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Thursday, June 20, 2013

Other French and Italian utility theorists of the eighteenth century

Two other distinguished French writers on economics, both contemporaries of Turgot, must be mentioned as contributing greatly to economic thought. The Abbé Ferdinando Galiani (1728–87) was a fascinating character who, though a Neapolitan, may be counted as largely French. Reared by his uncle, the chief almoner to the king, Galiani early came into contact with the leaders of Neapolitan thought and culture. At the age of 16, Galiani translated some of Locke's writings on money into Italian, and began an eight-year study of money. During the same period, Galiani took religious orders. At the age of 23, he published his remarkable major work, Della Moneta (On Money) (1751) which set forth a utility–scarcity theory of the value of goods and money. Unfortunately, Della Moneta has never been fully translated from the Italian.

In 1759, the Abbé Galiani became secretary and later head of the Neapolitan embassy in Paris, where he stayed for ten years, and where the erratic, witty, erudite, 41/2 foot tall Galiani became the social lion of the Paris salons. After his return to Italy, though he wrote several minor works in linguistics and politics, and held several leading positions in the civil service, he considered himself an exile from his beloved France.

In the late scholastic–French–Italian tradition, Galiani expounded the value of goods as subjective valuation by consumers. Value is not intrinsic, he pointed out, but ‘a sort of relationship between the possession of one good and that of another in the human mind’. Man always compares the valuation of one good with another, and exchanges one good for another in order to increase the level of his satisfactions. The quantity demanded of a good is inverse to its price, and the utility of each good is in inverse relation to its supply. Alert to the law of diminishing utility upon increasing supply, Galiani, like his predecessors, stops just short of the marginal concept, but is at any rate able to solve the ‘value paradox’: the view that use-value is severed from price- or exchange-value because bread or water, goods highly useful to man, are very cheap on the market whereas fripperies like diamonds are highly expensive.

Thus Galiani writes, with great subtlety and perception and with his usual flair:

It is obvious that air and water, which are very useful for human life, have no value because they are not scarce. On the other hand, a bag of sand from the shores of Japan would be an extremely rare thing – yet, unless it has a certain utility, it is without value.

Galiani then states the alleged value paradox, quoting from the seventeenth century Italian writer, Bernardo Davanzati. Davanzati laments that ‘A living calf is nobler than a golden calf, but how much less is its price!’ while ‘others say: “A pound of bread is more useful than a pound of gold”.’ Galiani then brilliantly demolishes this doctrine:

This is a wrong and foolish conclusion. It is based on neglect of the fact that ‘useful’ and ‘less useful’ are relative concepts, which depend on the specific circumstances. If somebody is in want of bread and of gold, bread is surely more useful for him. This agrees with the facts of life, because nobody would forego bread, take gold, and die from hunger. People who mine gold never forget to eat and to sleep. But somebody who has eaten his fill will consider bread the least useful of goods. He will then want to satisfy other needs. This goes to show that the precious metals are companions of luxury, that is, of a status in which the elemental needs are taken care of. Davanzati maintains that a single egg, priced at 1/2 grain of gold, would have had the value of protecting the starving Count Ugolino from death at his tenth day in gaol – a value in excess of that of all the gold in the world. But this confuses awkwardly the price paid by a person unafraid to die from hunger without the egg, and the needs of Count Ugolino. How can Davanzati be sure that the Count would not have paid 1,000 grains of gold for the egg? Davanzati obviously had made a mistake here, and, although he is not aware of it, his further remarks indicate that the knows better. He says: What an awful thing is a rat. But when Casilino was under siege, prices went up so much that a rat fetched 200 guilders – and this price was not expensive because the seller died from hunger and the buyer could save himself.

Professor Einaudi informed us in 1945 that ‘this is the classical section which is always read in Italian seminars when a telling illustration of the principle of diminishing utility is to be given’. In addition to illuminating this crucial principle, the above passage also shows how people, satiated with bread, turn to the consumption or use of other goods foregone.

