting if we named the capi¬ 
 tal also as an element of cost, over and above the necessary 
 labor. That seems conclusive against Dr. von Wieser’s 
 proposition. Further, if we introduce capital as a special 
 item of cost, there is really no natural limit to the application 
 of the principle, short of the whole cost of things. For is 
 not every part and stage of every productive process a use, 
 a consumption, of capital ? Is not every device of production, 
 and exchange, every material, every half-wrought product— 
 is not even every finished commodity while still in the course 
 
 [363] 
 
28 
 
 Annals of the American Academy. 
 
 of transportation and exchange—capital ? If so, how can 
 we possibly speak of the use of capital as an item of cost 
 distinct from, and in addition to, the necessary labor and wait¬ 
 ing of production ? Is not capital the very product and neces¬ 
 sary result of the labor and waiting ? Is it not the mark and 
 interim pledge of the coming enjoyable return for labor ex¬ 
 pended ? Do not the Austrian economists themselves treat 
 it so? How then, I repeat, shall we escape mere absurdity, 
 if, in spite of all that, we set down capital as an independent 
 item of cost, as if it somehow included something that has 
 not been produced by human labor and waiting ? 
 
 Dr. von Wieser apparently thinks the classical definition 
 of cost requires that the capital now in use should have been 
 produced by the men of to-day without the aid of previous 
 capital. This is a misapprehension of the definition, since 
 those who hold it have never so understood it. If it be 
 granted that all capital, whether new or old, is a product of 
 human industry, the definition carries its own justification. 
 The capital now in use is undoubtedly, to a large extent, a 
 product of the labors and waitings of past generations of 
 men ; but it is none the less a product of labor and waiting. 
 No sane person contends that those who provide capital are 
 always those who enjoy the resulting product or even the 
 greater part of it. Each successive generation has the enjoy¬ 
 ment of commodities whose cost was largely borne by pre¬ 
 ceding generations ; and, in its turn, it expends much of its 
 own labor in ways that yield their chief returns to a succeed¬ 
 ing generation. But these facts, so far from being in conflict 
 with the classical definition of cost, seem only to supply an 
 illustration of its main principle. Dr. von Wieser’s difficulty 
 is probably due to his assuming that classical economists 
 reduce cost to labor alone. 
 
 The fact that the existing capital is largely a legacy from 
 past times, has, I think, no other bearing on the relation of 
 capital to cost than that here indicated. Capital being in all 
 cases merely the result of labor applied to production in 
 
 [364] 
 
The: Austrian Theory of Vaeue. 
 
 29 
 
 certain ways, it cannot be a new element of cost different from 
 the labor and waiting that produced it. The legacy feature 
 of the case has undoubtedly great importance in other ways ; 
 but it has nothing to do with the agency of capital in dimin¬ 
 ishing cost, nor with the nature of the cost of capital itself. 
 Its importance lies in the field of so-called distribution. 
 Though all men are enormously benefited by the legacy of 
 capital, the benefits are not equal to all. Those to whom the 
 ownership has come, besides sharing the common benefit of 
 reduced cost of commodities, have, by virtue of their owner¬ 
 ship of the capital, a lien on the products of the general 
 industry. This seems to me to be the only important conse¬ 
 quence of the history of capital. But the ownership of the 
 industrial outfit has obviously nothing to do with its influ¬ 
 ence in making industry productive, and so it has nothing to 
 do with cost of production. It affects the “sharing,” not 
 the production, of commodities. 
 
 For these reasons I cannot but hold that Dr. von Wieser’s 
 criticism of the classical doctrine of cost, like his defence of 
 the Austrian substitute for that doctrine, is lacking in con¬ 
 clusiveness. 
 
 III. MARGINAL UTILITY VS. COST. 
 
 We now come to the main question raised by the Austrian 
 economists—the question how the exchange value of com¬ 
 modities is fixed. The classical theory attributes the normal 
 control of value to comparative cost; the Austrian theory 
 attributes this function to the principle of marginal utility. 
 The new theory does not, indeed, propose to drop the action 
 of cost out of account entirely ; but what its advocates call 
 cost is, as we have seen, nothing but a form of utility. 
 They, of course, see clearly that there cannot be two inde¬ 
 pendent regulators of value, for the two could but rarely 
 coincide in fixing the same value for things. As a way out 
 of the difficulty, they have, in fact, undertaken to show that 
 marginal utility governs the cost as well as the value of com¬ 
 modities. That undertaking can hardly be called successful; 
 
