Columbia University
FACULTY OF POLITICAL SCIENCE
=Nicholas Murray Butler=, LL.D., President. =J. W. Burgess=, LL.D.,
Professor of Political Science and Constitutional Law. =Munroe Smith=,
LL.D,, Professor of Comparative Jurisprudence. =F. J. Goodnow=, LL. D.,
Professor of Administrative Law. =E. R. A. Seligman=, LL.D., Professor
of Political Economy and Finance. =H. L. Osgood=, Ph.D., Professor of
History. =Wm. A. Dunning=, LL.D., Professor of History. =J. B. Moore=,
LL.D., Professor of International Law. =F. H. Giddings=, LL.D., Professor
of Sociology. =J. B. Clark=, LL.D., Professor of Political Economy.
=J. H. Robinson=, Ph.D., Professor of History. =W. M. Sloane=, L.H.D.,
Professor of History. =H. R. Seager=, Ph.D., Adjunct Professor of
Political Economy. =H. L. Moore=, Ph.D., Adjunct Professor of Political
Economy. =W. R. Shepherd=, Ph.D., Instructor in History. =A. S. Johnson=,
Ph.D., Instructor in Economics. =H. A. Cushing=, Ph.D., Lecturer in
History. =J. T. Shotwell=, Ph.D., Lecturer in History. =G. W. Botsford=,
Ph.D., Lecturer in History. =G. J. Bayles=, Ph.D., Lecturer in Sociology.
=V. G. Simkhovitch=, Ph.D., Lecturer on History. =C. A. Beard=, Ph.D.,
Lecturer in History.
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2
HISTORY AND CRITICISM OF THE LABOR THEORY OF VALUE
STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW
EDITED BY THE FACULTY OF POLITICAL SCIENCE OF
COLUMBIA UNIVERSITY
Volume XIX] [Number 2
HISTORY AND CRITICISM
OF THE
LABOR THEORY OF VALUE
IN ENGLISH POLITICAL ECONOMY
BY
ALBERT C. WHITAKER, Ph.D.,
_Sometime University Fellow in Economics, Columbia University;
Instructor in Economics, Leland Stanford Junior University_
[Illustration]
New York
THE COLUMBIA UNIVERSITY PRESS
THE MACMILLAN COMPANY, AGENTS
LONDON: P. S. KING & SON
1904
COPYRIGHT, 1904,
BY
ALBERT C. WHITAKER
CONTENTS
PAGE
CHAPTER I
GENERAL OUTLINES OF THE HISTORY OF THE LABOR THEORY
§ 1. Scope of the present history 9
§ 2. Great diversity of early opinions on value 10
§ 3. The two main ideas, the “philosophical” and the “empirical”
accounts of value 12
CHAPTER II
ADAM SMITH’S PHILOSOPHICAL OR PRIMITIVE ACCOUNT OF VALUE
§ 1. Interpretation of Smith’s doctrine of value rendered difficult
by a plurality of explanations 16
§ 2. Preliminary observations concerning the use of the terms
“labor” and “value” 19
§ 3. The two distinct labor standards in the primitive account—the
“labor cost” and the “labor command” standards 20
§ 4. Smith’s conception of quantity of labor 22
§ 5. The labor and the corn measure of value in different times
and places 24
CHAPTER III
THE EMPIRICAL ACCOUNT OF ADAM SMITH
§ 1. Abandonment of the labor-cost standard for the conditions
of real society 29
§ 2. The labor-command standard retained as still valid 30
CHAPTER IV
CRITICISM OF THE THEORIES OF ADAM SMITH
§ 1. Principal argument for the labor-command standard a theory
of labor as undifferentiated or potential commodity 32
§ 2. Complete failure of this theory to afford an ultimate
philosophy of value 34
§ 3. The concept of labor as disutility cost suggests later
valid theories, but fails to lead to a satisfactory result 36
§ 4. The arguments, by which Smith supports the labor-command
standard, prohibit its use under the conditions of
advanced society 39
CHAPTER V
RICARDO AND THE TRUE CLASSICAL LABOR THEORY
§ 1. General estimate of Ricardo’s theory 41
§ 2. At foundation an attempt to reconcile the “philosophical”
and “empirical” accounts 42
§ 3. Preliminary conditions of the theory laid down by Ricardo
himself 44
§ 4. How determine quantity of labor; unsatisfactory treatment
of skilled labor; labor indirectly applied 46
§ 5. The introduction of interest on capital as an element in
cost of production (i. e., entrepreneur’s cost) 49
§ 6. In Ricardo’s conception, interest enters into Natural Price
or Normal Value, though he does not make this clear 50
§ 7. Essence of Ricardo’s explanation of the complication of
interest 52
§ 8. Peculiarly round-about form of statement of the same 53
§ 9. Ricardo’s explanation of the complication also positively
misleading 55
§ 10. Summary 56
CHAPTER VI
MCCULLOCH, JAMES MILL AND TORRENS.
ANTICIPATION OF MARX’S THIRD VOLUME
§ 1. The interest which attaches to these three minor writers 61
§ 2. Samples of McCulloch’s extravagant dogmatism 62
§ 3. McCulloch anticipates Marx’s solution of the “organic
composition of capital” complication 64
§ 4. James Mill’s complete misapprehension of the nature of
the interest difficulty 70
§ 5. False move made by Torrens in defining the concept of
entrepreneur’s cost 74
§ 6. Shallow attempt of Torrens to avoid the interest difficulty
by a theory of “accumulated labour” 76
CHAPTER VII
THE EMPIRICAL THEORY AS DEVELOPED BY MALTHUS
§ 1. Malthus a prolific writer on value, and opponent of Ricardo 79
§ 2. An important transfer of emphasis from the “philosophical”
to the “empirical” account 79
§ 3. The law of costs made subordinate to the law of supply and
demand 80
§ 4. Detailed criticism of Ricardo’s labor-cost theory 83
§ 5. Majority of these points of criticism provided for by Ricardo
himself 85
§ 6. Difference between the two economists partly one of emphasis:
ultimate gain of Malthus’ theory 86
§ 7. Note on the question of the invariable measure of value for
all times and places 88
CHAPTER VIII
SENIOR
§ 1. Opening of his discussion very unfavorable to old labor cost
philosophy 93
§ 2. Originates a consistent conception of subjective cost of
production,—labor and abstinence 95
§ 3. Approaches a theory of final equivalence of utility and
disutility 96
§ 4. Values produced would be in proportion to subjective cost
of production were there no rents 98
§ 5. Remarkable extension of the rent concept 99
§ 6. The universal prevalence of rent in real life nullifies
the law of subjective costs 101
§ 7. Net result of Senior’s reasonings very destructive of
labor-cost theory 102
CHAPTER IX
JOHN STUART MILL
§ 1. Begins with “empirical” laws of supply and demand, and of
entrepreneur’s costs 104
§ 2. Scant attention paid to subjective costs 106
§ 3. Wavers concerning inclusion of “profits” in cost: an
illustration of the inadequacy of the ancient
philosophy of value 107
§ 4. Follows Ricardo, without the slightest improvement in
his explanation of the interest complication 108
§ 5. Departs from Ricardo in admitting that case of skilled
labor necessitates qualification of the labor-cost theory 110
§ 6. Summary: the labor theory weakened; comparison with Malthus
and Senior 112
CHAPTER X
CAIRNES
§ 1. Cost of production, as ultimate regulator of value, defined
in purely subjective terms 114
§ 2. Wages and interest, being rewards, cannot be costs 116
§ 3. Conception of the “average sacrifice” 117
§ 4. The problem of the influence of subjective cost upon
exchange value, more clearly stated than ever before 118
§ 5. The theory of “non-competing groups” 119
§ 6. Consequent limitation of law of costs 120
§ 7. And resort to a principle of “reciprocal demand,” which
fails to replace the law of costs 121
§ 8. Cairnes’ theory of non-competing groups signifies that the
existence of skilled labor is fatal to the Ricardian
labor theory 123
§ 9. Ricardo’s assumption of perfect competition does not
foreguard against the difficulty of skilled labor 124
CHAPTER XI
THE ULTIMATE RELATION OF COST TO VALUE
§ 1. Net result of English discussion from Smith to Cairnes 127
§ 2. Classification of cost concepts 135
§ 3. Necessary preliminaries concerning the concepts of value
and utility 140
§ 4. Essential features of the pure utility theory; the supply
of goods taken for granted 146
§ 5. Explanation of the law of entrepreneur’s cost in the light
of the utility theory 155
§ 6. The modern refined labor theory—the marginal equivalence
of utility and disutility—considered first in the
isolated economy 165
§ 7. The relation of marginal subjective cost to exchange
value in the developed social economy 177
§ 8. Summary 191
CHAPTER I
GENERAL OUTLINES OF THE HISTORY OF THE LABOR THEORY OF VALUE
1. The following history of the labor theory of value begins with Adam
Smith, not because it is supposed that Political Economy was born with
the _Wealth of Nations_, but because no other work written affords so
convenient a starting-point to the historian who has no desire to press
his investigations into regions too remote from modern interests.
After Adam Smith, the writers to be considered are Ricardo and Malthus,
McCulloch, James Mill and Torrens, Senior, John Stuart Mill, and Cairnes.
In the next great treatise after that of Cairnes, the _Principles of
Economics_ of Marshall, there is nothing left of the labor theory of
value, except a note at the end of a chapter on the general theory of the
equilibrium of supply and demand.[1] This note, “On Ricardo’s Theory of
Value,” endeavors to state the ultimate relations of cost, utility and
value in such a manner that Ricardo’s explanation of value is made to
appear as a statement true as far as it goes, which errs only in being
incomplete, and which is completed, not refuted, by the utility theory.
This view will be taken up in the last chapter of the present essay. But
no separate chapter is devoted to Professor Marshall’s work, because, as
a matter of fact, the Ricardian labor theory finds no place in the text
of his _Principles_. From Smith to Cairnes, the list of writers given
above was selected as well calculated to exhibit the general line of
development of English political economy. No attempt has been made to
discover writers outside of this list, although it is not denied that
such writers may not at present receive due credit for their influence
upon the development of economic theory. Making no attempt at what might
be called a discursive or _extensive_ study of the field, this history
will be confined to an _intensive_ study of the chief writers. If it be
found that certain of the above list of writers contributed nothing but
error to the theory of value—and such is the case with three of them—even
such a conclusion is deemed to be of historical value.
2. With the limits of our field thus defined, attention should first be
called to a fairly prevalent, but mistaken, impression regarding the
so-called classical labor theory of value. It is frequently assumed
that this theory of value was a simple and absolute dictum, supported
in substantial unanimity by a considerable body of writers, called
collectively “the classical school.” There is, no doubt, sufficient
resemblance among these writers in their general tendencies of thought
to justify the term “classical school;” but with respect to their views
on the central problem of value, it is their differences of opinion that
at present need emphasis, just as it is these differences which take
the modern reader by surprise when he first undertakes a detailed study
of their writings. Instead of finding the minds of the early English
economists dominated by a single labor theory, having the merit of great
directness and simplicity, the historian of the theory is confronted
with an appalling jumble of ideas on the relation of labor to value.
Ricardo, it is true, defended the simple thesis that the exchange value
of a commodity is governed by its cost of production in labor, but it
is sometimes forgotten that he hedged this doctrine about with several
important qualifications and conditions. Furthermore, there was not a
contemporary or subsequent writer who did not differ from Ricardo in
important points of theory. Taking Smith, Malthus, Ricardo, McCulloch,
Torrens, and James Mill together, we find labor sometimes conceived of
as _disutility cost_, at other times as _productive power_, without
any recognition of the distinction between these concepts. Yet this
distinction may be of great importance in certain propositions of theory.
We find McCulloch at one time claiming that the value-determining labor
employed in the production of a commodity includes the operations of
machines and inanimate objects, which are “philosophically just as truly
labor as human exertions.” Torrens maintained that value is governed by
cost of production in “accumulated” labor, and James Mill held interest
on capital to be really wages of labor, an absurd thought absolutely
foreign to Ricardo’s theory. In addition to the _labor-cost regulator_
of value, there was the _labor-command measure_ of value, the measure of
the value[2] of a good for all times and places, alleged to be afforded
by the amount of labor which could be commanded by it or had in exchange
for it. The principal defender of this measure, Malthus, did not believe
in the labor-cost regulator. It was asserted that the “value of labor”
is the same in all times and places. When this value is inadvertently
identified with _exchange value_, which must, of course, be measured
by the commodity wages of labor, some highly interesting arguments are
necessitated to show that real wages are in some sense or other the
same in all times and places, in spite of the fact that, as commonly
understood, they are by no means the same. We find a “corn measure” of
value first proposed as a convenient index to the true labor measure.
But, strange to say, later we run upon a proposal to take an “arithmetic
mean between corn and labor” (_i. e._, between their prices) as the
“least defective measure” of “intrinsic value in exchange.” _Cost of
production_ was used without any distinguishing adjectives to indicate
concepts so distinct as entrepreneur’s cost and labor cost (presumably
“disutility cost”). In consequence there arose a dispute, which was at
the time nearly unintelligible, as to whether or not profits (_i. e._,
interest on capital) are a part of cost of production.
3. In the confusion, a few main lines of thought can be discerned.
There is a theory of value _regulation_, and there is a theory of value
_measurement_, which is, as Malthus and others pointed out, a distinct
thing from value regulation. The classical theory of value _regulation_
was composed of two separate accounts. That is, these two accounts were
of distinct origin and nature, and should have been kept distinct.
Instead of this they were more or less fused and the relation between
them was always clouded. To this fact is due the great difficulty all
must experience in reaching a complete understanding of the classical
theory. Though it is for this reason very necessary to give the accounts
separate names, it seems impossible to find unobjectionable terms.
Professor von Wieser, from whom I have taken the idea that the confusion
between these two accounts is the key to the history of the labor
theory of value, distinguishes them by the terms “philosophical” and
“empirical.”[3]
Adopting these names, in default of better, the “philosophical” account
is the answer of the fathers of modern political economy to the general
riddle of value, the riddle of its ultimate nature, or essence. At first
blush it would seem that things must derive their value from their
usefulness. But almost immediately the mind turns to the fact, which has
since “classical” days become such a time-honored illustration, that
bread is “more useful” than gold, but much less valuable. The usefulness
of bread, as it is here understood, is its general or characteristic
usefulness, its usefulness as a class of things, its power to preserve
our health and strength. Meditating upon the importance of the entire
class of utilities represented by bread, one is led to ignore the
question whether the specific utility of a particular piece of bread,
in the given circumstances of the supply of bread, is not less than
the specific usefulness of a particular piece of gold for purposes of
ornament, in the given circumstances of the supply of gold. This is the
line of inquiry which leads to the utility theory. But having passed
the place where this road branches off, the earlier speculation on
value reached the conclusion that things possessing utility have their
values determined by their cost in labor. This answer to the riddle
seems foreordained, when once Adam Smith’s “value in use” is adopted as
the sole conception of utility. Elaboration and illustration of this
philosophy always leads to primitive and “natural” society, where the
hunter and fisherman, rent-free and equal, exchange the products of their
labor as measured in days. When, however, the attention turns to the
market-price of goods in the actual world, it is observed as a matter
of business experience, in contrast with speculation with regard to the
essence of things, that the exchange value of commodities tends to equal
the sum of the wages of labor, the “profits” of stock, and the rent
of land[4] which must be paid to obtain their production. This is the
“empirical” account. The principle discovered is that now known as the
law of entrepreneur’s costs.[5]
The central idea in the “philosophical” account is that labor-cost is
the essence of value. It appeals primarily to the reader’s introspective
judgment for confirmation. The primitive state of society by which it is
illustrated is quite imaginary. The “empirical” account is an outwardly
observed tendency of market competition. In the progress of the thought
of English economists upon value, the “philosophical” labor-cost account
becomes more and more attenuate, until in the _Principles_ of Professor
Marshall, as before observed, nothing remains of it but a note on
“Ricardo’s Theory of Value.” Professor Marshall’s general theory of the
equilibrium of normal demand and supply is the classical “empirical”
account enlarged and greatly improved, with some of the more general
laws of the newer utility theory incorporated into the whole to serve as
the ultimate principles of demand. While the “philosophical” account was
fading away, the “empirical” account was becoming virtually the whole
theory of value. Strange to say, Ricardo contributed very little to the
advancement of the empirical account as such. The direct line of descent
of this doctrine is traceable from Smith’s _Wealth of Nations_, through
the _Principles_ of Malthus and J. S. Mill, to Marshall. Neither Ricardo
nor Cairnes can be considered to stand in the line.[6]
Adam Smith and Malthus considered ground-rent to be a “component part”
of entrepreneur’s cost (not that they employed the term entrepreneur’s
cost), co-ordinate with wages and “profits of stock.” Ricardo never
stated a law of entrepreneur’s cost plainly, formally, as such, though
he gave it an obscure recognition as a source of difficulty to the pure
labor theory of value. But he influenced its form profoundly, for when
the doctrine passed into the hands of J. S. Mill, the latter removed
the rent of land from among the elements of cost, leaving wages and
interest.[7]
While many points of detail will appear in the following pages, it will
be found necessary to trace the relations of the two great accounts of
value, the “philosophical” and the “empirical,” in the writings of every
economist hereafter considered.
CHAPTER II
ADAM SMITH’S PHILOSOPHICAL OR PRIMITIVE ACCOUNT OF VALUE.
1. There is a veritable multiplicity of explanations of value in the
_Wealth of Nations_, which makes a history of Adam Smith’s views on this
subject extremely difficult writing. Many a wise or philosophical sort
of observation may be correct in a general way, or largely true, and yet
not be precisely true. Perhaps the greater part of what Adam Smith has
said on the nature of value consists of reflections of this kind, and
the student of his text can never be certain that he really planned to
describe the laws of value with that precision which modern theory at
least hopes to attain. Still there are some exact theorems laid down. The
language in which these are expressed is uniformly flowing and makes good
reading; but it seems to be more an eloquent appeal against the shallow
mercantilist view of wealth, than an attempt at a painstaking analysis
of the facts of value. The following thoroughly typical passage from
the chapter, “Of the Real and Nominal Price of Commodities, or of their
Price in Labor and their Price in Money,” is truly a call to people to
look away from money as the sole measure of wealth and regard the real
source of wealth. But in spite of this it happens to end in a precise
proposition or theory of value:
“Wealth, as Mr. Hobbes says, is power. But the person who
either acquires, or succeeds to a great fortune, does not
necessarily acquire or succeed to any political power,
either civil or military.... The power which that possession
immediately and directly conveys to him, is the power of
purchasing, a certain command over all the labour, or over all
the produce of labour which is then in the market. His fortune
is greater or less, precisely in proportion to the extent of,
his power; or to the quantity either of other men’s labour, or,
what is the same thing, of the produce of other men’s labour,
which it enables him to purchase or command. The exchangeable
value of everything must always be precisely equal to the
extent of this power which it conveys to its owner.”[8]
From which Adam Smith concludes that labor is “the real measure of
the exchangeable value of all commodities.” The exact meaning of the
conclusion, it must be observed, is not plain. If “exchangeable value”
meant mere exchange value in the modern sense—the power of a good to
exchange for some quantity of another good objectively measured in
weight, volume, or length—then money would afford a measure of this value
quite as reliable as labor and far more convenient. What is intended by
“exchangeable value” is a question we may approach later, but whatever
exact meaning we take for this term, we find that the series of general
observations preceding the conclusion does not prove this conclusion as a
precise proposition. This passage is typical of the chapter. Painstaking
study of Smith’s theory or theories of value is also made difficult by
occasional lapses into very loose terminology. For an instance, we find
the sentence, “equal quantities of labor, at all times and places, may be
said to be of equal value to the laborer.”[9] The context shows that, in
all probability, value here means _disutility_.[10]
The several different minor theories of value given by Adam Smith are
not woven into a whole by him. The student of his views approaches his
great work with a respect that amounts to awe, and it takes time to
force himself to the conclusion that there is a part of the _Wealth of
Nations_ which, though profoundly suggestive, is not entirely consistent.
The attempt, instinctively made by the commentator, to find a hidden
consistency behind the various incompatible utterances, to discover a
hypothesis upon which the contradictions may be declared apparent only,
is, according to the belief of the writer, fore-doomed to complete
failure.
Within the plurality of explanations of value two main divisions are
discernible, the first contained in Chapter V, and the second in
Chapters VI and VII of Book I.[11] These are the “philosophical” and
the “empirical” accounts distinguished in the first chapter of this
essay. The first of these is in its place stated in general terms, as
if unconditionally true, but when the empirical account is reached, a
considerable part of what had been said previously is restricted to “that
early and rude state of society which precedes both the accumulation of
stock and the appropriation of land.”[12] For this reason what has been
called the “philosophical,” may, in the case of Adam Smith, also be
called the “primitive” account of value.
2. Preparatory to taking up the philosophical account, a few words on
the use of the terms labor and value are pertinent. The word _labor_,
now as formerly, denotes really two distinct, though related, things.
One is the _productive power_ of human beings. For instance, labor
and natural agents are called factors in production, or it is said
that the entrepreneur purchases labor. The other is the _disutility_
or _discomfort_ endured by men in the course of production, as in the
sentence: “This article has cost me much labor.”[13] Productive power
may be accompanied by no disutility, or by moderate or high disutility,
according to circumstances. Labor is used in both senses by Adam Smith.
As for the word _value_, Smith explains at the outset that the term has
two meanings, “value in use” and “value in exchange,” and restricts
his investigations to the principles of the “exchangeable value.” This
is defined as the “power of purchasing other goods” which an object
“conveys” to its owner.[14] But Adam Smith does not explain nor appear
to realize that he uses the term “exchangeable value” in two senses.
When he asserts that the “real worth” of anything to a man “is the
toil and trouble which it can save himself, and which it can impose
on other people,” and that therefore labor is the real measure of the
“exchangeable value of all commodities;” “exchangeable value” means
something other than mere purchasing power. Writing nearly a century
later, Menger said that value is that significance (_Bedeutung_) which
a good attains in our estimation when we feel the satisfaction of some
want to be _conditioned_ upon it. This is “_esteem_ value,” or value as
_Bedeutung_. Smith’s concept, of value as “real worth,” which he has
miscalled “exchangeable” value, is something analogous to this. But Smith
finds the significance in labor instead of in satisfaction.[15]
3. Turning now directly to the “philosophical” account, we find the
multiplicity of Adam Smith’s explanations of value illustrated once more
by the fact that within this chapter he suggests two distinct labor
standards. One is given as a _regulator_ of value, a something which
quantitatively governs value. The other is merely a _measure_ of value.
There is no adequate discussion of the mutual relations of the two. Both
appear in the following sentence:
“What everything is worth to the man who has acquired it, and
who wants to dispose of it or exchange it for something else,
is the toil and trouble which it can save to himself, and which
it can impose on other people.”[16]
The “toil” saved “to himself” must be the labor cost of reproduction, not
distinguished by Smith from cost of production. The two standards are
asserted separately. In an early and rude state of society,
“the proportion between the quantities of labour necessary for
acquiring different objects seems to be the only circumstance
which can afford any rule for exchanging them for one
another.”[17]
And
“at all times and places, that is dear ... which it costs much
labour to acquire.”[18]
And again:
“The value of any commodity to the person who possesses it
[and wishes to exchange it] is equal to the quantity of
labour which it enables him to purchase or command. Labour,
therefore, is the real measure of the exchangeable value of all
commodities.”[19]
The first of these, in accordance with which it is asserted that value is
governed (in the philosophical primitive conditions) by cost in labor,
may be called the _labor-cost standard_. The second finds a convenient
name as the _labor-command standard_.[20] The two play separate and
important parts in the subsequent history of the labor theory of value.
Ricardo adopted the labor-cost standard as applicable to the conditions
of advanced or capitalistic society and repudiated the labor-command
measure. Malthus, on the contrary, defended the latter and rejected the
former.[21]
4. Since the amount of the value of a good is asserted to bear certain
definite relations to the amount of labor it costs or commands, it is
a very proper question to inquire how quantity of labor is measured in
any particular case. Adam Smith remarks that the quantity of money for
which a good can be exchanged is “a plain palpable object,” but that
the quantity of labor which it commands, indirectly through the use of
money is “an abstract notion, which, though it can be made sufficiently
intelligible, it (_sic_) is not altogether so natural and obvious.”[22]
He suggests, in that most excellent and familiar Smithian sentence, that
the proportions in which different concrete kinds of labor exchange (or
count for quantity of labor in general or in the abstract) are
“adjusted not by any accurate measure, but by the higgling
and bargaining of the market, according to that sort of rough
equality which, though not exact, is sufficient for carrying on
the business of common life.”[23]
Nevertheless there are certain principles which enable us to define
quantity of labor in a general way. Time alone spent at a task does not
determine the quantity of labor put forth. The different degrees of
hardship endured and of ingenuity exercised in different employments must
also be considered.
If we should assume for the moment that there were exact units of
disutility and skill as of time, Adam Smith’s theory would signify
that the quantity of labor in any particular case is measured by time
units weighted with units of disutility and of skill. The amount of two
different kinds of labor commanded in exchange by any commodity depends
upon the wages commonly earned at these kinds of labor. If a certain
commodity, worth such and such a sum of money, commands in exchange one
day of labor in employment A and two days in employment B, Adam Smith
would be forced to assume that one day of A is the same quantity of labor
as two days of B. At bottom, then, the theory means that one day of A is
the same quantity of labor as two days of B, because these two pieces of
labor get the same wages.
Taking it for granted that the amount of wages paid (under competitive
conditions) is a true test of the _quantity_ of labor in any given
concrete task, we shall find some further speculation on this question if
we turn to the famous chapter upon the inequality of wages in different
employments.[24] In this chapter there is a suggestion that the extra
reward for skilled labor is a disguised payment for superior disutility.
The following analogy drawn between skill and a machine has been used by
many later writers:
“When any expensive machine is erected, the extraordinary
work to be performed by it before it is worn out, it must be
expected, will replace the capital laid out upon it, with at
least the ordinary profits. A man educated at the expense of
much labour and time to any of those employments which require
extraordinary dexterity and skill, may be compared to one of
those expensive machines. The work which he learns to perform,
it must be expected, over and above the usual wages of common
labour, will replace to him the whole expense of his education,
with at least the ordinary profits of an equally valuable
capital.... The difference between the wages of skilled labour
and those of common labour is founded upon this principle.”[25]
Thus skill represents disutility incurred in its acquisition, and the
surplus reward to skill is virtually reward to disutility in a form
bearing analogies to interest. This is for acquired skill. What is to
be said of inborn skill, of native superior talents? This question
apparently escapes Adam Smith. Uniformly, the tacit assumption underlying
his thought seems to be that of the inborn equality of powers in men.
Keeping this assumption in mind, we see that Smith’s view amounts to
the theory that all occupations are about equally well rewarded, all
things considered. Higher wages are paid only where there is more labor,
ultimately in the sense of _disutility_. The _inequalities_ of wages are
such only in proportion to the _time_ of labor.[26]
To give a mid-chapter summary of results—put together by ourselves rather
than by Smith—if the exchange values of goods are to be governed by the
quantity of labor which they have cost, and the “real worth” of goods is
to be measured either by the quantity of labor they have cost or by that
which they can command in exchange, there must be some means of defining
the _quantity_ of labor in different employments. Adam Smith has made
this depend, in the first instance, upon time compounded with amounts
of disutility and skill. But he has further suggested that the element
of skill really represents a past disutility. The principal assumption
involved is that all occupations are competed for by men born equal in
efficiency. If he did not clearly avoid the appearance of laying down
hard and fast principles, we could conclude that he meant _quantity of
disutility_ by quantity of labor.
5. The dictum that labor is the means of measuring the “real worth” of
goods does not, I believe, necessarily involve the notion that this
measure can be used to compare the value of a good in A.D. 1400 with its
value in 1800, or its value in China with that in England. An important
part of the chapter on the real and nominal price of commodities is given
over to the claim that labor furnishes an “invariable measure” of value
in all times and places. Money, the most convenient measure of value in a
given time and place, varies in its value in different times and places.
But
“Equal quantities of labour, at all times and places, may be
said to be of equal value to the labourer. In his ordinary
state of health, strength and spirits, in the ordinary degree
of his skill and dexterity, he must always lay down the same
portion of his ease, his liberty, and his happiness. The
price which he pays must always be the same, whatever may be
the quantity of goods which he receives in return for it....
Labour alone, therefore, never varying in its own value, is
alone the ultimate and real standard by which the value of
all commodities can at all times and places be estimated and
compared.”[27]
In this passage the misuse of the word value is flagrant, but the meaning
is plain. No matter what be the physical quantity of goods which a day
of labor either produces or earns as wages, the value of these goods,
in the sense of _significance_ to human welfare, is the same, _because_
they cost the same amount of disutility. The person who purchases labor
commands it sometimes with a greater and sometimes with a lesser amount
of goods:
“It appears to him dear in the one case, and cheap in the
other. In reality, however, it is the goods which are cheap in
the one case and dear in the other.”[28]
The question of an absolute measure or unit of value (whether it is
incapable of solution or not) is one which will be avoided in this essay
as far as exhaustive or critical discussion is concerned. The purely
statical part of the classical theories of value is best considered in
isolation, and furthermore the question of an absolute measure is one of
such extreme difficulty that it would require a separate essay of much
greater dimensions than this history. Malthus examined the question at
great length, and Ricardo paid some attention to it. A brief résumé of
the classical discussion of this problem will be found in the note at the
end of Chapter VII.
It may be of interest to note that Adam Smith virtually contradicts
the assertion made in the citation last given by his statement four
lines later. “The labourer is rich or poor, is well or ill rewarded,
in proportion to the real ... price of his labour.”[29] This leads to
irreconcilable contradictions. Smith has said that a man is rich or
poor according to the quantity of labor which his goods enable him to
command. That is, the “real value” of a thing is measured by the amount
of labor for which it will exchange. Thus a man is rich or poor according
to the “real value” of his possessions. A changing physical quantity of
goods will have the same “real value” if it command the same quantity
of labor. Therefore a given quantity of labor must always exchange for
the same amount of _riches_ in the sense of this word employed by Smith.
If the real wages of a day of labor must always be the same quantity of
riches, how can the laborer be richer or poorer according as the physical
quantity of the goods of his real wages increases or diminishes? It
might be said that Smith means that the laborer will be richer in life’s
enjoyments if he receives a larger physical quantity of goods as wages.
But Smith is estopped from such a statement because he has affirmed that
the measure of _riches_ is command of labor or cost in labor, that the
more or less of riches can be discovered only by the more or less of the
labor commanded by the goods composing the riches.[30]
It is necessary to mention Adam Smith’s so-called corn measure of value.
Ricardo says, referring to Smith, that “sometimes he speaks of corn,
at other times of labour, as a standard measure.”[31] The impression
thus given is erroneous. Corn is not selected as a standard coördinate
with labor, but is merely singled out from among commodities as being a
convenient practical index of the real or labor standard. The practical
question of corn-rents was interesting and called for some mention. Smith
believed that a given quantity of grain possessed more nearly a constant
value in different times than most commodities, merely _because_ corn
is likely to remain from age to age in a steady exchange ratio with
_labor_.[32]
CHAPTER III
THE EMPIRICAL ACCOUNT OF ADAM SMITH.
1. In the splendid chapters on the “Component Parts of Price,” and the
“Natural and Market Price of Commodities,” Adam Smith flees the more
speculative questions of the philosophical essence of value, and turns
to that most important, but relatively proximate, principle of exchange
value in the modern market, which we now call the law of entrepreneur’s
costs. It is beyond the scope of this history to follow him through
his analysis of the component parts of this cost, called by him the
“component parts of price,” into wages, profits and rent. The “natural”
or “necessary price” is the sum of these components, and is the center
toward which actual market-price is always tending. With Cairnes, we now
call this by the better term, “normal market value.” Nor can we trace the
thought into the subsequent separate chapters on “Wages,” “Profits,” and
“Rent of Land,” where Adam Smith presents what is probably the earliest
attempt at a systematic theory of distribution.
We are concerned only with the fact that in the “empirical account” Adam
Smith shifts his ground on the question of the relation of labor to
value. While dwelling upon the hypothetical primitive conditions under
which the essence of value is supposed to be laid bare, he proposed the
_labor-cost_ and the _labor-command_ standards without a word as to
their mutual relations. But as he approaches the problem of value under
advanced conditions, he both explains his view of the relation of these
two standards, and abandons the first one, that of labor cost. In the
primitive state of society, the labor cost of a commodity _determines_
the amount of labor commanded by it in exchange. The two amounts of
labor must “naturally” be the same. The “whole produce of labour,”
then, belongs to the laborer, and no profits or rent exist to destroy
the proportionality between labor-cost and value. But in society as now
constituted, it is different.
“The whole produce of labour does not always belong to the
labourer. He must in most cases share it with the owner of the
stock which employs him. Neither is the quantity of labour
commonly employed in acquiring or producing any commodity
the only circumstance which can regulate the quantity which
it ought commonly to purchase, command, or exchange for. An
additional quantity, it is evident, must be due for the profits
of stock,” (and the rent of land.)[33]
2. In a word, value in exchange is no longer proportionate to labor-cost,
because the value of a commodity must now contain elements which
remunerate not only the labor, but also the capital and land employed
in its production. Nevertheless, the “real value” of such a commodity
produced in advanced society is measured by the labor which that
commodity will command in exchange.
“The real value of all the different component parts of
price, it must be observed, is measured by the quantity of
labour, which they can, each of them, purchase or command.
Labour measures the value not only of that part of price which
resolves itself into labour, but of that which resolves itself
into rent, and of that which resolves itself into profits.”[34]
The inaccuracy of expression in this passage is gross. Without scrutiny
of the context one would certainly fail to get an idea from the
astonishing words that “_labour_ measures the _value_ of that part
of _price_ which resolves itself into _labour_.” In the first place,
for the last word “labour,” _wages_ should be substituted. Labor is
neither a share in distribution nor a “component part of price.” The
meaning of the passage is that the “real value” of a commodity, even in
advanced society, is measured by the amount of labor which can be had
in exchange for it, in spite of the fact that its value in exchange is
no longer in proportion to its _cost_ of production in labor. In the
above citation, Adam Smith means to assert that the “real value” of any
concrete income as a share in distribution is measured by the amount of
labor it will command. Thus the “real value” of the rent of a plot of
ground would vary through time, according to the number of days of labor
that could be purchased by it in the different years. As a theory of
value to apply to actual life, Adam Smith left us an early form of the
law of entrepreneur’s cost and a labor-command _measure of value_. But
he disowns what is naturally thought of as the genuine classical labor
theory of value, that labor-cost regulates market-value. This theory was
Ricardo’s, and really his alone.[35]
CHAPTER IV
CRITICISM OF THE THEORIES OF ADAM SMITH.