In addition to taking a subjectivist, ‘pre-Austrian’ approach to utility and value of goods, Galiani also introduced the same approach towards interest on loans, outlining at least the rudiments of the time-preference theory of interest in passages that influenced Turgot. Thus Galiani wrote:

From this arises the rate of exchange and the rate of interest – brother and sister. The former equalizes the present and the spatially distant money. It operates with the help of an apparent agio, which... equate(s) the real value of the one to that of the other, one being reduced because of lesser convenience or greater risk. Interest equalizes present and future money. Here the effect of time is the same as that of spatial distance in the case of the rate of exchange. The basis of either contract is the equality of the real value.

Galiani defines a loan as ‘the surrender of a good, with the proviso that an equivalent good is to be returned, not more’. But, in contrast to the centuries-long tradition of anti-‘usury’ writers who proceed from the same premise to denounce all interest on loans as illegitimate, Galiani points out what would later be a fundamental insight of the Austrian School: a good, in this case an ‘equivalent’, is not to be described by its physical properties or similarities, but rather by its subjective value in the minds of individual actors. Thus Galiani writes that those who conventionally define the equivalence of goods as ‘weight, or similarity of form’, focus on the physical objects in each exchange (such as units of money). But, he adds, those who adopt such definitions ‘understand little of human activities’. He reiterates, instead, that value is not an objective characteristic inherent in goods, but rather it is ‘the relationship of goods to our needs’. But then, ‘Goods are equivalent when they provide equal convenience to the person with reference to whom they are considered as equivalent’.

Another prefigurement of the Austrian approach was Galiani's intimations towards a theory of distribution, which were not taken up until Böhm-Bawerk, probably independently, arrived at a similar but much fuller analysis a century and a half later. For Galiani hinted in his Della Moneta that it was not labour costs that determine value, but the opposite: it is value that determines labour costs. Or, more

concretely, that the utility of products and the scarcity of various types of labour determine the prices of labour on the market. Though he begins his discussion by stating that labour in the sense of human energy ‘is the sole source of value’, he quickly goes on to point out that human talents vary greatly, so that the price of labour will vary. Thus:

I believe that the value of human talents is determined in the very same way as that of inanimate things, and that it is regulated by the same principles of scarcity and utility combined. Men are born endowed by Providence with aptitudes for different trades, but in different degrees of scarcity.... It is not utility alone, therefore, which governs prices: for God causes the men who carry on the trades of greatest utility to be born in large numbers, and so their value cannot be great, these being, so to speak, the bread and wine of men; but scholars and philosophers, who may be called the gems among talents, deservedly bear a very high price.

Galiani was undoubtedly over-optimistic about the ‘very high price’ to be commanded by scholars and philosophers on the market, having overlooked his own scintillating example of scarce goods, such as ‘bags of sand from the shores of Japan’, which, though rare, may have little or no utility or value in the minds of consumers.

On the theory of money proper, the Abbé Galiani paved the way for the Austrian Menger–von Mises analysis of the origin of money by demonstrating that money – the medium of exchange – must originate on the market as a useful metal, and that it cannot be selected de novo, as a convention by some sort of social contract. In a lively assault on money-as-a-convention that could apply to any social contract explanation of the origin of the state, Galiani derided

those who insist that all men had once come to an agreement, making a contract providing for the use, as money, of the per se useless metals, thus attaching value to them. Where did these conventions of all mankind take place, and where were the agreements concluded? In which century? At which place? Who were the deputies with whose help the Spaniards and Chinese, the Goths and the Africans made an agreement so lasting that during the many centuries which have passed the opinion never was changed?

Galiani pointed out that the sort of metal that would be chosen on the market would have to be universally acceptable, and hence would need to be highly valuable as a non-monetary commodity, easily portable, durable, uniform in quality, easily recognizable and calculable, and be difficult to counterfeit. Wiser than Smith and Ricardo after him, Galiani warned that money should not be regarded as ideally an invariable measure of value, for the value of a unit of account necessarily varies as the purchasing power of money changes, and therefore such an invariable standard cannot exist. As Galiani put it with typical pungency: ‘Finally, this concept of stable money is a dream, a mania. Every new and richer mine that is discovered immediately changes all measures, without showing an effect on them but changing the price of the goods measured’.

