on the number of exceptions to a principle, but quite disagreed as to
what remains of the principle. The labor cost of a commodity in a modern
market can influence its exchange value only by means of influencing its
entrepreneur’s cost. Thus any cause which weakens the connection between
the value of a commodity and its entrepreneur’s cost of production,
thereby also weakens its connection with labor cost. Therefore, the
first three points made by Malthus to show that entrepreneur’s costs
do not exercise perfect control over actual market-values are relevant
to the dispute about the labor-cost regulator. But, as the reader has
observed, the three exceptions to the law of money costs are only such
as have always been made to any proposition of static theory. A static
law of value is supposed only to govern _normal value_ under competitive
conditions. It is perfectly legitimate to put emphasis upon the causes
of the variation of actual values from static standards, but on the
principle, now so well understood, that actual conditions can be fully
understood only by the preliminary establishment of static laws, the
first three points of criticism made by Malthus, and admitted by Ricardo,
must be judged to leave the law of costs a perfectly valid principle.
If the only causes of variation of actual exchange values from the
standard of labor costs were those causes which operate to weaken the
law of entrepreneur’s costs, the Ricardian labor theory would remain a
principle of the utmost importance. The attacks which the labor-cost
theory cannot withstand are those directed against its validity _as a
static principle_. It is an undisputed static principle that exchange
values are in proportion to entrepreneur’s costs. Therefore, every time
a cause is shown which throws entrepreneur’s costs out of proportion
to labor cost, a heart-thrust is given the theory of the labor-cost
regulator. To the list of causes of this kind granted by Ricardo, Malthus
added one, an important one; or rather, he persisted in retaining what
Adam Smith considered to be such a cause—rent of land. Malthus then
discovered no new point; but he marshaled many points in an able manner.
Considering only the weighty part of his case, his argument is that
entrepreneur’s costs consist of wages, interest, and rent; that wages
alone stand for labor cost;[125] that therefore the existence of the
other two elements makes the total entrepreneur’s cost decidedly out of
proportion to labor cost. This signifies not only that entrepreneur’s
costs are composed of outlays in excess of payments for labor, but
that when one entrepreneur’s cost is compared with that of another
the two will (barring an accidental coincidence) not be to each other
as the respective labor costs entering into them (through wages). Two
commodities may have equal exchange values and equal entrepreneur’s
costs, but one may cost twice as much labor as the other, because the
latter may cost more rent or interest than the former. Ricardo denied the
influence of rent, and _assumed_ that interest preserves fairly constant
proportions with the wage element. In our judgment, Ricardo was much the
profounder of these two economists, but Malthus made the fortunate gain
of presenting the empirical principles of value at the outset of his
work, and in this way was led to adjust the labor theory to them, instead
of doing the reverse, as Ricardo did.
_Note on the Question of the Invariable Measure of Value in all Times and
Places._
7. Adam Smith made several general assertions concerning the power of a
labor standard to measure value _in all times and places_. If mankind
should live under conditions free from the rent of land and interest
on capital, according to Smith the quantity of labor which commodities
cost might properly be regarded as commensurate with the quantity
which they command in exchange. Under actual conditions the command
standard alone will apply. Ricardo became a steadfast critic of the
idea that the labor-command standard could be thus used. He believed it
to be impossible to find an invariable measure based on labor cost of
production (as distinguished from labor commanded in exchange); but he
made statements which implied that if a commodity existed which cost
the same quantity of labor throughout time, it would be an invariable
measure of “real value.” Then again he faltered in this view because
“profits” enter into the cost of production of different articles in
different degrees. The writer has found himself unable to reach a
complete understanding of Ricardo’s section on this subject, Section
vi of Chapter 1. Malthus always defended the labor-command standard
of Smith, though in a vacillating way. In the end he adopted it in an
unqualified form. (In the 2d and last edition of his _Principles_, the
text being written just before his death.) With his last published
discussion, appearing in 1836, the question practically disappeared from
English political economy. Referring to this question, John Stuart Mill
said: “it is necessary to touch upon the subject, if only to show how
little there is to be said about it,” and concludes that the measure
sought is impossible. J. B. Say wrote that “an invariable measure of
value is a pure Chimera.”[126] Torrens expressed his judgment in words
quoted from Lord Lauderdale: “Lord Lauderdale has justly observed that
the search of economists after a measure of exchangeable value, is just
as irrational and as hopeless as was that of the alchemists in quest of
the philosopher’s stone.”[127] Well might the discussion be condemned by
contemporaries and neglected by subsequent economists, for, especially in
the lengthy writings of Malthus, the question was involved in distracting
confusion, while the comparatively brief passage Smith devoted to the
subject contains fatal contradictions.
It is doubtful if we can escape this question in theory. The required
standard may come as a more modest proposal than that of Adam Smith,
but some means of comparing value, as significance (as Menger’s
“_Bedeutung_”) in different times will always be desirable, to say the
least. In the recent controversy over the question whether gold is a
good standard of deferred payments, practical men decided for gold
on other (and sufficient) grounds than any alleged invariability in
value, but it was inevitable that the question should suggest itself:
What does constitute the same _value_ in different times (_i. e._ under
changed conditions of wealth)? It is the legitimate function of economic
theory to wrestle with such questions, whether to conclude that an
answer is impossible (for that would be a conclusion, hard to prove
and of importance when proved) or that such and such a standard may be
established.