 [365] 
 
30 
 
 Annals of the American Academy. 
 
 and until it has been successfully carried out, the adherents 
 of the classical theory might well rest their defence on this 
 point alone. But it is due to Dr. von Wieser that we should 
 examine briefly the precise function of marginal utility in 
 the exchange of products. That it has a function has been 
 made abundantly clear, and the Austrian economists have 
 done a highly valuable service in calling attention to it. 
 Their only mistake has been the natural one of claiming too 
 much for the principle. This mistake they made almost 
 inevitable by their mode of treating exchange of products. 
 They treat exchange as an independent subject—as a trans¬ 
 action entered into for its own sake. They have chosen to 
 make no account of the fact that economic exchange is 
 simply a stage, the closing stage, in production by division 
 of labor. Cutting themselves off in this way from the true 
 explanation of the origin and motives of exchange, they 
 have been obliged to invent for it a cause and a motive which 
 may appear in the act of exchange itself. This they try to 
 do by a comparison of the utilities of the things exchanged 
 to the two exchangers. Each parts with a thing of lower 
 utility to him than the thing he receives; the difference is 
 his “profit” by the transaction, and constitutes his motive 
 for making it. How it happens that men constantly find 
 themselves in possession of things of lower utility to them 
 than the things their neighbors have, would seem to be a 
 question calling for treatment, as the very basis of any theory 
 of exchange. Any discussion of it must disclose the fact that 
 the gain of exchange is not to be found in exchange itself, 
 but in the method of production which makes exchange 
 necessary. The gain is in the increased productiveness that 
 comes by division of labor. It is the gain of having more 
 commodities for our labor, not of having commodities of 
 higher utility to us. That the act of exchange does result in 
 giving each producer an article of higher utility to him than 
 his own product is undoubtedly true ; but that is no real 
 explanation of the case, because it asks us to take the 
 
 [ 3 66 ] 
 
The Austrian Theory oe Value. 31 
 
 subordinate, incidental circumstance instead of the larger and 
 more fundamental principle that governs the whole proceed¬ 
 ing. Exchange can never be properly treated except as a 
 part of the method of production that gives rise to it. Once 
 forget that the nailmaker has made his stock of nails with 
 no other thought than that of getting a general assortment 
 of useful commodities in exchange for vthem, and you are 
 on a wrong ground altogether. Once off the true ground 
 of his action, you are in danger of inventing wholly un¬ 
 real motives for him, and of adopting wholly untenable 
 doctrines as to the way in which the terms of exchange are 
 settled. 
 
 Precisely this error I think the Austrian economists have 
 fallen into. They practically ignore production in their 
 treatment of exchange. Dr. von Wieser, in his treatise on 
 ‘ ‘ Natural Value, ’ ’ expressly states that his purpose is to discuss 
 value as it would present itself if a highly developed com¬ 
 munity existed without exchange and without price, (p. 37.) 
 For the purposes of his treatment he assumes, provisionally 
 of course, that the supply of each article exists without pro¬ 
 duction (p. 24, note). By ignoring production as the source 
 of supply, he easily arrives at a theory which ignores cost 
 of production as the regulator of value. Now, I have 
 nothing but admiration for the patient skill with which the 
 Austrian economists have worked out the play of human 
 feelings in connection with the acquisition of material com¬ 
 modities. The principle of marginal utility is undoubtedly 
 a most important contribution to economic theory. But it 
 seems entirely clear to me that its authors have been misled 
 as to the precise scope of its action. They attribute to it 
 the power of controlling and determining exchange value, 
 to the practical supersedence of the traditional law of cost. 
 In my opinion, its true function is not at all to fix exchange 
 value, but to limit the demand for each commodity at the 
 value fixed by the cost of producing it. A few considera¬ 
 tions will serve to make this plain. 
 
 [367] 
 
32 
 
 Annals of the American Academy. 
 
