1. Outside of monopoly considerations. But see chapter VI.
2. This is intended as a statement of historic fact, not a dogma of necessity or desirability. To the extent that in behavior of any other sort principles may be discovered of a sufficiently general applicability to enable useful conclusions to be drawn from them, there is no reason why such principles should not be incorporated in the premises of pure theory. On the other hand, it is indisputably legitimate to begin, as an early approximation to reality, with the assumption that all the behavior of which we treat is of the character which certainly belongs to a great part of it. In any case we have to separate fundamental tendencies by such a process of analysis (i.e., abstraction) if we are to know anything about them individually. Here we are not concerned to inquire into the possibilities of an economics of instinct and reflex, much less to build up the science; we rest on the fact that the historic body of speculation has dealt with that section of behavior which we call "conduct," and, in line with our leading aim, point out the corresponding limitations of the conclusions from the reasoning. It would be futile to insist further (for those who have not grasped the point already) that limitations are no valid objection to a theory,—may even be a condition of its having any worth,—but the limitations must be recognized and appreciated.
3. It is impossible to follow out this line of thought to the length that its importance really justifies. Considerations somewhat along the line suggested are ably put forward in a lecture on John Ruskin as an Economist, by Patrick Geddes (The Round Table Series); also by Professor H. W. Stuart in his essay on "The Phases of the Economic Interest," in the volume by Dewey and others entitled Creative Intelligence. Cf. also Wesley C. Mitchell, "Human Behaviour and Economics," Quarterly Journal of Economics, vol. XXIX, pp. 1 ff.
At the opposite extreme a presentation of economics uncritically rationalized and devitalized to the point of approximate chemical purity may be found in the writings of Professor T. N. Carver. The old economists employed the concept of an economic man deliberately and intelligently; for Carver he is literally the man in the street.
4. The extinct civilizations of Mexico, and especially of Peru, are alleged to have been largely of this character.
5. For fuller statement see below, chapter V.
6. We must by no means be understood to assert or assume that these things are done ideally or even in the best practicable manner by the free exchange system of organization. In the first and third problems in particular, the formation of the social value scale and the use of resources in furthering progress, its methods and results, are open to severe criticism. But again we do not assert that there is any better method or solution practically available. It is our business simply to analyze and describe the workings of a purely voluntary, individualistic, competitive system in relation to the fundamental tasks of organization.
7. It is outside our purpose to attempt a detailed classification of wants. We may notice in passing the difficulty of distinguishing between really different wants and different means of satisfying the same want. For example, we may speak of the want for food, or wants for different foods; one can supply the place of another within limits, but only within limits, and finally the desire for variety itself becomes a want. In our view wants must be classified for the purposes of economic science in accordance with the actual market classification of goods. Nor shall we pretend to go into the psychological problem of the basis of desire. Our discussion deals with things in relation to conduct, and it is a matter of no concern whether we want the things or the conscious states we expect to derive from them, or what, so long as the relation between the acts themselves and the material changes toward which they are directed is clear.
8. There seem to be and perhaps are exceptional cases where this description does not fit the facts; there seem to be, that is, absolute wants, based on absolute limitation and not on limitation due to conflicting demand for the means of satisfaction. These are certainly of negligible importance in economics, however, and on scrutiny they have a tendency to lose the character of "wants" altogether. It is hard to see how a science can deal fruitfully in a constructive way with utterly capricious phenomena; of course it must deal with them in the sense of recognizing that they exist and form a limitation on the completeness of theory, but they can hardly be taken account of in the theory itself.
9. We carry some wants to complete satiety because it takes less effort than would be required to calculate accurately the most desirable place to stop when this point would be near the absolute satiety limit, as in the case of eating bread, for example. The fact may serve to illustrate the fundamental "irrationality" of a perfectly "rational" attitude to life. One of our most significant "wants" is freedom from the bother of calculating things or making close estimates. Cf. J. M. Clark, "Economics and Modern Psychology," Journal of Political Economy, vol. 26, nos. 1 and 2.
