DOCUMENT 14 The Psychological Tendency in Recent Political Economy (1892)

Conrad Schmidt[761]

Source: Conrad Schmidt, ‘Die psychologische Richtung in der neueren Natio- nal-Oekonomie', Die Neue Zeit, 10.1891-2,2. Bd. (1892), H. 41, s. 421-9,459-64.

Introduction by the Editors

There is much irony in the fact that just as Marx was working to complete Capital, and then Engels to make Volumes 11 and ill of Capital available, a new approach to economic theory, beginning from a viewpoint exactly the opposite of Marx's, was emerging in Britain and continental Europe.

The traditional approach, beginning with Adam Smith and extending through the works of Ricardo and Marx, was principally concerned with the dynamic of capital accumulation and other conditions for economic growth. Smith and Marx were profoundly aware of stages of history, and both meas­ured material progress in terms of expanding the social product in physical terms. But as capitalism in Europe and America entered the ‘long depression' of the late nineteenth century, the marginalists replaced the focus on growth with the question of how capitalism tends towards equilibrium by efficiently allocating given resources among competing wants. Jevons famously defined the ‘economic problem' as one of maximising the utility of the social product, given ‘a certain population, with various needs and powers of production, in possession of certain lands and other sources of material'.^[762]

Whereas political economy previously emphasised the conditions for increasing supply, the marginalists concentrated instead on demand.

Instead of social existence determining consciousness, exactly the opposite chain of causality was now said to prevail. The exploited worker was replaced by the self-determining individual. The poor were to be regarded as ‘sovereign' consumers in the same sense as princes, aristocrats, landlords or employers. A neo-Kantian world of individual responsibility was to replace a world of class struggle. Value, surplus value and exploitation would vanish simply by looking at things from a different ‘point of view'. Marx's laws of history would be replaced by universal principles of individual, utility-maximising choice.

Carl Menger, founder of the Austrian school of subjective economic theory, thought that ‘exact’ economic laws could be discovered, to which exceptions were inconceivable due to the logical force of the ‘laws of thinking’.^[763]

Menger believed that even the value of means of production is determined by consumers. How much are machines or raw materials worth? That depends on the - utility of the goods they might be used to produce.^[764] What is the value of a unit of constant capital? That depends on the expected satisfaction from consuming additional units of the commodity in whose production the capital might be employed. The value of any ‘factor’ of production ‘is merely the importance we attribute to those satisfactions’.^[765] Whereas Marx saw demand being determined by production, which a) distributes income in a predictable pattern between social classes, and b) objectively determines prices on the basis of labour costs, prices were now to be explained entirely in terms of subjective judgements of consumer satisfaction.

Conrad Schmidt, in the article that follows, responded to this new ‘psycho­logical tendency’ in economic theory by first hypothetically adopting the per­spective of an individual consumer. He agreed that if a single individual already has determinate quantities of two goods at his disposal, he will surely judge the utility of acquiring an additional (or marginal) unit of one or the other on the basis of his subjective expectation of relative satisfaction. It was clear that ‘under certain circumstances, value estimation is actually regulated in this manner, by the stock of goods alone’.

But the obvious problem is that costs of production have not been con­sidered. If the same individual must also produce the goods in question, then ‘The greater or lesser difficulty in replacing the goods manifests itself in the lar­ger or smaller quantity of labour which the individual would have to expend in reproducing those goods’. If the argument is carried one step further, the isol­ated individual gives way to individual commodity producers, in which case their own self-interest will lead each to produce and exchange according to his labour expenditures. Add capitalist production, and the result will be Marx's account of the objective determination of exchange-value according to direct and indirect expenditures of labour.

The second part of Schmidt's argument elaborates some of the implications. In social terms - as distinct from the perspective of an abstract individual - the cheapest goods are not generally the ones least required, or those yielding the least subjective satisfaction; they are the only ones that most people can afford. If a harvest failure makes bread scarce, it would be absurd to say that the ensuing price rise occurs because one of the least necessary needs is no longer satisfied, or, to put in another way, that bread has become more expensive because the marginal unit is now satisfying more necessary needs, namely, those of the wealthy.

Conrad Schmidt's contribution clearly exposed the one-sidedness of a the­ory that began and ended with abstract individuals, whose preferences as con­sumers were supposed to explain the entire system of market prices.

Schmidt himself inadvertently raised the problem. He recognised that ‘If people were only consumers, and goods fell down upon them from the sky, then in fact everybody would value his property according to the marginal utility theory alone'. Yet even if goods did not fall from the sky, it was also obvious that every individual, when spending his income, would purchase

a specific type of goods only as long as the satisfaction of needs (marginal utility), achieved by the last monetary unit, is greater than the utility effect to be obtained through an alternative expenditure of that unit. This law, formulated in the jargon of marginal utility theory, is simply the precise expression of the self-evident truth that everybody, in spending his money, seeks to satisfy his system of needs as perfectly as possible.

This meant two principles were involved. Individuals with purchasing power at their disposal would make decisions on the basis of marginal utility, yet there was also an objective determination of price on the basis of labour expended. How, then, did the two principles interact? Schmidt concluded that they did not. The way in which an individual spent his money presupposed that prices were already determined. On the road from speculation to the real world, the second principle must prevail: ‘The more regular and better organised the functioning of the economy, and the more cautious the provision for the accumulation of stocks of goods becomes, the more will this second principle of value estimation supersede the first principle of marginal utility'.

