THE MEASURE OF CONSUMERS’ WEALTH

In all stages of social development the economic motives that actuate men remain essentially the same. All men seek to get as much net service from material wealth as they can. The more wealth they have, other things remaining the same, the better off they are, and the more personal sacrifice they are compelled to undergo in the securing of the wealth, the worse off they are. Some of the benefit received is neutralized by the sacrifice incurred; but there is a net surplus of gains not thus canceled by sacrifices, and the generic motive which may properly be called economic is the desire to make this surplus large. Except in a perfectly isolated individual life, there is opportunity for ethical motives to affect men’s economic actions. Altruism has a place in any social system of economics, and so have the sense of justice and the positive compulsion of the law. Altruism does its largest work in causing men to give away wealth after they have acquired it, but conscience and the law powerfully affect their actions in acquiring it. These are forces of which Social Economics has to take account; but the more egoistic motive, desire to secure the largest net benefit from the wealth-creating process, is one of the premises of any economic science. This involves a general pursuit of wealth; but men seek the wealth for a certain personal effect which comes from the use of it, and they measure it, when attained, by means of this subjective effect.

How Specific Utilities are Measured. - As the essential quality of wealth is specific effective utility, we measure wealth by estimating the amount of this quality, and it is always a consumer who must make the measurement. He must discover the importance to himself of a small quantity of a particular commodity. The hunter must find out how much worse off he would be if he were to lose a small part of his supply of game and endure some hunger as a consequence. In doing this he gets the measure of the effective utility of any like quantity of game, since any one specific part of his supply is as important as any other and no more so. The estimate of the importance of such a supply of food material has to be made in this specific way, by taking the amount on hand piece by piece, and not by gauging the importance of the whole of it at once.

Value the Measure of Specific Effective Utility. - If any consumer will estimate the importance to himself of a single unit of goods of a certain kind, and multiply the measure so gained by the number of units he is appraising, he will make a measurement of the value of the total amount.

Values not based on the Importance of the Total Supply of Goods. - It is essential that the consumer, in determining the value of a kind of goods, should not estimate the importance of the supply in its entirety, since that would give an exaggerated measure. Measurements of value are always made specifically, and single units of the supply of goods are appraised apart from the remainder. The total utility of atmospheric air is infinite, since the loss of the whole of it would mean the total destruction of animal life; but the specific utility and the value of air is nil, since no one limited part of the supply has any practical importance. A roomful of it might be destroyed with impunity. So the cereal crops of the world, taken as a whole, have almost infinite importance, since their destruction would result in universal famine; but each bushel of grain has an importance that is relatively small. The loss of it would impose no serious hardship upon the average consumer, since he could easily replace it. The value of the crop is determined by the importance of one bushel taken separately and by the number of the bushels. If we estimate the importance of one unit of the supply of anything, express the result of the estimate in a number, and then multiply this by the number of units in the supply, we express the value of this total amount. The total utility of it, on the other hand, is measured by the benefit which we get from the supply in its entirety, or by the difference between the state we are in when we have it all and that to which we should be reduced if we lost it all and were unable to replace it. To measure any such total utility we contrast, in imagination, our condition with the full supply on hand and a condition of total and hopeless privation, in so far as these goods and similar ones are concerned.

This Method of measuring Wealth Universal. - These principles apply as well to the economy of a solitary islander of the Crusoe type as they do to that of a civilized society. A Crusoe does not need to measure values for purposes of exchange, but he has other reasons for measuring them. It is for his interest to use his own labor economically, and to that end he should not put too much of it into one occupation and too little into another. When, by reason of a large store of wheat on hand, the specific importance of it is small, - or, if we use a common expression, when the utility of the “final increment” of it, which a man might secure by making an addition to his supply, is small, - he should divert his labor to raising goats or building huts, where the utility of the increment of product to be gained is, for the time, greater. The solitary man thus well illustrates the act of the society which, in its own peculiar way, sends labor from one department of industry where the “final utility” of its product is small to another where it is larger. It is all done by measuring the specific importance of goods.

