The Value of Money Part 23

Now dynamics, theory of prosperity, etc., are concerned with the causes of changes in the data with which statics works, in large measure. Among the problems with which statics has not adequately dealt, and in large measure cannot deal, are (1) the nature of value itself, and the laws governing changes in the value-scales; (2) the problems of readjustment, including the problems of money, credit and exchange; (3) the psychology of invention, of enterprise, and the like. (4) The reactions of economic values and economic organization on the non-economic phases of social life. (5) The reaction of the non-economic factors, as law, morals, art, religion, etc., on economic life. (6) The problem of prosperity and depression. I say that statics has not dealt adequately with these problems. Statics in its present narrow form cannot deal with them. But in considerable degree, I am convinced, statics can be made to deal more adequately with them, if its scope be broadened, and its limitations be made less rigid. Schematically, at least, the central ideas of statics can be applied to a large part of these problems. I may add that my list of six cla.s.ses of problems with which statics has not adequately dealt is not meant as a system of categories. The list is incomplete, and the cla.s.ses are not mutually exclusive. Rather, they overlap in large measure. In a large way, it might be said that statics is concerned with the laws of the equilibration of values, and that dynamics, theory of prosperity, etc., are concerned with the nature and causes of variations in the values themselves. The contrast may be put, in general, as the contrast between the _theory of value_, and the _theory of price_, statics being price-theory, and dynamics being value-theory. But this is a thesis which calls for much elaboration and qualification before its significance is made clear, to say nothing of its justification being established.

We may approach the problem of bringing the two terms of the contrast together from either of two angles: (1) we may show that dynamic factors tend, in large degree, to submit themselves to measurement in terms of money-prices, which obey the laws of static marginal equilibrium. (2) We may show that all static prices presuppose values whose explanation is in terms of the same phenomena with which dynamics, the theory of prosperity, etc., have busied themselves, namely, considerations drawn from the study of social psychology, including the psychology of suggestion, imitation, mob-mind, the functional organization of minds into a social mind, social beliefs, social values of other than economic nature, and social inst.i.tutions. (1) The evidence on the first point is already in considerable measure worked out, particularly by Veblen, in his _Theory of Business Enterprise_, and in his other writings on the nature of capital, etc. Something more in this direction I have done in my _Social Value_, and other writers have elaborated the notion. (2) The case for the second contention has been made in detail in my _Social Value_, and in what follows I shall rely chiefly on the discussion presented there, and in the chapter on "Value" in this book.

I take up first the thesis that dynamic factors may come under the static measure. Veblen has made much of the contention that modern "capital" is not, as Smith thought, and as orthodox economists in general have contended, a matter of physical acc.u.mulations of goods. The volume of business capital is a pecuniary concept, and may wax and wane with little variation in the physical stocks. "Under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." (_Theory of Business Enterprise_, p. 149.) And in large measure Veblen's work is given to showing how factors of legal and social psychological nature get a money-measure. The actual capital of a business enterprise does not rest chiefly on the physical equipment, stocks of raw materials, etc., etc., which it possesses. To be added is "good will," and this includes (p. 139) established customary business relations, reputation for fair dealing, franchises, privileges, trade-marks, brands, patent rights, copyrights, exclusive use of processes guarded by law or secrecy, exclusive control of particular sources of materials, etc. Veblen contrasts things of this nature sharply with the concrete equipment, saying that the former are serviceable only to the owners, while the latter are serviceable to the community at large as well. The physical, tangible, and ethically commendable character of the physical equipment is everywhere stressed, while the pathological, anomolous, and sinister character of the less tangible and more recent "capital items" is always set before us--all the more effectively because Veblen maintains a satirical att.i.tude of moral indifference, and presents the case with Olympian aloofness. I am not here concerned with the social welfare aspect of the matter, though I shall later speak of that. My present purpose is to make clear two points in Veblen's doctrine: (1) that he does bring these intangible things, which are the variables involved in his theory of prosperity, under the price measure; and (2) that he considers these prices as anomalies from the standpoint of the general laws governing the values and prices of concrete goods. To this last point I shall later take sharp exception. For the present, I wish to develop further the extent to which such factors may be brought under the general static measure.

The feature of static theory which Veblen chiefly employs in giving a money-measure to his "intangible capital" is the capitalization theory.[585] The capital magnitude of the items of good will previously mentioned is a capitalization of the _income_ which they are expected to bring in. And it may be said that a large part of Veblen's doctrine of the causes of the ups and downs of business rests on the complaint that this capitalization process is not rationally carried through--that incomes are overestimated, and that business men are tenacious of capital magnitudes once built up, and refuse to mark them down properly when the facts in the situation have changed. His theory of prosperity thus rests on non-rational enthusiasm on the one hand, and a certain kind of "friction" on the other hand, and apparently the difficulties in the situation as he sees it would largely disappear if these two elements could be rationalized, and the static theory work more perfectly. The elements involved in the capitalization theory, as shown in the chapter on that topic, are three: the antic.i.p.ated income, the prevailing rate of discount, and the capital value, the last named being the child of the first two. The capital magnitude is a shadow, where the income is the substance. Veblen seems to find the trouble arising in that the capital magnitude takes on a substantial character, and refuses to play the pa.s.sive role of shadow. It is interesting, in pa.s.sing, to compare this theory of Veblen's with the theory of crises developed by Irving Fisher, from the standpoint of a body of doctrine which is purely static, and which Veblen has criticised as "taxonomic" in a high degree.

