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KNUT WICKSELL

‘Usually when a great is translated into English, reputation is deflated. Not so with Wicksell.’ Paul A.Samuelson ‘No finer intellect and no higher character have ever graced our field’ wrote about the Swedish economist Knut Wicksell (1851–1926). Wicksell made lasting contributions to capital theory, monetary theory and . However, whilst most of his books, originally published in German or Swedish, have long been translated into English, only a few of his more than eight hundred articles are available in English. This volume fills part of that huge gap by presenting a wide range of hitherto untranslated material. This volume includes: • contributions to neoclassical and Austrian capital theory; • essays on income, taxes and duties, including Wicksell’s doctoral thesis On the Theory of Tax Incidence; • one of Wicksell’s few articles on . A second volume contains essays on monetary questions and population, as well as a number of Wicksell’s book reviews.

Bo Sandelin has been at the Department of , University of Gothenburg, since 1973. His publications in international journals include articles on the economics of housing, the economics of crime, capital theory and the history of economic thought, with special reference to Wicksell’s capital theory. He has published several books in Swedish, and edited The History of Swedish Economic Thought (Routledge, 1991). Page Intentionally Left Blank KNUT WICKSELL

Selected essays in economics

Edited by Bo Sandelin

VOLUME I First published 1997 by Routledge

This edition published in the Taylor & Francis e-Library, 2003.

Simultaneously published in the USA and Canada by Routledge Published 2014 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017 USA

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 1997 Bo Sandelin

All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library

Library of Congress Cataloguing in Publication Data Wicksell, Knut, 1851–1926. [Essays. English. Selections] Knut Wicksell: essays in economics/edited by Bo Sandelin. p. cm. Translated from German or Swedish. Includes bibliographical references and index. ISBN 0-415-15512-6 (alk. paper) 1. Economics. I. Sandelin, Bo, 1942– . II. Title. HB34.W48213 1996 96–9038 330–dc20 CIP

ISBN 978-0-203-44354-5 Master e-book ISBN

ISBN 978-0-203-75178-7 (Adobe eReader Format) ISBN 978-0-415-15512-0 (Print Edition) CONTENTS

Preface vii Introduction viii

Part I Marginalism and capital theory 1 IN DEFENCE OF THE THEORY OF 3 2 KAPITAL—UND KEIN ENDE! (Reply to Docent Brisman) 15 3 LEXIS AND BÖHM-BAWERK 26 4 ON THE THEORY OF (Böhm-Bawerk’s ‘Third Ground’) 41

Part II Income, taxes and duties 5 ON THE THEORY OF TAX INCIDENCE 57 6 THE INHERITANCE TAX 116 7 TARIFFS AND WAGES 153 8 HIGH PRICES, TARIFFS AND WAGES 158 9 VOLUNTARY OR FORCED SAVINGS? 166 10 THE HISTORICAL DEVELOPMENT OF THE CONCEPT OF INCOME 170 11 THE CONCEPT OF INCOME AS REGARDS TAXATION, AND SOME ASSOCIATED TAX ISSUES 213 12 A FEW COMMENTS 240

v CONTENTS

Part III Unemployment 13 WHY ARE FACTORY OPERATIONS BEING CURTAILED? 253 Index 261

vi PREFACE

This is the first of two projected volumes of previously untranslated writings by Knut Wicksell. The publishers have already responded to interest in Wicksell by publishing three volumes of articles on him in their Critical Assessments series, edited by John Cunningham Wood. Altogether, then, the availability of material both by and about Wicksell has now been improved for English- language readers. The texts have been translated by Dr Timothy Chamberlain (1, 4–6, 8– 13) and Julie Sundqvist (2–3, 7). Working with the translators has been very stimulating, and I have been impressed by their skill in interpreting Wicksell’s frequently complicated way of expressing himself. They deserve special thanks for their efforts. The translation has been financed by the Swedish Council for Research in the Humanities and Social Sciences. I should like to thank the Council for its support, which has made this project possible. Bo Sandelin

vii INTRODUCTION

‘Einige werden posthum geboren’—some are born posthumously—says the German philosopher Friedrich Nietzsche in his autobiography; he has himself in mind. From the perspective of English-language readers, the same claim can be made for the Swedish economist Knut Wicksell (1851–1926), since his most important writings only began to be published in English after his death. Wicksell’s best-known work, the two volumes of Lectures on Political editions had already appeared, the first in 1901–6. In addition, a German ediEconomy, was published in English in 1934–5. By this time, three Swedish tion had come out in 1913–22.1 The Lectures on were followed almost immediately by the translation of Interest and Prices. A Study of the Causes Regulating the Value of (1936).2 The original edition (in German) had been published in 1898. Wicksell’s first book, Value, Capital and Rent, was published in German as early as 1893, but had to wait until 1954 before appearing in English translation.3 Wicksell’s main work on the theory of public finance, Finanztheoretische Untersuchungen nebst Darstellung und Kritik des Steuerwesens Schwedens (1896) is still not available in its entirety in English. The main part of the section ‘A New Principle of Just Taxation’ has, however, been translated into English by James Buchanan.4 The preceding section, ‘On the Theory of Tax Incidence’, is published in English for the first time in this collection. Wicksell himself published very little indeed in English—barely a dozen short articles, about half of them on population. He published a couple of brief contributions on the gold problem in the Economic Journal and an article on international freights and prices in the Quarterly Journal of Economics. All his more significant essays were published in Swedish instead, and to some extent in German. Ekonomisk Tidskrift, which was renamed the Swedish Journal of Economics in 1965 and the Scandinavian Journal of Economics in 1976, was his most important scholarly forum in Swedish. Wicksell’s German articles were spread among several different journals, most prominently Jahrbücher für Nationalökonomie und Statistik. Fourteen articles

viii INTRODUCTION have previously been translated for a volume edited by , entitled Knut Wicksell. Selected Papers on Economic Theory (1958). A bibliography of works by Wicksell printed between 1868 and 1950 lists 889 titles.5 In addition, he left about one hundred unpublished manuscripts, which are now preserved in Library.6 As stated above, very few of Wicksell’s works were originally published in English, but some have been translated. All things considered, a very small proportion of Wicksell’s work has been available in English.7 The present collection is the first of two projected volumes containing further translations from Wicksell’s ample production.