Galiani made clear throughout Della Moneta that his entire analysis was embedded in the conceptual framework of the natural law. Natural laws, he explained, have a universal validity in economic affairs as much as in the laws of gravity or of fluids. Like physical laws, economic laws can only be violated at one's peril; any action defying the order of nature will be certain to fail.

The abbé proved his point by citing a hypothetical case: suppose that a Mohammedan country suddenly converts to Christianity. The drinking of wine, previously prohibited, now becomes legal, and its price will rise because of the small quantity available in the country. Merchants will bring wine into the country, and new wine producers will enter the field, until profits in dealing with wine fall back to their normal equilibrium level, ‘as when waves are made in a vessel of water, after the confused and irregular movement the water returns to its original level’.

This equilibrating action of the market, which Galiani shows also applies to money, is furthermore propelled, marvellously enough, by self-interest, greed, and the quest for profit:

And this equilibrium wonderfully suits the right abundance of commodities of life and earthly welfare, although it derives not from human prudence or virtue but from the very vile stimulus of sordid profit: Providence having contrived the order of everything for her infinite love of men, that our vile passions are often, in spite of us, ordered to the advantage of the whole.

The economic process, Galiani concluded, was guided by a ‘Supreme Hand’ (shades of Adam Smith's ‘invisible hand’ a generation later!).

The institution of money, indeed, enables all people to ‘live together’, to be interdependent on each other, while still benefiting greatly in pursuing their individual ends. As Galiani eloquently puts it:

I saw, and everyone can now see, that trade, and money which drives it, from the miserable state of nature in which everyone thinks for himself, have brought us to the very happy one of living together, where everyone thinks and works for everybody else: and in this state not for the principle of virtue and piety alone (which are insufficient in dealing with entire nations), but we earn our living for the purpose of our personal interest and welfare.

Galiani's analysis is fuelled by an original and profound comparative analysis of seeing, mentally, what happens in different social systems. Thus he noted that, to avoid the inconveniences of barter, people might try ‘living together’ literally, in communities, as monasteries and convents do, but this is hardly feasible for entire nations. In a larger society, there might be a system where everyone produces whatever goods he wishes and then deposits them in a public warehouse where everyone could draw on the common store. (Galiani might have phrased it as, ‘from each according to his ability, to each according to his needs’). But the system would collapse because lazy people would try to live at the expense of exploiting the hard-working ones, who in turn would work less. The public warehouse could, on the other hand, give producers ‘receipts’ which would then exchange for other goods at relative prices fixed by the prince; but one problem is that the prince might well inflate by printing an excessive number of such receipts. So that metals are the only viable money.

Galiani's youthful work On Money was his great contribution to economics. In his early days an ardent Catholic, abbé and monsignore, in Paris Galiani became a free thinker, roué, and Voltairean wit. In the course of rising in the bureaucracy, he completely changed his economic views, publishing the well-known Dialogues on the Grain Trade in 1770, which ridiculed laissez-faire and free trade, natural rights and the very idea of economic laws transcending time and place. Thus Galiani was not only an excellent utility theorist, but in his later years a forerunner of the nineteenth century historicists.
In his private letters, Galiani reveals quite frankly the underlying reason for his later conservatism, adherence to the status quo, cynical Machiavellianism, and critique of any liberal or laissez-faire disruption of the existing state of affairs. Attacking the idea of worrying about anyone's welfare but one's own, Galiani writes: ‘The devil take one's neighbor!’ and that ‘All nonsense and disturbance arise from the fact that everybody is busy pleading somebody else's cause, and nobody his own’. He wrote that he was well satisfied with the existing French government because it was frankly expedient for him to do so; specifically, he did not wish to lose his luxurious income of 15 000 livres.