For Fisher[586] the trouble arises from friction in connection with another element in the capitalization problem, namely, the interest rate. Business men think that "a dollar's a dollar," and refuse to let the interest rate be marked up in accordance with the doctrine of "appreciation and interest." This, likewise, leads to overcapitalization, leaves the pa.s.sive shadow too big. I must confess that it seems to me that one theory is about as "taxonomic" as the other--that both rest on pointing out divergences from a static, "taxonomic" norm. In general, Veblen's work in this field consists in a.s.similating the "intangible" capital to the cla.s.s of land, and other long time concrete income-bearers, but that is after all cla.s.sification, systematization, "taxonomy." In saying all this, I am as far as possible from questioning the value of Veblen's work. Rather I rate it as of extreme significance. "Taxonomy" does not appear to me so dreadful a word as it does to Veblen. I should rather say that some taxonomy is good and some is bad, depending on whether or not it leads to fruitful generalizations, and deeper insights.

It is, as I have said, chiefly the capitalization theory which Veblen applies to these newly important intangible "capital-items." The phenomena of the stock-market, where such things are most actively bought and sold, and where they appear as differential portions of the capital values of securities, doubtless first called attention to them--though the item of "good will" as a business a.s.set, for which a money-price is paid when businesses change hands, is doubtless older and wider than modern corporation finance. The capitalization theory applies to them most readily and obviously, as compared with other elements in the static theory of prices.

But as we become better used to the large role which these phenomena play,--not that the phenomena are new, but that their present importance is new, and hence our serious study of them is new--we are increasingly able to see that other elements of static theory also apply. _Static theory applies increasingly as understanding increases!_ The vaguely discerned, the novel, the imperfectly a.n.a.lyzed, can be stated only in qualitative terms. As things are better understood, the mind seeks system, taxonomy, quant.i.tative measurement. Business men to-day are well accustomed to applying _cost_ concepts to many of these intangible magnitudes. Advertising, for example, is being worked out with increasing exactness, and business men are increasingly applying accounting processes to the determination of the question of _how much_ advertising "pays." Well-known brands are capital items. Well-known brands have cost money! Business men contemplating the marketing problem may well balance the cost of creating a new brand against the cost of buying an old one, and may balance the cost of creating a new brand against the profit to be made from allowing an old one to deteriorate, through cheapening its process of manufacture. Trade-connections are capital items. They are also items which have been created by patient thought and labor and expense. Franchises, since the days when the public awoke to their value, have cost money to the corporations that possess them, and figure in corporate bookkeeping often. Even in the old days, they often had a cost, which commonly stayed _out_ of the corporations' books, at least in that form,--bribes, entertainments to legislators and members of councils, and so on. In Part II of this book,[587] I have discussed "selling costs" as contrasted with costs of production in the narrow sense, and have pointed out how high a proportion of total costs these selling costs are. I have also indicated how many of these costs tend to be "capitalized." These selling costs are static measures of the elements of "friction" which interfere with the smooth working of static laws! An extension of statics, however, can in considerable degree take account of them. It is, of course, far from true that cost doctrine will explain all of these intangible capital magnitudes. But this is likewise true of the prices of many tangible items. Cost doctrine does not hold universal sway even in the confines of the strictest static theory.

I have said that dynamic factors tend to come under the rules of static taxonomy to the extent that they become more accurately understood. The understanding here referred to is not merely on the part of the scientific theorist! The subject-matter of economic science is itself psychological. It includes the psychology of the business man, as well as the psychology of purchasers and laborers, and the general field of social-mental life that bears on economic processes. It includes the theories of the business men, as well as their aspirations and "motives." It includes their methods of computation, and the accuracy or inaccuracy of their prognostications. It has been pointed out recently that at the current price of copper (22c. per pound in Jan. 1916) the prices of copper stocks are very much lower than they were when copper reached the same price some years ago. Calumet and Hecla stands some two or three hundred points lower than it did then, and the same percentage difference is manifest in the case of many other stocks. But the explanation which the broker and market writer offer is that people have awakened to the fact that mining stocks are stocks with wasting a.s.sets, that the incomes from copper stocks cannot, therefore, be capitalized on so high a basis as similar incomes from other securities; that people to-day realize this fact as they did not some years ago; that the earlier capital-prices of copper stocks were vastly exaggerated on the basis of a careful estimate of probable total future income, etc. j.a.pan, little used to the great prosperity growing out of sudden great increases of special kinds of business, found herself in such an orgy of war stock speculation that it was necessary to close the stock exchange in 1915. The United States, better familiar with the phenomena of boom and depression, seasoned by many experiences of similar nature, have found that on the whole,--at least in the opinion of many competent judges in January of 1916,--war stock speculation has been kept in reasonable bounds, thanks in large part to the conservatism and caution of bankers and brokers, and that the general economic situation is in fairly stable equilibrium, with most of the probable sources of disaster foreseen and "discounted." To "discount" is to make "static"![588]

Whatever the business man can reduce to bookkeeping terms, and whatever he can measure by money in the market, the economist should be able to bring within the "orderly sequences of economic law."

In _Social Value_, I have pointed out how wide is the scope of the money measure. Waves of public opinion, of waning or waxing hope and belief, of patriotic fervor, of religious exaltation, of political movements of one or another kind--all these find some sort of money measure in the market. In the gold market in the early '60's in New York, the "bulls"

sang "Dixie," and the bears sang "John Brown's Body"! It was patriotic to be a bear, and unpatriotic to be a bull. These considerations affected the prices very appreciably, at times, especially at the beginning of the speculation in Greenbacks. Waning and waxing belief in the triumph of the Northern armies manifested itself very strikingly in the prices in the gold market, as W. C. Mitch.e.l.l has conclusively proved, with a wealth of detailed evidence, in his _History of the Greenbacks_. But in less systematic markets, in less organized and regular ways, many things besides are given a money measure: "Against what, indeed, shall wealth be measured? Where are the markets which measure its fluctuations?

