by Herbert J. Davenport, Chicago: University of Chicago Press, 1908.

Selected Quotations and Interpretations from Chapter 1-19

The book is dedicated to J. Lawrence Laughlin for fostering freedom of thought. [Laughlin was department of the U. of Chicago, which admitted Davenport to graduate school and offered him his first job.


Chapter 1

Various Cost Concepts

A catalogue of the types of costs.

"[I]t is especially necessary to call attention at this point to the distinction between individual (competitive) and social (collective) costs, as of fundamental and far-reaching significance."(7)


Chapter 2-6

Separate chapters on Smith, Ricardo, Senior Mill, and Cairnes


Chapter 7

Further Cost Doctrines

On Hadley, Mill, and Walker.

~2 Sections in the chapter

1. "Labor cost in non-competitive production -- opportunity cost"(84-87)

Cost in the Crusoe situation (85). "Collectivist production would, for the most part, proceed parallel-wise with production in the isolated individual economy."(86)

2. "Opportunity cost and outlay cost in competitive production"(87-93)

Entrepreneurs are evidently of differing capacities, precisely as lands are of different grades."(91) Thus we must find the marginal entrepreneur, Walker says. This is wrong because different entrepreneurs face different alternatives. "It is, in truth, entirely credible that the largest profit-maker in the industry should be the marginal producer."(92)

First statement of the problem: "...our quest is the determination of what the French call the prix de revient...cost conceived as the point below which the producer under consideration will decline to produce..."(90-91) "[E]ach man's cost is simply his prix de revient, the price requirement upon which the continuance of production by him depends. And evidently his price may differ for different volumes of product."(93)


Chapter 8

Profit Defined: Profit and Risk as Related to Cost

Interesting and important point. Quasi-rent earned by lenders may include a risk-cost -- the only case of true risk-profit in the interest relation.(p. 96) Note the assumption that the marginal lender bears no uncertainty.

"The question remains whether the term profit shall serve (1) merely for exceptional, unclassified, lawless gains -- conjuncture profits, as they have sometimes been called, or whether, on the contrary, the term should stand (2) for the broader notion of compensation for the independently working human factor in production, or (3) for the still broader notion of compensation for the independently gain-acquiring human factor in economic activity."(97)

"Number (3), the competitive view, would harmonize (1) and (2)."

"It has been the writer's preference to use the term profit in the third sense...In this sense, profit stands as merely one form of the remuneration of labor and is thereby a subhead under the broader interpretation of the term wages. It points to gain without the intervention of an employer; it is, then, remuneration to the entrepreneur for entrepreneur activity as such. This profit goes, truly, to him who takes the risk, but does not, therefore, go as compensation for the risk or in proportion to it."(98)

A 9-page footnote discusses the concepts of profit advanced by Carver, Fetter, Flux, Seager, and Seligman. He especially sees his concept of profit as compatible with that of Fetter.(98-99)

Entrepreneur activity consists of the "enterpriser's services"(Fetter) and the bearing of risk, although profit is not merely a reward for taking risk.


Chapter 9

Early Utility Theory: Say

Discussion of Ricardo vs. Say on Ricardo's real marginal cost doctrine. Say differed from Ricardo by emphasizing utility and, later, associated the determination of value with entrepreneurship. Davenport tries to establish a link between Say and his own theory. The effort is strained, as Davenport himself admits. Nevertheless, Say breaks from the other classicals.

He makes a qualified argument that Say was more advanced in his thinking about utility and the entrepreneur point of view than all the modern books on the subject.(p. 115) He quotes correspondence between Say and Ricardo on the cause of market prices.(p. 110) Thus, it is possible that he learned his economics by reading Say.