1. In this chapter it is the intention to examine more fully the
reasoning by which Adam Smith sought to establish his main contentions
concerning the relation of labor to value. As for a proof that, under
“philosophical” primitive conditions, goods would exchange in proportion
to their costs in labor, none is given. It is considered obvious that
this would be true:
“It is natural that what is usually the produce of two days’ or
two hours’ labour, should be worth double of what is usually
the produce of one day’s or one hour’s labour.”[36]
In support of the theorem of the _labor-command standard_, however, in
contrast with that of labor-cost, he makes a show of argument, which is
contained in the following quotation:
“Every man is rich or poor according to the degree in which
he can afford to enjoy the necessaries, conveniences, and
amusements of human life. But after the division of labour has
once thoroughly taken place, it is but a very small part of
those with which a man’s own labour can supply him. The far
greater part of them he must derive from the labour of other
people, and he must be rich or poor according to the quantity
of that labour which he can command, or which he can afford
to purchase. The value of any commodity, therefore, to the
person who possesses it, and who means not to use or consume
it himself, but to exchange it for other commodities, is equal
to the quantity of labour which it enables him _to purchase
or command_. Labour, therefore, is the real measure of the
exchangeable value of all commodities.”[37]
This passage permits of but one interpretation. If I am rich, in
the sense of owning things with a money price or exchange value, in
proportion to the quantity of labor which, by means of these things, I
can purchase or command, _quantity of labor_ here can mean but one thing,
namely, quantity of _productive power_ as opposed to quantity of toil,
pain, subjective sacrifice, or disutility. In society, I am supplied with
this world’s goods virtually in proportion to the amount of productive
power of labor at my call; and this amount is asserted to be the true
measure of value. This we may describe as a view of _labor as potential
commodity_. Labor to be performed is commodity in the making. What kind
of commodity it shall be in the particular case depends upon the will
of him who has command over the labor. A later sentence bears out this
explanation perfectly:
“[A person’s] fortune is greater or less precisely in
proportion to the extent of this power [over labor]; or to
the quantity either of other men’s labour, or, what is the
same thing, of the produce of other men’s labour, which it
enables him to purchase or command. The exchangeable value of
everything must always be precisely equal to the extent of this
power which it conveys to its owner.”[38]
This signifies, then, that the value of any article to its possessor must
be measured by the amount of labor which it can command in exchange,
_because_ this labor is the means of obtaining valuable articles in
general. To Smith, labor is the great homogeneous, undifferentiated,
common denominator to the wonderfully diverse mass of goods which come
into existence out of it, and the value or “real worth”[39] of each
of these goods follows the quantity of the source-stuff turned to its
production.
2. The law of supply and demand and the law of entrepreneur’s cost are
proximate empirical principles which, although possibly of much more
practical importance than a philosophy of value, do not give an ultimate
explanation of the riddle of this phenomenon. Adam Smith’s theory
of labor as “potential commodity” is an attempt to give an ultimate
explanation, but as such it should be judged a failure, for it really
avoids the question of ultimate explanation. It begins: “Every man is
rich or poor according to the degree in which he can afford to enjoy
the necessaries, conveniences, and amusements of human life.” Air is
a necessity to human life, but a man is not rich in proportion to the
quantity of air he can command. The object of this statement is not
to make a carping criticism of Smith, but only to point out that by
“necessaries, conveniences and amusements” he means here solely such of
these things as have economic value. Since he has already passed judgment
that the _economic quantity_ of these things is completely independent
of the _quantity_ of their utility, he sees no way of measuring these
things, as economic quantities, except by looking to their origin in a
measurable and, as he believes, homogeneous something called labor.
In criticism of this we have but to note that if the only means, or
the first means, of determining the _economic quantity_ of a physical
complex of goods were by measurement of the labor turned to its making,
the economic system of things would be turned upside down. If the value
of the articles produced for me by that part of the labor of society
over which I have command, can be determined solely by reference to
the quantity of this labor, I am left without the slightest guidance
for the application of this labor under my direction. The truth is,
the command or direction of labor necessarily implies the ability to
estimate _values_ independently of the quantity of labor employed in
the production of them, previously to its employment. Value is the
guiding-star to labor. How can the point of attack of labor against the
physical environment be selected unless the results to be expected in
different cases can be compared in value, independently of the quantity
of the labor? If the quantity of labor determined the value, it would
make no difference where the labor was turned; the value of the result
would always be the same. Turned in an indefinite number of directions,
labor will produce no value whatsoever; turned in certain directions it
will bring forth the maximum value of which it is capable. It is one of
the main functions of the entrepreneur in modern economic society to turn
labor-power in the directions of maximum value return. All these things
are perfectly obvious, yet value theorists uncounted have ignored them.
Quantity of labor-cost, even when conceived of as being an entity of
superior homogeneity to quantity of satisfaction, cannot be the first or
fundamental means of measuring value.
The view that cost is the essence of value is thus obviously irrational,
and no escape from this difficulty is afforded by the concession made
explicitly by Ricardo, and after him by Marx, that utility is a
_condition_ prerequisite to value. The problem of directing labor in
production is a question of _how much_ labor can be economically employed
in making such and such a useful thing. In the theories of Ricardo
and Marx, the _quantity_ of value is held to have no relation to the
_quantity_ of utility, but to be determined by the quantity of cost.
There must be a quantity of utility to which the quantity of productive
power destroyed in its obtainment is adjusted. Utility properly
conceived, there is such a quantity, and value is its measure.
3. In the first general argument for the labor-command standard, Adam
Smith seems to regard labor solely in the aspect of productive power;
but, as the reader will recall, we do not advance far in his many-sided
discussion before we encounter labor as _disutility_. Labor is later said
to be an “invariable measure,” because it stands for a constant amount
of hardship. Beyond a doubt, _disutility_ is associated with value (as
“_Bedeutung_”) in some very intimate relation.[40] This is, at bottom,
the explanation of the remarkable vitality of the labor theory, even in
forms that are absurdly incorrect.
If it is my labor which is commanded in exchange by a given commodity,
the personal value to me of this commodity for which I have given my
labor might well be carried in my mind in terms of the disutility it cost
me. So, in a general way, if the amount of some kind of commodity which
can be bought by a day’s wages (_i. e._, which “commands” a day’s labor)
alters, the significance of this commodity to wage-earners in general
will alter. Some persons might conceive the change in significance
chiefly in terms of altered disutility cost. This fact is probably
considered by statisticians when they investigate questions of real
wages, or changes in family budgets. But Adam Smith’s proposition that
labor commanded in exchange is a precise and invariable measure of
“_exchangeable_ value” is not a good form of stating so mild a principle.
Further discussion of this subject must be attended by extreme
difficulties. For in endeavoring to ascertain what Smith meant, or “ought
to have meant,” we encounter the difficulties due to the laxness and
paucity of Smith’s explanations superposed on the difficulties inherent
in this intricate subject. His various expressions suggest that his
labor theory of value means more than the thought that the disutility
of each person’s labor may measure the “subjective” value _to that
person_ of commodities obtained by him in exchange for his own labor.[41]
Smith speaks of labor as the “real measure of exchangeable value.” The
exchange-value of a commodity in a given market is the same, whoever
its owner may be and whatever may be his needs, or the relation of this
commodity to his particular needs. This relation may give it value
_to_ him; but we would never speak of the commodity’s exchange-value
_to_ him. This independence of market-value from the particular needs
of the particular owner is one of the things desired to be conveyed by
the Austrian economists in their term, “_objective_ exchange-value.”
Now Smith fails to distinguish between the “real worth” of goods and
their “exchangeable value.” There can be no doubt that he would be quite
willing to speak of the “real exchangeable value” of a good as being that
which is measured by labor.[42] Thus, I believe, Smith conceives of a
“real worth” independent of worth to any particular person. This “real
worth” in a good is measurable by the labor commanded in exchange for the
good, because, as he first suggests, labor, as productive power, is the
homogeneous source-stuff of commodities. But secondly, the suggestion
enters that a unit of labor is also a unit of disutility, a unit assumed
to have an independent and invariable significance. This kind of real
worth and such a unit of disutility are compounded abstractions. No one
can hold it against a concept, except in the infancy of thought, that it
is an abstraction, but, after my best effort, I for one cannot see that
these concepts are meaningful abstractions.
If we grant this conception of “real worth,” and the conception of a unit
of disutility in general, distinguishable in the different labors of
different persons, we still find difficulties ahead. The same commodity
may exchange for two days of common labor or one day of skilled labor.
Either of these is the quantity of labor commanded in exchange. According
to Smith’s conception, either must measure its “real value.” Now the fact
is, one day of skilled labor ordinarily involves _less disutility_ than
two days of common labor.[43] Competitive wages are paid in proportion
to _efficiency_, not in proportion to disutility. A given piece of labor
will count as a great or small quantity when commanded in exchange in
proportion to the wages paid for it. It is then a difficulty with Smith’s
labor-command standard that he implies that labor derives its capacity
to serve as a measure of real value from its disutility, while the same
commodity will command _different_ disutilities in different exchanges.
The attempt to reduce skill to disutility by urging that the higher wages
of skill are in proportion to the disutility of acquiring the skill
is futile. The tendency of the wages of skilled labor to proportion
themselves to the comparative disutility of that labor—_i. e._, to the
sum of the disutility daily felt plus some share or other of the past
disutility cost of acquiring the skill—is so completely submerged beneath
other forces that it is negligible. In addition to this, much skill is
not acquired, but is inborn without having entailed any disutility cost
of acquisition to its possessor.
To conclude with this question, so far as Adam Smith means to suggest
that the economic worth of a good to a given person can be measured _by
him_ in terms of its disutility cost _to him_, the position and some
of its consequences mentioned above are well taken. Smith’s theory,
however, failed to penetrate the problem as do later theories of the
final equivalence of utility and disutility. But the implications of his
arguments further than this seem incapable of defense.
4. Adam Smith states that since under the division of labor any man
must derive almost all his necessaries, conveniences and luxuries from
the labor of other people, he must be rich, in the sense of possessing
things of value, in proportion to the quantity of this labor which he can
command. The assumption implicit in this is that the quantity of labor
expended upon the production of things for this man, _as labor-cost_,
determines their values. For if the economic goods obtained by him from
the labor of others, which he is enabled to command, should have values
out of proportion to the quantity of labor so commanded, namely, their
labor-cost, this man would not be rich or poor merely in proportion to
the labor which he commands. Since, therefore, the labor-command standard
of value is made to depend upon labor-cost regulation of value, according
to the principal argument advanced by Smith, it follows that Smith is
really estopped from applying the labor-command standard as he does
under the conditions of advanced society. For he himself has stated that
labor-cost regulation of value fails under these conditions.
Adam Smith’s _empirical_ account of value by no means made future
improvement of statement impossible, but it was an excellent theory of
proximate principles. His _philosophical_ account was an unsystematic
body of suggestions, so filled with difficulties that it is doubtful if
the present writer has been able to keep his interpretation and criticism
of this account free from fallacy. The carrying over of the labor-command
standard of value from the philosophical to the empirical account seems
only to introduce an impurity into the latter.
CHAPTER V
RICARDO AND THE TRUE CLASSICAL LABOR THEORY
1. It is not incumbent upon the historian of a single doctrine to pass
judgment upon the question of the proper position of Ricardo as a
general economist, compared with Smith and Malthus. But since, in the
following chapter, we shall be led to find much fault with Ricardo’s
method of exposition of the theory of value, it is necessary to state
at the outset that Ricardo’s writings on value possess the distinctive
merit, in contrast with those of Smith and Malthus, that they can be
reduced to a whole, essentially self-consistent in its large lines.
Self-consistency is not the sole test of truth, and this praise does
not signify that Ricardo’s is a correct theory, but the longer one
studies Ricardo the more satisfactory does his text become, up to the
point where one believes he has obtained a complete understanding of it.
On the other hand, it is a task of supreme difficulty to read Ricardo
critically. His inconsistencies in the use of terms are most trying.
It is remarkable that the final result of his reasoning was on the
whole self-consistent. The commentator is inclined to quote Senior with
approval when he remarked that Mr. Ricardo “is perhaps the most incorrect
writer [_i. e._, in the use of terms] who ever attained philosophical
eminence.”[44] The point of greatest weight in the labor theory of value,
after the vestibule of the subject has been passed through, is treated
with a maladroitness which has made a matter that is not over-difficult
in itself very hard to understand. This is the theme of sections IV and V
of the chapter on value, and is, indeed, in another guise, the difficulty
arising out of the “organic composition of capital,” which, under this
name, becomes the main point of theoretical interest in the third volume
of Marx’s _Das Kapital_.
There is abundant evidence that Ricardo himself considered the theory
of value to be a very hard problem, and furthermore that he was not
completely satisfied with his own treatment of it. As late as 1823, he
wrote to McCulloch:
“The difficult subject of value has engaged my thoughts, but
without my being able satisfactorily to find my way out of the
labyrinth.”[45]
Earlier he wrote to the same disciple:
“I am not satisfied with the explanation I have given of the
principles which regulate value.”[46]
Some things have a value which is obviously not regulated by labor cost.
Concerning these, Ricardo wrote:
“I cannot get over the difficulty of the wine which is kept in
the cellar for three or four years [_i. e._, while constantly
increasing in exchange value], or that of the oak tree, which
perhaps originally had not 2 s. expended on it in the way of
labour, and yet comes to be worth £100.”[47]
2. The writer of the present essay has already acknowledged his
indebtedness to Professor von Wieser for suggestion of the means of
interpreting the main lines of the history of the labor theory. Professor
von Wieser’s terse judgment of Ricardo’s writings on value is contained
in the following sentences:
“What, then, did Ricardo attempt? His whole endeavor exhausted
itself in trying to show that the philosophical and the
empirical theories of Adam Smith—both of which, indeed, in
taking up this position he had to clear and carry further—did
not contradict each other so much as at first sight would
appear.”[48]
The manner of putting this is objectionable, in that it implies, I
believe, an improper subordination of Ricardo’s theory to that of Smith.
While Ricardo quotes Smith freely, his exposition of the subject of value
is in no sense a summary and criticism of Smith’s views. On the contrary,
he writes with a remarkably independent spirit. It is, nevertheless, true
that the principal part of the reasoning of Ricardo is concerned with
the adaptation of the empirical account of value to the philosophical,
that is, to the philosophical account as he understands it. These two
accounts are almost inextricably entangled in Ricardo’s work, but their
disentanglement is the sole method of exhibiting the ultimate purport of
his reasonings. For, in essence, his theory is as follows: The value of
those things whose value is subject to an ascertainable principle depends
on their cost of production in human labor. (The value of pure scarcity
goods which cannot be increased in quantity by the application of common
human labor simply “varies with the varying wealth and inclinations of
those who are desirous to possess them.”[49] If subject to no law of
value, these goods are also, in Ricardo’s view, unimportant.) Labor
cost is the kernel of value, so far as it seems to have a kernel. This
is the philosophical account. Smith’s labor-command measure is condemned
at the outset. There is little doubt that labor is here conceived as
disutility, though Ricardo does not pause to discuss the concept of
labor. But Ricardo’s theory ends as an empirical doctrine, in which
labor-cost figures as the regulator of exchange value only because it is
conceived to be the all-important element which governs the amount of
entrepreneur’s expenses of production. Smith abandoned the labor-cost
regulator for real society because he observed that the “necessary price”
of a market commodity, or the price determined by its entrepreneur’s
cost of production, must cover payments for rent of land and interest
on capital as well as wages of labor. Not so Ricardo. He holds fast
to the labor-cost standard, upon the belief that rent does not “enter
into” this necessary price, and that the taking of interest causes only
a negligible variation of money cost from proportionality with labor
cost. The discussion of this variation is the most involved part of his
writings. The end is an imperfect reconciliation between the empirical
and philosophical accounts.
3. The simpler and more familiar parts of Ricardo’s theory may be
considered first. His doctrine, it should be observed, is by no means
absolute or unconditional.
(1) Utility is a condition essential to value, but no more. The
quantitative discrepancy between utility and exchange value seems as
obvious to Ricardo as to Smith. In a letter to Say he expressed his whole
theory with respect to utility even a little more concisely than in the
_Principles_:
“The utility of things is incontestibly the _foundation_ of
their value, but the degree of their utility cannot be the
measure of their value.” “The difficulty of [a thing’s]
production is the sole measure of its value.”[50]
When arguing against Smith’s corn-measure in Chapter XXVIII (Gonner
ed.), our author exclaims: “What can value have to do with the power of
feeding and clothing?” as if the instantaneous answer should be, “Nothing
whatever.” This curious slip is mentioned only to show how far utility
was removed from value in Ricardo’s habitual thought.
(2) “Possessing utility, commodities derive their exchangeable value
from two sources: from their scarcity, and from the quantity of labour
required to obtain them.”[51] This proposition has occasioned the
claim of the “Austrian” writers that the Ricardian theory of value is
“dualistic.” Not all economists have acquiesced in this criticism,
for there are those who hold the labor-cost and utility theories to
be but two parts of one larger, consistent, whole. Among these latter
economists, one of the most uncompromising in his attitude is Professor
Heinrich Dietzel, of Bonn, who asserts that Ricardo’s explanation
is not dualistic, because the utility and cost views are perfectly
reconcilable.[52] Still it appears fair to say that, whether or not some
later writer can construct a theory which is itself not dualistic and
which is still in inner harmony with what Ricardo _meant_ to say, what
Ricardo said was dualistic. Textually, formally, his proposition is
dualistic, for an intelligent contemporary reader would interpret his
thought as such. Commodities derive value from two sources, and the law
of the one kind has no applicability to the other kind of goods.
(3) The value of scarcity goods is “wholly independent of the quantity of
labor originally necessary to produce them.” This is because “no labor
can increase the supply of such goods.” These commodities are, however,
an unimportant element in the market.
(4) The labor-cost regulation of values applies only to goods in the
production of which competition acts without restraint.
4. The doctrine that, with the foregoing conditions understood, the
exchange value of commodities is governed by the comparative quantity of
labor required for their production, involves a number of questions with
respect to the manner of determining _quantity of labor_. Ricardo did not
carry his inquiry into these questions as far as modern critics of the
labor theory have pressed theirs, but in the course of his writings he
made three important observations on this subject.
(1) In the first place, Ricardo distinguishes between _quantity_ and
_value_ of labor. J. B. Say had in various places endeavored to state
Ricardo’s position as being that the _value_ of labor determines the
value of its products, for in this form the doctrine can easily be shown
to involve a circle. Ricardo wrote to Say:
“You misrepresent me ... when you say I consider the value
of labour to determine the value of commodities; I hold, on
the contrary, that it is not the value, but ‘the comparative
quantity of labour necessary to production which regulates the
relative value of the commodities produced.’”[53]
The purport of this—though not so explained by Ricardo—is that the
quantity of labor which an entrepreneur is compelled by the nature of
a good to employ to produce that good, determines the amount of wages
he has to pay for its production. As far as this single point goes, the
answer to Say is satisfactory.
(2) When Marx came to the question of skilled labor, he called it simply
“condensed labor.” It goes without saying that he judged the degree of
the condensation of any concrete skilled labor purely by its comparative
wages, or exchange _value_.[54] Ricardo’s treatment of skilled labor is
even less satisfactory than Marx’s. He says:
“If a day’s labour of a working jeweller be more valuable than
a day’s labour of a common labourer, it has long ago been
adjusted, and placed in its proper position in the scale of
value.”[55]
What has long ago been adjusted? In definite words our author does not
say, but his meaning is ascertainable.
“If a piece of cloth be now of the value of two pieces of
linen, and if, in ten years hence, the ordinary value of a
piece of cloth should be four pieces of linen, we may safely
conclude, that either more labour is required to make the
cloth, or less to make the linen, or that both causes have
operated.”[56]
If the exchange ratio of cloth to linen alters, the doctrine is that
the cause must be that some change has taken place in the quantity of
labor required to produce cloth or linen, and _not_ that the “value”
of a linen-maker’s day of labor has changed in ratio to the “value” of
a cloth-maker’s day. In other words, if ten hours of a cloth-maker’s
labor have earned the same wages (and thus occasioned the same cost to
entrepreneurs) as twelve hours of a linen-maker’s labor, “we may safely
conclude” that it is not alteration of this ratio that causes alteration
of the exchange ratio of cloth to linen. It is this ratio between the
wage-earning capacity of one kind of labor and another kind that “has
long ago been adjusted.” To make this point perfectly clear, let us quote
again:
“The comparative degree of estimation [an equivocal expression
which means comparative wage-earning power] in which the
different kinds of human labour are held ... continues nearly
the same from one generation to another, or at least ...
the variation is very inconsiderable from year to year, and
therefore can have little effect, for short periods, on the
relative value of commodities.”[57]
The question is this: In the labor-cost theory of value, does skilled
labor count as _more_ labor per day than unskilled, and if so upon what
principle? Ricardo’s argument, as just traced, avoids the question, and
is faulty in two essential points. In the first place, it is not true,
and was not true in Ricardo’s time, that the comparative skilfulness of
labor employed in producing different commodities remains unchanged.
Machine invention alone produces veritable revolutions in this field. But
in the second place (a more important point as a matter of theory), in
this argument Ricardo has shifted his ground with respect to the meaning
of his labor-cost law. This principle is stated in italics at the head of
his chapter:
“The value of a commodity, or the quantity of any other
commodity for which it will exchange, depends on the relative
quantity of labour which is necessary for its production.”
This means precisely that, if one A exchange for two B, it is because,
_at this time, without reference to changes in time_, it costs twice
as much labor to produce an A as to produce a B. But now Ricardo has
virtually changed the principle to mean that _alterations_ in the
exchange ratios of commodities will be due to _alterations_ in the
comparative amounts of labor required to produce them. This is a
different principle, and indeed one no stronger than the other. We are
forced to the conclusion that Ricardo unconsciously avoided the real
question in the case, and failed to explain away the difficulty of
skilled labor in the labor theory.
(3) The quantity of labor required in the production of a commodity,
which regulates its value, includes the labor employed in making the
raw material, machinery and buildings (capital goods) used up in its
production, as well as the labor directly applied to it. This proposition
is copiously illustrated by examples drawn from primitive and modern
industry, and commands immediate assent. It is obvious, when once stated,
that the labor indirectly applied to the production of a commodity is no
less _required_, if we are to obtain it, than that directly applied.
5. We have here an important consideration. If the labor _directly_
applied to the production of a commodity were all that is included in
its labor-cost, the entrepreneur’s expenses, covering cost to him of
machinery and raw material, would be too obviously out of proportion to
the labor cost (as manifested in _his_ wages cost). But it is Ricardo’s
intention to reduce the cost of capital goods to labor cost. The total
labor cost of a commodity produced from capital and raw material is
paid for by a series of entrepreneurs in their wages charges. Each
entrepreneur exacts a “profit” for the time he has advanced the wages.
It is in this way, as Ricardo sees it, that interest enters into
entrepreneur’s costs. Does it destroy the force of labor cost as a
regulator of exchange value? To make Ricardo’s answer to this question
clear, it is necessary to refer first to what he has to say in Chapter IV
of the _Principles_ on natural and market price.
The term “Natural Price” has, it happens, a “philosophical” and an
“empirical” significance. It is at best an inexact pair of words. Its
empirical meaning is simply _normal value_, the excellent term for that
value which, under competition, constitutes a center of oscillation for
market values. Its “philosophical” meaning, as suggested a few times by
Smith, is the _human_ cost of obtaining goods from the physical outer
world.
“Labour was the first price, the original purchase-money that
was paid for all things. It was not by gold or by silver, but
by labour, that all the wealth of the world was originally
purchased.”
With this sort of natural or primary price Adam Smith’s empirical
chapter on “Natural and Market Price” has nothing to do. This ought also
to be true of Ricardo’s chapter (Chapter IV), because it is a chapter
explaining how competition always forces the market-price toward a normal
value.[58] It turns out in the end that this normal value is a sum of
exchange value which is just sufficient to cover the _wages_ of labor
and the _interest_ of capital required in production. This is never made
clear. Malthus probably never understood Ricardo as meaning this. What we
affirm is, that _his text_ means this when it is altered or rectified so
as to give it the self-consistency which seems to lie within it.
6. We need now the proof of this interpretation. The opening sentence of
the chapter on natural and market price proceeds as follows:
“In making labour the foundation of the value of commodities,
and the comparative quantity of labour which is necessary to
their production the rule which determines the respective
quantities of goods which shall be given in exchange for
each other, we must not be supposed to deny the accidental
and temporary deviations of the actual or market price of
commodities from _this, their primary and natural price_.”[59]
This sentence seems to state that the labor cost of a commodity is its
“natural price.” If so, the statement is due to the influence of the
philosophical account; but it is an absurdity in this connection. Actual
market-price does not deviate temporarily from _labor cost_. Normal
value is not an amount of labor, nor can it be spoken of as equal to an
amount of labor. The passage is a careless way of saying that the normal
values of goods are _in proportion to_ their labor costs. Ricardo’s real
conception of normal value is this: The total labor cost of a commodity
determines the total wages charges that must be paid by the entrepreneur,
or series of entrepreneurs producing it. Competition tends to give the
entrepreneurs producing different commodities equal rates of “profits”
upon these outlays. Therefore the normal exchange value of a commodity is
composed of a sum of wages costs (due to the nature of the commodity as
requiring such and such an amount of labor to produce it), which is the
independent determining element, and a sum of interest which is merely
a uniform rate upon the wages cost. It is in this way that labor cost
regulates value, _according to an empirical account_.[60]
To substantiate this view of Ricardo’s meaning, we can quote the
following:
“Mr. Malthus appears to think that it is a part of my doctrine
that the cost and value of a thing should be the same;—it
is, if he means by cost, ‘cost of production’ including
profits.”[61]
The only kind of cost that includes “profits” (_i. e._, interest) is
entrepreneur’s cost.
7. We may now turn our attention to what is perhaps as difficult a
passage as was ever incorporated into a treatise on economics. I refer to
Sections IV and V of Chapter I of Ricardo’s _Principles_. These sections
treat of the _complication of interest_ in the labor theory of value.[62]
But if all Ricardo claims in his labor theory is that normal values are
_in proportion to_ labor costs, why is not the explanation satisfactory
that interest is merely a rate taken upon wages costs? The difficulty
is that in reality two commodities may cost the same amount of wages
(because, as Ricardo has it, they require the same amount of labor for
production) and yet cost very different amounts of interest. In such a
case the two commodities have the same labor costs but have different
entrepreneur’s costs, and consequently different exchange values. This
comes about because the entrepreneur (or series of entrepreneurs) who
produces commodity A may have been compelled to pay the money wages to
the labor producing it a longer time before A can be put on the market
than is the case with commodity B, though the _amount_ of wages paid in
both cases be the same.
8. In the end, Ricardo’s theory of the interest difficulty reduces
itself to the statement that has just been finished. That is to say,
the above is the true interpretation of his argument. But Ricardo’s
own presentation of the difficulty is superficially so different from
this statement that it will be necessary to prove this interpretation
in detail. (1) In the first place, he separates the general case of
“profits” paid on a longer “advance” of wages into three subdivisions.
“According as capital is rapidly perishable, and requires to be
frequently reproduced, or is of slow consumption, it is classed
under the heads of circulating or of fixed capital.” (“A
division not essential, and in which the line of demarcation
cannot be accurately drawn.”—Note.)
“Two trades may employ the same amount of capital; but it
may be very differently divided with respect to the portion
which is fixed, and that which is circulating.” “A rise in the
wages of labour cannot fail to affect unequally commodities
produced under such different circumstances” (in respect to
the proportions of these two kinds of capital in different
trades.)[63]
Section V is written to show that different degrees of durability in the
durable capital have the same effect as different proportions of the
durable to the circulating capital, and is merely an example of the bad
arrangement of the _Principles_.[64] Formally, there is a third case.
Goods slower to market must bring more “profit.” But all cases come to
the same thing, _i. e._, a longer investment of entrepreneur’s “capital”
in labor, before the commodity produced can be put finally upon the
market.
(2) In the second place, the effect of all this, says Ricardo, is to
introduce a _second cause of variation of “relative values”_. The
“variety in the proportions in which the two sorts of capital
may be combined introduces another cause, besides the greater
or less quantity of labour necessary to produce commodities,
for the variations in their relative value—this cause is the
rise or fall in the value of labour.”[65]
A rise in wages affects “relative values,” because wages, being a
different fractional part of the entrepreneur’s costs of different
commodities, the _whole_ of entrepreneur’s costs is affected in varying
degrees by the increase of this one factor. In Ricardo’s view a rise
of wages means simply a fall of profits. If the entrepreneur’s cost
of production of good A were ½ wages and ½ “profits,” and of good B ¾
wages and ¼ “profits,” then if general wages rise a fixed percentage,
and consequently general “profits” fall a fixed percentage, it follows
that the entrepreneur’s costs of A and B will change, one relatively to
the other, though the costs of these goods in labor are not altered. He
concludes:
“It appears that in proportion to the durability of capital
employed in any kind of production, the relative prices of
these commodities on which such durable capital is employed,
will ... fall as wages rise, and rise as wages fall; and on
the contrary those which are produced chiefly by labour with
less fixed capital, or with fixed capital of a less durable
character than the medium in which price is estimated, will
rise as wages rise, and fall as wages fall.”[66]
9. Ricardo’s way of describing the interest difficulty is unnecessarily
round-about, but a more important point is that it is positively
misleading. He must mean that interest and wages together make up
entrepreneur’s costs. In the cost of producing one commodity interest
will be a certain fraction of the whole; in the cost of producing
another commodity it will be a different fraction. Now, says Ricardo,
if the general rate of interest or of wages rises or falls, it will
affect the total cost of production of two such commodities in different
degrees.[67] Thus a rise or fall of the general rate of wages of labor
is a cause of variation of the exchange ratios of products, as well
as the cause of changes in the quantity of labor required to produce
them. This statement is misleading, because the existence of interest
throws the entrepreneur’s costs, and consequently the normal values of
commodities, out of proportion to their labor costs without any reference
to _variations_ in the general rates of interest or of wages. _At any
given time_ values are already out of proportion to labor costs, whether
or not there be a future change of the ratio of wages; yet Ricardo
is misled in his illustrations to assume the proportionality before
the wages rate changes.[68] The origin of Ricardo’s indirection in
explaining the law of entrepreneur’s costs lies in the preconceptions
of the “philosophical” account of value. To be precise, it is due to
Ricardo’s quarrel with one of Smith’s two “philosophical” standards,
namely, the labor-command standard. According to this standard, if wages
rise or fall, the amount of a given commodity required to command a day
of labor in exchange falls or rises. Smith said, in effect, that the
“exchangeable value” of commodities in general falls when wages rise. He
could not have meant pure exchange value by this, but Ricardo took him
at his word, and proceeded to show that when the exchange ratio between
day labor and a commodity alters, the exchange value of the labor may
change just as much as that of the commodity. Therefore he concluded
early in his chapter that the exchange value of commodities depends
on the comparative quantity of labor required for their production,
and not (as Adam Smith said) on the greater or less compensation which
is paid for that labor.[69] On account of this dispute, he is led to
state the qualification of the labor-cost law, due to interest, in
terms of variation of the compensation of labor. That is, he qualifies
slightly his original statement against Smith. The false philosophy
that labor cost is the _essence_ of value exercised an influence upon
the statement of the empirical law of costs which was truly baleful in
English political economy. Its effect on terminology reached at least
into the writings of John Stuart Mill, who sometimes referred to cost of
production as being composed of _labor and profits_![70] Either wages and
profits (interest), or labor and abstinence, but not labor and profits!
10. What Ricardo should have given us is a rectilinear theory of
entrepreneur’s costs. For a theory of these costs is truly all he has
offered. As for an ultimate answer to the riddle of value—an answer not
contained in the simple empirical law of costs—Ricardo has not given
us one. For, in answer to the query, _why_ labor cost, barring the
qualifications he develops, should regulate value, he has said nothing.
He has not even said what labor is; and in explaining the ultimate nature
of economic value, and the relation of labor to it, it will not suffice
to trust that every one knows exactly what is meant by labor. It should
be understood, without remark, that the criticisms here passed are not in
the least directed against his greatness as a thinker. His greatness is
relative to his time. We criticize him with reference to the developed
theory of our time; if we did not do this, this history would be a mere
summary of Ricardo’s chapter on value, and would be almost, if not quite,
pointless.
To conclude, Ricardo makes four qualifications of the doctrine of the
labor-cost regulation of value. (1) Labor must be expended on things
of utility. Utility is an absolute condition of value. (2) Goods to be
subject to this law of value must be reproducible. The unimportant class
of scarcity goods has a value entirely independent of labor-cost. (3)
Labor-cost really regulates only the natural or central value of goods.
There must be perfect competition to keep the market value at the natural
value. (4) Variety in the proportions of fixed and circulating employer’s
capital causes an aberration of natural value from proportion to pure
labor-cost.
These points reappear explicitly or implicitly in all labor accounts of
value. They are interesting in view of the estimates of Ricardo’s theory
as being absolute. The second and fourth counts especially negative
this estimate. The point of greatest interest in this connection is
the question as to how much of a trunk remains of the Ricardian labor
theory after so much bark has been stripped off. Ricardo considered the
theory to remain for practical purposes intact. The fourth count is the
only one that gives him serious concern, and though he is plainly much
impressed with the force of the difficulty while he is treating of it,
and concludes because of it that labor is not a precise regulator of
value, when he has delivered himself of this statement he proceeds with
the resolve to abstract from the whole difficulty, and reason as if the
thesis first advanced were unqualified.
“In estimating, then, the causes of the variations in the value
of commodities, although it would be wrong wholly to omit
the consideration of the effect produced by a rise or fall
of labour[71] it would be equally incorrect to attach much
importance to it; and consequently, in the subsequent part of
this work, though I shall occasionally refer to this cause of
variation, I shall consider all the great variations which take
place in the relative value of commodities to be produced by
the greater or less quantity of labour which may be required
from time to time to produce them.”[72]
This citation from the _Principles_, edition of 1821, indicates the
position Ricardo usually took. But occasionally he appears to have
wavered regarding the proper emphasis of the qualification. For instance,
in 1820 he wrote: “I sometimes think that if I were to write the chapter
on value again which is in my book, I should acknowledge that the
relative value of commodities was regulated by two causes instead of by
one, namely, by the relative quantity of labour necessary to produce the
commodities in question _and by the rate of profit_”....[73] Ricardo’s
theory of value, as qualified by himself, might be summarized: Objects
of utility, “produced by labor” (the function of factors in production
other than labor not explained), and capable of further production by
the application of more labor, have normal values in proportion to the
total quantity of labor required to produce them, except that this
proportionality is disturbed “by the employment with labor of capital of
various degrees of durability.”
NOTE. Ricardo’s principle of rent is susceptible of development
into a universal principle of competitive distribution. To J.
B. Clark this development is in fact due. (In divers early
articles in the American economic periodicals. Professor
Clark’s views have now been summed up in his _Distribution
of Wealth_. See especially Chapters iv, viii, xii and xiii.)
Perfecting the reasoning, by means of which Ricardo endeavored
to get rid of the rent of land, as a cause of the divergence
of the exchange value of products from proportionality to
their labor costs, Clark gets rid of interest on capital as
well. What is left of the product of industry after interest
(including land rent and rent of other capital goods) has
been deducted is defined by Professor Clark as the _specific_
product of labor, or the marginal product of labor. To assert
proportionality of the specific product of labor to its labor
cost is a very different thing from asserting that the total
product of land, labor and capital in any given business is
governed by the labor cost of that product, defining the labor
cost as Ricardo did. It cannot be said that Ricardo in any
way realized that the principle of land rent could be turned
to account as a universal principle in determining shares in
distribution. But there is a distant hint at such use in the
following passage: “The exchangeable value of all commodities,
whether they be manufactured, or the produce of the mines,
or the produce of land, is always regulated, not by the less
quantity of labour that will suffice for their production
under circumstances highly favourable, and exclusively enjoyed
by those who have peculiar facilities of production, but by
the greater quantity of labour necessarily bestowed on their
production by those who have no such facilities, by those
who continue to produce them under the most unfavourable
circumstances, meaning by the most unfavourable circumstances,
the most unfavourable under which the quantity of produce
required, renders it necessary to carry on the production.”