"But such markets exist, always have existed. Are there not streets where woman's virtue is sold? Are there not commonwealths where there is a ruling price for votes? Do not the comparative rewards of occupations indicate what inducements will overcome the love of independence, of safety, of good repute? We see men sacrificing health, or leisure, or family life, or offspring, or friends, or liberty, or honor, or truth, for gain. The volume of such spiritual goods Mammon can lure into the market measures the power of money.... When gold cannot shake the n.o.bleman's pride of caste, the statesman's patriotism, the soldier's honor, the wife's fidelity, the official's sense of duty, or the artist's devotion to his ideal, wealth is cheap. But when maidens yield themselves to senile moneybags, youths swarm about the unattractive heiress, judges take bribes, experts sell their opinions to the highest bidder, and genius champions the cause it does not believe in, wealth is rated high." (Ross, _Foundations of Sociology_, pp. 171-172.) Ross is here interested chiefly in the problem of measuring the varying significance of wealth, symbolized by money, in terms of other and non-economic, goods. But it is equally true that money measures these goods. The range of the money measure is very wide. Nor is it confined to the exchanging process. Gabriel Tarde[589] has pointed out that money may function as a measure of non-material goods through gifts, public subscriptions, etc.

It is surely no extravagant claim to make that the methods of static economics may be extended at least as far as the money measure goes! We shall later see reason for believing that fruitful results may come from an even wider extension of the static notion, at least as a schematic device.

In reducing static and dynamic considerations to common terms, we have now gone far. We have shown that a wide range indeed of the phenomena deemed dynamic, and largely ignored by current static theory, left to the discussion of such innovating students of the "theory of prosperity"

as Veblen, are really in the actual practice of the business world treated in the same way as are the "static" phenomena of the values of physical goods and concrete services. And we have further shown how wide indeed is the scope of the static yardstick, the dollar. But this is only a part of the story. We have generalized statics. Can we similarly generalize dynamics? Or has our generalization of statics merely narrowed the field of dynamic considerations?

To this I reply that we may view the whole field likewise from the angle of what we have called dynamics, or theory of prosperity, or similar name. These terms are not satisfactory, in my view, and I have already used terms that appear to me better. My exposition on this point will be briefer than in the generalization of statics, since I may refer to what I have said elsewhere. In stating Veblen's contrast between "business capital" and "the wealth of nations," I quoted him as follows: "Under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." The capital, or the wealth in general, of older and simpler days was a material matter, concrete goods and services, in his view. The newer items of capital are anomalies, presenting something strange and novel, and sinister. I should maintain that, whether sinister or no, they are in principle at least not _novel_ or _anomalous_. _All economic values are matters of folk-psychology!_ All economic values are social values. All are to be explained on the same general principles that explain the values of the most complicated stock-market phenomena--except of course, that the application of the principles involves less complication in the case of such values as that of a loaf of bread. But value is always a matter of psychological significance, and never a matter of mere material fact. And these psychological significances are not explained by such simple individual phenomena as labor-pain, or marginal utility, but always by reference to the total social-mental system, including its laws, its mores, its inst.i.tutions, its centres of power and prestige, its modes and fas.h.i.+ons, etc. If Veblen has in mind the contrast between goods whose values rest in labor-pain or marginal utility, on the one hand, and values which rest in a folk-psychology on the other hand, the contrast is a false one. The first cla.s.s does not exist. I shall not elaborate this point. I have developed it at length in _Social Value_, and in the chapter on "Economic Value" in this book. I should make the contrast, then, which seems to me to gather up the central significance of most of the contrasts we have been discussing, as follows: on the one hand, we may view the matter mechanically and abstractly, in terms of the equilibration of values conceived of like physical forces, expressed in prices; on the other hand, we may view the economic situation more fundamentally and realistically, seeing the interplay of men's minds, viewing economic values as parts of a social mind, a functional unity of many minds. We may treat society as a mechanism, or we may treat it as a living, pulsing, psychological organization. In short terms, our contrast may be between the theory of value, and the theory of price.

And here we are back to our thesis set forth on p. 559 of this chapter.

The theory of value, as thus marked out, is still an abstraction from the totality of our cross-section picture of social, or even of economic, life. The essence of society is indeed psychological. But men have bodies, and live in a material world, and have an elaborate technology. Many of the factors which students of dynamics are concerned with grow out of biological and technological relations.h.i.+ps, and are connected with physiographic influences. Can we bring all these into our scheme? Giddings and Spencer would answer affirmatively. For Giddings (_Principles of Sociology_, ed. 1905, p. 363): "All social energy is trans.m.u.ted physical energy." Giddings guards himself (pp. 365-366) against a thoroughgoing monism, which would leave no distinction between mind and matter, but in general he would hold to the scientific goal of reducing the physical and psychical phenomena in society to a parallelism, so that concomitant percentage variation could be predicated of them, and so that considerations in one sphere could be expressed by considerations in the other. In the hands of Giddings and Spencer, such notions are handled with caution and discrimination, and command respectful consideration. One feels, however, that the starting point is a monistic metaphysics, and that the philosophical doctrine does not justify itself in its scientific application. In the hands of such a writer as Winiarski, however (_Rev. Philosophique_, vol. XLV, pp.