Chapter 10

The Capital Concept

Scarcity alone determines the character of economic goods, not the requirement that labor must be used. This is evidenced by the scenery enjoyed on natural, but scarce land.(124) "Utility and necessity of sacrifice for its enjoyment appear, then, to be the only requisites of value."(124)

We can make a distinction between the technological view and the value view. "[I]f productive factors are to be distinguished according to technological considerations, not two or three but countless categories of productive factors will have to be recognized."(128)

"Technological classification, then, on the basis of the supply outlook, is a hopeless undertaking."(135)

Although we cannot retain the technological distinction between the factors of production, we can retain the distinction between production goods and consumption goods, although "the distinction holds only as socially viewed."(139) This seems to mean that, from the technological point of view, a particular item cannot be placed classified as either a production good or a consumption good


Chapter 11

Capital as a Competitive Concept

Capital as purchase power, from the point of view of the entrepreneur, is the only concept of capital that is valid for inquiries into price and value.(143)

For the socialist society, the technological concept of capital is useless. "The collectivist definition of capital would then run somewhat as follows: wealth held for increment -- wealth in time.

Is this collectivist concept of wealth as fund useful for considering the competitive society?(146) "...for most purposes, the concept does not apply, simply because the activities of men in society are competitively and not socially organized."(my italics)"...a computation of competitive costs [requires] another and quite different, and even a radically inconsistent, concept of capital."(148) This is "entrepreneur capital -- capital in the guise in which the type form of modern business, the corporation, presents it...[It] includes not merely consumption goods in stock, but banking balances, counter money, funds tied up in customers' accounts and in bills receivable of many varieties, corporate stocks and securities, whether held for sale or for investment, and generally all that fund of working capital, more or less unspecialized, requisite for the successful function of a business."(149, italics added)"

He takes Fetter to task (by quoting him) for occasionally slipping into a materialist definition of capital.(147)

Time preference: Consumption goods are held (and not consumed) only "because an advantage, an increment, lies with postponed consumption." "Even with goods deteriorating or decaying, as objectively considered, the advantage is on the side of delay."(147)

"With the acceptance of this entrepreneur concept of capital...there must evidently go the abandonment of the threefold division of productive factors...for...the services of the various factors in value production are, in competitive business, reduced to the common denominator of money price, stand with regard to entrepreneur outlay in an entirely indistinguishable relation, and are paid for as costs out of one common fund of resources, the capital fund of the entrepreneur."(152, italics added)

This fund includes not only material items. It also "includes patents, copyrights, good will, etc.(152) Also included are the expenses of stifling competition, as in cut-throat competition; and the buying of legislatures or city councils for "cogent business reasons."(153)

Throughout most of the chapter, Davenport's exact meaning is unclear. Is he talking about private capital as defined above, about the loan fund, or about that part of the loan fund that is borrowed by businesses. However, he seems to clear things up in his final paragraph when he says: "[I]t is here insistently urged that the category of private capital must not be abandoned, but enlarged to be as wide as the concept of competitive capital; and that this latter concept needs not only recognition, but a markedly increased emphasis surpassingly important among capital concepts..."(154) In this statement, he seems to imply that the private capital and competitive capital are the same and that the concept of capital that both imply should include the idea that out of private capital emerges a loan fund from which enterprisers borrow to finance their activities. This entrepreneur concept of capital is needed, he says, so that "economics may preserve some practical relation to the actual business life of a competitive entrepreneur society."(154) The technological definition of capital may be kept for other purposes; and the "capital-as-an-abstract-fund" conception may be kept for the collectivist society, but for the competitive entrepreneur society, these distinctions are untenable.(154)

Included in this chapter is also a long footnote on Fisher, which concludes that his view of entrepreneur capital differs significantly from his, as well as from Fetter's.(154, fn 8)


Chapter 12

Competitive Savings and Social Capital: Loan Fund and Abstract Capital

or competitive economics, all concepts must be competitive in character."(157)

A similarity between social capital and competitive capital: an advantage accruing with time.(158)

"...the distinction between the social and the competitive concepts has commonly been but vaguely felt and never consistently worked out."(159)

"...[S]aving is merely the postponement of the consumable services of private wealth."(161)