In terms of the subsequent development of economic theory, it was Alfred Marshall, professor of political economy at Cambridge University, who ad­dressed this issue most directly in an effort to reconcile marginalism with the traditions of earlier thinkers. Marshall had no interest in Marx, but he was equally unimpressed by the one-sidedness of a demand-centred determination of prices.^[767] In his Principles of Economics, first published in 1890, Marshall combined the theory of diminishing marginal utility with the principle of diminishing marginal productivity - anticipated by Ricardo with reference to agriculture - and reconceived the question of price determination in terms of the point of intersection between the schedules of demand and supply. Individuals made purchase decisions on the basis of marginal utility; and any change in the pattern of demand would affect prices due to a change in marginal production costs.^[768]

Schmidt's achievement was to specify the logical circularity in Menger's scheme: it proposed ‘to deduce the price of goods, given by the marginal util­ity consideration [Grenznutzuberlegung], from the marginal utility considera­tion itself'. In a footnote, Schmidt mentioned that ‘the changing relationship between supply and demand, given constant commodity values, continually produces price fluctuations’, but he did not see how that same change would affect values themselves. Among Marxists, the question of how demand affects the value of commodities was more effectively explored by Isaak I. Rubin in the 1920s.

In his Essays on Marx’s Theory of Value, Rubin derived his own supply curve directly from Marx. He saw that demand influences price through a change in costs due to the changing technical conditions of production. Increased demand draws less efficient firms into production, thereby raising the market value of the commodities produced: ‘the extension of production to worse enterprises changes the average magnitude of socially-necessary labor per unit of output, i.e., changes the value (or price of production).

The result of Rubin's study was a positively sloped supply curve, demonstrat­ing that ‘even if price is determined by supply and demand, the law of value in turn regulates supply. Supply changes in relation to the development of pro­ductive forces and to changes in the quantity of socially-necessary labor', all of which would be reflected in the prices of production that would prevail with an equalised rate of profit. The theory of marginal utility had produced a debate that moved in a ‘vicious circle'. What determines what? Does demand determ­ine supply, or supply demand? Rubin replied that the solution had already been provided by Marx: it is ‘the labor theory of value [that] emerges from this vicious circle'.^[770]

The Psychological Tendency in Recent Political Economy (Conrad Schmidt)

ι

A huge, bewildering mechanism, guided by hidden powerful laws, in eternal motion and held in check by no limits, mountains or seas - thus the economic life of modern times appears to us. Just as astronomy proves that the earth, which the naive observer considers fixed and independent, is a tiny planet obeying the general laws of the universe, so the social point of view regards the single individual, who likewise considers himself so very free and independent, as a true microcosm, a vanishing atom in the movement of the economic mechanism, which is entirely free from any individual caprice.

To penetrate into the inner workings of this mechanism, to try to understand the conformity to law behind the infinite diversity of external appearances, objectively and from a unifying perspective - that is surely one of the most challenging tasks the scientific mind can conceive. This task is all the more compelling because this economic order, which today rules over the people, emerged historically from the work of the people themselves, even if it was not a purposeful work; and just as it came into being through an historical process, so it is also bound, given the restless developmental needs of humanity, to experience its own historical downfall. Economic research, by subjecting that economic order to the deepest analysis, is directly connected with the great problem of the social development of contemporary humanity.

I have called modern economic life a mechanism, regulated by laws (of course economic, not legal), and knowledge of these objectively understand­able laws is the essential task of political economy. But must each economic order be subject to such covertly working laws? This [necessity] does not inhere in the concept of economic order itself. As long as people consume the products of their labour themselves, or must cede part of them to the ruling class for direct consumption, the economic order remains transparent, simple and clear. To understand such an economic order means to describe it and to demonstrate the historical causes of its formation and development. No economic laws are necessary in order to understand that. The reason driving modern economists to investigate such laws must not, therefore, be the fact that we have an economic order in general, but that we have this particular [capitalist] economic order. The distinctive factor, which makes the modern economic order different from all previous, less complicated organisms, is that, in the whole area under its sphere of influence, it rests on commodity pro­duction, i.e. on purchase and sale of the goods produced. The omnipresence and omnipotence of money, which mediates both the distribution and produc­tion of goods - that is the hallmark of its nature, the wellspring of its strength and of its weaknesses. The mystery, which must be solved in order to gain real knowledge of the modern economic order - as well as to explain the monetary income of the different social classes (the workers as much as the capitalists), and thus their conditions of existence and their [political] tendencies - lies in the fact that all goods, including the labour power of the people themselves, are exchanged for money at a price and, moreover, at specific prices.

And this mystery does not disappear if we describe the external form of mod­ern economic life with even the most exhaustive statistics, or if we research ever so accurately the origin of this new social order, its struggles and its fate. This riddle can only be solved if we understand the universal, objective and comprehensible law that rules the exchange of commodities for money. All the laws to which we are subject in economic life today lead back to this first, great and universal law, without which all the rest remain in darkness. It is the riddle of prices that forces modern economists to look for a hidden, objective eco­nomic law.