351-386; vol. XLIX, pp. 113-134; summarized by Ross, _Foundations of Sociology_, pp. 156-157), who makes all mental states mere forms of physical energy, and applies to mental processes the laws of mechanics, the doctrine becomes merely bad poetry! From the standpoint of the needs of social science, and from the standpoint of our present knowledge of social facts--to say nothing of general philosophical considerations--it seems clearly best to me to a.s.sume the common-sense doctrine of dualism as a premise: mind and matter are two different things; mind acts on matter, and matter acts on mind. We are then at this position, when it comes to bringing technological and physiographic factors into our scheme: on the one hand, the values control technological applications, and control the course of industry. New technological devices will be employed when the present worth of their antic.i.p.ated products is great enough to overcome the values that compete with them. Land will be employed on that crop which gives the largest rent, etc. Men's physical activities, and their employment of their physical resources, are _motivated_ by values. That is the _function_ of values. On the other hand, physiographic and technological factors modify the lives and characters of men and peoples. _Values_ are in part controlled by physiographic and technological conditions of life. But these technological and physiographic factors, in order to influence economic _conduct_, must first influence the value system. This they do, (1) by affecting the quant.i.ties of _objects_ of value, and so modifying the marginal relations among the value-scales and the marginal values; (2) by affecting the lives of the people directly, and so modifying the value-scales themselves. Similarly I see no way of bringing the vitally important factor of heredity into our scheme in a direct manner, _in propriore persona_, but only mediately, as it (1) affects the character of the society, and so changes its value-system or its technological activity and volume of products, or (2) as heredity becomes a matter of concern to the society, and so an object of value, with its own place in the value-system.

There remains, therefore, in the field of technological, biological, and physiographic features affecting economic life a considerable residuum of economic problems for which, so far as I can see, no extension of the static method can be devised. I propose no scheme of static price a.n.a.lysis for balancing the effects of poor land and good heredity on the character of a society.[590] The problem must be approached by other methods specially suited to it, which we need not here discuss. But, given the values that rule in that society, we may be sure that our static picture of that value system will sum up much of the influence of the bad land and the good heredity, mingled with the other factors which have determined that set of values.

Once a factor has been introduced into the value system, once it has modified the value-scales, we may treat it by the methods of static price theory. The a.n.a.lysis of the factors controlling the value-scales is the problem of value theory. And here is, indeed, the central problem of the "theory of prosperity." What are the causes controlling the _mutations_ of values? What factors cause values to rise, intensifying economic activity, stimulating trade, spreading prosperity? What brings about the crash in economic values (and consequently in prices), in panics and crises? Why the low values of the period of depression, giving slight stimulus to industry and trade, leaving economic life lethargic, inert? Increasingly it is recognized that the problems are problems of values and prices. It is no part of my plan to give answers in specific terms to these questions. That were the task of a large book! And very much of it has already been done. It is my purpose here, simply, to show that price theory, as developed on the basis of static notions, may be extended, and has in considerable measure been extended, to cover these problems, and that for the same reason that price theory is unable to give really fundamental answers to them, often, it is likewise unable to give fundamental answers to the value problem anywhere--that the phenomena of value are of the same stuff and substance as the phenomena treated by "dynamics" and "the theory of prosperity," and that static theory has been busied chiefly with a limited portion of the field only because the problems were easier there. Much has been made, especially in such a book as W. C. Mitch.e.l.l's _Business Cycles_, of technological factors, and of factors in the psychology of the business man and of the laborer in the ups and downs of business, and particularly of certain elements of scarcity or overabundance of productive resources at critical parts of the economic system, which raise values and prices unduly at certain points, compelling radical readjustments of values and prices elsewhere.

Virtually all of these considerations will fit into the scheme here outlined. They work _through_ modifications of the system of values and prices. H. L. Moore's recent _Economic Cycles_ lays heavy emphasis on physiographic factors, particularly variations in rainfall. But these, too, act on the economic situation through affecting the quant.i.ties of objects of value, and so through modification of the marginal values of goods. The psychological theory of economic value by no means excludes any amount of influence one can find in physiographic or technological factors.

One of the most important factors in the minds of many writers who would treat business cycles, and a factor to which virtually all writers give attention, is the waxing and waning of business confidence, and of the volume of credit. I have given an extended a.n.a.lysis of the psychology of confidence, and of the psychological nature of credit, in my chapters on that topic. It is enough to say here that we have in credit phenomena things which are of the very stuff of economic values in general.

Beliefs and hopes are factors in economic values, and values wax and wane with them. There is little indeed in the psychological and inst.i.tutional aspects of the theory of prosperity which an adequate theory of value would not contain.

The theory of _prices_, as an abstract formula of description, is of primary interest to the scientist, who has nothing to do with the manipulation of concrete values, and who has no interests at stake in the behavior of particular values at a particular time. His purposes are ultimately practical, no doubt, but the practical ends he has in view are, after all, only to lay down general rules of public policy, of a high degree of generality, and he consequently may abstract from a great deal of the concrete causal process. The theory of _value_, in its concrete fulness, is the special interest of the active business man, and especially of the business man who wishes, not merely to _adapt himself_ to changes in values, but also in part, to _control_ and _manipulate_ those values. _He_ must study every factor which does, in fact, bring about changes in the value system. We do not find the market-letter of a brokerage house, or the calculations of a captain of industry, or trust promoter, troubling themselves about marginal utilities or labor-pains! Notions of supply and demand, and the relations of the prevailing interest rate to the capital values of securities, they do employ. Notions of money-costs of production they make use of. But they also give very close attention to questions of governmental policy, to court decisions, to movements in the field of labor organization, to money-market phenomena, and particularly to gold movements and the state of the exchanges, to political campaigns, to the strength of the prohibition movement, to changing fas.h.i.+ons and modes, and, above all, to the general _tone_, the _consensus_, so far as it is ascertainable, as to whether business is good or bad, whether men are buoyant or depressed, to the ups and downs of business confidence. They pay marked attention to the opinions expressed by certain men, great bankers or industrial leaders, not merely because they think these men good judges, but also, and in part primarily, because these men are centres of power, "radiant points of social control," whose opinions make the opinions of others, and whose statements that times are good tend to make them good, and that times are bad tend to make them bad.