The "loan-fund form of savings capital" consists of (1) money put aside, private saving, non-consumption.(161-162) In addition, it consists of (2) saleable wealth ("some form of purchasing power, whether money or other, in which is expressed and embodied his deferred right of service...").(162) Finally, it consists of monetized debt.(163-164)

We can imagine loans of equipment in a barter society. However, "without some credit intermediary or underwriter, the purchaser's (purchaser of physical capital) medium of payment fails the requisite degree of market-ability -- is not for the purposes of the case at hand a currency...It is precisely at this point that banking methods take on their great important."(163)

"Loan funds -- it begins to look as if for some share of these the term capital is of doubtful propriety -- are even more intangible and incorporeal than savings capital."(169)

Davenport presents an example that illustrates the following conclusions. (1) "debts must exist, that is, collectible rights in money or in other forms of wealth -- for money is for many purposes only a form of credit -- must exist, before these credit rights can be lent; and nothing else can practicably be lent." (2) "A debt that is secured by character is as good an investment and as truly capital as any other debt, if only it be really as secure."(164)

"All that the bank really does is underwrite the credit of the customer; it lends its own credit, truly, but only in the sense of adding its guarantee to the customer's undertaking to pay."(168)

"From the social point of view all technological goods and indeed all social wealth have, in varying degrees, the quality of fixedness. But from the private point of view all capital is mobile, since all wealth facts are salable, and since all wealth is capital in the measure and degree of its market price."(169) "Complete mobility for private purposes is, however, achieved only by the transformation of the vendible item of private wealth into the ...very commercial material or medium of which the loan fund is composed."(170)

Because banks may increase purchasing power through underwriting, broadly speaking, ...[b]ank loan funds must be recognized as intangible and incorporeal facts, a sheer matter of intricacy and complexity in business relations -- meshes of obligation -- a mere scaffolding of promises -- a folding back one upon another of successive layers of credit."(169)

" seems necessary to recognize the loan fund as a distinct economic category."(169)

Comparison of abstract capital from the competitive (or private) point of view and capital from the social point of view. "...[F]rom the social point of view...there...[is no] `spiritual essence' of value hovering over the material forms of capital...But from the view of private competition...all capital, by virtue of its quality of vendibility is, in a sense, unspecialized, mobile, and fluid..."(169-171)

"[P]urely personal claims, if they are enforceable, are as truly capital as are rights secured by collateral or by mortgage; many debtors put in pledge their future earning power, precisely as may a state its future revenues."(173)

"The essential and important kernel of truth in the abstract-capital concept is, then, the obscure recognition of the loan-fund fact."(174)


Chapter 13

Standard of Deferred Payments

Subjectivism -- "...[M]arket values are mere price relations -- exchange relations -- between things of service, that is, between goods subjectively viewed..."(175-176)

Critique of Say on this point. (176)

"If utilities cannot be reduced to would seem to follow that the problem of deferred payments must be worked out in terms of value rather than in terms of utility."(179)

"...[T]o say that two different things at one and the same time have the same value is merely to assert their actual equality in exchange power as referred to some selected commodity or complex of commodities -- a price statement possible only by the temporary or conventional adoption of a standard."(180)

To find a standard for deferred payments, it is necessary "to choose some group or complex of such fashion as to represent a sort of average budget."(180)

Note 4, p. 181ff discusses money as a measure and criticizes Laughlin's discussion.

"...[I]t should now be clear that interest also is not a problem of value or of value surplus but rather of price and of price surplus."(187-188)


Chapter 14


Interest is "to be defined, in the competitive economy, as the premium which present purchasing power, as money or in terms of money, commands over future purchasing power in terms of money."(189)

Begins with a proof that all instruments (goods higher than the first order) earn rentals for time use.(191)