If all goods are exchanged against one and the same good, namely, against money, they thereby equate themselves with each other. Despite all their dif­ferences, despite their incommensurability, a common factor must therefore exist that makes this equalisation, this commensurability of the seemingly incommensurable units, possible. And this common factor in all commodit­ies can be nothing other than the fact that they are labour products, products of human labour per se, expended in any form. As crystallisations of abstract, equal labour, the commodities are values. As soon as commodity exchange has developed into a monetary economy, they express their value in a single com­modity, which, as a result, receives general social validity [Gultigkeit] within the circulation of commodities - i.e. receives a monetary character. In its essence, then, price is the monetary expression of value. In the amount of money rep­resented by the price of a commodity, the same amount of abstract labour is contained as in the commodity itself. If, however, the price can express the value of a commodity, and if the price must be understood, by its very nature, as value expression, it by no means follows, as Marx himself explicitly pointed out, that in each price relation the value of the commodity must come to an exact expression. Economics does not deal with random and individual deviations, but with general [laws].^[771] The cause and extent of those deviations must be developed from the law of value itself. Whether or not such deviations exist, it is necessary in any case to find a general objective law regulating the exchange­value and the price of commodities; and such a law must be founded upon the general nature common to all commodities, that of being the product of abstract, equal average labour.

We cannot describe here, even in outline, how Karl Marx continued with wonderful energy, after a long interruption, the value analysis begun by Smith and Ricardo, how far he followed the law of value regulating price formation in the complications of reality, what phenomena can be considered as solved by the already published first two volumes of Capital, and which ones still wait for their solution, for that would be impossible within the limits set for this essay. However, it is probably worthwhile to clarify a preliminary question that in recent times often confronts the ‘deductive’ tendency in political economy; namely, the question of whether such an objective and covertly working law of value can exist at all. Most economic writers make things extremely simple for themselves. They explain prices at one time by the costs of production, then from supply and demand, and then from wages, profits and rents, etc., without thinking that what is to be explained, in all those cases, is presupposed.¹¹ In the name of psychology, an opposition has recently arisen against this unprincipled

raised by the theory - for instance, the contradiction that labour, which is the measure of all values, is itself sold, and so receives a special value. The simple Marxian definition according to which not labour, but labour power, is sold, removed that contradiction at one stroke. One should therefore, in all fairness, wait with such claims until Marx’s train of thought itself becomes available for examination, and thus the basis for a criticism is created. Mr. Bohm-Bawerk, in an essay to which we shall return later, pleads in favour of psychological economics as the last choice, because Marx’s theory, the dogma of pious Socialists, comes into insoluble contradiction with experience. Proof: the phenomenon of the average profit rate and the tendency of the prices of the products to rise when wages rise. A convenient way of reckoning! By the way, as regards the second objection, it falls apart in the easiest way. Both wage increases and the increases in product prices are consequences of a favourable market conjuncture, which is expressed in an increased demand for goods, i.e. in increased production, and therefore in an increased demand for labour power. Marx never dreamed of denying, but rather stressed most emphatically, that the changing relationship between supply and demand, given constant commodity values, continually produces pricefluctuations (Cf. e.g. Volume I of Capital, third chapter, the section on money as a ‘measure of value’).

11 Production costs are the outlays in capital equipment and workers necessary for the production of a certain quantity of commodities. The price of the means of production and of labour is thereby assumed to exist. The relation between supply and demand can be, and often is, the same with the most expensive as well as with the cheapest commodities, and yet the huge differences in commodity prices continue to exist quietly. eclectic style, as well as against scientific research based upon analysis of an objective law of value. This psychological tendency was inaugurated by the Englishman [William Stanley] Jevons, though it has followers in different countries and its main camp is in the Austrian universities. Its best-known spokesmen there are Menger, Bohm-Bawerk and Wieser.^{[772] [773]}

The argumentation of that school runs something like this: Each commodity exchange is always conditioned by the mutual consent of two contracting parties. But the will, as a rule, is guided only by psychological motives and, in the economic sphere, by selfish motives. The conclusion of each act of exchange thus depends solely on whether the contracting parties, according to their subjective estimates of value, regard the particular exchange as beneficial. Assuming this is the case, the deal must materialise; otherwise it cannot come into being. The factors on which everything depends in exchange are therefore the subjective value estimates; if one wants to know how the exchange-value of goods is determined, it is necessary to find the principle of subjective value estimation through psychological analysis. From this standpoint, the existence of an objective law of value, directly or indirectly determining exchange-value according to the real amount of labour embodied in the products, and without regard for such subjective factors, appears from the outset to be impossible. It is not this or that result of the objective theory of value, but rather the theory itself that is called into question. Psychology, investigating subjective factors, should take its place. That is the fundamental significance of the new school.

This much is obvious: the discovery of an objective law of value, no matter how it may be formulated, can never be consciously intended [by this school], because the individual will only follows the impulses of individual interest. The only question is whether, by the individual will doing this, by all the individual wills doing this, an objective law still can (and indeed must) unconsciously and unintentionally arise, a law of value as envisaged by the classics of political economy, to whose rule all the individual acts of exchange are subject. We shall now consider the remarks of the value psychologists from that point of view. A double question is under discussion here: first, whether their analysis

takes into consideration the psychological factors that are really crucial in the determination of exchange-value; and then, whether these really operative psychological factors preclude the existence of an objective law of value or whether, on the contrary, they permit its existence or even presuppose it as a necessary consequence. The examination will therefore be somewhat tedious, because we must begin with abstract isolated persons, as postulated by the barren arbitrariness of this school of psychologists, who believe that in this way they are able to recognise most clearly the general principle of value­judgements and the valuation of goods.