For static theory, nothing is more contemptible than the view which "demagogues" often express in Congress that great men in Wall Street make and unmake prosperity, bring about and check panics. For static theory, the only way that big men can lower prices is by selling, and the only way they can raise prices is by buying.[591] Their power to raise and lower prices is thus limited by the amount of their wealth which they are willing to employ in this way. As it is not likely to be profitable to be a bull when the general condition of the "fundamentals"

calls for falling prices, and as bear operations, contrary to the fundamentals, are likewise usually costly, the inference would be that the big men will not, even if they could, alter the course of the market. Their wealth is, after all, not so tremendous, as compared with the aggregate wealth of the rest of the community. But the market takes the big men more seriously! When they are selling heavily, other men are often _afraid_ to buy, such is their prestige. When they give out opinions, these opinions _become_ the opinions of a host of others, almost automatically. When Morgan stepped into the breach in the Panic of 1907 with $25,000,000, it was quite as much the fact that _Morgan_ had acted, as it was the millions themselves, which relieved the situation. Indeed, it was in no small degree the prestige of Morgan which relieved the _disorganization_, which restored the discipline, and made it possible for the elements in the market to work in harmony and cooperation again. Society is a functional unity, and the "tone of business," the ups and downs of prosperity, depend in large measure indeed on the degree to which the lines of communication between the different parts are kept open, on the question of whether each part does its expected task at the right time and in the right way, on the all-together-functioning, the _integration_, of the elements. These are phases of the matter from which static theory abstracts. They are organic problems, not mechanistic problems. Of course, mechanisms get out of order too. But tightening a bolt is a very different thing from restoring confidence and discipline to a market!

Those who wish to control values have their own technology. There is a technology of industry, a mechanical technology, running in terms of pistons and levers and soil-fertility-equivalents, and b.u.t.ter-fat-content, and ton-miles, which is governed by the values.

But there is also a technology of _controlling_ values which involves advertising, making sentiment, keeping up social discipline, effecting the equilibration of values by exchange, keeping "interst.i.tial"

adjustments smooth, which involves a different kind of activity, thought, and ability, and which employs different instrumentalities. Its problems are problems of human nature and social relations.h.i.+ps, its laws are psychological laws, particularly the laws of suggestion, imitation, and the like, its tools are the newspaper, the sign-board, the whispered word, the cigar and the dinner with wine, sound logic, money and credit instruments, the prestiges of men and inst.i.tutions. For men whose work lies in controlling and making values, rather than in making pa.s.sive technical adjustments to existing values, the theory of value, as I have defined it, is of supreme importance.

This, I may say for the critic who may consider the social value theory a highly speculative and theoretical notion, does not mean that the active business man or the advertising writer, has formulated the social value theory in terms of a social mind, conceived of, in the light of modern functional psychology, as a functional unity of individual minds!

The advertising writer is a student of modern psychology, and reads books on the psychology of advertising, which discuss the psychology of suggestion, and the like. But long before such books were written for him, he studied the phenomena involved in his own way. It is not his business to construct a theoretical economics! It is his business to make a market for his wares. He is interested in the scientific theories of modern social psychology only in so far as they help him in that task. He has no occasion to construct a vast conspectus, which shall summarize the whole economic situation, in its social setting. But my point is, simply, that the kind of phenomena which he does study are indicated and stressed and brought into a system in the theory of social value which I have tried to elaborate. As his purposes are different from those of the economist, his method of approach, and his range of investigation, will necessarily be different.

The notion of dynamics has been in a way connected with the idea of evolution, of historical process in time, while the notion of statics has been essentially connected with the notion of a cross-section, a stage, an equilibrium of contemporary forces. How, then, bring the two together? Of course, we may conceive the evolutionary process itself as a series of stages, and the mind does tend almost inevitably to do that.

The fact is, of course, a perpetual flow, with unceasing change. The mind grasps such a notion with difficulty, if at all. Logic is mechanical and mathematical, and mathematics and mechanics are static.[592] But further, we may in large measure bring the historical considerations into a cross-section picture, when it is a value system that is involved. _Past_ facts exert their influence through _present_ values; and _future_ facts, which may be expected to modify future values, come into the present equilibrium as discounted _present_ worths.

When we view the situation realistically, moreover,--which means, when we view it as a living organic, psychological process,--our cross-section does not need to be narrowed to a moment of time. We may see the values not yet in stable equilibrium, but in process of equilibration, with marginal values and prices fluctuating, tending toward a static goal, but hindered by various cross-currents, of "friction," of uncertainty, of momentary values which rest on beliefs regarding the process of transition itself--as when a "bull" on the war-stocks turns bear temporarily, because he thinks that prices may fall before recovering themselves, and going higher. We may see obstacles in the way of readjustment whose importance is itself subject to static measure--labor temporarily out of work, and labor-time lost, at so much per day; uncertainties which give rise to speculation, which calls for the employment of extra banking credit, at such and such per cent; capital-instruments which have to be "sc.r.a.pped," representing the loss of so many dollars. We may see the process of building up new trade connections, at such and such a cost, to replace others which formerly functioned, but which no longer serve, which were once worth so much, and which now are valueless. Watching the realistic process of transition, through a period of time, we may still apply our static yardstick to many of its features.