 In the first place the principle of marginal utility is simply 
 that our subjective valuation of each commodity, or rather 
 of each additional unit of it, grows less as our supply of the 
 commodity is increased. If a man has but a single coat, he 
 necessarily sets a high value on it; to lose it would be to lose 
 a great deal of comfort. Give him a second coat; this, 
 though a highly-prized addition to his possessions, is not of as 
 great utility to him as it would be if he had no other ; the 
 loss of it would not be so great a loss of comfort. A third 
 coat would have still less utility for him than the second ; 
 and so on. By successive additions to his supply of coats 
 you would finally reach a point at which a coat more or a 
 coat less would be a matter of indifference to him. This is 
 the point of satietjL There is thus between the famine, or 
 maximum valuation and the satiety, or zero valuation, a 
 descending scale of utility for each commodity—each point 
 in the scale corresponding to some determinate supply of the 
 article. The application of the utility-scale to the purchase 
 of commodities is, in some respects, entirely obvious. The 
 man who already has two coats will give so much, and only 
 so much, for a third ; if he has already three coats, he will 
 not buy a fourth unless the price falls within his estimate of 
 the utility to him of having a fourth coat. And so of the 
 fifth and the sixth and all higher numbers. For the sake of 
 definiteness, let us assume that all men agree in estimating 
 the utility of coats as follows : 
 
 First, 
 
 . . . . . . 100 
 
 Second, 
 
 • . . • • .IQ 
 
 Third, 
 
 • • • • • • 13 
 
 Fourth, 
 
 ..«•«. 3 
 
 Fifth, 
 
 ■2 
 
 • ••••• ** 
 
 Sixth, 
 
 ••••• 0.5 
 
 Seventh, 
 
 • ••••• O • O 
 
 Now, obviously there is nothing in this scale, in and of 
 itself, to tell us anything as to the actual price of coats. It 
 
 [368] 
 
The Austrian Theory oe Vaeue. 33 
 
 tells only that the price cannot exceed $100. In order to 
 establish a particular price, we must know how many coats 
 there are to be sold. If there are so many in the market 
 that, in order to sell all, every man must be induced to buy 
 three, then we can say at once that the price must be not 
 above thirteen dollars. If every man must be induced to 
 buy four, the price cannot exceed eight dollars. But observe 
 the “if.” If we could assume, with Dr. von Wieser, that 
 the supply of commodities came to us without production, 
 we should have no hesitation in accepting his theory of value. 
 As, however, there is no way by which men can get com¬ 
 modities except by producing them, it is obvious that pro¬ 
 duction controls the supply. And in order that coats shall 
 be forthcoming to meet the calls of purchasers, it is neces¬ 
 sary that some men be induced to produce them. 
 
 What, then, determines whether each wearer of coats shall 
 be able to obtain only one coat a year at $100, or two coats 
 at nineteen dollars each, or four coats at eight dollars each. 
 Obviously, nothing but the greater or less difficulty of pre¬ 
 vailing on other men to produce them for him. This, again, 
 will depend on the estimate men put upon the whole task of 
 producing coats. In other words, it will depend on what we 
 call cost of production. 
 
 Division of labor gives rise to most of the puzzles and 
 misconceptions with which economic theory has to deal. It 
 so complicates every question, that even trained economists 
 may readily lose the true bearing of things. In this matter 
 of marginal utility, the whole difficulty in perceiving the 
 exact function it performs, grows out of division of labor. 
 If every man produced each article directly for the supply 
 of his own wants, I think the whole matter would be clear 
 to everybody. Such a producer would constantly have to 
 answer for himself the question—How much of this thing 
 shall I produce ? I11 answering it, he would have a rather 
 
 complicated set of considerations to base his decision upon. 
 He would have in mind in the first place, the limits of his 
 
 [369] 
 
34 Annals of the American Academy. 
 
 whole productive capacity and the extent and character of his 
 needs. He would wish to apportion his labors among the 
 various sorts of production in such a way as to yield him the 
 largest possible satisfaction—the maximum of utility. In 
 deciding how much of each commodity to produce, he would 
 have of course to balance its utility against that of the other 
 possible commodities, measure for measure. But that would 
 not be all. He w 7 ould also have to balance its cost, measure 
 for measure, against that of the other commodities. Or, if a 
 different way of expressing it be preferred, he would have 
 to consider not merely the utility of each commodity, but the 
 utility in comparison with the cost : the question being 
 whether, for the necessary cost of it, the given commodity 
 offers on the whole the best return. He would give up 
 producing it and turn to something else, when the point was 
 reached at which he should say to himself, “ Things being as 
 they are, I can do better for myself by now devoting my 
 labor to that other article. By the same amount of trouble 
 as would be required for producing another measure of this, 
 I could produce so and so many measures of that other ; and 
 this, as I am situated, would be better for me.” The point 
 I wish to insist on, is the part necessarily played by cost in 
 the forming of this decision. Without the consideration of 
 cost, in some form, there is really no basis for a decision at 
 all; for, were it not for the obstruction of cost, everybody 
 would carry his supply of every commodity to the point of 
 satiety—in which case all considerations of value and all 
 theories of value would alike disappear. 
 