The present essay will not attempt the herculean dialectical labor of
setting in order and criticising all that Smith, Malthus, and Ricardo
wrote on this subject. The labor doctrine as a statical theory is a
problem of sufficient proportions in itself to permit specializing upon
it. A brief discussion however is added concerning what Malthus wrote
upon the subject of the labor-command measure. In the first edition of
his _Principles_, Malthus held that there is no question of possessing
a perfect measure of value at different times, but there is a question
of choice between various imperfect measures. He was apparently much
impressed by the charge that the value of labor changes when the quantity
of commodity (_i. e._ measured in physical units) which it commands, is
altered. Accordingly he proposes to take labor and “corn” together, or a
“mean between them” as a standard.[128] He proceeds upon the supposition
that “when corn compared with labour is dear, labour compared with corn
must necessarily be cheap. At the period when a given quantity of corn
will command the greatest quantity of the necessaries, conveniences, and
amusements of life, a given quantity of labour will always command the
smallest quantity of such objects, (and _vice versâ_); ... If, then, we
take a mean between the two, we shall evidently have a measure corrected
by the contemporary variations of each in opposite directions.”[129]
In this double standard a unit of labor is to be a _day_ of “common”
labor. For the use of the standard some unit of corn is necessary.
A _peck_ is selected. The reason given for this choice is that this
amount may be considered “in respect to quantity as equivalent to a
day’s labour.” Accordingly, “any commodity, which at different periods
will purchase the same number of days’ labour and of pecks of wheat, or
parts of them, each taken in equal proportions, may be considered, upon
this principle, as commanding pretty nearly the same quantity of the
necessaries, conveniences, and amusements of life; and, consequently,
as preserving pretty nearly its real value in exchange at different
periods.”[130] In his correspondence with Malthus, Ricardo made the
former very uncomfortable in the position taken with respect to the
combined labor-corn measure of value. In the second edition of the
_Principles_ of Malthus this hybrid standard was abandoned. In principle
it was a shallow makeshift. It is needless to say that if the arguments
for regarding the amount of commodities purchaseable by a day’s wages,
as the unit of wealth, are sufficient, grain should be measured in its
“real value” by reference to this standard in the same way as any other
important commodity. As was stated in Chapter ii, the corn measure of
value was suggested by Smith to serve as a convenient index to the labor
measure. Beyond a doubt, Smith spoke of the corn measure in a way to
mislead both Ricardo and Malthus; but nothing could be plainer than the
words quoted from him to show that corn is used on principle only because
it is supposed to remain from age to age in a steady exchange ratio with
day labor.[131]
In Malthus’s second edition, the view is taken simply that “standard”
labor commanded in exchange is the measure of value in all times and
places. There is great difficulty in telling precisely what value, or
what kind of value, it is that is measured. It is called “real value
in exchange” and “intrinsic value in exchange.” The latter is in one
place defined to be “not the general power of purchasing possessed by a
particular commodity, but its power of purchasing _arising from intrinsic
causes_, which includes all the causes of whatever kind they may be,
which have contributed to the limitation of its supply compared with the
demand.”[132] The extrinsic causes of a commodity’s exchange value are
the causes of the value of the other commodity in whose quantity the
exchange value of the first is expressed.[133] In various other places,
“intrinsic value in exchange” is defined as indicating (1) the degree
of necessity or convenience to life (1st ed.); (2) the difficulty of
obtainment (in some sense supposed to be more inclusive than Ricardo’s
labor cost); (3) the degree of the limitation of the supply as compared
with the demand. Thinking with such terminology would be like painting
portraits with a white-wash brush. If a day of labor in America commanded
twice the physical quantity of a given complex of commodities that a day
of English labor commanded, Malthus was forced to admit that the simple
exchange value of the goods commanded by a unit of American labor was
twice that commanded by a unit of British labor. But at the same time
his doctrine of the labor measure of value required him to affirm that
the “real exchange value” of the goods commanded by a day of labor in
the two countries was the same. In this way he was led to contend that
two complexes of goods having different exchange values, had the same
“real exchange values.” In view of the fact that “real exchange value”
is defined virtually as “exchange value as arising from its causes,”
the contention is mystifying. One is prone to acquiesce in J. S. Mill’s
judgment that the argument of Malthus is a “vain subtlety.”