Above all, do we get in this connection a realization of the fact that the "immaterial capital" of which Veblen speaks is true social wealth.[593] Whatever is necessary for the carrying on of economic life, whatever, if destroyed, must be replaced, before the economic process can go on, and will be replaced by the expenditure of labor and thought and money, is capital. The sales-force is as truly a part of the labor-force of a corporation as are the mechanics. The trade connections which the sales-force has built up is as truly a part of the capital of the business as the machines which the mechanics have made. The static theory which abstracts from this easily leads to dangerous conclusions.

Removing a tariff may well, _after the transition is completed_, give a greater productive efficiency to a country. But what of the cost of transition? May not the values destroyed, and to be recreated, in the form of trade connections, social organization, accomplished adjustments, and the like, be greater than the new values to be gained by better adaptation of industry to the physical resources or the capacities of the labor supply, of the country? In large measure, this question, in a given case, is susceptible to a quant.i.tative answer. The statesman who reckons only the gains which the final static adjustment will bring, and neglects the costs of reaching it, costs not alone in "sc.r.a.pped" machines, but also, in "sc.r.a.pped" social organization, has missed a substantial part of his problem.

The theory of prosperity, and the theory of value, are largely concerned with just this system of social control, by means of which value scales are altered, and by means of which altered values are brought into a new equilibrium. It is a complicated fabric of psychological relations.h.i.+ps, partly inst.i.tutionalized, partly non-inst.i.tutional. The inst.i.tutions--as banks, big corporations, speculative exchanges, and the like, are the nuclei, about which centre much that is temporary, s.h.i.+fting, and flexible. Given time, the whole system is highly flexible--it is organic, and not mechanical.

The serious injury of this system in a country may well be a greater disaster than the destruction of physical items. Let unscrupulous men--or misguided men--bring about a legal repudiation of debts, and the disaster may be greater than the destruction of a city by an earthquake.

That creditors have been robbed is a minor matter, but that credit has been shaken, so that men will fear to lend again or to sell except for cash, may well mean industrial paralysis.

Considerations like these enable us, in substantial degree, to reduce "transitional" considerations to common terms with "normal"

considerations. We can apply the static measure to the "transitional considerations," and we find the values which come into equilibrium in the "normal" period to be generically like those whose variations interest us in the period of transition. Indeed, the "normal equilibrium," if it were ever reached, would also contain these intangible capital items, though many of them would be much reduced, since the work that they have to do would be largely gone, if the normal equilibrium were persistent.

It does not follow from the foregoing that many of the elements in "modern business capital" are not, as Veblen's a.n.a.lysis suggests, sinister and anti-social. To say that their values are true social economic values, generically the same as the values of wheat or corn or whiskey or opium or Sanatogen or milk or tickets to burlesque shows, or silver sacramental sets, or Ford automobiles, is not necessarily to give them a good moral character! Some of these intangible capital goods are thoroughly anti-social, and should be destroyed. This is particularly true of monopoly power, and of popular brands whose value rests in popular delusion. But even here, caution is needed. Is it socially wise to destroy a wine cellar, containing an hundred thousand dollars worth of fine wines, even a.s.suming that Demon Rum is as black as he is painted, and that Veuve Cliquot is his favorite daughter? Will not the economic values which have been destroyed in this moral fervor be recreated? And will not this tend to divert labor and capital from the creation of a corresponding amount of more wholesome economic goods?

Might it not be wiser from the standpoint of the temperance movement itself, to sell the wine cellar--at private sale, of course!--and use the proceeds in the campaign fund of the prohibition party? Of course, there is more still to the story. The destruction of the wine cellar may be done so dramatically, and may be so well advertised, that it will arrest public attention, and tend to create new social values, of a moral and legal sort, which will prevent the recreating of that wine, by changing the direction of demand, and by lessening the sources of supply. Similarly with trade connections, and other intangible capital items. If destroying one means merely that labor and capital will be employed in making others no better, the social gain is very doubtful.

And some sort of system of control of interst.i.tial adjustment, of overcoming friction, etc., there must be.