 Those who find diagrams helpful for illustrating a matter 
 of this sort, may perhaps get assistance from the one annexed. 
 It is intended to illustrate the relations of cost and marginal 
 utility in the case of three commodities—two of them neces¬ 
 saries and the third in the nature of a luxury. Since our 
 estimate of the utility of each additional unit of any commod¬ 
 ity is less than that of the previous units, we may represent 
 the utility of successive units by a descending curve. Cost, 
 
 [37°] 
 
The Austrian Theory of Vaeue. 35 
 
 on the other hand, being a constant quantity, may be repre¬ 
 sented by a horizontal line. The point of marginal utility 
 for the given conditions is found where the utility curve 
 intersects the line of cost. Flour and coats being necessary 
 articles, the utility of the first coat and the first barrel of 
 flour cannot well be expressed. The scale of numbers is 
 
 primarily for costs : the unit of cost being a definite amount 
 ot labor and waiting : not in the sense that the composition 
 of the unit is identical in all cases, but that, in point of 
 burdensomeness, each is equivalent to every other. The 
 same scale, read downward, may also answer for the units 
 
 [371] 
 
36 
 
 Annals of the American Academy. 
 
 of utility ; but it must be remembered of course, that for 
 this purpose, they have a wholly different signification. 
 
 Suppose, now, that we have the case of a man who has 
 seventy-five units of labor and waiting to be applied to the 
 production of coats, flour and beer ; also let us assume that 
 each coat has a cost of ten units, the barrel of flour six units 
 and the keg of beer three units. Let us further suppose 
 that the curves of our diagram represent truly his estimate 
 of the utility of successive units of the three commodities. 
 From these data, we are enabled to predict that he will pro¬ 
 duce for himself three coats, five barrels of flour and five 
 kegs of beer; for by this distribution of his productive 
 power, he will, on our assumptions, produce a greater total 
 utility for himself, according to his own estimate of the 
 respective utilities, than he could by any other selection.* 
 
 Two things are to be noted in this example for their 
 bearing on our main problem. In the first place, it is 
 obvious that the man’s estimate of the utility of the suc¬ 
 cessive units has not the least effect on the terms of obtaining 
 them : all the units of each commodity cost him alike. 
 Secondly, and I may say consequently, his low estimate of 
 the utility of the last barrel of flour, or of the last keg of 
 
 * This is a mere matter of arithmetic. Using the data of the diagram, and 
 adding together the figures indicating the utility and the cost of the successive 
 units of commodity, we have the following results. No other selection yields so 
 large a sum of utility for the same cost. The dotted prolongation of the utility 
 curves gives the data for testing this proposition. 
 
 Utility. 
 
 Coats, ist,.? 
 
 2d, 19 
 
 3d, 13 
 
 Flour, ist bbl.,.? 
 
 2d “ 25 
 
 3d “ 23 
 
 4th “ 20 
 
 5th " 14 
 
 Beer, ist keg,.15 
 
 2d 
 
 3d 
 
 4th 
 
 5th 
 
 10 
 
 7 
 
 5 
 
 4 
 
 Cost. 
 
 10 
 
 10 
 
 10 
 
 6 
 
 6 
 
 6 
 
 6 
 
 6 
 
 3 
 
 3 
 
 3 
 
 3 
 
 3 
 
 155+ 75 
 
 Total, 
 
 [372] 
 
The; Austrian Theory of Vaeue. 
 
 37 
 
 beer, has not the least effect on the terms he has to submit 
 to in order to get it. The only things determined by his 
 sense of utility are, first, that he desires this last unit of each 
 commodity sufficiently to be willing to submit to the neces¬ 
 sary cost in order to add it to his supply; and secondly, that 
 he does not sufficiently desire a further unit of either to be 
 willing to give the necessary cost for it. That is to say, the 
 effect, the only effect, of marginal utility, is to fix the pro¬ 
 portional quantity of each commodity to be produced. 
 