The psychological condition of any production, and moreover of exchange, is that the goods under consideration should be the object of a value estima­tion. But their value is estimated because these goods are means for the satis­faction of needs - provided that they are not, as with air, sunlight, water, etc. available in unlimited and never-decreasing quantities. In general, the ques­tion arises: how is the measure [Maβ] of our value estimation determined? The Mengerians claim that it is determined not according to the abstract but according to the concrete, or rather subjective use-value that the things have for the individual. Abstract use-value depends upon the satisfaction of needs by a good; thus bread satisfies hunger, clothes satisfy the need for clothing, stucco satisfies vanity, etc. Therefore, a value estimation, based upon abstract use-value, would appraise the value of goods according to the importance of the satisfaction of needs. It would, for instance, declare a certain amount of bread more valuable than an equivalent quantity of clothes or even of stucco.^[774] It is clear that in this way one cannot solve the problem of exchange-value, because that value is obviously determined in a way totally independent of the abstract importance of the goods. What happens now with concrete, or subject­ive, use-value? Can it be independent from abstract use-value, from the social significance of goods? The Mengerians claim so, and they exemplify their view with the isolated subject in possession of a stock of goods; in a sense, the eco­nomic Adam. In this case, the subjective value estimation is, in fact, essentially independent of the abstract use-value of goods. Let us assume, for example, that the isolated individual has a lot of bread and relatively little wine. Bread is certainly a more necessary and more important good than wine. However, des­pite this difference in abstract use-value, the loss of a certain amount of bread will, under those circumstances, probably feel less painful for the isolated indi­vidual than that of a corresponding amount of wine; he will value wine more than bread. The subjective estimation of value of the goods therefore depends not on the quality of those goods, or rather on the satisfaction of needs they provide, but on the amount of a specific sort of goods available for the needs of the subject, because on that amount depends the extent to which a certain kind of need on the part of the subject will be satisfied.

Herewith we have arrived at the much-vaunted theory of marginal utility. The marginal utility means the last, weakest, relatively most unnecessary sat­isfaction of needs that I can expect from a given quantity of goods. The value that I attach to goods of a certain kind should be based on marginal utility thus defined. Marginal utility seems to the psychological school to be the general and only principle of value estimation, from which the exchange-value and the price of goods are derived.

We shall explain value estimation, based on marginal utility, by means of a brief example that is freely modelled on a similar one given by Bohm-Bawerk. Our isolated individual has, according to our assumptions, a lot of bread avail­able, let us say, 5 pounds per day, of which 2½ he consumes himself, and 2½ he uses to feed animals that he keeps for pleasure. If he loses half a pound per day, the loss will be little felt, because the continuing fall in the satisfaction of needs will be of minor importance; the feeding of animals will be somewhat limited. The loss of a further half pound will be felt more sharply, since now the animals have to suffer hunger, and possibly their maintenance will be called into ques­tion. Therefore, the value estimation of half a pound of bread, which was low when the individual disposed of 5 pounds, will be greater if he disposes of only 4½ pounds, because the marginal utility, i.e. the last, relatively most unneces­sary satisfaction of needs, which was to be expected from the half-pound, has changed. It has become more important, its marginal utility has increased, and that change in the amount of marginal utility is expressed in the new value estimation. The further the amount of bread decreases, the more important is the relatively most unnecessary satisfaction of needs, the marginal utility, which is to be expected by the subject from half a pound. If he only possesses the 2½ pounds of bread required for his own consumption, the loss of half a pound means that his habitual food wants will not be satisfied; the loss of a further half pound means that his appetite will not be satisfied; and the loss of a further half pound will mean hunger.

We can see that the marginal utility of goods, at the disposal of the individual for consumption, varies with their quantity. The quantity of goods is compared with the quantity of needs; the last, only just covered ranking of needs [Bedur- fnifstajfel] regulates the marginal utility that goods of this kind have for the individual, and thus the individual value estimation of such goods in general. It is obvious that, under certain circumstances, value estimation is actually reg­ulated in this manner, by the stock of goods alone - for example, when students mutually exchange their stamps and other treasures, or to take an example very popular in the Mengerian school, in desert travel, where no replacement for the existing provisions is to be expected. But the question is whether - if one selects circumstances a little less arbitrarily and fancifully and more in accord­ance with economic reality - marginal utility can remain as the only defining principle of individual value estimations.