I wish to contrast the view I have been here presenting with that developed by Schumpeter, in his _Theorie der Wirtschaftlichen Entwicklung_. In Schumpeter's view, the division between statics and dynamics is much more than methodological. The phenomena of statics and dynamics are different phenomena. Statics is concerned with the influence of individual utility-scales, or utility-scales and psychic cost-scales, hedonistic phenomena. Dynamics is concerned with the influence of "_energisch_" (as distinguished from "_hedonisch_") factors. (_Loc. cit._, 128.) Most men are moved by hedonic considerations. Their economic activity tends toward the equilibrium described in static theory. Seeking to maximize satisfactions, and to minimize pains, they tend to get into the "best-possible" situation ("best-possible" under the "given conditions") and stay there. The "energetic" type of men, moved by motives like love of activity for its own sake, love of creative activity, love of distinction, love of victory over others, love of the game, etc., undertake activities which tend to alter the "given conditions" themselves, to alter the structure and technique of economic society, to introduce new ways of doing things, and so to break the static equilibrium. This last type of men is small in number, but tremendously important. Schumpeter's theory of value rests solely in an a.n.a.lysis of the hedonic factors mentioned, conceived of as individual psychological magnitudes. I have discussed his theory of value in the chapter on "Marginal Utility" in this book, and would refer to that discussion here. He makes virtually no use of the value concept there developed in explaining the causation of dynamic change, but instead, as I have pointed out in that chapter, invents new concepts, which do the work of the value concept, which he calls "_Kaufkraft_," "_Kapital_," and "_Kredit_," which do not rest on marginal utility, but rather on the activities of certain centres of economic power, particularly of banks.[594] His picture of economic evolution is that of a conflict between these static and dynamic forces, between "utility-curves" and the psychological factors of the "energetic" type, the former represented in a set of static price-ratios, the latter in a set of dynamic "powers," conceived of, not as sums of money (even though expressed in money-terms), but as "abstract power," which grows, not merely out of the individual psychologies of the entrepreneurs, but also, and primarily, out of the social influence centered in the banker. This power which the banker to-day supplies was in earlier periods supplied by the political power of the despot, and is distinctly a matter of social organization, and social control, an over-individual, social phenomenon, a.n.a.logous to the "social value" which I have sought to put behind all prices, whether "static" or "dynamic." The dynamic man needs "power," either political or financial, to "force" the "static" men out of their accustomed ways of activity. They fear and resist him. He must coerce them. The contrast is thus sharply made between abstract price-ratios, resting on individual feeling-scales, and quant.i.tative "powers," measured in money, resting on a social basis. Between the factors underlying static prices, and those underlying dynamic prices there is, thus, nothing in common.

Statics and dynamics are concerned with fundamentally different phenomena.[595]

If my criticisms of the utility theory of value are sound, and if what has gone before in this chapter holds good, we must restate Schumpeter's contrast.[596] The static tendencies do not rest on any peculiarities of the psychological "stuff" from which static values are derived. They rest rather in the universal tendencies of all values, whatever the psychological factors behind them, to come to an equilibrium. The reason that values, whether they be the values of new and novel things, or the values of old and familiar things, tend to come to an equilibrium is that gains come from equilibrating them. When some values are too low, and some are too high, the opportunities for speculative gain are evident. Arbitraging transactions, as between different places, time-speculation, transferring labor and capital from one enterprise to another, increasing the supplies of some goods and reducing the supplies of other, changing land from wheat to corn, etc., etc.,--all these things are sources of gain, and they will be done, whatever the origin of the values involved. The new, dynamic enterprise, before it becomes actualized in concrete machinery, factory building, etc., and long before its income is actualized in money-receipts from the goods it is destined to produce, becomes an _object of value_. The value is a _future_ value. But it comes into the present as a discounted present worth. As such it functions like any other value, tending to attract in its own direction the land, labor and capital necessary for its realization. It does not differ in its functioning from the present worths of future goods of familiar sorts.[597] It tends, after a process of reequilibration--which Schumpeter, with his theory of crises, has done much to elucidate--to come into equilibrium with the older, "static" values, becomes itself a static value. Indeed, from its inception, it comes under the static, money measure. It enters at once into the scheme of static values and prices, even though it causes readjustment there.

The preexisting static values are themselves to be explained, not as growing out of individual feeling-scales, but as growing out of a complex social psychology, in which some men and groups of men have vastly greater social "power" than others. The preexisting static values are of the same stuff as the dynamic values. But this has already been made clear.

The possibility of presenting an equilibrium picture of social forces, to the extent that those social forces submit themselves to the money measure, the possibility of applying the methods of static price-theory wherever pecuniary concepts may be carried, does not exhaust the possibilities of the static notion, at least as a schematic device.

There are many social values, particularly in the legal and moral sphere, which do not readily come under the money measure, and where such measurements as may be made in money terms seem obviously inadequate. Of these values, as of all values, however, the law of equilibration holds. _All_ tend to come into adjustment of a sort that will allow the maximum of values to be realized. Something of the exactness of the static method has recently appeared in a decision by a famous jurist, confronted with the fact of the conflict of two legal principles. Most judges would go on the legal theory that there can be no conflict in the laws of a single sovereign. Of course, we have courses in "Conflicts of Laws" in our law schools, but the subjects treated in such courses relate to conflicts, say, between the laws of New York and the laws of New Jersey. When a judge is presented with a case of conflict between two laws of New York, he will commonly feel it to be his duty to "remove" the conflict, by making distinctions, till the conflict is whittled away. Not a little bad law has thus originated!

The law is "absolute." It knows no exceptions. It does not obey the law of diminis.h.i.+ng significance. Of course, "_de minimis non curat lex_,"

but that means, not that there is a delicate margin, where the law ceases to apply, but merely that the law disregards trifles too insignificant to attract its attention at all. They are, in mathematical phrase, "infinitesimals of the second order," discontinuous with the interests of magnitude great enough to attract the attention of the law.

There is little room in such a legal theory for notions of the sort discussed in this chapter to find place! But a different theory of the law is implied, and partly expressed, in a recent decision by Mr.

