Harvard. Core Advanced Economic Theory. Taussig (and Day), 1915-1917
Examination questions spanning just over a half-century can be found in Frank Taussig’s personal scrapbook of cut-and-pasted semester examinations for his entire Harvard career. Until Schumpeter took over the core economic theory course from Taussig in 1935, Taussig’s course covering economic theory and its history was a part of almost every properly educated Harvard economist’s basic training. Taussig’s exam questions were posted for the academic years 1886/87 through 1889/90 along with enrollment data for the course; material from 1890/91 through 1893/94; 1897-1900 ; 1904-1909 ; 1911-14 have been posted as well.
The course was taught by Taussig up through the Winter term of 1916/17. Early in 1917 Taussig was appointed chairman of the newly created United States Tariff Commission. He also was appointed a member of the Advisory Committee on the Peace (sub-committee on tariffs and commercial treaties) and he went to Europe for the economic sessions of the peace negotiations. His resignation from the Tariff Commission was effective August 1, 1919 after which he returned to Harvard.
U.S. Tariff Commission Reports under Taussig 1917-1919:
[F. W. Taussig]
Arrange your answers in the order of the questions.
- “Given machinery, raw materials, and a year’s subsistence for 1000 laborers, does it make no difference with the annual product whether those laborers are Englishmen or East Indians?
. . . The differences in the industrial quality of distinct communities of laborers are so great as to prohibit us from making use of capital to determine the amount that can be expended in any year or series of years in the purchase of labor.”
Under what further suppositions, if under any, does this hypothetical case tell in favor of those holding that wages are paid from a wages fund? Under what suppositions, if under any, in favor of those holding views like Walker’s?
- (a)“The labourer is only paid a really high price for his labour when his wages will purchase the produce of a great deal of labour.”
(b) “If I have to hire a labourer for a week, and instead of ten shillings I pay him eight, no variation having taken place in the value of money, the labourer can probably obtain more food and necessaries with his eight shillings than he before obtained for ten.”
Explain concisely what Ricardo meant.
- What, according to Ricardo, would be the effects of a general rise of wages on profits? on the prices of commodities? on rents? the well-being of laborers?
- “The component elements of Cost of Production have been set forth in the first part of this enquiry. The principal of them, and so much the principal as to be nearly the sole, we found to be Labour. What the production of a thing costs to its producer, or its series of producers, is the labour expended in producing it. If we consider as the producer the capitalist who makes the advances, the word Labour may be replaced by the word Wages: what the produce costs to him, is the wages which he has had to pay.” J.S. Mill.
What would Ricardo say to the proposed substitution [of “Wages” for “Labour”]? Cairnes? Marshall?
- “Suppose that society is divided into a number of horizontal grades, each of which is recruited from the children of its own members, and each of which has its own standard of comfort, and increases in number rapidly when the earnings to be got in it rise above, and shrinks rapidly when they fall below that standard. Suppose, then, that parents can bring up their children to any trade in their own grade, but cannot easily raise them above it and will not consent to sink them below it. . . .
On these suppositions the normal wage in any trade is that which is sufficient to enable a laborer, who has normal regularity of employment, to support himself and a family of normal size according to the standard of comfort that is normal in the grade to which his trade belongs. In other words the normal wage represents the expenses of production of the labor according to the ruling standard of comfort.” Marshall.
On these suppositions, would value depend in the last analysis on cost or utility?
- (a)“Were it not for the tendency [to diminishing returns] every farmer could save nearly the whole of his rent by giving up all but a small piece of his land, and bestowing all his labor and capital on that. If all the labor and capital which he would in that case apply to it gave as good a return in proportion as that he now applies to it, he would get from that plot as large a produce as he now gets from his whole farm; and he would make a net gain of all his rent save that of the little plot that he retained.”
(b) “The return to additional labour and capital [applied to land] diminishes sooner or later; the return is here measured by the quantity of the produce, not by its value.”