(P. 50.) In Chapter xi of the present essay we shall attempt
to make clear the difference between the assertion that the
exchange value of the entire product of a given industry is
determined by its labor cost and an assertion that the specific
product of labor has a value determined by its labor cost.
The following chapters will contain many references to Ricardo.
These will concern minor points in his theory which are best
taken up in connection with the arguments of subsequent
economists.
CHAPTER VI
MCCULLOCH, JAMES MILL AND TORRENS. ANTICIPATIONS OF MARX’S THIRD VOLUME.
1. The three minor writers, McCulloch, James Mill, and, to a less degree,
Torrens, were imitative expounders of the Ricardian political economy.
While their views were not identical with those of Ricardo, they were
accustomed to explain themselves by pointing out wherein they differed
from the master. In this history they are of interest because each
endeavored to state the labor-cost theory in a more arbitrary form than
did Ricardo himself. This chapter could well be entitled, “The Labor
Theory Running Riot.” McCulloch and Mill endeavored to reason out of
existence the qualification Ricardo placed in the doctrine on account
of interest, and Torrens thought he avoided the difficulty by stating
that value is determined by cost in “accumulated labor.” An interesting
fact in the literary history of the labor theory, and one which, to the
best of my knowledge, has not hitherto been brought to light, is that
McCulloch anticipated Karl Marx’s solution of the “organic composition of
capital” problem. Marx closed his theory of value, in the first volume of
_Das Kapital_, with the confession that, to all _appearances_, the facts
of market values contradict the theory. He promised, however, to show, in
a later volume, that in _reality_ there is no contradiction.[74] When the
second volume appeared only to defer to the third the promised solution,
“a regular prize essay contest” sprang up in Germany, and endured for
ten years, in which the participants endeavored to forecast what Marx’s
solution would be. No one was successful.[75] The answer to the enigma,
as it appeared in the posthumous third volume of _Das Kapital_, is
precisely the one McCulloch gave to the same question.
1. MCCULLOCH.
2. We shall not retrace the general lines of Ricardo’s exposition as
they reappear in McCulloch’s writings.[76] In the course of the numerous
editions of his _Principles_, and in his other observations upon value,
this writer managed to commit nearly every conceivable blunder that could
connect itself with the labor theory.[77] From time to time, Ricardo
mildly reproved his disciple for his rigidity:
“You go a little farther than I go in estimating the value
of commodities by the quantity of labour required to produce
them. You appear to admit of no exception or qualification
whatever, whereas I am always willing to allow that some of the
variations in the relative value of commodities may be referred
to causes distinct from the quantity of labour necessary to
produce them.”[78]
The cases of the value of standing timber, previous to the employment
of labor upon it, or of the value of old wine, which Ricardo freely
confessed were beyond his philosophy of value,[79] had no terrors for
McCulloch. In his abandonment to dogma, he solves the difficulty with
ease by the following definition, one of the most crassly ridiculous
originalities in the annals of political economy. It finds a place in
this history to illustrate to what extremes the labor theory could be
carried:
“Labour may properly be defined to be any sort of action
or operation, whether performed by man, the lower animals,
machinery, or natural agents, that tends to bring about any
desirable result.”[80]
The distinction between the operations of men and those of machinery and
natural agents is
“on the whole objectionable because it gives countenance to
the idea that there is some radical difference between the
labour of man and of machinery, etc., whereas, in so far as the
doctrines and conclusions of political economy are concerned,
they are in all respects the same.”[81]
Consider the example of a cask of wine, which is entirely finished as
far as labor bestowed on it is concerned, and now possesses a certain
exchange value. If let stand a few years it will be found to possess
additional value. To force this case, McCulloch has decided to define
whatever it be that “works” in the wine to be labor, and thus to affirm
that the increased value is occasioned by the increased quantity of labor
employed upon it. Malthus has made a rare criticism on this idea that
cannot be omitted:
“There is nothing that may not be proved by a new definition. A
composition of flour, milk, suet, and stones is a plum-pudding;
if by stones be meant plums. Upon this principle Mr. McCulloch
undertakes to show that commodities do really exchange for each
other according to the quantity of labour employed upon them:
and it must be acknowledged that in the instance which he has
chosen he has not been deterred by apparent difficulties.”[82]
Should we grant McCulloch’s definition of labor, the explanations
which he bases upon it involve an uncommonly “vicious” circle. Having
included in labor any of the operations of all “nature” which tend
to produce a desirable result, he is forced to place aside desirable
natural operations that are “gratuitous.”[83] Having no way to measure
natural operations by themselves, he decides, in effect, that whenever a
commodity is found which possesses an exchange value in excess of that
which would be proportionate to its cost in human labor, the thing to
do is to add in enough labor of natural forces to restore the desired
proportionality. Subsequently he adopted another line of reasoning,
incompatible with this one, but his later method of establishing the
absolute truth of the labor-cost theory was of the same calibre.[84]
3. The fatal difficulty in which the Marxian theory of value culminated,
due to the fact, as Marx described it, that the “organic composition of
capital” is, for technical reasons, different in different industries,
is the same as the difficulty of “fixed and circulating” capital, which
occupied so large a share of Ricardo’s and McCulloch’s attention.
The problem as discussed by Marx differs from Ricardo’s greatly in
terminology, and considerably in certain other external features, but the
identity of the two in essence can easily be shown.
From his general law that the value of a commodity is governed by its
labor cost,[85] Marx made a law of wages follow as a corollary, namely,
that the value of labor, its exchange-value, or wages, is governed by
its cost of production in labor. It is very hard to find a labor-cost of
production of labor, so, by an act of logical legerdemain, this becomes
the labor-cost of labor’s _subsistence_.[86] The value _produced by_
labor depends upon the duration of its exertion; but, says Marx, the
_exchange value of_ labor is a different thing. If laborers commonly
work ten hours a day for their employers, while six hours of labor will
produce a day’s _subsistence_, the value produced by a day of labor is
as ten, while the wages paid for it are—in virtue of the general law of
value—as six. The difference between the value produced by labor and
the value of labor—in this case (adopting the labor-cost unit of value)
four hours of value—is the famous “_surplus-value_,” and the four hours
a day is called the surplus labor time. We shall have to adopt a special
and _purely temporary_ terminology to describe the complication in this
theory about to be discovered.[87] By value we mean exchange-value,
unless otherwise specified. The outlay of value made by an entrepreneur
in labor, raw-material, machinery, _etc._, returns to him in the course
of time a certain value of products, which is greater than the outlay
required to produce them. The excess of this value over the outlay we
shall call the “profit fund.” Now, according to Marx, _surplus-value is
the sole source of this profit fund_. The reasoning to support this runs
as follows: The entrepreneur’s investments in machinery and raw-material,
says Marx, cannot contribute anything to this fund. For, according to
the labor dialectic, all the value these goods can contribute to their
products is derived from their own labor-costs, and the law of value
forces the entrepreneur to pay this value for them in full. They can,
therefore, afford him no surplus. But the _labor_ he buys is a different
kind of thing. It, and it only, as just explained, gives more value to
the product than he is forced by the law of value to pay for it.
We are now face to face with the great difficulty. If surplus-value
is the sole source of the profit fund, the profit funds of different
business units ought to be in proportion to the surplus labor time
immediately exploited in them. Since the surplus labor time in each day
of labor depends on the general rate of wages, there is a general rate
of surplus labor time per labor day—_e. g._, four hours in ten—and the
profit fund of every business would be directly in proportion to the
number of laborers it employed. This is absolutely not the case in fact.
“It appears, therefore,” says Marx, “that here the theory of value is
irreconcilable with the actual movement of things.”[88]
For technical reasons, the proportions in which the entrepreneur’s
outlays are invested in labor on the one hand, and other production-goods
on the other hand, are different in different lines of business. The
make-up of the entrepreneur’s outlay with respect to these proportions
Marx calls the “organic composition” of his capital.[89] The facts of
life are that equal capitals, in the sense of equal outlays, in different
employments tend to produce equal “profit funds,” regardless of their
organic composition. Now what the profit fund actually turns out to
be, depends on the selling price or value of the product. If we take
a capital spent _in large proportion_ for labor, the large amount of
surplus labor time exploited ought to give the product a value very much
in excess of the outlay, and afford a large profit fund. If we take a
precisely equal capital, spent in very small proportion for labor, and
almost entirely for machinery, _etc._, the relatively small amount of
surplus labor time exploited ought to make the value of the product not
nearly so great as that of the first capital.
Since Marx frankly admits that in fact competition makes _the value
of these products equal instead of unequal_, how does he “solve the
contradiction” and redeem his theory? The actual “profit” (as defined
here temporarily) afforded by the selling-value of the products is,
throughout society, on the average, say 20 per cent. of that value. Where
the “organic composition of capital” in a particular industry happens
to be such that the profit which ought to be produced according to
the theory is also the actual profit, here the _value_ of the product
required by the theory will be the same as the actual value. But in some
industries where the proportion of labor purchased in the total outlay
is low, the actual value will be above the theoretical value, whereas
in other industries, under reverse conditions, the actual value will
be below the theoretical value. Now, concludes Marx, _the variations
of actual values_ (called by Marx simply “prices”) _above and below
the theoretical or labor values_ (called by Marx simply “values”)
_counterbalance or cancel one another, and the total actual values of all
commodities collectively remain equal to their total labor values_.[90]
The “theoretical values,” so-called above, are those which would be in
proportion to labor costs. The law of labor cost declares that the value
of any given commodity is determined by its cost in labor. In admitting
that in fact actual particular values do not follow this law, Marx has
abandoned the law. (For a consideration of the erroneous claim that the
average rate of surplus-value determines the average rate of profits, the
reader may refer to Böhm-Bawerk’s essay.)
The point desired to be made here, is that Ricardo’s difficulty of “fixed
and circulating” capital is the same as that in the Marxian theory.
Ricardo stated that variations in the proportions in which fixed and
circulating capitals are combined in different industries introduces
a second cause of change in the relative value of a commodity. The
first cause is change in the quantity of labor required to produce
a commodity; the second is a change in the general rate of wages. In
the chapter in this history devoted to Ricardo, it has been argued at
length[91] that what Ricardo said was only a round-about explanation of
the fact that the values required by the labor theory are not the same as
actual values.
McCulloch, following Ricardo, discusses the same problem in the same way,
and concludes that changes in the rate of wages will cause variations
of values aside from the influence of pure labor cost. But he adds to
what Ricardo has said, attempting a justification of the pure labor-cost
theory on the grounds that it regulates average value. I trust what has
been said will make it clear that McCulloch’s defense is identical in
essence with that of Marx, though different in form. McCulloch wrote as
follows, in 1849:
“It should also be observed, that though fluctuations in the
rate of wages occasion some variation in the exchangeable value
of _particular_ commodities, they neither add to nor take from
the _total value_ of the entire mass of commodities. If they
increase the value of those produced by the least durable
capitals, they equally diminish the value of those produced by
the more durable capitals. Their aggregate value continues,
therefore, always the same. And though it may not be strictly
true of a particular commodity, that its exchange value is
directly as its cost, or as the quantity of labour required to
produce it and bring it to market, it is most true to affirm
this of the _mass of commodities taken together_.”[92]
McCulloch also expressed the same thought twenty-one years earlier,
in 1828. Though a change of the rate of wages may cause a particular
commodity to vary from its “real value,”
“the exchangeable value of some other commodity must vary to
the same extent in a contrary direction.”[93]
Marx says the same, and concludes that the variations of the actual
from the theoretical values cancel one another.[94] Both McCulloch and
Marx were involved in a hopeless endeavor to overcome the difficulty of
interest.
2. JAMES MILL.
4. James Mill held that value depends, in the first instance, on
demand and supply, but ultimately upon cost of production.[95] Cost
of production consists of cost in capital and labor combined, but the
capital element can be reduced to labor, and in the last resort quantity
of labor cost determines the exchange value of commodities.[96] But there
is an argument which is brought to controvert this conclusion.
“It is said that the exchangeable value of commodities is
affected by time, without the intervention of labour; because,
when profits of stock must be included, so much must be added
for every portion of time which the production of one commodity
requires beyond that of another.”[97]
Mill takes the regular example of the cask of wine, worth twenty sacks of
flour now—because it cost the same amount of labor—but worth more if kept
in a cellar some years. Now, he says, the objection here is that there
is an addition of value without an application of more labor, and that
therefore quantity of labor does not regulate value. But
“this objection is founded on a misapprehension with respect to
the nature of profits. Profits are, in reality, the measure of
quantity of labour; and the only measure of quantity of labour
to which, in the case of capital, we can resort. This can be
established by rigid analysis. If two commodities are produced,
a bale of silk, for example, for immediate consumption, and a
machine, which is an article of fixed capital; it is certain,
that if the bale of silk and the machine were produced by the
same quantity of labour, and in the same time, they would
exactly exchange for one another: quantity of labour would
clearly be the regulator of their value. But suppose that the
owner of the machine, instead of selling it, is disposed to use
it, for the sake of the profits which it brings; what is the
real character and nature of his action? Instead of receiving
the price of his machine all at once, he takes a deferred
payment, so much per annum: he receives, in fact, an annuity,
in lieu of the capital sum; an annuity fixed by the competition
of the market, and which _is therefore an exact equivalent for
the capital sum_. Whatever the proportion which the capital
sum bears to the annuity, whether it be ten years’ purchase,
or twenty years’ purchase, such a proportion is each year’s
annuity of the original value of the machine. The conclusion
therefore is incontrovertible: as the exchangeable value of the
machine, had it been sold as soon as made, would have been the
practical measure of the quantity of labour employed in making
it, one-tenth or one-twentieth of that value measures also a
tenth or a twentieth of the quantity of labour.”[98]
When an entrepreneur pays a certain sum for a machine, which he uses up
in production, at the end a certain sum of value produced stands in the
place of, and is imputed to, the destroyed machine. This sum of value
is normally greater than the value of the machine, being sufficient, in
fact, to replace the machine and leave a marginal fund of value, which
we call interest. But Mr. Mill’s text discloses the fact that it is the
gross value of the product of the machine which he designates by the term
“profit.” If the machine lasts ten years, the entrepreneur receives these
gross profits in ten annual installments. In purchasing the machine he
has remunerated the labor which was expended in its production. Now he
receives back that remuneration in ten parts. _Competition makes these
ten parts the “equivalent” of the original whole._
“It thus appears that profits are simply remuneration for
labour. They may, indeed, without doing any violence to
language, hardly even by a metaphor, be denominated wages:
the wages of that labour which is applied, not immediately
by hand, but mediately by the instruments which the hand has
produced.”[99]
Such was the puzzle of value in “classical” times that a thinker of
repute could resort to explanations shallow almost beyond belief. It is
the italicized line, of course, which begs the question. The assertion
that the gross return from a machine is the exact _equivalent_ of its
cost price, might mean that the sum total of the “annuities,” in which
the entrepreneur receives this return, is _equal_ to the cost price of
the machine to him. In this case the statement is simply false. But if
the intention be to admit that the sum of annuities is more than equal
to the cost price, the plain import of the admission is unconsciously
concealed under the word “_equivalent_.” For the excess of the value of
the product of the machine which affords this surplus in the annuities
is precisely the value out of proportion to the cost of the product in
labor indirectly applied to it, that is, applied through the machine. To
return to the cask of wine, _by hypothesis_, its value is in excess of
proportionality to the quantity of labor it has cost. And yet Mr. Mill
sets about to explain that its value is, nevertheless, in proportion to
the quantity of labor it has cost, because it is a general principle that
“profits” are “really wages of labour.” In fact,
“the case of the wine in the cellar coincides exactly with
that of a machine worn out in a year, which works by itself
without additional labour. The new wine, which is one machine
is replaced by its produce, the old wine, with that addition
of value which corresponds with the return to capital employed
upon the land [in Mill’s view, the capital that sets the rate
of interest for all other]; and the account which is to be
rendered of the one return, is also the true account of the
other.”[100]
Although Mr. Mill has taken trouble to show that it is a misapprehension
to suppose that difference in the time required to produce commodities
throws their values out of proportion to their labor costs, he now caps
the climax of his strange argument by explaining, directly after Ricardo,
how a rise or fall in the general rate of wages will alter the exchange
ratios of commodities, irrespective of changes in their labor costs.
As explained in the chapter on Ricardo, this is but an indirect way of
showing that the existence of interest is fatal to the law of labor cost,
and that the length of time through which interest must be taken is a
material factor in determining the cost of production of commodities. The
failure of Mr. Mill, as a disciple of Ricardo, to understand the real
meaning of the master’s qualification of the labor-cost law, serves but
to prove the assertion already made, that Ricardo’s round-about argument
on this subject was most misleading. As for Mr. Mill, his treatment of
the interest difficulty was a bungle from first to last.
3. TORRENS.
5. Torrens explains at great length why commodities cannot be exchanged
in primitive society on any other basis than that of labor cost; but
concludes that the forces which produce this result in early times cause
products to exchange, under advanced conditions, according to their
capital cost. A commodity’s cost in capital, measured as the money outlay
of the capitalist-employer, is its “natural price.” Actual exchange value
does not, as Ricardo and Malthus say, tend to settle at _natural price_,
because there is a permanent difference between these quantities, and
this difference constitutes “profits.”[101] It is true that writers who
claim that the actual price tends to come to the “natural price” include
profits in natural price,
“But this classification is highly unphilosophical and
incorrect.”[102] “We cannot assert that the profit of stock is
included in the cost of production, without affirming the gross
absurdity that the excess of value above the expenditure,
constitutes a part of expenditure.”[103]
The difference of view between Malthus and Torrens is easily explained.
Malthus means by natural price, normal value. Torrens has in mind one
variety of the “natural price” of the “philosophical” account of value.
“Natural price is that which we must give in order to obtain
the article we want from the great warehouse of nature, and is
the same thing as cost of production.”[104]
In primitive times this was labor; in present times it is capital.
Torrens really attempted an “empirical” law,[105] namely, that the
exchange values of commodities are _determined by_ their cost in capital
to the entrepreneur, but are in excess of the cost by a constant
percentage. Exchange values are still determined by the cost, because the
percentage of this excess is reckoned on the cost. In criticism of this,
it is easy to show that, as an empirical account, the only possible way
of defining entrepreneur’s cost to show that it does regulate value is
to include interest (“profits”) in the cost. The “philosophical” account
is brought to bear on the law of entrepreneur’s costs only to injure its
statement. Interest is a part of the cost of any particular commodity,
in the sense that it must be paid to call forth capital to aid in its
production, just as wages must be paid to call forth labor. If interest
be excluded from entrepreneur’s costs, the statement of Torrens that the
value of the product will still be in proportion to cost cannot bear the
slightest examination. The total process of the production of most goods
is conducted by a series of entrepreneurs. If we take any two commodities
of equal market value, the briefest consideration will show that their
costs of production (in the sense employed by Torrens), merely to the
last entrepreneur making them, may be quite unequal. As Ricardo pointed
out, if one commodity takes longer to market after the entrepreneur
makes his outlay than another, the amount of profits which its market
value must afford will be greater, so that its cost (as Torrens defines
it) must be less. But considering the entire cost of production to the
series of entrepreneurs, the “profits” of each entrepreneur increase the
necessary money outlay of the next entrepreneur succeeding him, who uses
the product of the first as production goods. If Torrens should permit
the profits of entrepreneurs earlier in the series surreptitiously to be
included in the cost to later entrepreneurs, he would be abandoning his
definition of cost. But if he excludes this element of profits to the
whole series from the cost to the whole series, it is not true (for the
same reason which applied to the case of the single entrepreneurs) that
the values would be in proportion to costs of production.
6. Unfortunately, the influence of the philosophical account upon the
thought of Torrens did not exhaust itself in the havoc it played with his
theory of entrepreneur’s cost. Perforce, he must give a new version of
the theory of labor cost intended to bring it into complete harmony with
the empirical law of costs. This theory is:
“it is always the amount of capital, or _quantity of
accumulated labour_, and not the sum of accumulated and
immediate labour expended on production, which determines the
exchangeable value of commodities.”[106]
No definition is given of “accumulated labor” other than that implied
in the sentence above: “the amount of capital, _or_ accumulated
labour.” Torrens defines capital to be the raw-material, machinery, and
_subsistence of labor_ necessary to production. The “accumulated labor”
which a product costs must be, in his view, the labor[107] which its
raw-material costs, plus that which the machinery used up for it costs,
plus—_not_ the labor actually employed on it in connection with this
machinery, but plus the labor which the _subsistence_ of this labor has
_cost_![108]
Since Torrens himself offers no explanation why this newly-defined
quantity of labor cost should regulate value, we are not in duty bound
to go very far into his fantastic conception. Just as labor theorists
generally proved that labor cost is the regulator of value by the simple
process of showing that utility is not, so, I suppose, Torrens shows
that labor cost, as he defines it, regulates value because as defined
by Ricardo it does not. An astonishing thing about his conception is
that the labor _directly applied_ to a thing is not a part of its labor
cost! To the money outlay of the capitalist-entrepreneur for machinery
and for raw-material corresponds the labor cost of these goods. To the
money outlay in wages must correspond either the labor cost directly
remunerated by these wages, _or else_ the labor cost of the things the
laborers buy with their money wages (subsistence). Both of these cannot
be represented by these wages, otherwise some labor cost would be counted
twice over. For instance, the labor employed directly on a pair of shoes
would be part of the labor cost of production of the shoes; but somewhere
else it would be counting as the cost of production of hats, or what not,
according to the employment of the laborer of whose subsistence these
shoes became a part. Having made the absurd choice to count this labor
(the direct labor cost of the shoes) as part of the cost of hats, upon
the general principle thus adopted, Torrens cannot count labor, directly
applied, as part of the cost of the thing to which it is applied. From
this it follows that the direct labor cost of a machine or a piece of
raw-material cannot be counted as a part of the real labor cost which
determines its value. As a consequence, it is interesting to note that
none of the labor directly applied to a commodity, or directly applied
to any production goods used up in it, is a part of its labor cost. If
Mr. Torrens had been pressed by a critic in his day, he could well have
defied any man to locate the Torrens labor cost of an article to show
that it _does not_ correspond to the value of the article.
CHAPTER VII
THE EMPIRICAL THEORY AS DEVELOPED BY MALTHUS.
1. Malthus was a prolific and inconsistent writer on the subject of
value.[109] His statement of the “empirical” laws of value was able, and
materially advanced the theory in English political economy, but when
he comes to the problem of the _measure of value_, as a part of what we
call the philosophical account, his writings are of so little worth that
it would be a waste of time to consider them in full. He was a great
temporizer and user of makeshifts in questions of principle. Malthus
denied the validity of Ricardo’s labor-cost _regulator_, but defended the
labor-command _measure_, which in turn Ricardo rejected. He had a direct
correspondence controversy with the latter on the subject of these two
standards, but what we have left of this correspondence is in many places
almost unintelligible to a modern student, unless read with infinite
care.[110]
2. In his _Principles_, Malthus opens his discussion by drawing the
established distinction between value in use and value in exchange; but
immediately after this he makes an important alteration in the order
of presentation of ideas, as followed by Smith and Ricardo. He begins
with the “empirical” account of value. In consequence, when he turns to
the question of the relation between labor cost and value, he is led to
adjust the labor theory to the previously developed empirical theory.
As pointed out in the introductory chapter of this essay, this was the
beginning of the process which has resulted in the pushing aside of the
labor theory in English political economy. Ricardo had been led, with
injurious results, to adjust the “empirical” to the “philosophical”
account.
In a history of the law of supply and demand, or of the law of
entrepreneur’s costs, the statement Malthus gave these principles would
be of great importance.[111] Here we are concerned with his version of
these principles only to the extent necessary to show the different
_setting_ they give the labor theory from that in Ricardo’s work.
3. We find that in the view of Malthus, the primary principle of exchange
value, or the principle of broadest application, is the law of supply and
demand. The law of entrepreneur’s costs is a secondary principle.
“It has never been a matter of doubt that the principle of
supply and demand determines exclusively, and very regularly
and accurately, the prices of monopolized commodities, without
any reference to the cost of their production; and our daily
and uniform experience shows us that the prices of raw
products, particularly of those which are most affected by the
seasons, are at the moment of their sale determined always by
the higgling of the market, and differ widely in different
years and at different times, while the labour and capital
employed on them may have been very nearly the same.”[112]
And even in those competitive manufactures where conditions are most
favorable to the law of costs, alterations of the demand and supply are
constantly overcoming the influence of cost. Therefore, the cost rule is
not only limited in action, but it is directly subordinate to the rule of
supply and demand.
“The cost of production itself only influences the price of
... commodities as the payment of this cost is the necessary
condition of their continued supply.”
“It follows that the great principle of demand and supply is
called into action to determine what Adam Smith calls natural
prices as well as market prices.”[113]
Cost of production “can do nothing but in subordination” to the principle
of supply and demand.[114]
Malthus follows Smith precisely in naming the components of
entrepreneur’s costs—wages, profits and rent—but prefers to call the
normal value requisite to cover these expenses, instead of natural price,
the “_necessary price_,” “because the term necessary better expresses
a reference to the conditions of supply.”[115] What he means by the
statement that the relation of supply to demand not only determines
temporary market prices but also natural prices as defined by Adam Smith,
is that wages of labor depend on the supply of labor, and the “profits”
of capital and rent of land in the same way on the supplies of these
agents.[116] Ricardo took an entirely different view of the relation of
the two “empirical” principles. In his work he takes no account of the
law of supply and demand until in Chapter XXX, where he admits that this
rule holds good of monopolized commodities, and, indeed, of all other
commodities for a limited period.[117] But, in a letter to Malthus, he
wrote:
“You say that demand and supply regulates (sic) value; this
I think is saying nothing; it is supply which regulates
value, and supply is itself controlled by comparative cost of
production.”[118]
Of course Ricardo was always conscious of the fact that cost of
production can influence exchange value only by way of influencing
supply. At the very outset of his chapter on value in his _Principles_ he
states:
“There are some commodities, the value of which is determined
by their scarcity alone. No labour can increase the quantity
of such goods, and therefore _their value cannot be lowered by
an increased supply_.”[119]
Ricardo’s view was virtually this: The rule of supply and demand tells
us practically nothing, but in those cases where we cannot get a further
principle we will let it count as a law of value. But wherever the law of
labor cost applies, the principle of supply and demand ceases to be of
importance.
An attempt to determine whether Ricardo or Malthus was right would
involve us immediately in a discussion of the ultimate relation of
cost in all its forms to value, which, so far as we do enter into it,
we hope to make the culmination of this essay. Which view is the more
profound, and whether an ambiguity in the word value is involved in the
controversy, are questions by no means easy to answer.
4. With this general theory, that the empirical law of costs is
“subordinate” to the law of supply and demand, as a starting-point,
Malthus proceeds to a thorough criticism of Ricardo’s law of labor
cost. In the indictment which he brings against this principle, we may
for ourselves distinguish seven counts (indicated by the numbers in
brackets). These counts really fall into two classes. The first main
contention is that Ricardo considers the relation between entrepreneur’s
cost (“necessary price,” as Malthus calls it; “natural price,” or cost
in “labour and profits,” as Ricardo calls it) and actual market values
too intimate. There are three sources of variation of actual from natural
prices which should be emphasized. There are [1] the temporary market
alterations of prices, too rapid to be met by changing the volume of
production; [2] monopoly in the product itself, or some raw product used
in its making; [3] seasonal fluctuations in all products of the soil.
The second main contention[120] is that Ricardo overestimates the degree
of control exercised by labor cost over natural price. Note the following
comprehensive passage:
“Under all the variations, therefore, which arise [4] from the
different proportions of fixed capital employed, the different
quickness of the returns of the circulating capital, [5] the
quantity of foreign commodities used in manufactures, [6] the
acknowledged effects of taxation, [7] and the almost universal
prevalence of rent in the actual state of all improved
countries, we must I think allow that ... _it is certainly
not_ the quantity of labour which has been employed in the
production of each particular commodity which determines their
relative values in exchange at the same time and at the same
place.”[121]
The claim is in unequivocal language that “well-known causes of constant
and universal operation” destroy the proportionality of value to labor
cost.
It will be observed that the four points made in this citation all
concern influences which make the entrepreneur’s expenses of production
out of proportion to the total quantity of labor which his outlay of
money directly and indirectly remunerates. For instance, the fifth
point regarding the use of imported raw-material or machinery refers
to the fact that $1,000 worth of production goods bought abroad by an
entrepreneur may have cost more or less labor than $1,000 worth of
raw-material of home production. As Ricardo himself points out (in
Chapter VII of his _Principles_), the exchange value of an imported
commodity does not depend on its labor cost abroad compared with the
home labor cost of the goods against which it exchanges. But the $1,000
spent by one entrepreneur counts just the same as that spent by another
in determining the “necessary price” of the respective commodities which
they produce. Thus there is here one source of disproportionality between
necessary prices and actual labor costs.
5. What is the position of Ricardo with respect to these seven counts?
He acknowledged all but the claim that rent causes an aberration of
normal value from the position required by labor cost. That is, in the
language of the day he denied that “rent enters into price.” He not only
acknowledged, but himself stated the other points. How fully he treats
the question of the different proportions of “fixed and circulating”
capital, we have seen.[122] As for the “acknowledged” effects of
taxation, the reference is to Ricardo’s own statements, scattered
throughout his various chapters on taxation, that this and that tax will
raise prices. Ricardo was perfectly aware of the effects of monopoly, and
of the influence of temporary oscillations of supply and demand.[123]
The old question whether “rent enters into price” could very properly
be discussed in a history of the labor theory of value. Since, however,
the question is large enough to warrant separate discussion, and has in
recent times received it in many prominent places, we shall be content
merely to point out the conflict between Malthus and Ricardo, and to take
the stand that recent discussion has shown that ground rent enters into
price in the same sense as wages, or interest on capital other than land.
Ricardo said rent does not and cannot enter in the least degree into
price. Says Malthus:
“It appears to me essential, both to correctness of language
and correctness of meaning to say that the cost of producing
any commodity is made up of all the wages, all the profits, and
all the rent which ... are necessary to bring that particular
commodity to market in the quantity required.”[124]
6. We have here the remarkable instance of two writers nearly agreed
on the number of exceptions to a principle, but quite disagreed as to
what remains of the principle. The labor cost of a commodity in a modern
market can influence its exchange value only by means of influencing its
entrepreneur’s cost. Thus any cause which weakens the connection between
the value of a commodity and its entrepreneur’s cost of production,
thereby also weakens its connection with labor cost. Therefore, the
first three points made by Malthus to show that entrepreneur’s costs
do not exercise perfect control over actual market-values are relevant
to the dispute about the labor-cost regulator. But, as the reader has
observed, the three exceptions to the law of money costs are only such
as have always been made to any proposition of static theory. A static
law of value is supposed only to govern _normal value_ under competitive
conditions. It is perfectly legitimate to put emphasis upon the causes
of the variation of actual values from static standards, but on the
principle, now so well understood, that actual conditions can be fully
understood only by the preliminary establishment of static laws, the
first three points of criticism made by Malthus, and admitted by Ricardo,
must be judged to leave the law of costs a perfectly valid principle.
If the only causes of variation of actual exchange values from the
standard of labor costs were those causes which operate to weaken the
law of entrepreneur’s costs, the Ricardian labor theory would remain a
principle of the utmost importance. The attacks which the labor-cost
theory cannot withstand are those directed against its validity _as a
static principle_. It is an undisputed static principle that exchange
values are in proportion to entrepreneur’s costs. Therefore, every time
a cause is shown which throws entrepreneur’s costs out of proportion
to labor cost, a heart-thrust is given the theory of the labor-cost
regulator. To the list of causes of this kind granted by Ricardo, Malthus
added one, an important one; or rather, he persisted in retaining what
Adam Smith considered to be such a cause—rent of land. Malthus then
discovered no new point; but he marshaled many points in an able manner.
Considering only the weighty part of his case, his argument is that
entrepreneur’s costs consist of wages, interest, and rent; that wages
alone stand for labor cost;[125] that therefore the existence of the
other two elements makes the total entrepreneur’s cost decidedly out of
proportion to labor cost. This signifies not only that entrepreneur’s
costs are composed of outlays in excess of payments for labor, but
that when one entrepreneur’s cost is compared with that of another
the two will (barring an accidental coincidence) not be to each other
as the respective labor costs entering into them (through wages). Two
commodities may have equal exchange values and equal entrepreneur’s
costs, but one may cost twice as much labor as the other, because the
latter may cost more rent or interest than the former. Ricardo denied the
influence of rent, and _assumed_ that interest preserves fairly constant
proportions with the wage element. In our judgment, Ricardo was much the
profounder of these two economists, but Malthus made the fortunate gain
of presenting the empirical principles of value at the outset of his
work, and in this way was led to adjust the labor theory to them, instead
of doing the reverse, as Ricardo did.
_Note on the Question of the Invariable Measure of Value in all Times and
Places._
7. Adam Smith made several general assertions concerning the power of a
labor standard to measure value _in all times and places_. If mankind
should live under conditions free from the rent of land and interest
on capital, according to Smith the quantity of labor which commodities
cost might properly be regarded as commensurate with the quantity
which they command in exchange. Under actual conditions the command
standard alone will apply. Ricardo became a steadfast critic of the
idea that the labor-command standard could be thus used. He believed it
to be impossible to find an invariable measure based on labor cost of
production (as distinguished from labor commanded in exchange); but he
made statements which implied that if a commodity existed which cost
the same quantity of labor throughout time, it would be an invariable
measure of “real value.” Then again he faltered in this view because
“profits” enter into the cost of production of different articles in
different degrees. The writer has found himself unable to reach a
complete understanding of Ricardo’s section on this subject, Section
vi of Chapter 1. Malthus always defended the labor-command standard
of Smith, though in a vacillating way. In the end he adopted it in an
unqualified form. (In the 2d and last edition of his _Principles_, the
text being written just before his death.) With his last published
discussion, appearing in 1836, the question practically disappeared from
English political economy. Referring to this question, John Stuart Mill
said: “it is necessary to touch upon the subject, if only to show how
little there is to be said about it,” and concludes that the measure
sought is impossible. J. B. Say wrote that “an invariable measure of
value is a pure Chimera.”[126] Torrens expressed his judgment in words
quoted from Lord Lauderdale: “Lord Lauderdale has justly observed that
the search of economists after a measure of exchangeable value, is just
as irrational and as hopeless as was that of the alchemists in quest of
the philosopher’s stone.”[127] Well might the discussion be condemned by
contemporaries and neglected by subsequent economists, for, especially in
the lengthy writings of Malthus, the question was involved in distracting
confusion, while the comparatively brief passage Smith devoted to the
subject contains fatal contradictions.
It is doubtful if we can escape this question in theory. The required
standard may come as a more modest proposal than that of Adam Smith,
but some means of comparing value, as significance (as Menger’s
“_Bedeutung_”) in different times will always be desirable, to say the
least. In the recent controversy over the question whether gold is a
good standard of deferred payments, practical men decided for gold
on other (and sufficient) grounds than any alleged invariability in
value, but it was inevitable that the question should suggest itself:
What does constitute the same _value_ in different times (_i. e._ under
changed conditions of wealth)? It is the legitimate function of economic
theory to wrestle with such questions, whether to conclude that an
answer is impossible (for that would be a conclusion, hard to prove
and of importance when proved) or that such and such a standard may be
established.
