D3.12.4 {ToC}



The old conception of cost and value was designed to solve this fundamental problem: what is the relation, if any, between the importance to the community (R’s absolute value) not value in use of a commodity and its price (exchange value). They assumed that there was a relation of some sort between the two, and they expressed this misterious {sic} relation by such words as "cause" or “measure” - but obviously they did not mean what is their appropriate sense (analyse) (De Quincey, traditional confusion perpetuated by Bohm-B., Edg., Clark).

The modern conception is derived from the erroneous belief that the classics were literally looking for the “causes” of value, and not in its relation with importance, i.e. its “meaning”. It may be useful to find how the actual adjustments of prices come about in detail, to analys {sic} the interplay of the forces determining the refinements of equilibrium (though also in these we can pass ourselves of utility + disutility and operate with demand price + expenses of production). But it cannot give us an explanation of the social meaning of value, not even of its "ultimate” causes. Because, being psychological, sacrifice is measured by incentives: incentive implies free choice, voluntary acceptance or refusal: and this implies in the factor of production

Böhm-Bawerk, E. (HET; OLL; Wikipedia) ­­Edgeworth, Y. (HET; Wikipedia) De Qunicey, T. (HET: Wikipedia) Clark, J.B. (HET; OLL; Wikipedia)

D3.12.4 {ToC}



the possibility of an alternative use, or of no use at all (which is in the present sense a form of use). The worker, if he has to be “induced” in this means that he can do something else of himself, and that this something else is preferable than work at the lower wage: the capitalist too must be assumed to have an alternative use, consuming (or not lending? (See p. 3) +7 no, this would apply also to landlord); only the landlord has no alternative use, therefore no inducement is required because he makes no sacrifice, and, therefore “rent does not enter into cost of production.”

But these “alternatives" (the giving up of which constitutes the sacrifice) have to be outside the field of our consideration, or else they involve is in a vicious circle (Henderson's + Co.’s opportunity cost; just as Bohm B, alternate utility). This leisure is put outside the national dividend. [it ought to the included, just as and wages ought to be excluded. Leisure should be computed in a physical cost necessary to produce it (the physical cost of labour is the or in money at the price of hour of labour what is necessary for him to produce the maximum? output per day permanently; when in order to get leisure he gives up producing 1/10 of his output, which means more than 1/10 of his working time and much more than 1/10 of his disutility, if there is such a thing, this cost of 1/10 of the physical cost of one day’s labour. Analyse carefully: it cannot be the maximum, as in a horse it must be the one that equalises marginal output and marginal physical cost. Besides, it may

Böhm-Bawerk, E. (HET; OLL; Wikipedia) Henderson, H. (HET; Wikipedia)

The reference “(See p. 3) +7“ refers to the pages below in the present note-set; page 3 = D3.12.4.5-18.3-8.[D3/12/4:5.3:(e13)]; page 7 = D3.12.4.5-1.7-8.[D3/12/4:5.7:(e17)].

D3.12.4 {ToC}



give, near the margin an unavoidable surplus of leisure. Intermediate zone to be explored.

If he gets 1 hour of leisure he gets the full benefit of it, but it costs less than ⅛, because production decreases less than ⅛. But after all it is a matter of allotment of expenditure, and these is, just as between socks + butter, and there is no greater difficulty is settling settling between leisure and socks.)]

As regards the “sacrifice of waiting", this too is only regarded as a cost to be overcome because we have left out of consideration the alternative uses to be made of it: this sacrifice consists only of giving up the alto advantages of the alternative uses. We must include these alternative uses within the field of the “product”

(“net product" Ricardo, or national dividend), and then no more incentive will be required, as no sacrifice will be involved in waiting. But in general, when the rate (or return) of interest is too low to induce a millionaire to lend his capital or to invest it himself in productive enterprise, he will not buy an enormous amount of food and proceed forthwith to eat a millionworth of steaks and chops, so as to remain without a penny for to-morrow; he will probably buy “consumers’ capital goods” such as motorcars, jewels, pictures, parks, etc, which

Ricardo, D. (HET; OLL; Wikipedia)

D3.12.4 {ToC}



will yield (from which he will draw) an ammal income in services. These goods will last for a long or a short time, and from themir services he will receive a small or large income in services, according as their duration is large or small. In fact he will receive an income in services even if he buys thing to be consumed immediately: the duration of food will be very short and the income accordingly enormous. If we want to get a consistent definition of net product income, we must include in it all these services: if we leave them out we shall be under the delusion that the capitalist undergoes a sacrifice for waiting, when he is simply giving up an alternative investment, we shall confuse cost with loss of utility.