Deals with the Clark-Bohm-Bawerk debate over capital. Says that Bohm-Bawerk"s assumption that physical productivity was a factor in determining interest was the main point on which he failed in his dispute with Clark. He also points out that Wieser was the first to criticize Bohm-Bawerk on this point, although Bohm did not answer Wieser. Clark, also failed, however, because he ultimately employed a concept of social (i.e., socially defined) capital. "Professor Clark appears to believe that what a capitalist 'really estimates' is like quantities of wealth measurable in money;" for really the measurement function is not present."(206)

Bohm Bawerk "denies that long-time consumption goods are capital." (209)

No writer denies "the influence of perspective [time preference], although Wieser criticizes the rational justification for the influence, and is not entirely definite as to its independent sufficiency for the emergence of an interest rate."(213)

"Fetter apparently ascribes the interest phenomenon entirely to perspective, allowing to productivity only such influence as it indirectly exercises through the effect upon the supply of goods with which the perspective principle concerns itself." [In a footnote, however, D. says that he cannot justify this interpretation either by direct quote or strict logical necessity.(213)]


Chapter 15

Interest (concluded)

The chapter begins by attempting to form an image of a moneyless exchange society. The moneyless society is one containing specialization and trade but and indefinite number of media. The "intermediate would be, for different men, and for each man at different times, a different medium."(218)

He quickly shifts to a discussion of deferred payments. He tries to form an image of a society in which there is no conventional standard for the expression of deferred payments.(219)

During short periods of time, value can be expressed in terms of money prices or quantities of the money good. These are not mutually exclusive apparently but D. seems to be concerned that the quantities of the "money good" may divert the analyst's attention away from the fact that capital is intangible and incorporeal. In relations over considerable intervals of time or of space, only money (a conventionally specialized money commodity) prices are relevant. This is because money is the standard of deferred payments. [This terminology seems especially tricky.](218-219)

D. constructs a brilliant two-commodity trading example to prove that money is the standard but not the measure of value through time. He concludes with the following. "The only value link between the two systems [exchange ratios in an imaginary two-good economy at different periods of time] is this of exchange relations established between two quantities of something chosen as standard for the purpose of the deferred-payment relation. And in this standard of deferred payment all notion of equality in value under some value-measure system is lacking. The situation is simply this: By virtue of the fact that the selected intermediate is one of wide acceptability, and offers, as is thought, the closest possible approximation to general purchasing power -- something approaching an equality in utility, in service, is possible; and this is all that is possible...But the money medium is not adapted to measure the service..."(220)

If labor is devoted entirely to capital, no first-order goods would be produced. In the Crusoe situation, saving may be carried so far that there is no additional benefits. Sufficiently modified, similar limitations apply to the isolated individual, although we must add that there are a variety of modifications to be made, depending on the individual's particular wants. D.'s example is of the isolated fisher who already has one or two boats and a fair supply of poles and lines.(222)

In the competitive society, can there be so much saving that there is no additional advantage? One point to recognize is that if the prospects for the future are so fearsome (e.g., anarchy) that many people would be devoted toward saving, a negative interest would be possible. He gives the example of paying someone to care for one's travel bag.(222) He then goes on to say that for a society saving may swamp borrowing. But how about the case where such uncertainty was not present? He discusses this on 223.

But the more important issue is the rate of interest under normal conditions. Without giving an answer, he acknowledges the importance of time preference and that "[t]echnological productivity does not, then for all possible conditions, guarantee an interest agio."(224)

Footnote on interest and depression

Misesian justification for time preference is presented more clearly than I have ever seen it in a long footnote beginning on p. 224]

"...the assumption of willingness indefinitely to postpone consumption is [entirely illegitimate. It amounts to tacitly abandoning] needs and desires as the bases of economic activity, to assume a total lack of demand for products..."(226)

"This view forsakes the fundamental assumptions of the science -- that human desires are the primary fact in economics, and that all production takes place as a mere intermediate toward consumption...(226)

"...[I]f men could content themselves with postponing the services of wealth to an indefinite future, they would never produce anything for either earlier or later service.(226)

"Thus, to assume the general and continuous non-burdensomeness of postponement is to cancel the possibility of all economic discussion -- to saw off the limb upon which all economists are sitting."(226-227)