Now, the isolated man, regarded as the economic nucleus, is inconceivable without an isolated economy. In Conrad's Jahrbucher fur Nationalokonomie undStatistik (1890), Professor [Heinrich] Dietzel has already strikingly demon­strated to the Mengerians that this not quite unimportant fact throws their entire analysis into disarray.^[775] If people were only consumers, and goods fell down upon them from the sky, then in fact everybody would value his property according to the marginal utility theory alone. But since people are themselves producers of their goods, and as a rule can always replace them by labour, they have absolutely no reason to value their products solely according to the ranking of needs covered by those products. The value estimation may just as well depend on the greater or lesser difficulty with which those goods can be replaced. In an isolated economy, moreover, they can only be replaced in one way: by the labour of the economic subjects themselves. The greater or lesser difficulty in replacing the goods manifests itself in the larger or smaller quantity of labour which the individual would have to expend in reproducing those goods. Already in the isolated economy, therefore, the value estimation can be totally independent of the existing stock of goods and the marginal utility of the commodities determined by it: they can be evaluated according to the amount of labour that their replacement costs. The more regular and better organised the functioning of the economy, and the more cautious the provision for the accumulation of stocks of goods becomes, the more will this second principle of value estimation supersede the first principle of marginal utility.

What this Mengerian school wants to prove by psychological analysis, namely, that the subjective value estimation of goods can only be determined by the marginal utility they provide, is contradicted precisely by psycholo­gical analysis even for the isolated economy - if only one does not forget the economy in economic analysis, and in the analysis of goods, therefore, their reproducibility. The objection that value estimation, according to the costs of reproduction, does not represent a new standard of valuation but only another application of the marginal utility principle, is likewise unwarranted, because from the last ranking of needs satisfied by a given stock of goods, i.e. from their marginal utility, absolutely nothing can be inferred about the quantity of labour required for reproducing one of those goods. The valuation from the first standpoint can thus come into conflict with the valuation from the second standpoint.^[776]

We see that, even in an isolated economy, economic value judgements will be more or less dominated by an objective factor - the amount of labour neces­sary to replace the goods. Only the wonderful one-sidedness of value psycho­logists could deny that. The question now is whether - if we substitute for isol­ated economic subjects people who are associated by exchange (furthermore, through purchase and sale), in short, a commodity-producing society - such an objective factor is not equally possible, or rather necessary, as the regulating principle of social value judgements, and thus of the exchange-value of goods, despite all the marginal utility psychology. This lengthy detour, through the isol­ated economy of the marginal utility theoreticians, was necessary in order to explain their views. Those views first become significant when marginal util­ity theoreticians turn from the economy of isolated subjects to the economy of exchanging subjects, from fantasy to reality, and then claim to understand the latter.

Commodity production, with free competition, has fully developed only in the capitalist form [of the economy], whose existence rests upon the antag­onistic and opposing classes of industrial capitalists, landowners and wage­workers. The production and circulation of commodities ultimately takes place through those classes. Political economy has to prove how the law of value, that is, the objective determination of the value of commodities by the amount of abstract labour necessary for the production of those commodities, comes into being in this historically given world. The psychological school, which denies the possibility of an objective law regulating exchange, does not regard commodity-producing society in its historically developed form, but in a com­pletely general form. The psychological school boils down to the argument that the exchanging parties (buyers and sellers) do not want to realise some objective law of value but only to look after their own individual benefit in the individual transaction; and that the labour time necessary for the produc­tion of commodities, since it is not the reason determining exchange-value in the consciousness of the exchanging subjects, therefore cannot be the factor determining exchange-value at all. This objection, which only bears in mind the most general features of commodity exchange, will be refuted most clearly if we disregard all the complications arising from the historical class character of commodity-producing society and regard commodity production in its most general undeveloped form, i.e. if we assume that the actual commodity pro­ducers exchange their products against each other directly, without the inter­vention of capitalists and landlords. If we are able to show that labour is the determining factor of exchange-value here, even if the parties to the transac­tions, looking after their own benefit, are unaware of it, then the psychological argument, which wants to infer the impossibility of an objective law of value from the [exchanging subjects'] lack of awareness of it, will be generally - that is, also for capitalist commodity production - refuted. Of course, the form in which the law of value is realised in capitalist commodity production cannot be the same as in the simple social order assumed by us. But if that form is developed by economic science in all its details, it will also appear as the psy­chologically necessary result of the competing individual wills, as the form in which an objective law of value is realised in simple commodity production, as a psychologically necessary result.

In such a society of independent commodity producers, everybody brings his entire labour product into the market and seeks to exchange it for the goods he needs. Everybody is concerned only about his own benefit. Everybody will, therefore, in exchanging his own products against other goods, always seek to exchange the smallest possible quantity of his own products for the largest possible amount of someone else's goods. He is compelled to do that by the endeavour to obtain the greatest possible satisfaction of his needs.

But his products, like everybody else's, embody the quantity of labour spent in their production. Each aliquot part of a product represents a corresponding fraction of the amount of labour crystallised in the entire product. The striv­ing to exchange the smallest possible quantity of one's own product for the largest possible amount of someone else's product therefore implies, even if the individual exchanging parties are unaware of it, the quest to get the largest possible amount of someone else's labour for the smallest possible quantity of one's own labour. The advantageousness of exchange is measured, in a sense, by the extent to which this endeavour is successful. This much is also clear from the outset: the competition between producers, belonging to one and the same industry, makes certain that the exchange-value of their products is uniform [einheitlich: standardised]. A cannot sell more dearly than its competitor B, and B cannot sell more dearly than A. If competition guarantees this uniformity of exchange-values within an industry, a limit is set to the competitors' aspirations to increase as much as possible the exchange-value of their own commodities vis-a-vis those of all others, a limit that is independent of their arbitrary wills. Meanwhile, however, the law that regulates this limit, the norm that governs this uniform exchange-value, is, of course, not yet determined by the fact that we know that this value must be uniform.

Such a norm exists, however, and it presents itself as a necessary result of the psychologically necessary competition of all individuals for their greatest possible advantage. Competition, which makes it impossible for members of an industry to sell their own commodities more profitably than their competit­ors - this same competition also makes it impossible, at least in the long run, for the producers of an industry to exchange their products more advantageously than the producers of other industries. They would exchange more profitably if the product of their labour had a higher exchange-value than products man­ufactured with the same amount of labour in other industries. In that case, however, the privileged industry would experience an influx of new producers until the pressure of the increasing supply of this type of commodities again led to the loss of that specific advantage. Competition thus ensures that, in the long run, the products of an industry cannot be exchanged on the mar­ket more profitably than the rest, i.e. it ensures that products containing the same amount of labour, no matter in which industry it was spent, have the same exchange-value. The fact that one commodity is the common medium of exchange, i.e. that it possesses a money character, cannot of course alter this tendency to equalisation. Thus we see that, even if the realisation of this object­ive law of value is not consciously desired by the individual contracting parties, it is still guaranteed, in a society of independent commodity producers, by the free play of economic self-interests whose only goal is their own benefit. The analysis of the decisive psychological factors in a commodity-producing society, far from making the appearance of an objective law of value impossible, actually dir­ectly demonstrates its necessity, assuming the existence of simple commodity production.

Thus the fundamental conclusion that the representatives of this school wanted to deduce from the psychological determination of the act of exchange is disproved; namely, that the concept of an objective law of value, regulating by and large all acts of exchange, is contradictory and absurd in itself. The pre­liminary question formulated by us above, by means of which they hoped to cut the ground from under any objective theory of value, is finally settled. For if the existence of an objective law of value has just been proved to be neces­sary in simple commodity production, precisely on the basis of psychologic­ally motivated individual wills - how could the struggle of these psychologic­ally motivated individual wills, in developed capitalist commodity production, make impossible the realisation of such a law (albeit in different form)?

II

We have already seen that the psychological school of economics errs in its analysis because it disregards the psychological factors that are really relevant for commodity exchange. If that were not the case, they would immediately have convinced themselves, by the argument we have just developed, that the psychological motivation of exchange reveals the existence of an objective law of value rather than refutes it, as they argue. However, that would only be an indirect refutation of the marginal utility theory. Given the epochal meaning that its supporters attribute to this theory, the contempt with which they treat all the achievements of classical economics - a contempt that only finds its counterpart in their respect and admiration for their own achievements - and the relatively great popularity of the school, it may perhaps appear immodest to settle accounts indirectly with the marginal utility concept in this summary manner.

We have left the marginal utility concept completely aside in our psycho­logical derivation of exchange-value, even though it should be, according to the assurances of the whole school, the only principle of all value judgements and hence of the exchange-value of goods. Let us now see whether a derivation of exchange-value from the marginal utility principle in a commodity-producing society is, I will not say correct, but only imaginable. If not, what appearances could its apostles invoke?

The first question is whether, in a commodity-producing society, a deriva­tion of the exchange-value of goods from the marginal utility principle is even possible. The marginal utility of goods should be calculated, as we have seen, according to the last satisfaction of needs provided by it. A subject who wants to valuate his goods according to the marginal utility principle must therefore - this is the presupposition - be in possession of a stock of goods serving for the satisfaction of needs. But the precondition for a valuation [of goods], on the basis of marginal utility, does not at all exist in a commodity-producing society. The goods that the producer exchanges are produced for the market; he does not (and usually cannot) consume them himself. His goods, produced for the market, thus offer him, as such, no satisfaction of needs and consequently no marginal utility. Therefore, there is no possibility of him valuating them accord­ing to their marginal utility, which should thus determine their exchange-value. In a commodity-producing society, marginal utility, so conceived, is, as a value principle, nothing more than a mere contradiction in terms.

If we assume, instead of a direct exchange of goods, an exchange medi­ated by money, in which the contracting parties face each other not as two commodity-owners but as money- and commodity-owners, as buyers and sellers, this changes absolutely nothing in favour of marginal utility theory. The seller's stock of commodities is just as little meant to satisfy the immediate wants of its owner as is the buyer's supply of money. Therefore, the commodity unit of the seller can just as little be valuated according to the marginal utility theory as can the monetary unit of the buyer.

But if money does not directly provide any satisfaction of needs, the means of subsistence bought with it do. Thus a subterfuge appears to present itself: even if the buyer cannot valuate money according to the theory of marginal utility, yet the goods bought with that money can be so valuated, and more or less can accordingly be paid for them. But for goods to be valuated by a subject according to the theory of marginal utility, we must assume -1 repeat - that the person under consideration already possesses a stock of those goods.^[777] He can only have a stock, however, if he bought it, and he could only buy those goods at a fixed price. The possession of a stock of goods, from which the marginal utility theoreticians must start in order to explain the exchange-value and price of goods, presupposes what must be explained, namely the price of goods.