The present essay will not attempt the herculean dialectical labor of
setting in order and criticising all that Smith, Malthus, and Ricardo
wrote on this subject. The labor doctrine as a statical theory is a
problem of sufficient proportions in itself to permit specializing upon
it. A brief discussion however is added concerning what Malthus wrote
upon the subject of the labor-command measure. In the first edition of
his _Principles_, Malthus held that there is no question of possessing
a perfect measure of value at different times, but there is a question
of choice between various imperfect measures. He was apparently much
impressed by the charge that the value of labor changes when the quantity
of commodity (_i. e._ measured in physical units) which it commands, is
altered. Accordingly he proposes to take labor and “corn” together, or a
“mean between them” as a standard.[128] He proceeds upon the supposition
that “when corn compared with labour is dear, labour compared with corn
must necessarily be cheap. At the period when a given quantity of corn
will command the greatest quantity of the necessaries, conveniences, and
amusements of life, a given quantity of labour will always command the
smallest quantity of such objects, (and _vice versâ_); ... If, then, we
take a mean between the two, we shall evidently have a measure corrected
by the contemporary variations of each in opposite directions.”[129]
In this double standard a unit of labor is to be a _day_ of “common”
labor. For the use of the standard some unit of corn is necessary.
A _peck_ is selected. The reason given for this choice is that this
amount may be considered “in respect to quantity as equivalent to a
day’s labour.” Accordingly, “any commodity, which at different periods
will purchase the same number of days’ labour and of pecks of wheat, or
parts of them, each taken in equal proportions, may be considered, upon
this principle, as commanding pretty nearly the same quantity of the
necessaries, conveniences, and amusements of life; and, consequently,
as preserving pretty nearly its real value in exchange at different
periods.”[130] In his correspondence with Malthus, Ricardo made the
former very uncomfortable in the position taken with respect to the
combined labor-corn measure of value. In the second edition of the
_Principles_ of Malthus this hybrid standard was abandoned. In principle
it was a shallow makeshift. It is needless to say that if the arguments
for regarding the amount of commodities purchaseable by a day’s wages,
as the unit of wealth, are sufficient, grain should be measured in its
“real value” by reference to this standard in the same way as any other
important commodity. As was stated in Chapter ii, the corn measure of
value was suggested by Smith to serve as a convenient index to the labor
measure. Beyond a doubt, Smith spoke of the corn measure in a way to
mislead both Ricardo and Malthus; but nothing could be plainer than the
words quoted from him to show that corn is used on principle only because
it is supposed to remain from age to age in a steady exchange ratio with
day labor.[131]
In Malthus’s second edition, the view is taken simply that “standard”
labor commanded in exchange is the measure of value in all times and
places. There is great difficulty in telling precisely what value, or
what kind of value, it is that is measured. It is called “real value
in exchange” and “intrinsic value in exchange.” The latter is in one
place defined to be “not the general power of purchasing possessed by a
particular commodity, but its power of purchasing _arising from intrinsic
causes_, which includes all the causes of whatever kind they may be,
which have contributed to the limitation of its supply compared with the
demand.”[132] The extrinsic causes of a commodity’s exchange value are
the causes of the value of the other commodity in whose quantity the
exchange value of the first is expressed.[133] In various other places,
“intrinsic value in exchange” is defined as indicating (1) the degree
of necessity or convenience to life (1st ed.); (2) the difficulty of
obtainment (in some sense supposed to be more inclusive than Ricardo’s
labor cost); (3) the degree of the limitation of the supply as compared
with the demand. Thinking with such terminology would be like painting
portraits with a white-wash brush. If a day of labor in America commanded
twice the physical quantity of a given complex of commodities that a day
of English labor commanded, Malthus was forced to admit that the simple
exchange value of the goods commanded by a unit of American labor was
twice that commanded by a unit of British labor. But at the same time
his doctrine of the labor measure of value required him to affirm that
the “real exchange value” of the goods commanded by a day of labor in
the two countries was the same. In this way he was led to contend that
two complexes of goods having different exchange values, had the same
“real exchange values.” In view of the fact that “real exchange value”
is defined virtually as “exchange value as arising from its causes,”
the contention is mystifying. One is prone to acquiesce in J. S. Mill’s
judgment that the argument of Malthus is a “vain subtlety.”
CHAPTER VIII
SENIOR
1. Senior’s little _Political Economy_[134] earned for him but a
secondary rank in the literary history of the science. This is because
the work, taken as a whole, is extremely unsystematic. It is also a
little erratic. Senior was, however, a man of far greater merit than
McCulloch, Torrens, or James Mill, and advanced many significant original
doctrines, or rather parts of doctrines. The most noteworthy of these
bear closely upon the theory of value; and if we put together what he
said, in our own way, we shall obtain an important line of commentary
upon the Ricardian labor-cost theory. The results tend more to destroy
than to support that theory.[135]
According to Senior, the conditions essential to value, which he
defines as exchange value, are (1) utility, (2) limitation in supply,
(3) transferableness.[136] We have seen how Malthus laid emphasis on
the fact that cost can influence value only through affecting supply,
and here we see the same thought put even more emphatically. It is
_limitation of supply_ alone that in the first instance gives value to
things of a useful nature. The following words, carrying out the lines of
thought suggested by J. B. Say and Malthus, are remarkable:
“It is true that wherever there is utility, the addition of
labor as necessary to production constitutes value, because,
the supply of labor being limited, it follows that the object
to the supply of which it is necessary, is by that very
necessity limited in supply. But any other cause limiting
supply is just as efficient a cause of value in an article
as the necessity of labor to its production. And in fact,
if all the commodities used by man were supplied by nature
without any intervention whatever of human labor, but were
supplied in precisely the same quantities as they now are,
there is no reason to suppose either that they would cease to
be valuable, or would exchange in any other than their present
proportions.”[137]
Senior adopts this last heroic hypothesis only in passing, by way of
exhibiting, in a striking way, what he considers to be the true relation
of labor cost to value. In criticism of Ricardo, he says:
“As limitation of supply is essential to the value of labor
itself, to assume labor and exclude limitation of supply, as
the condition on which value depends is not only to substitute
a partial for a general cause, but pointedly to exclude the
very cause which gives force to the cause assigned.”
2. Although Senior is careful to give limitation of supply as the factor
which, combined with usefulness, occasions value, he still holds that
cost of production may govern value under certain ideal conditions.
These conditions are described as those of “perfect competition,” but
he means a great deal more by this than these words signify to-day.
Senior’s conception of cost, however, is different from Ricardo’s. “By
_cost of production_ we mean the sum of labour and abstinence necessary
to production.”[138] Labor is defined, with especial reference to
cutting off the extension of the term attempted by McCulloch,[139] to be
“voluntary exertion of bodily or mental faculties for the purposes of
production” (p. 57). The new word _abstinence_ is defined as follows:
“A term by which we express the conduct of a person who either
abstains from the unproductive use of what he can command,
or designedly prefers the production of remote to that of
immediate results.”[140]
For the variety of conceptions of cost, expressed and implied in the
writings of his predecessors, Senior substitutes a consistent definition
of cost in terms of subjective sacrifice. With this improved concept as
an aid, he is enabled to resolve many of the difficulties which had beset
earlier debates upon the meaning of cost. The objection of Mr. Torrens to
the inclusion by Mr. Malthus of “profits” in cost is good, says Senior,
as against Mr. Malthus’s word _profits_.
“Want of the term abstinence, or of some equivalent expression
has led Mr. Malthus into inaccuracy of language.... When he
termed profit a part of the cost of production, he appears to
us to have meant not profit, but that conduct which is repaid
by profit: an inaccuracy precisely similar to that committed by
those who term wages a part of the cost of production; meaning
not wages, which are the result, but the labour for which wages
are the remuneration.”[141]
The clearness of thought here is gratifying in comparison with earlier
discussions, but, as we have had occasion to urge before, the idea that
it is erroneous to consider wages and profits as cost, confines the term
to the meaning of subjective cost whereas there can well be other forms
of cost. It may cost coal and machinery to produce an article, just as it
may cost labor and abstinence.
3. The true cost of production of commodities, affirms Senior, would
regulate their values if the only obstacles to their supply were the
labor and abstinence required for their production. There are two
different arguments given to substantiate this proposition. The first
partially corresponds to the “philosophical” account of value, being
stated in highly generalized terms without regard to the division of
society into classes of capitalists and laborers.
“Where the only natural agents employed are those which are
universally accessible, and therefore are practically unlimited
in supply, the utility of the produce, or in other words, its
power of producing gratification, or preventing pain, must be
in proportion to the sacrifices made to produce it, unless the
producer has misapplied his exertions: _Since_ no man would
willingly employ a given amount of labor or abstinence in
producing one commodity, if he could obtain more gratification
by devoting them to the production of another.”[142]
This passage, whether consciously or unconsciously, is a proposition
about a primitive or a Robinson Crusoe economy. It affirms that the
utility of products will be _in proportion to_ their total disutility
costs of production, but it does not affirm that production will be
carried on until the utility per unit of the increasing number of
products will be reduced until it is _equal to_ the disutility cost of a
unit. Except for the failure to make this latter observation, Senior’s
formula looks like an anticipation of later theories of value. This
appearance is carried out by the use of the word “utility” for value.
The word as here used was probably taken directly from Say; it cannot
be Adam Smith’s “_value in use_.” For if Crusoe produced at equal cost,
measured in disutility, a small article of luxury and a great quantity
of necessaries, and estimated the two at the same value—and this
would be normal—the Smithian values in use distinctly would not be in
proportion to sacrifice costs. The great quantity of necessaries would
have a great “_value in use_,” as contrasted with the small article of
luxury, for which Crusoe nevertheless was willing to expend quite as
much labor. “Marginal” or “final” utility would fit the requirements of
this formula, but there is nowhere in the book the slightest evidence
that Senior utilizes the marginal method. In fact, on the same page
with this proposition is a paragraph which shows that he considers the
value of things not capable of increase in supply—the “rare productions
of nature and art”—to be subject to no general rule, because dependent
merely on the wealth and taste of the community.[143] That is to say,
unless there is some ascertainable rule governing the conditions of the
supply of goods, there is no rule of their value. But the utility theory
is a whole explanation of value lying precisely in this region of no
rules.[144]
4. We come shortly to the explanation that nearly corresponds with Adam
Smith’s “empirical account.” Here the scene is the social economy. Cost
of production—always the sum of labor and abstinence—must be divided into
(a) cost on the part of the producer or seller and (b) on the part of the
consumer or purchaser. The latter is the amount of labor and abstinence
which would have to be undergone by the consumers if they themselves,
or some of them in behalf of themselves and the others, were to resort
to producing the good in question instead of buying it. The former cost
sets the minimum limit to price, or exchange value. The latter sets
the maximum. Under circumstances of free competition, when no producer
possesses any advantage over another, these two limits coincide, and the
price of commodities therefore represents the aggregate amount of labor
and abstinence necessary to continue their production.[145] This division
of cost into two parts, each forming a limit, is Senior’s peculiar and
inferior way of describing the action of competition among producers. He
concludes nearly in the ordinary way:
“If the price should rise beyond the cost of their [the
commodities’] production, the producers must receive more
than an average remuneration for their sacrifices. As soon
as this has been discovered capital and industry flow
towards the employment which, by this supposition, offers
extraordinary advantages. Those who formerly were purchasers,
or persons on their behalf, turn producers themselves, until
the increased supply has equalized the price with the cost of
production.”[146]
The reverse movement, of course, prevents an abnormal fall of prices.
This process of bringing exchange values into proportion to subjective
costs of production, reduces itself simply to the adjustment of values to
such a level that the wages and profits into which they are divided in
each industry furnish the regular or average (as we should say, “static”)
remuneration to the labor and abstinence required for production.
5. We see, then, that where labor and abstinence are the only “obstacles”
to supply, or where profits and wages are the only shares which “enter
into” price, values will be in proportion to cost of production, which
is not labor, but a “sum of labor and abstinence.” The next question is,
in what light does Senior regard _rent_. Rent, in his view, overturns
the whole correlation of value with subjective cost of production. And
here we are introduced to Senior’s remarkable extension of the concepts
of _rent_ and of _natural agents_. In the first place, rent is defined
to be the return to natural agents which are not universally accessible
(p. 90). But in the second place, rent is defined to be the surplus of
value produced above the amount required to remunerate the sacrifices of
production.
“If the established division is adhered to, and all that
is produced is to be divided into rent, profit, and
wages,—and certainly that appears to be the most convenient
classification,—and if wages and profit are to be considered
as the rewards of peculiar sacrifices, ... it is clear that
under the term ‘rent’ must be included all that is obtained
without any sacrifice; or, which is the same thing, beyond
the remuneration for that sacrifice; all that nature or
fortune bestows either without any exertion on the part of the
recipient, or in addition to the average remuneration for the
exercise of industry or the employment of capital.”[147]
Accordingly, rent includes not only the return to land, in the widest
economic sense of this term, but also the return to secret processes of
production, and to talents or extraordinary personal abilities.[148]
This necessitates the very curious use of the words “natural agents” to
include exclusive knowledge of, or right to, an advanced process, and
talents or unusual faculties:
“The mere knowledge of the operations of nature, as long as
the use of that knowledge can be confined either by secrecy or
law, creates a revenue to its possessor analogous to the rent
of land ... so precisely resembling the rent of land, that it
often receives the same name,” (and it must be called rent).
The salary, wages, or remuneration of the laborer may really be composed
of wages, rent, and profits:
“Is then the extraordinary remuneration of the labourers,
which is assisted by extraordinary talents, to be termed Rent
or Wages? It originates in the bounty of nature; so far it
seems to be rent. It is to be obtained only on the condition
of undergoing labour; so far it seems to be wages. It might be
termed ... rent which can be received only by a labourer, or
wages which can be received only by the proprietor of a natural
agent. But as it is clearly a surplus, the labour having been
previously paid for by average wages, and that surplus the
spontaneous gift of nature, we have thought it most convenient
to term it rent.”[149]
6. Does this rent, the surplus of value above reward for true cost
of production, “enter into price?” Senior does not use these words
or discuss this question directly, but, although he follows Ricardo
precisely in explaining rent as a differential return and defends the
doctrine vigorously against Say’s attacks, he assumes nevertheless,
contrary to Ricardo, that rent does “enter into price” in the sense
of constituting a source of permanent disproportionality of value to
subjective cost of production. As was intimated some pages back, the
state of free competition, as understood by Senior, is highly ideal,
postulating not only the ordinary condition of ideal mobility of capital
and labor, but also the use of none but free natural agents:
“When we speak, therefore, of a class of commodities as
produced under circumstances of equal competition, or as
the result of labour and abstinence unassisted by any other
appropriated agent, ... we do not mean to state that any such
commodities exist, but that, if they did exist, such would be
the laws by which their prices would be regulated.”[150]
He takes up the example of the watch, a commodity adduced by McCulloch
and others as having a value derived from labor cost alone, and shows
that at every turn _rent_, of the diverse kinds he has defined, is paid
out of its price.[151]
7. What is the net result of Senior’s argument for the labor-cost
theory of value? In the first place, Senior had little to say about the
difficulty of “fixed and circulating capital” which took so much of
Ricardo’s time. The reason is simple. Of course the values of products
are out of proportion to their labor costs, because of the different
lengths of time required to produce them. Two goods may cost the same
labor, but differ in value.
“The principle is that, though in both cases the labour
employed is the same, more abstinence is necessary in the one
case than in the other.”[152]
The great effort of Ricardo to force the facts into some conformity with
the only philosophy of value he possessed, by asking us to consider
“profits” an element about in proportion to wages cost, though they
are not, becomes unnecessary from Senior’s view-point. The motive to
undertake this forcing of facts is undermined. For “profits” stand on
the subjective basis of “abstinence,” just as wages stand on the base of
labor.
Furthermore, according to Senior, land rent “enters into” price. So
far, both “profits” of stock and rent of land exist to destroy the
proportionality of values to labor cost. This is the result to which
Malthus’s criticisms of Ricardo had led. But Senior’s criticism goes
beyond Malthus’s. Wages, as an element in entrepreneur’s cost, are not
even in proportion to the labor remunerated. That is to say, this is
what Senior says if we keep his thought while reforming his language. He
states that the actual income, which we always call _wages_, is really
composed in many cases of wages, profits, and rent. He says this because
he wishes to define wages as that remuneration which is in proportion
to sacrifice. In this departure in terminology we cannot follow him.
It is the whole wage of a laborer which is truly analogous to the rent
of a physical unit of land. Different laborers, of different earning
capacities, could be conceived of as ranged in a scale, so as to give a
differential aspect to their incomes. Senior’s _rent to skill_ is really
_an excess of wages_ over the amount required to be in proportion to
disutility. As he himself wrote in one place:
“There are few employments in which extraordinary powers of
body and mind do not receive an extraordinary remuneration.
It is the privilege of talent to work not only better but
_more easily_. It will generally be found, therefore, that the
commodity or service produced by a first-rate workman, while it
sells for more than an average price, has _cost less than an
average amount of labor_, [_i. e._, disutility.]”[153]
Said Ricardo: The principle of value is that labor cost regulates it; but
this principle is considerably modified by the fact that the values of
different commodities have to include different proportions of “profit.”
Piecing together for ourselves what Senior says, it is his position that
the value of commodities must include (if the commodities are to be
produced) rent, profits, and wages; rent and profits, being different
percentages in the whole entrepreneur’s cost of different goods, make
values out of proportion to labor cost; there is no necessity of
considering profits as an element in entrepreneur’s costs approximately
in proportion to wages; and lastly, wages are not in proportion to labor,
which is disutility.[154]
CHAPTER IX
JOHN STUART MILL
1. Though Mill regarded his exposition of the theory of value with great
satisfaction—a fact that has occasioned innumerable thrusts at him
since—his contributions to the whole subject were not great, considering
the work of Ricardo, the criticisms of it by Malthus, and the abundance
of suggestions in the writings of Senior. His terminological faults
are gross, and in many places his thought is very loose. His entire
discussion of value, above all, lacks precision. By value is to be
understood exchange value, general power of purchasing, and Mill insists
strongly on the necessity of keeping in mind that a general rise or
fall of value so defined is “unthinkable.” Value is purely a relative
term. The conditions essential to value are utility and difficulty
of attainment. Difficulty of attainment may “consist in an absolute
limitation of supply” or in “the labour and expense requisite to produce
the commodity.”[155] When, in the latter event, labor is applied under
conditions of diminishing returns, a third case of value is distinguished
for separate treatment. Following Malthus in his important innovation of
giving the “empirical account” precedence, Mill begins with the assertion
that the law of value of the first class of things—namely, those under
an absolute limitation of supply—is merely the law of supply and demand.
“There is another law for that much larger class of things which admit of
indefinite multiplication.”[156] This is a law of entrepreneur’s costs
of production. While demand and supply rule alone in a certain field,
and rule over the oscillations of value in all fields, in the case of
reproducible goods,
“they themselves [_i. e._ demand and supply] obey a
superior force, which makes value gravitate towards Cost of
Production.... Demand and Supply always rush to an equilibrium,
but the condition of stable equilibrium is when things exchange
for each other according to their cost of production.”[157]
Cost is called now by Ricardo’s words “natural value;” now by Malthus’s,
“necessary price.” Cost of production is defined as follows, in the
chapter which summarizes the theory of value:
“Cost of production consists of several elements, some of which
are constant and universal, others occasional. The universal
elements of cost of production are the wages of the labour and
the profits of the capital. The occasional elements are, taxes
and any extra cost occasioned by a scarcity value of some of
the requisites.”
With respect to rent, Mill follows Ricardo for the general rule, instead
of Malthus and Senior:
“Rent is not an element in the cost of production of the
commodity which yields it; except in the case (rather
conceivable than actually existing) in which it results from,
and represents, a scarcity value. But when land capable of
yielding rent in agriculture is applied to some other purpose,
the rent which it would have yielded is an element in the
cost of production of the commodity which it is employed to
produce.”[158]
If Mill had followed the lead given in the last sentence to its logical
end, the result ought to have been the inclusion of ground-rent as an
element in entrepreneur’s costs. But, in spite of these concessions,
he thought of rent habitually as failing to enter into price, and thus
failing to be a cause of disproportionality between labor-cost and value.
2. The profit of capital is stated explicitly to be the remuneration of
abstinence, but nothing is made to depend on this.[159] Abstinence is not
elevated into a position logically coördinate with labor, nor are the two
conceived of together as constituting subjective costs, as distinguished
from entrepreneur’s costs, consisting in profits and wages.[160] While
the language of Mill in diverse places shows that he was well enough
aware of the difference between the two main forms of cost, so little was
this essential distinction ever ready in his mind that he is able to say,
without realizing the offence, just as Ricardo does: “Besides the natural
and necessary elements in cost of production—labour and profits....”[161]
When the time comes to develop the traditional philosophical account
of value, abstinence is forgotten. Labor alone comes to the front. The
aberration, due to profits, of the value of products from the standard
required by labor cost, is treated not in a “philosophical” account
like Senior’s, which endeavors to include and explain the case, but is
regarded as an exception to the “philosophical” explanation, or as an
error in it.
3. There is a place in his book where Mill wavers in the decision to
include profits in cost of production. The probable explanation of his
hesitancy is of considerable interest, for it suggests the internal
weakness of the theory that cost in any form is the essence of value. His
doubt arises in connection with the familiar case of the relative values
of a cask of wine and a piece of cloth, originally costing the same
amount of labor in their production. The difficulty arises from the fact
that the wine alone continues to increase in value through mere lapse of
time:
“The wine and the cloth were made by the same original outlay.
Here then is a case in which the natural values, relatively
to one another, of two commodities, do not conform to their
cost of production alone, but to their cost of production plus
something else.”
In this sentence Mill excludes “profits” from cost. But he continues:
“Unless, indeed, for the sake of generality in the expression, we
include the profit which the wine merchant _foregoes_ during the five
years in the cost of production of the wine.”[162] The word “foregoes”
(not italicized by Mill) is uncalled for. The wine merchant does not
get profits he foregoes elsewhere, but the profits he makes from the
added value of the wine. They might be greater or less than the profits
foregone elsewhere. The forces tending to make them equal to those
elsewhere relinquished are precisely the same in this case as in any
other. If they are greater, more five-year-old wine will be brought to
the market and its price will fall, and if they are less the reverse
will happen. What is the difference between this case and the case of
an ordinary industrial product that Mill should falter so? Does capital
(using the term in the sense defined by J. B. Clark), the fund of wealth
employed in production, play different rôles in the two cases? Not in
the least. Suppose a fund of capital is embodied in a certain quantity
of raw material for a certain length of time until the same becomes
final product. The final product, besides covering all other expenses,
affords a sum of value equal to the capital invested in materials plus
the interest on it. The difficulty felt in the case of the wine was
undoubtedly that no tools, machinery, or labor were employed upon it
during the time of its improvement in value. The changes working within
it effected its increase in value merely by augmenting its utility to
users of wine. The increase of value, secondly, affords a “profit” or
interest. This profit may strike the mind as a surplus over cost to the
entrepreneur, but the relation of this interest to the value of the final
product is precisely the same as in any common case of manufacture.
Interest as a cost can influence the value of the product only by
influencing its supply. To discover the essential nature of value, we
must lay bare the causes which determine what the value of a given supply
is, independently of its cost. Cost and value may, in certain cases,
tend to make mutual adjustments, but these are effected only by means of
changes in supply. Value is not determined by cost _per se_, or, that is
to say, cost is by no means of its essence. In the ordinary case, if one
capital is employed for a longer time than another, the outwardly active
process of production is continued for a longer time. If extra profit
accrues through a time when labor works and wheels turn, it is easy to
say that profits must be paid, and therefore the value of the product
must be of such and such an extent. But in an instance where the value
increases without the whirl of wheels and the manipulation of tools, the
phenomenon naturally presents itself to the mind in an unfamiliar aspect.
The wine merchant remains passive, and it seems plain that instead of
his expense dictating what the value of the wine shall be, the truth is,
he takes what the causes independently determining the value of the wine
give him. Beyond a doubt there is a relation of cost to value, but there
are instances where the ultimate philosophy that cost is the very essence
of value applies with such unsatisfactory results that any but the most
doctrinaire classical economist must falter and hasten on.
4. If “profits” are a part of entrepreneur’s cost of production, the
question which confronted Ricardo must reappear. Does not the variety
of the proportions in which fixed and circulating capital are combined
in production, free values from the regulation of labor cost? The
consideration of this question in Mill’s _Principles_ is accompanied by
unpardonable blunders in terminology. Mill’s mind seems here completely
tradition-ridden. The havoc is wrought in the use of terms by adopting
the view that besides labor cost influencing value, wages also influence
it. In the topical analysis (Table of Contents, vol. i, p. 15) the
outline of the chapter on cost of production proceeds as follows:
“Principal element in cost of production, quantity of labour.
Wages not an element in cost of production, except in so far as
they vary from employment to employment.”
When cost is used in a sense which makes labor one of its elements,
wages are not an element in so far as they vary from employment to
employment, or in any other way. In the sense of cost in which wages are
an element, the variation of the latter from employment to employment is
an irrelevant consideration. Again we find such an observation as the
following: “The relative wages of the labour necessary for producing
different commodities affect their value just as much as the relative
quantities of labour.”[163] In the chapter on Ricardo, we saw how this
form of expression originated, and determined what the comparatively
simple truth is which it so awkwardly conveys. Wages cost, instead
of affecting values “as much as” labor cost, does the whole of the
affecting; and labor cost affects values only as it affects wages
cost. The end of it all is, Mill concludes, with Ricardo (and without
improvement upon Ricardo), that a variation of the general rate of wages
alters the exchange relations of commodities produced with different
combinations of “fixed” and “circulating” capital, independently of the
comparative labor costs of the same. What is true of Ricardo’s statement
is true of this. The proposition regarding the effect of a change of the
general rate of wages (or of the rate of profits, for one must always
accompany the other in the view of Ricardo and Mill) upon “relative
values,” may be a true dynamical principle; but the qualification of
the original labor-cost theory of value which is contained in this is
statical. Exchange values are statically out of proportion to comparative
labor costs, without any reference to changes in rates of wages and
profits.[164] The reason is that interest is an element in entrepreneur’s
costs as well as wages. Of the total of wages plus interest, in some
cases interest may be 30 per cent., in other cases 60 per cent., or
virtually any other per cent. Values being in proportion to the total,
cannot be in proportion to either element alone.[165]
5. Up to the present point, Mill has not taken a decided stand in favor
of any qualification of the labor-cost theory which Ricardo had not
also approved. In his treatment of skilled labor he admits of a further
qualification. Ricardo handled the subject in a very unsatisfactory
manner. While he gave the appearance of finding no difficulty for his law
of value in skilled labor, he unconsciously evaded the real question at
issue. Mill writes:
“When the wages of an employment permanently exceed the average
rate, the value of the thing produced will, in the same degree,
exceed the standard determined by mere quantity of labour.
Things, for example, which are made by skilled labour, exchange
for the produce of a much greater quantity of unskilled labour;
for no reason but because the labour is more highly paid.”[166]
The plain implication of this passage is that skilled labor receives
remuneration out of proportion to the quantity of labor rewarded.
Therefore it is also implicit that quantity of disutility is what
determines quantity of labor. Since labor cost operates upon exchange
values only by way of wages cost, in so far as wages cease in fact to be
an accurate index of real labor cost, a new difficulty is created for
the labor theory—one very important in principle. Mill himself lays
little emphasis upon this point. He regards the superior remuneration of
skilled labor as due virtually to a failure of perfect competition. In
presenting the subject in this light, he anticipates the important theory
of non-competing groups later developed by Cairnes:
“We have before remarked that the difficulty of passing from
one class of employments to a class greatly superior, has
hitherto caused the wages of all those classes of labourers,
who are separated from one another by any very marked barrier,
to depend more than might be supposed upon the increase of
the population of each class, considered separately; and
that the inequalities in the remuneration of labour are much
greater than could exist if the competition of the labouring
people generally could be brought practically to bear on each
particular employment.”[167]
It is hardly necessary or advisable to define perfection of competition
in such broad terms as to make it require that the remuneration of
skilled labor should be reduced to the standard of disutility of labor.
In any event, the tendency of remuneration to approach such a level
is ineffective, and therefore negligible. Static principles may be
conditioned upon assumptions contrary to fact, but the assumptions are
never to be made so violent that the law is not an effective force which
must be apprehended before dynamic reality can be explained. Under
perfect competition, properly defined, skilled labor is still a thorn in
the flesh of the old theory of value.
6. It remains to summarize Mill’s view of the relation of labor cost to
exchange value, and to compare it with the views of Ricardo, Malthus
and Senior. In Mill’s own language we find the following summary: If
one thing exchanges for more than another, the cause must be that “it
requires for its production either a greater quantity of labor,” or (1)
“a kind of labour permanently paid at a higher rate,” or (2) “the capital
which supports that labour must be advanced for a longer period,” or,
lastly, (3) “the production is attended with some circumstance which
requires to be compensated by a permanently higher rate of profit.” “Of
these elements, the quantity of labor required for the production is the
most important; the effect of the others is smaller, though none of them
is insignificant.”[168]
The qualification which we have numbered one (1) is an addition to
Ricardo’s list of qualifications. Number two (2) is Ricardo’s own work;
and of number three (3) he is aware, though he abstracts from it with his
customary facility.[169] In the end, we may say that Mill placed more
stress on qualifications of the labor theory than did Ricardo. Senior
made both ground rent and the superior wages of skilled labor causes
of qualification of the labor-cost theory. Mill took Senior’s view of
skilled labor, but took his stand with Ricardo on the general question of
ground rent.
CHAPTER X
CAIRNES
1. The political economy of J. E. Cairnes is virtually a treatise on
value and distribution.[170] The points in his work which are of interest
to our present purpose are his analysis of cost of production and his
famous innovation, the theory of non-competing groups.[171] The views
of Cairnes resemble those of Senior in many ways, and are exceedingly
destructive of the labor-cost theory, more so than he seemed to realize
or cared to admit.
The conditions essential to the existence of value are given as utility,
difficulty of attainment, and transferableness.[172] This is Senior’s
statement with the inferior term, “difficulty of attainment” substituted
for “limitation in supply.” How the substitution could be made in the
face of Senior’s reasons against it, is one of the ever-recurring riddles
in the history of the philosophy that in some way cost is the essence of
value. The theory of value is, according to the best usage of the day,
initiated by a discussion of supply and demand. Cairnes posed as a critic
of Mill’s conception of the law of supply and demand, but Professor
Marshall has shown conclusively that Mill was correct in substance
while Cairnes was not.[173] Following Mill, Cairnes next proceeds to
cost of production as an influence fundamental to that of supply and
demand. “The supply of a commodity tends to adapt itself to the demand
at the normal price,” or at that price which just suffices to yield to
the producers “the average and usual remuneration on such sacrifices as
they undergo.”[174] These sacrifices are the elements which constitute
cost of production. In the formal definition of cost, Cairnes makes it
include “the ultimate elements—labour, abstinence, and risk.”[175] But
the coördinate position of risk is not maintained. For, in the discussion
of cost in detail, risk to laborers is held to be a factor in labor cost,
and risk to capitalists a factor in abstinence cost.
“We find labour as an element of cost of production measurable
by reference to three of its incidents, and to three of its
incidents only—1st. the duration of the exertion, or the
quantity of labour, 2d. its severity, or irksomeness; and 3d.
the risk attending it.”[176]
As for abstinence:
“the sacrifice will be measured by the quantity of wealth
abstained from, taken in connection with the risk incurred, and
multiplied by the duration of the abstinence.”[177]
With this much said, Cairnes drops risk from consideration. We may follow
his example in the present chapter, since the precise relation of risk
or risk-taking to cost of production need not be decided in order to
determine the import of Cairnes’s work for the labor theory.
2. In Cairnes we find a repetition of the protest of Senior against the
definition of cost from the point of view of the capitalist-entrepreneur.
Thus Cairnes is “compelled to dissent” from the “radically unsound”
doctrine of Mill, that wages and profits compose cost of production.
“Of all ideas within the range of economic speculation, the two
most profoundly opposed to each other are cost and the reward
of cost.... Cost and remuneration are economic antitheses
of each other.... Now in the analysis of cost of production
which I have quoted [_i. e._ Mill’s] these two opposites are
identified.”[178]
Cost cannot be defined from “the partial and limited standpoint of the
capitalist-employer.”[179] Cairnes makes an excellent and eloquent plea
for his idea, but truly all that can be conceded to him is that the two
kinds of cost must be scrupulously distinguished, and that propositions
true only of disutility costs must not be affirmed of entrepreneur’s
costs, and _vice versâ_. As for the views of Mill, this economist
stated that wages and interest are rewards as well as costs. The gross
inconsistencies, however, of Mill’s language in different parts of his
book justify scathing criticism.
3. Cairnes does not quit the subject of the measurement of the subjective
cost without turning his attention to an incidental problem not touched,
I believe, by his predecessors. He states that the effort required
to produce a given result does not represent the same sacrifice for
different persons, being one thing for the strong or experienced and
another for the weak or untrained. Similarly a given sum of capital
may stand for no appreciable self-denial on the part of the person
contributing it, if he be rich, but for very rigid self-denial if he be
poor or in moderate circumstances. How are such differences, Cairnes
asks, to be dealt with in computing the cost of production?
“The sacrifices to be taken account of, and which govern
exchange value, are, not those undergone by A, B, or C, but
the average sacrifices undergone by the class of labourers
or capitalists to which the producers of the commodity
belong.”[180]
In view of the fact that the word _average_ as often serves to cover up
the lack of an explanation as it serves to explain, Cairnes would have
done well to be a little more explicit. As the present writer understands
it, a few additional words will place his idea beyond possible
misconception. If we call the capitalists who can furnish a given sum
of capital at a small sacrifice, and the laborers who can furnish a
given amount of labor (in the sense of productive power) at a small
sacrifice, strong producers, and call others who are situated in reverse
circumstances from these, weak producers, Cairnes’s proposition about
“average sacrifice” means that “within a given field of competition” we
may expect the individually strong and individually weak producers to be
thoroughly and uniformly intermingled. With this meaning, the statement
certainly commands assent. With this idea understood, we are able to
speak of the labor of coal miners as being harder than that of dry-goods
salesmen, without thought of the unusual cases where a very healthy miner
suffers less fatigue and discomfort than an invalid salesman.
4. Proceeding with labor and abstinence as cost of production, Cairnes
describes the relation of cost to value in terms clearer than any before
attained in the regular line of English “_Principles_.” Wages and
“profits” are derived from the value of the product, and “absorb the
whole of that value,”
“with the exception of the case where rent is also an element
in the value of commodities—a case which, those acquainted with
the economic theory of rent will perceive, does not affect the
general argument.”[181]
These words make the sum total of Cairnes’s discussion of rent, though
he has written a large volume devoted chiefly to value and distribution.
Value is then everywhere divided into wages and profits. If these
wages and profits are in proportion to the sacrifices remunerated,
value is in proportion to the sum of these sacrifices, or cost of
production. The question, then, becomes definite. Are wages everywhere
in proportion to the labor for which they are paid, and is interest an
amount proportionate to the abstinence remunerated? Strange as it may
seem, this simple question—the affirmative answer to which is necessary
to establish the regulation of exchange value by “real” or subjective
cost of production—was never proposed by Mill or any of his classical
predecessors.