CHAPTER VIII
SENIOR
1. Senior’s little _Political Economy_[134] earned for him but a
secondary rank in the literary history of the science. This is because
the work, taken as a whole, is extremely unsystematic. It is also a
little erratic. Senior was, however, a man of far greater merit than
McCulloch, Torrens, or James Mill, and advanced many significant original
doctrines, or rather parts of doctrines. The most noteworthy of these
bear closely upon the theory of value; and if we put together what he
said, in our own way, we shall obtain an important line of commentary
upon the Ricardian labor-cost theory. The results tend more to destroy
than to support that theory.[135]
According to Senior, the conditions essential to value, which he
defines as exchange value, are (1) utility, (2) limitation in supply,
(3) transferableness.[136] We have seen how Malthus laid emphasis on
the fact that cost can influence value only through affecting supply,
and here we see the same thought put even more emphatically. It is
_limitation of supply_ alone that in the first instance gives value to
things of a useful nature. The following words, carrying out the lines of
thought suggested by J. B. Say and Malthus, are remarkable:
“It is true that wherever there is utility, the addition of
labor as necessary to production constitutes value, because,
the supply of labor being limited, it follows that the object
to the supply of which it is necessary, is by that very
necessity limited in supply. But any other cause limiting
supply is just as efficient a cause of value in an article
as the necessity of labor to its production. And in fact,
if all the commodities used by man were supplied by nature
without any intervention whatever of human labor, but were
supplied in precisely the same quantities as they now are,
there is no reason to suppose either that they would cease to
be valuable, or would exchange in any other than their present
proportions.”[137]
Senior adopts this last heroic hypothesis only in passing, by way of
exhibiting, in a striking way, what he considers to be the true relation
of labor cost to value. In criticism of Ricardo, he says:
“As limitation of supply is essential to the value of labor
itself, to assume labor and exclude limitation of supply, as
the condition on which value depends is not only to substitute
a partial for a general cause, but pointedly to exclude the
very cause which gives force to the cause assigned.”
2. Although Senior is careful to give limitation of supply as the factor
which, combined with usefulness, occasions value, he still holds that
cost of production may govern value under certain ideal conditions.
These conditions are described as those of “perfect competition,” but
he means a great deal more by this than these words signify to-day.
Senior’s conception of cost, however, is different from Ricardo’s. “By
_cost of production_ we mean the sum of labour and abstinence necessary
to production.”[138] Labor is defined, with especial reference to
cutting off the extension of the term attempted by McCulloch,[139] to be
“voluntary exertion of bodily or mental faculties for the purposes of
production” (p. 57). The new word _abstinence_ is defined as follows:
“A term by which we express the conduct of a person who either
abstains from the unproductive use of what he can command,
or designedly prefers the production of remote to that of
immediate results.”[140]
For the variety of conceptions of cost, expressed and implied in the
writings of his predecessors, Senior substitutes a consistent definition
of cost in terms of subjective sacrifice. With this improved concept as
an aid, he is enabled to resolve many of the difficulties which had beset
earlier debates upon the meaning of cost. The objection of Mr. Torrens to
the inclusion by Mr. Malthus of “profits” in cost is good, says Senior,
as against Mr. Malthus’s word _profits_.
“Want of the term abstinence, or of some equivalent expression
has led Mr. Malthus into inaccuracy of language.... When he
termed profit a part of the cost of production, he appears to
us to have meant not profit, but that conduct which is repaid
by profit: an inaccuracy precisely similar to that committed by
those who term wages a part of the cost of production; meaning
not wages, which are the result, but the labour for which wages
are the remuneration.”[141]
The clearness of thought here is gratifying in comparison with earlier
discussions, but, as we have had occasion to urge before, the idea that
it is erroneous to consider wages and profits as cost, confines the term
to the meaning of subjective cost whereas there can well be other forms
of cost. It may cost coal and machinery to produce an article, just as it
may cost labor and abstinence.
3. The true cost of production of commodities, affirms Senior, would
regulate their values if the only obstacles to their supply were the
labor and abstinence required for their production. There are two
different arguments given to substantiate this proposition. The first
partially corresponds to the “philosophical” account of value, being
stated in highly generalized terms without regard to the division of
society into classes of capitalists and laborers.
“Where the only natural agents employed are those which are
universally accessible, and therefore are practically unlimited
in supply, the utility of the produce, or in other words, its
power of producing gratification, or preventing pain, must be
in proportion to the sacrifices made to produce it, unless the
producer has misapplied his exertions: _Since_ no man would
willingly employ a given amount of labor or abstinence in
producing one commodity, if he could obtain more gratification
by devoting them to the production of another.”[142]
This passage, whether consciously or unconsciously, is a proposition
about a primitive or a Robinson Crusoe economy. It affirms that the
utility of products will be _in proportion to_ their total disutility
costs of production, but it does not affirm that production will be
carried on until the utility per unit of the increasing number of
products will be reduced until it is _equal to_ the disutility cost of a
unit. Except for the failure to make this latter observation, Senior’s
formula looks like an anticipation of later theories of value. This
appearance is carried out by the use of the word “utility” for value.