10. Even "for consciousness" the difference between pleasure and the absence of pain and conversely, though real, is of an "accidental" and very elusive character; we cannot formulate a difference between the two series or classify experiences between them. It is too obvious to call for discussion that the same event will be a pleasure to one person and a pain to another, and even pleasurable to the same person at one time and painful at another, according to circumstances, and, especially, expectations. The difference fades out on scrutiny. An inheritance of a hundred thousand, which is a pleasure to one to whom it is a surprise, may be an intense grief if he has expected and made his plans for ten million. A prison sentence is undoubtedly a source of joy to a man who counted on being hanged, and it is ridiculous to say that it is "really" only an escape from a worse pain, or the inheritance a deprivation of a greater pleasure. The comparison of alternatives and fact of preference is the real thing; pleasure and pain are accidental and arbitrary matters.
11. The phrase "equal utility," as we shall presently see, should be taken to refer merely to the fact of indifference in choice, and not a comparison between quantities in the true sense at all. We avoid the expression "marginal" utility, because of its implication that there is a difference in the significance of different portions of the same supply. In speaking of the utility of a supply, however, it is sometimes useful to have some word to distinguish between the utility per unit and the utility of the supply as a whole. When it seems advisable we shall use the expression "specific utility" to indicate utility per unit.
The general method of taking the principle of choice as the starting-point of economic reasoning and treating "diminishing utility" in a comparative sense has been used with especial clearness and force by Wicksteed (Common Sense of Political Economy), and is also adopted by Fetter in his recent work (Economic Principles). Economists generally have been coming to recognize that the psychology of the subject is properly behavioristic; that an economist need not be a hedonist (Jevons and Edgeworth notwithstanding), and that he does not need even to consider the issue between rival psychologies of choice. See Mitchell, "The R鬺e of Money in Economic Theory," Proceedings, Twenty-Eighth Annual Meeting of the American Economic Association. The principle of relativity of utility and value holds in the same way under any theory of motivation. B. M. Anderson, Jr. (Social Value, and Value of Money, chap. I) advocates a theory of absolute social value, defining value, as we have done, as power to motivate conduct. It is hard to explain his failure to see that this notion is as relative as any other, is in fact the most obviously relative of all. Motivation of conduct means of "this" conduct rather than some other, and is obviously inconceivable apart from a situation presenting alternatives between which comparison and choice must be made. Davenport, also (Economics of Enterprise, chap. VII), while insisting on the importance of relative utility in economic reasoning, treats utility itself as an absolute magnitude. The present writer finds it impossible to conceive such an entity.
12. Close scrutiny makes it appear doubtful just how much real explanatory value the viewpoint of the utilization of resources adds to the bare principle of combining alternatives. It seems that what we call a "resource" is such, not on its own account, but solely because of the uses to which it can be put, and its quantitative aspect, how much resource there is, is still more evidently determinable only in terms of the use. But at least the resource idea helps us to mediate in thought the fact of the quantitatively alternative character of the opposed lines of utilization, as is shown by the fact that we habitually make use of it. The form of the unsophisticated psychosis in regard to sacrifices or "costs" is in fact a bit puzzling. If we ask what a thing has cost, we seem inclined to answer first in terms of money or effort, etc., i.e., of "resources"; but when pressed, we are likely to go back of the latter and evaluate the resource in turn in terms of some other utility which might have been had for it. The "ontologizing" of the notion of resources seems to be an illustration of an "instrumental concept," but one which it would be difficult to get along without.
13. Principles of Economics, book V, chap. II, sec. 1.
14. Which, to be sure, is not very far. Nor is this any criticism of the boy. Quite the contrary! It is evident that the rational thing to do is to be irrational, where deliberation and estimation cost more than they are worth. That this is very often true, and that men still oftener (perhaps) behave as if it were, does not vitiate economic reasoning to the extent that might be supposed. For these irrationalities (whether rational or irrational!) tend to offset each other. The applicability of the general "theory" of conduct to a particular individual in a particular case is likely to give results bordering on the grotesque, but en masse and in the long run it is not so. The market behaves as if men were wont to calculate with the utmost precision in making their choices. We live largely, of necessity, by rule and blindly; but the results approximate rationality fairly well on an average.
