The German Use Value School: Its Beginnings
The publication of Christian Garbe’s translation of Adam Smith’s Wealth of Nations (1776 [1976], hereafter WN) into German in 1794 paved the way to a critical discussion especially of the Scotsman’s theory of value.
In the course of this discussion marginal utility theory gradually took shape. The upshot of the development was the work of Karl Heinrich Rau (1826, 1828, 1832, 1833, 1837a, 1837b), who elaborated not only the concept (but not the expression Grenznutzen, which was coined by Wieser 1884) of marginal utility of a commodity as a function of the quantity consumed, but also, and independently of Cournot, the concept of a market as consisting of the confrontation of a demand and a supply schedule. (The concept of marginal utility had already been clearly formulated by the Swiss Daniel Bernoulli, whose work was, however, ignored for some time.)While in early German authors we do indeed encounter anticipations of marginal utility theory, this must not distract attention away from the fact that many of them adopted large parts of the teachings of the classical economists, especially Smith, but also Ricardo. In terms of the method of analysis employed, they typically did not endorse methodological individualism, as advocates of the Austrian school would do later, but entertained a more holistic view of society and economy. The idea of “reconstructing” the latter by starting from the single needy individual was alien to them. Society shaped the individual much more than the individual shaped society. The authors under consideration stressed the existence of collective, public and cultural needs and wants alongside individual ones, which they did not consider as purely subjective, but as conditioned by the society in which people lived and the social group to which they belonged. While utility (Nutzen, Nutzwerth) became an important analytical category in their writings, it would be wrong to consider them advocates of utilitarianism or hedonism.
In their writings we encounter the concept of a hierarchy of needs and wants and thus a lexicographic ordering of preferences, which defies the use of utility functions. Substitution of goods within a category of needs or wants was possible, but across categories it was not. Reflecting the cameralist tradition of German economics, the state played an important role, a great deal more important than in Smith, and was dealt with in the subject of Finanzwissenschaft (public finance).The starting point of the German use value school was Smith’s discussion of the “paradox of value” which revolved around his distinction between “value in use” and “value in exchange” - a distinction we encounter already in Aristotle. Smith observed: “The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use” (WN I.iv.13). He exemplified this antinomy in terms of drinking water and a diamond, water being available (in Scotland) at a very low price, whereas a diamond of a given quality and size being very expensive. Smith explained what at first sight might be considered puzzling in terms of the very different costs of attaining the two kinds of commodities.
Before we turn to the early German discussions of Smith’s argument, the following observations are apposite. In Smith’s understanding the consumption or use of certain commodities is a social act, a form of communicating with other people. It cannot therefore be described exclusively in terms of a relationship between a single person and the commodity under consideration, as in the case of drinking water. A diamond is a case in point and it is safe to assume that Smith had chosen the example on purpose. While the demand for a diamond may be seen to express a delicacy of taste, it serves first and foremost as an ideal device to signal wealth, fortune and social position. What matters is that the diamond is seen, not by the person who wears it, but by other people.
It is meant to impress them and is thus wanted, as Smith stressed, despite the fact that it “has scarce any value in use” (WN I.iv.13) for the person wearing it. It is a kind of “positional good,” to use Fred Hirsch’s concept. The more expensive a diamond is, the more exclusive is its possession. It seems that this aspect of Smith’s argument has been widely ignored (not only) in the German literature to which we now turn. This means, of course, that Smith’s critics have at least partly missed their target.One of the first authors to express his disenchantment with Smith’s analysis was Friedrich Julius Heinrich, imperial count of Soden (1754-1831), who in his book Die Nazionalokonomie (1805) launched an attack on Smith. Soden replaced Smith’s value dichotomy by what he called “positive” and “comparative value” (positifer and vergli- chener Werth). While water, Soden explained, has positive value for humanity under all conditions, its comparative value depends upon its scarcity. Similarly, if diamonds were available in abundance they would lose in comparative value. Ludwig Heinrich von Jakob (1759-1827) in his Grundsatze der National-Oeconomie (1805) came up with a similar distinction, using different expressions. However, in a fully classical spirit he saw the prices of goods determined by costs of production, which resolved in quantities of labour needed in order to bring forth the goods. Hence, while he was convinced that the value in use of a good ought to be seen as depending on the quantity available of it, he felt no need to abandon the classical cost of production approach to exchangeable value. Gottlieb Hufeland (1761-1817) in his Neue Grundlegung der Staatswirthschaftskunst (1807) for the main part simply expounded Smith, but then stressed subjective aspects and put special emphasis on the role of knowledge in the estimation of value, an emphasis we later encounter also in Austrian economists. In addition he anticipated the Marshallian concepts of “supply price” and “demand price”.
The idea of a hierarchy of needs and wants and thus “lexicographic preferences” is clearly expressed by Johann Friedrich Eusebius Lotz (1771-1838) in his Revision der Grundbegriffe der Nationalwirthschaftslehre (1811-14). Friedrich Benedict Wilhelm von Hermann in his Staatswirthschaftliche Untersuchungen (1832) elaborated on the idea in some depth (see also Kurz 1998).
Characteristic features of these early contributions to the German use value school are: (1) subjectivist elements in explaining exchange values gain in importance without, however, becoming all-dominant; (2) the role of the quantity available of a commodity and thus of its relative scarcity for its value as seen by the consumer is discussed, but the concept of marginal utility as a function of the quantity consumed is still missing; (3) needs and wants are typically seen to be partly shaped by society and most of them are considered to be satiable, the exception being fancied and artificial desires and the services to meet them.
The discussion moved on to a higher level with Karl Heinrich Rau (1782-1870), whose tripartite Lehrbuch derpolitischen Oekonomie (vol. I, 1826; vol. II, 1828; vol. III.1, 1832; vol. III.2, 1837) saw in total five editions up to 1867. The first three editions of volume I of the book published in 1826, 1833 and 1837 especially deserve our attention.