D. refutes the overproduction (or underconsumption) thesis by pointing out that demand for present goods are always in relation to demand for future goods. It follows that when we observe what the overproductionist or underconsumptionist claims is an excess supply or short demand for near future goods, what we really are observing is a maladjustment of near future to distant future goods.(227)

"[S]peculation is (really) nothing but the desire to have now, on terms of promise against the future, with the hope, it is true, that the future by its larger prices will justify, in terms of price gain, the hurry of acquisition. It is, in the last analysis, an emphasis upon present goods, through present purchasing power in terms of money, as against future money or money credits."(231)

"At all times future facts are a part of the present offer, and, as credit is varying in volume, are a fluctuating share in the total volume of offer. The granting of credit is really a method of making, out of the putative future purchasing power, a present purchasing power; the business of discount banking is essentially nothing but the underwriting of these undertakings against the future."(231) The result is a lower real rate of interest and "a modification in the exchange relations between the unit of currency and the commodities against which currency is being exchanged..."(the level of prices)

How Davenport explains depression. Credit is "an enlarged disposition to promise heavily against the future, in order to have in the present..." Because of credit, "the purchasing power which is being offered against present goods is not at any time solely other present goods or the suspended purchasing power into which they have been converted."(231) But then a change develops. Producers and sellers develop "a marked disposition to refuse to exchange present goods against present goods and to demand in exchange deferred rights of purchase."(231, italics added) Prices will fall. But will the fall clear the market? The problem is that there is a reduced disposition to consume. People want to save. However, the reduced disposition to consume dampens the desire of producers to produce. As a result there is no market for the additional savings.(233) For a time, there will be "an adequate market only for those goods ministering to the more primary classes of needs..."(232)

[Note the method of beginning with Crusoe, proceeding through barter, and ending with the competitive-entrepreneur economy. (225-233)]

"[T]he interest problem, as it presents itself in actual affairs, is the sale of present purchasing power, expressed in terms of the standard, against future purchasing power, expressed in terms of the standard.("233)

He notes that the problem of time discount must be considered within the frame of a monetary system that is not disturbed by purely monetary factors. Thus, he seems to assume that the quantity of money is constant.(238) There is a long footnote that discusses money. It is not particularly revealing.

There is a long footnote on Fisher's "The Rate of Interest," which was published as D.'s book was in press. For the most part, the footnote paraphrases. It seems neither sympathetic nor critical. Fisher believes that the "productivity of wealth has an effect upon interest rates -- that it is a cause --" but he denies that "it is a separate and independent cause."(246) Davenport presents a discussion of the causal methodology implied in the argument. He compares the inclusion of productivity to a person who deliberately tips the scales on a balance. The tipping of the scales, as Davenport sees it, is what productivity does. But the scales apparently always return to their equilibrium. Davenport presents a hypothetical example that he believes proves that the productivity of wealth is an independent cause of the rate of interest. The example assumes a present in which "present needs and desires are so far weak or so far satiated as to approach the limit of non-existence or of disappearance."(246) Yet the individuals appreciate that there will be need tomorrow. What would happen if "for each unit of the existing wealth of today, there may by tomorrow be derived two units for tomorrow's consumption...?"(246) Bidding would cause the interest rate to rise to 100%, says Davenport. He also points out that in discussion the rate of interest, one should adopt the entrepreneur-acquisitive point of view. Thus, he must take account of the possibility that interest may be effected by, for example, the prospect for buying a monopoly right. In addition, he must take account of loan-fund capital. "The rate of time discount, therefore, is a rate fixed and determined in the loan-fund market; all properties -- instrumental or other -- that command a hire receive a value through the application of this interest rate to the computation of the present worth of these hires."(248)