PRINCIPLES OF SELECTION

The selection has been guided by the following principles. First, only material that—as far as I have been able to establish—has not previously been published in English is included. Second, only writings on economics have been taken into account. (A few works on the closely related issue of population are included in the second volume.) The emphasis therefore lies on Wicksell’s role as a scholar of economics, while his contributions to general public debate are passed over. However, it is worth pointing out that in Wicksell’s lifetime it was his activity as a provocative participant in public debate that made him known to the public at large. Here, no topic was beyond his range. He wrote articles or gave lectures on subjects as far apart as defence, euthanasia, spiritualism, marriage, prostitution, foreign policy, issues of law and religion. On one occasion, he dealt with the latter topic in a lecture in so deliberately provocative a manner that as a reputable professor in his late fifties he spent two months in prison in 1909 for ‘blaspheming and mocking God’s holy word in such a manner as to occasion public offence’. Wicksell’s many contributions to public debate and letters to the press undoubtedly retarded his career as an economist. But he liked journalism and, in addition, for many years this kind of activity provided a necessary contribution to his livelihood. He had no regular income until he was fifty, when he became Professor of Economics and Fiscal Law at Lund University. Nevertheless, his contributions to the daily newspapers are not represented in this collection. A third criterion is that, to be included, an article should throw light on some principle. I have tried to avoid articles that focus too narrowly on a specific case and have little general interest. Fourth, Wicksell published a number of articles that were draft versions of chapters of his books, or that summarized central sections of his books. I have avoided those articles because they do not add much to what the reader can find in the books themselves.

ix INTRODUCTION

Fifth, Wicksell, however, also wrote articles in which he clarified points that may have seemed obscure in his books or in earlier articles, or in which he concurred with critical comments, or, on the contrary, defended his propositions against attacks. A few articles of this kind are included. One example is the first article in this collection, ‘In Defence of the Theory of Marginal Utility’, which contains a critique of ideas that had put forward in his article ‘Grundriß einer elementaren Preislehre’. Among other things, Cassel censures the concept of marginal utility in price theory used by Wicksell in Value, Capital and Rent, as well as by other authors. Cassel prefers to go directly to the relationship between price and quantity demanded. Another example is the second article (‘Kapital und kein Ende’), which deals with the concept of capital and the return to capital and is mainly a response to criticism levelled by Professor Sven Brisman against Wicksell’s views after the publication of the first part of the second edition of Lectures on Political Economy.

WICKSELL’S AREAS OF RESEARCH AND THIS COLLECTION Most of Wicksell’s scholarly writings can be classified in three broad groups. The first comprises his work on microeconomic price theory and capital theory, the second his work on fiscal theory and fiscal policy, and the third his monetary or, to use a term more adequate today, macroeconomic writings. His best-known publications on price theory and capital theory are his books Value, Capital and Rent and the first volume of Lectures on Political Economy. Even if his achievement here largely consisted in clarifying and refining the thoughts of earlier authors—particularly Böhm-Bawerk, Jevons and Walras—he also made enduring original contributions. His account of the phenomenon in capital theory that has come to be known as the ‘Wicksell effect’ played a major role during the so-called Cambridge controversy in the 1950s to 1970s. Wicksell demonstrated here that problems can arise if capital is treated like any other factor of production. It is an irony of fate that the ideas of the neoclassicist Wicksell were used to support the position of the English Cambridge School, which opposed neoclassicism. was even of the opinion that the Wicksell effect not only obstructs the construction of an aggregate production function and challenges orthodox marginal propositions, but it ‘is the key to the whole theory of accumulation and of the determination of wages and profit’.8 In this collection a few articles in the first research category are brought together under the heading Marginalism and Capital Theory. In addition to the two articles already mentioned, ‘In Defence of the Theory of Marginal Utility’ and ‘Kapital und kein Ende’, there is first an obituary tribute to Lexis and Böhm-Bawerk. Here Wicksell explains the enormous significance Böhm- x INTRODUCTION