The word as here used was probably taken directly from Say; it cannot
be Adam Smith’s “_value in use_.” For if Crusoe produced at equal cost,
measured in disutility, a small article of luxury and a great quantity
of necessaries, and estimated the two at the same value—and this
would be normal—the Smithian values in use distinctly would not be in
proportion to sacrifice costs. The great quantity of necessaries would
have a great “_value in use_,” as contrasted with the small article of
luxury, for which Crusoe nevertheless was willing to expend quite as
much labor. “Marginal” or “final” utility would fit the requirements of
this formula, but there is nowhere in the book the slightest evidence
that Senior utilizes the marginal method. In fact, on the same page
with this proposition is a paragraph which shows that he considers the
value of things not capable of increase in supply—the “rare productions
of nature and art”—to be subject to no general rule, because dependent
merely on the wealth and taste of the community.[143] That is to say,
unless there is some ascertainable rule governing the conditions of the
supply of goods, there is no rule of their value. But the utility theory
is a whole explanation of value lying precisely in this region of no
rules.[144]
4. We come shortly to the explanation that nearly corresponds with Adam
Smith’s “empirical account.” Here the scene is the social economy. Cost
of production—always the sum of labor and abstinence—must be divided into
(a) cost on the part of the producer or seller and (b) on the part of the
consumer or purchaser. The latter is the amount of labor and abstinence
which would have to be undergone by the consumers if they themselves,
or some of them in behalf of themselves and the others, were to resort
to producing the good in question instead of buying it. The former cost
sets the minimum limit to price, or exchange value. The latter sets
the maximum. Under circumstances of free competition, when no producer
possesses any advantage over another, these two limits coincide, and the
price of commodities therefore represents the aggregate amount of labor
and abstinence necessary to continue their production.[145] This division
of cost into two parts, each forming a limit, is Senior’s peculiar and
inferior way of describing the action of competition among producers. He
concludes nearly in the ordinary way:
“If the price should rise beyond the cost of their [the
commodities’] production, the producers must receive more
than an average remuneration for their sacrifices. As soon
as this has been discovered capital and industry flow
towards the employment which, by this supposition, offers
extraordinary advantages. Those who formerly were purchasers,
or persons on their behalf, turn producers themselves, until
the increased supply has equalized the price with the cost of
production.”[146]
The reverse movement, of course, prevents an abnormal fall of prices.
This process of bringing exchange values into proportion to subjective
costs of production, reduces itself simply to the adjustment of values to
such a level that the wages and profits into which they are divided in
each industry furnish the regular or average (as we should say, “static”)
remuneration to the labor and abstinence required for production.
5. We see, then, that where labor and abstinence are the only “obstacles”
to supply, or where profits and wages are the only shares which “enter
into” price, values will be in proportion to cost of production, which
is not labor, but a “sum of labor and abstinence.” The next question is,
in what light does Senior regard _rent_. Rent, in his view, overturns
the whole correlation of value with subjective cost of production. And
here we are introduced to Senior’s remarkable extension of the concepts
of _rent_ and of _natural agents_. In the first place, rent is defined
to be the return to natural agents which are not universally accessible
(p. 90). But in the second place, rent is defined to be the surplus of
value produced above the amount required to remunerate the sacrifices of
production.
“If the established division is adhered to, and all that
is produced is to be divided into rent, profit, and
wages,—and certainly that appears to be the most convenient
classification,—and if wages and profit are to be considered
as the rewards of peculiar sacrifices, ... it is clear that
under the term ‘rent’ must be included all that is obtained
without any sacrifice; or, which is the same thing, beyond
the remuneration for that sacrifice; all that nature or
fortune bestows either without any exertion on the part of the
recipient, or in addition to the average remuneration for the
exercise of industry or the employment of capital.”[147]
Accordingly, rent includes not only the return to land, in the widest
economic sense of this term, but also the return to secret processes of
production, and to talents or extraordinary personal abilities.[148]
This necessitates the very curious use of the words “natural agents” to
include exclusive knowledge of, or right to, an advanced process, and
talents or unusual faculties:
“The mere knowledge of the operations of nature, as long as
the use of that knowledge can be confined either by secrecy or
law, creates a revenue to its possessor analogous to the rent
of land ... so precisely resembling the rent of land, that it
often receives the same name,” (and it must be called rent).
The salary, wages, or remuneration of the laborer may really be composed
of wages, rent, and profits:
“Is then the extraordinary remuneration of the labourers,
which is assisted by extraordinary talents, to be termed Rent
or Wages? It originates in the bounty of nature; so far it
seems to be rent. It is to be obtained only on the condition
of undergoing labour; so far it seems to be wages. It might be
termed ... rent which can be received only by a labourer, or
wages which can be received only by the proprietor of a natural
agent. But as it is clearly a surplus, the labour having been
previously paid for by average wages, and that surplus the
spontaneous gift of nature, we have thought it most convenient
to term it rent.”[149]
6. Does this rent, the surplus of value above reward for true cost
of production, “enter into price?” Senior does not use these words
or discuss this question directly, but, although he follows Ricardo
precisely in explaining rent as a differential return and defends the
doctrine vigorously against Say’s attacks, he assumes nevertheless,
contrary to Ricardo, that rent does “enter into price” in the sense
of constituting a source of permanent disproportionality of value to
subjective cost of production. As was intimated some pages back, the
state of free competition, as understood by Senior, is highly ideal,
postulating not only the ordinary condition of ideal mobility of capital
and labor, but also the use of none but free natural agents:
“When we speak, therefore, of a class of commodities as
produced under circumstances of equal competition, or as
the result of labour and abstinence unassisted by any other
appropriated agent, ... we do not mean to state that any such
commodities exist, but that, if they did exist, such would be
the laws by which their prices would be regulated.”[150]
He takes up the example of the watch, a commodity adduced by McCulloch
and others as having a value derived from labor cost alone, and shows
that at every turn _rent_, of the diverse kinds he has defined, is paid
out of its price.[151]
7. What is the net result of Senior’s argument for the labor-cost
theory of value? In the first place, Senior had little to say about the
difficulty of “fixed and circulating capital” which took so much of
Ricardo’s time. The reason is simple. Of course the values of products
are out of proportion to their labor costs, because of the different
lengths of time required to produce them. Two goods may cost the same
labor, but differ in value.