5. To answer this question, it is first necessary to inquire how far
effective competition is realized in actual industry (_i. e._, in English
industry, and for purposes of present-day theory, English industry of
Cairnes’s time is a very proper system to consider); for wages and
profits will be in proportion to the sacrifices undergone “wherever, and
only so far as competition prevails among producers,” and laborers and
capitalists have an “effective choice” in selecting from the various
occupations in the industrial field. First, Cairnes gives a very clear
explanation of the process by which the flow of capital and labor
can be redistributed over the industrial field without the transfer
of individual units already specialized.[182] This disposes of some
exaggerated and erroneous ideas regarding the failure of competition; but
the next step is taken by Cairnes himself, who points out an important
limitation of competition not emphasized by previous writers. This
limitation applies only to the competition of laborers:
“The competition of capital being as we have seen, effective
over the entire industry of each commercial country, it follows
that so much of the value of commodities as goes to remunerate
the capitalist’s sacrifice ... will correspond throughout the
range of domestic industry with that portion of the cost which
falls to the capitalist.”[183]
Not so in the case of labor:
“What we find, in effect, is, not a whole population competing
indiscriminately for all occupations, but a series of
industrial layers, superposed on one another, within each of
which the various candidates for employment possess a real
and effective power of selection, while those occupying the
several strata are, for all purposes of effective competition,
practically isolated from each other.” ... “We are thus
compelled to recognize the existence of non-competing
industrial groups as a feature of our social economy.”[184]
6. It follows from this that the exchange relations of commodities
produced by laborers in different industrial groups are “not governed by
the principle of cost of production.” And the result is much complicated,
because even a single commodity is “very frequently” the product of the
labor of more than one industrial group.[185] The terms of exchange
between two commodities will be “governed by more than one principle.”
“So far as the two commodities are the products of workmen in
competition with each other, their values will be governed by
cost of production, but so far as they proceed from workmen
not in mutual competition, they will be governed by that other
principle, yet to be ascertained, which governs normal values
in the absence of competition.”[186]
It “generally happens that the bulk of the value of each commodity
follows one law, ... while a small remaining element is governed” by the
other law.[187] This unsatisfactory idea is at times better expressed in
another way, namely, the law of costs governs a good’s value in exchange
with commodities produced by the same order of laborers, but not in
exchange with commodities produced by different orders.
“The true conception of the law of cost is thus, not of a law
governing universally the values of any class of commodities,
but that of one governing the values of certain commodities in
certain exchanges.”[188]
7. We come now to the second coördinate principle of value, existing in
addition to the principle of cost of production, and held to divide with
it the control of actual values. This is the so-called law of reciprocal
demand. It is simply Mill’s law of reciprocal demand as developed by him
to explain international values, applied by Cairnes to the “strictly
parallel case” of inter-group values. International and inter-group
values, or the relative prices of the products of different nations or of
different groups,
“do not vary at random irrespective of rule or measure, but
exhibit precisely the same tendency to gravitate towards a
central point as is manifested in those exchanges which are
governed by cost of production.”[189]
These words surely attribute a very exact control of values to the
“principle of reciprocal demand.” But after perusing a very interesting
piece of text (pp. 99-105), in which Cairnes applies Mill’s doctrine of
international value, point by point, to the problem of non-competing
groups, we come upon a very important difference between this principle
and that of cost in respect to control of values.
“They each ... furnish a centre about which market values
gravitate; but there is this difference between the two
cases: The centre furnished by Cost of Production stands
related to the fluctuations of the individual commodity; that
supplied by Reciprocal Demand to the average fluctuations
of considerable aggregates of commodities. A reduction in
the cost of producing a hat will lower its price.... But an
alteration in the reciprocal demand of two trading nations
(or of two non-competing groups) will act upon the price not
of any commodity in particular but of every commodity which
enters into the trade. What such an alteration necessitates is
a change in the _average_ terms on which the trade is carried
on; but _it decides nothing as to the details by which the
required average shall be attained and maintained_.... In
the interchanges of non-competing domestic groups, what the
reciprocal demand of the groups determines is the average
relative level of prices within each group; the distribution
of price among the individual products being regulated by
the cause which governs value within it, namely, cost of
production.”[190]
It develops that the law of reciprocal demand fails completely of being
a principle coördinate with, and similar to, that of costs. Instead
of ruling exchange values in the same way as cost of production, only
in another field, it turns out that the force of reciprocal demand is
incapable of determining the value of any single good. The principle
of reciprocal demand fails signally of fulfilling Cairnes’s promise of
a principle other than that of cost, which will provide for a central
point of gravitation of inter-group exchange ratios. The purport of the
argument of Cairnes is no more than this: the law of reciprocal demand
merely requires the general level of international exchange values to
be such that in the long run the exports of a nation just discharge its
liabilities, or, in other words, that its exports and imports will be led
to balance, except for the payment of interest on foreign debts, cost of
carriage to foreign ship-owners, _etc._ Cairnes applies the law without
changing line or point to interchange between non-competing groups.
8. It is not necessary, in view of our present purpose, to enter
further into the nature of the law of reciprocal demand. The question
of importance to us is the effect on the labor-cost theory of value
of the doctrine of non-competing groups. Cairnes’s famous doctrine
merely adds emphasis to a point already made by Senior, namely, that
the wages of skilled labor are out of proportion to the amount of labor
cost remunerated. Though Cairnes rejects the definition of cost as
entrepreneur’s cost, his whole argument signifies that subjective cost,
or pain cost, can control market value only by way of controlling the
wages and interest elements which compose entrepreneur’s cost. As for
the element of interest, Cairnes, like Senior, holding interest to be
paid for abstinence, places it upon an independent basis of subjective
cost, and makes it logically coördinate with wages; and Cairnes would
treat the difficulty of interest, or the difficulty of “the different
proportions of fixed and circulating capital,” not as Ricardo did, but
precisely as Senior did.[191] As for the element of wages cost, the
doctrine of non-competing groups signifies that the comparative wages
cost of different commodities may fail to represent their comparative
labor costs, or specifically, that they do so fail, when we compare the
cost of commodities produced by different non-competing groups. Even if
labor cost were the only kind of subjective cost that the entrepreneur
has to remunerate, true labor cost would still fail to control exchange
values, because the comparative wage expenses of entrepreneurs are not in
proportion to the true amount of labor remunerated in each case.
In the view of Cairnes, skill as such cannot be called an element in cost
of production. But skill may be, and generally is, he continues,
“an indication of that which is an element in cost—namely, the
sacrifice whether in the form of labor or abstinence, undergone
in acquiring the skill.... The point to be attended to is that
the addition made to the cost of production [_i. e._ by the
employment of skilled labor] is in proportion ... [only] to the
sacrifice.”[192]
If competition were effective between groups of laborers, it would result
that wages would be forced to correspond with the disutility of labor in
all employments, skilled or unskilled (the disutility of acquiring the
skill being weighed by the competitors along with the daily disutility of
the occupation). In the absence of effective competition—namely, under
the actual conditions of non-competing groups—skilled labor generally
receives a wage beyond that proportionate to the comparative disutility,
past and present, incidental to it.
Cairnes himself refused to regard his innovations as causing any
substantial damage to the older theories, for of his whole doctrine of
non-competing groups, he says:
“In effect the point in question is of little more than
theoretic importance. As a point of theory it is proper to
notice it, but the circumstance it deals with has little
sensible effect on the facts of exchange.”[193]
9. In the opinion of Cairnes, then, there is a failure of the law
of costs due to a _failure of competition_. Since Ricardo expressly
postulated “perfect competition” as a condition essential to his theory,
it might seem as if the difficulty of non-competing groups is one
against which he has taken the necessary precautions. This, however, can
hardly be the case. Ricardo’s discussion of the subject of skilled labor
is so indefinite that his intentions, with respect to the meaning of the
words “perfect competition” in this connection, are not obvious. But,
in all probability, Ricardo could not have meant that the postulate of
perfect competition provides against the wages of skilled labor being
in excess of those of common labor. For if he had meant this, he would
not have written the section he gives us on skilled labor.[194] In this
he says, in effect, that the degree in which different kinds of skilled
labor enjoy higher wages does not change greatly from time to time
(this itself an error), and that nothing more need be said, since he is
considering only the causes of _change of “relative” values_ (this is
also incorrect).
We will take it for granted, then, that by his assumption of free
competition Ricardo did not intend to abstract from the difficulty of
skilled labor. We certainly could not approve of such a procedure if he
had adopted it; for there is so little tendency for actual competition to
remove the superior remuneration of skill, that this tendency should not
be recognized among legitimate or effective static forces.[195]
The conclusion is that Ricardo did not examine the problem of skilled
labor sufficiently, and that the work of Senior, and especially of
Cairnes, shows that in this problem there resides a grave difficulty for
the labor theory. Neither Senior nor Cairnes took occasion specifically
to point this out themselves. To discover that such is the effect of
their writings becomes the task of the historian of theory. Though
Cairnes refuses to give the name “cost” to entrepreneur’s expenses,
at bottom his teaching means that the labor cost “philosophy” of
value cannot be true, because it is in conflict with the more certain
“empirical” laws of value.
CHAPTER XI
THE ULTIMATE RELATION OF COST TO VALUE
1. The history contained in the preceding ten chapters covers but a
limited number of English writers. At the time of writing, a short list
of economists was drawn up in advance, which enumerated the thinkers at
that time generally regarded as the leaders in the development of the old
English political economy. It was stated at the outset that the purpose
was to review the opinions of these writers only. An endeavor was made
to define this purpose as being to make an _intensive_ rather than an
_extensive_ study of the history of English theory. By an extensive study
we should mean the effort to discover writers who have made important
contributions to the thought the history of which is being traced,
but have been previously unrecognized or insufficiently accredited.
Such examinations into the history of English economic literature will
probably in the immediate future result in important alterations in what
might be called our accepted lists of chief writers. It will be found
that thinkers now supposed to have expressed the doctrines of their time
with the greatest clearness and power were in some cases surpassed in
these points by writers at present almost or quite forgotten. Or it will
be found perhaps that new ideas—such for instance as the conception of
marginal utility—really originated earlier than at present supposed.
A brief time elapsed between the writing of the tenth and the eleventh
chapters of this essay. But in this period there has been published
a discussion of the work of some earlier British economists, which
establishes beyond a doubt that the marginal utility theory of value was
conceived and formulated in most excellent fashion by an English writer
as early as 1833, two decades before Gossen and a generation before
Menger, Jevons and Walras. The English writer was W. F. Lloyd, Professor
of Political Economy at Oxford. A full description of Lloyd’s theory,
with citations showing the excellence of its statement, appeared in _The
Economic Journal_, over the signature of Professor Seligman, of Columbia
University.[196] Professor Seligman has called attention to still another
writer of great consequence because of his contributions to the theory of
value. This is Mountifort Longfield who, as Professor Seligman states,
in 1833 gave an able exposition of what is now the modern doctrine of
marginal demand and marginal cost.[197]
Avoiding the larger task involved in the extensive study of the history
of the theory of value in England, the present monograph has endeavored
to interpret the labor theory as it passed through the minds of some nine
economists beginning with Smith and ending with Cairnes. The history
is that of a subjective-cost philosophy of value and the difficulties
of its application to explain the facts of industry. According to
this philosophy, or this ultimate explanation, utility is a condition
essential to the existence of value, but cost or difficulty of attainment
is the _essence_ of value. The idea was elucidated by a variety of
figures of speech. Utility was conceived as a sort of resting-ground
for value, but the height of value upon this ground, the value as an
_amount_, was held to be determined by or measured by cost of production.
Thus Ricardo wrote to J. B. Say:
The utility of things is incontestably the _foundation_ of
their value, but the degree of their utility cannot be the
measure of their value.... The difficulty of [a thing’s]
production is the sole measure of its value.[198]
Karl Marx was accustomed to speak of value as “a congelation of human
labor,” and to speak of a useful object, or an object made useful in the
process of production, as a sort of receptacle for value.
In his involved “philosophical” account of value, as we termed it, Adam
Smith taught that the value, or “real worth,” of a good is measured
equally well by the amount of labor which it has cost to produce, or by
the labor which it can command in exchange. When, however, Adam Smith
turns his attention to the proximate principles of value in the actual
competitive market, we find him confessing that the theory which he
first developed applies without modification only to a primitive state
of society, without land rent and interest on capital. In this primitive
state the amount of labor which a commodity costs determines the amount
of labor which it can command in exchange. Under the conditions of
advanced society, the rent of land and the “profits of stock” must come
out of the exchange value of the product, and the labor cost of the
latter, which is paid for by wages, no longer determines its value.[199]
If we take advantage of modern terminology, and throw Adam Smith’s
theory into our own words, we make its precise significance clearer. It
means virtually that the exchange value of a good in the fully developed
social economy is determined by its _entrepreneur’s_ or _money_ cost of
production, so far as it is determined by cost at all. Competition must
be perfect to enable cost to determine actual values. Entrepreneur’s
cost is composed of expenditures for wages of the labor, rent of the
land, and “profits” of the capital necessary for production. The labor
cost of producing the commodity determines only the amount of the wages
cost to the entrepreneur. The other elements helping to make the total
of entrepreneur’s cost are not determined by the labor cost of producing
the commodity. Thus the exchange value of a good is determined by its
entrepreneur’s cost, but this latter is not determined by labor cost,
and consequently the exchange value of the good is not determined by
labor cost. The existence of rent and interest destroys the regulation
of exchange values by labor cost. It must be kept in mind that all this
is very much more explicit than what Adam Smith said. It signifies that
the labor-cost philosophy of value cannot be true—perhaps Smith would
say only that it is imperfect or not precisely true—because it is in
conflict with a more certain empirical law of value, namely, the law of
entrepreneur’s cost.
Ricardo adopted the labor-cost philosophy of value virtually as a
premise, and the most important parts of his reasoning on the subject are
concerned with removing or minimizing the empirical difficulties with
this philosophy.[200] In the end he admitted that interest is an element
in that form of cost which exercises the most direct and compelling
influence on exchange values. He made concessions, which pursued to
their logical outcome, signify that the existence of interest throws the
exchange values of goods out of proportion to their pure labor costs
of production. We have seen how he put this concession in a peculiar
and misleading manner.[201] As for rent of land, Ricardo hastens to
repudiate Adam Smith’s admission that it also is a source of difficulty
to the labor theory. He gets rid of rent by explaining that the exchange
values of commodities are regulated by the quantity of labor required for
production on the least fertile land in use, or the quantity required
to produce the most expensive portions of the supplies. In modern
phraseology, he urged that it is not the actual labor cost of a good but
its marginal labor cost, which regulates its value. Ricardo himself used
that fatally ambiguous formula, “rent does not enter into price.” Having
removed rent by making the value determining cost marginal, and having
minimized the difficulty of interest, Ricardo proceeded as if the labor
theory were, for the sake of argument, intact.
The chief purport of the work of Malthus was, first, to deny Ricardo’s
right to disregard the interest difficulty and, second, to reaffirm Adam
Smith’s opinion that land rent also throws values out of relation to
labor costs. Turning now to Senior, who was the next writer to suggest
a worthy and new idea, we find that in the view of this economist the
existence of land rent and interest as elements in entrepreneur’s cost is
fatal to the labor theory. But Senior explained interest as the reward
for abstinence, just as wages are the reward for labor. In his view
labor and abstinence are independent, co-ordinate elements in subjective
cost.[202] However, the more important idea that can be extracted from
Senior’s reasonings is that wages as actually paid are not in proportion
to the quantities of labor engaged in different employments. For in his
view all skilled labor gains a wage which really includes a rent to
“scarce natural talents.”[203]
Summing up the results of Senior’s argument for ourselves (since he
himself did not make the present applications of his doctrines), the
labor theory requires that the entrepreneur’s costs of commodities
should be in proportion to their labor costs, but entrepreneur’s costs
are out of proportion to labor costs, not only because they include rent
of land and interest on capital, but because the very payments of wages
themselves may be out of proportion to the comparative amounts of labor
employed and remunerated. When we say that entrepreneur’s costs are out
of proportion to labor costs, we do not mean that they are in excess
of wages cost, though they are this, but that for commodity A to cost
the same quantity of labor as commodity B, is not a sign that the two
commodities have the same entrepreneur’s costs. In other words, relative
entrepreneur’s costs are not determined by relative labor costs.
John Stuart Mill took Ricardo’s view of land rent and of interest, but
took Senior’s view that skilled labor occasions the entrepreneur an
expense out of proportion to the _quantity of labor_ remunerated. That
is to say, he held that the higher wages of skill do not represent a
higher labor cost. This opinion he adopted without at the same time
taking up Senior’s particular use of the term, “rent to talents.” As we
concluded at the end of Chapter IX, it may be said that Mill followed
Ricardo more closely than any other of his predecessors on the question
of the relation of labor to value. Turning to Cairnes we note that this
writer gave one sentence in his book to the doctrine of land rent, and in
this he acquiesced in the judgment of Ricardo and J. S. Mill. But Cairnes
adopted a position with reference to interest identical with that assumed
by Senior, and his theory of “non-competing groups” merely emphasizes the
claim that the amount of wages paid in different employments is not a
test of the quantities of labor employed.
Taking the whole period covered in this history, we see that a goodly
number of points of criticism were raised against the pure labor-cost
theory. The reader may have noted that all these points were implicit in
the work of Senior, and in his alone. Does the entrepreneur’s payment of
land rent, of interest on capital, and his payment of a superior wage
to skilled labor (a wage out of proportion to the disutility of skilled
labor), make impossible the theory that labor cost regulates value? Is
it not possible that labor cost may be conceived in some way, perhaps as
“marginal cost,” or “social marginal disutility,” such that the exchange
values of the products of industry can be shown to depend upon the labor
cost of these products? In the following pages the writer will try to
give an answer to this question, so far as it lies in his power. It will
be indispensable to bear with a considerable number of preliminaries. The
ultimate relation of cost (in any or all of its forms) to value, cannot
be discussed with any success, unless the parties to the discussion have
reached some understanding as to the relation of utility to value and as
to the meaning of other proposed laws of value than cost laws. Merely a
moderate acquaintance with the contemporary literature of economic theory
gives complete assurance that the necessary understanding just mentioned
cannot be presumed to exist, but must be established as carefully as
possible.
2. Historically, there have been two distinct conceptions of cost—at
least in English political economy—namely, (1) labor cost, and (2)
entrepreneur’s cost. Logically, there are two elementary forms of cost,
(1) pain cost, and (2) potentiality cost. The first consists in the
human discomforts or undesirable feelings incidental to the production
of wealth, whether the disutility of labor, or that of “abstinence” or
“waiting.” This is also frequently called “true,” “real,” or “subjective”
cost. The terms “true” and “real” are hardly commendable, for the other
elementary form of cost is quite as real as this. The word “subjective”
is genuinely distinctive, but probably less so than the generic term
“pain.”
The second elementary form of cost is that emphasized chiefly by the
Austrian writers. In the making or acquisition of economic products,
certain scarce agents are either destroyed, or else for the time being
employed in a way that excludes their employment in the production of
other goods. We may say that the production of any given good involves
the destruction of certain productive agents, or, permitting a convenient
liberty of expression, of the uses of agents from which other goods
might have been produced. Thus with the emergence of one good the
possibility of some other good is excluded. Professors von Wieser and
Böhm-Bawerk, who have written the best explanations of the relation
of this form of cost to value, have suggested no distinctive name for
it. The reason appears to be that they consider this as the only form
of cost which requires especial explanation, since, as they hold, it is
the only kind of cost which can be correlated with value. In an article
in the _Quarterly Journal of Economics_,[204] Professor D. S. Green
has suggested the term “opportunity cost” for the Austrian conception.
Professor H. J. Davenport, having in mind the same conception, refers to
it as “sacrifice cost.”[205] Professor Heinrich Dietzel speaks of the
same cost as “_Nutzeneinbusse_.”[206] This concept has also in various
places been designated “social cost.” Though this cost is social in
a certain comparatively irrelevant sense in which the other kind of
cost is not social, the term “social cost” is not a good one because
it lacks distinctiveness. There is nothing intrinsically social about
potentiality cost, nor would the other elementary form of cost, that is,
pain cost, be best designated “individual cost.” Both forms would appear
in an isolated individual economy, for instance in our fictitious but
highly useful Crusoe economy. “Sacrifice cost” is ambiguous, because the
word “sacrifice” is used as often as not, though perhaps improperly, to
signify the discomfort or pain endured in production. A term is needed to
distinguish a form of cost from pain cost. “Potentiality” cost appeals to
the writer as being a term somewhat better than “opportunity” cost. When
certain common production goods, capable of being turned to the making of
more than one kind of thing, are used up to make a given thing, their
potentiality to make an alternative thing is destroyed. The potentiality
cost of a commodity is measured by the highest other value that might
have been obtained if this commodity had not been produced from the
productive agents entering into it.
If it be correct that pain cost and potentiality cost are the two
elementary kinds of cost, what is the relation of the two historical
forms of cost, labor and entrepreneur’s cost, to these? Just as the
word labor stands for two distinct things, toil and productive power,
so may “labor cost” mean either pain cost or potentiality cost. If the
term labor cost is used without a qualifying adjective or explanatory
phrase, it would naturally call up in most minds the conception of pain
cost. But labor force is the most disposable of all productive agencies,
and when the productive power of labor (what the entrepreneur buys)
is used up in the production of a given commodity, we have a perfect
example of potentiality cost. As we have seen, Adam Smith used labor
at different times, both in the sense of toil or disutility and in the
sense of productive power or potential commodity. Ricardo, to the best
of the writer’s knowledge, said nothing to indicate definitively which
of these concepts he designated by the term labor. In the writer’s
judgment the presumption is that by the labor cost which regulates the
exchange value of commodities, Ricardo meant what we call pain cost. At
one place, Ricardo said “difficulty of attainment” is the true measure
of value. It seems almost assured that this must mean “pain cost.” When
cost is conceived as the ultimate essence of value, the cost will almost
certainly be pain cost or “real cost.” It is interesting to note that
Professor Dietzel, in arguing that the Ricardian labor theory of value is
perfectly reconcilable with all that holds good in the utility theory,
states that labor cost must be conceived solely as “_Nutzeneinbusse_,”
_i. e._, utility-sacrifice, or potentiality cost. When the labor theory
is founded upon the conception of labor as toil (“Unlust”), he considers
it to be “built upon sand.”[207]
We see that it is possible to mean either pain or potentiality cost by
the words “labor cost.” Labor as “pain” and labor as productive power are
not the same thing but the first is incident to the second. It remains
to consider the relation of entrepreneur’s expense to the two elementary
forms of cost. Torrens desired to exclude the money outlays of the
entrepreneur in interest charges from the money cost of production of a
good. That is, he maintained that what he called “profits,” the chief
constituent of which was interest, is no part of cost of production. This
view was never adopted by any subsequent economist of weight. The very
simple reasons why it is indefensible were mentioned in the chapter on
Torrens. Conceding then that interest is a part of entrepreneur’s cost,
the relation of the latter to “pain cost” can be stated in a few words.
The total “pain cost” of any article, which is produced by entrepreneurs,
finds its remuneration in those payments which go to make up _cost_ from
the view-point of the entrepreneur. The point to be held fast, a point
already emphasized, is that the subjective costs of goods so produced
can influence their exchange values only by way of influencing their
entrepreneur’s costs.
The relation of entrepreneur’s expense to potentiality cost is less
simple and familiar than the foregoing. It will best be taken up in a
subsequent section after we have endeavored to state the gist of the
utility theory of value. We may conclude the present discussion of cost
concepts by noting that there are several ways of reckoning or analyzing
entrepreneur’s cost. (1) Adam Smith’s method, adopted by Malthus, is set
forth in the following definite words written by the latter: “The cost of
producing any commodity is made up of all the wages, all the profits, and
all the rent which ... are necessary to bring that particular commodity
to market in the quantity required.”[208] (2) Perhaps the most approved
modern method of analyzing the elements in entrepreneur’s cost is merely
into wages and interest. In this case rent paid for the use of land is
treated in the same way as rent paid for buildings or for machinery or
power. (3) The most direct treatment of entrepreneur’s cost defines it
shortly as including the prices of all the productive agencies used up in
the making of the product, or as the value of raw material, machinery,
and labor power “entering into” the product. It is always necessary to
explain immediately that some production goods are in no sense consumed
in the making of the product. Such are the land and buildings. Some
production goods are consumed only in very small part in the making of
a single product. The total money cost of a product is according to one
system divided into “prime cost” and “establishment cost.” The former
includes the prices of all those elements which are entirely used up in
making the product. The latter includes the product’s due share of the
money cost of the rest of the establishment, worn to a certain extent or
occupied for a time in its making. Numerous practical formulæ are in use
to aid in the difficult problem of imputing to the product its due share
in the various general charges. A second necessary explanation connected
with the third form of calculating entrepreneur’s cost is that, since
the prices of the production goods have to be paid before the product
is finished, each price must be increased by interest for the time of
its advance, to give the complete cost of the product. In order to state
the relation of entrepreneur’s expense to potentiality cost, it is not
necessary to discuss in full the mutual relations of the various modes
of calculating entrepreneur’s cost. Such a discussion would, it seems to
the writer, involve us in the theory of interest and indeed in the entire
theory of distribution. Fortunately it is sufficient for our present
ends to point out that all forms of analyzing entrepreneur’s cost must
be based upon the third, or, as we might call it, the practical method.
If it is desired to reduce the cost of a product to wages and interest,
the practical cost of the article as defined above will have to be
ascertained as a starting-point. We will be content in a later section to
trace the connection between potentiality cost and the practical form of
entrepreneur’s cost.
3. It is impossible to give the term _value_ any one meaning. The word is
so ambiguous that Jevons advocated its abandonment. The central thought
of the value concept seems to be _capacity to excite desire_, but there
are two grand kinds of economic value which are best designated, (1)
exchange value and (2) esteem value.[209] The exchange value of an
article has often been defined as a ratio—or specifically, as the ratio
in which the unit of measure of the article exchanges for a multiple, or
fraction, of the unit of measure of any other determinate thing[210]—and
again as the quantity of that other thing for which it exchanges. But
both of these conceptions are involved in metaphysical difficulties which
make them impossible to employ in actual reasoning, and all writers are
accustomed to make assertions about exchange value which are not in
the least true of these, their purely formal, definitions. Walsh has
shown most clearly that the only conception of exchange value free from
difficulty is that of _power_ in exchange. Exchange value is the power in
a thing by means of which its owner is enabled to command other things
possessing a similar power.[211] This power is measured objectively by
the physical quantity of some other thing selected for the purpose, but
the value is not that quantity, though speaking elliptically we may say
the value of a coat is twenty bushels of wheat or twenty dollars. The
exchanging power in our daily thought is always and properly referred to
the thing and not to the man or owner. When the thing is gone the power
is gone. The purchasing power of a twenty-dollar piece does not reside in
the holder.[212] It goes without saying that this power can exist in an
article only when there is another thing for which it can be exchanged
and when there are men to effect the exchanging. It is not implied that
articles of commerce have the power to exchange themselves in market
places without human intervention. But the purchasing power resides in
the article; it is always referred to the article in our thought, and it
leads to nonsensical results to run counter to our commonest and most
practical forms of thought and endeavor to locate it elsewhere.
The end of the theory of value is to explain the causes which govern
exchange values, or practically, market prices. Other conceptions of
value than exchange value derive their just importance in political
economy only from the aid they may render in this explanation. This
defines the place of the conception of esteem value. A finished
explanation of exchange values is impossible without a theory of esteem
values, just as an ultimate explanation of the counterbalancing powers
of different objects in the scales is vain without the general law of
gravitation. The power of an apple to counterbalance two eggs might have
been thought of as a matter purely relative between apples and eggs,
before the general conception was framed of the common attraction exerted
by the earth upon both apples and eggs. Exchange values were once stated
to be “purely relative.” The objectionable point in the statement lies in
the adverb “purely.” For exchange values are derived from esteem values
very much as weights, or powers to counterbalance, are derived from the
earth’s attraction. That is, these two derivations are generally similar.
Here as elsewhere analogies can be pressed too far. The derivation of
the exchange values of different goods in the social market from the
esteem values put upon these goods by the consumers, or purchasers
in the society, is a process indefinitely more difficult to explain
than the relative weights of ponderables.[213] Given the gravity of
separate objects it is but a step to explain their relative weights, but
given the esteem values of different economic commodities it is a long
road to follow the process through which these determine the exchange
values of the same commodities. If esteem value be the gravity behind
exchange value, the case is rendered complex in that each good possesses
a separate esteem value for every different consumer whereas there is
but one earth to attract each object whose relative weight we desire to
explain.
In the judgment of the writer, the best definition of esteem value is
“the significance (_Bedeutung_) which concrete goods attain in our
estimation when we realize that we are _dependent_ upon them for the
satisfaction of some want.” This is a loose translation of the definition
formulated by Carl Menger in 1871.[214] The individual good attains value
not simply when it is capable of affording us satisfaction, but when
it _conditions_ the satisfaction. Goods existing in superfluity give
satisfactions but do not _condition_ them, hence any unit of such goods
possesses no value. The removal or destruction of a unit occasions the
loss of no satisfaction. Menger’s definition was a triumph of theory in
stating the relation of value to human satisfaction and to utility.
The law of marginal utility is but a corollary of the principle
involved in this definition. The utility of a good is its power to
afford satisfaction.[215] When goods occur in stocks of like units
the phenomenon of “marginal” utility emerges. As the stock of such
goods to be used by a consumer within a given time is increased, the
satisfaction afforded by each successive unit declines.[216] The actual
utility of each successive increment is lower than the actual utility
of the preceding increment. The actual utility of the last or marginal
increment is the “marginal” utility of any of the increments. The reason
why the value of any such increment is determined at the height of its
“marginal” utility is only because any one increment conditions merely
the satisfaction afforded by the last or marginal increment. Remove
or destroy any increment and rationally only the satisfaction of the
marginal increment will be given up. In effect any increment is the
marginal one. Thus the law of marginal utility is not the fundamental
law of value. Menger’s definition contains this fundamental law and
gives a universal principle of value. The theorem that value depends upon
marginal utility is merely a deduction from this fundamental principle,
and is of limited scope, since it applies only where there are goods in
stocks.[217]
An absolutely essential point to be kept in mind is that the value of
an object is not derived from the sacrifice made to obtain it. On the
contrary we make the sacrifice because the object has this value. The
value is first, the sacrifice second. The only means of estimating how
much sacrifice or discomfort we can afford to undergo to obtain an object
is by judging its value to us _previously_ to and _independently_ of the
sacrifice. If the labor cost, say, determined the value, we could expend
labor cost regardlessly in producing any objects whatsoever. But this is
just what we cannot do. We must have a care when we expend labor. A care
for what? For the value of the result. The value of the object is derived
from the satisfaction which it can afford, but it is attributed to the
object only when it is the indispensable condition of that satisfaction.
When a particular object conditions some satisfaction of ours, it
possesses a superior power over our welfare to that possessed by a good
which, while it affords us satisfaction, does not condition it. It would
be a waste of energy to spend it in producing or conserving the thing of
inferior power. The ultimate reason why our minds instinctively assign
a superior importance to the things of higher power over our welfare
is that such instincts contribute to our fitness in the struggle for
existence. The things of lower rank possess merely utility. The things of
higher rank possess a superior power which we recognize and distinguish
as _value_. Lack of this distinction would lead to a waste of energy in
the modifications which we effect in our environment.[218]
4. Let us consider now the essential features of the utility theory of
value. According to this doctrine the sole source of value is human
satisfaction. The thought is well conveyed, though the expression may
be somewhat loose, by saying that the only inherently valuable thing
is satisfaction, and that the value of satisfaction is passed out to,
or attributed to, any external object upon which the satisfaction is
dependent. Human satisfactions are quantities, for they are capable of
being _more_ or _less_. But they are inexact and wavering quantities.
Similarly, the esteem values of goods, derived from the satisfactions
conditioned by these goods, are quantitative, but are incapable of exact
or constant numerical expression. The exchange values of goods are exact
and relatively constant quantities. Nevertheless, exchange values are
assuredly founded upon esteem values. The description of the process by
which these wavering and more or less uncertain esteem values determine
the exact and definite exchange values of goods, is perhaps the most
difficult part of the utility theory. But without this part—commonly
called the “theory of price”—the utility doctrine remains a mere torso.
Böhm-Bawerk’s theory of price is the only attempt that has been made to
complete the utility theory in this direction, which is at once well
known and authoritative.[219] Though the fundamental lines of this
explanation are correct, it is in externals at least defective in two
noteworthy respects. In the first place, one of its principal assumptions
is untrue to the typical conditions of exchange under the division of
labor. This assumption consists in supposing that sellers’ subjective
valuations are effective factors in determining price in the market of
an organic society. In Böhm-Bawerk’s theory, the reader will recall,
the miniature but supposedly typical market is assumed to consist of a
number of sellers owning horses and a number of buyers desiring them.
The first step in the argument is to assign a money expression to the
esteem or “subjective” value of a horse to each buyer and each seller.
Then if these money expressions, or “price equivalents,” are higher
for some one buyer than for some one seller an exchange of money for a
horse is possible between the two. If buyer B values a horse at $45 and
seller S at $40, B can afford to part with, and S can afford to take for
a horse any sum of money over $40 and under $45. By considering all the
price equivalents of sellers on one side and of buyers on the other side,
Böhm-Bawerk shows us that for every given combination of such figures in
a market there is a certain definite number of sales possible, and these
sales must take place at a price fixed between the price equivalents of
the last buyer and the last seller. In other words, the market price will
be fixed between the money valuations set upon a horse by the “marginal
pair.” The region so delimited by the marginal pairs becomes narrower
as the number of buyers and sellers entering the market increases. Thus,
in a large market the price is virtually determined to a point. The
difficulty with this theory is that under the division of labor, sellers
make products for the market, in view of the market price, and make them
in numbers and keep them in stocks far in excess of their own needs.
Under the division of labor, the lowest price at which a seller will
part with a commodity is not set by the marginal utility or subjective
value of the commodity to him. A theory of price applicable to the modern
market must not employ the subjective valuations of sellers as a factor
in price determination.
In the second place, Böhm-Bawerk’s theory of price is misleading, since
it obscures the fact that the Austrian theory of value always assumes the
supply of the goods whose value it is to explain. The Austrian writers
themselves teach us that the value of a good depends upon the supply of
it. The theory of marginal utility explains very well why an increase of
supply lowers value or a decrease raises value. But if there should be
any cause which limits or regulates the supply of goods with reference to
their value, _by some kind of an adjustment to value_, this cause would
be both a cause and a regulator (or at least a part regulator) of value.
Cost of production in some ultimate form is by many writers supposed to
be such a cause. The human “pain cost” of producing goods is of equal
importance in theory with the human pleasure gain had from utilizing the
goods. The value of an addition to the stock of a given sort of goods
always furnishes a motive for the increase of the stock. Any cause which
limits the supply at a certain point in the face of this human desire
for the increase is a cause of value. True, it is a cause more remote
than utility, but still a cause of value. Since the Austrian writers
virtually ignore the cause or causes governing supply (and thus governing
or helping to govern marginal utility itself), the doctrine of price
which they advance ought to rest openly and squarely upon the assumption
that the supply of the good is taken for granted. In Böhm-Bawerk’s theory
of price, the total supply of horses in the miniature market is simply
assumed, not accounted for.[220] If horses were more plentiful in this
market the sellers’ price equivalent would be lowered and the market
price would turn out lower. It is a fair criticism that Böhm-Bawerk
obscures the important point of the dependence of price upon supply, by
assigning sellers and buyers an arbitrary series of money valuations as
the very first step in his argument.