Of course Galiani found it expedient to confine his Machiavellianism to private letters while pretending to moralism in his public writings.13 Thus in his Della Moneta, in both the original edition and in the second edition in 1780, Galiani bitterly denounced the institution of slavery: ‘There is nothing that appears to me more monstrous than to see human beings like ourselves, vilified, enslaved and treated like animals’. But his approach was very different in a letter written in 1772:

I believe that we should continue to buy negroes as long as they are sold, unless we succeed in letting them live in America... The only profitable trade is to exchange the blows one gives for the rupees one collects. It is the trade of the strongest.14

In short, anything is right if it succeeds.

Another Italian utility theorist, in his case an analyst of exchange, was the highly influential Neapolitan Abate Antonio Genovesi (1712–69). Genovesi was born near Salerno, and became a priest in 1739. At first a professor of ethics and moral philosophy at the University of Naples, Genovesi shifted his interests and became a professor of economics and commerce, in which he was a notable teacher. In his rather disjointed Lezione de economía civile (Lessons on Civil Economy) (1765), the learned Genovesi took a moderate free trade stance. More important, he pointed out the essential double inequality of value involved in any exchange. In any exchange, he said each party desires the object he acquires more than he does the object given up. The superfluous is given up for the necessary. Hence the mutual benefit necessarily present in any exchange.

The last gasp of subjective utility theory in the eighteenth century was set forth brilliantly by the French philosopher, Étienne Bonnot de Condillac, abbé de Mureaux (1715–80). Condillac, a leading empiricist–sensationalist philosopher, was the younger brother of the communist writer Gabriel Bonnot de Mably, and son of the Vicomte de Mably, who served as secretary to the parliament of Grenoble. After being educated at a theological seminary in Paris, Condillac left to pursue philosophy, publishing several philosophical works in the 1740s and 1750s.

In 1758, Condillac went to Italy as tutor to the son of Duke Ferdinand of Parma. There his interest was stimulated in economics by acquaintance with the pro-free trade economic policymaker, Tillot, state secretary to the duke. At the same time, Condillac learned of the work of Galiani and other Italian subjective value theorists. After a decade as tutor of the future duke, Condillac published a 16-volume Course of Studies he had prepared for his pupil.

When Condillac returned to Paris in the late 1760s, interest in trade, political economy and physiocracy was at its height, and Condillac, always favouring free trade on his own subjectivist grounds very different from the physiocrats, was stimulated to write his last work, Le commerce et le gouvernement considérés relativement l'un à l'autre (Commerce and Government), published in 1776, only a month before The Wealth of Nations.

In Commerce and Government, unfortunately destined to be swept away by Smith's all-commanding influence, Condillac set forth and defended a sophisticated subjective utility theory of value. The last of the utility–scarcity theorists before the advent of the British classicists, Condillac declared that the source of value of a good is its utility as evaluated by individuals in accordance with their needs and desires. Utility of goods increases with scarcity and decreases with abundance. Exchange arises because the utility and value of the two goods exchanged is different – indeed the reverse – for the two people engaging in the exchange.

As in the case of Genovesi, in exchange the superfluous is exchanged for the object in insufficient supply. But Condillac was careful to point out that exchange does not mean we give up things which are totally useless. An exchange only implies, as a later commentator summed it up, ‘that what we acquire is worth more to us than what we part with’.

As Condillac put it: ‘It is true that I might sell a thing that I wanted; but as I would not do so except to procure one that I wanted still more, it is evident that I regard the first as useless to me in comparison with the one that I acquire’. The point is relative, rather than absolute, superabundance. And this set of superfluous-for-scarce exchanges greatly increases the all-round productivity of the market economy. Notes Condillac:

The superabundance of the cultivators forms the basis of commerce... the cultivators procure the thing which has a value for them, while they give up one which has a value for others. If they could make no exchanges, their superabundance would remain in their hands, and would have no value for them. In fact, the superabundant corn which I keep in my granary, and which I cannot exchange, is no more wealth for me than the corn which I have not yet produced from the earth. Hence next year I shall sow less...