15. The discussion assumes that the quantitative relation between the alternatives themselves remains unchanged, that one is sacrificed for the other in the same ratio throughout, or "resources" converted into both at the same rate, In practice this is only exceptionally possible; in general not only the relative importance of given quantities of alternative goods will change as the supply changes, but in addition the amount of one which must be sacrificed to obtain a given amount of the other will increase as the supply of the first increases; i.e., a "law of diminishing productivity" (likewise a law of proportions merely) becomes operative in addition to the law of diminishing utility (and works in the same direction).
Professor Patten has raised the objection to the utility analysis that consumption also requires time, which must be saved out of the productive operations. (See Annals, Amer. Acad. 1892-93, pp. 726-28. Cf. also Edgeworth, Mathematical Psychics, p. 68, where the energy as well as time required for consumption is considered.) It seems logically more accurate, however, to include in production everything except the actual experience of satisfaction, and if this is done the objection loses its force. In our method of approach to the problem, viewing it as a matter of choice between (i.e., combination of) alternatives, and taking the alternatives simply for whatever they may be in the facts of the case, the whole issue loses its relevance.
16. This may be expressed in technical phrase by saying that they are "ordinal" rather than "quantitative"; they are variable, but not measurable, can be ranked, but not added. The nature of this attribute will lose its mystery if any simple sensation, as a sensation, is considered for a moment. It is easy to tell when one light is brighter than another, impossible to tell how much brighter. The intensity of light is indeed "measured" by science, but it is done by a method analogous in principle to the discussion of utility above. One light is removed to such a distance that it becomes equal in intensity to the standard, and the distance is measured. Obviously this does not involve the measurement of sensation at all. Similarly, a thermometer does not measure the sensation of heat, or a balance that of weight. A better illustration of "ordinal" variables is furnished by the field of 鎠thetics (another form of "value," of course). We can tell that one poem or picture is better than another, but no one would seriously propose measuring the superiority. To be sure, in school and in contests we may go through the motion of "grading" such things (even deportment!) on a percentage scale, but no one whose opinion is entitled to respect attaches any particular weight to the results of this make-believe.
17. That to a considerable extent purchases are based on momentary impulse and not on an estimation of relative long-time significance, is, of course, true, and perhaps increasingly so with the development of the "anti-social" arts of window-dressing, display advertising, and salesmanship. This is one of the important "allowances" that has to be made in applying economic theory to actual fact, until the progress of the science reduces the phenomena to general laws and incorporates them into the deductive system. (Cf. above, p. 52 [II.III.2-3—Ed.], and note; also p. 61, note. [II.III.17, nn8—Ed.]) Effects balance out to approximate rationality under the law of large numbers.
18. The doctrine of the surplus is one of the few points where the writer is compelled to disagree with Marshall on a fundamental matter of doctrine. (See Principles, 6th ed., pp. 125-33, esp. p. 129, note.) The question relates to "scope and method," however, rather than to fact or logic. I simply cannot see any use for the notion in understanding human conduct or explaining economic phenomena, and am convinced that the confusion of viewpoint which underlies putting it to the fore has led to serious error and the drawing of wholly irrelevant conclusions from economic reasoning. Moreover, an appeal to "unsophisticated common sense" seems to fail utterly to substantiate the existence of the phenomenon. A man might pay, say, a thousand dollars for the "first" loaf of bread (whichever one that is) rather than do without it, but it does not follow and is not true that when he gets it for a dime he gets $999.90 worth of free satisfaction. Various thinkers have perceived the mythical character of these alleged surpluses; it is hoped that the argument above will suggest the source of the error and so render it more easily identified and avoided.
19. Pages 64, 65 [II.III.22-24—Ed.].
20. Dependent members of the society must be completely dependent on some particular individual in it. The wants of any dependent person will then operate only through wants on his behalf felt by his sponsor, and we need not consider them at all. We need simply regard the independent members of the society as having normal solicitudes in regard to families, etc., but each person enters into economic life on an absolute equality with others or not at all.
The meaning of the above assumptions is not necessarily that they form a complete description of the people and their relations. This is but an emphatic way of saying that we here consider only their market behavior, which is assumed to conform to these specifications.
21. It goes without saying that our imaginary society is "isolated." Every individual who has anything at all to do with it is in it and of it on a par with all the rest.
22. We might characterize such a society as a "handicraft" system in contrast with "enterprise," in which the operative has lost his responsible status and lives, not by the production and sale of a commodity, but by the sale of productive services to an entrepreneur.