They want to avoid these impossibilities by replacing the individuals with the masses. The goods, which are accumulated in the hands of the sellers, con­front the mass of consumers. Each one of these consumers needs goods, and the multiplicity of those needs will be at least partially satisfied if these goods pass into the hands of the consumers through purchase. Just as individuals have different rankings of needs, so do the masses. The psychological school starts from here. Among all of those rankings of needs finally satisfied by the goods, one must be the lowest. The lowest ranking of needs is the marginal util­ity that goods of this kind havefor society, and it is the one ultimately determining the exchange-value of commodities. Proof: as a rule, the price of the products is lower, the greater their number, and higher, the fewer of these products are available. ‘The more individual goods are available of 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’.^{[778] [779] Thus the psychological school explains the, at first sight, striking phenomenon that relatively useless things can have a very high value, while very useful ones can have a very small value.}

This evidence only proves that the imagination of the marginal utility the­oreticians does to economic facts what some famous fantasies did with world history. The facts have to give birth to an order as if they were in front of a Prussian corporal, and turn upside down by word of command. Of course, cheap products are not cheap because they are available in bulk, but they are rather available in bulk because they are cheap?⁸ Most people in modern soci­ety are poor devils, who can buy only the cheapest means of consumption. The cheapest commodities are thus, precisely because they are cheap, the ones most in demand, and therefore also the ones most mass-produced. To deduce their cheapness from their quantity is to confuse cause and effect.

But quite apart from the unfortunate conclusion, the argument is untenable in itself. The marginal utility was determined as the last ranking of needs satisfied by a stock of goods at the disposal of a subject. But even if we replace the individuals by the masses, we must not forget that these people (the totality of the consumers) in reality have no stock of goods available, and that the precondition for a direct marginal utility valuation [of goods] is therefore missing for the masses as well as for the individuals in a commodity-producing society. The stock of goods must first be acquired by purchase. If the prices paid for this purchase were governed by the marginal utility principle, one would necessarily have to assume that the price level is determined by the last ranking of needs satisfied by those goods after they came into the hands of consumers - or, to give it another name, by the estimated social marginal utility. But that is again absurd.

Let us assume that the grain harvest was bad and that the amount of bread offered for sale in society was correspondingly reduced by a certain percent­age. According to the law of supply and demand, the price of bread will go up.^[780] Why? The marginal utility theoreticians say: because the estimated social mar­ginal utility of bread has increased. Since the amount of bread was reduced, only a smaller quantity of needs than normal can be satisfied. According to marginal utility theory, the relatively most unnecessary satisfaction of needs would therefore be discontinued, therewith increasing the estimated social marginal utility [of bread], and this rise [in its marginal utility] would be the cause of the price increase. But what actually is discontinued [in this example], is not the relatively most unnecessary satisfaction of needs, but part of the most urgently felt satisfaction of needs of the poorest, who can no longer buy [bread] to the former extent due to the increase in prices. The bread consumption and, if you will, the bread waste of the property owners, on the other hand, will not be modified in the least. The relatively most unnecessary needs will be satisfied as before; the estimated social marginal utility remains therefore unchanged, while prices vary. The assumption that the estimated social marginal utility [of goods] can be the cause of price variations and, moreover, of the determination of prices is therefore untenable.

It turns out that the psychologists, who transferred the marginal utility concept from the individual who owns a stock of goods to the class of buy­ers who first buy a stock by purchase, have achieved absolutely nothing. The problem of exchange-value defies all of those efforts. They believe, incidentally, that in this way their doctrine can be harmonised with the theory that explains exchange-value by the relation between supply and demand and, indeed, that they can prove this theory to be a consequence of their wider general principle. Apart from the fact that supply and demand explain only the fluctuations in prices and not the prices themselves, and that therefore even a happily accom­plished marriage between both theories would only prove that two different errors get along well together, it is clear that this marriage has also failed. For whatever one might accuse the supply and demand doctrinaires of, at least they do not usually forget that not demand per se, but only effective demand can have an influence on the determination of prices. But whether a demand is solvent or not depends, as the above-mentioned example clearly illustrates, by no means on the intensity of the subjective needs, but first of all on the monet­ary income of the buyers. The needs, as such, are absolutely indifferent to price formation. Only when they can legitimise themselves through money do they count. Therefore, subjective need, in the form of marginal utility, cannot pos­sibly be the regulating principle of prices. The marginal utility doctrine, which gives itself the airs of being a philosophical deepening of the theory of supply and demand, has not even come close to the latter in the explanation of price phenomena.

But how was it possible - and this brings us to our final question - for a theory so obviously in contradiction with all the facts of economic life to have such an impact? It rests on a dazzling, bewildering quid pro quo. It seems to me to draw its strength from the fact that marginal utility is, if not the principle regulating prices, then the norm according to which the buyer of the commodities categorises [einteilt: arranges, divides into classes] his monetary income. Although money has no direct use-value for its owner, it does have use­value for him as a medium of exchange, because it gives him the goods he wants in order to satisfy his needs. The utility of money, as a medium of exchange, is generally determined according to the volume of goods that can be bought with it. Besides, it is clear that even this application of the Mengerian school's utility concept can be of no use, because the level of commodity prices, which is to be explained, is assumed here as given. If the utility of money therefore depends on the goods that can be bought with it, the [amount of] goods that can be bought again depends on their prices.