“The principle is that, though in both cases the labour
employed is the same, more abstinence is necessary in the one
case than in the other.”[152]
The great effort of Ricardo to force the facts into some conformity with
the only philosophy of value he possessed, by asking us to consider
“profits” an element about in proportion to wages cost, though they
are not, becomes unnecessary from Senior’s view-point. The motive to
undertake this forcing of facts is undermined. For “profits” stand on
the subjective basis of “abstinence,” just as wages stand on the base of
labor.
Furthermore, according to Senior, land rent “enters into” price. So
far, both “profits” of stock and rent of land exist to destroy the
proportionality of values to labor cost. This is the result to which
Malthus’s criticisms of Ricardo had led. But Senior’s criticism goes
beyond Malthus’s. Wages, as an element in entrepreneur’s cost, are not
even in proportion to the labor remunerated. That is to say, this is
what Senior says if we keep his thought while reforming his language. He
states that the actual income, which we always call _wages_, is really
composed in many cases of wages, profits, and rent. He says this because
he wishes to define wages as that remuneration which is in proportion
to sacrifice. In this departure in terminology we cannot follow him.
It is the whole wage of a laborer which is truly analogous to the rent
of a physical unit of land. Different laborers, of different earning
capacities, could be conceived of as ranged in a scale, so as to give a
differential aspect to their incomes. Senior’s _rent to skill_ is really
_an excess of wages_ over the amount required to be in proportion to
disutility. As he himself wrote in one place:
“There are few employments in which extraordinary powers of
body and mind do not receive an extraordinary remuneration.
It is the privilege of talent to work not only better but
_more easily_. It will generally be found, therefore, that the
commodity or service produced by a first-rate workman, while it
sells for more than an average price, has _cost less than an
average amount of labor_, [_i. e._, disutility.]”[153]
Said Ricardo: The principle of value is that labor cost regulates it; but
this principle is considerably modified by the fact that the values of
different commodities have to include different proportions of “profit.”
Piecing together for ourselves what Senior says, it is his position that
the value of commodities must include (if the commodities are to be
produced) rent, profits, and wages; rent and profits, being different
percentages in the whole entrepreneur’s cost of different goods, make
values out of proportion to labor cost; there is no necessity of
considering profits as an element in entrepreneur’s costs approximately
in proportion to wages; and lastly, wages are not in proportion to labor,
which is disutility.[154]
CHAPTER IX
JOHN STUART MILL
1. Though Mill regarded his exposition of the theory of value with great
satisfaction—a fact that has occasioned innumerable thrusts at him
since—his contributions to the whole subject were not great, considering
the work of Ricardo, the criticisms of it by Malthus, and the abundance
of suggestions in the writings of Senior. His terminological faults
are gross, and in many places his thought is very loose. His entire
discussion of value, above all, lacks precision. By value is to be
understood exchange value, general power of purchasing, and Mill insists
strongly on the necessity of keeping in mind that a general rise or
fall of value so defined is “unthinkable.” Value is purely a relative
term. The conditions essential to value are utility and difficulty
of attainment. Difficulty of attainment may “consist in an absolute
limitation of supply” or in “the labour and expense requisite to produce
the commodity.”[155] When, in the latter event, labor is applied under
conditions of diminishing returns, a third case of value is distinguished
for separate treatment. Following Malthus in his important innovation of
giving the “empirical account” precedence, Mill begins with the assertion
that the law of value of the first class of things—namely, those under
an absolute limitation of supply—is merely the law of supply and demand.
“There is another law for that much larger class of things which admit of
indefinite multiplication.”[156] This is a law of entrepreneur’s costs
of production. While demand and supply rule alone in a certain field,
and rule over the oscillations of value in all fields, in the case of
reproducible goods,
“they themselves [_i. e._ demand and supply] obey a
superior force, which makes value gravitate towards Cost of
Production.... Demand and Supply always rush to an equilibrium,
but the condition of stable equilibrium is when things exchange
for each other according to their cost of production.”[157]
Cost is called now by Ricardo’s words “natural value;” now by Malthus’s,
“necessary price.” Cost of production is defined as follows, in the
chapter which summarizes the theory of value:
“Cost of production consists of several elements, some of which
are constant and universal, others occasional. The universal
elements of cost of production are the wages of the labour and
the profits of the capital. The occasional elements are, taxes
and any extra cost occasioned by a scarcity value of some of
the requisites.”
With respect to rent, Mill follows Ricardo for the general rule, instead
of Malthus and Senior:
“Rent is not an element in the cost of production of the
commodity which yields it; except in the case (rather
conceivable than actually existing) in which it results from,
and represents, a scarcity value. But when land capable of
yielding rent in agriculture is applied to some other purpose,
the rent which it would have yielded is an element in the
cost of production of the commodity which it is employed to
produce.”[158]
If Mill had followed the lead given in the last sentence to its logical
end, the result ought to have been the inclusion of ground-rent as an
element in entrepreneur’s costs. But, in spite of these concessions,
he thought of rent habitually as failing to enter into price, and thus
failing to be a cause of disproportionality between labor-cost and value.
2. The profit of capital is stated explicitly to be the remuneration of
abstinence, but nothing is made to depend on this.[159] Abstinence is not
elevated into a position logically coördinate with labor, nor are the two
conceived of together as constituting subjective costs, as distinguished
from entrepreneur’s costs, consisting in profits and wages.[160] While
the language of Mill in diverse places shows that he was well enough
aware of the difference between the two main forms of cost, so little was
this essential distinction ever ready in his mind that he is able to say,
without realizing the offence, just as Ricardo does: “Besides the natural
and necessary elements in cost of production—labour and profits....”[161]
When the time comes to develop the traditional philosophical account
of value, abstinence is forgotten. Labor alone comes to the front. The
aberration, due to profits, of the value of products from the standard
required by labor cost, is treated not in a “philosophical” account
like Senior’s, which endeavors to include and explain the case, but is
regarded as an exception to the “philosophical” explanation, or as an
error in it.
3. There is a place in his book where Mill wavers in the decision to
include profits in cost of production. The probable explanation of his
hesitancy is of considerable interest, for it suggests the internal
weakness of the theory that cost in any form is the essence of value. His
doubt arises in connection with the familiar case of the relative values
of a cask of wine and a piece of cloth, originally costing the same
amount of labor in their production. The difficulty arises from the fact
that the wine alone continues to increase in value through mere lapse of
time:
“The wine and the cloth were made by the same original outlay.
Here then is a case in which the natural values, relatively
to one another, of two commodities, do not conform to their
cost of production alone, but to their cost of production plus
something else.”
In this sentence Mill excludes “profits” from cost. But he continues:
“Unless, indeed, for the sake of generality in the expression, we
include the profit which the wine merchant _foregoes_ during the five
years in the cost of production of the wine.”[162] The word “foregoes”
(not italicized by Mill) is uncalled for. The wine merchant does not
get profits he foregoes elsewhere, but the profits he makes from the
added value of the wine. They might be greater or less than the profits
foregone elsewhere. The forces tending to make them equal to those
elsewhere relinquished are precisely the same in this case as in any
other. If they are greater, more five-year-old wine will be brought to
the market and its price will fall, and if they are less the reverse
will happen. What is the difference between this case and the case of
an ordinary industrial product that Mill should falter so? Does capital
(using the term in the sense defined by J. B. Clark), the fund of wealth
employed in production, play different rôles in the two cases? Not in
the least. Suppose a fund of capital is embodied in a certain quantity
of raw material for a certain length of time until the same becomes
final product. The final product, besides covering all other expenses,
affords a sum of value equal to the capital invested in materials plus
the interest on it. The difficulty felt in the case of the wine was
undoubtedly that no tools, machinery, or labor were employed upon it
during the time of its improvement in value. The changes working within
it effected its increase in value merely by augmenting its utility to
users of wine. The increase of value, secondly, affords a “profit” or
interest. This profit may strike the mind as a surplus over cost to the
entrepreneur, but the relation of this interest to the value of the final
product is precisely the same as in any common case of manufacture.
Interest as a cost can influence the value of the product only by
influencing its supply. To discover the essential nature of value, we
must lay bare the causes which determine what the value of a given supply
is, independently of its cost. Cost and value may, in certain cases,
tend to make mutual adjustments, but these are effected only by means of
changes in supply. Value is not determined by cost _per se_, or, that is
to say, cost is by no means of its essence. In the ordinary case, if one
capital is employed for a longer time than another, the outwardly active
process of production is continued for a longer time. If extra profit
accrues through a time when labor works and wheels turn, it is easy to
say that profits must be paid, and therefore the value of the product
must be of such and such an extent. But in an instance where the value
increases without the whirl of wheels and the manipulation of tools, the
phenomenon naturally presents itself to the mind in an unfamiliar aspect.
The wine merchant remains passive, and it seems plain that instead of
his expense dictating what the value of the wine shall be, the truth is,
he takes what the causes independently determining the value of the wine
give him. Beyond a doubt there is a relation of cost to value, but there
are instances where the ultimate philosophy that cost is the very essence
of value applies with such unsatisfactory results that any but the most
doctrinaire classical economist must falter and hasten on.
4. If “profits” are a part of entrepreneur’s cost of production, the
question which confronted Ricardo must reappear. Does not the variety
of the proportions in which fixed and circulating capital are combined
in production, free values from the regulation of labor cost? The
consideration of this question in Mill’s _Principles_ is accompanied by
unpardonable blunders in terminology. Mill’s mind seems here completely
tradition-ridden. The havoc is wrought in the use of terms by adopting
the view that besides labor cost influencing value, wages also influence
it. In the topical analysis (Table of Contents, vol. i, p. 15) the
outline of the chapter on cost of production proceeds as follows:
“Principal element in cost of production, quantity of labour.
Wages not an element in cost of production, except in so far as
they vary from employment to employment.”
When cost is used in a sense which makes labor one of its elements,
wages are not an element in so far as they vary from employment to
employment, or in any other way. In the sense of cost in which wages are
an element, the variation of the latter from employment to employment is
an irrelevant consideration. Again we find such an observation as the
following: “The relative wages of the labour necessary for producing
different commodities affect their value just as much as the relative
quantities of labour.”[163] In the chapter on Ricardo, we saw how this
form of expression originated, and determined what the comparatively
simple truth is which it so awkwardly conveys. Wages cost, instead
of affecting values “as much as” labor cost, does the whole of the
affecting; and labor cost affects values only as it affects wages
cost. The end of it all is, Mill concludes, with Ricardo (and without
improvement upon Ricardo), that a variation of the general rate of wages
alters the exchange relations of commodities produced with different
combinations of “fixed” and “circulating” capital, independently of the
comparative labor costs of the same. What is true of Ricardo’s statement
is true of this. The proposition regarding the effect of a change of the
general rate of wages (or of the rate of profits, for one must always
accompany the other in the view of Ricardo and Mill) upon “relative
values,” may be a true dynamical principle; but the qualification of
the original labor-cost theory of value which is contained in this is
statical. Exchange values are statically out of proportion to comparative
labor costs, without any reference to changes in rates of wages and
profits.[164] The reason is that interest is an element in entrepreneur’s
costs as well as wages. Of the total of wages plus interest, in some
cases interest may be 30 per cent., in other cases 60 per cent., or
virtually any other per cent. Values being in proportion to the total,
cannot be in proportion to either element alone.[165]
5. Up to the present point, Mill has not taken a decided stand in favor
of any qualification of the labor-cost theory which Ricardo had not
also approved. In his treatment of skilled labor he admits of a further
qualification. Ricardo handled the subject in a very unsatisfactory
manner. While he gave the appearance of finding no difficulty for his law
of value in skilled labor, he unconsciously evaded the real question at
issue. Mill writes:
“When the wages of an employment permanently exceed the average
rate, the value of the thing produced will, in the same degree,
exceed the standard determined by mere quantity of labour.
Things, for example, which are made by skilled labour, exchange
for the produce of a much greater quantity of unskilled labour;
for no reason but because the labour is more highly paid.”[166]
The plain implication of this passage is that skilled labor receives
remuneration out of proportion to the quantity of labor rewarded.
Therefore it is also implicit that quantity of disutility is what
determines quantity of labor. Since labor cost operates upon exchange
values only by way of wages cost, in so far as wages cease in fact to be
an accurate index of real labor cost, a new difficulty is created for
the labor theory—one very important in principle. Mill himself lays
little emphasis upon this point. He regards the superior remuneration of
skilled labor as due virtually to a failure of perfect competition. In
presenting the subject in this light, he anticipates the important theory
of non-competing groups later developed by Cairnes:
“We have before remarked that the difficulty of passing from
one class of employments to a class greatly superior, has
hitherto caused the wages of all those classes of labourers,
who are separated from one another by any very marked barrier,
to depend more than might be supposed upon the increase of
the population of each class, considered separately; and
that the inequalities in the remuneration of labour are much
greater than could exist if the competition of the labouring
people generally could be brought practically to bear on each
particular employment.”[167]
It is hardly necessary or advisable to define perfection of competition
in such broad terms as to make it require that the remuneration of
skilled labor should be reduced to the standard of disutility of labor.
In any event, the tendency of remuneration to approach such a level
is ineffective, and therefore negligible. Static principles may be
conditioned upon assumptions contrary to fact, but the assumptions are
never to be made so violent that the law is not an effective force which
must be apprehended before dynamic reality can be explained. Under
perfect competition, properly defined, skilled labor is still a thorn in
the flesh of the old theory of value.
6. It remains to summarize Mill’s view of the relation of labor cost to
exchange value, and to compare it with the views of Ricardo, Malthus
and Senior. In Mill’s own language we find the following summary: If
one thing exchanges for more than another, the cause must be that “it
requires for its production either a greater quantity of labor,” or (1)
“a kind of labour permanently paid at a higher rate,” or (2) “the capital
which supports that labour must be advanced for a longer period,” or,
lastly, (3) “the production is attended with some circumstance which
requires to be compensated by a permanently higher rate of profit.” “Of
these elements, the quantity of labor required for the production is the
most important; the effect of the others is smaller, though none of them
is insignificant.”[168]
The qualification which we have numbered one (1) is an addition to
Ricardo’s list of qualifications. Number two (2) is Ricardo’s own work;
and of number three (3) he is aware, though he abstracts from it with his
customary facility.[169] In the end, we may say that Mill placed more
stress on qualifications of the labor theory than did Ricardo. Senior
made both ground rent and the superior wages of skilled labor causes
of qualification of the labor-cost theory. Mill took Senior’s view of
skilled labor, but took his stand with Ricardo on the general question of
ground rent.
CHAPTER X
CAIRNES
1. The political economy of J. E. Cairnes is virtually a treatise on
value and distribution.[170] The points in his work which are of interest
to our present purpose are his analysis of cost of production and his
famous innovation, the theory of non-competing groups.[171] The views
of Cairnes resemble those of Senior in many ways, and are exceedingly
destructive of the labor-cost theory, more so than he seemed to realize
or cared to admit.