The Utility of Producers’ Goods. - Consumers’ goods have a direct utility, which is a power immediately to serve a consumer. Instruments of production, on the other hand, have indirect utility, since all that they are good for is to help produce things that render the immediate service. They have productivity, and this has to be measured in determining their value. What we need to know about hoes and shovels, hammers and anvils, spindles and looms, etc., is how much power they have to create the goods that we want for consumption. Here again the measurement has to be made in the specific way. The capital goods have to be taken unit by unit if their value for productive purposes is to be rightly gauged. A part of a supply of potatoes is traceable to the hoes that dig them; but in valuing the hoes we do not try to find out how much worse off we should be if we had no hoes at all. We endeavor simply to ascertain how badly the loss of one hoe would affect us or how much good the restoration of it would do us. This truth, like the foregoing ones, has a universal application in economics; for primitive men as well as civilized ones must estimate the specific productivity of the tools that they use, and make hoes, shovels, or axes according as the procuring of a single tool of one kind becomes more important than procuring one of another kind. Indeed, the measuring of the utility has to be done, as we shall soon see, in a way that is even more specific than this; for the man has to determine not only how many hoes he will make, but how good he shall make them. The quality of each tool has to be determined in a manner that we must hereafter examine with care. The earning power of capital is, as we shall later see, governed by a specific power of productivity which resides in capital goods.

Cost and Utility. - A ripe consumers’ good, in exhausting itself on man, benefits him; but during the period in which it is being prepared for use, when it is receiving utilities at the hands of successive producers, it has an opposite relation to the men who handle it. In making the material useful a man confines and tires himself. He is willing to do it if the reward that he expects will more than pay for the sacrifice, but not otherwise. Moreover, this sacrifice itself has to be estimated specifically in a way that is akin to the method of measuring utilities which determines the values of goods. It is necessary for a man to gauge the sacrifice which is entailed on him, not by his labor as a whole, but by a specific part of it. He finds himself in the evening feeling the fatigue and the sense of confinement which the day of labor has imposed and asks himself how much it would burden him to work a little longer. If what he can get by this means pays for the extra sacrifice involved in thus getting it, he will work for the few minutes, but otherwise he will not. His objection to a few minutes of additional work measures what we may call the specific disutility of labor; and men, whether they be primitive or civilized, are forever making such measurements. They consider how much it will cost them to add slightly to the length of their working day or how much it will benefit them to shorten it. In this way they measure the specific disutility of labor rather than the total disutility of it, since they do not gauge the relief that it would afford to cease working altogether.

The Increasing Cost of Successive Periods of Labor. - It is easy to work when one is not tired, and the first hour or two of labor may even afford a pleasure that largely offsets the burden that it entails; but it is hard to work when one is tired and painfully conscious of the confinement of the shop. Adding anything to the length of a working day imposes on a man the necessity of working at the time when the burden is greatest; and shortening his day, for a like reason, relieves him of some of his most costly toil.

The Natural Length of the Working Day. - Any laborer, as his work goes on, hour after hour, is certain to reach a point at which it is unprofitable to go farther. However greatly he may need more goods, he will not need them as much as he needs rest and change. It may be that he has worked twelve hours, and that, by working longer, he can improve his wardrobe, his food, or his furnishings; but if he has a tolerable supply of such things, he will hardly choose to add to it by staying in the shop when his strength has been exhausted and he is eager to reach his home.

Specific Cost at its Maximum a Measure of Specific Utility. - Two very important principles are at work whenever a man is performing labor in order to create wealth. The more consumers’ wealth he gets, the less important to him are the successive units of it, and the more do these successive units cost him. The tenth hour of labor adds to his supply of food, but this addition is not as important as the supplies that were already on hand. If we divide the supply into tenths and let the man produce a tenth in each successive hour, the first tenth, which rescues him from starvation, is the most important, while the last tenth, which comes nearest to glutting his appetite, is least important. This last increment, however, is produced by the greatest sacrifice, for it is gained by making the working day ten hours long instead of nine.