Bawerk’s Positive Theory of Capital had for him; the book hit him ‘like a revelation’. The final essay in this section, ‘On the Theory of Interest’, was originally published posthumously and contains a critical discussion of Böhm- Bawerk’s grounds for the rate of interest, especially the third ground. Wicksell’s central work on fiscal policy is his book Finanztheoretische Untersuchungen nebst Darstellung und Kritik des Steuerwesens Schwedens (1896). What has attracted most attention here is his argument for the in taxation, i.e. that the tax imposed on a given individual should be in proportion to the benefit that person receives from the tax. Further, in Wicksell’s version, the principle implies ‘approximate’ unanimity and voluntary consent in taxation. Wicksell’s views have been made known to the English-speaking world by James Buchanan’s translation of the relevant section of the book, but they had previously been further developed by Erik Lindahl in his doctoral dissertation Die Gerechtigkeit der Besteuerung. Eight pieces on fiscal policy and related areas make up the second part of our collection, entitled Income, Taxes and Duties. It begins with ‘On the Theory of Tax Incidence’, which was Wicksell’s doctoral thesis, defended in 1895 and included as the first part of Finanztheoretische Untersuchungen. ‘On the Theory of Tax Incidence’ was a short thesis, only seventy-five pages, the reason being that Wicksell wanted to keep down the cost of the 360 complimentary copies he was obliged to submit to the university. In his thesis, Wicksell sorted through existing ideas on the effects of taxes on monopoly profits, indirect taxes and income taxes. The second piece on taxes is an article from Ekonomisk Tidskrift on the inheritance tax. In Wicksell’s time, due attention was paid to fundamental conceptual issues, and this informs the whole essay. Thus, should what is called inheritance tax be seen as essentially a fee or a tax, or should it be seen as an expression of the view that the state and municipality also have a right of inheritance when one of their members dies? And where do considerations of social policy lead? Wicksell’s policy conclusion is that the inheritance tax ought not to be used in its entirety for current expenses but that most of it should go to capital formation on the part of the state and the municipality. After a few shorter articles on various issues, including tariffs, we have two lengthy articles on the concept of income. They derive from a government report written by Wicksell and David Davidson. (One of Wicksell’s contributions was also published in Ekonomisk Tidskrift.) It is worthy of note that Wicksell and Davidson were unable to agree on the appropriate concept of income in connection with taxes.9 Davidson wanted to view all revenues contributing to increased wealth or employed in consumption as taxable income. Consequently he included, for example, inheritances, lottery winnings and increases in the value of land. Wicksell wanted to restrict taxable income to the individual’s contribution to the national income. In his view, inheritances, increases in the value of land and similar revenues should be xi INTRODUCTION treated separately and be confiscated by the state to the extent that they were unearned; they were not part of taxable income. The final, short article in the second section is entitled ‘A Few Comments’. This article responds to views on the issue of taxation advanced by David Davidson, in part polemically against Wicksell, and which are based on the so-called principle of ability to pay. Wicksell himself, as I have said, is generally cited as an important advocate of the benefit principle. Here, Wicksell tones down the difference between the two principles, and he clarifies his own position in a way that some of his interpreters may find surprising. His intention was not to transform taxes into voluntary payments. ‘The voluntarism I talked about only applied to the actual passing of tax bills’. Furthermore, ‘These days, taxation is actually exercised by and by means of the taxpayers themselves [because of the universal franchise in parliamentary elections and the right of parliament to decide on taxes]. That the result must then be taxation according to perceived benefits, as far as these are capable of making themselves felt, seems to be not merely, as Davidson would put it, ‘a postulate’, but a real axiom’. Thus, in a democratic, parliamentary system, the benefit principle is de facto the main principle applied. Wicksell did not write much about unemployment.10 Nor did his contemporaries. As is evident from the single article (‘Why are Factory Operations being Curtailed?’) in the last section of this volume (‘Unemployment’), unemployment was an ‘irrational, almost incomprehensible’ phenomenon. For a rational economist it seemed like a paradox that it could ever pay to do nothing, to leave the available productive forces unused. The fundamental question in economics was how to manage an economy with scarce resources, but the question of unemployment was of the opposite nature. This was undoubtedly one of the reasons why the neoclassical of the time, including someone as engaged in social policy as Wicksell, did not really feel that unemployment was a central field for their discipline. I have argued that most of Wicksell’s scholarly writings can be classified into three broad groups, the third of which comprises his monetary writings. Two of his books have to do with this area, namely Interest and Prices (1898) and the second volume of Lectures on Political Economy (1906). The element that has attracted most attention in this context is undoubtedly Wicksell’s cumulative process, which he presents in both books, though with minor differences.11 The main idea here is that if the rate of return on investments is higher than the lending rate, it will be profitable to increase production, which will lead—via increased demand for the , higher incomes and greater demand for consumer goods—to . This process will continue as long as the difference between the rate of return on investments (the ‘’) and the banks’ lending rate persists. There was no space for Wicksell’s monetary articles in this volume, but a selection will make up the first part of a second volume that is in preparation. The second volume will also include writings on the population question, xii INTRODUCTION and a number of reviews written by Wicksell of books by his contemporaries Walras, Clark, Seligman, Mises, Knapp and others. Bo Sandelin

NOTES 1 The English edition was followed by editions in Japanese (1938–9), Spanish (1947) and Italian (1950). A new Japanese translation of Volume 1 was published in 1984. 2 Also published in Japanese (1939 and 1984). 3 A Japanese edition was published in 1937. 4 It was published in Classics in the Theory of Public Finance, ed. R.A.Musgrave and A.T.Peacock, London: Macmillan, 1958. The same section and the preceding section (‘On the Theory of Tax Incidence’) were published in Japanese in 1995. 5 Erik J.Knudtzon, Knut Wicksells tryckta skrifter 1868–1950, ed. Torun Hedlund- Nyström. Lund: CWK Gleerup, 1976. 6 These were assembled for publication by Torun Hedlund-Nyström and Lars Jonung in 1985–6, but have not yet appeared in print. Parts of Wicksell’s correspondence, especially letters to Wicksell, have been compiled by Hitoshi Hashimoto and published (in Swedish) in 1992–5 in numbers 19–22 of Economic and Business Review, published by the Society of Economics and Business Administration at Kyoto Sangyo University, Japan. Hashimoto has also put together a catalogue of 4,007 letters to Wicksell, published in The KeizaiKeiei Ronso, The Economic and Business Administration Review, vol. 28, no. 3, Dec. 1993. 7 There is a good deal of material in English by other authors on Wicksell. The classic biography is Torsten Gårdlund, The Life of Knut Wicksell, , 1958. A comprehensive survey of Wicksell’s economic thought is given by Carl G.Uhr, Economic Doctrines of Knut Wicksell, Berkeley and Los Angeles: University of California Press, 1962. There are two major collections of articles on Wicksell: Knut Wicksell (1851–1926), Pioneers in Economics 28, ed. Mark Blaug, Aldershot, Hants.: Edward Elgar, 1992, and Knut Wicksell, Critical Assessments, ed. John Cunningham Wood, London and New York: Routledge, 1994. The Scandinavian Journal of Economics, vol. 80, no. 2, 1978, is a special Wicksell issue. 8 Joan Robinson, The Accumulation of Capital, London, 1956, p. 396. A comparison of Wicksell’s approach with that of later economists is given in Bo Sandelin, ‘Wicksell’s Wicksell Effect, the Price Wicksell Effect and the Real Wicksell Effect’, in Perspectives on the History of Economic Thought, vol. 6, ed. William J.Barber, Aldershot, Hants.: Edward Elgar, 1991. 9 A brief survey is provided in Lars Söderström and Bo Larsson, Svensk skatteforskning 1919–1979. En annoterad bibliografi, Riksbankens Jubileumsfond, 1981. 10 Lars Jonung has written a survey article which shows that Wicksell’s few works in this field mainly date from the years immediately following the First World War, when unemployment was high in Sweden. See Lars Jonung, ‘Knut Wicksell on Unemployment’, History of Political Economy, vol. 21, no. 1, 1989, pp. 27–42. These articles, which seem to have numbered fewer than ten all told, were published in very diverse forums. Wicksell’s article on ‘Ricardo and the Present Unemployment’ was sent to the Economic Journal, but was rejected by the editor, Keynes. It was, however, published in the same journal in 1981 with an introduction by Jonung. 11 C.-H.Siven describes in ‘The Early Swedish Debates about the Cumulative Process’ (manuscript, 1995) how Wicksell changed his mind.