23. We treat the entire stock as for sale without reserve. The demands of present owners for their own goods, which underlie any possible reservation prices, are in fact no different from the demand of other persons, and the situation as a whole is most truthfully and significantly represented as given quantities of goods over against given dispositions to own them, since the question of whose disposition it is has nothing to do with the price that will be established. We must, of course, include the demand of present owners in the demand for every good; that it is "backed up" by the good itself instead of some other good in hand has nothing to do with the result. (Cf. Davenport, Economics of Enterprise, chap. V, pp. 48 ff.)
24. The problem of a perfect market is best treated mathematically (i.e., symbolically) and has been well handled by mathematical economists. See Edgeworth, Mathematical Psychics, pp. 40 ff., and Marshall, Principles, Appendix F, and Mathematical Appendix, note XII bis.
25. Easily proved by disproving the contrary. If exchanges be thought of as taking place at different prices the buyer at the higher price and seller at the lower will get together at an intermediate figure.
26. These two propositions are often treated as equivalent in economic discussion, but the relation between them is not so simple as that. To prove the second from the first, suppose that at any given price the individual has determined upon the proper amount to purchase. (For the sake of similarity with the pecuniary situation let us leave the purchase good out of account and think of a comparison between two commodities being bought with money which has no commodity value.) Now let the price of one commodity rise, relatively to that of another. If the commodity which has risen in value is a very important one, it is probable that the individual will spend as much of his resources for it as before, quite possibly even more. But he will not buy as much of the commodity, measured in physical units. For to do so he would have to spend correspondingly less resources for the alternative good, and buy less of it. But if he buys the same amount of one good as before, and less of the other, the utility ratio between the two is upset (since it was in equilibrium), and a given amount of resources is buying less utility in the good of which relatively more is purchased; resources will therefore be diverted from this good to the other. That is, he will buy less of the good which has risen (relatively) in price. Q. E. D.
27. Pages 66 ff [II.III.26 and nn13—Ed.].
28. It is also possible, but complicates matters needlessly, to plot the demand of others than present owners of the good, only, in the demand curve, and draw an ascending curve to represent the sales at different prices taking account of the present holders' reservation prices. The same data will give the same price point whichever method is used, and the one described in the text is the more significant description of the situation, since there is no practical difference in the causes or motives back of reservation prices and demand prices.
29. Seligman's treatment (Principles of Economics, pp. 179 ff. and 198 ff.) is a particularly glaring instance of the organism fallacy. B. M. Anderson, Jr.'s Social Value involves the same error. Anderson palpably confuses social influences back of individual judgments and preferences with social judgments and preferences in any proper sense. Of course the individual is a social product, but consciousness is still an individual phenomenon, and the conduct with which economists are concerned no less so. It is individual purchases and sales which fix prices, not social, unless in a socialistic state or one organized in some other way than through free exchange between individuals, the kind economics deals with.
30. See above, pp. 76-80 [II.III.39-50—Ed.].
31. The use of money does not affect the theory at all, and the use of circulating credit not in any way that vitiates the argument, if it does not change in value.
In one respect the actual situation is very much simplified as compared with the theoretical, and the disparities which would otherwise arise mitigated. The continuity of the process and the constant existence of published prices means in general that sellers will not come into the market at all unless they are willing to take the quoted price (or more) and buyers not unless they are willing to pay that or anything less. It is then easy to see how an excess of goods offered or an excess of purchase offers will move the price downward or upward to the equilibrium point. The real, practical problem, that is, relates to price changes, not to the establishment of price, and is vastly less complicated than the latter.
32. The other branch is the theory of distribution under static conditions, but under our present assumptions there is no such problem since joint production is absent.
33. It will be noticed that our cost curve is one of increasing costs. This is the only case to be considered from the present point of view. The question of decreasing costs comes in at a later stage of the analysis under more complicated conditions. It is obvious that to increase the production of any good involves the diversion of resources from producing other goods, which will raise their value while lowering that of the good first considered, and since resources are valued according to the best available use, this means increasing cost with increased output. At the present stage of the argument there is no problem as to the cost of any unit of commodity or yield of any unit of productive agency, since only one kind of agency is used in making any one good.