Let the hours of the working day be counted along the line AD, and let us suppose that a man gets unit after unit of consumers’ wealth, as he works hour after hour, and the units grow less and less important. The first and most important we may measure by the vertical line AB. The second is worth less, the third still less, and the last one is worth only the amount CD. This means that the successive units of what we may call general commodity for personal use have declined in utility along the curve BC. On the other hand, as the man’s labor has been prolonged, it has grown more and more wearying and irksome. The sacrifice that it involved at first was almost nothing, but the sacrifice of the succeeding hours has increased until, in the last hour, it amounts to the quantity expressed by CD. As the man has continued to work, the onerousness of working has increased along the ascending line AC until the point has been reached where it is so great that it is barely compensated by the fruits of the labor. The man will then work no longer. If he were to do so, his sacrifice would become still larger and his reward still less. Up to this point it is profitable to work, for every hour of labor has brought him something so useful that it has more than paid for whatever sacrifice he has made in order to get it. Beyond this point this is not the case. The line CD represents the cost of labor at its maximum, and it is this which acts as a measure of effective utility and value.

AC is the curve representing the sacrifice entailed by
successive hours of labor.

In like manner we should have to recognize the fact that the utility of some kinds of goods may not reach a maximum with the first increment, and should construct a utility curve to express this fact. BC here represents the increase and the following decrease in the specific utility of the supply of an article of this kind.

The Coincident Measure of Cost and Utility. - It now appears that the line CD signifies two different things. It measures the utility of the last unit of the man’s consumers’ wealth, and it also measures the sacrifice that he has incurred in order to get it. These are opposing influences, but are equally strong. The one, of itself, makes man better off, while the other, of itself alone, makes him worse off. At the last instant of the working day they neutralize each other, though in all the earlier periods the utility secured is greater than the sacrifice incurred and the net gain thus secured has kept the man working.

The Point at which Utility and Disutility are mutually Neutralizing. - At a certain test point, then, production acts on man in such a way as exactly to offset the effect experienced from the consuming of the product. Man, as a consumer, has to measure a beneficial effect on himself, and, as a producer, he has to measure an unpleasant effect. He finds how much he is benefited by the last unit of wealth which he gets for personal use, and also how much he is burdened by the last bit of labor that he performs. If this sacrifice just offsets the benefit derived from the final consumption, it is the best unit for measuring all kinds of utilities. A man secures by means of this final and most costly labor a variety of things, for if he works up to this point every day in the year, he will have at his disposal, say, a hundred hours of labor in excess of what he would have had if he had worked a third of an hour less each day. The product of this extra labor will be taken in the shape of goods that are also extra, or additional to whatever he would otherwise have secured. They will represent special comforts and luxuries of many kinds. The values of these goods may be measured and compared by means of the quantity of labor that the man has thought it worth while to perform in order to get them. If he values one of them highly enough to think it worth while to work for an extra period of twenty minutes at the end of a day in order to get it, it may be said to have one unit of value; and if he is anxious enough to get something else by doing this on two successive days, this second article may be said to have two units of value. The savage who, by working for an extra hour, makes some improvement in his canoe, and by doing the same thing on another day makes some improvement in his food, establishes thereby the fact that he values these two additional bits of consumers’ wealth equally. If he uses ten hours of the same costly kind of labor in making an addition to his hut, he proves that he values that gain ten times as highly as he does either of the others. Establishing values by means of such final costs is a process that goes on in every stage of social evolution.

Unlike Results of Creating Wealth and Using it Summarized. - Wealth, then, affects a man as a consumer in one way and the same man as a producer in an opposite way. In the one case the effects are favorable, and in the other they are unfavorable. At a certain test point the two effects may be equally strong as motives to action, and so may be said to be equivalent. The man is impelled to work by his desire for a final unit of wealth, and he is deterred from it by his aversion for the final unit of labor which he will have to incur if he secures the benefit. If he performs the labor and gets the benefit, he neither gains nor loses as the net result of this particular part of his labor, though from all other parts of his labor he gets a net surplus of benefit. It is natural to measure all such economic gains in terms of sacrifices incurred at the test point where these are greatest. This is the labor one would have to incur in order to add the means of gratification to his previous supply of consumers’ goods.

Minimum Gains offset Maximum Pains. - Running through and through the economic process are these two different measuring operations. Man is forever estimating the amount of harm that wealth does him when he is in the act of producing it, and the amount of good it does him when he consumes it; and there is always to be found a point where the two amounts are equal. It is the point at which gains are smallest and sacrifices greatest. It is at this point that men measure values in primitive life and in civilized life. How in the intricate life of a modern society the measuring is done we shall in due time see; for the present it is enough that we perceive the universality of the law according to which value is best measured by the disutility of the labor which is most costly to the worker. Organized societies do something which is tantamount to this. It is as though the whole social organism were an individual counting the sacrifices of his most costly labor and getting therefrom a unit for comparing the effective utilities of different goods.

How Primitive Man tests Value. - It is a mistake to suppose that what is essential in value depends on the existence of an actual market in which things are exchanged for each other. In a market, it is true, values are established and their amounts are expressed in ways that cannot be adopted in primitive life. When we buy a thing, we help to fix the value of it and of other things which are like it. The mere ratios in which things exchange for each other in a market are, however, by no means the essence of value itself. That is something deeper and is one of the universal phenomena of wealth. Value, as we have said, is the measure of the effective utility of things, a kind of measure that every one is frequently compelled to employ, whether he is making goods for himself or buying them from others. A producer who has the option of making different things for himself needs to know what variety of goods can be increased in supply with the greatest advantage to himself as a consumer. Adding to the supply of any one of them is getting a “final” or “marginal” unit of consumers’ wealth. It is something that is needed less than the things that were already on hand. Without making such a comparison of the importance of marginal units of different commodities he cannot use his resources in the way that will do him the most good.

The terms marginal and final mean essentially the same thing, but the modes of conceiving it differ. When utilities are thought of as supplied one after another, the last is the least important. We may represent a man’s enlarging gratifications, not by such a mere series of quantitative increments, but by an enlarging area. We may draw a series of concentric circles, beginning with the smallest, and let this central area inclose the most necessary forms of consumers’ wealth. When we draw a second and larger circle, we inclose between it and the first one a zone which includes those forms which come next in importance. By continuing to draw circles we reach an outermost one which bounds a zone in which are included the least important of the consumer’s acquisitions. These are the things which he gets with his costliest increment of labor, and the things which lie beyond the circle last drawn would not pay for the sacrifice which acquiring them would cost. In the accompanying figure the fifth zone includes these “marginal” forms of wealth.

How Isolated Men measure Final Utility. - If a cave dweller possesses a store of one hundred measures of nuts, he measures the final utility and the value of this store in the manner which we have described. If he were to be deprived of the whole stock, he might starve, but this fact does not afford the basis of the value which he puts on the nuts. He measures the importance of this consumers’ wealth specifically. He tests the effect of losing one measure and no more, and finds that he could lose the single measure without suffering greatly. The difference between having an appetite fully satiated and having it very nearly so is not serious.

Let AD represent the savage’s total supply of food. AB will represent the utility of the first unit; CD of the hundredth. If we supply the food unit by unit, the utility of the successive increments will decline along the curve BC. When the man has a hundred units of food, no one unit of it is worth any more than the last one, since if any one were taken away, the last one could be put in the place of it.

The total absolute utility of the food is measured by the area ABCD, but the total value will be represented by the rectangle ADCE. The area EBC measures the surplus of utility contained in the earlier units in the series.

The Motive for measuring Values in Primitive Life. - Even the cave dweller would have to measure values, and would thus have to apply the principle of final utility, because he would need to spend his limited productive energies in the way that would do him the most good. When he is nearly satiated with food, he needs other things more than he does food stuffs. If he has secured so much of one product that any additional amount that he may get by an hour’s labor would be of less use to him than what he could get of some other product by the same amount of labor, it is important for him to change his occupation and produce that thing of which an additional unit - which will perhaps be the final unit of this more desirable article - has the higher degree of usefulness.

Final Utility and Labor Cost. - On the supposition that a small store of roots and nuts were incapable of being replaced by any amount of effort and that no other food were to be had, the utility of it would be indefinitely great, since the man’s life would depend on this one increment of food alone. A man would value that life-sustaining good for what it would do for him and without any reference to the amount of work he had performed in order to get it, or to the amount he would have to perform in order to get another store like it. On the supposition that by labor the man could replace this essential supply, the effective utility of it would be gauged by the sacrifice he would have to make in order to replace it. The effective utility of any unit of a good that an hour’s labor will produce can never be more than enough to offset the disutility of a marginal or final hour of labor; and thus even a single unit of replaceable food stuff, even when it stands alone and constitutes the whole supply, is valued according to the cost of getting another one like it. A man will prize it according to his dread of the sacrifice involved in getting the duplicate. If he gets this by adding an hour of labor to his day’s work, this fact is an evidence that the importance of the original supply of the food is measured and expressed by this personal cost of replacement; and as any similar quantity in a large supply of food can be duplicated by the same amount of labor, it appears that, by a standard based on cost, the effective utilities of all units are equal, that of each one is measured by the “disutility” of an hour’s labor and that of the whole supply is this amount multiplied by the number of units that this supply contains.

Although we may use the terms final utility and effective utility in a way that makes them nearly interchangeable, it is clear that the qualities for which the two terms stand are by no means identical, and that effective utility must be studied in any complete analysis of value. In distinguishing final utility we assume that the units of the supply of goods of a particular kind are furnished one by one, and we measure the absolute utility of each unit. The line AB measures the absolute utility of the first unit supplied. This measurement does not take any account of the cost of replacing this unit, for it does not recognize the possibility of replacing it. What is estimated is the absolute importance of the service which this first unit of the article renders, on the supposition that, if this first increment of the supply were wanting, the service would not be rendered at all. It is, in like manner, the absolute utility of the successive increments supplied which declines along the curve BC. DC measures the absolute utility of the final increment, and the area ABCD the total absolute utility of the supply. If the goods can be reproduced by labor, the total effective utility is less, since it is measured, as we have seen, by the amount of sacrifice which the replacing of one lost unit would entail multiplied by the number of units in the supply. It is the amount expressed by the area AECD which is the amount of the value of the goods, since measure of effective utility and value are the same, both in the case of a single unit and in that of a total supply.

We have discovered two reasons why the effective utility of any one of the earlier units is equal to the absolute utility of the final one. The first reason is that, if any one of them were lost, the final one would be put in the place of it and the consumer would suffer no loss except what would be entailed by going without the last unit. The second reason is that if the consumer should lose any one of the earlier units, he could replace it by the same amount of labor that would replace the final one. We have seen that the line DC of the figure expresses not only the absolute utility of the final unit of goods, but the disutility of the labor of reproducing it or of reproducing any other unit. The cost of replacing the whole supply is expressed by the area AECD, on the supposition that the units are replaced, one at a time, by means of labor performed at the end of several working days when the sacrifice is greatest. Total value is thus quantitatively equivalent to total effective sacrifice of replacement, as well as to total effective utility. If, by adding a brief period to the length of one working day, a man can make good the loss of one unit of the goods, by adding the same period to the length of a number of working days, he can make good the loss of the total supply. For simplicity we assume that the man’s physical condition remains unchanged, and that an extra hour of labor at the end of any one day costs him as much as it would at the end of any other.