If we include them, waiting is no more a cost (notice, waiting means here maintaining in being old savings, not accumulate new capital: this excludes Robertson's swelling of the sources, which would be a “physical cost”: expand).

“Waiting” a becomes simply the choice made between two alternative investments: obviously it would be absurd silly to say that the “cost of saving” £100 in the form of 5% War Loan is the loss involved in not giving up investing them in shares of Celanese: it would be a vicious circle to say that the interest in one investment is determined by the interest to be received in another, and viceversa: (that is, if we are considering the rate of interest all over the place simultaneously - it may

Robertson, D. (HET; OLL; Wikipedia)

D3.12.4 {ToC}



be legitimate in an investigation on the causes of the return from a given investment, on the explicit assumption that we take for given the general level of interest.)

Suppose the yield of investments falls from 5 to 4%: an investor sells a part of his shares, in consequence of this, and with the proceeds buys a motorcar. Shall we say that the cost, i. e. the sacrifice of waiting is over 4% for him and that he would incur a loss if he continued to wait? Of course not: it will be simply mean that the net (or depreciation, etc.) income in services which he expects from the car is worth to him betwe more than 4 and less than 5% - in other words that the actuarial value of those services capitalized at 5% is smaller, capitalized at 4% is larger than the value of his investment.Consequently when the yield of the shares was 5% it paid to keep the shares, when at 4% it pays to keep the car.

This conception of income may appear repulsive at first sight; but it is absolutely necessary to adopt it and become used to think in terms of it, if we dont want, not only to avoid the vicious circle, but to avoid the pitfalls of assuming that the “national dividend” is fluctuating (incr.. or decr.) when

elements of it are simply passing from one class to another, which has been arbitrarily excluded.

Expand Fisher's def. of capital + income

v. p. 7

Fisjer, I. (HET; OLL; Wikipedia)

D3.12.4 {ToC}



We must therefore include all the services of goods in the income of the capitalist and all leisure in the income of the worker, but exclude necessary wages. (Should the leisure or the necessary food of the capitalist be included in his income? the one of the other, measured in physical cost, as they are identical, food being the cost necessary to produce leisure but to what standard of efficiency ? it is better to include his food all in income)

A new theory of cost has been advanced in recent years, and finds widespread acceptance. That of alternative cost, or opportunity cost, (Davenport, Cassel, last ch. of Henderson). It is not new in fact: it is only the old effort and sacrifice expressed openly. and It implies a vicious circle. It confuses the ideas, because more explicitly than the other recognizes that disutility is only a loss of utility, and still insists in regarding them as two different things.

Davenport, H. (HET; Wikipedia) Cassel, G. (HET; Wikipedia) Henderson, H. (HET; Wikipedia)

D3.12.4 {ToC}



First correction to above theory of alternatives to waiting. The exchanging of the shares for a car would only be a choice between two investments only if the capitalist, when using the car, set aside a fund for its depreciation. If he does not, ultimately he will have used up and destroyed his capital. In this case, which is really the relevant one, there seems to be a true choice between immediate consumption (or in the near future) and waiting.

Of course if I have a machine and want to eat it I cannot; if I find to exchange it for consumable goods, this simply means that somebody else is willing to forego consumption and wait in my place - the total waiting will remain unchanged; but still, if we suppose interest fallen to zero, an alternative is left: I can consume the fixed yearly sum which should be allocated to depreciation of the machine, and allow the machine to decay. The resources which produced spare parts for repairing and renewing my machine will be diverted (but are they movable? or is this impossible?). If we suppose that the machine wears down continuously, and up to the end is always productive [in full] I shall be able gradually in 1 or 10 years to consume all my machine: but normally only a part of it, often a small part of it, can be consumed in this way.

In fact the same applies to the worker: if his net income is reduced to zero, he can give up making children (his own depreciation) and consume the goods that which he ought to use

D3.12.4 {ToC}



Second attempt correction

in that fashion. But of course variations in net wages do not directly affect birth rate, as children are not made for economic considerations, in view of the income to be derived from them. Capital is" waited" only, for income. But is it?

Could we not say that, just as the labourers want children who perpetuate their labour power, the capitalist wants to leave to them intact his capital?

Second attempt at correction

“Present goods, so far as not perishable, can always be converted into future goods; but future goods can not be converted into present ones. From the point of view of the individual, I can always give up consuming my goods and save them; but I can only consume now my future income if there is another man who is willing to give me his present goods in order to get in the future back my own”.

But the trouble, in the above refusal to “wait" for depreciation is that the capitalist does not try to convert a future income into a present one; he simply refuses (discontinues) to convert a present one into a future.

5-18 of D3/12/4: End of November 1927 (Trinity 2.0) - Google Slides