xiii Page Intentionally Left Blank Part I MARGINALISM AND CAPITAL THEORY

Page Intentionally Left Blank 1

IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

In the third number of this journal for 1899, my fellow-countryman and friend Dr G.Cassel published an essay ostensibly intended as a synthetic presentation of the theory of prices according to Walras, but actually comprising in the main a critique of modern theories of value.1 This critique boils down to the judgement that ‘absolutely nothing is left of the formulas presented by the theorists of marginal utility that is capable of standing up to rigorous criticism’. However, Cassel’s essay includes a substantial number of arguments whose correctness must be challenged. Moreover, since I (along with many other writers) am directly attacked by Cassel, I take the liberty of making a brief response. Cassel first criticizes the theorists of marginal utility on the grounds that it is impossible to measure in real terms and make a direct comparison between the various needs either of a single person or of a number of people compared with one another. For any measurement, he claims, demands a unit of measurement, and the theorists of marginal utility have never established and can never establish a unit of this kind. Rather, we only gain a measurable sign of psychological processes, of the varying intensity of our feelings, by observing some kind of outward effect they have, i.e. in the case in question, by evaluating the goods to be bought or sold in terms of some conventional yard-stick, most simply in monetary terms. ‘In money’, says Cassel, ‘the individual possesses a scale of value by the aid of which he is able not only to classify his needs, but also to express their relative intensity in numerical terms. If need be (i.e. if I cannot get it more cheaply) I am prepared to pay 10 marks (but no more) for a certain good. For another good I might perhaps pay up to 20 marks. This means that not only is the second good more important to me than the first, it is also, over and above that, precisely twice as important.’ In passing, in conventional linguistic usage this is only true when relatively small portions of my assets or income are involved—in other cases it is false. For example, I should if necessary spend half my income on accommodation

Originally published as ‘Zur Verteidigung der Grenznutzenlehre’, Zeitschrift für die gesamte Staatswissenschaft, 1900. 3 MARGINALISM AND CAPITAL THEORY and dress appropriate to my social class, assuming the prices of other goods remain unchanged; for food I cannot, of course, spend more than my whole income, even if I need to. Does that mean that food, for me, is only twice as important as accommodation and dress appropriate to my social class? ‘Thus’, Cassel continues, ‘money is a scale of value for the individual, and by means of trade it becomes a shared, public scale of value, too. For if A and B are prepared at any time to exchange their units of value, the one mark coin, for the same goods, this proves that A’s and B’s scales of value are in fact identical…. It is of course impossible a priori to compare the intensity of A’s needs with B’s. At least such a comparison lies completely outside the domain of economics. But if I make the assumption that A’s and B’s needs are of equal intensity as soon as they both evaluate these needs at the price of one mark, then I have derived from the psychological presuppositions all that is of significance for the economic side of the matter.’ No more precise justification for these claims is to be found in Cassel’s essay. In response I should now like to observe the following. To take first the case of a single individual, a comparison, and a direct comparison at that, between the intensity of our various needs is not only possible, it takes place, as it were, every minute of our life. According to circumstances, each of us prefers to satisfy one of our needs—for sleep, reading, exercise in the fresh air, etc.—rather than the others, without any need to undertake a prior valuation of these needs in monetary terms. Of course, in this process our judgement of value generally goes no further than to rate two different needs as approximately equal in importance to us, or to rate one of them somewhat higher, or even markedly higher than the other, but it is really only a step from this to a precise numerical evaluation. For example, let us suppose a boy already in possession of a stock of apples and nuts is prepared to exchange one of his apples for ten more nuts, but is also, on the other hand, prepared to give up nine nuts from his stock in order to acquire one more apple. Then, obviously, he values one apple above nine, but below ten nuts, that is, at approximately 9 nuts. But not only is that the case: under the given conditions he values the nuts to be in turn given up or acquired almost equally, and therefore considers the value of an apple 9 times that of a nut. Now for those around him, to be sure, the boy’s judgements of value are perceivable only through their ‘symptoms’, their ‘economic expressions’, but for the boy himself the unmediated intensity of his feelings, the amount of pleasure he anticipates from the apples on the one hand and the nuts on the other, is obviously decisive. It is clearly this, and nothing else, that Böhm-Bawerk intends to emphasize in his polemic against Dietzel, mentioned by Cassel (p. 399). Böhm-Bawerk ‘does not (as Cassel believes) claim to know how much Robinson’s hut is worth’. He merely asserts that Robinson himself knows it, in other words, that he has an unmediated sense of the utility of his hut and of his stock of provisions, and that it is just this sense that forms the basis of his judgement of their value.