The “theory of price,” as the Austrians call that part of their theory
which traces the connection between consumers’ “subjective” values and
market exchange values, must begin with a clear recognition that the pure
utility theory of value assumes outright the extent of the supplies of
all goods. Let us, then, inquire first how the price of a given supply
of consumption goods is determined.[221] If a certain supply of some
consumption good is presented for sale in the social market, there is
theoretically some one price at which just this amount of goods can be
sold. Following Professor Marshall, we may call this the “social demand
price.” At a higher price, only a less supply could be disposed of. At
a lower price more could be sold. The competition of buyers ultimately
prevents this lower price being set. The dependence of the social demand
price of a given supply of goods upon the esteem value of these goods to
the consumers in the social market may be traced as follows:
(1) From _esteem values_ to _price equivalents_. The sum of money which
a consumer would pay for the addition of an article to his possessions
rather than go without that article is called its price equivalent. The
price equivalent must not be confused with the price he may pay actually
to buy the article, namely, the market price. A piano may have a market
price of $600, but have a price equivalent of $1,000 to A. If the market
price of pianos were to ascend to $1,000, A would still purchase one.
But more than $1,000 he would not pay. When A assigns to a piano a price
equivalent of $1,000, this sum of money, of course, has significance
merely as the representative of the indefinite variety of other goods
which A supposes to be within the command of $1,000. Thus A’s ability to
think out price equivalents depends upon the already existing exchange
value of money, or, in other words, upon prices themselves. If the market
prices of carpets, carriages, wines and other things were different from
what they are, the amount of other things commanded by $1,000 would be
altered, and assuredly A’s price equivalent for a piano would change.
Thus the price equivalent of one thing can be named only in view of
previously existing scales of market prices of other things. A consumer
comes to form a conception of the significance of a unit of money to
his welfare. Into the question of the inner nature of this conception we
cannot afford here to push our inquiry. Without this conception he could
not set price equivalents. It is merely a matter of experience that in
fact consumers do set price equivalents. The sole possible explanation
of the fact that when a monopoly raises the price of a consumption good
the sales of it decline, is that some buyers have been excluded because
the price asked for has passed above their price equivalents.[222] The
worth of money to a consumer depends upon the extent of his money income.
Thus the price equivalent set upon a good by any consumer depends (1)
upon the esteem value of that good to him, and (2) upon the extent of
his money income. Given a consumer’s money income, his price equivalents
for various articles will be determined by, and be in proportion to, the
esteem values those articles have for him.
(2) From _price equivalents_ to _market-price_. The price at which a
given supply of a certain good can be sold to a body of consumers is a
_resultant_ from their individual price equivalents for this good. It
is in no sense an average or mean of these price equivalents.[223] This
is best understood by imagining the supply of the good offered in the
market to be increased by one unit. This extra unit must be added to some
person’s stock. It will go normally to the person who will pay the most
for it, but the price of the unit will have to be lowered sufficiently
to bring it down to this person’s price equivalent for a unit. In the
open market, then, the prices of all units will have to be lowered to
the level of the price of this unit. This illustrates the way in which
the social demand price of a given supply of goods is determined at some
individual price equivalent. The price of a given supply is determined at
the point of a marginal individual price equivalent.
In the last section it was asserted that unless a good is possessed in a
plurality of units, that is, in a _stock_, by the individual consumer,
its value will not be determined by _marginal_ utility. The Austrian
writers have made this perfectly clear, but there are innumerable places
in the literature which has sprung up about the Austrian theory, either
expounding or criticizing it, where the value of such a good as a piano
or a furnace is said to depend on marginal utility. Let us suppose
that no person possesses more than one piano. In this case, properly
speaking there is nothing marginal about the value-determining utility
of a piano. There are, however, two methods in vogue of discovering an
alleged marginal utility in such a single unit commodity. The first is
to point out that a piano may serve several uses. For instance, it may
be used to produce music and also as an ornamental piece of furniture.
It is then suggested that one of these uses is greater or less than the
other and is marginal. Some suggest by implication or directly that it
is the least use to which a piano is put which determines its value to
the owner. If it should be suggested in reply that a piano might be used
to conceal a discolored place in the wall, which could equally well be
done by a two-dollar screen, the probable reply would be that it is
only the least use to which the piano can be put _economically_ which
determines its value. Even so acute a writer as Smart[224] is guilty of
this perversion. When it is in the pursuit of such margins, the mind is
far adrift from the true logic of the utility theory. When a piano is
actually used to cover a piece of wall, this is assuredly an “economic”
use of the article. This use does not exclude or hamper any of its other
uses. It is true no one would pay $600 for a piano merely to cover a bad
piece of wall, but very likely few would pay that sum for any one use of
the piano. The truth is, the value of a piano to its user depends upon
the sum of its uses to him. The value of the piano measures the total
amount of satisfaction _conditioned_ upon its possession. When goods
are used in stocks any one unit _conditions_ only the satisfaction had
from the last unit. Thus only does _marginal_ utility—the actual total
utility of the marginal increment—determine value. It is quite futile to
attempt to distinguish between the different uses of a unit commodity and
arrange these in a descending scale and choose a marginal use. When the
unit is taken away all these uses would be sacrificed. Professor Dietzel,
an undiscerning critic and imitator combined of the Austrians, has
stated that it is the “highest use,” the use on the upper margin, which
determines the value of a unit commodity.[225]
A second method of discovering a marginal utility for a piano is to
conceive of the utility of a piano to that possessor who has just been
able to afford the price as the marginal utility of pianos. All men
pay the same price for a given grade of piano, but the rich men have
much higher price equivalents than the poor. If the supply of pianos
to be sold in a given social market be increased, the price will fall.
This fall is interpreted as being caused by a decline in the “marginal
utility” of pianos. There is no justification for this logic in the
utility theory. It is not possible to compare the satisfactions had from
pianos by different persons. It is not possible to imagine the pianos in
society arranged in a series, the pianos of highest utility being those
held by the persons who could afford to pay most and so on. The price
of a piano depends upon the _marginal price equivalent_ of a piano, but
neither the exchange value nor the esteem value of a piano depends upon
_marginal_ utility.
To conclude, all goods derive their exchange values from the esteem
values placed upon them by consumers. The exchange value of a good in
money is determined in a marginal manner by the price equivalents set
upon the good by the consumers. Since the extent of a consumer’s money
income helps determine the price equivalents placed upon all articles by
him, it is impossible to show that these price equivalents depend solely
upon esteem values. But it is still proper to say that the esteem value
of a good is the sole source of its exchange value. A consumer will
assign no price equivalent to a good unless it possess esteem value,
and when he does assign a price equivalent, it will be precisely in
proportion to the esteem value of the good as compared with other goods
which he values.
The price of a commodity is a definite and fairly stable quantity,
_e. g._, the price of an oil-stove is $4.50. Is it possible that this
definite price can be said to be determined by the utility of oil-stoves
to consumers? Consumers cannot reduce their estimates of the utility
of articles directly to figures. But, nevertheless, a consumer can
determine upon a sum of money whose general purchasing power he considers
approximately equivalent to the value of an oil-stove to him. The value
of the oil-stove is a wavering quantity, but having struck a money
estimate on the basis of that value, taking it for what it is at the
instant of the decision, this money sum is a definite something that will
be carried in mind as such though the value is indefinite and wavering.
Given these definite “price equivalents” the definite market price is
a resultant from them. The market price of a good is a sort of social
institution and has the momentum or stability of such an institution.
Being once determined, it will not waver as do the numberless individual
estimates of “esteem value” upon which it is founded.
5. If a commodity fetching a definite and exact price, as for instance an
oil-stove selling for $4.50, is produced under competitive conditions,
the apparent and proximate reason why the article has this particular
price is because it costs its manufacturer about this sum of money
to produce it. Putting aside the complications due to the fact that
competition frequently takes place between firms producing at different
costs, the commonest law of exchange value, stated in the usual language,
is that price is “determined by” entrepreneur’s cost of production.
Whether entrepreneur’s cost is reckoned in terms of wages, interest,
and rent; wages and interest alone; or in terms merely of the prices
of all the production goods “entering into” the product, the law of
entrepreneur’s cost, as stated above, reduces itself to the proposition
that the exchange value of production goods “determines” the exchange
value of products. For all forms of calculating entrepreneur’s costs are
based on the simple, practical, or first method of reckoning costs, as
the prices of labor, raw material, machinery, power, _etc._[226]
There is seeming antagonism between the law of entrepreneur’s cost and
the utility theory of value. For, according to the latter, the value of
production goods is derived solely from the value of their products.
Value originates in human satisfaction, flows out to those consumption
goods upon which the satisfaction is immediately dependent (_i. e._, by
which it is conditioned), from these flows out to the production goods
upon which the consumption goods as products are dependent for their
existence. From these on, the flow of value continues to those production
goods which are still farther removed, and so on, rank by rank, until
unproduced agents are reached. Put in other words, raw material,
machinery and similar goods, have value solely because the entrepreneur
can afford to pay for them, and this he can do solely because his
products have value. If value conduction runs from product to production
goods, how can value determination run in the reverse direction, from
production goods to product? If the stream runs from the spring, we know
that the volume of the spring must determine the volume of the stream and
not the contrary. But does not the law of entrepreneur’s cost assert that
the value of production goods _determines_ the value of products? The
solution of the enigma of this apparent conflict of the utility theory
with the great empirical law of cost (in its common form of statement) is
one of the most interesting and important products of the acute thinking
of the Austrian economists.
The difficulty exists solely because many single production goods, such
for example as iron and wood, or pre-eminently common labor, enter into
a variety of products. When several various products are related to
one another by reason of the fact that a common production good enters
into all of them, we may, following von Wieser, call them “cognate
products.” If cognate products A, B, and C are made in part from the
common production good P, P will derive its value from the values of A,
B, and C, but the value of P itself will have a peculiar reactionary
effect, yet to be described, upon the value of these products taken
individually. This reaction is the phenomenon really at the foundation
of the law of entrepreneur’s cost. For an instant permit a supposition
quite contrary to fact. Suppose that A, B, and C are made entirely from
P so that no other production good enters into them. Then the exchange
values of A, B, and C will be derived solely from the “marginal” utility
of these products, but their exchange values are peculiar in this, that
they will be related, will be adjusted, each to the others by reason
of their common origin in P. If a unit of P entering into A attains in
that form a higher value that when entering into B or C, then more A’s
will be made from P and less B’s and C’s. The increase in the supply
of A’s will decrease their value _by decreasing the marginal utility_
of A’s.[227] This process keeps the values of A’s, B’s, and C’s in a
mutual adjustment. If we carelessly confine our view to a part of this
process of adjustment, we see what appears to be a determination of the
value of A, the product, by the value of P, the production good. If
the value of A is out of adjustment with its cost in P, and then the
adjustment is effected, it is the value of A which seems to move to
that of P. The value of P may seem to be the independently determining
factor. As a matter of fact, in the first place, the value of A moves
only when its marginal utility has been altered by a change of its
supply, and in the second place, when it does move toward the value of
P, that of P also moves toward it. It depends on the relative importance
of A’s in comparison with all of the rest of the products of P, how far
the value of A moves and how far the value of P moves in their mutual
adjustment. If it is discovered that the two stars in a “double star”
are approaching each other, we easily conceive that both take part in
the moving. But when an apple falls to the earth it is more difficult
to realize that the earth also falls toward the apple, moving its due
proportion of the distance between them. In the same way, when we see
that the value of some relatively unimportant product remains equal to
its cost of production, we are inclined to state the case as one of
pure determination of value by cost. But this “determination” is but
a part, viewed by itself, of a larger process by which the supplies,
and consequently the values, of cognate products are being adjusted to
one another. The whole truth is that the value of production goods is
determined by the value of their products. Because of the existence
of great common production goods of manifold productive uses, we
have the peculiar reaction of the value of production goods on the
value of products, a part of which process is described in the law of
entrepreneur’s cost.
The case of real life is more complex than the one considered above in
that a plurality of common production goods always enters into a product.
In this more complex case we find an entirely new problem, which rejoices
in the name of the “imputation of the productive contribution,” but
the explanation of the law of entrepreneur’s cost remains exactly the
same in principle as that given for the artificially simplified case.
When a product is made from several production goods, as a carriage
from wood, iron, leather and labor, the value which by anticipation the
production goods derive from the product is divided among them. The share
of value of each production good is called its productive contribution.
The different solutions of the problem of imputing the productive
contribution already offered in the literature of value and distribution,
will not be discussed here.[228] One principle, however, will be taken
for granted. It will be assumed that the productive contribution of any
kind of production good in the value of a particular kind of product
varies inversely with the supply of this production good which is
turned to the making of that kind of product. If product A is made from
production goods P, Q and R, and the amount of P used in producing A’s
is increased—with or without an increase in the amount of Q’s and R’s
used[229]—the productive contribution of a unit of P in the value of A’s
will be decreased.
Considering now the reaction of the value of production goods on the
value of particular products, we may represent the more complex case,
corresponding to real life, by supposing products A, B and C to be made
from production goods P and Q, P and R, and P and S respectively. In
this case the products are cognate only by reason of their relationship
through P. The production goods Q, R and S are not common. Here as before
the supplies and values of the products A, B and C are in a relation of
mutual dependence. The dependence is, however, not so close as in the
first artificially simplified case considered above. In the present case
it is not the values of A, B and C themselves which are brought to an
equilibrium, but it is merely the _productive contributions of P_ in the
values of A, B and C that must reach an equality. If a unit of P obtains
a higher productive contribution in A than in B and C, more P will be
put to the making of A’s and less to the making of B’s and C’s, until
a unit of P attains the same productive contribution in each of these
products. If the amount of P put to the making of A’s is increased, the
supply of A’s will be increased and A’s will decline in value. But the
decline in the value of A’s caused in this manner will fall entirely
upon the productive contribution of P. The decline of value takes place
merely to bring the contribution of P’s in A’s to an equilibrium with the
contribution of P’s in B and C. Abstract as the foregoing formulæ are,
they are nevertheless real. If entrepreneurs were not able to ascertain,
at least approximately, the productive contributions of the various
production goods entering into the product which they manufacture, they
would be unable to tell either how much of each productive factor they
can afford to buy or what price they can pay for it.
When we call to mind the fact that in actual industry most production
goods are themselves products, and that into the majority of final
products nearly all the great common production goods enter, we realize
the stupendous complexity of the relationships of cognate products in
actual life. It is no wonder that ordinarily a whole half of the process
by which the values of all these fellow products are brought to mutual
adjustment escapes our notice. Pig iron derives its value from a thousand
and one kinds of products. When the value of one of these alone is being
brought into adjustment with the value of pig iron, the mass is all on
the side of the pig iron, if we may so express it. In this movement
the single product is seeking a value-equilibrium with all the vast
multitude of other products of pig-iron. It seems itself to effect all
the adjusting. As a matter of fact, it contributes its due share to
the determination of the value of the raw iron. Thus far, we may safely
affirm, the difficulty which, at first sight, the law of entrepreneur’s
cost seems to present to the utility theory has been quite surmounted.
It is a matter of some interest to define as exactly as possible
the relation of potentiality cost to entrepreneur’s cost. When an
entrepreneur, in making his product, uses a production good capable of
other applications, by other entrepreneurs, his product is made at the
expense of potentiality cost. Whether in the isolated or in the social
economy, there is waste whenever a good is produced at a potentiality
cost which is higher than the value of the good itself. A greater value
will be sacrificed to obtain a less. In the isolated economy Crusoe will
easily guard himself against this form of waste. In the social economy,
the competition of entrepreneurs for the supplies of production goods
prevents the same form of waste. Competition being granted, nowhere
will there be found an entrepreneur who uses up production goods to
make a value less than the highest value that these goods could produce
elsewhere. For otherwise the entrepreneurs located at the other points
of higher return would be able to command the production good for their
purposes, and the possibility of profits would furnish them with the
motive to bid for it. If entrepreneurs’ costs always consisted solely in
the value of production goods capable of manifold applications, we could
say that the potentiality cost of a product determined its entrepreneur’s
cost. For the former cost consists in the highest other values that these
production goods may be made to produce elsewhere, and the entrepreneur
will normally have to pay that value for them and no more. His necessary
outlay for a product is thus regulated by its potentiality cost.
But sometimes in the making of a product certain valuable production
goods may be used whose employment does not involve potentiality cost.
These are, of course, production goods capable of being used in this one
product alone. A production good may be capable of making but one kind
of product and yet receive from that product a certain share of value as
its productive contribution. A mineral spring may be so situated as to be
such a production good. A mine is a perfect example. Here a new question
confronts us. Does or does not an entrepreneur’s outlay in the value of
such a production good constitute a part of entrepreneur’s cost? This is
solely a question as to how we choose to define entrepreneur’s cost. It
may be defined either way. But in the event that we define this cost to
include outlays for single-use production goods, it will no longer be
possible to assert that potentiality cost governs entrepreneur’s cost
wholly and in all cases. Let us give an illustration of the question.
If the bottled water of a mineral spring can sell for ten cents in a
neighboring city, and it costs five cents for the bottle and labor and
two cents for transportation, is or is not the three cents per bottle
which remains as the rent (“price-determined surplus”) to the spring a
part of the entrepreneur’s cost of producing bottled mineral water? If
the vender of the water did not own the spring, he would be inclined
to reckon the rent paid for it to its owner as a part of his money
costs. But economists are agreed that the distinction between costs and
surpluses does not hinge on relations of legal ownership. If the producer
of the bottled water owned the spring, he would merely pay the rent of it
to himself. To the present writer it seems that entrepreneur’s cost may
be defined either to be coextensive with potentiality cost, or to exceed
this cost by the inclusion of “price-determined” rents,[230] provided
a consistent usage be maintained. In the one case, entrepreneur’s cost
is determined by potentiality cost; in the other case it is principally
determined by potentiality cost.[231]
In accounting for the value of consumption goods the Austrian theory
takes their supply for granted. In the same way, when the Austrians
come to their explanation of the law of cost they take the supplies of
production goods for granted. If the supply of pig iron brought every
year to the iron market be increased, the supply of the products of
iron will be increased and the exchange values of these products will
fall. The exchange value of pig iron will fall in consequence.[232] At
this point a question—a criticism in behalf of the cost theories of
value—naturally suggests itself. Is not supply ultimately regulated by
cost of production in some form, and is not cost of production thus
either the ultimate regulator of value itself, or at least a joint
regulator with utility? We have suggested here the famous question of
the “reconciliation” of the cost and the utility theories of value.
It is certain that the only form of cost which can exercise ultimate
control over the supply of any produced good is what we have called by
the generic name of “pain cost.” The potentiality cost of a product is
measured in the value of the production goods entering it. But this value
itself depends on the supply of these production goods. The ultimate
cost regulator of the value of both the products and the production
goods cannot be potentiality cost. The influence of potentiality cost
causes the supply of the individual kind of product merely to be
adjusted to the supplies of its cognate products. But potentiality
cost has no influence whatever over the total supply of the production
goods or the absolute supply of the total mass of cognate products. To
appeal to a simple illustration, if a flow or stream of some production
good be supposed to divide into several branches as it proceeds, each
branch representing one of the several cognate products of that good,
the influence of potentiality cost may determine the _relative volumes
of the different product-streams_, but only pain cost—if any cost at
all—can influence the volume of the parent stream, and thus govern the
_absolute volume of all the branches_. Entrepreneur’s cost also, most
obviously, fails as an ultimate regulator of supply. This cost is but the
proximate agency through which the two elementary forms of cost exert
their influences upon the relative and absolute supplies of products.
Undoubtedly the recognition that pain cost is the only form of cost
capable of exerting any ultimate control of value, helps to suggest
that it be called “real cost” or “true cost.” Professor Marshall, for
instance, analyzes cost into two forms, (1) real, and (2) money costs.
6. There is to-day a large following for the doctrine that cost and
utility are joint and equal regulators of value. Professor Alfred
Marshall, for instance, states that “we might as reasonably dispute
whether it is the upper or the under blade of a pair of scissors that
cuts a piece of paper, as whether value is governed by utility or cost of
production.”[233] Historically, there have been developed by economists
two distinct and apparently antagonistic theories professing to afford
ultimate explanations of value; the earlier or cost and the later or
utility theory. But if it can be shown that in reality cost and utility
are but joint regulators of value, recent thinkers hold this equivalent
to a demonstration that the two apparently hostile doctrines are after
all but the two parts of a larger harmonious whole. It is, therefore,
maintained by many that the two opposed schools of value merely failed
to take a broad enough view of the problem. Thus we have ever before us
the interesting question of the reconciliation of the cost and utility
theories. If it be desired to effect a fundamental reconciliation, what
appears to be the most propitious starting point is found in the theory
of the “marginal or final equivalence of utility and disutility,” a
doctrine which originates purely as a theory of “subjective” or esteem
value in contrast with exchange value. The first writer to give this
theory a definite formulation was probably Gossen, but it was J. B.
Clark’s later but entirely independent statement of the same idea which
was first to bring it to the notice of economists generally.[234]
Professor Clark develops a theory that the ultimate standard of the value
of a good is the “effective social disutility” cost of its acquisition.
Thus he presents a theory of distinctively social valuation.[235] But
we also find as a part of his doctrines a theory of purely individual
valuations. Professor Clark distinguishes clearly between these two,
and in fact develops the theory of social from the theory of individual
valuation. In drawing the reader’s attention to these doctrines, it will
suit our purposes best to emphasize as much as possible the distinction
between value in the individual economy and in the social economy. We
may, therefore, adopt the device of “Crusoe economics,” and consider the
relation of subjective cost to value in the isolated individual economy.
In the theory of value, the pursuit of this plan does not involve a
waste of time, but on the contrary it is an excellent measure for which
there is precedent at some point or other in the writings of nearly
all theorists. The plan corresponds to the artifice of the primitive
society of hunters and fishers so frequently used and also abused by the
classical economists. It is in a peculiar degree a device of what Roscher
called the “idealistic method.” We are, of course, now dealing with a
problem entirely outside the possible sphere of the “historical method.”
We find in the Crusoe economy the prototype, as it were, of many a
complex value relation in advanced social conditions, and an appreciation
of certain simple and highly generalized principles true of this economy
may greatly facilitate our understanding of the difficult subject of cost
and value under real conditions. But the strongest reason of all for
considering consciously and explicitly the case of Crusoe by himself, is
because there are many examples in the literature of value where certain
doctrines are laid down ostensibly as universal principles, which are in
reality conditioned upon the unconscious assumption of Crusoe conditions.
The case of Crusoe should be discussed if only to show what principles
are limited to the conditions of his economy.
Crusoe might possess various articles of value which cost him no labor,
or cost him an entirely negligible amount, such as certain scarce fruits;
but the major part of Crusoe’s wealth, let us suppose, is produced, and
is freely reproducible, by his labor. The amount of labor power which
he expends upon his island is variable at his pleasure within wide
limits. If he choose to work only a few hours a day through the year, he
will produce only a certain limited amount of the most useful things.
If he add more hours per day, he will produce more of the old kinds of
goods and also other different articles, luxuries as contrasted with
necessities, but at any rate things of lower utility. Thus as Crusoe
increases the hours of labor power put forth per day, he finds that
there is a decline in the additional utility produced by each successive
increment of labor. On the other hand, he finds that the pain cost or
disutility of labor increases as he toils longer and longer. Crusoe will,
for his average day, work until the increasing disutility of labor comes
to an equality in his judgment with the decreasing utility of the things
being produced. It would not be rational for him to stop at an earlier
point, for then further labor would produce him a means of satisfaction
greater than the “pain” of the labor itself. Nor would he labor beyond
this point so that the pain would exceed the pleasure gain. Thus the
utility produced by, and the disutility of, the final increment of labor
in the working-day counterbalance, or we have the “marginal equivalence
of utility and disutility.”
The most important part of Professor Clark’s teaching is that the
disutility of labor expended in producing goods is the ultimate standard
of their value. To establish this thesis, it is necessary for him to
show that the “effective” disutility of an increment of labor is always
the actual disutility of the final increment, and that the “effective”
utility produced by any increment is the actual utility produced by the
final increment. If Crusoe works ten hours a day, any hour of the day’s
labor will have the same effective disutility as the tenth hour. Thus
if it costs one hour of labor to produce the article A, the pain cost
of A is always _in effect_ the disutility of the final or tenth hour
of labor, no matter in what part of the day the good A happens actually
to be produced. For if Crusoe should decide to go without this article
in order to avoid the hour of labor which it costs, his day would then
consist of nine hours spent upon the rest of his products, and the effect
would be to save himself the disutility of the tenth or last hour.[236]
By shortening the working-day an hour he cannot do otherwise than save
himself from suffering this marginal disutility.
In a similar way it can be shown that the _effective_ utility of a
product A produced by the first hour of labor is the same as the actual
utility of the product B produced by the tenth hour. For if A were to
be lost, destroyed, or traded away, another A could be produced in its
stead through the sacrifice of a B, by turning the tenth hour from B to
the production of an A. In effect, then, upon the possession of A is
_dependent_ merely the utility of B. The utility of a good is defined as
its power to afford satisfaction, but the “effective utility” of a good
as conceived by Professor Clark is, we may say, the power of that good
over a man’s satisfactions, taking into consideration the adjustments he
may make in his productive activities in case of the loss of that good.
If he produces this same good over again, and instead goes without some
other good, _in effect_ he foregoes the utility of the latter, and this
is precisely the _effective utility_ of the first good.[237] Thus, in
Professor Clark’s view, the utility produced by the last increment of
a man’s labor affords a unit for measuring the effective utility to him
of any and all the freely producible products of his labor. But it has
already been shown that the _disutility_ of this last increment of labor
is equal to the utility produced by it. Thus terminal disutility becomes
also an available unit of “subjective” or esteem value, and Professor
Clark adopts this as the “ultimate standard of value” upon the ground
that pain is a more convenient measure than pleasure.[238] The theory
signifies that the subjective value to the isolated producer of any good
whose supply depends on labor can be most conveniently measured by the
labor cost of that good. To quote:
It follows that, in the case of an isolated man, we may
measure the subjective value of goods by the mere duration
of the work that creates them. All goods made in an hour are
equal in effective utility and all hours of labor are of equal
effective disutility. Destroy the product of an hour’s work,
and you injure the man by a fixed amount; make any hour’s work
unnecessary, by making nature freely supply what is produced in
that period, and you benefit the man by a fixed amount.... The
product of two hours’ work will always be of just twice as much
subjective value as is the product of one.[239]
Professor Clark has in some place defined subjective value as the
“measure of effective utility.” Menger defined this kind of value as
the significance attained by a good in our estimation when we know that
some satisfaction of ours is conditioned upon command of this particular
good. Value, as an amount, is the measure of the quantity of satisfaction
conditioned. The present writer has already expressed his opinion[240]
that Menger’s mere definition of value gives the solution to the great
riddle of the relation of value to usefulness and satisfaction, and
that virtually from the mere proposition contained in this definition
a large part of the theory of value can be deduced directly. It is of
great interest to note, therefore, that Professor Clark’s definition
of subjective value is in entire harmony with Menger’s. The definition
of Menger explains value universally, wherever there is value. Clark’s
definition, though conceived quite independently by him, is but an
extension of the principle in Menger’s definition, but an application
of it to a certain special case. This case, though logically a special
instance, is however typical of most of the goods we imagine a Crusoe
to be producing, consuming and reproducing. This is the case of freely
reproducible goods. Here, if a good be destroyed, its value will be
revealed by the satisfaction that must be given up because of its
destruction, which is the satisfaction finally conditioned upon it. In
the end, what Professor Clark points out is merely that this good may
be replaced by diverting to its making labor which otherwise would have
been employed in producing some other good which Crusoe chooses to resign
instead. The satisfaction in effect, or in the end, conditioned by good
A is the satisfaction directly conditioned by or afforded by good B, the
good given up.[241]
As it appears to the present writer, Clark’s theory of esteem value is
to this point so well founded that even the most uncompromising opponent
of labor theories can find no ground to deny it. We have here explained
a labor measure of esteem value, perfectly justified at least under the
conditions of the isolated economy, and Professor Clark’s analysis has
disclosed the inner reasons why this measure can be employed. Indeed,
while speaking of reproducible goods in the Crusoe economy, it may be
affirmed that cost is not only a “measure” of esteem value, but is also a
joint _regulator_ of value. To be precise, the costliness of a good acts
jointly with the utility of the good in regulating its value. To say that
one thing regulates another is, of course, asserting more than that it
measures that other. A regulator is a measuring cause, whereas a mere
measure is not a cause of the thing estimated.[242]
In what precise sense is costliness here a co-determinant of value?
When a good both costs pain or discomfort in its production and affords
pleasure in its use, it is common custom to speak of the “cost” of the
good as the exact opposite of its “utility.” But these concepts are not
direct opposites. Cost consists in the subjective experiences of the
producing man, and its precise opposite is pleasure or, specifically
in our economic usage, satisfaction of want. But “utility” never is a
precise equivalent for satisfaction. On the contrary, utility is another
kind of opposite of satisfaction, being always conceived to belong to
the good and not to lie within the man, except in the treatises of
certain unconscious metaphysicians. In virtue of a certain combination of
physical properties a good possesses a power to produce a satisfaction
in a man.[243] This power, due to its physical properties, is the best
conception of the good’s utility. The precise opposite of utility cannot
be designated by cost, but the word “costliness” fits the need. In virtue
of their physical properties, or physical and chemical relations with
other external things, some goods require a large amount of change of
man’s external surroundings to be effected by him in order that they may
be produced. We give these goods the attribute of costliness, similar to
the attribute of utility, and the relation between costliness and cost
is similar to the relation between utility and satisfaction.[244]
The question which now concerns us is whether in the case of freely
producible goods the supply of which can be augmented at will by the
application of more labor, the costliness of a good takes an equal part
with its utility in determining its value. If the marginal utility of a
good determines its value, marginal utility is still the mere creature
of the supply of the good. The larger the supply, the lower the marginal
utility. Putting the matter the way it is often stated in present-day
treatises, the supply that will be produced depends upon the cost of the
good, and thus at bottom cost determines value. Making a more careful
statement we may say that the supply depends upon both the costliness
and the utility, since Crusoe will increase the supply—the _average_
yearly supply, we should say if speaking of a crop—until the marginal
cost and marginal satisfaction become equivalent. For the normal case,
the increase of the number of increments of the good will entail an
increase of marginal cost and a decrease of marginal utility. Both the
marginal cost and the marginal utility vary when the supply is changed,
but the supply tends to rest at the point of equilibrium of these two
quantities, and is thus determined by them jointly.[245] If the general
costliness of this grain should fall, its value would soon be lowered,
for Crusoe would be led to produce more of it in order to reach the
point of supply which equilibrates final cost and satisfaction. Thus
the marginal utility and value would be lowered. Conversely if the
costliness be increased, value will be raised. Under Crusoe conditions
we are considering the relations of costliness, utility and value in
the simplest of circumstances we can imagine. Even here the question
arises, is it correct to affirm that costliness is _precisely coördinate_
with utility in determining value? To me it seems apparent that utility
exercises a more direct and intimate control over value than cost, even
in the simplified case now before us.[246] In the first place, value is
still _derived_ solely from utility.[247] Cost influences value only
by way of influencing the value-determining utility itself. Thus cost
is more remote from value than is satisfaction or utility. Even in the
case of goods valued according to their “effective utility,” that is,
according to a foreign utility, there is no violation of the principle
that value is derived solely from utility. Cost or costliness is never
the source of value. No amount of cost endured for a good without utility
will confer value upon it. There can be no discrepancy between utility
(here we are speaking of the utility that is the counterpart of the
satisfaction _conditioned_ upon the good, _i. e._, the marginal utility
in the cases of goods divisible into increments) and value, whereas there
may be between costliness and value. If anything prevents the supply of
a good from being increased to the point of marginal equivalence of
utility and costliness, then of course the value follows the utility
and not the costliness. Costliness is thus not a more fundamental cause
of value, but merely a more remote cause than utility, and in any event
can influence value only by affecting the utility itself, by helping to
determine supply.
7. Turning to social conditions, we meet the new problem of exchange
value. It is true, certain value comparisons may be made in the entirely
isolated economy which afford a kind of prototype of the exchange value
of the market. Crusoe might, perhaps, have occasion to make mental note
that ten bushels of his wheat supply possess the same esteem value to him
as one cord of his firewood. This comparison involves a ratio between
valuable goods, and if Crusoe only had reason to trade with himself we
might find the phenomenon of purchasing power—the true conception of
exchange value—and ten bushels of wheat would have the purchasing power
of one cord of wood. This kind of exchange value—if we dare call it
such—would be most simple; for it would be directly determined by, and
be in exact proportion to, esteem value. Just as Crusoe will be able to
carry the esteem values of reproducible goods in mind most readily in
terms of disutility cost, so would he be able to strike value ratios
between such goods most easily by comparing the disutility costs of their
physical units of measure. Thus, if one cord of wood should exchange for
ten bushels of wheat, the reason would be that a bushel of wheat costs
one-tenth as much labor as one cord of wood. This thought need not be
pursued further. If the exchange value of a good in the social market
depended in the same direct manner upon the esteem value of that good to
all society or to “society as a unit,” the final theory of exchange value
would be much simplified. But, unless the present writer is mistaken,
a good cannot possess an esteem value to society as a whole, but can
merely have a separate value to each individual member of society.
Though it is questionable whether we can apply the theory of final
equivalence of utility and disutility directly and in an unmodified
form to all kinds of social value, we still find generally that
each individual in society values his personal consumption goods
substantially in the same manner as Crusoe. Under the division of
labor, the individual does not produce his own consumption goods, but
renders certain productive services to society for which he receives
remuneration in the shape of a money income. Money income may also be
derived from capital acquired at the cost of abstinence on the part of
the individual receiving it. But again, it may as well be the result
of gift or inheritance, in which case it represents no subjective cost
to the recipient. When a dollar costs a man subjective sacrifice to
acquire it, and the dollar is spent for a commodity, this commodity thus
indirectly costs that sacrifice. The commodity is bought by the consumer
because it possesses esteem value. It derives this esteem value from the
satisfaction conditioned by it, but this value may well be carried in
mind by the consumer in terms of his own subjective cost. Crusoe spends
units of disutility, as it were, to obtain from nature certain utilities;
the man under social conditions spends dollars, which may represent
disutility, to obtain utilities from the social warehouse. Professor
Clark’s theory of “effective disutility” as the measure of value may
be applied to the individual economy within society as well as to the
individual economy in isolation.
