We have now seen how the economic system as a whole takes its course; we have seen how purchase or sale, loan and gift act as impelling factors, motive factors, within this system. Let us realise at once that there can be no economic system without this interplay of loan, gift and purchase. The influences, which create the economic values (of which we have already spoken from one aspect) and lead to the forming of price, will therefore proceed from these three factors: purchase, loan and gift. The important thing is to understand how the three factors work in the forming of price. Only by perceiving this, shall we succeed in any degree in formulating the price problem.

Granting then that gift, purchase and loan are inherent in economic movement, let us consider what in our present-day economy are — if I may so call them — the principal factors of rest. Let us turn for a moment to what is perhaps one of the commonest topics nowadays and a principal source of the errors that find their way into Political Economy. People talk of “Wages,” and they talk of them in such a way as to make them look like the price of Labour. If the so-called wage-earner has to be paid more, they say: “The price of Labour has gone up.” If he has to be paid less, they say: “Labour is cheaper.” Thus they actually speak as though a kind of sale and purchase took place between the wage-earner who sells his Labour and the man who buys it from him. But this sale and purchase is fictitious. It does not in reality take place. That is the trouble in our present economic conditions. On all hands we have hidden or masked relationships — relationships which develop in a way not in accordance with what in a deeper sense they really are. I have spoken of this before.

Value in the economic system, as we have already seen, can only arise in the exchange of products — in the exchange of commodities or — more generally — of economic products. It cannot arise in any other way. But what follows? If value can only arise in this way, and if moreover the price of the value is to be arrived at along the lines laid down yesterday (that is, by seeing that the producer of a given product receives, as its counter-value, what he will require to satisfy his needs during the production of another like product) — if this is to be possible, the various products must, as it were, reciprocally determine one another's value. And, after all, it is not difficult to see that this is what actually happens in the economic process. Only it is masked by the fact that money steps in between the objects exchanged. But the money is not the important thing. We should not take the slightest interest in money if it did not foster the exchange of products, making the process not only more convenient but less expensive. We should have no need of money if it were not for the fact that when a man brings a product to the market — under the influence of the division of Labour — he cannot be bothered to fetch what he needs from wherever it may happen to be; instead, he takes money for it, so that he may supply his needs later on at his own convenience. In fine we may say: It is the mutual tension, arising between the various products in the economic process, which must be concerned in the forming of prices.

Let us consider from this point of view the so-called wage-nexus, that is, the Labour-nexus. We cannot really exchange Labour for anything; since, as between Labour and anything else, there is no possibility of reciprocal determination of value. We may fancy that we are paying for Labour, we may even actualise this fancy by letting in the wage-nexus. But we do not really do anything of the sort. In reality, even in the Labour or wage-nexus, it is values which are exchanged. The worker produces something directly; he delivers a product, and it is this product which the enterpriser [Unternehmer] really buys from him. In actual fact, down to the last farthing, the enterpriser pays for the products which the workers deliver to him. It is time we began to see these things in their right light. The enterpriser buys products from the worker; and after he has bought them it is his business to impart to them a higher value, by making use of the conditions present in the social organism and by his own enterprising or “undertaking ” spirit. It is really this which gives him his profit. He gains on the transaction because, having bought the commodities from his workers, he is able by his “knowledge of the market” (we must not shirk unpleasant expressions) to enhance their value.

Thus, in the Labour-nexus we are dealing with a true purchase. And, ladies and gentlemen, we cannot speak of a surplus value arising through the Labour-nexus as such. All we can say is that in such and such circumstances the price which the enterpriser pays is not according to the true price, of which we spoke yesterday; and this is a thing we shall often find in the economic process — that, although the products reciprocally determine one another's values, although they have their real values, these values are not actually paid for in the course of commercial dealing. It is easy enough to see that all values are not really paid for. Take the case of a manufacturer on a small scale, who suddenly inherits a large legacy. Tired of the whole factory business, he decides to sell his stock-in-trade, and does so at an absurdly low price. That does not mean that the commodities decrease in value; it only means that the true price is not paid. Thus in actual economic intercourse prices are constantly being falsified. We must not forget this. In the course of commercial dealing prices may often be falsified. But there is, nevertheless, a true price. The commodities sold by the man in the above example are worth just as much as the same commodities produced by someone else.

Now that we have tried to make it clear that the wage-nexus does really involve a purchase, let us consider what is involved by rent — by the price of land. You see, the conditions under which the price of land originates are not those of a mature economy. To take an extreme instance, we may consider how a piece of land may have come under the control of particular persons by conquest, that is, by the exercise of force. Even here, no doubt, the element of exchange will enter in to some extent; the invader will have granted certain portions of the conquered territory to those who helped him to victory. Here, then, at the starting-point of an economic process we have something that is not properly economic. The process is not really economic; it is a process to which we can only apply the word “power” or “right.” By means of power, rights are gained — rights, in this case, over land. Thus we have the economic domain bordering on the one hand on these relationships of right and power.

