Institutional Economics

Its Place in Political Economy, Volume 2

Malcolm Rutherford

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351512282
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This book deals with a variety of issues including matters of method, particularly John R. Commons' pragmatism, the role of scarcity and conflict in economics as opposed to a presumed harmony of interest, and the importance of custom and common law as opposed to individual pleasures and pains.

CHATER X
Reasonable Value

I. VEBLEN¹

1. From Corporeal to Intangible Property

Two diverse theories of the modern intangible property have been developed since the year 1890. The one is the exploitation theory of Veblen, the other is the reasonable value theory of the courts. Each is founded on the new idea of property as the present value of future profitable transactions; but Veblen took as the source of his materials the testimony of industrial and financial magnates before the United States Industrial Commission of 1901;² and published it as his Theory of Business Enterprise in 1904. The judicial idea was developed slowly and can be found only in the decisions of the Supreme Court since 1890.

From the United States Industrial Commission’s hearings and findings come such illustrations as follow: Andrew Carnegie had the strategic position in the steel industry in that his costs of production were the lowest and he owned iron and coal mines and the lake barges and railways needed to bring his materials to his furnaces and mills in Pittsburgh. He had not carried his product into the tinplate end of the industry; but he announced his intention of building such a plant with the latest improvements on the shores of Lake Erie. It became plain to all who knew Carnegie’s methods of destructive competition that this new plant would drive them out of the market. J. Pierpont Morgan and Company and their lawyers were then called upon to construct a huge holding company which should take over all of the plants necessary to form an integrated whole of all corporations in all branches of the industry. It was necessary for this combination to buy all of Carnegie’s interests, whose value as corporeal property was estimated on the basis of reconstruction cost at about 75 million dollars. But, owing to Carnegie’s threatening position in the markets, he was able to command 300 million dollars in gold bonds. This difference of 225 million dollars could not be ascribed, on the traditional theory of economics, as the value of the corporeal property. Nor was it incorporeal property since it was not a debt owed to Carnegie. The only other name that could be given to it was “intangible property,the name given by the financial magnates themselves. Veblen rightly interpreted this intangible property as merely an exploitation or “hold-up” value, because it arose solely from the need of all competitors to remove Carnegie from the price-cutting competition which it was known he would initiate.

As for all the other companies taken over by the holding company, they were willing to exchange their stocks for stocks in the holding company. The valuations given to them in terms of holding company stocks were likewise much in excess of the corporeal value of their property. So that when the United States Steel Company was finally organized it had a total capitalization of two billion dollars, including 300 million dollars debt owing to Carnegie and one billion seven hundred million dollars of common and preferred stock, whereas the value of the corporeal property at cost of reproduction was probably less than one billion dollars. This intangible valuation was eventually built up out of profits into a corporeal plant equal in value to the original intangible value. The excess original valuation of one billion dollars above the corporeal property value was given the name “intangible property,” or “intangible value,” because it was asserted that the increased prospective earning power of the holding company would justify that amount of valuation, which eventually proved true.

Veblen, in 1904, could properly say that this intangible value based on expected earning power was literally only a “pecuniary” valuation, and not the “industrial” valuation of the traditional economics which always held that value tended towards the cost of reproduction of the plant and commodities. The Steel Corporation was evidently not a monopoly. It should therefore come under the economists’ competitive standard of cost of production, for the holding company purchased only the number of companies needed to round out an integrated industry. It was purely the exercise of the rights of private property, without monopolization, and this was so decided by the United States Supreme Court in 1920.

Hence Veblen distinguished “capital” as the value of the corporeal property; but he distinguished intangible value, or intangible capital, as the purely pecuniary valuations by business men, according to their strategic power of holding up the community and “getting something for nothing.” In this he was correct.

Thus Veblen was the first who builded upon the modern concept of intangible property, which he derived directly from the customs of business men who used the term. Veblen practically disregarded the corporeal property of primitive society and of the classical, Marxian, and hedonic economists, as well as MacLeod’s incorporeal property of debt. He rested solely on the new concept of intangible property as the present value of the future bargaining power of capitalists.

But he did not investigate the decisions of the Supreme Court. The Supreme Court of the United States, when cases arose, rested its decisions on this same new phenomenon of intangible property, not, however, on Veblen’s exploitation, but on its own historic concept of reasonable value. In some cases this doctrine sustained the contentions of the capitalists, as in the United States Steel Dissolution Suit (1920). In other cases it greatly reduced the values contended for by the capitalists. In still other cases it gave a much higher value to the properties than the capitalists contended against. The court’s valuation of intangible property, however bitterly fought on both sides, plaintiff and defendant—always contained a public purpose—while Veblen strongly contended that a science of economics, like other sciences, does not properly permit the introduction of purpose.

The beginning of the court’s recognition of the new concept of intangible value was in the year 1890,³ when the court declared that the reduction of railway rates by the Minnesota Railway Commission was a “taking of property,” although it was taking, not the corporeal property, but the intangible property of power to fix prices. The court also declared that the taking of property was a judicial question, and not a legislative question, under the Fourteenth Amendment to the Federal Constitution which prohibited a state from taking property without due process of law. In the preceding similar case of Munn v. Illinois (1876), when the court’s meaning of property was corporeal property, the court had held that the reduction of rates by a state legislature was not a taking of property, but was only a regulation of the use of property.⁴ But in 1890 the lawyers of the railway company petitioned the court to reverse itself and to hold that taking the “value” of the property by reducing freight rates was also a “taking” of property under the constitution. They were correct in that what was now taken was not the corporeal property of the company but was the intangible property of the right to charge such prices as the corporation wished and could. In other words, the lawyers were standing for Veblen’s meaning of intangible property. The court accepted their contention to the extent that the taking of the newly defined intangible property was a judicial question to be decided by the Supreme Court and not by the state of Minnesota, and therefore the state rates were invalid.

In this way it was in the year 1890 that the first step was taken toward changing the meaning of property from corporeal property to intangible property. With this change of meaning the Supreme Court usurped what had previously been considered the right of the states, acknowledged in the Munn case, to regulate prices charged by public utilities.

The next significant step in recognizing intangible property as a value entirely different from the economists’ meaning of corporeal property was in the case of Adams Express Company v. Ohio.⁵ This was a taxation case, and the Supreme Court, against the protest of the corporation, raised the value of the property in question, for purposes of taxation in the state of Ohio, from $23,000 to $449,377. The corporeal property of the economists and the common law were the horses, wagons, safes, pouches, and similar tangible property. The intangible property was the whole market value of the stocks and bonds based on the expected earning capacity of the corporation as a going concern, of which Ohio’s proper share among the states was $449,377. In this case the intangible property was eighteen times as much as the corporeal property. The court said, on rehearing, that “It is enough that it is property which though intangible exists, which has value, produces income and passes current in the markets of the world.”⁶

In this case it will be seen that the court recognized precisely Veblen’s distinction between “capital” as the value of corporeal property ($23,000)—corresponding indeed to the prevailing theories of economists—and the new phenomenon of the value of intangible property ($449,377). But instead of leaving the matter, as did Veblen, as a purely scientific hypothesis of economics about which nothing should be done, the court proceeded, under that rule of public purpose which requires equality of treatment in matters of taxation, to raise the reasonable value for taxation purposes from the older value of corporeal property to the 18-fold greater value of intangible property.

One more case will indicate a difference between Veblen’s “scientific” treatment of intangible property and the court’s public purpose treatment: The San Joaquin and King’s River Canal and Irrigation Company had built an irrigation system which, on the principle of Veblen’s intangible property, the Corporation had valued at $18 million. The state of California had furthermore authorized the company to charge rates for water at such amounts as would yield 18 per cent on this valuation. The United States Supreme Court, in the case on appeal from a lower court which had decided favorably to the company, reduced the value from $18 million to $6 million, and reduced the rate of return on this reduced intangible capital from the original contract rate of 18 per cent to the reasonable rate of 6 per cent. In other words, the court reduced the allowable earning capacity of the company about 90 per cent and ordered a corresponding reduction in water rates. So that, while recognizing Veblen’s scientific observation of what the capitalist actually does to build up intangible capital, the Supreme Court deemed it extortionate in this case and reduced the earning capacity to what it thought was a reasonable earning capacity. The court said, in justification of its decision:

“It is not confiscation nor a taking of property without due process of law, nor a denial of the equal protection of the laws, to fix water rates so as to give an income of 6 per cent upon the then value of the property actually used for the purpose of supplying water as provided by law, even though the company had, prior thereto, been allowed to fix rates that would secure to it one and a half per cent a month income upon the capital actually invested in the undertaking. . . . The original cost may have been too great; mistakes of construction, even though honest, may have been made, which necessarily enhanced the cost; more property may have been acquired than necessary or needful for the purpose intended.”⁷

We can thus see the highly different conclusions reached by Veblen and the Supreme Court upon the newly arrived concept of intangible property which each of them was investigating at the same time after its recognition by the court, in the year 1890. The Veblen conclusion reaches a theory of exploitation, the Court reaches a theory of reasonable value. Veblen reaches it suddenly in a book; the court reaches it experimentally by investigation, by mistakes and corrections according to the changing personalities on the bench.

If we look for the foundation of this remarkable difference in conclusions on the same phenomenon of the new capitalism, we shall find that it consists of a difference in the concept of science itself. Veblen’s concept of a science was the traditional concept of the physical sciences which rejected all purpose in the investigation of the facts. The court’s concept of a science was an institutional concept wherein the investigation must start with a public purpose as a primary principle of the science itself. It is the difference between physical science and social science.

Veblen’s elimination of purpose from the scope of science was based on his interpretation of Pragmatism as then set forth by James and Dewey.⁸ He does not seem to have known the Pragmatism of Peirce, which dealt only with physical sciences, nor the Pragmatism of the courts, which more nearly followed Dewey. When James and Dewey took over the name of pragmatism, James applied it to individual psychology, and Dewey applied it to social psychology. In this field they recognized that purpose was the dominant problem of a human science. Hence they were rejected even by Peirce himself⁹ and likewise by Veblen. The latter considered that science is “matter-of-fact” science, arising from the modern inventions of machinery, wherein the scientist eliminates all of the older ideas of purpose or “animism” contained in the concepts of alchemy, or divination, and adopts merely the ideas of “consecutive change,” or “process,” which has no “causation” and no “final end” or “purpose.” “Modern technology,” he says, “makes use of the same range of concepts, thinks in the same terms, and applies the same tests of validity as modern science.”¹⁰

If this is so, then there is no science of human nature. Science becomes only the physical sciences. When applied to human nature, therefore, according to Veblen, Pragmatism

“creates nothing but maxims of expedient conduct,” whereas “Science creates nothing but theories. It knows nothing of policy or utility, of better or worse. . . . Wisdom and proficiency of the pragmatic sort does not contribute to the advance of a knowledge of fact. . . . The mental attitude of worldly wisdom is at cross-purposes with the disinterested scientific spirit, and the pursuit of it induces an intellectual bias that is incompatible with scientific insight.”¹¹

Yet in institutional economics it is exactly this bias which we investigate as a part of the whole economic process. Even when Veblen comes to a specification of these attitudes of worldly wisdom, which he assembles under the name of pragmatism, they turn out to be special cases of his general idea of institutional conduct, for, he says, the intellectual output of worldly wisdom

“is a body of shrewd rules of conduct, in great part designed to take advantage of human infirmity. Its habitual terms of standardization and validity are terms of human nature, of human preference, prejudice, aspiration, endeavor, and disability, and the habit of mind that goes with it is such as consonant with these terms.”¹²

When we examine these terms of “worldly wisdom,” we find that they are summarized in our concept not of a vague human nature, but of transactions and the working rules of going concerns wherein collective action controls individual transactions. In the field of jurisprudence these terminate in the theories of reasonable value and due process of law, always inspired by the collective purposes of the parties who make rules for a conflict of interest to be decided with the public interest in view. But, with Veblen, whose theories are not derived from judicial decisions but from the evident exploitation of capitalistic transactions when left unregulated by law, institutionalism becomes all of the exploiting devices which capitalists can invent and use.

In other words, we use the term “pragmatism” always in the scientific sense of Peirce as a method of investigation, but we consider that Peirce used it only for the physical sciences where there is no future and no purpose, while James and Dewey used it always for the human sciences, where the subject-matter itself is a pragmatic being always looking to the future and therefore always motivated by purposes. Thus, without leaving in the air all the enumerated special cases of exploitation, we collect them together in the general concept of all kinds of collective action in control of individual action according to the evolving working rules of the various customs and concerns. These rules and concerns can also be investigated by the pragmatic method of science, just as the technological rules of the physical sciences can be investigated; and they can thus be investigated as “matter of fact” in the evolving decisions of courts and arbitration tribunals, and in the changing meanings of reasonable value, as well as in the unregulated exploitations of Veblen.

It is in the changes of these collective rules, including custom and going concerns...

Table of contents

• Cover Page
• Institutional Economics
• copy
• Contents
• INTRODUCTION TO THE TRANSACTION EDITION
• PREFACE
• X. REASONABLE VALUE
• XI COMMUNISM, FASCISM, CAPITALISM
• INDEX