Furthermore, Condillac pressed on and generalized Galiani's utility theory of costs and distribution, declaring that ‘a thing does not have value because it costs, as people suppose; it costs because it has a value’.16 And the value is determined by the subjective opinions of individuals on the market.17
Condillac, moreover, refuted the typical classical and preclassical doctrine, dominant since Aristotle, that the fact that one good exchanges for another must mean that the two goods are of ‘equal value’. Condillac rebutted this point neatly, a rebuttal which was promptly lost for 100 years: ‘It is false that in exchanges one gives equal value for equal value. To the contrary, each of the contractors always surrenders a lesser for a greater value’.

Since consumer utility and demand determines value, people will tend to receive income from production to whatever extent they satisfy consumers in the production process. Hence, as Hutchison summarizes, ‘people could expect to receive in income whatever they could expect to receive from the sale of such productive agents as they commanded.... Pay was regulated in markets by sellers and buyers, and depended on productivity and the expected utility of what was produced’.18 Since greater intelligence and skill is in scarcer supply, it will tend to command a higher price, or wage, on the market.

Condillac's theory of entrepreneurship followed Cantillon, profits of the entrepreneur depending on the way in which he meets uncertainty and is able to forecast future markets. Like Cantillon, too, Condillac denied that money's value is arbitrary or determined by mere convention or government. The value of metallic money depends on the utility of monetary metals and their supply on the market, so that money's value is determined, as is that of other goods, by supply and demand. And Condillac also followed Cantillon in analysing the equilibrating, self-adjusting processes in international money flows and the balance of payments.

It was, then, not a great exaggeration when, nearly a century afterwards, the British economist Henry Dunning Macleod waxed rhapsodic over his rediscovery of the then forgotten Condillac. Macleod noted that Condillac drew from his insights an ardent devotion to complete free trade, and to an attack, far more consistent than that of his contemporary Adam Smith, on all forms of government intervention in the economy. Macleod noted Condillac's discussion of the ‘mischievous consequences produced by all violations of, and attacks on’ the principle of free markets:

These are wars, custom-houses, taxes on industry, privileged and exclusive companies, taxes on consumption, tamperings with the currency, government loans, paper money, laws about the export and import of corn, laws about the internal circulation of grain, tricks of monopolists...

Condillac, Macleod went on,

first proclaimed, as far as we are aware, the doctrine that in commerce both sides gain; the old doctrine sanctioned by Montaigne, Bacon, and many others, was that what one side gains, the other loses. This pernicious folly was the cause of many bloody wars. The Physiocrats then maintained that in exchange the values are equal. But Condillac laid down the true doctrine, that in commerce both sides gain. And he shows truly that the whole of commercial dynamics arise from these inequalities of value.

Himself joining in anticipation of the imputation, or marginal productivity theory of wages or other factor pricing, Macleod also underlined the significance of Condillac's insight that costs are determined by a good's value to the consumer rather than the other way round. In that way, Condillac helped inadvertently to refute the entire Smithian labour theory of value apparatus which was coming into being the same year that Condillac published his work. As Macleod puts it:

Thus, too, he strikes at the root of many of the prevailing theories of value, which are based upon labour; he says that people pay for things because they value them, and they do not value them because they pay for them, as is commonly supposed. This is exactly the doctrine of Dr. [Archbishop Richard] Whately, when he says that people dive for pearls because they fetch a high price, and they do not fetch a high price because people dive for them... that it is not labour that is the cause of value, but value that attracts labour.

Macleod concludes his discussion with a rhetorical flourish. Noting that Condillac and Smith's classic works were published in the same year, he contrasted Smith's ‘universal celebrity’ with Condillac's neglect, but then notes that the world is rediscovering Condillac and learning of the superiority of his conception of economics to that of Smith. And, besides, Macleod wrote not without justification, ‘the beautiful clearness, and simplicity’ of Condillac contrasts notably with ‘the incredible confusions and contradictions of Adam Smith’. However, ‘at length he will receive justice...’. If we contrast, however, the hypertrophy of Smith's bicentennial celebration with the non-existence of Condillac's, we might not be so quick to conclude that history has yet judged correctly.

Austrian Perspective on the History of Economic Thought (2 volume set)

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