But what is it that takes place under the influence of such relationships of right and power? This is what happens continually: The man who has the free right of disposal over land looks after himself better than those others whom he attaches to himself as labourers — who deliver the products to him by their Labour. I am speaking now not of the Labour, but of the products of the Labour; it is the products of Labour with which we are concerned. The others have to deliver more to him than he delivers to them. This, indeed, is only the prolongation of his relationship to them of conquest or right. Now, what is this excess of what they give him over what he gives them? What is it, in other words, that falsifies the price relationship in this case? It is none other than compulsory gift! Here, then, the relation of giving comes in, with the sole difference that the man who is to make the gift does so not of his own free will, but by compulsion; it is in fact a compulsory gift. That is what happens in relation to the land. Through the compulsory gift, the price which farm-products really ought to have in terms of other products is actually raised.

Thus the price of all things capable of subjection to such relationships of “right” has an inherent tendency to rise above its true level. So, for instance, if foresters or huntsmen are living with farmers, the foresters and huntsmen will come off better than the farmers. Farmers, among forest people, have to pay higher prices to the foresters for what they give them — higher prices, that is to say, than the true exchange prices as between their respective products, for the simple reason that in forestry, more than anywhere else, it is as a pure matter of right that the owner has the thing at his disposal and determines prices. Farming requires some real Labour; but in forestry, hunting and the like, we come very near to the pure “Labour-less” valuation — a valuation proceeding solely from relationships of right and power. Again, if handicraftsmen are living among farmers, the prices once again will tend to rise above their true level on the farmer's side; while on the other hand they will sink beneath the true level as against handicraft. Life is dearer for handicraftsmen among farmers; life is comparatively cheaper for farmers among handicraftsmen (assuming there are enough of them to make any appreciable difference). Handicraftsmen among farmers will find life comparatively dearer. Thus, the sequence governing this tendency for prices to rise above or to sink below their true level is as follows: First, forestry, then farming, then handicraft and, lastly, the entirely free spiritual work. These are the lines along which we should approach the problem of price-formation in the economic process.

There is a tendency, an inherent tendency, in the economic process to create rent. The economic process tends, as it were, of its own accord, to submit itself to this necessity of paying more dearly for farm products than for other things. This tendency obtains where there is division of Labour — and all our remarks have reference to a social organism in which there is division of Labour. This tendency is called forth through the fact that what I had to repeat twice over a few days ago, to the bewilderment of a large number of the audience (namely that the man who provides for himself lives more expensively and for that reason must take more for his products, must estimate them at a higher value than one who gets his products in free commercial dealing from others), that this simply does not come in in the case of farming.

In relation to the various branches of industry, ladies and gentlemen, this has a very real meaning, albeit you may have to think a very long time to find your way to that meaning. But in respect to agriculture and forestry it has no meaning. We must never forget that, when we are dealing with realities, the various concepts only hold good for certain regions; they change for other regions. This is equally true in other walks of life. What is a means of healing for the head, is pernicious — is a means to disease — for the stomach; and vice versa. And so it is in the economic organism. For example, if it were at all possible for the farmer not to provide for himself, the rules we apply for the general circulation of commodities would be right in his case, too. But the fact is, he can do no other than provide for himself; for within the economic process the entire agriculture of a social organism forms of its own nature a single entity, however many individual landowners there may be. Accordingly, the farmer must in every case keep back, from the totality of his products, what he has to provide for himself. Even if he gets it from another farmer, in reality he is still keeping it back. The farmer is essentially a man who provides for himself. Hence he is obliged to value his goods more expensively. The consequence is that prices must rise on his side.

You see, for the same reason which underlies the tendency in the economic process to create rent, there arises, on the other hand, the tendency of the industrialists to devalue Capital, to make Capital cheaper and cheaper. We shall best understand this tendency if we get it clear to begin with that Capital cannot really be bought, True, there are dealings in Capital; people “buy” Capital. But every such purchase of Capital is once again merely a masked relationship; in reality we do not buy Capital, we only borrow it. Yet, in the end, even if the relationship is apparently other, you will always be able to unmask it and expose the loan character of industrial Capital. I say expressly, of industrial Capital, for if you extend the principle to rents it is no longer the case. But it is certainly the case with industrial Capital, for the simple reason that there is a constant tendency to undervalue, as compared with other things, that which depends on the human Will — that is to say, handicraft or manufacture and entirely free activity (at this point in the diagram)). Industrial Capital is altogether implicated in the free activity of the Spirit; hence it is constantly being devalued; and we may say, on this side (Diagram 4), there is inherent in the economic process a tendency, while we create rents, to lower industrial Capital, to make it lower and lower in value. Just as things become more and more expensive on the one side, on the side of ground-rent, so do they become cheaper and cheaper on the other side, on the side of Capital. Capital has a permanent tendency to go down in its economic value, or rather in its economic price. Rents have a permanent tendency to rise in price.

There is also another reason from which you will see that industrial Capital must inevitably go down. We said just now that in farming one cannot help providing for oneself. It is just by this self-provision that the rise in the value of farm-products is brought about. At the same time you will see that in the case of industrial Capital, where the loan principle predominates, one cannot provide for oneself; one cannot provide for oneself with Capital. What one does provide for oneself must be included in the balance sheet nowadays in precisely the same way as what one borrows — if the balance sheet is to be correct. Since, therefore, at this point (Diagram 4) one cannot provide for oneself, it follows that the opposite tendency obtains — the tendency towards lower prices.

Everything depends on our seeing clearly through these relationships in the economic process. For then we shall see that it is by no means easy to establish true prices. The true price is constantly being upset by the fact that, on the one hand, there are things appearing on the market which tend to be too high in price, while, on the other hand, there are things appearing which tend to be too low in price. And since the price is settled by exchange, being in the middle, between the two, it is continually exposed to these influences. You can observe this very clearly in the economic process. In the same measure in which the products of forestry and agriculture grow more expensive, those produced by free human activity grow cheaper. Thus there arise those relationships of tension which give rise to social unrest and discontents. This, therefore, is the most important question in relation to the formation of price: How can we deal with the natural tension which exists in the creation of prices, as between the values accruing to goods arising out of the free will of man, and the values accruing to those goods in the production of which Nature participates? How can we get at this tension? How can we equate the one, the downward, tendency with the other, upward tendency?

Through division of Labour, more and more highly differentiated products arise. You need only remember how simple are the products arising, let us say, among a hunting or forest community. Here the price difficulty scarcely comes into question; but as soon as agriculture is added to forestry, the difficulty begins. In effect, the difficulty lies in the differentiation; the further the division of Labour extends, and new needs arise in the process, the more does the differentiation of products increase, and the difficulties connected with price-formation accumulate. The more varied are the products, the more difficult does it become to bring about their reciprocal valuation — and the valuation can only be reciprocal. This may be seen from the following comparison: There is a reciprocal valuation even in the case of products only slightly differentiated one from another — say, for instance, wheat and rye and other agricultural products. But follow the thing out over a long period of time and you will find the relationship of reciprocal valuation as between wheat, rye and other cereals remains fairly stable. If wheat goes up, the other cereals go up; if wheat goes down, the other cereals go down with it. This is due to the fact that there is comparatively little differentiation between these products; as soon as the differentiation becomes greater, this constancy no longer obtains. For it may well happen, through various events in the social organism, that some product which someone has been accustomed to exchange for another suddenly shoots up in price, while the other may go down at the same time. Think what revolutions are thus brought about in economic relationships. Altogether the things that happen in the economic world depend far more on the relative risings and fallings in price than on any other circumstance. It is by the relative rise and fall in prices that the difficulties of life itself are introduced into the economic sphere. As to whether the products as a whole rise or fall — if they all rose or fell uniformly, it would concern us very little. What interests people is that the different products rise or fall to a different extent. This fact is emerging in a very tragic way just now, under the present economic conditions. Products rise and fall in varying measure. Money-values especially are rising and falling, but in the money-values we simply have stored up what were once upon a time real values. By this rising and falling, an entire mingling and confusion is now being brought about in society.

From this we can see that there is another way, too, in which we must look at the factors operative in the economic organism. We took our start from the several factors which are enumerated by orthodox Economics, but we saw that the mere enumeration of Nature, Capital and Labour leads us no farther. Precisely when you add what we have said today to what has been said before, you will see that the pricing or valuing of Nature-products does not come about through purely economic relationships, but also through relationships of right or title; while, on the other hand, the valuing of industrial Capital is influenced by the free human Will with all that it unfolds when it is active in public life. Consider all that is necessary in order to collect a sum of Capital for a given purpose. Here the free human will comes in. Where lending is concerned, free human will has a very great part to play — indirectly perhaps, for the man who wants to keep savings is naturally going to invest those savings; but whether he ever saves at all, or not, is an expression of his Will. Here, then, the free human Will plays a real part. Now, if we take this into account, we shall find yet another classification of the economic factors beside the one which we have been considering hitherto.

