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]