(c) “Ricardo, and the economists of his time generally were too hasty in deducing this inference [tendency to increased pressure] from the law of diminishing return; and they did not allow enough for the increase of strength that comes from organization. But in fact every farmer is aided by the presence of neighbours, whether agriculturists or townspeople. . . . If the neighbouring market town expands into a large industrial centre, all his produce is worth more; some things which he used to throw away fetch a good price. He finds new openings in dairy farming and market gardening, and with a larger range of produce he makes use of rotations that keep his land always active without denuding it of any one of the elements that are necessary for its fertility.”
Have you any criticisms or qualifications to suggest on these passages from Marshall?
- “When the artisan or professional man has once obtained the skill required for his work, a part of his earnings are for the future really a quasi-rent. The remainder of his income is true earnings of effort. But this remainder is generally a large part of the whole. And herein lies the contrast. When a similar analysis is made of the profits of the undertaker of business, the proportions are found to be different: in this case nearly all is quasi-rent.”
Explain what you believe to be Marshall’s meaning, and why he considers undertaker’s profits not to be “true earnings of effort.”
[F. W. Taussig]
Arrange your answers in the order of the questions.
- Explain briefly what Walker meant by the “no-profits” business man; what Marshall means by the “representative firm”; what your instructor means by the “marginal product of labor.” How are the three related?
- Explain briefly whether anything in the nature of a producer’s surplus or a consumer’s surplus appears as regards (a) instruments made by man and the return secured by their owners; (b) unskilled labor and the wages paid for it; (c) business management and business profits.
- “ Wages are paid by the ordinary employer as the equivalent of the discounted future benefits which the laborer’s work will bring him — the employer — and the rate he is willing to pay is equal to the marginal desirability of the laborer’s services measured in present money. We wish to emphasize the fact that the employer’s valuation is (1) marginal, and (2) discounted. The employer pays for all his workmen’s services on the basis of the services least desirable to him, just as the purchaser of coal buys it all on the basis of the ton least desirable to him; he watches the ‘marginal’ benefits he gets exactly as does the purchaser of coal. At a given rate of wages he ‘buys labor’ up to the point where the last or marginal man’s work is barely worth paying for. . . . If, say, he decides on one hundred men as the number he will employ, this is because the hundredth or marginal man he employs is believed to be barely worth his wages, while the man just beyond this margin, the one hundred and first man, is not taken on because the additional work he would do is believed to be not quite worth his wages.”
Does this seem to you in essentials like the doctrine of Clark? of your instructor?
[Hand-written note: The author is I. Fisher.]
- An urban site is leased at a ground rental of $2,000 a year; a building is erected on it costing $50,000; the current rate of interest is 4%.
Suppose the net rental of the property (after deduction of expenses and taxes) to be $8,000. What is the nature of this return, according to J. S. Mill? Marshall? Clark?
Suppose the net rental to be $3,000; answer the same questions.
- “That capital is productive has often been questioned, but no one would deny that tools and other materials of production are useful; yet these two propositions mean exactly the same when correctly understood. Capital consists primarily of tools and other materials of production, and such things are useful only in so far as they add something to the product of the community. Find out how much can be produced without any particular tool or machine, and then how much can be produced with it, and in the difference you have the measure of its productiveness.”
What would Böhm-Bawerk say to this? What is your own view?
[Hand-written note: The author is Carver.]
- “ Wages bear the same relation to man’s services that rent does to the material uses of wealth. . . . While rent is the value of the uses of things, wages is the value of the services of men. . . . The resemblance is very close between rent and wages.”
“The principles governing the rate of wages are, in a general way, similar to those governing the rate of rent. The rate of a man’s wages per unit of time is the product of the price per piece of the work he turns out multiplied by the rate of output. His productivity depends on technical conditions, including his size, strength, skill, and cleverness.”
Explain what is meant by “rent” in these passages and by what writers it is used in this sense; and give your opinion on the resemblance between such “rent” and wages.