Up to now I have given you a diagrammatic classification. I showed: There is Nature, but value only arises through Nature elaborated, that is to say, it only arises when Nature moves in the direction of human Labour; and again, value will only arise through human Labour when it moves on towards Capital, i.e., towards the Spirit. In this way the tendency arises to return again to Nature. This, as we saw, can be prevented by leading over the excess Capital, not into the land, where it would become fixed, but into free spiritual undertakings where it vanishes, save for the remnant which must continue as a kind of seed, by which the economic process may be fertilised and maintained.

Now, in addition to this movement which begins from left to right (see (Diagram 5) there is another movement. The former movement, as we have seen, gives rise to elaborated Nature, organised or articulated Labour, and emancipated Capital — Capital, that is to say, which figures only within undertakings dependent on mind or Spirit — active Capital. The other movement does not lead to the creation of values in this way, the preceding element always being taken on by the next, but goes in the opposite direction; the first movement runs counter-clockwise, the second clockwise. Here, in the first movement, something arises through the former member always working on into the next; in the other movement something arises through the fact that that which flows in one direction receives, as it were, what is flowing in the other direction and embraces it. You will see what I mean directly. Remember that Capital is, properly speaking, Spirit realised in the economic process; so that I can write at this point “Spirit” — which gives us Nature, Labour and Spirit. Now when the Spirit absorbs and receives the elaborated Nature (Nature transformed by Labour) — when it does not merely lead it on into the economic process in the continued counter-clockwise movement, but absorbs it — Means of Production arise. What we call means of production is something different — it is in quite an opposite process of movement — from a Nature-product which has been elaborated for consumption. It is a Nature-product taken in charge by the Spirit — a Nature-product which the Spirit needs. From the pen which I possess as my means of production to the most complicated machinery in a factory, means of production

And now, what arises at this point with the help of means of production can move on and be taken in charge in turn by human Labour. Just as Nature is here received by the Spirit, so can the means of production (in the widest sense of the term) be received in turn by Labour. What have we then, when Labour receives the means of production — when means of production and Labour are united? It is Industrial Capital, for in effect industrial Capital consists in this very union. Thus if you follow the process out, you get a movement whereby means of production and industrial Capital coalesce.

And if this movement be now continued, so that Nature (albeit another portion of Nature) from time to time receives what has been produced with the help of means of production a and industrial Capital, then and then only does there arise in the economic process what we may call Commodity in the proper sense. For the commodity is at once taken over by the process of Nature. Either it is eaten, in which case it is taken up very decidedly by Nature; or it is used or otherwise destroyed. In short, a thing becomes a commodity by the very fact that it returns to Nature.

So that you may say: We have now traced out the movement, which is inherent in the whole economic process and which contains the three factors: Means of Production, Industrial Capital and Commodity. Here, at this third point in the diagram, the distinction becomes unusually difficult; for when the thing we are seeking is shifting to and fro in the process of exchange proper — that is, in purchase and sale — it is extraordinarily difficult to distinguish whether it is moving in this direction or in that — whether it is a commodity or something that cannot be called a “commodity” in the true sense of the word. How does a piece of goods become a “commodity”? In describing this counter-clockwise movement, to make the nomenclature quite exact, I ought really to write “goods” instead of “commodities” and in the opposite movement I ought to write “commodity”; for a “commodity” may be defined as a piece of goods in the hands of the tradesman, the merchant who offers it for sale and does not use it himself.

Today my main purpose was that we should acquire such concepts as point to the true relationships in the economic process. These true relationships are again and again being diverted, by falsified processes, into a mode of operation which introduces constant disturbances into the economic process. Continually to smooth out and compensate for the disturbances is one of the essential tasks of Economics. People keep on saying that we ought to get rid of the evils of economic life; and they are inclined to have at the back of their minds the notion: “Then everything will be all right and the earthly paradise will begin.” But that is just as though you were to say: “I should like, once and for all, to eat so much that I need never eat any more.” I cannot do that; for I am a living organism wherein ascending and descending processes must constantly be taking place. Such ascending and descending processes must equally be present in the economic life; there must be the tendency on the one hand to falsify prices by the forming of rent, and on the other hand the tendency to lower prices on the side of industrial Capital. These tendencies are present all the time, and we must understand them in order to obtain, as far as possible, those prices which represent a minimum of falsification.

To this end it is necessary, by direct human experience, to take hold of the economic process as it were in the nascent state — to be within it all the time. The individual can never do this; nor can a society above a certain size. (A society, for example, such as the State). It can only be done by Associations growing out of the economic life itself, and able therefore to work out of the immediate reality of the economic life. The greater the technical accuracy with which we study the economic process, the more are we led to recognise that the required institutions must grow out of the economic life itself. Then, they will be able to observe the kind of tendencies that are at work and how these can be counteracted.