Knut Wicksell

Selected Essays in Economics, Volume 1

Bo Sandelin

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135748630
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Knut Wicksell made enormous contributions to capital theory, monetary theory and fiscal policy. However whilst his books are widely available in English, few of his more than 800 articles have ever been translated. This volume, first published in 1997, includes new translations of Wicksell's contributions to marginalism and capital theory; public economics and unemployment.

Part I

MARGINALISM AND
CAPITAL THEORY

1

IN DEFENCE OF THE THEORY
OF MARGINAL UTILITY

In the third number of this journal for 1899, my fellow-countryman and friend Dr G. Cassel published an essay ostensibly intended as a synthetic presentation of the theory of prices according to Walras, but actually comprising in the main a critique of modern theories of value.¹ This critique boils down to the judgement that ‘absolutely nothing is left of the formulas presented by the theorists of marginal utility that is capable of standing up to rigorous criticism’. However, Cassel's essay includes a substantial number of arguments whose correctness must be challenged. Moreover, since I (along with many other writers) am directly attacked by Cassel, I take the liberty of making a brief response.

Cassel first criticizes the theorists of marginal utility on the grounds that it is impossible to measure in real terms and make a direct comparison between the various needs either of a single person or of a number of people compared with one another. For any measurement, he claims, demands a unit of measurement, and the theorists of marginal utility have never established and can never establish a unit of this kind. Rather, we only gain a measurable sign of psychological processes, of the varying intensity of our feelings, by observing some kind of outward effect they have, i.e. in the case in question, by evaluating the goods to be bought or sold in terms of some conventional yardstick, most simply in monetary terms. ‘In money’, says Cassel, ‘the individual possesses a scale of value by the aid of which he is able not only to classify his needs, but also to express their relative intensity in numerical terms. If need be (i.e. if I cannot get it more cheaply) I am prepared to pay 10 marks (but no more) for a certain good. For another good I might perhaps pay up to 20 marks. This means that not only is the second good more important to me than the first, it is also, over and above that, precisely twice as important.’ In passing, in conventional linguistic usage this is only true when relatively small portions of my assets or income are involved — in other cases it is false. For example, I should if necessary spend half my income on accommodation and dress appropriate to my social class, assuming the prices of other goods remain unchanged; for food I cannot, of course, spend more than my whole income, even if I need to. Does that mean that food, for me, is only twice as important as accommodation and dress appropriate to my social class? ‘Thus’, Cassel continues, ‘money is a scale of value for the individual, and by means of trade it becomes a shared, public scale of value, too. For if A and B are prepared at any time to exchange their units of value, the one mark coin, for the same goods, this proves that A's and B's scales of value are in fact identical…. It is of course impossible a priori to compare the intensity of A's needs with B's. At least such a comparison lies completely outside the domain of economics. But if I make the assumption that A's and B's needs are of equal intensity as soon as they both evaluate these needs at the price of one mark, then I have derived from the psychological presuppositions all that is of significance for the economic side of the matter.’

No more precise justification for these claims is to be found in Cassel's essay. In response I should now like to observe the following. To take first the case of a single individual, a comparison, and a direct comparison at that, between the intensity of our various needs is not only possible, it takes place, as it were, every minute of our life. According to circumstances, each of us prefers to satisfy one of our needs — for sleep, reading, exercise in the fresh air, etc. — rather than the others, without any need to undertake a prior valuation of these needs in monetary terms. Of course, in this process our judgement of value generally goes no further than to rate two different needs as approximately equal in importance to us, or to rate one of them somewhat higher, or even markedly higher than the other, but it is really only a step from this to a precise numerical evaluation. For example, let us suppose a boy already in possession of a stock of apples and nuts is prepared to exchange one of his apples for ten more nuts, but is also, on the other hand, prepared to give up nine nuts from his stock in order to acquire one more apple. Then, obviously, he values one apple above nine, but below ten nuts, that is, at approximately 9½ nuts. But not only is that the case: under the given conditions he values the nuts to be in turn given up or acquired almost equally, and therefore considers the value of an apple 9½ times that of a nut. Now for those around him, to be sure, the boy's judgements of value are perceivable only through their ‘symptoms’, their ‘economic expressions’, but for the boy himself the unmediated intensity of his feelings, the amount of pleasure he anticipates from the apples on the one hand and the nuts on the other, is obviously decisive. It is clearly this, and nothing else, that Böhm-Bawerk intends to emphasize in his polemic against Dietzel, mentioned by Cassel (p. 399). Böhm-Bawerk ‘does not (as Cassel believes) claim to know how much Robinson's hut is worth’. He merely asserts that Robinson himself knows it, in other words, that he has an unmediated sense of the utility of his hut and of his stock of provisions, and that it is just this sense that forms the basis of his judgement of their value.

Of course, it is a rather different matter when dealing with different people, or with the same person in different circumstances. A direct comparison between the intensity of the emotions felt by different individuals is of course out of the question, but this by no means prevents a comparison being possible — not as might be supposed by means of money, but rather via induction and analogy. When dealing with people of the same age, the same sex, possessing the same degree of education, etc., one can reasonably assume that their elementary needs — precisely those that are significant for the science of economics — are virtually the same; and if in addition they have equal wealth, then the extent to which they can and will satisfy these needs is surely probably identical. If on the other hand all these circumstances or even just some of them are different, then of course the comparison will involve the greatest difficulties; it could really only be made by an individual who himself had lived in all these circumstances and preserved a vivid memory of his impressions. Here indeed the imperfection of the standard is commonplace: the old forget they were once young, the rich they were once poor (if they ever were poor at all), the rulers are incapable of comprehending the ruled as creatures of their own ilk, etc. But this does not mean giving up hope that the technique of measurement may be perfected. On the contrary, progress in psychophysics towards this end promises well. Fechner's well-known psychophysical law — first proposed, if I am not mistaken, by E.H. Weber for sensations of pressure — according to which the minimum distinguibile, the just perceptible change in an impression on the senses within certain limits, always demands the same quota of the strength of the stimulus used in each case, constitutes in fact a kind of confirmation of D. Bernoulli's and Laplace's earlier speculations about the relation between fortune morale and fortune physique. To the best of my knowledge, no theorist of marginal utility doubts that in the case of real — not just theoretical — measurements of this kind one necessarily requires a unit determined in advance, and that this unit can only be some use or another, and a concrete use at that, taking effect under quite specific conditions — let us say, for example, the use that a pair of work boots affords a middle-aged agricultural labourer living in Brandenburg over the course of a year. The only one who seems to overlook this fact is Cassel himself when he recommends money as a general standard even for subjective valuations, for like other things, money to be sure is useful, but this usefulness is obviously completely different in differing circumstances. It is like wanting to use the length of the day at the winter solstice as a measure of time, or the length of the seconds-pendulum's swing, which also varies with geographical latitude, as a unit of length. I hardly need to remind Cassel that the element assumed as fixed in measurements and similar processes can never be something purely conventional. It only became possible to make the rate at which the earth turns the basis for all measurements of time when a process of induction had demonstrated that it possesses in the highest degree the quality that we understand as uniformity of motion. As we have seen, Cassel himself terms the process in question ‘an assumption’, at least when dealing with different individuals, but he has been unable to convince me of the usefulness or even the admissibility of this assumption. In the theory of prices, assuming free competition, it is harmless, to be sure, but only because there it never comes to be employed in practice, since, as Cassel himself emphasizes, when determining prices under conditions of free competition there is never any need at all to compare the varying utility or marginal utility a good has for different people, but rather, only its relative significance over against the numeraire good for one and the same person. However, price formation under free competition far from exhausts the domain of economics, and as soon as one progresses from purely individualistic to altruistic or social points of view, the concept he proposes, or rather the way in which he confuses concepts, turns out to have dire consequences. Cassel himself later admits this, moreover, even if with a rather dissatisfied air!

Oddly enough, Cassel later attributes to other writers his own definitions of subjective value and marginal utility in place of those they use themselves, as I shall now show.

In order to determine the price ratio of two commodities on the market Walras, as is well known, assumes this ratio itself as an independent variable and the quantities of goods given and received in exchange as variables dependent on it. Jevons, in contrast, had viewed precisely these quantities as the independent variables in the problem, but obviously that means taking into account as many (or twice as many) unknown quantities as there are exchanging persons. If on the other hand we restrict our attention to just two exchanging persons, which may have been Jevons's original notion, then again the law of competition (the law of indifference according to Jevons), which entails that there can only be a single uniform price for each commodity on the market, is deprived of its effect. For this reason Jevons has hit on the idea of bringing commodity owners together into two groups, so-called trading bodies, but now has to operate with the unclear and in fact undefinable concept of a marginal utility valid for each of these groups in its entirety. Cassel considers the observation I make on this (Öber Wert, Kapital und Rente, p. 47) ‘incorrect’. ‘If I know’, he says,‘that I can sell to a group of buyers who have already acquired x kg of a commodity an additional 1 kg for at most y marks, then I am surely justified in designating y this group's marginal utility. When I use this term, it must simply be ignored for a moment who buys this final kg; for this buyer in any case the marginal utility is equal to y, and the marginal utility of the group coincides with his.’ I could of course simply respond that this concept of marginal utility is actually not the one Jevons had in mind; but in addition I must emphasize that the method indicated by Cassel is just as impracticable, unless it is a matter of the purchase and sale of a few discrete items of the same size and quality, as in Böhm-Bawerk's well-known example of the horse market. For the level of the marginal utility in Cassel's sense depends not only on the size of the stock of goods acquired, but also on its distribution among the buyers (and similarly with the seller's marginal utility). But in order to ascertain this level — assuming the personal allocations of the exchanging individuals as given — one has to solve the original problem or a very similar one at every step, over and over again, or, to put it differently, one has to investigate by whom and at what maximum possible price the first, second, third, and so on up to perhaps the hundred thousandth kilogram of the commodity might be acquired. Certainly this is a method, too, but one that functions very slowly.

In this connection Cassel upbraids me for ‘not properly understanding the significance of a common measure of value’, and consequently ‘also failing to lay the axe to the root of all the confusion that Launhardt has brought forth in this area under the cover of mathematics’. The answer to this reproach is already given in the preceding passage. I do not consider incorrect in principle Launhardt's treatment of the marginal utilities of different persons as commensurable quantities, and in my opinion he has caused no confusion by this procedure. In general Cassel could have treated this author somewhat more kindly, for on the very next page (414) he reaps the benefits of Launhardt's work. For the elegant method he employs there, ‘diverging from the customary manner of presentation’, by treating all consumers of a commodity uniformly, whether with prices at a given level they be buyers or sellers, originally comes, to the best of my knowledge, from Launhardt. At least I adopted this method from Launhardt, and Cassel probably found it in my work (Öber Wert, Kapital und Rente, pp. 52f).

The section of Cassel's essay that might be expected to arouse most interest among theorists of marginal utility is probably the third, where he endeavours to show that the equality or rather proportionality they assert between marginal utility and commodity prices in general does not obtain. This assertion, according to him, rests on ‘two assumptions, namely, first, that consumer goods are divisible at will, and secondly, that our estimations of value represent continuous functions of the quantity previously possessed’. These assumptions, he says, are ‘both fundamentally incorrect’.

Now, concerning the first of these assumptions, surely nobody has advanced it as a generally valid fact, and to this extent of course the strict law of marginal utility suffers certain exceptions, as also is generally recognized. On the other hand, there is a fact that is regularly overlooked by Cassel, which entails that those goods which by their very nature can only be employed as discrete units are subject to the laws of marginal utility no less than those divisible at will. This is the fact that in reality they almost always occur in numerous different qualities or nuances. Let us hear how Cassel argues his case.

Cassel ‘lives at present in Berlin and rents a room there’. The room costs 30 marks, and he ‘assumes for the sake of simplicity’ that in Berlin there exist ‘only similar rooms and, in fact, all at the same price. If the price ro...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• KNUT WICKSELL
• CONTENTS
• Preface
• Introduction
• Part I Marginalism and capital theory
• Part II Income, taxes and duties
• Part III Unemployment
• Index