4 IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

Of course, it is a rather different matter when dealing with different people, or with the same person in different circumstances. A direct comparison between the intensity of the emotions felt by different individuals is of course out of the question, but this by no means prevents a comparison being possible—not as might be supposed by means of money, but rather via induction and analogy. When dealing with people of the same age, the same sex, possessing the same degree of education, etc., one can reasonably assume that their elementary needs—precisely those that are significant for the science of economics—are virtually the same; and if in addition they have equal wealth, then the extent to which they can and will satisfy these needs is surely probably identical. If on the other hand all these circumstances or even just some of them are different, then of course the comparison will involve the greatest difficulties; it could really only be made by an individual who himself had lived in all these circumstances and preserved a vivid memory of his impressions. Here indeed the imperfection of the standard is commonplace: the old forget they were once young, the rich they were once poor (if they ever were poor at all), the rulers are incapable of comprehending the ruled as creatures of their own ilk, etc. But this does not mean giving up hope that the technique of measurement may be perfected. On the contrary, progress in psychophysics towards this end promises well. Fechner’s well-known psychophysical law—first proposed, if I am not mistaken, by E.H.Weber for sensations of pressure—according to which the minimum distinguibile, the just perceptible change in an impression on the senses within certain limits, always demands the same quota of the strength of the stimulus used in each case, constitutes in fact a kind of confirmation of D.Bernoulli’s and Laplace’s earlier speculations about the relation between fortune morale and fortune physique. To the best of my knowledge, no theorist of marginal utility doubts that in the case of real—not just theoretical—measurements of this kind one necessarily requires a unit determined in advance, and that this unit can only be some use or another, and a concrete use at that, taking effect under quite specific conditions—let us say, for example, the use that a pair of work boots affords a middle-aged agricultural labourer living in Brandenburg over the course of a year. The only one who seems to overlook this fact is Cassel himself when he recommends money as a general standard even for subjective valuations, for like other things, money to be sure is useful, but this usefulness is obviously completely different in differing circumstances. It is like wanting to use the length of the day at the winter solstice as a measure of time, or the length of the seconds-pendulum’s swing, which also varies with geographical latitude, as a unit of length. I hardly need to remind Cassel that the element assumed as fixed in measurements and similar processes can never be something purely conventional. It only became possible to make the rate at which the earth turns the basis for all measurements of time when a process of induction had demonstrated that it possesses in the highest degree the quality that we understand as uniformity of motion. As we have seen, Cassel 5 MARGINALISM AND CAPITAL THEORY himself terms the process in question ‘an assumption’, at least when dealing with different individuals, but he has been unable to convince me of the usefulness or even the admissibility of this assumption. In the theory of prices, assuming free competition, it is harmless, to be sure, but only because there it never comes to be employed in practice, since, as Cassel himself emphasizes, when determining prices under conditions of free competition there is never any need at all to compare the varying utility or marginal utility a good has for different people, but rather, only its relative significance over against the numeraire good for one and the same person. However, price formation under free competition far from exhausts the domain of economics, and as soon as one progresses from purely individualistic to altruistic or social points of view, the concept he proposes, or rather the way in which he confuses concepts, turns out to have dire consequences. Cassel himself later admits this, moreover, even if with a rather dissatisfied air! Oddly enough, Cassel later attributes to other writers his own definitions of subjective value and marginal utility in place of those they use themselves, as I shall now show. In order to determine the price ratio of two commodities on the market Walras, as is well known, assumes this ratio itself as an independent variable and the quantities of goods given and received in exchange as variables dependent on it. Jevons, in contrast, had viewed precisely these quantities as the independent variables in the problem, but obviously that means taking into account as many (or twice as many) unknown quantities as there are exchanging persons. If on the other hand we restrict our attention to just two exchanging persons, which may have been Jevons’s original notion, then again the law of competition (the law of indifference according to Jevons), which entails that there can only be a single uniform price for each commodity on the market, is deprived of its effect. For this reason Jevons has hit on the idea of bringing commodity owners together into two groups, so-called trading bodies, but now has to operate with the unclear and in fact undefinable concept of a marginal utility valid for each of these groups in its entirety. Cassel considers the observation I make on this (Über Wert, Kapital und Rente, p. 47) ‘incorrect’. ‘If I know’, he says, ‘that I can sell to a group of buyers who have already acquired x kg of a commodity an additional 1 kg for at most y marks, then I am surely justified in designating y this group’s marginal utility. When I use this term, it must simply be ignored for a moment who buys this final kg; for this buyer in any case the marginal utility is equal to y, and the marginal utility of the group coincides with his.’ I could of course simply respond that this concept of marginal utility is actually not the one Jevons had in mind; but in addition I must emphasize that the method indicated by Cassel is just as impracticable, unless it is a matter of the purchase and sale of a few discrete items of the same size and quality, as in Böhm-Bawerk’s well-known example of the horse market. For the level of the marginal utility in Cassel’s sense depends not only on the 6 IN DEFENCE OF THE THEORY OF MARGINAL UTILITY size of the stock of goods acquired, but also on its distribution among the buyers (and similarly with the seller’s marginal utility). But in order to ascertain this level—assuming the personal allocations of the exchanging individuals as given—one has to solve the original problem or a very similar one at every step, over and over again, or, to put it differently, one has to investigate by whom and at what maximum possible price the first, second, third, and so on up to perhaps the hundred thousandth kilogram of the commodity might be acquired. Certainly this is a method, too, but one that functions very slowly. In this connection Cassel upbraids me for ‘not properly understanding the significance of a common measure of value’, and consequently ‘also failing to lay the axe to the root of all the confusion that Launhardt has brought forth in this area under the cover of mathematics’. The answer to this reproach is already given in the preceding passage. I do not consider incorrect in principle Launhardt’s treatment of the marginal utilities of different persons as commensurable quantities, and in my opinion he has caused no confusion by this procedure. In general Cassel could have treated this author somewhat more kindly, for on the very next page (414) he reaps the benefits of Launhardt’s work. For the elegant method he employs there, ‘diverging from the customary manner of presentation’, by treating all consumers of a commodity uniformly, whether with prices at a given level they be buyers or sellers, originally comes, to the best of my knowledge, from Launhardt. At least I adopted this method from Launhardt, and Cassel probably found it in my work (Über Wert, Kapital und Rente, pp. 52f).