Justice Holmes: "All rights tend to declare themselves absolute to their logical extreme. Yet all in fact are limited by the neighborhood of principles of policy which are other than those on which the particular right is founded, and which become strong enough to hold their own when a certain point is reached. The limits set to property by other public interests present themselves as a branch of what is called the police power of the State. The boundary at which the conflicting interests balance cannot be determined by any general formula in advance, but points along the line, or helping to establish it, are fixed by decisions that this or that concrete case falls on the nearer or farther side.... It constantly is necessary to reconcile and adjust different const.i.tutional principles, each of which would be ent.i.tled to possession of the disputed ground but for the presence of the others." (Hudson County Water Co. vs. McCarter, 209 U. S., 349, 1908.) Here we have a scheme very like that of static economic theory! "The boundary at which the conflicting interests balance"--the _margin_ where the curves of diminis.h.i.+ng value of the two legal principles intersect! A plurality of legal values, in marginal equilibrium! Lacking a tool of thought so convenient as money has proved for the economist, the jurist finds trouble in making his margins precise. He is dealing with quant.i.ties for which he has found no common measure. There is no "standard or common measure" of legal values. Hence, most lawyers content themselves with qualitative reasoning, seeking to avoid the necessity of quant.i.tative weighing and comparison of the factors in their problem by making distinctions of _kind_. Mr. Justice Holmes recognizes the necessity and the existence of legal _quant.i.ties_, and of making quant.i.tative distinctions, _i. e._, distinctions of _degree_. He sees a generic essence common to the whole body of laws, such that marginal equilibria are possible and actual.

So far we have a static system of laws. But the same writer, in a later decision, has said: "And yet again the extent to which legislation may modify and restrict the uses of property consistently with the const.i.tution is not a question for pure abstract theory alone. Tradition and the habits of a community count for more than logic." (Laurel Hill Cemetery _vs._ San Francisco, 216 U. S. 358, 1910.) As these traditions and habits of a community may change, so may the legal values change, and new equilibria need to be reached in a process of readjustment.

But further, in this view, and in the view of the best students of jurisprudence in general, the legal values are not an insulated, self-contained system. In the sentence last quoted, Justice Holmes sees their root in a total social situation. And it is easy to show that economic values, in particular, are part of that social situation out of which legal values derive their power. Legal values enter into economic values. Economic values enter into legal values. And between legal values and economic values are marginal equilibria. There is a vast social system of values, legal, economic, moral, religious, etc., in constant dynamic change, but tending also to static equilibrium. Changes at any part of the system compel readjustments throughout. The process of equilibration is often slow, but slow or rapid, smooth or violent, it is in constant process. For the further elaboration of notions like these, I refer again to my _Social Value_. Here, as in the narrower economic sphere, we have men and inst.i.tutions whose chief activity is concerned with the manipulation and control of these values, with effecting the readjustments, and bringing about the reequilibrations.

They have their appropriate tools and technology. Money and credit are merely part of a much wider system concerned with social control and social adjustment!

To summarize: The problem of this chapter has been to harmonize statics and dynamics, the "theory of wealth" and the "theory of prosperity,"

"normal" and "transitional," and similar notions, commonly held to belong to different spheres, and to be incapable of reduction to common terms. A number of such contrasts have been pa.s.sed in review, and numerous ill.u.s.trations of the various types of contrast have been given.

It is the contention of the present chapter that the most fundamental of these contrasts, and the one which gathers up the meaning of most of them, is that between the theory of value, and the theory of price. The theory of value is dynamic, is concerned with the phenomena of prosperity and depression, is realistic enough to deal with transitions and readjustments; the theory of price is static, and rests in the notion of accomplished equilibrium, abstracting from the problems of friction and transition. The reconciliation comes from two angles: on the one hand we have generalized price theory, showing that in large measure the phenomena with which value theory, theory of prosperity, dynamics, deal come under the money measure, are made "static" by "discounting," and by the application of accounting principles; that this tends to be more and more true as knowledge grows more accurate; that "statics" means especially quant.i.tative, as opposed to merely qualitative, thinking. We have shown further that the static schema is applicable even where the money measure is inapplicable, and even beyond the economic sphere, as ill.u.s.trated by a recent decision of Justice Holmes. The other angle of approach was to universalize value theory, dynamics, theory of prosperity, by showing that all prices, whether "static" or "dynamic" have the same fundamental sort of explanation, that value is always a matter of social psychology, and never a matter of mere individual psychical magnitudes, or of "material fact." This is not to deny that physical facts have their bearing in the scheme: (a) they are among the objects of value, even though not the only objects, and (b) material facts, technological, physiographic, and biological, are the basis on which human nature rests, out of which it has developed, even though human culture including social values has increasingly emanc.i.p.ated itself from immediate dependence on them, and has acquired a partially independent movement of its own. The effort was not made to reduce mind and matter to common terms, but the case was rested in an irreducible dualism, and the causal influence of non-mental factors on the value-scales themselves cannot be measured by the static scheme. The static scheme, a.s.suming the value-scales, gives a precise answer as to the influence of the quant.i.ties of physical objects on the marginal values. The significant fact about the values with which dynamics, theory of prosperity, etc., deal is that they are the values of immaterial social relations.h.i.+ps and inst.i.tutions, in large part, which are concerned with the problems of social adjustment and control, with affecting equilibria in the economic sphere, with overcoming the friction and effecting the transitions from which static theory abstracts. This is a phase of production quite as important as the physical activities of laborers or machines. It has its own technology, appropriate to its problems. In particular, money and credit are part of its tools. Since its problems are to control men's minds, it uses psychological forces. Where the mechanic uses a storage battery, charged with electricity, to move material things, the technologist of economic readjustment employs a dollar, charged with social value, which is power over the action of men. It is as a bearer of value, in form adapted to the problem, that is in highly saleable form, that the dollar functions.

It is the psychological significance of the dollar, and not its physical qualities _per se_, that enables it to do its work. The physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. Given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment.