PRESIDENTIAL ADDRESS. 561 
to give more for it, and he will get it, while I go without. But again, since 
the more he has the less difference will a still further increase make to him, 
and the less I have the more difference will a still further decrease make to me, 
we shall ultimately arrive at an equilibrium; what I am willing to give and 
what I am compelled to give will coincide, and the difference that a little more 
or a little less of any commodity which I habitually consume makes to my 
estimated satisfaction will be identical with the similar estimated difference to 
avy other habitual consumer. 
Now it is obvious (though it is by no means always observed) that this 
identical or equilibrated ‘difference of estimated satisfaction’ must be under- 
stood and measured objectively, not subjectively. 1f two men estimate the 
difierence that a given addition or subtraction of supply would make to them 
at the same money value, it shows that this increment or decrement occupies 
the same place on their respective scales of preference relatively to all other 
things or services that could be obtained for the money. This much it tells, 
but no more. The actual experiences of the two men cannot indeed be compared, 
but an increment of supply that stands on a poor man’s relative scale of prefer- 
ences exactly where it does on a rich man’s, may, and ‘in our circumstance and 
course of thought’ often must, depart indefinitely from it in its vital significance. 
Such, then, is the theory of exchange, which I should like to call the ‘ diffe- 
rential theory,’ that underlies the theory of distribution we are presently to 
examine. It has been objected to it that since it only asserts that a man will 
never give more for a thing than he thinks it is worth, and can never get it 
for less than the man who has it believes he could get from someone else or 
thinks it worth to himself, it comes down to the simple assertion that value 
in exchange—is value in exchange. I am quite willing to accept this reproach, 
only I must be allowed to add something to it and to say, ‘The differential 
theory of value in exchange asserts that value in exchange is value in exchange. 
All other theories assert that it is not.’ 
Chief amongst these other theories in historical and polemical dignity, and 
in tenacity of lite, is the ‘cost of production’ theory; which, in its crudest 
form, asserts that the true measure of exchange value is to be found not in the 
estimated worth of a thing, but in the amount of labour that has gone to its 
production. This theory, I think it is safe to say, is now discredited and 
hardly dares to announce itself openly. The actual nature of the connection 
between ‘cost of production’ and market price, or exchange value, and the true 
analysis of the tendency to coincidence between them are now clearly understood. 
When the production of two different commodities involves the same cost, and 
one of them has a higher market price, because it has a higher differential 
significance to the purchasers, then enterprise will naturally be directed to the 
production of the one rather than of the other; and as this goes on, and the 
supply increases, the differential significance, and so the exchange value, of the 
_favoured product will decline, until equilibrium is reached. Thus the idea that 
cost of production already incurred determines exchange value turns out to be 
a reversal of the true relation. It is the anticipated value in exchange that 
determines what cost of production the producer will be willing to encounter, 
and if a relatively low cost of production ultimately brings down prices it is 
only because it determines an increased supply. 
‘All this is well understood; but nevertheless the cost-of-production fallacy 
assumes subtle disguises; and theories of distribution based upon it, or at least 
tainted by it, are perpetually reappearing. I shall not stay to examine it 
further; but one of the chief reasons for reconsidering the current methods of 
economic exposition is, to my mind, the need of a more complete and drastic 
cleansing of economic doctrine from the baneful sequele of this disease of its 
youth. 
The ground is now clear for a step forward along the main line of our 
advance. The differential theory of exchange values carries with it a corre- 
sponding theory of distribution, whether we use this term in its technical sense 
of the division of a product amongst the factors that combine for its production, 
or whether we employ it as equivalent to ‘administration,’ and are thinking 
of the administration of our personal resources ; that is to say, their distribution 
amongst the various objects that appeal to us; or again, the distribution, under 
1913, (ome) 