In dealing with the interest rate in a market economy, the "entrepreneur concept of capital is the only one having relevance here, purely because individual and not social productivity is the only productivity in question...Not only this: but the interest rate is determined in the purchase and sale market of the loan-fund form of capital. All the different demands for all the different kinds of present goods, and of rights to goods, express themselves as call for loan funds -- unspecialized purchasing power. The supply of loan the deferred consumption volume turned into immediate and current purchasing power...The value of any instrument of production is the present worth of all the future incomes attributed to it, as computed under the time-discount rate established in the loan-fund market."(241-2)

Now consider Wieser's point that a complete theory of interest requires "an investigation of the distribution-imputation process under which the rate of interest, together with all the other distributive shares accruing under the productive process, is supposed to be determined."(248-249) He answers that the interest problem is a different problem.(250) He uses a comparison between Crusoe and the competitive economy to show that "for both borrowers and lenders, the problem, while worked out in terms of standard and of price, is in ultimate analysis a calculation of present utility against future utility: from no point of view is it, in any other sense than this price sense, a problem of value."(252)

The problem of the precise relationship between technological productivity and the interest rate: "It has become sufficiently evident that technological productivity alone would explain the time-discount phenomenon." Can perspective, by itself, explain it also?(252-253)

A long footnote on credit gets to the heart of an important part of the definition of profit. He says that the ability to borrow on advantageous terms "is an attribute of the human being to whom it attaches, and in close analysis must receive a compensation under the category of profit in the strict sense of the term."(259)


Chapter 16

Rent and Cost -- Marginal Cost and Relative Cost

This chapter on entrepreneurship and entrepreneur costs asks two questions:

1. Does marginal cost ("Is the cost margin") equal the land margin ("an instrument margin")?

2. "[I]n what sense, if any, is one item of supply more price-determining than any other?"(265)

D. believes that a long footnote on cost in Dr. N.G. Pierson's Principles of Economics, translated from the Dutch (Macmillan, 1902), will shed "some light upon the later trend of cost doctrine with the Austrian school."(268)

"That one man is marginal as against another must, it seems, be due to such peculiarities in him, or in his circumstances as render his relation to the market situation a peculiar relation."(271-2)

Answer to the first question: "[C]ost at a[!] margin is purely a matter within the personal aspects of entrepreneurship, a managerial fact, a subjective phenomenon, in which all the influences bearing upon the psychology of choice between different occupations or between occupation and leisure have their place."(273)

"The truth of the case appears to be as follows: There are margins of many and various sorts, all important to the problem of supply."(274) "But some of these margins are of the distinctly personal sort...nor is there any possibility of any instrument margin, an aspect of the entrepreneur problem, and as an expression of the judgment and choice of the entrepreneur fact in production."(275)

"Any change in price will involve a rearrangement in the entrepreneur complex...But whatever may be the modifications which result, they will come about through him as a man marginal in some or all of his activities, and no instrument will be marginal excepting in relation to him."(275-6, my italics)

"[P]ersonal preferences, repugnancies, considerations of climate, neighborhood, home ties, national prejudice, wholesomeness, cleanliness, good repute...are all elements of cost to the extent that they serve to limit supply..."(276)

"All excepting the marginal items of product afford to entrepreneurs a surplus above cost -- producers' quasi-rents, occupation differentials. Of this entrepreneur remuneration, only a part is necessary remuneration -- minimum profit."(276-7)

"Both costs and distributive shares stand, therefore, as entrepreneur adjustments. Each human being has before him to decide, in view of his peculiar situation and adaptation, whether he shall be an entrepreneur, a purchaser of productive powers, a combiner and adjuster of productive energies, or whether he shall sell his own productive energy to another, shall be a hired item, a mere instrument, like the land or the draught horse. The wage-earner differs from the draught horse only by the fact that the wage-earner may become an independent producer or an employing entrepreneur."(277)

"So important is the doctrine of this chapter, especially with regard to the multiplicity of the different margins, and their nature, so great the danger of misinterpretation, and so imperative the resultant call for all possible expositional clarity, that, even at the certainty of some repetition, a restatement of the doctrine appears to be desirable..."278)

"Here are surely margins enough; but there are more...Evidently the margins are multitude; and all that we may say, from the cost point of view is that any one of the agents may, through a change in its costs, become the margin-changing agent -- that is to say, the agent deciding the producer to modify or abandon his line of productive activity."(278-9)

D. talks about equilibrium, normal value, moving equilibrium, etc as being the consequence of independent and competing human agents.

"[M]en as employees are passive facts, mere agents under the direction of managing producers, and are therefore only potentially directing forces."(279-80)

"Entrepreneur computations take all items of outlay cost as data, as definitive, fundamental facts, which, for any other than the entrepreneur point of view, they indubitably are not."(280)

How Ricardo's doctrine of rent should be revised. (281-288)

First mention of "situation facts."(283) These are environmental facts.(282)

"[I]t is not at all certain that the man upon the lowest-price land, or upon rentless land, would more than he pays."(288)

He anticipates his later refutation of the marginal productivity theory of distribution.(289)

Critique of Marshall.(290)

Critique of the notion of the marginal entrepreneur on the basis of the situation facts of "peculiarities of adaptation in productive agents, and peculiarities in entrepreneur ability and adaptation."


Chapter 17

Marginal Utility and Subjective Value (Bohm Bawerk and Wieser)

D. regards the use of the term utility as very misleading and likely to hinder the development of the proper psychological foundations for choice theory.(310)

"It is only when a quantitative relation of utility is asserted with reference to a commodity outside the series -- when utility becomes relative -- that marginally utility, so called, can express itself in price limits or become relevant to the phenomena of exchange."(314)

"[W]ith the accepted terminology of the school, neither consistency of doctrine nor clarity of exposition was readily possible.(318)

"In truth, the Austrian analysis of subjective worth has not yet been fully presented."(322) D. then seems to go on to present it, concluding that "[e]xchange value, estimated or expressed or fixed or worked out 'according to a combination of marginal utility and purchasing power,' becomes not marginal utility or marginal subjective valuation, but marginal relative utility, that is, marginal sacrifice, marginal buyer's offer price, or marginal seller's demand price."(330)

"Subjective Wert is...badly presented when, as over and again in Austrian discussion, it is made exclusively a question of marginal utility." The reason is that what they really mean (i.e., what Bohm Bawerk meant in a particular passage is marginal displacement, or marginal cost).(323)


Chapter 18

Classical vs. Modern: Dietzel vs. Boehm-Bawerk

He spends his second chapter on the Austrians dealing almost exclusively with a disagreement over the meaning of value and cost between Bohm and Heinrich Dietzel in a German-language journal. In 1890 and 1891, Dietzel wrote critical papers on Wieser and Bohm. In 1892, Bohm responded. Davenport's chapter focusses on Bohm's response. Davenport quotes Bohm: "The actual and essential features of the cost law, viz., that cost regulates the value of reproducible goods, that we commonly appraise the goods directly according to costs, that changes on the side of cost cause changes in the level of value, these things the marginal utility theorists have never in the slightest overlooked or denied."

Davenport goes on to paraphrase Bohm: "The issue, he (Bohm) says, is merely as to whether this cost law is final or whether, on the other hand, it rather does not itself need explanation."((345-346).

Davenport correctly identifies this as the heart of the newer, Austrian view of cost. He points out that the classical school did not explain costs. The Austrian school must be credited with facing this issue fully. However, Davenport says that the Bohm's answer only makes "a passable showing."(346) In explaining costs, Bohm Bawerk invokes the standard Austrian theory described above, namely, that in calculating costs, the entrepreneur takes account of the prices of the factors, which are ultimately derived from the marginal prices that consumers are willing to pay for the products that they aid in producing. This is insufficient, says Davenport, because it fails to account for the human agent.(347) He tells what he means by this in two ways later in the chapter. First, he says directly that Bohm is right in insisting that the [price] aspect attaches to the production goods only by way of derivation from the value of the product. But it is equally true that the limitation of supply, whereby value arises, is upon the products only as a derivative from the limited supply of agents.