[Hand-written note: The authors are Fetter and Fisher, respectively.]
- Böhm-Bawerk remarks that the theory which he has put forward bears “a certain resemblance” to the wages fund theory of the older English school, but differs from it in various ways, one of which is “the most important” What are the points of resemblance? and what is this most important difference?
- “While the slowness of Nature is a sufficient cause for interest, her productivity is an additional cause. . . . Nature is reproductive and tends to multiply. Growing crops and animals make it possible to endow the future more richly than the present. By waiting, man can obtain from the forest or farm more than he can by premature cutting or the exhaustion of the soil. In other words, not only the slowness of Nature, but also her productivity or growth, has a strong tendency to keep up the rate of interest. Nature offers man, as one of her optional income-streams, the possibility of great future abundance at trifling present sacrifice. This option acts as a bribe to man to sacrifice present income for future, and this tends to make present income scarce and future income abundant, and hence also to create in his mind a preference for a unit of present over a unit of future income.”
What would Böhm-Bawerk say to this? What is your own view?
Whom do you believe to be the writer of the passage?
[Hand-written note: The author is I. Fisher]
[F. W. Taussig]
Arrange your answers strictly in the order of the questions.
- On what grounds is it contended that there is a circle in Walker’s reasoning on the relation between wages and business profits? What is your opinion on this rejoinder: that Walker, in speaking of the causes determining wages, has in mind the general rate of wages, whereas in speaking of profits he has in mind the wages of a particular grade of labor?
- According to Ricardo, neither profits of capital nor rent of land are contained in the price of exchangeable commodities, but labor only.” — Thünen.
Is there justification for this interpretation of Ricardo?
- “Instead of saying that profits depend on wages, let us say (what Ricardo really meant) that they depend on the cost of labour. . . . The cost of labour is, in the language of mathematics, a function of three variables: the efficiency of labor; the wages of labour (meaning thereby the real reward of the labourer); and the greater or less cost at which the articles composing that real reward can be produced or procured.” — J. S. Mill.
Is this what Ricardo really meant? Why the different form of statement by Mill? What comment have you to make on Mill’s statement?
- State resemblances and differences in the methods of analysis, and in the conclusions reached, between (a) the temporary equilibrium of supply and demand (e.g. in a grain market), as explained by Marshall; (b) “two-sided competition,” as explained by Böhm-Bawerk; (c) equilibrium under barter, as explained by Marshall.
- Explain concisely what is meant in the Austrian terminology by “value,” “subjective value,” “subjective exchange value,” “objective exchange value.”
Does the introduction of “subjective exchange value” into the analysis of two-sided competition lead to reasoning in a circle?
- “Suppose a poor man receives every day two pieces of bread, while one is enough to allay the pangs of positive hunger, what value will one of the two pieces of bread have for him? The answer is easy enough. If he gives away the piece of bread, he will lose, and if he keeps it he will secure, provision for that degree of want which makes itself felt whenever positive hunger has been allayed. We may call this the second degree of utility. One of two entirely similar goods is, therefore, equal in value to the second degree in the scale of utility of that particular class of goods. . . . Not only has one of two goods the value of the second degree of utility, but either of them has it, whichever one may choose. And three pieces have together three times the value of the third degree of utility, and four pieces have four times the value of the fourth degree. In a word, the value of a supply of similar goods is equal to the sum of the items multiplied by the marginal utility.” — Wieser.
Do you think this analysis tenable? and do you think it inconsistent with the doctrine of total utility and consumer’s surplus?
- “If the modern theory of value, as it is commonly stated, were literally true, most articles of high quality would sell for three times as much as they actually bring.” What leads Clark to this conclusion? and do you accept it?
[F. W. Taussig]
Arrange your answers strictly in the order of the questions. Allow time for careful revision of your answers.
- “The productivity of capital is, like that of land and labor, subject to the principle of marginal productivity, which is, as we have seen, a part of the general law of diminishing returns. Increase the number of instruments of a given kind in any industrial establishment, leaving everything else in the establishment the same as before , and you will probably increase the total product of the establishment somewhat, but you will not increase the product as much as you have the instruments in question. Introduce a few more looms into a cotton factory without increasing the labor or the other forms of machinery, and you will add a certain small amount to the total output. . . . That which is true of looms in this particular is also true of ploughs on a farm, of locomotives on a railway, of floor space in a store, and of every other form of capital used in industry.” Is this in accord with Clark’s view? Böhm-Bawerk’s? Marshall’s? Your own?
- What is the significance of the principle of quasi-rent for
- the “single tax” proposal;
- Clark’s doctrine concerning the specific product of capital;
- the theory of business profits.
- Explain what writers use the following terms and in what senses: Composite quasi-rent; usance; implicit interest; joint demand.
- On Cairnes’ reasoning, are high wages of a particular group of laborers the cause of the result of high value (price) of the commodities made by them? On the reasoning of the Austrian school, what is the relation between cost and value? Consider differences or resemblances between the two trains of reasoning.
- “This ‘exploitation of interest’ consists virtually of two propositions: first, that the value of any product usually exceeds its cost of production; and, secondly, that the value of any product ought to be exactly equal to its cost of production. The first of these propositions is true, but the second is false. Economists have usually pursued a wrong method in answering the socialists, for they have attacked the first proposition instead of the second. The socialist is quite right in his contention that the value of the product exceeds the cost. In fact, this proposition is fundamental in the whole theory of capital and interest. Ricardo here, as in many other places in economics, has been partly right and partly wrong. He was one of the first to fall into the fallacy that the value of the product was normally equal to its cost, but he also noted certain apparent ‘exceptions,’ as for instance, that wine increased in value with years.” Is this a just statement of Ricardo’s view? Of the views of economists generally? In what sense is it true, in in any, that value usually exceeds cost?
- Explain carefully what Böhm-Bawerk means by
- social capital;
- the general subsistence fund;
- the average production period;
- usurious interest.
- In what way does he analyze the relation between (b) and (c)?
- Suppose ability of the highest kind in the organization and management of industry became as common as ability to do unskilled manual labor is now; what consequences would you expect as regards the national dividend? the remuneration of the business manager and of the unskilled laborer? Would you consider the readjusted scale of remuneration more or less equitable that that now obtaining?
- What grounds are there for maintaining or denying that “profits” are (a) essentially a differential gain, (b) ordinarily capitalized as “common stock,” (c) secured through “pecuniary,” not “industrial” activity? What method of investigation would you suggest as the best for answering these questions?
[Economics] 11. Asst. Professor Day.—Economic Theory
Total 28: 21 Graduates, 2 Seniors, 1 Junior, 1 Radcliffe, 3 Others
Source: Harvard University. Reports of the President and Treasurer of Harvard College, 1916-1917, p. 57.
[F. W. Taussig]
Arrange your answers strictly in the order of the questions.
- “Is it not true, in any normal condition of things, that consumption is supported by contemporaneous production?
. . . Just as the subsistence of the laborers who built the Pyramids was drawn not from a previously hoarded stock, but from the constantly recurring crops of the Nile Valley; just as a modern government when it undertakes a great work of years does not appropriate to it wealth already produced, but wealth yet to be produced, which is taken from producers in taxes as the work progresses; so is it that the subsistence of the laborers engaged in production which does not directly yield subsistence, comes from the production of subsistence in which others are simultaneously engaged.”
Consider, as regards contemporaneous production in general and also as regards the example of the Pyramids.
- “Our [British] commodities would not sell abroad for more or less in consequence of a free trade and a cheap price of corn; but the cost of production to our manufacturers would be very different if the price of corn was eighty or was sixty shillings per quarter; and consequently profits would be augmented by all the cost saved in the production of exported commodities.” — Ricardo.
Explain what Ricardo meant here by “cost of production”; why he thought cost would be different in consequence of free trade in corn; and whether he believed cost (in this sense) to be the regulator of value.
- In what sense is the term “demand” used by Mill when speaking of (a) the equation of demand and supply, (b) demand and supply in relation to labor, (c) the demand for money?
- “The one universal rule to which the demand curve conforms is that it is inclined negatively throughout the whole of its length.” Can you mention exceptions as regards the demand curve for short periods? for long periods? In what sense is the term “demand” here used?
- It has been said that Marshall’s discussion of demand and utility is “an elementary analysis of an almost purely formal kind.” Does this seem to you a just comment?
- Explain “subjective value” and “subjective exchange value.” Under what conditions is subjective value to sellers of substantial influence in the determination of “objective exchange value”? Under what conditions, if under any, is subjective exchange value effective in such determination?
- “He [Longe] puts the case of a capitalist who, by taking advantage of the necessities of his workmen, effects a reduction in their wages, and succeeds in withdrawing so much, call it £1000, from the wages-fund; and asks how is the sum, thus withdrawn, to be restored to the fund? On Mr. Longe’s principles the answer is simple — ‘by being spent on commodities;’ for it may be assumed that the sum so withdrawn will, in any case, not be hoarded. . . . And I am disposed to flatter myself that the reader who has gone with me in the foregoing discussion will not have much difficulty in replying to it [the question] upon mine.”
What is the answer on Cairnes’s principles? and is this the answer to be expected on the basis of a wages-fund doctrine?
- Explain in what way the relation between cost and value is analyzed by Cairnes and by the Austrian School. Would Cairnes’s analysis differ in essentials from the Austrian, if he were to assume complete mobility of labor? What significance do the Austrians attach to mobility of labor?
[E. E. Day]
- “The ultimate determinant of value…is marginal utility, not cost in the sense of labor of effort.” What would Marshall say of this? Böhm-Bawerk? Taussig?
- “The forces which make for Increasing Return are not of the same order as those that make for Diminishing Return…The two ‘laws’ are in no sense coordinate….The two ‘laws’ hold united, not divided, sway over industry.” Comment critically.
- Suppose the Federal government imposes a tax of 10 cents a bushel on all wheat grown in the United States. Upon whom will the burden of the tax fall? What conditions determine the final incidence of the tax? Illustrate, where possible, by diagram.
- “Rent forms no part of the expenses of production….Rent is not one of the factors bearing on price, but is the result of price.” Carefully analyze this contention.
- “The differences in the productive power of men due to their heredity or social position give to certain individuals the same kind of an advantage over others that the owner of a corner lot in the center of a city has over one in the suburbs. If the income from a corner lot is a surplus and can therefore be described as unearned, the income of a man of better heredity, education or opportunity must also be regarded as a surplus income and therefore unearned.” Discuss this statement with reference to your general theory of distribution.
- Contrast briefly the definitions of “capital” advanced by (a) Böhm-Bawerk; (b) Clark; (c) Taussig; (d) Fetter; (e) Veblen.
- Discuss the place of abstinence (or the sacrifice of saving) in the interest theories of (a) Böhm-Bawerk, (b) Clark; (c) Fetter; (d) Taussig.
- “In previous chapters, interest has been accounted for, in part at least, by the fact that there is productivity of capital; it results from the application of labor in more productive ways. If this were the whole of the theory of interest, we should reason in a circle in saying that wages are determined by a process of discount.” Do you agree as to the circle? Why or why not?
Source: Harvard University Archives. Examination Papers (HUC 7000.28, vol. 59). Harvard University Examinations. Papers Set for Final Examinations in History, History of Religions, History of Science, Government, Economics,…, Fine Arts, Music in Harvard College, June 1917. p. 61.
Image Source: Frank Taussig’s 1919 passport application.