The Ultimate Standard of Value — Summary

This 1894 article by Eugen von Böhm-Bawerk, translated by C. W. Macfarlane, is a theoretical intervention in the dispute over whether value is ultimately determined by utility, cost, labor, or disutility. Böhm-Bawerk does not deny the practical importance of the “law of cost”; rather, he argues that cost is usually a proximate mechanism through which values are leveled, while the ultimate determinant remains marginal utility.

The article begins by situating the problem within the long controversy from Say and Ricardo through Jevons, the Austrian school, Marshall, Edgeworth, Clark, Dietzel, Macvane, and others. Böhm-Bawerk’s opening diagnosis is semantic as well as theoretical: economists have debated “cost” as though it were a single clear concept, when in fact the term covers several distinct phenomena.

In this case we need not search far afield; it is the concept of “cost.”

He then distinguishes forms of cost. Synchronous cost refers to the entrepreneur’s money outlay for the means of production used in a particular productive process. Historical cost traces those means back to labor, abstinence, and perhaps natural powers. Labor-cost itself may mean duration, market value, or pain and sacrifice. These are not interchangeable measures. A commodity may require much labor-time but little painful exertion, or high money outlay but little direct labor. Thus the question is not whether value follows cost in some vague sense, but which sense of cost can actually explain price.

Böhm-Bawerk grants that the law of cost works effectively when cost is understood as the money cost borne by producers. If price falls below outlay, production contracts; if price exceeds outlay, production expands. Competition therefore tends to align prices with the values of the productive goods used. He also allows that historical cost, when reduced to the value of productive services, may appear to explain value. But cost measured by labor-time, and still more cost measured by labor-pain, fails as a general standard.

This critique is aimed especially at economists who try to reconcile cost and utility by interpreting cost as disutility. Böhm-Bawerk accepts that pain of labor can influence certain margins: a worker choosing whether to work overtime, an artisan deciding how long to continue, or laborers choosing among occupations. But modern production usually does not allow each worker to vary labor freely until marginal wage and marginal pain equilibrate. Hours are shaped by custom, law, contracts, and industrial organization. Disutility therefore cannot serve as the general regulator of wages or product-values.

The law of cost operates, therefore, by changing the occupation of the productive power.

The decisive step is his attack on circular explanation. If the value of a good is explained by the value of the labor used to produce it, one must still explain the value of labor. That value cannot be derived simply from subsistence or from pain. For Böhm-Bawerk, wages depend on the value of the marginal product of labor; but that product is valued because consumers assign utility to the final goods it helps create. The explanation therefore returns to marginal utility, not as an optional supplement to cost theory, but as its foundation.

In the final section, Böhm-Bawerk reconstructs the law of cost as a leveling principle among alternative employments of productive resources. Productive powers move toward their most remunerative uses. The “cost” of one commodity reflects the value of other commodities that could have been produced with the same labor, capital, or materials. A rise in demand for copper wire, for example, can raise the price of copper kettles because the same copper has become more valuable elsewhere. Cost transmits alternative utilities.

The law of cost is always in the first instance a simple leveling principle.

This reframing also revises the familiar image of demand and supply as two independent blades of a pair of scissors. In many cases, what appears on the supply side as cost is itself derived from demand elsewhere: from the marginal utility of other goods competing for the same productive powers. Cost is therefore not abolished, but demoted from ultimate cause to mediating relation.

It is, therefore, utility and not disutility which, as well on the side of supply as of demand, determines the height of the price.

The article’s lasting importance lies in its clarification of Austrian marginalism against both classical labor-cost theory and overly symmetrical cost-and-utility compromise theories. Böhm-Bawerk’s point is not that producers’ costs are irrelevant, but that their explanatory force depends on prior valuations of alternative products and productive services. The ultimate standard of value is thus utility at the margin, with disutility admitted only in limited and exceptional cases.