The section of Cassel’s essay that might be expected to arouse most interest among theorists of marginal utility is probably the third, where he endeavours to show that the equality or rather proportionality they assert between marginal utility and commodity prices in general does not obtain. This assertion, according to him, rests on ‘two assumptions, namely, first, that consumer goods are divisible at will, and secondly, that our estimations of value represent continuous functions of the quantity previously possessed’. These assumptions, he says, are ‘both fundamentally incorrect’. Now, concerning the first of these assumptions, surely nobody has advanced it as a generally valid fact, and to this extent of course the strict law of marginal utility suffers certain exceptions, as also is generally recognized. On the other hand, there is a fact that is regularly overlooked by Cassel, which entails that those goods which by their very nature can only be employed as discrete units are subject to the laws of marginal utility no less than those divisible at will. This is the fact that in reality they almost always occur in numerous different qualities or nuances. Let us hear how Cassel argues his case. Cassel ‘lives at present in Berlin and rents a room there’. The room costs 30 marks, and he ‘assumes for the sake of simplicity’ that in Berlin there 7 MARGINALISM AND CAPITAL THEORY exist ‘only similar rooms and, in fact, all at the same price. If the price rose to 100 marks per month, Cassel would ‘probably pay it’; but for an additional room he is only prepared to give at most 5 marks. Therefore, he argues, there is no question of the marginal utility according with the price, neither on one side nor on the other. Now it is clear, however, that the assumption that Cassel makes ‘for the sake of simplicity’ in reality begs the question and decides the entire issue in advance in the way he desires. In fact not just one, but a hundred kinds of room exist in Berlin; if Cassel were prepared to invest even 35 marks he would certainly be able to obtain a more spacious, brighter, more favourably located or in some other way more convenient room in the same part of the city, perhaps even in the same house. If he is not prepared to pay this price, then that of course shows unambiguously that he does not value the better room and therefore a fortiori not the worse room he currently lives in at quite 35 marks. Similarly, he could certainly obtain a simpler or more inconveniently located room for 25 marks; but in fact he prefers the one he lives in now for 30 marks. What could show better that he raises or lowers his demands for space, comfort, location, etc. to the point at which a further addition to or subtraction from these qualities, i.e. what one could designate in the real meaning of the term as the marginal utility of Berlin rooms valid for him, is approximately equivalent to the price demanded for it? But even in the case of goods which he himself conceives as divisible at will, the proposition mentioned above does not in general hold, according to Cassel. ‘Let us take’, he says, ‘my consumption of sugar as an example. I do not consider it particularly healthy to eat sugar, yet on account of its pleasant flavour I consume, say, 10 kg of sugar a year. I should quite certainly consume this same quantity even if sugar cost 2 marks per kg, and it is just as certain that I should eat not a bit more if the price of sugar went down to 10 pfennigs.’ The latter statement is certainly possible, for since he considers eating sugar unhealthy, even a moderately increased consumption might soon bring him more qualms of conscience on account of the danger to his health than pleasure. But this makes me even less able to accept that a price increase would cause no change in his consumption of sugar. For it is quite obvious that if he spends, say, 15 marks more on sugar, a corresponding deficit must arise somewhere in his annual budget; at the end of the year he may have to cut down on the Christmas presents for his wife or the savings put by for his children by 15 marks. Is he willing to do that? Probably not. Rather, he will attempt in future to distribute the sum in question more or less equally over all his needs, and why then should precisely his consumption of sugar, the actual source of the evil, be spared reductions? Here, incidentally, we have a point that does not have to depend exclusively on theoretical speculations, but could instead perfectly well be settled by statistical enquiries. Cassel claims that ‘every even moderately prosperous man satisfies a large part of his needs fully, and is prepared to pay far more 8 IN DEFENCE OF THE THEORY OF MARGINAL UTILITY for this degree of satisfaction, if need be, than he has to in reality. However, he is not in the least disposed to pay anything for an additional degree of satisfaction.’ If this is true, then so remarkable a fact must of necessity be reflected in consumption statistics. These statistics admittedly do not generally distinguish between poor and rich; with a little ingenuity, however, it would surely not be difficult to establish that in the case of several important articles a price reduction leads to absolutely no expansion in consumption on the part of moderately prosperous people, but at the same time a price increase causes no decline in consumption on their part—if this really is the case in fact.2 In accordance with the rule that the burden of proof is on the one making the claim, I should like urgently to recommend to him statistical studies of this kind. However, in my experience this is not the way things are; on the contrary, I remember from my youth that at the time, when sugar prices were high, even quite prosperous people treated this article far more economically than happens today. For the present, therefore, I should be inclined to assume that the law of marginal utility retains its validity not only, as Cassel claims, for one group of individuals, the least well-off, but rather, if correctly understood, more or less for all people and all commodities. This does not of course prevent its working being in part counteracted or obstructed by other forces, above all the power of habit, human inertia, etc.

