merely "academic.' No one will doubt that our farmer on due occasion—say, on an offer made him for the cornwould act practically according to the same estimates Any one of us, placed in his position, would undoubtedly be inclined to let one of the five sacks go pretty cheap in consideration of and in correspondence with its small marginal utility. He would charge considerably more for one of the three sacks. And he would not let the irreplaceable single sack, with its enormous marginal utility, go for any price whatever.

Transfer, now, the field of illustration from the solitary in the primeval forest to the bustle of a highly organized economic community. Here we encounter, in an altogether dominating position, the empirical proposition that quantity of goods stands in inverse ratio to value of goods. The more goods of one kind there are in the market, the smaller, ceteris paribus, is the value of the single commodity, and vice versa. Every one knows that economic theory has made use of this empirical proposition-the most elementary propositon in the doctrine of price-to establish the law of "Supply and Demand." But this proposition maintains its validity quite apart from exchange and price. For instance, how much more value does a collector put upon the single specimen, which represents a class in his collection, than upon one of a dozen of such specimens! It is easy to show that well-authenticated facts of experience like these follow, as a natural consequence, from our theory of marginal utility. The more individual goods there are available in any class, the more completely can the wants to which they relate be satisfied, and the less important are the wants which are last satisfied-those whose satisfaction is imperilled by the failure of one of the goods. In other words, the more individual goods there are available in any class, the smaller is the marginal utility which determines the value. If, again, there are available so many individual goods of one class that, after all the wants to which they are relative are completely satisfied, there still remains a number of goods for which no further useful employment can be found, then the marginal utility is equal to zero, and a commodity of that particular class is valueless.

Here, then, we have an entirely natural explanation of the phenomenon which originally struck us as so surprising, that comparatively "useless" things, such as pearls and diamonds, have so high a value, while infinitely more "useful" things, like bread and iron, have a far less value, and water and air no value at all. Pearls and diamonds are to be had in such small quantities that the relative want is only satisfied to a trifling extent, and the point of marginal utility which the satisfaction reaches stands relatively high. Happily for us, on the other hand, bread and iron, water and light, are, as a rule, to be had in such quantities that the satisfaction of all the more important wants which depend on them is assured. Only very trifling concrete wants, or no wants at all, are dependent, for instance, on the command over a piece of bread or a glass of water. It is, of course, true that in abnormal circumstances—as, for instance, in besieged towns, or in desert journeys, where water and food are scarce, and small stores only suffice to meet the most urgent concrete wants of meat and drink-the marginal utility flies up. According to our principles the value of those goods, otherwise of so little account, must rise also, and the inference finds ample empirical confirmation in the enormous prices paid in such circumstances for the most wretched means of subsistence. Thus those very facts which, at first sight, seemed to contradict our theory that the amount of value is dependent on the amount of utility conditioned, on closer examination afford a striking confirmation of it.

READING XVIII.

HOW THE COST AND UTILITY THEORIES OF PRICE ARE RECONCILED BY THE

AUSTRIAN SCHOOL.

In spite of the growth of monopolistic industries, the principle that price tends to be brought to equality with cost (expense) of production still applies to a very large number of commodities. That principle, consequently, continues to be of much practical significance. It is very easy, however, for the student who does any reading in current economic literature to get the impression that many, if not most, economists are giving up the doctrine, or at least treating it as a very trifling matter. This is particularly true when one reads the books that have been written under the influence of the school which makes utility the sole foundation stone of value,—the Austrian School. It seems desirable, therefore, to supply the student with some reading like the following, wherein an eminent British representative of the school in question affirms the reality and importance of the Cost principle, and explains how it is reconcilable with the Utility doctrine.

I hardly need add that many teachers of economics would not be satisfied with the concessions made by Professor Smart in the passage given. We believe that cost plays a more fundamental rôle than he admits. We think that, even in the ultimate processes of value determination, cost (disutility cost) probably plays a part. We are anyhow certain that the Austrian writers are quite wrong in giving marginal utility so large a rôle and cost so small a one. It is quite impossible that the marginal utility of pig iron,

or cotton, or silver, or any other one kind of raw material should have its value determined independently of other kinds of raw material. Just as nails, screws, rails, girders, ranges, etc., are all products from a common element-pig iron-the price of which common element must be determined for the whole stock of it taken together whatever be the use to which it is put, which price of this common element, when once fixed, must in turn determine the price of most of its products,—so pig iron, cotton, silver, and other raw materials are all products from common elements, labor, waiting, etc., the prices of which common elements must each be determined for the whole stock of that element taken together, whatever be the use to which it is put, which prices of the common elements, when once fixed, must in turn have a part at least in determining the prices of all the products of these common elements, e. g., pig iron, cotton, silver and so on. That is, the prices of all ordinary intermediate goods can not, even on the principles of the Austrian school, be determined by marginal utility solely, can not be determined independently of their cost in the ultimate production goods, nature's raw materials, labor, waiting, etc. In short, the field wherein marginal utility acts alone if there be any such-can not possibly include anything more than the ultimate production goods just mentioned. In determining the price of everything else in the world, cost must play some part.

*We now have to compare the law of Value at which we have arrived with that generally adopted by English economists. It is a matter of common experience that, in the case of articles manufactured on a large scale-"freely produced," or "reproducible at will"-the price always tends towards equality with the costs of their production. On

* Smart-Introduction to the Theory of Value (1891). Published by Macmillan & Co. pp. 64-82.

this experience is founded the familiar law that the value of a good is determined by its cost. Speaking generally, Costs of Production are all the productive goods consumed in the making of a product,-raw and auxiliary materials, machinery, power, and labour. To speak more accurately we should substitute the term Expenses of Production, thus indicating that the naturally incommensurable "efforts and abstinences" are measured by the money paid for them. On this theory the value of a good comes from its past.

Now, on the theory above explained [i. e., in the preceding chapters], we have to show that the causal connection runs the other way, from Product to Cost. Human want, it was said, is the first factor in Value. The relation of each man's resources to his varied wants determines what is the last want satisfied in each class of wants,and so the Marginal Utility and subjective value of goods. The figures which buyers and sellers respectively put on their goods determine the competitors, determine the marginal pair or the last buyer, and so determine price. Through price the subjective valuations are carried back to means of production. As the typical labourer, the peasant, measures the value of his labour by the produce he raises, or the value of his implements by the additional crop they procure, so is all value reflected back from goods to that which makes them. Thus value comes, not from the past of goods but from their future; that is to say, from the side of consumption in satisfying want. Goods stand midway between production and consumption. In the old reading it was the former term that gave value; in the new, it is the latter. Before going further we must more exactly define the connection between production and consumption goods.

All goods find their goal in satisfying the want of man. As Roscher finely says, Ausgangspunkt, wie Zielpunkt unserer Wissenschaft ist der Mensch. The consumptiongood then the good which is to find its destiny, and its life-work, in ministering to human life and want is that for which and towards which we set in motion the whole machinery of industry. From the soil or the mine downward every productive instrument is, economically, a consumption-good in the making. This Menger has put in terms which are