Then he paraphrases Bohm's own argument in order to show that he too regards the agent as a source of value. He goes on: "And in fact, Boehm-Bawerk says as much; his argument for this aspect of the truth runs as follows: Priority of time is not the point; there is no summer till after the spring, but the spring does not cause the summer. The value of the product is explained by the fact that the production of goods are not in superfluity; put with this the demand, and value comes both for products and for cost goods, -- that is, the product has value by virtue ultimately of the same cause that gives value to the productive good. None the less the value of the product is farthest back in the chain of causation; the production good gets its value from the value of the product. So corn is not high because rent is paid, but rent is paid because corn is high. If the art of smelting ore were lost, iron ore would become valueless, but not iron; while to forget the methods of using iron would render both iron and iron ore valueless..."(351, italics added)


Chapter 19

The Positive Theory and Natural Value

Davenport addresses the third chapter on the Austrian theory to the Bohm's Positive Theory and Wieser's Natural Value. He makes two points. The first and less substantive is that Bohm-Bawerk and Wieser use such slippery language that it is difficult to tell whether the understand the more essential points of the cost doctrines the aim to promote. Regarding Bohm, he says: "That between subjectivist cost, market-value cost, collectivist cost, and entrepreneur cost, there is a shifting so continuous that one is rarely sure of precisely what is being discussed, must fairly be accorded this much of justification, that Boehm-Bawerk himself does not recognize the importance of the distinctions."(353)

Regarding Wieser, he says that although Wieser's book is about collectivist value (value under socialism, without money and calculation), " often there slip in competitive [private market] concepts and illustrations, rarely clearly distinguished, and...the point of view appears to be in perpetual flux between collectivism and competition. In truth, here, as with Boehm-Bawerk, the reader finds that the difficulties of distinguishing between subjective- and objective-value doctrines are extreme."(359)

The second, and more substantive point is an extension of the critique of Bohm on his use of failure to explicitly recognize the importance of entrepreneurship. Bohm had pointed out that in the market for a consumer good, the marginal utility received by a buyer has a cost and that this cost itself represents marginal utilities related to alternative products that could be used with the factors of production. Davenport said this doctrine was either false or too vague to be of practical use. It is false because the prices paid for the factors of production do not equal the marginal utilities of alternative products for two reasons. First, we can by no means be certain that the price paid by any single entrepreneur is, in fact, the marginal price in the market. It would only be the marginal price in the imaginary world of equilibrium and infinitesimals. In reality only the marginal entrepreneur pays the marginal price. Second, there is complementarity among the factors in the alternative uses. This makes it impossible to determine their marginal contribution to the utility enjoyed by the consumers of the other goods.

His discussion of Wieser elaborates on this third reason. The following quote is illustrative: "There is, therefore, for any particular production good, no such thing possible as one specific marginal use or marginal service or marginal utility or marginal productivity, as attributable to it in its own right and independently, or even as dependent solely on the relation of the agent in question to some other production good or goods, but only as also related to the situation and aptitudes and needs of a specific entrepreneur. There must, then, be as many specific marginal productivenesses as there are different entrepreneurs to come into relation with the good in question."(364)

"This [my] appeal to the entrepreneur computation and the entrepreneur bid supplies the missing link in the argument of Wieser with reference to the different equations; somehow, he says, the market out of all the different equations, arrives at a marginal-utility imputation for each productive good. If it really does so, it is done by the bidding of entrepreneurs."(366)

Davenport goes on to correct a statement in Wieser about imputation by inserting reference to the entrepreneur's calculation at every stage where Wieser speaks of a marginal utility or a marginal product.

"It is, indeed, only as working out through entrepreneur computations and entrepreneur competitions, that production goods of any sort acquire value or rental, or rank as costs, and come thereby to have their little or much bearing on the relative volumes of goods seeking exchange against one another."(368)

Gunning’s Address
J. Patrick Gunning

Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung

Taiwan, R.O.C.
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