What Cassel says about the impossibility of reducing the problem of price formation to just two variables, since in fact of course all prices at the same time influence the demand for every single commodity, is perfectly right and correct. However, when he says that it ‘has become customary in economics’ to overlook this, that the ‘invalid argument’ in question ‘comes up again and again in price theories’, and so on (pp. 422ff), he should in justice at least have excluded from this general judgement those writers influenced by Walras. He does not do this, and occasionally accuses Walras himself of having committed this elementary error, which to my mind sounds more or less like trying to accuse Newton of ignorance of the binomial theorem. Cassel is mistaken in claiming that Walras ‘regards the occurrence of competing goods as an exception’, for on the contrary, in the very passage that Cassel cites Walras calls it an everyday phenomenon (‘c’est ce qui se voit tous les jours’). Also, Walras has never said that ‘the demand for each of the previous goods is approximately equally influenced by the appearance of the new commodity’. On the contrary, he says that those changes in demand for the other goods would in certain circumstances be so small that the ratio of the quantities to one another remains virtually unchanged, which means something completely different.

I now turn to that section (VI) in which Cassel subjects the view of some theorists of marginal utility, or rather the dogma of the old free-trade school, 9 MARGINALISM AND CAPITAL THEORY which they accept, that free competition would realize ‘the old Benthamic maxim of the greatest possible happiness for the greatest possible number of individuals’ to a critique which in itself is fully justified. In passing, as far as I know Bentham is not to blame for the illogical formulation of the maxim in question; this formulation derives rather from Beccaria. Bentham, on the other hand, at least in his Traité de législation, always speaks of the greatest possible sum of happiness, an expression that can certainly not be attacked on formal grounds. Here the critique is, as I say, perfectly justified. But the point is by no means novel. A critique of this dogma that essentially coincides with Cassel’s is already given in Böhm-Bawerk’s well-known treatise in Conrad’s Jahrbücher (1886), and subsequently in my work Über Wert, Kapital und Rente. Later I went further—further, too, than Cassel goes now—and showed that free competition only has the quality of bringing about the greatest possible total satisfaction in a special case—e.g. when all traders are in precisely the same economic position (in the broadest sense of the word).3 In the general case, on the other hand, it is always possible to set up another combination of uniform prices without otherwise changing the current distribution of property that must necessarily give rise to greater total satisfaction than can be attained under free competition. And in arguing this I, just like the defenders of the proposition in question, took as my starting point precisely the constancy of marginal utility functions. Cassel is therefore in error when he believes that this assumption could serve in any way to support that proposition (p. 431). On the other hand, precisely in this area the whole inadequacy of Cassel’s own definition of subjective value or marginal utility becomes apparent. For if it were correct, then in fact that proposition concerning the greatest possible total satisfaction under free competition would indeed be impossible to refute. For if the subjective value of the last portion of goods given and received in purchase is equal for both the buyer and the seller—and of course according to Cassel this would be the case, at least for the groups of ‘marginal buyers and marginal sellers’—then, since one can further assume that each unit of goods acquired earlier or sold later is worth somewhat more, while each unit of goods acquired later or sold earlier is worth somewhat less, the necessary consequence must be that both a reduction in consumption on the part of the purchaser together with an increase on the part of the seller, and an increased consumption on the part of the purchaser together with a decrease on the part of the seller, would cause a loss in total value—and this is of course a genuine and correct maximum condition. Rightly anticipating this unwelcome consequence, Cassel here deviates without noticing it from the path he has followed thus far, and at the end of the section arrives at the statement: ‘If one has the least ambition to invest the term total satisfaction with something more [than he himself has done], something that cannot be defined in conceptual and still less in numerical 10 IN DEFENCE OF THE THEORY OF MARGINAL UTILITY terms, but that must be understood and felt by anyone engaged in making social policy, then all one can do is to strike out at once all theories about maximum satisfaction on the free market.’ Indeed, but that clearly also means striking out his own definition of value, at least in the area of social policy.