Everywhere in society among individuals who earn a part or all of their
money incomes,[248] we may expect to find pure “esteem values” being
measured by subjective costs. But the relation of subjective cost
to _exchange value_ is a different matter. Two parlor tables of the
same make and pattern will possess the same exchange values, but the
esteem values of the two to their separate owners are not comparable
quantities. Each of these owners, for himself, may estimate the esteem
value of the table in terms of its indirect _cost of acquisition_ in his
own disutility. The dollars cost him disutility and the table cost him
dollars. But this is not at all the same as saying that the “exchange
value” of a table is measured by the disutility _cost of production_ of
that commodity. Exchange value can have no such intimate relation with
disutility cost as esteem value. Furthermore, the cost of production
of tables is experienced only by makers of tables, and not by their
consumers. The exchange values and pain costs of commodities can have
no closer relation than one of mere proportionality. It is possible
that, if one A has an exchange value of two B, an A has cost twice as
much disutility to produce as a B. In this case the exchange values of
these commodities, each in terms of the other, are proportional to their
subjective costs. It is permissible to predicate equality of subjective
cost and esteem value, but to say that the subjective cost of an article
_equals_ its exchange value would, of course, convey no meaning. The
unqualified classical labor theory asserted that exchange values were
determined in proportion to relative labor costs. The aim of this chapter
has been, therefore, to prepare to answer this question: Are the
exchange values of commodities in the social market in proportion to the
subjective costs of production of these commodities? Is there any way of
defining, or method of reckoning, the pain cost of a good, which will
enable us to show this proportionality?
Before attending directly to these questions, it is best to consider
whether it is possible to compare the subjective costs of commodities
produced by different persons or groups of persons. A ton of coal may
exchange for six bushels of wheat. The subjective cost of the coal
consists chiefly in the labor of certain miners; that of the wheat in
the labor of certain farmers. To assert that the subjective costs of
production of these commodities either are or are not in proportion to
their respective exchange values, implies that we are able to compare
these costs as quantities. To assert proportionality requires that we be
able to say that the disutility experienced by the miners in producing
a ton of coal is equal to that experienced by the farmers in producing
six bushels of wheat. To assert disproportionality, we must be able to
state that these disutilities are unequal. If these disutilities are
quite incommensurable, we can assert nothing regarding the relation of
these costs to the corresponding exchange values.[249] Men as scholars
are accustomed to maintain that the pleasures or pains of different minds
cannot be compared as quantities, while in every-day life the same men
are equally accustomed to state that John _enjoys_ music _more_ than
Paul, or that Primus _suffers more_ or works _harder_ than Secundus.
May or may not we affirm that the stoker works harder, or in our own
jargon, suffers more disutility, than the dining-room steward? In the
hope of settling part of the issues raised in these questions, let us
consider the meaning of one of Adam Smith’s statements regarding wages
in different employments. I refer to the doctrine that wages tend to be
higher than the average in employments where there is a higher degree of
disutility. This tendency is operative only under perfect competition,
and the existence of numerous non-competing groups occasions a result
much changed from that to be expected from this tendency, which is
sometimes described in the “evil paradox” that the harder the work, the
lower the wages. The question which concerns us here is, how much does
either of the above statements imply with respect to the possibility of
comparing the pains or pleasures of different persons. It seems to the
writer that neither necessitates a direct quantitative comparison of the
subjective experiences of different persons. I may, perhaps, say that
the persons in occupation A are suffering more disutility and receiving
higher wages than those in employment B, but all I can be supposed
really to know is that if I were in occupation A, I would suffer more
discomfort than if I were in occupation B. If I am a person of “average”
(_i. e._, typical) constitution, I may infer legitimately that this
is true also of any average person. While making no affirmation that
John suffers more disutility than Paul, either when these persons are
in the same or in different employments;[250] we may be able to state
that either John or Paul will suffer more in occupation A than in B.
The upshot of the matter is that Adam Smith’s proposition implies only
our ability to compare the _disutility_ (using this word in the sense
it ought to have) of different tasks. A task is objective, consisting
in certain objective results to be effected under certain objective
conditions. When the objective characteristics of a task necessitate
subjective discomfort in the person who performs it, the task or
employment possesses _disutility_, which is thus a concept the opposite
of _utility_. If within a competing group employment A affords a higher
wage than employment B, because its _disutility_ is higher, the result
is brought about not, in the first instance, through the perception
by the workers that certain individual persons work harder than other
individual persons, but through the perception that any normal individual
for himself would work harder at the task A than at the task B. The
possibility of comparison is implied merely between the “pains” of the
same person, though there are common forms of expression which imply
more. We may conclude, then, that there is a perfectly legitimate sense
in which we can compare the subjective costliness of commodities produced
in society by entirely different groups of persons. And no one doubts
that the day’s product of a coal miner has a higher disutility cost than
the day’s product of a farmer.
When we find the statement in an economic treatise that the exchange
values of commodities are ultimately regulated by their subjective cost,
it is to be assumed that the meaning is the same as that which would be
expressed with greater precision by using the word costliness. With the
explanations already offered we may henceforth follow common usage and
employ the mere word cost. There are two distinct ways of reckoning the
pain cost of a commodity, namely, (1) as total cost; (2) as marginal
cost. Ricardo reckoned cost according to a hybrid method. The _total
subjective cost_ of a good consists in all the discomforts of labor
and abstinence actually endured in the past to produce it. Taking the
factor of labor alone for illustration, it includes the cost of the
labor directly applied to the good, and of the labor indirectly applied
by being directly applied to the raw material and machinery which are
used up in its making. The machinery, however, has always been made at
the combined expense of labor and of using up formerly existing tools
and machinery; and the latter tools and machines had a labor cost. A
product’s total cost may include, perhaps, one one-hundredth of the labor
cost of the first generation of certain machinery used in its production,
and as we go back, one one-millionth of the second generation;[251] and
the total labor cost of any commodity thus goes back no man knows how
far. Therefore, the total labor cost alone of a good (to say nothing
of the abstinence element) is an extremely indefinite quantity; and
it is impossible to know anything very definite about the comparative
total labor costs of different articles. But beyond this, we do know
that the existence of differential rents destroys the possibility of
proportionality between total labor costs and exchange values.
The concept of the _marginal cost_ of a good appears in the Ricardian
theory of rent, and has been involved more or less clearly in the
reasonings of most modern economists, but it is almost entirely to J. B.
Clark that we owe the consistent development of this idea. The marginal
subjective cost of a good may consist either of labor or of abstinence,
but not of both combined. In this essay we will arbitrarily set aside
the problem of abstinence cost. The marginal labor cost of a good is,
of course, determined by ascertaining the marginal product of labor in
producing this good. To illustrate in the simplest manner possible,
we will follow the time-honored procedure of eliminating capital for
the moment, and suppose successive doses of labor to be applied to
a given piece of land.[252] Let the labor force applied stand at a
certain amount, and suppose the dose to consist of a labor day. Then,
if experimentation reveals the fact that the addition of one more dose
will increase the whole product by the amount of two bushels, we define
these two bushels to be the marginal product of a labor day. Professor
Clark frequently refers to this same quantum as the _specific_ product
of labor. The land in this case may have consisted of a 100-acre field
and the total labor applied may have amounted to, say, 300 labor days.
The total produce may have been 3,000 bushels of grain. By hypothesis,
capital being eliminated, the total labor cost of these 3,000 bushels is
300 labor days, or ten bushels cost one labor day, or the total cost of
a bushel is one-tenth of a day. On the other hand, the marginal cost of
a bushel is one-half of a labor day, since two bushels are the marginal
product of a day.[253] Ricardo, who so explicitly defined total labor
cost as consisting of the labor both directly and indirectly applied
to a commodity, also assumed that in one respect value-determining
cost is _marginal_, though he never used the word “marginal.” It was
for this reason that not far back we described his method of defining
cost as hybrid. His doctrine that rent does not enter into cost was
but one way of stating that _on land_, it is only marginal cost (as he
expressed it, the cost of the most costly portion of the supply) which
determines value. In real life, products are the result of combining
not land and labor alone, but land, labor and capital (in the sense
excluding land—our usage at present). When Ricardo was expounding and
illustrating the theory of rent which bears his name, he was forced
to suppose that the successive doses added to land were composed of
capital and labor jointly,[254] which left his marginal quantum the
product of both of these agents. This left him with the great interest
difficulty with which he occupied himself in his first chapter.[255]
It remained for J. B. Clark to point out that the marginal product of
labor could be disentangled from the product of capital as well as
from that of land.[256] Upon this possibility depends the important
productivity theory of wages. In order to explain the process by which
the pure marginal product of labor is found by the entrepreneur, Clark
adopts what is virtually the business man’s conception of capital, as
distinguished from concrete capital goods. The latter alone have been
designated capital by most economists in their formal and explicit
definitions. Professor Clark prefers to call the two concepts simply
capital[257] and capital goods. Capital is a “sum of productive wealth,
invested in material things which are perpetually shifting—which come and
go continually—although the fund abides.”[258] These material things are
the capital goods. Capital as an amount must be measured by its exchange
value. A capital of $100,000 may be prepared to employ say 40 men. Should
it be rearranged to employ 20 men, its concrete make-up would have to be
altered. A less number of machines and tools of better quality would have
to compose it. Now as the concrete tissue of a given capital perishes
or matures and frees its value for reinvestment in more concrete goods,
an entrepreneur has it open to him to alter the concrete constitution
of his capital. In this way, in the course of time, an entrepreneur may
be able to rearrange his capital so as to augment or decrease the labor
force employed with it. In many cases pretty large changes in the labor
supply employed with a given capital could be made with little or no
alteration of its technical concrete make-up. Somewhat slowly and under
this and that frictional difficulty, the experimentation is made which
reveals the marginal product of labor. The process which discloses this
must always in the end be one in which an increment of labor is added to
or removed from the force working with a given capital and an observation
made of the resulting addition to or subtraction from the total product.
The exposition of this process and the explanation why competition tends
to make the wages of labor (of whatever grade) equal to its specific or
marginal product, is probably the greatest contribution to economics
contained in Clark’s _Distribution to Wealth_, and occupies a large part
of that work.
As was virtually pointed out by Malthus,[259] the presence of rent and
interest charges in entrepreneur’s costs is an insuperable obstacle
in the way of the theory that a commodity’s total labor cost is
proportionate to its exchange value. If, however, an attempt is made to
correlate _marginal_ labor cost and exchange value, the difficulties of
rent and interest are eliminated. When we say that these difficulties are
eliminated, we do not mean that they are arbitrarily set aside, or that
we merely run away from them: but the marginal labor cost of a commodity
is not affected by the payment of rent and interest. For instance, if
wheat is being produced at the same time on land of the best and land
of the poorest grade, a large rent will be paid out of the total wheat
product on the former soil, and little or no rent may be paid out of the
total product on the latter, and yet the cultivation will be carried to
the point which makes the marginal product of labor and the marginal
labor cost of wheat the same on both grades. The same observations may
be applied to rent of capital (or interest, as we call it when it is
calculated as a percentage of the value of the rent-bearing agent).[260]
The great difficulty in the way of the theorem that the marginal labor
costs of commodities are in proportion[261] to their exchange values,
is the problem of skilled labor. The best way to show the effect of
skilled labor upon comparative marginal costs is first to eliminate it
temporarily from the problem, and show what the relation of marginal
labor cost would be to exchange value, if there were only common labor
throughout society. If all labor were of a single grade, all commodities
which are products of labor would have exchange values in proportion to
their respective marginal disutility costs. This would be true whether
the products are consumption goods or are merely production goods which
are used in making further products. Some valuable goods are not products
of labor. Such are bodies of ore lying in their natural state, standing
timber, _etc._ These production goods have no disutility cost, marginal
or total, and consequently their exchange values have no relation to
cost. Their supplies are determined independently of human agency. Ore at
the surface, crushed or smelted ore, are, however, products of labor, and
so long as only a part of the known existing ore of mines is removed—a
part remaining untouched because of too high cost—the supply of any
product resulting from the combination of labor and native ore-bodies,
will depend upon marginal labor cost.[262]
The homogeneous labor force (which we have assumed temporarily)
will distribute itself among all the various industries in society
in proportions determined by the marginal product in each industry.
Capital will also distribute itself throughout the system of industries,
tending, of course, in the long run, to appear in each industry in such
proportions as will, apart from inequalities of risk, produce everywhere
an equality of its returns. Assuming the distribution of capital to have
reached a condition of equilibrium—it being no part of our present
task to follow out a theory of interest—let us try to show that labor
will distribute itself over the field of industry in such a manner
that exchange values will be proportionate to marginal labor costs. If
labor flows from one industry to another, the total output of the first
industry will decline and that of the second will increase. The change
in the supplies of the respective products of these industries will
alter the exchange values of these articles. Different distributions of
labor among industries will give rise to different relative supplies
of commodities and different exchange values. As the supply of labor
in any industry increases, its marginal product decreases. If all
occupations possessed the same disutility, the supply of labor would be
so distributed that its marginal product would have the same exchange
value in all industries. But if some occupations necessitate higher
disutility costs than ordinary, the supply of labor obtainable for
those industries will decrease until the exchange value of the marginal
product is raised till it compensates for the superior disutility.[263]
If one commodity is produced at a higher disutility cost (to the labor
directly employed upon it) than another, the marginal product of labor in
it will have a higher exchange value. If 6 A in one industry and 1 B in
another make the marginal product of a labor-day, 6 A will exchange for
1 B, provided the disutility of labor is the same in both employments.
But if it costs more disutility to produce 6 A than 1 B, the relative
supplies of A’s and B’s would be so adjusted that 6 A will exchange for
more than 1 B. Thus a superior disutility cost raises the exchange value
of a commodity, in order that this commodity may afford a superior value
product to labor. Labor-power is a peculiar production good. Like other
production goods of manifold productive uses, its expenditure constitutes
potentiality cost; but it is unlike others in that human pain cost is an
ever-present incident to its expenditure. The distribution of labor power
among different productive uses is not governed solely with reference to
its share of value derived from the product, but is governed in part with
reference to the pain-cost involved in the production of the product. A
higher disutility necessitates a higher share of exchange value. Thus
it comes to pass that this most disposable and important of production
goods will distribute itself among products in such a manner that these
products will have exchange values in proportion to their marginal pain
costs. This result is brought about solely by control of the relative
supplies of these products, the exchange values of which are all derived
from utility solely after the method described in the utility theory.
When we introduce the question of skill into the problem, we find that
the supplies of many kinds of labor are limited not with reference to the
disutility of the tasks performed, but are limited solely because the
requisite brain-power, ingenuity or strength are scarce. The marginal
product of such labor is raised by the limitation of its supply. Thus, it
is a truism that many occupations of the lowest disutility afford very
high wages, and that in the vast majority of cases high wages are not
caused by high disutility, but by scarcity of competent persons. Suppose
the commodity A is scarce, is of high exchange value, and is the marginal
product of a skilled labor day. Article B is the product of a day of
the lowest kind of labor. One A may well exchange for three or four B.
Yet the marginal labor cost of A is, in the typical case, even less than
that of B, for the skilled laborer ordinarily suffers less pain cost per
day than the unskilled. Hence, the exchange values of these products are
quite out of proportion to their comparative marginal disutility costs.
The existence of non-competing groups, first emphasized and named such
by Cairnes, is then a fatal obstacle in the way of the adjustment of
exchange values to comparative marginal costs.
8. We may now essay a partial summary of the results which have been
reached up to this point. The end of the theory of value is primarily
to explain exchange value. The only workable definition of this term
is purchasing power. The purchasing power of a commodity is measured
objectively in terms of the physical units of some other particular
good, except when we are speaking of the concept of an article’s
_general_ purchasing power. This, its purchasing power over all other
commodities,[264] is measured as some kind of mean or average of all its
particular purchasing powers. What mean, it is no part of our task to
enquire. All goods which possess exchange value also possess that other
kind of worth which we termed “esteem value.” Every commodity derives
its exchange value solely from its esteem value, or, speaking with
precision, from its esteem values. For a commodity has a separate esteem
value to each individual person who can utilize it. If society were as
one man,[265] the exchange values of goods would be but the exponents of
their relative esteem values. In other words, if a physical unit of one
commodity exchanged for two units of another, the reason would be merely
because the first possessed twice as much esteem value to all society
as a unit of the second. But the esteem value of an article is a much
more definite thing than a social estimate, _i. e._, an “average” (or
typical) estimate of worth. The esteem value of a good to a person is
the measure of the amount of that person’s satisfaction conditioned upon
the enjoyment of the good. Goods existing in superfluous abundance give
satisfaction but do not condition it, and hence lack esteem value. Taking
for granted the amount of an individual’s income, the esteem value which
a good has for him determines his price equivalent for that good.[266]
The market price, or exchange value, of a good is a _resultant_ from
(never in any sense an average of) the individual price equivalents
placed upon it by the body of individual consumers.
The exchange value of a good varies inversely with the supply of it
presented to the body of consumers. The larger the supply, the lower is
the price equivalent which must be reached as the marginal determining
point of its market price.[267] A change of supply alters exchange
value only because it changes the marginal price equivalent.[268] In
the social market, the purchasing powers of all the various products
over one another depends upon their relative supplies. So far as cost of
production in any form exercises any degree of control over the value of
a good, it can act solely by way of influencing the supply of the good.
The phenomenon of the apparent regulation of the exchange values of
products by their entrepreneur’s costs, is but a part of a large process
in which cognate (or “fellow”) products adjust their relative supplies
and their exchange values to one another, to the end that the common
production goods entering into all of them may produce equal productive
contributions or shares of exchange value per unit in all of their
productive applications.[269] The relation of the pain costs of products
to their exchange values is limited to one of mere proportionality.[270]
The pain cost of a product may be calculated in two very distinct ways,
giving total pain cost or marginal pain cost. The total pain cost of a
good, consisting in all the labor and abstinence ever endured to bring
it into existence, is quite an indeterminate quantity,[271] and its
influence upon the exchange value of a good is very remote and irregular.
The larger part of total labor cost, the part which includes the labor
directly applied to commodities, plus the labor indirectly applied by
being directly applied to the raw material and machinery immediately
used in their production, and so on for the few nearest generations of
machines, this being the part which excludes the infinitesimal bits of
labor cost expended far in the past, can be shown positively not to be in
proportion to their exchange values. For commodities produced at a higher
expense of rents of all kinds (as opposed to wages) have exchange values
out of proportion to this calculable part of their total costs.[272] We
find that the control of _marginal_ cost over value is closer than that
of total cost. If it were not for the existence of innumerable grades
and classes of skilled labor, the supplies of produced goods would be
so adjusted that their exchange values would be in proportion to their
respective marginal costs. But on account of skill, we must here again
characterize the influence of subjective cost as remote and irregular.
In conclusion, it is true, speaking in very loose and general terms, we
may say the exchange value of a good depends both upon its utility and
its costliness to mankind. But it would not be proper to say that cost
and utility are equal and coördinate regulators of value. Therefore,
Professor Marshall’s shears simile is not to be commended. The most
noteworthy changes in exchange values have been produced by discoveries
which reduced the labor cost of goods. But the amount of the reduction
thus produced in the exchange value of a particular commodity could
have only the roughest correspondence with the amount by which its
relative pain cost was reduced. Also, for reasons already shown, we
know that neither before or after these changes was it possible for
exchange values to be in proportion to relative pain costs, whether total
or marginal costs be taken. Furthermore, all alterations of exchange
values produced by cost changes are effected solely by alteration of the
value-determining utility itself. Utility has a much more direct and
intimate relation with value in either form than cost. Value may exist
without cost and cost may be expended without occasioning value. Value
never exists without utility and utility (not in the sense of Smith’s
“use-value,” but the effectual utility, the utility which measures the
satisfaction conditioned by a good) never exists without value. Cost
affects value solely by influencing utility itself. From this comes the
all-important conclusion that whenever any of the numerous and permanent
forces are active which interfere with the influence of cost, value
follows the utility and not the cost.
FOOTNOTES
[1] Chap. xiv of book v, 4th ed., 1898, pp. 554-570.
[2] Value was in this connection used in another sense than pure exchange
value, but the difference of significance was never satisfactorily
explained.
[3] _Natural Value_, edited by Wm. Smart (London, 1893), pp. xxvii-xxix.
Von Wieser gives but three pages of the preface of _Natural Value_ to
the writings of Adam Smith and Ricardo on value. But in this brief though
profound passage, he has not only suggested what I believe to be the true
interpretation of the theories of Smith and Ricardo, but he has also made
the greatest single contribution to our understanding of the subsequent
course of English thought on the subject.
[4] Rent of land was excluded by Ricardo, but included by Smith and
Malthus, and also by J. B. Say.
[5] The Austrian writers are accustomed to call this the “empirical law
of costs.”
[6] The detailed history given in the following chapters will, it
is believed, substantiate this view. The development of the law of
entrepreneur’s costs will be traced only so far as is necessary in order
to understand the history of the labor theory, but it is indispensable
to follow the general lines of its progress if we are to perceive the
“setting” of the labor theory.
[7] Mill granted certain exceptions to the proposition that rent cannot
“enter into price,” but placed no emphasis upon them.
[8] _Wealth of Nations_, 2d Thorold Rogers ed., 1880, pp. 31-2. All
subsequent page references are to this edition, volume 1.
[9] P. 34.
[10] Referring to the words just quoted, Mr. Ingram says: “This sentence,
which on close examination will be found to have no definite intelligible
sense, affords a good example of the way in which metaphysical modes of
thought obscure economic ideas.” _History of Political Economy_, p. 94,
note.
[11] Chap. v. “Of the Real and Nominal Price of Commodities, or of their
Price in Labour and their Price in Money.” Chap. vi. “Of the Component
Parts of the Price of Commodities.” Chap. vii. “Of the Natural and Market
Price of Commodities.”
[12] P. 49. At the same time many important assertions in the
“philosophical account” are not restricted to primitive conditions.
[13] It is true that an article’s cost in labor may instead mean its cost
in productive power. The cost in this case is at bottom the utility of
some other article which might have been created by this productive power
had it not been employed in making the first article. In the same sense
we speak of a thing as costing money.
[14] P. 29, in chap. iv.
[15] It has been suggested by many writers that the germ of practically
every theory of value is found in the _Wealth of Nations_. That is
probably true, if we except the utility theory, which associates quantity
of value with _quantity of utility_, a conception absolutely foreign to
Adam Smith’s thought.
[16] P. 31.
[17] P. 49.
[18] P. 34.
[19] P. 30.
[20] In this instance the word “standard” is used in a sense sufficiently
general to include a regulator (_i. e._, a measuring cause) and a mere
measure. A standard is “1. Any measure of extent, quantity, quality or
value.” ... “2. Any fact, thing or circumstance forming a basis for
adjustment and regulation.” _Standard Dictionary._
[21] What Adam Smith has to say of the relation of these standards, one
to the other, comes in connection with the account for advanced society,
where he discards the labor-cost standard but retains the labor-command
measure.
[22] P. 32.
[23] _Ibid._
[24] Chap. x, of book i.
[25] P. 106.
[26] In one place Smith puts forward a naive and uncritical explanation
of the reward to skill, comparable to his explanation of the division
of labor as due to a propensity of men to truck and barter. “If ... one
species of labour requires an uncommon degree of dexterity and ingenuity,
_the esteem which men have for such talents will naturally_ give a value
to their produce superior to what would be due to the time employed about
it.” P. 49.
[27] P. 34.
[28] _Ibid._
[29] P. 35.
[30] In criticising the labor-command standard of Smith, Ricardo has made
virtually the same point as the above (pp. 8-14, Gonner ed. Ricardo’s
_Principles_). By _riches_ Smith cannot mean what Ricardo means by this
term in his famous chapter on the antinomy of value. (Chap. xx, “Value
and Riches, their Distinctive Properties.”) If by reason of scarcity,
wine should come to command in exchange more labor than formerly, Smith
would have to say that a given quantity of wine becomes more riches. This
Ricardo would not say.
[31] _Principles_, p. 8.
[32] P. 36. The following passage (p. 38) exhibits perfectly Smith’s
general theory of the relation of labor, the precious metals, and grain
to value as a dynamic problem. “Labour, therefore, it appears evidently,
is the only universal as well as the only accurate measure of value,
or the only standard by which we can compare the values of different
commodities at all times and at all places. We cannot estimate, it is
allowed, the real value of different commodities from century to century
by the quantities of silver which were given for them. We cannot estimate
it from year to year by the quantities of corn. _By the quantities of
labour we can, with the greatest accuracy, estimate it both from century
to century and from year to year._ From century to century corn is a
better measure than silver, _because_ from century to century equal
quantities of corn will command the same quantity of labour more nearly
than equal quantities of silver. From year to year, on the contrary,
silver is a better measure than corn, because equal quantities of it will
more nearly command the same quantity of labour.”
[33] P. 52.
[34] P. 52.
[35] McCulloch and James Mill were but satellites of Ricardo.
[36] P. 49. Torrens, in his _Essay on the Production of Wealth_, has
worked out with great pains a form of proof of this proposition. It is
exhibited in a series of dialogues between primitive producers to show
that an exchange of goods at a ratio out of proportion to labor-costs is
incompatible with recognized motives of trade. His proof is good enough
under the tacit assumptions which he makes, including all the conditions
of the perfect type of fictitious primitive society used by classical
writers.
[37] P. 30.
[38] P. 32.
[39] When Smith speaks of “exchangeable value” as being measured by power
to command labor, he is using the only term he has to stand for any
or every concept of value distinct from the “value in use” or general
utility of free goods.
[40] Its relation to pure objective exchange-value is another question.
In Chapter xi of this essay will be found a summary discussion of the
relation of disutility cost to value.
[41] The thought in the “final disutility” theories of Gossen, Jevons and
Clark, independently worked out by these writers.
[42] These very words were later used by Malthus in his defense of the
labor-command standard.
[43] In this sentence we do not assume the commensurability of
disutilities incurred by different persons, but the commensurability of
the disutilities incident to different occupations. Thus we should all be
willing to say that the steamship stoker’s position means harder labor
than that of the chief steward of the dining room, but we may be supposed
to judge this by comparing our own (imagined) labor as a stoker with our
own labor as steward.
[44] _Political Economy_, p. 115.
[45] _Letters of Ricardo to McCulloch_, p. 153.
[46] _Ibid._, p. 132.
[47] _Letters to McCulloch_, p. 153. This shows that Ricardo was not
satisfied in principle with his treatment of the value of scarcity goods.
[48] _Natural Value_, Author’s Preface, p. xxviii.
[49] _Principles_, Gonner ed., p. 6.
[50] J. B. Say, _Mélanges et Correspondance d’Économie Politique_, Paris,
1833, pp. 93-4.
[51] _Principles_, p. 6.
[52] Dietzel, _Theoretische Socialökonomik_, Leipzig, 1895, pp. 228-30.
[53] Quoted in _Letters of Ricardo to Malthus_, p. 165, n.
[54] For this he is accused of reasoning in a circle. As far as any
defense by Marx himself is concerned the charge goes home. Assuming the
productivity theory of wages (which is entirely inconsistent with Marx’s
theory of wages) it is quite permissible to say that labor which has a
higher wage (or value) contains more units of productive power, more
efficiency units, than that receiving a lower wage.
[55] P. 13.
[56] P. 14.
[57] P. 16.
[58] This explanation of the workings of competition is beautifully
written both by Smith and Ricardo—is _classic_ in fact.
[59] P. 65. The italics are the present writer’s.
[60] “It is necessary for me to remark that I have not said because one
commodity has so much labour bestowed upon it as will cost £1,000 and
another so much as will cost £2,000 that therefore one would be of the
value of £1,000 and the other of the value of £2,000, but I have said
that their value will be to each other as two to one, and that in those
proportions they will be exchanged. It is of no importance to the truth
of this doctrine whether one of these commodities sells for £1,100 and
the other for £2,200, or one for £1,500 and the other for £3,000,” _etc._
Gonner ed., p. 39.
[61] _Principles_, p. 39, n. The same statement is made in _Letters to
Trower_, p. 153.
[62] The difficulty of rent is escaped through the Ricardian theory of
rent. The present writer is persuaded that the classical theory of rent
is unsound in this respect.
[63] Pp. 24-6.
[64] The distinction between the two kinds of capital was stated to be a
question of degree in the first section on this subject.
[65] P. 24.
[66] P. 35.
[67] Ricardo’s theory that a rise of interest must accompany a fall
of wages and _vice versâ_ is not an essential part of the present
problem. Interest acts as a cause of deviation of exchange value from
proportionality to wages cost, whether this particular theory of wages
and interest be adopted or not.
[68] Compare the same unconscious shifting of ground in the discussion of
skilled labor.
[69] P. 5. _Principles._
[70] See also Ricardo, himself: “The value of almost all commodities is
made up of labor and profits.” _Letters to Malthus_, p. 225.
[71] _i. e._, wages.
[72] P. 34.
[73] _Letters to McCulloch_, p. 71.
[74] _Das Kapital_, 1st ed., pp. 285, 286, 508, n. See Böhm-Bawerk, _Karl
Marx and the Close of his System_, p. 24.
[75] Böhm-Bawerk, _op. cit._, p. 26.
[76] The writings herein referred to are his _Principles of Political
Economy_, 4th ed., Edinb., 1849, and his extensive notes on Adam Smith’s
text in the McCulloch edition of the _Wealth of Nations_, 4 vols.,
Edinb., 1828.
[77] In his _Capital and Interest_, pp. 97-102, Böhm-Bawerk devotes a
few pages to McCulloch’s theory of interest, which is interwoven with
his theory of value. Böhm-Bawerk concludes: “McCulloch’s utterances on
the subject are one great collection of incompleteness, irrationality
and inconsistency.” The examples of McCulloch’s reasonings cited by
Böhm-Bawerk show the above judgment to be scrupulously just.
[78] _Letters of Ricardo to McCulloch_ (_Pub. Am. Econ. Assn._, Vol. 10),
pp. 131-2.
[79] See passage from a letter to McCulloch, quoted _ante_, p. 42.
[80] McCulloch’s edition of the _Wealth of Nations_, vol. iv, note 1, p.
75.
[81] _Ibid._, p. 77.
[82] Malthus, _Definitions_, pp. 100-101.
[83] McCulloch ed. _Wealth of Nations_, vol. iv, pp. 77-78.
[84] _Principles_, 4th ed., pp. 371-3.
[85] We omit the qualification regarding “socially necessary” labor, and
the theory of skilled labor as “condensed labor,” as not required for our
present point.
[86] If one granted, for the sake of argument, both the labor-cost law
of value and the iron law of wages, we should still lack the slightest
justification for deriving the latter as a corollary from the former. The
only theoretical basis of the iron law of wages is a rigid Malthusian law
of population, or labor supply, the alleged law so greatly abhorred by
Marx and all socialists.
[87] The elaborate special terminology developed by Marx for the problem
(not followed here) will be found explained in full in Böhm-Bawerk’s
excellent essay previously cited. This little book presents Marx’s theory
of value, the “contradiction” and the outcome, in the clearest possible
form. It would be useless to infringe on the territory covered by this
work, but Dr. v. Böhm-Bawerk did not mention the existence of the same
“contradiction” in classical English theory.
[88] _Das Kapital_, v. iii, p. 131; quoted by Böhm-Bawerk, _op. cit._, p.
49.
[89] “Die organische Zusammensetzung des Kapitals,” _Das Kapital_, vol.
iii, p. 124.
[90] Vol. iii, p. 138. See Böhm-Bawerk, _op. cit._, p. 67 _et seq._ There
are other arguments advanced by Marx for the redemption of his theory,
considered in order by Böhm-Bawerk, but that given is the first and
principal one. The second is that the law of value governs the _movement
of prices_. This is analogous to, if not identical with, Ricardo’s claim,
that changes in labor-cost are the causes of changes of values. See
_ante_, pp. 54-5.
[91] Pp. 55 _et seq._
[92] _Principles_, 4th ed., p. 371 (1849). The italics are mine.
[93] McCulloch edition of the _Wealth of Nations_, vol. iv, note viii, p.
200.
[94] “Dass die Abweichungen vom Werth ... sich gegeneinander aufheben.”
_Das Kapital_, vol. iii, p. 140. James Mill, in _Elements of Political
Economy_, pp. 112-113 (1826), said the same thing. When the general rate
of wages varies, for “the aggregate of commodities, taken all together,
there is neither fall nor rise.”
[95] _Elements of Political Economy_, London, 1826. This statement
probably came from Malthus, who laid down the general lines of the theory
of value in this same way in 1820.
[96] P. 96.
[97] Pp. 96-7.
[98] Pp. 99-100. The italics are mine.
[99] Pp. 102-3.
[100] P. 104.
[101] _Essay on the Production of Wealth_, London, 1821, p. 51. Torrens
considered his theory of “exchangeable value” quite original, (Preface,
p. 7.)
[102] P. 51.
[103] P. 53.
[104] P. 50.
[105] “Empirical,” in the particular sense of this term, adopted in the
opening chapter of this essay.
[106] Pp. 39-40. See also Preface, p. 7. This theory does not occupy a
prominent place in his book. The sum of accumulated and immediate labor
is what Ricardo considers to be the total labor cost of a good—under the
name of labor indirectly and directly applied.
[107] Presumably, in its turn, “_accumulated_.”
[108] Explanation of this follows shortly.
[109] In his _Principles_, 1st ed., 1820, and 2d ed., 1836, which was
considerably altered from the first. _The Measure of Value Stated and
Illustrated_, a pamphlet of 1823, and the _Definitions in Political
Economy_ may be mentioned, but the text of the two editions of the
_Principles_ suffices for any except the most minute investigation of his
views.
[110] Ricardo’s part is contained in his published letters to Malthus,
as well as those to McCulloch and Trower, but the letters of Malthus to
Ricardo have not, to my knowledge, been found for publication, except one
given in _Letters of Ricardo to McCulloch_, (_Pub. Am. Ec. Assn._, 10,
Nos. 5-6) p. 161.
[111] The law of supply and demand is not so simple as to preclude a
variety of ways of stating it, and the meaning of such conceptions as
_intensity of demand_, _equilibrium_ or _balance_ of supply and demand,
_etc._, requires careful reasoning to define. The history of the law in
English political economy would be concerned mainly with Malthus, J. S.
Mill, Cairnes and Marshall.
[112] _Principles_, 1st ed., pp. 73-4.
[113] _Ibid._, 74-5.
[114] _Ibid._, 76.
[115] _Ibid._, p. 83.
[116] The claim regarding the subordination of the law of costs is set
forth emphatically as follows: “If it appears generally that the cost of
production only determines the prices of commodities, as the payment of
it is the necessary condition of their supply, and that the component
parts of this cost are themselves determined [_i. e._, as values] by the
same causes which determine the whole, it is obvious that we cannot get
rid of the principle of demand and supply by referring to the cost of
production. Natural and necessary prices appear to be regulated by this
principle, as well as market prices, and the only difference is that the
former are regulated by the ordinary and average relation of the demand
to the supply, and the latter when they differ from the former depend
upon the extraordinary and accidental relations of the demand to the
supply.” _Principles_, 1st ed., pp. 84-85.
[117] Gonner ed., p. 376.
[118] _Letters to Malthus_, p. 176. Malthus’s contrary opinion is
defended at length by him in Sec. 11 of Chap. xi, on value, in the
_Principles_, 1st ed.
[119] Gonner ed., p. 6. The same thought is expressed in the first
paragraph of Chapter xiii, p. 171.
[120] The case is not presented by Malthus as one of two main arguments
with seven counts in total, but all except this division and the
numbering are his.
[121] 1st ed., pp. 104-5. This passage happens not to reappear in the 2d
ed., but all the points in it are still maintained there.
[122] As Malthus said in another place, “The effects of slow or quick
returns, and of the different proportions of fixed and circulating
capitals, are distinctly allowed by Mr. Ricardo, but in his last edition
he has much underrated their amount. They are both theoretically and
practically so considerable as entirely to destroy the position that
commodities exchange with each other according to the quantity of labour
which has been employed upon them, but no one that I am aware of has ever
stated that the different quantity of labour employed on commodities is
not a much more powerful source of difference of value.” _Measure of
Value Stated and Illustrated_, pp. 12-13.