Now, if money has a utility in accordance with the satisfaction of needs achieved by it, it follows that the concept of marginal utility must be applicable to it. If one spends money for the purchase of certain goods, the ranking of needs satisfied by the last commodity unit will steadily decrease with the increasing stock of goods, and finally a point will come when more money spent on goods of this kind will no longer seem worthwhile to the subject, and the remaining money will therefore be used to satisfy other needs. The last, relatively most unnecessary satisfaction of needs achieved by spending a monetary unit in the purchase of certain kinds of goods is the relatively weakest satisfaction of needs, the marginal utility that the monetary unit spent for this purpose has. Generally speaking, the following law holds: Everybody will successively invest monetary units in the purchase of a specific type of goods only as long as the satisfaction of needs (marginal utility), achieved by the last monetary unit, is greater than the utility effect to be obtained through an alternative expenditure of that unit. This law, formulated in the jargon of marginal utility theory, is simply the precise expression of the self-evident truth that everybody, in spending his money, seeks to satisfy his system of needs as perfectly as possible. It applies everywhere and determines everybody, no matter what kind of goods he buys or how many of them. The thrifty as well as the spendthrift are subject to it.

That is the reason why the marginal utility theory appears so natural and clear. And it would indeed be so, had it set itself the admittedly most modest goal of finding the formula according to which, at given commodity prices, the individual categorises his monetary income. Because - and this should not be forgotten - the precondition for the utility and the marginal utility of money, about which the individual thinks when he spends it, is that the monetary price of goods should have a well-known given magnitude. The error and the insolvable contradiction [of the marginal utility theory] begin as soon as one wants to deduce the price of goods, given by the marginal utility consideration [Grenznutzuberlegung], from the marginal utility consideration itself.

One can ultimately speak about the marginal utility of a monetary unit in a double sense. One meaning refers to a specific type of need that is to be satisfied by the monetary expenditure. The last, relatively most unnecessary satisfaction of this need, provided by the expenditure of a monetary unit, indicates the marginal utility of this unit, i.e. of the monetary unit spent in the satisfaction of this specific need. The marginal utility of a monetary unit has hitherto always been mentioned in this specific sense. On the other hand, one can ignore differences between the specific kinds of needs on which money was spent, and designate the marginal utility that a monetary unit, as such, has for the subject, as the absolutely unnecessary and most dispensable satisfaction of needs that the subject obtains through the expenditure of a monetary unit. The concept of the marginal utility of money is, in this case, taken in the most general sense, regardless of any specific, given type of need. It can be said from this standpoint that the marginal utility of a monetary unit must be different, depending on the size of the income someone has; moreover, [it will be] all the higher, the smaller is the income, and the lower, the larger is the income. Of course! A fifty-cent piece in the hands of the worker has a different meaning from [the same coin] in the hands of a rentier. The reason is obvious: because the income of the worker only suffices very imperfectly to satisfy his needs, while that of the rentier satisfies his own needs comparatively perfectly. The last, relatively most unnecessary satisfaction of needs that the worker obtains with 50 pennies is far more important to him than the most unnecessary satisfaction of needs that the rentier obtains with the same expenditure of money. That has not been disputed by anyone. But it only follows from this that the worker buys for himself other means of consumption than the rentier, because, as a result of the inequality of monetary income, the division and use of money will be different. The worker will limit his needs and therefore buy cheap commodities, while the rentier, who can afford them, will buy more expensive commodities. But this most self-evident statement of fact is totally irrelevant for the explanation of the exchange-value of commodities and the formation of prices. For it is surely obvious, that the commodities demanded by the workers are not cheap because the workers buy them, but, conversely, the workers demand commodities of a certain kind because they are cheap. Their lower exchange-value, or their cheapness, is not at all determined by the personal circumstances of the purchasing consumers, but by the relatively small quantity of labour with which they can be manufactured. The great discovery that a given monetary unit, depending upon the monetary income of the owner, represents a greater or lesser marginal utility is therefore just as correct as it is immaterial, because it is self-evident and a matter of indifference for explaining the exchange-value phenomenon.^[781]

In estimating the value of his money as [he does] in its distribution, the subject therefore really always employs marginal utility considerations. All the semblance of naturalness, which the explanation of the magnitude of exchange-value from the marginal utility principle superficially has, flows from this simple but, for the determination of exchange-value, actually entirely irrel­evant fact; this is the popular quid pro quo operating in the background, which has made the fortune of the marginal utility theory, whose whole psychology never goes beyond the one-sided consumer standpoint. It exerts its power of abstraction by abstracting from all the essential psychological factors lying beyond this one-sided position, which must in reality determine the exchange­value of goods. Once those factors are taken into account, the existence of an objective law of value appears not only possible but necessary. But the basic belief that had been challenged in order to conjure up the philosophical truths of psychology emerges from the court of appeal all the more firmly. It remains the first and most important task of economic science to investigate [economic phenomena] according to an objective law of value controlling price forma­tion, not only in simple but also in capitalist commodity production. The fact that only one person has furthered that great work since Ricardo's death, and that this person is Marx, whose theoretic-economic critique unfolded into the most profound social criticism, surely does not make the counter-arguments of the psychological school more valid. But it is, according to the psycholo­gical valuation principle, perhaps a factor explaining why the marginal utility of those arguments, and with it their subjective and market value, has increased considerably.