Finally, I must make a few comments on the final two sections (VII and VIII), which deal with price formation taking into account production. Here Cassel first summarizes what Walras has elaborated in lesson twenty of his Éléments. The fundamental thought is that under free competition the actual profit from operations tends towards zero, so that the purchase price of the productive services or, in Cassel’s terms, the ‘raw materials’, reappears without remainder in the sales price of the finished goods. Sensibly, Cassel excludes for the time being the part played by capital, the treatment of which was precisely the vulnerable point in Walras, by assuming that production demands no time, and this is undoubtedly permissible as a first approximation. But when he proceeds to draw up equations for the demand for finished goods, he forgets that this demand depends not only on the prices of these goods, but also on the purchasing power of the individual buyers, and that this in turn depends on the prices of the ‘raw materials’; for of course, in the long run, each person receives only so much in income as is given for the producer goods he has in his possession. In other words, the demand functions (system 4) become dependent not only, as Cassel thinks, implicitly, but also explicitly on the price of the ‘raw materials’. But over and above this, these functions are not all independent of one another. Rather, if equilibrium is to continue to prevail on the market, they have to be such that the sum of the exchange values of the producer goods corresponds to that of the consumer goods. An equation to this effect must therefore be satisfied identically, or one could, as Walras does, replace one of the equations in system 4 with the equation just mentioned. But then it becomes evident that in system of equations 6, too, by which Cassel intends to determine definitively the prices of the producer goods, not all the equations can be independent of one another. For if one multiplies them each in turn by the prices of the ‘raw materials’, q1…qr, and then adds the results, this yields precisely the equation that must be identically satisfied. In reality, therefore, for the determination of the unknowns we have not as Cassel claims r, but rather only r—1 independent equations. And this has to be the case by the nature of things, for in this connection money is treated only as a means of exchange or even only as an arithmetical quantity; in the final analysis consumer goods are paid with ‘raw materials’ and ‘raw materials’ with consumer goods. But then of course it is impossible to gain any kind of information about the concrete money prices of the goods; all that can be determined are the relative prices, the exchange ratios of these goods to one among them, and there are precisely only r—1 such ratios for 11 MARGINALISM AND CAPITAL THEORY the r ‘raw materials’. Perhaps Cassel will regard this observation of mine as petty, but since he himself is of the opinion that ‘Walras is almost always misunderstood’, he really should have taken care not to encourage new misunderstandings himself. Now over against this method of ascertaining, or rather of explaining, the prices of producer goods and with that the part played by the factors of production in the results of production, there stands according to Cassel another, which he would like ‘to designate with the name maximum method’, and whose main representative he names as myself, among others. This statement caused me some surprise, for I should never have wanted to regard the procedure I employ as the opposite of Walras’s. If one disregards the divergent treatment of capital goods (which indeed Cassel does not take into account at all), then the two methods are rather, in my opinion, in essence one and the same, or differ at most somewhat in their starting-points. But my astonishment increased when I read in Cassel that my method takes as its point of departure ‘the principle that the economy tends to achieve the greatest possible total utility’. If I had claimed such a thing, I should in fact have made myself guilty of the most gross inconsistency, for otherwise I have of course explicitly emphasized everywhere in my work that the economy as such under the system of free competition precisely lacks any such inherent tendency. In fact I have never said anything of the kind. On the contrary, I talk about the tendency present in every entrepreneur by the nature of economic activity to maximize his profits, to attain the greatest possible total earnings from his production.4 By means of these competing efforts of individual entrepreneurs a condition of equilibrium will finally be reached, in exact analogy to the process of exchange dealings (and in reality under the simultaneous influence of the exchange trade), and in this equilibrium the parts played by the factors of production under the given circumstances can be neither raised nor lowered. Let me add that the few hints to this effect in the preface to my book, which Cassel praises as ‘clear and concise’, but which he has gravely misunderstood, are elaborated very thoroughly in the book itself. If Cassel has discovered any flaw in my reasoning in that presentation, he should have drawn attention to it; if he has not, or if he has not read the chapters in question, he should really have held back for the time being from judgements such as ‘unsolvable problem’, ‘a priori false’ and the like. On the basis of this brief and succinct discussion Cassel, however, considers himself in a position to dismiss as ‘completely off the mark’ the critique provided in my preface of Wieser’s attempt to ascertain the parts played by the factors of production by means of a system of simultaneous, conventional equations. For according to Cassel, ‘Wieser’s account shows quite clearly that he regards the technical ratios as given from the start’, and ‘there is therefore no maximum problem at all to be solved here’. But first, if he read Wieser’s work carefully, Cassel could easily satisfy himself that Wieser does not in the least assume the manufacturing ratios as given. On the contrary, a 12 IN DEFENCE OF THE THEORY OF MARGINAL UTILITY few pages previously (Der natürliche Wert, p. 71), Wieser emphasizes quite explicitly that every entrepreneur faces the task of deciding whether under given circumstances he should ‘make savings’ on one producer good or another, ‘on labour or capital, machines or raw materials’, or whether he should ‘on the contrary spend more on them’, and this would of course be impossible if their proportions were already ‘fixed once and for all’ by the technology. Of course it is rather inconsistent of Wieser to go on to reckon those ratios among the known instead of the sought quantities in the problem; my observation that his equations only state the facts of the case, not the how and why of the problem of ‘attribution’ or distribution, is probably justified at least in this connection. But even if one assumed as fixed each and every one of the technical ratios, then too the marginal law and the maximum method of course come into full application, only in a much simpler way, as labour, land, etc., are transferred from the less profitable or loss-making businesses to the more profitable, until equilibrium is reached throughout. To be sure, in this special case the necessary conditions of equilibrium are already included in Wieser’s equations, if one goes along with him in extending them to cover the entire area of production. I am happy to admit this, and perhaps should have emphasized it explicitly. Cassel’s own criticism of Wieser for taking into account only the cost equations and not at the same time those governing exchange I do not consider substantial. In the same way as stocks of goods or rather the periodic supply of goods is in the first instance assumed as given in the problem of exchange, one is doubtless justified in assuming as given the exchange ratios or prices of consumer goods as a first approximation when discussing production and distribution. This approach even has certain advantages from a pedagogical point of view, for later of course it is relatively easy to unite the two systems of equations in a single one. Whether after all this very much remains of Cassel’s critique that deserves serious consideration, the knowledgeable reader may decide.

Upsala, December 1899

NOTES

1 ‘Grundriß einer elementaren Preislehre’ [Outline of an elementary theory of prices]. 2 However, let me point out that a consequence of this kind could sometimes occur even in full accord with the law of marginal utility. A reduction in the price of certain foods, e.g. corn or potatoes, could very well cause certain people to give up in part their predominantly vegetarian consumption, i.e. to reduce their demand for corn, etc., in order to go over to more expensive means of subsistence, e.g. meat. 3 See my review of Pareto’s Cours d’économie politique, vol. I, in the Austrian Zeitschrift für Volkswirtschaft, 1897.

13 MARGINALISM AND CAPITAL THEORY

4 Incidentally, it really can be claimed, if commodity prices are assumed fixed, that the sum of exchange values of the goods produced and to that extent the total earnings from the total production of the economy (but not necessarily its total utility) must become a maximum under free competition, for if it could be increased at any point with the available means of production, the entrepreneur involved would of course necessarily pocket a profit.

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