 Now, carrying over these elementary ideas into our 
 existing industrial S3^stem, we may get some help from them 
 in discerning the precise office of marginal utility in connection 
 with exchange of products. It will be admitted, I suppose, 
 that division of labor has no necessary effect on the in¬ 
 dividual producer’s estimate of the utility of commodities. 
 It increases enormously the productiveness of labor: gives 
 each man a vastly greater sum of utility in return for a given 
 outlay of labor and waiting. But I see no reason to suppose 
 that each man’s choice of commodities is at all different, 
 under division of labor, from what it would be if he were 
 able to produce all things directly for himself, in the same 
 quantities as he can now procure them by exchange with 
 other producers. The new element in the case affects only 
 the amount and the form of the cost to him of the com¬ 
 modities he seeks to obtain. Cost is indefinitely lessened 
 for him. Secondly, the cost on which his sense of marginal 
 utility is to play, is no longer the very labor and waiting 
 that produce the commodities he uses ; for they are pro¬ 
 duced by others. It is rather the labor and waiting he must 
 bestow in producing the quantity of his own commodity he 
 gives in exchange for them. Therefore, the cost of produc¬ 
 ing his own product being given, the cost to him of the 
 things he buys depends on the terms of the exchange ; in 
 other words, it is a question of exchange value. The cost, 
 then, which must figure in our diagram, is no longer the 
 direct and proper cost of producing flour and coats and beer, 
 
 [373] 
 
33 
 
 Annals of the American Academy. 
 
 but the cost of acquisition of these commodities to the 
 purchaser.* This being merely another word for the 
 exchange value of these commodities, viewed from the 
 purchaser’s standpoint, it follows that their exchange value 
 now takes the place of direct cost in determining the position 
 of the refusal-point in the scale of marginal utility, the 
 point, that is to say, at which the buyer says to himself, 
 
 ‘ ‘ I can do better, as values stand, by buying other things 
 instead of buying any more of this one.” 
 
 This is a result of the highest importance for our main 
 question. It goes to indicate a wholly different relation 
 between marginal utility and value from that which Dr. von 
 Wieser undertakes to establish. So far from being able to 
 set the exchange value of things by its own independent 
 action, marginal utility in any given case, must rely on the 
 exchange value for its own determination of anything. Cost 
 in some form is necessary as a basis for the sense of utility 
 to operate on, in order to evolve a refusal-point in the demand 
 for each commodity. Otherwise, as already remarked, every¬ 
 body would push his acquisition of every commodity to the 
 limit of satiety. The Austrian economists seem to me to 
 ignore too much the fact that value in exchange means, for 
 the purchaser, cost as well as utility. They are so preoccu¬ 
 pied with subjective value, or utility, that they have too little 
 thought of this other side of the case. In exchange, and 
 from the standpoint of the buyer, value is synonymous with 
 cost; it holds to the buyer the same relation that cost of pro¬ 
 duction does to the producer. This is, at bottom, the reason 
 why exchange value and cost of production are so closely 
 allied. 
 
 The normal operation of the principle of marginal utility 
 in exchange would seem to be that each producer should offer 
 his own product, on the basis of equal cost for equal cost, for 
 such quantities of the various other commodities as he would 
 
 * On the assumption, of course, that we are not dealing with the case of a man 
 who produces one of these articles. 
 
 [374] 
 
The Austrian Theory of Vaeue. 
 
 39 
 
 have wished to produce directly for himself, if that method 
 of production were open to him. He knows that his estimate 
 of the utility of each has no effect on the cost of obtaining 
 it. But, knowing the natural cost, his sense of utility 
 prompts him to have a certain quantity at that cost, through 
 exchange. 
 
 Suppose now, that our diagram represents the case of a 
 brickmaker, who wishes to obtain flour, coats and beer. The 
 question we have to answer is this : Why is it ordinarily 
 true that the man can obtain a keg of beer in exchange for 
 the quantity of bricks representing three units of cost, the 
 barrel of flour for the quantity representing six units, and 
 the coats for the quantity representing ten units ? The classi¬ 
 cal theory answers that it is because the natural effort of men 
 to get the best returns they can for their labor and waiting, 
 tends to keep the returns for equivalent quantities of labor 
 and waiting about equal. The Austrian theory avers that it 
 is because the marginal utility of each commodity makes 
 men willing to take, at these values, the whole supply of each 
 commodity offering for sale. If the value were set a little 
 higher some part of the supply would be unsold ; if lower, 
 some part of the demand would be unsatisfied. 
 