How Primitive Man measures the Productivity of Labor and Capital. - There is a truth relating to producers’ wealth that resembles the truth that we have just stated with regard to consumers’ wealth. The more consumers’ goods of one kind a man has, the less is the value that any one of them has to him. The more producers’ goods of a given kind a man has, the less is the efficiency that any particular one of them possesses as an aid to labor. The last bit of bread serves the man himself in a less important way than does the first, inasmuch as it gratifies a want that is less intense; and the last implement of a given kind - the last hatchet or spade or arrow - helps him less in his productive operations than did the first one. On the one hand, we have the law of the diminishing utility of successive units of consumers’ goods, and on the other hand, we have a parallel law of the diminishing productivity of successive increments of producers’ goods.

The Necessity for measuring the Productive Powers of Capital Goods even in Primitive Life. - Now, it is necessary for every producer, though living in the simplest possible manner, to measure in some way the efficiency of the last unit of each kind of productive instrument that he uses. He has, let us say, a certain number of hatchets and of arrows, and he can produce one hatchet with the same amount of labor that would produce an arrow. Now, if a hatchet will do more good than an arrow, he will direct his energies to the making of the hatchet. It is important that any producer should bring the final units of the different parts of his equipment to a certain uniformity of producing power. He must not go on adding to the stock of implement N when implement N, which could be had by the same expenditure of labor, would do more good; nor must he add to the stock of either of these after he has acquired such a supply of them that the first unit of implement N would be of greater importance. Measuring the efficiency of producers’ goods is necessary in the case of every one who creates wealth at all, and such measurements reveal the fact that the more producers’ goods of one kind a man has, the less is the productive power that resides in one of them.

The Foregoing Truths Universal. - All the general facts which have been thus far stated hold true wherever wealth is produced. They do not presuppose the facts of a division of labor and a system of exchanges, and they do not even require that there should be any social organization. Men in the most primitive tribes and even men living in Crusoe-like isolation would create wealth by labor aided by capital. The essence of that wealth would be effective utility, and the measure of this, which is value, would be made in the specific way that we have described. The varieties of capital, the distinction between capital and capital goods, and the law of diminishing productivity of such goods would appear in the most primitive economics as well as in the most advanced. These are by no means all of the facts and principles which are thus of universal application. They are merely a few of the more important and may serve as a foundation or a “Grundlegung,” for further study. If we should extend our list of general and basic truths, it would quickly appear that the incomes that have been treated as rent and the various surplus gains which are analogous to rent are universal economic phenomena which it would be not illogical to discuss in the preliminary part of this treatise. What has been stated, however, concerning the laws of diminishing productivity of successive units of producers’ wealth, concerning the diminishing utility of successive units of consumers’ wealth, and also concerning the increasing burdensomeness of continuous hours of labor, presents the essential principles on which all rents and quasi-rents rest. It is best to study the applications of these principles as they are made in a civilized state.

Universal Economic Truths independent of the Special Facts of Sociology. - This first division of economic science borrows none of its premises from sociology, for the truths which compose it would abide if there were no society in existence. Basic facts it takes from Physics, Biology, Psychology, Chemistry, etc. Facts concerning man, nature, and the relation between them are material for it, but relations between man and man come into view only in the later divisions. There, indeed, they do come into the very foreground with results which immeasurably enrich the science. What we may call the socialization of the economic process we shall have next before us, and we shall find it full of critical problems involving the future well-being of humanity. Industry is carried on by a social organism in which men are atomic parts and to which nature has given a constitution with laws of action and development. We have first to study the nature of this industrial organism and the mode in which it would act if it were not subject to any constitutional change; and later we must study it in its process of growth. The economic action of a society which is undergoing no organic changes is the subject of Social Economic Statics, while such changes with their causes and effects constitute the subject of the science of Social Economic Dynamics.