[123] We have not happened upon a passage by Ricardo referring to the
third count, respecting good and bad crops, but Ricardo would undoubtedly
have considered that it did not invalidate his position. If agricultural
capital and labor remain the same in quantity while good and bad crops
alternate, the _cost of production per unit of crop_ varies as well as
the price. When the wheat crop is good the cost per bushel is low. The
price per bushel would also be low. If good crops mean low cost and low
value at the same time, they probably do not mean sinking of value and
cost in the same degree. The consequent deviation of value from cost is
probably what Malthus had in mind.
[124] 1st ed., pp. 102-3.
[125] The strange attempt of James Mill to show that the interest
element stands for labor also, mistook, as we showed in Chapter vi, the
replacement fund of an entrepreneur for his interest fund.
[126] In his notes in a French edition of Ricardo’s _Principles_, “_Des
Principes de l’Economie Politique et de l’Impôt_,” 2d ed. Paris (1835),
note, p. 12.
[127] _Essay on the Production of Wealth_, p. 65.
[128] The principle of this choice had very little in common with the
principle of the various “multiple standards of value” since proposed.
[129] 1st ed., pp. 128-9.
[130] 1st ed., p. 129.
[131] See _ante_, p. 27, n.
[132] 2d ed., p. 96.
[133] 2d ed., p. 57.
[134] Prepared as the article on “Political Economy” in the _Encyclopædia
Metropolitana_, 1836, but appearing as a separate work in numerous
reprints from this. Page references are good for any edition. The table
of contents looks systematic at first blush, but study of the text,
especially the part on the theory of distribution, soon dispels any
illusions concerning this point.
[135] Senior was, in my judgment, indebted fully as much to Malthus and
Say as to Ricardo. To all appearances much of interest in the writings of
Cairnes must have been suggested by the work of Senior.
[136] _Political Economy_, p. 6. These are the three constituents of
_wealth_, but things composing wealth are defined to be the same as
things of value. Curiously the qualification of transferableness is
held not to exclude personal talents from the category of wealth, for
these are considered to be things “imperfectly transferable.” A lawyer
transfers his talents to me when I hire him to plead my case. See pp.
9-10.
[137] P. 24. A similar passage, not so well expressed, is found in
Malthus, _Principles_, 1st ed., p. 74.
[138] P. 101.
[139] See _ante_, chap. vi, § 2.
[140] P. 58. Scrope, an English writer, 1833, said: “Profit is to be
viewed in the light of a compensation for abstaining for a time from
consumption in personal gratification.” Mentioned by Böhm-Bawerk,
_Capital and Interest_, p. 271. “But,” continues Böhm-Bawerk, “this same
idea which his predecessors merely touched on, Senior has made the center
of a well-constructed theory of interest.”
[141] P. 100.
[142] P. 97.
[143] P. 97. _Cf._ p. 105.
[144] But yet of all English writers previous to Jevons, he develops the
explanation most compatible with the utility theory of value.
[145] P. 101.
[146] P. 101.
[147] Pp. 91-2. P. 128, the question of nomenclature is discussed all
over again. Rent is “the revenue spontaneously offered by nature or
accident.”
[148] Pp. 91, 128-135. For general argument to justify inclusion of
personal qualities within _wealth_, see pp. 9-10.
[149] _Ibid._, pp. 129-30. Some of the extraordinary earning power or
ability of the laborer may be the result of education and training
for which sacrifices have been made. Such abilities are “_immaterial
capital_,” and the part of the whole wages due to them is really profit
on this capital (p. 130). Then wages of skilled or professional labor may
contain rent for inborn talents, _profit_ for abilities acquired through
the sacrifice called abstinence, and _wages_ for the real disutility of
labor incurred. “Forty pounds a year would probably pay all the labour
that [a lawyer] undergoes in order to make, we will say, £4,000 a year.
Of the remaining £3,960 probably £3,000 may be considered rent” (p. 134).
“The intellectual and moral capital of Great Britain far exceeds all her
material capital, not only in importance, but even in productiveness.”
_Ibid._
[150] P. 114.
[151] P. 112. The payment of rent in every case is but the wedging in of
a slice between value and the remuneration for cost of production.
[152] Pp. 100-101.
[153] P. 129.
[154] In an unobtrusive position further on in the book he adopts the
labor-command standard, but without discussion. “The best standard of
value for philosophical purposes appears to be the command of labour.”
This appears to be an uncritical and passing acquiescence in the views of
Malthus.
[155] _Principles_, 6th ed., vol. i, pp. 546-7. The language is
uncritical. Absolute limitation of supply is not a case of difficulty of
attainment, but a case of value apart from questions of difficulty of
attainment. Senior’s analysis was superior.
[156] Vol. i, p. 552.
[157] Vol. i, p. 561.
[158] Vol. i, p. 589.
[159] Vol. i, p. 568.
[160] The socialists’ attacks upon abstinence as a cost are really
directed against the _ethical_ coördination of it with labor.
[161] Vol. i, p. 574.
[162] Vol. i, pp. 569-70.
[163] Vol. i, p. 507.
[164] Mill emphasizes the fact that he is considering the causes of
variations in values. It remains true that both he and Ricardo should
have considered the causes of statical aberration of values from the
standard of labor cost.
[165] It may be useful to recall the explanation Ricardo made of his
position with regard to this point. “I have not said, because one
commodity has so much labour bestowed upon it as will cost £1000 and
another so much as will cost £2000 that therefore one would be of
the value of £1000 and the other of the value of £2000, but I have
said that their value will be to each other as two to one.... It is
of no importance to the truth of this doctrine, whether one of these
commodities sells for £1100 and the other for £2200, or one for £1500 and
the other for £3000.” (Gonner ed. Ricardo’s _Principles_, p. 39.) The
interest qualification signifies that the commodities may exchange at
other ratios than two to one.
[166] Vol. i, p. 566.
[167] Vol. i, pp. 566-7.
[168] Vol. i, p. 590.
[169] See Ricardo, _Principles_, p. 83. “Let us suppose that all
commodities are at their natural price, and consequently that the profits
of capital in all employments are exactly at the same rate, or differ
only so much as, in the estimation of the parties, is equivalent to any
real or fancied advantage which they possess or forego.”
[170] _Some Leading Principles of Political Economy Newly Expounded._
London, 1874.
[171] A third point might be taken up were it not for the fact that
Cairnes’s treatment of it is hardly worthy of consideration. This is
his rebuttal against the then newly appeared utility theory of Jevons.
Cairnes seems to have had virtually no understanding of the point Jevons
was trying to make.
[172] P. 9.
[173] See Marshall’s _Principles_, 3rd ed., p. 172, note, and also the
reference there cited, _Fortnightly Review_, April, 1876.
[174] P. 41. Cairnes claims, with great justice, that his term “normal
value” or “normal price” is superior to the old terms “natural” and
“necessary” price (p. 46).
[175] P. 82.
[176] P. 88. It is a waste of terms to call the duration and quantity of
labor the same thing, and consequently to consider the quantity of labor
cost and quantity of labor different things. Smith and Ricardo merely
touched on this matter, but the former says in a passage incorporated
also by the latter in his text: “There may be more labour in an hour’s
hard work than in two hours early business;” or quantity of labor is the
product of duration multiplied by disutility per unit of time; and this
is the preferable usage.
[177] P. 97. Abstinence is described as a “negative” sacrifice except for
the “small positive element of risk.”
[178] P. 50.
[179] P. 58.
[180] P. 95.
[181] Pp. 62-3.
[182] Pp. 65-70.
[183] P. 74.
[184] Pp. 72-3. Cairnes makes the same classification of the industrial
population into groups that Mill made. For criticism and a new
classification see Giddings, “The Persistence of Competition,” _Political
Science Quarterly_, vol. ii, p. 69 _et seq._; and J. B. Clark, “The
Limits of Competition,” _ibid._, p. 45 _et seq._
[185] P. 76. “Very frequently” ought really to be “nearly always.”
[186] P. 76.
[187] P. 80.
[188] P. 80.
[189] P. 98.
[190] Pp. 105-6. The italics are mine except for the word “average.”
[191] That is to say, for Senior and Cairnes, interest is no longer an
unexplained difficulty in the way of the cost philosophy of value, but
the conception of cost has been widened so as to include and explain the
case of interest. Cairnes has no longer a labor-cost philosophy, but a
subjective cost philosophy of value.
[192] P. 84.
[193] P. 78.
[194] _Principles_, chapter i, section iii. _Cf._ chap. v, sec. iv of the
present essay.
[195] The validity of a theory is not proved if _some_ tendency can
be shown to be in keeping with it. The tendency must be _effective_.
When the forces that oppose a tendency are relatively great, or the
mere obstacles in its way relatively immovable, the tendency cannot be
assigned the rank of a force or be laid down as an economic law, not
even a static law. True, the difference between an effective and an
inoperative tendency is only one of degree. This makes it difficult to
decide upon the claims of a proposed law in the particular case, but
this is a difficulty which cannot be avoided. The weaker the tendencies
taken cognizance of in a given static theory, the more idealistic or
refined is that theory. And, at least after a certain point is reached,
the more refined the theory becomes, in this sense, the less its degree
of validity. To illustrate this, we need but to refer to the present
question of skilled labor. Throughout the classical economics runs the
idea that the superior remuneration of skill really rewards the extra
disutility necessarily undergone in acquiring the skill. Now, if the
movement of men among occupations were calculated solely with reference
to this disutility, and were free enough, the actual wage of skilled
labor could be said to be adjusted to the disutility of the occupation,
including the past disutility of acquiring the skill. The extra part of
the wage would be a sort of interest on disutility already expended,
as suggested expressly by Adam Smith and by Senior. But we need not
pursue this idea into its minor complications. The point desired to be
made is that the tendency for actual wages of skilled labor to adjust
themselves to the disutility of the skilled labor is so submerged
(permit a questionable metaphor) beneath other forces, that it makes a
theory over-refined to recognize it as a law. I believe it possible to
justify nearly all the older theories of value by making a static state
to order for each writer, that is, by making one over-refined enough.
Put in other words, so far as the older economists were not guilty of
self-inconsistencies, their theories could be justified by granting them
sufficient _assumptions_. The latter is what we refuse to do. An example
of a legitimate static law is that wages tend to equal the specific
value-product of labor, as contrasted with the theory that wages tend to
adjust themselves to the disutility _of the task_ performed.
[196] “On Some Neglected British Economists,” _Economic Journal_, v.
xiii, pp. 357-363.
[197] _Ibid._, p. 527.
[198] See _ante_, pp. 44-5.
[199] Adam Smith nevertheless retains the “labor-command” measure of
value as applicable to the conditions of advanced society, for criticism
of which see _ante_, pp. 30 and 39.
[200] Since the chapter on Ricardo herein contained was written, it has
been suggested to the writer that he is mistaken in attributing any
“philosophical” account whatsoever to Ricardo, that in fact Ricardo’s
whole treatment is purely empirical. The writer cannot concur in this
judgment. It is admitted that Ricardo virtually takes this philosophy
for granted, instead of endeavoring to establish it, but the almost
appalling confusion into which his exposition of value falls when the
difficulty of interest is reached (see _ante_, chap. v, §§ 5-9) can be
explained, so it is believed, only according to Wieser’s interpretation
of Ricardo’s work. This is, namely, that he is endeavoring to force the
empirical principles, or the “facts” of entrepreneur’s cost, to fit the
labor philosophy. A thinker who confined himself to a purely empirical
analysis would never reach the labor-cost thesis with which Ricardo opens
at once his chapter on value and his _Principles of Political Economy_.
The thesis is _a priori_, that is, as contrasted with the theory of
entrepreneur’s cost. If Ricardo were working with merely an empirical
account of value, and were not embarrassed by an uncertain philosophy of
value, how would he ever come to speak of the cost of production, which
determines value, as consisting of “labor and profits!” He should say
“wages and profits.” Again, how would he be led to commence his chapter
on “Natural and Market Price,” by the assertion that the market price
of a commodity can deviate temporarily from its “natural price, or the
quantity of labor which it has cost!” No empirical theory would lead
to the statement that the normal price toward which competition forces
actual prices is a _quantity of labor_. This natural price is Adam
Smith’s “philosophical” natural price or “first price,” namely, labor.
[201] He stated it in the form of an admission that, besides changes in
labor cost, there can be a second cause of _variations_ of the exchange
ratios between commodities, namely a rise or fall of the general rate of
interest. He first stated the second cause to be a fall or rise of the
general rate of wages, but in his view this is equivalent to a rise or
fall of “profits,” _i. e._, interest. See _ante_, chap. v, §§ 7 and 8.
[202] Senior—the attacks of Marx upon him notwithstanding—was far from
assigning to these two elements equal ethical importance.
[203] Senior’s rent to skill is an entirely different form of surplus
from that due to the excess of utility produced above disutility incurred
in the “earlier” parts of the working day of all labor. So long as the
length of the working day is left to the worker himself, he will stop
when the terminal utility and disutility are equivalent. All previous
parts of the day produce a surplus of utility. This is the surplus which
occupies an important place in J. B. Clark’s theory of value. Compare
Marshall’s “producer’s” and “consumer’s rents.” Senior’s “rent to
scarce natural talents” is explicable only on the supposition that the
disutility endured and the return of utility enjoyed by a skilled laborer
can be compared with the same quantities for an unskilled laborer.
Senior means merely that skilled laborers obtain higher returns at lower
sacrifices as compared with unskilled. A certain part of the return
enjoyed by the skilled laborer is equivalent to that enjoyed by the
common worker; the part in excess of this is the rent. Senior considers
it analogous to the rent which goes to lands of superior fertility.
Further consideration will be given in a later section to the relation of
skill to the labor theory of value.
[204] January, 1894, p. 218.
[205] In the _Journal of Political Economy_, vol. ii, p. 561.
[206] _Theoretische Socialökonomik_, 1895, vol. i, p. 205.
[207] _Theoretische Socialökonomik_, 1895, vol. i, p. 233. Dietzel
supposes that Smith conceived of labor solely as “_Unlust_,” but in this
he is clearly mistaken. See _ante_, chapter iv.
[208] See _ante_, p. 86.
[209] For an excellent discussion of the term “esteem value” see Walsh,
_The Measurement of General Exchange Value_, pp. 1-6. The writer is
greatly indebted to Walsh’s discussion of the value concept. The two
kinds of value here distinguished are the same as those designated
objective exchange value and subjective value by the Austrian writers.
[210] As, for instance, by Pantaleoni, _Pure Economics_, p. 123.
[211] This definition by itself does not of course make clear the
ultimate source of this power. For proximate and practical purposes the
weight of a pound nugget of gold might well be defined as its power to
counterbalance in the scales a certain piece of metal, the standard troy
pound. This definition contains no hint of the common source of the
counterbalancing power of both weights. In the same way the above-given
definition of exchange value ignores a certain common source of all
exchange values.
[212] For a discussion of certain avoidable objections that have been
made to the concept of purchasing power, see Walsh, _op. cit._, pp. 7 and
8.
[213] It takes little discernment to see that this statement is
not equivalent to saying that the formulation of a theory of value
is a greater accomplishment than was the formulation of the law of
gravitation. The writer does not plead guilty to implying that.
[214] See _Grundsätze der Volkswirthschaftslehre_, Wien, 1871, p. 78.
“Der Werth ist die Bedeutung, welche concrete Güter oder Güterquantitäten
für uns dadurch erlangen, dass wir in der Befriedigung unserer
Bedürfnisse von der Verfügung über dieselben abhängig zu sein uns bewusst
sind.” Menger gives this as a definition of value simply, but it is of
course a definition of that particular kind of value which we have agreed
to call “esteem value.”
[215] Of course this power in the good exists only in relation to some
human being. It is perfectly true that the good would have no such power
if there were no man to use it, and that its power may change as the
condition of the man using it is changed, and that its power over one
man is different from its power over another. For these reasons, utility
has often been declared to be subjective, as if it resided in the mind
of the man. Whether it is subjective or objective depends precisely upon
what one means by these terms. Practically we may say that our habitual
thought correctly refers the utility to the good and conceives it as
an attribute belonging to the good in virtue of its common physical
properties. The utility of the good does not exist in the mind except
in the sense in which all things exist in the mind. We should at least
say that utility has objective reference. The satisfaction belongs to
the mind, the utility to the good. The utility is a sort of objective
counterpart or projection of the satisfaction.
[216] “Gossen’s law.”
[217] That is, it applies only where goods are held in stocks by
individual consumers. Thus the “esteem” value of a piano commonly has
nothing to do with “marginal” utility. Only if consumers were to own
pianos in stocks—to use several at once—would there be grounds for
speaking of the marginal utility of a piano. For further consideration of
this point see the next section.
[218] Professor v. Wieser explains that the reason why we attribute a
superior importance to a good that has marginal utility as compared with
a good that is superabundant, is because we have a “natural indifference”
toward goods in general, which can only be overcome when the good is
so scarce that its absence would decrease our satisfactions. _Natural
Value_, p. 29. This would seem to be explaining the thing by itself.
The ultimate origin of this “natural indifference” is what calls for
explanation.
[219] _Positive Theory of Capital_, book iv, especially chap. iv.
[220] As Professor Macvane exclaims, the Austrians seem to reason as if
the good fairies determined what the supply of commodities shall be. See
_The Quarterly Journal of Economics_, vol. v, p. 24. Concerning Professor
Macvane’s general attacks on the Austrian position, it is only fair to
say, however, that he appears in the main issues entirely to miss the
point of the utility theory. See also the same journal, vol. vii, p. 255,
and the _Annals of the American Academy of Political and Social Science_,
vol. iv, p. 348.
[221] This enquiry must constitute the first part of the theory of
exchange value, since it is quite beyond dispute that cost in any form
can influence exchange value only by influencing supply. Value will rest
at the level of cost only when the supply of the good is at just the
proper point. When the supply is at any other point, as in the case of
monopolies, value no longer rests at the level of costs. But value is
still determined by certain other influences. The description of these is
the first problem.
[222] If the good be of a kind held by consumers in stocks, it should go
without saying that instead of a buyer being entirely excluded by a rise
of price, only the marginal increments of his purchases may be excluded.
[223] Employing Professor Marshall’s terminology we would say that
the “social demand schedule” is a _resultant_ from combining all the
“individual demand schedules.”
[224] See his _Introduction to the Theory of Value_, p. 37.
[225] See his _Theoretische Socialökonomik_, 1895, p. 282.
[226] As pointed out in section 2 of this chapter.
[227] Or at any rate, if not by decreasing their marginal utility,
by decreasing their marginal price equivalent. See the section just
preceding.
[228] Explanation of the principles in accordance with which the various
classes of production goods share in the value of the product is but a
part of the theory of distribution viewed in a particular way.
[229] The use of some kinds of production goods cannot be increased
without increasing to the same extent the use of certain other kinds in
the same production, but it can be shown that this does not change the
general principle of the case.
[230] When a single-use production good is short-lived instead of
durable, so that it receives its value from its product in one payment,
instead of a series of payments in time, we do not call its value return
a “rent.” Its value is nevertheless “price-determined” in the same sense
as the rents just discussed and belongs to the same category as these
rents.
The term “price-determined rent” has, among professed followers of
Ricardo (such as Professor Marshall who holds to Ricardo’s theory in the
main), come to mean the income to a durable single-use production good.
In the most unfortunate terminology of the Ricardian school—which the
writer believes can be traced back to their ultimately false philosophy
of value—a “price-determined rent” is one which “does not enter into
price.” But the leading exponents of present-day Ricardian doctrine
are now agreed, it seems, that when a production good is capable of
more than one application—as land to wheat or fruit or pasture—its rent
_does enter_ into the price of its product. Therefore they mean by a
price-determined rent, not the rent of such a good, but the rent of a
single-use production good.
[231] A plausible argument could be made to show that we have Ricardo’s
authority for maintaining that price-determined rents must not be
considered a part of entrepreneur’s cost. For Ricardo said “rent cannot
enter in the least degree into price.” But there can be no question that
by this he meant that rent cannot enter into cost of production. As was
frequent with him, he did not say precisely what he meant. Malthus had
said that cost of production includes wages, “profits,” and rent, and
that profits and rent, not being paid for labor, prevented the regulation
of value by pure labor cost. Ricardo admitted that profits enter into
cost but minimized the difficulty thus granted in the labor theory. On
the contrary he denied that rent enters into cost. The first paragraph of
his chapter on rent shows it to be his purpose in that chapter to justify
this denial. Later he stated his contention as being that rent cannot
enter into “price,” instead of cost.
Now Ricardo frequently thought of cost as being composed of “labour
and profits”! In most places we can make his reasonings clear only by
substituting for this hybrid concept a plain concept of entrepreneur’s
cost. If Ricardo habitually meant entrepreneur’s cost by the words
“cost of production,” then his famous doctrine comes to signify that
price-determined rents are not properly a part of entrepreneur’s costs.
As far as the present writer can see, our decision in this regard is
purely a matter of arbitrary choice between two possible definitions of
entrepreneur’s cost. As far as Ricardo is concerned, he had no clear
and definite concept or concepts of cost. Into _potentiality cost_, a
price-determined rent assuredly does not enter.
[232] The value of the iron may fall earlier in time than the value of
its products, because entrepreneurs using it know beforehand that the
increased products of pig will have to be sold lower.
[233] _Principles of Economics_, 4th ed., 1898, p. 428.
[234] Professor Clark’s theory appeared first in the _New Englander_ for
1881. Gossen’s statement of the same fundamental idea was much earlier,
but the strange fate of his work is known to all. Professor Clark’s
theory of value was developed by him independently of Gossen and of
Menger and Jevons as well.
[235] See the _Distribution of Wealth_, chap. xxiv.
[236] So large an increment as an hour is taken merely as a matter of
convenience. There is a certain form of attack upon all marginal methods
of theorizing in economics which is always met by making the increments
infinitesimal. It is hardly necessary to guard against that attack here.
[237] The curious reader would find it of interest to compare Professor
Smart’s statement that the value of a good is almost always in the end
measured by a “foreign utility.” “The value of a horse may be measured
by the foreign utility of a summer vacation.” See _Introduction to the
Theory of Value_, pp. 37-8. Much dialectical exercise of interest could
be had by comparing fully the precise formulæ of “marginal” utility
developed by the Austrian economists and Prof. Clark’s formula. Clark’s
theory is at bottom in harmony with the Austrian, but goes further.
[238] See _op. cit._, p. 380.
[239] _Ibid._ p. 389.
[240] _Cf._ _ante_ p. 145.
[241] A brief comparison of the Austrian concept of “marginal utility”
with Clark’s concept of “effective utility” may be of interest. Many
kinds of goods are divisible into parts without changing their economic
nature. Grain is a good example. A piano is an example of the other kind
of good, the unit good. When a given good is divisible into increments,
the Austrians point out that the value of any or every increment depends
purely upon the satisfaction afforded by the last used or least useful
increment. Putting it in another way, they say the marginal utility of
the good is the actual utility of the last increment, and value depends
on marginal utility. The very essence of this principle is that the value
of a thing, as for instance first increment, does not depend on its own
exact utility. Professor Clark, developing his thought in his own way,
and using a different terminology, goes further than the Austrians, but
along the same line. The “effective” utility of a good is not its own
utility, but is that other least utility produced by the same amount of
labor. The Austrians state that the value of any bushel of wheat depends
on the utility of the “last” bushel, because if any bushel is removed the
result will be that the last bushel is really given up, or any bushel
is in effect the last. Clark points out that among goods which are all
freely reproducible, the value of the product of any unit of labor time
depends on the utility of the least useful product produced by a unit
of labor time, though this other least useful product be an entirely
different kind of good and not an increment of the same kind of good.
Many minute questions in this connection we may pass for lack of space.
[242] Without attempting a systematic classification of kinds of causes,
we all know that such is our notion of cause that we can conceive of many
causes which bear no assignable quantitative relation with their effects
(_i. e._, effects for which they are partly responsible). The pressure of
an electric button “caused” the Hell Gate explosion (after conditions—_i.
e._, other causes—were prepared) but the amount of pressure put upon this
button, or the size of this button, had nothing to do with the quantity
of the explosion or the amount of work done in the explosion. We are
permitted to speak of the act of pressing the button as a cause, but not
as a regulator (except with respect to the _time_ of the explosion, an
irrelevant consideration here), for a regulator is a cause the quantity
of which determines the quantity of the effect. It should be noted that
when the quantity of the cause is compared with the quantity of the
effect, to show that the former regulates the latter, the quantity of
the cause must be established independently of the quantity of this same
effect; otherwise the fallacy of reasoning in a circle is committed. This
digression does not lead us so far astray from the theory of value as
might be supposed. This precise fallacy has been committed time and again
in the reasonings that have been brought to the support of the labor
theory of value. For instance when the term “labor” is used to signify
disutility or cost (instead of productive power) by the expounders of
the “difficulty of attainment” philosophy of value, and it is asserted
that the labor cost of a good regulates its value, the objection is
soon encountered that skilled labor produces a greater value per day
than common. Thereupon it is frequently explained that skilled labor is
condensed, or counts as more labor per day than common. As a matter of
fact, we all know that in the vast majority of cases, skilled labor,
measured independently of the value produced by it, and measured as a
quantity of labor in the sense of disutility, is less labor per day than
common toil.
[243] Whenever, of course, the man acting for himself, places himself in
the relation with the good which permits its power to become effective.
Compare the discussion in section ii of this chapter. No apology is
offered for the present “discussion of mere words” as it might be termed
by the hostile. These discussions contribute to clearness of thought
upon questions of theory, and clearness of thought in theory is certain
from time to time to be of benefit to discussions of many proximate and
practical issues. For instance, we find recently a well known writer
explaining that “scientifically” the distribution of money among nations
is so governed that money reaches the level of equal “marginal utility”
in the different countries. See a paper entitled “The Distribution of
Money,” _Journal of Political Economy_, vol. ix, p. 49. This proposition
has no meaning, and is authorized by nothing in the Austrian theory,
though the writer quotes the Austrians freely. A little “word discussion”
by “practical” writers might enable them to see when they are covering up
the absence of an explanation by mere conjuring with formulæ whose real
meaning has not been ascertained.
[244] The term “disutility” is almost universally used as equivalent
to “discomfort,” that is, as being purely subjective. This makes it
available as an opposite of satisfaction (or of utility according to the
usage of those writers who use the latter as a subjective term) but the
same usage debars its employment as the opposite of utility in the sense
advocated in the present essay.
[245] The determination of Crusoe’s supply of a good at this point, which
fixes the subjective value of the good, bears a few obvious analogies to
the determination of competitive exchange values in the social market at
the point of “normal equilibrium of supply and demand,” as described by
Professor Marshall.
[246] Reasons will appear later, it is believed, to show that when we
reach the complex case of real social industry and exchange value the
control of cost over value will be much more impaired than that of
utility.
[247] It has already been shown why it is quite impossible to hold to the
opinion that cost is the essence of value. _Cf._ _ante_ pp. 34-5.
[248] A man may receive part of his income by gift or inheritance and
earn a part. The latter part becomes in this case a sort of marginal
portion. Though all of his dollars have not cost him disutility, some
of them have, and upon principles already discussed, any dollar has the
“effective” disutility cost of the most costly dollars. This is just as
true as the fact that the first hours of labor may sometimes be play and
yet their product always counts as having a disutility cost because of
the disutility of the final hour.
[249] The reader should bear in mind that the “theory of price,” in
which exchange value is explained according to the utility theory of
value, involves so comparison whatever of the satisfactions of different
persons. See _ante_, § 4.
[250] This kind of affirmation is, however, very common, and hence the
presumption is that it has a legitimate meaning.
[251] Suppose a machine is destroyed in the making of 100 units of
a certain product. Then the total labor cost of each of these units
contains ¹⁄₁₀₀ of the total labor cost of this machine. This is explained
by Ricardo and by recent followers of Ricardo, as for instance by
Professor Macvane in his text book. Another earlier machine was partly
used up in making this first one. Perhaps it contributed ¹⁄₁₀₀₀₀ of its
total labor cost to this first. Then each of our products contains in its
total labor cost ¹⁄₁₀₀ of ¹⁄₁₀₀₀₀ of the total labor cost of the machine
of the second generation back.
[252] Using capital here in the sense of means of production that are
themselves products of labor. We will go so far in our illustration as to
suppose that the land has never had labor expended upon it to drain it,
or in any other way to “fix an element of capital in it.”
[253] In this illustration the marginal cost is five times as high as the
“total cost” or total average cost of a bushel, but this ratio could have
no significance even if the data of our illustration were approximately
true with respect to the _direct_ labor cost of wheat on good land, for
we have eliminated from the real total labor cost all of what Ricardo
called the “indirect” labor cost, by eliminating capital.
[254] Ricardo frequently supposed his doses to consist of sums of money
expended by the farmer, or to consist of increments of money capital.
These doses of money, however, would be expended for capital goods and
labor power conjointly.
[255] Traced in the fifth chapter of the present essay.
[256] That is to say, when we affirm that in our theory we can
disentangle the specific product of labor, we mean that entrepreneurs in
practical effect do ascertain the marginal product of labor in making up
their labor forces.
[257] Sometimes “pure capital.”
[258] _Distribution of Wealth_, p. 119.
[259] See _ante_, chap. vii, §§ 4 and 5.
[260] Adopting the view of the income of capital taken by Professor Clark
and advocated with so much force by Professor F. A. Fetter.
[261] By this phrase we mean always _in relative proportion_, so that the
value of A is to that of B, as the cost of A is to that of B.
[262] Put in proximate and practical language, the amount of ore that can
be taken profitably from a mine depends jointly on the price of the ore
at the surface and the wages of labor.
[263] A rise of the exchange value of the specific product of labor
compensates for superior disutility by enabling the laborer to purchase
things of higher esteem value with his enhanced wages. In other words,
we have been explaining the familiar doctrine that wages tend to be
higher in employments of higher cost. If a laborer were free to choose
the precise length of his own working day, he would stop when the final
disutility of the labor and the utility of the commodities purchased by
the marginal increment of wages are equivalent.
[264] Or, as Walsh states, it may also be defined as the article’s
purchasing power over all goods including itself. This is not the same
concept, but is one equally entitled to the name “general purchasing
power.” _Op. cit._, p. 13.
[265] The meaning of this condition, it is hoped, will be apparent from
the discussion in section 6.
[266] See p. 151.
[267] See p. 151.
[268] This proposition is stated loosely as being that an increase of
supply lowers value by reducing marginal utility. In many cases, exchange
value is lowered by a decline of marginal utilities, but not always. See
p. 152-4.
[269] Compare p. 160.
[270] See p. 179.
[271] Even as economic quantities go. For concept of total pain cost see
p. 182.
[272] See p. 183.
INDEX OF AUTHORS MENTIONED.
Böhm-Bawerk, 62, 68, 95, 135, 147-9.
Cairnes, 9, 14, 29, 80n, 93n, 111, chap. x, 128, 134.
Clark, J. B., 37, 59, 108, 120n, 133n, 166-71, 178, 183-7.
Davenport, H. J., 136.
Dietzel, H., 45, 136, 137, 138n, 153.
Fetter, F. A., 187n.
Giddings, F. H., 120n.
Gossen, 37, 128, 166.
Green, D. S., 136.
Ingram, J. K., 18n.
Jevons, 37, 98, 114, 128.
Lauderdale, 89.
Lloyd, W. F., 128.
Longfield, Mountifort, 128.
Macvane, S. M., 149n, 183n.
Malthus, 9, 11, 12, 14, 15, 21, 26, 37, 41, 50, 52, 63, 74, chap.
vii, 93n, 94, 95, 102, 104-5, 112, 132, 139, 163n.
Marshall, 9, 14, 80n, 115, 133n, 150, 151n, 163n, 165n, 175n, 194.
Marx, 36, 42, 47, 61, 64-70, 129, 132n.
McCulloch, 9, 11, 31n, 42, chap. vi, 93, 95, 101.
Menger, 20, 89, 128, 143, 145, 171.
Mill, James, 9, 11, 31n, chap. vi, 87n, 93.
Mill, J. S., 9, 14, 15, 56, 80n, 89, chap. ix, 115, 116, 121, 133-4.
Pantaleoni, 141n.
Ricardo, 9, 10, 11, 14, 15, 21, 26, 27, 31, 35, 36, chap. v, 61, 62,
64, 68, 69, 73, 74, 79, 80, 82-8, 89, 90, 91, 93n, 94, 101,
102-3, 104-5, 106, 108, 109, 110, 111, 112-13, 124-6, 129,
130-2, 133, 137, 163n, 182, 185.
Roscher, 167.
Say, J. B., 14, 44, 46, 89, 93n, 94, 97, 101, 129.
Scrope, 95n.
Seligman, 128.
Senior, 9, 41, chap. viii, 104-5, 106, 112-13, 114, 116, 123, 133.
Smart, Wm., 152, 169n.
Smith, 9, 11, 13, 14, 15, chaps. ii-iv, 41, 43, 44, 45, 50, 56, 80,
81, 87, 88, 89, 90, 91, 98, 128, 129-30, 137, 138n, 139, 181.
Torrens, 9, 11, 32n, chap. vi, 89, 93, 95, 138.
Walras, 128.
Walsh, C. M., 140n, 141, 191n.
Wieser, 12, 43, 131n, 135, 146n, 156.
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Price, $4.00; bound, $4.50.
1. The Administration of Iowa. By Harold Martin Bowman, Ph. D. Price,
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2. Turgot and the Six Edicts. By Robert P. Shepherd, Ph. D. Price, $1.50.
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VOLUME XIX. 1903-1904.
Price, $3.00; bound, $3.50.
1. Josiah Tucker. Economist. By Walter Ernest Clark, Ph. D. Price, $1.50.
2. History and Criticism of the Labor Theory of Value in English
Political Economy. By Albert C. Whitaker, Ph. D. Price, $1.50.
3. The Hemp Industry in the United States. By Thomas B. Moore. (_In
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VOLUME XX. 1904. 514 pp.
Price, $3.00; bound, $3.50.
1. The Office of Justice of the Peace in England. By Charles Austin
Beard, Ph. D. Price, $1.50.
2. A History of Military Government in Newly Acquired Territory of the
United States. By David Y. Thomas, Ph. D. Price, $2.00.
VOLUME XXI. 1904.
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1. Treaties, their Making and Enforcement. By Samuel B. Crandall, Ph. D.
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_Vol. XXI, no. 1, may also be obtained bound._ Price, $2.00.
2. The Sociology of a New York City Block. By Thomas Jesse Jones, Ph. D.
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3. Pre-Malthusian Theories of Population. By Charles E. Stangeland, Ph.
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VOLUME XXII. 1904.
Price, $3.50; bound, $4.00.
1. The Historical Development of the Poor Law of Connecticut. By Edward
W. Capen, Ph. D.
The set of twenty-two volumes (except that Vol. II can be supplied only
in unbound nos. 2 and 3) is offered for $68. Volumes I, III and IV can
now be supplied only in connection with complete sets.
For further information apply to
Prof. EDWIN R. A. SELIGMAN, Columbia University
or to THE MACMILLAN COMPANY, New York,
London: P. S. KING & SON, Orchard House, WestminsterProject Gutenberg
History and criticism of the labor theory of value in English political economy
Whitaker, Albert C. (Albert Conser)
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