 But this latter answer obviously leaves altogether out of 
 sight the vital question how comes it to pass that the supply 
 of each commodity is so adjusted in amount that the whole 
 product is ordinarily taken at the value that corresponds to 
 cost? It is clearly the adjustment of the supply that makes 
 it possible for the exchange to proceed on that basis. If we 
 take the proper adjustment of supply for granted, we take 
 the whole matter for granted ; for if the proportional supply 
 were different, a different point in the scale of marginal 
 utility would come into play for each commodity, and 
 exchange values would cease to correspond with cost. Fur¬ 
 ther, these new values, so far from tending to be corrected 
 by the action of marginal utility, would simply be in accord¬ 
 ance with that principle, and, so far as it is concerned, might 
 
 [375] 
 
40 Annals of thk American Academy. 
 
 remain permanently the exchanging ratios of the commodi¬ 
 ties. The corrective which restores the terms of exchange 
 to the basis of cost, must surely proceed from the side of 
 cost. The readjustment of values has to be preceded by a 
 readjustment of supply; and, at the sources of supply not 
 marginal utility, but cost, makes itself felt—impelling men, 
 through self-interest, to a course of action that tends to bring 
 values into such relations with each other as to equalize the 
 rewards of equal quantities of labor and waiting. 
 
 Now, if the contention of the Austrian economists were 
 merely that in this corrective process, marginal utility plays 
 a part; if their doctrine were simply that men naturally 
 strive to obtain the greatest possible sum of utility in return 
 for their labor and waiting, and that, in determining the 
 direction in which the maximum of utility is to be found, 
 the principle of marginal utility is decisive, there could be no 
 hesitation in agreeing with them. That would not be to 
 claim for marginal utility the power of regulating exchange 
 values. It would only be an assertion of the principle that, 
 given the terms on which commodities may be obtained, 
 marginal utility indicates the relative proportions of the 
 various commodities that would bring the highest sum of 
 utility in return for a given quantity of labor and waiting. 
 The new doctrine seems to go far beyond this, and to assert 
 that marginal utility not only settles how much men want of 
 the several commodities on any given terms, but also has the 
 power of fixing' the terms themselves, on which each com¬ 
 modity may ordinarily be obtained. It seems to aver that the 
 fundamental reason w T hy the normal exchange value of each 
 commodity is what it is, must be found, not in an}" comparison 
 of costs, but in the fact that there is ordinarily a last buyer 
 who is just willing to give the normal price for the last unit 
 of the normal supply. So far as it does involve this doctrine, 
 it seems to me to be at variance with sound reason. 
 
 The classical theory holds that utility is an essential con¬ 
 dition of value, but that neither the utility of the first nor 
 
 [376] 
 
The Austrian Theory of Vaeue. 41 
 
 of the last unit of supply fixes the exchange value. The 
 last unit, like the first, must indeed have a utility great 
 enough to counterbalance the dis-utility of the necessary 
 cost; otherwise it would not be produced. The fact that, in 
 the case of the last unit, utility comes to the level of cost, 
 does not affect the terms on which the producer can obtain 
 this or any other unit from nature’s sources of supply. 
 Neither, therefore, can it affect the terms on which one man 
 may induce another man to produce this or any other unit 
 for him. The sole consequence of the coincidence of utility 
 with cost, in the case of the last unit, is to make it the last. 
 Recurring to our diagram, the position of the classical econo¬ 
 mists is made plain by observing that so long as the costs 
 of the three articles remain as given, no change in the 
 curves of utility w T ill have any permanent effect on the 
 exchange values. Even if the utility curves were inter¬ 
 changed, the only lasting effect would be to alter the propor¬ 
 tional production of the three commodities : one coat would 
 still be equal in value to 1^ bbls. of flour, and 3 yi kegs of 
 beer. But, each article keeping its own curve of utility, let 
 the lines of cost be interchanged—coats taking the cost of 
 flour, flour that of beer, and beer that of coats—and we 
 cannot doubt that exchange value will be interchanged also. 
 Coats will fall to the value flour had before, flour to the value 
 beer had before, and beer will rise to the value coats had 
 before. These things being so, how shall we avoid the 
 conclusion that cost, not marginal utility, regulates the 
 exchange value of commodities ? 
 
 S. M. Mac vane. 
 
 Harvard University. 
 
 [377] 
 
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