The conditions essential to the existence of value are given as utility,
difficulty of attainment, and transferableness.[172] This is Senior’s
statement with the inferior term, “difficulty of attainment” substituted
for “limitation in supply.” How the substitution could be made in the
face of Senior’s reasons against it, is one of the ever-recurring riddles
in the history of the philosophy that in some way cost is the essence of
value. The theory of value is, according to the best usage of the day,
initiated by a discussion of supply and demand. Cairnes posed as a critic
of Mill’s conception of the law of supply and demand, but Professor
Marshall has shown conclusively that Mill was correct in substance
while Cairnes was not.[173] Following Mill, Cairnes next proceeds to
cost of production as an influence fundamental to that of supply and
demand. “The supply of a commodity tends to adapt itself to the demand
at the normal price,” or at that price which just suffices to yield to
the producers “the average and usual remuneration on such sacrifices as
they undergo.”[174] These sacrifices are the elements which constitute
cost of production. In the formal definition of cost, Cairnes makes it
include “the ultimate elements—labour, abstinence, and risk.”[175] But
the coördinate position of risk is not maintained. For, in the discussion
of cost in detail, risk to laborers is held to be a factor in labor cost,
and risk to capitalists a factor in abstinence cost.
“We find labour as an element of cost of production measurable
by reference to three of its incidents, and to three of its
incidents only—1st. the duration of the exertion, or the
quantity of labour, 2d. its severity, or irksomeness; and 3d.
the risk attending it.”[176]
As for abstinence:
“the sacrifice will be measured by the quantity of wealth
abstained from, taken in connection with the risk incurred, and
multiplied by the duration of the abstinence.”[177]
With this much said, Cairnes drops risk from consideration. We may follow
his example in the present chapter, since the precise relation of risk
or risk-taking to cost of production need not be decided in order to
determine the import of Cairnes’s work for the labor theory.
2. In Cairnes we find a repetition of the protest of Senior against the
definition of cost from the point of view of the capitalist-entrepreneur.
Thus Cairnes is “compelled to dissent” from the “radically unsound”
doctrine of Mill, that wages and profits compose cost of production.
“Of all ideas within the range of economic speculation, the two
most profoundly opposed to each other are cost and the reward
of cost.... Cost and remuneration are economic antitheses
of each other.... Now in the analysis of cost of production
which I have quoted [_i. e._ Mill’s] these two opposites are
identified.”[178]
Cost cannot be defined from “the partial and limited standpoint of the
capitalist-employer.”[179] Cairnes makes an excellent and eloquent plea
for his idea, but truly all that can be conceded to him is that the two
kinds of cost must be scrupulously distinguished, and that propositions
true only of disutility costs must not be affirmed of entrepreneur’s
costs, and _vice versâ_. As for the views of Mill, this economist
stated that wages and interest are rewards as well as costs. The gross
inconsistencies, however, of Mill’s language in different parts of his
book justify scathing criticism.
3. Cairnes does not quit the subject of the measurement of the subjective
cost without turning his attention to an incidental problem not touched,
I believe, by his predecessors. He states that the effort required
to produce a given result does not represent the same sacrifice for
different persons, being one thing for the strong or experienced and
another for the weak or untrained. Similarly a given sum of capital
may stand for no appreciable self-denial on the part of the person
contributing it, if he be rich, but for very rigid self-denial if he be
poor or in moderate circumstances. How are such differences, Cairnes
asks, to be dealt with in computing the cost of production?
“The sacrifices to be taken account of, and which govern
exchange value, are, not those undergone by A, B, or C, but
the average sacrifices undergone by the class of labourers
or capitalists to which the producers of the commodity
belong.”[180]
In view of the fact that the word _average_ as often serves to cover up
the lack of an explanation as it serves to explain, Cairnes would have
done well to be a little more explicit. As the present writer understands
it, a few additional words will place his idea beyond possible
misconception. If we call the capitalists who can furnish a given sum
of capital at a small sacrifice, and the laborers who can furnish a
given amount of labor (in the sense of productive power) at a small
sacrifice, strong producers, and call others who are situated in reverse
circumstances from these, weak producers, Cairnes’s proposition about
“average sacrifice” means that “within a given field of competition” we
may expect the individually strong and individually weak producers to be
thoroughly and uniformly intermingled. With this meaning, the statement
certainly commands assent. With this idea understood, we are able to
speak of the labor of coal miners as being harder than that of dry-goods
salesmen, without thought of the unusual cases where a very healthy miner
suffers less fatigue and discomfort than an invalid salesman.
4. Proceeding with labor and abstinence as cost of production, Cairnes
describes the relation of cost to value in terms clearer than any before
attained in the regular line of English “_Principles_.” Wages and
“profits” are derived from the value of the product, and “absorb the
whole of that value,”
“with the exception of the case where rent is also an element
in the value of commodities—a case which, those acquainted with
the economic theory of rent will perceive, does not affect the
general argument.”[181]
These words make the sum total of Cairnes’s discussion of rent, though
he has written a large volume devoted chiefly to value and distribution.
Value is then everywhere divided into wages and profits. If these
wages and profits are in proportion to the sacrifices remunerated,
value is in proportion to the sum of these sacrifices, or cost of
production. The question, then, becomes definite. Are wages everywhere
in proportion to the labor for which they are paid, and is interest an
amount proportionate to the abstinence remunerated? Strange as it may
seem, this simple question—the affirmative answer to which is necessary
to establish the regulation of exchange value by “real” or subjective
cost of production—was never proposed by Mill or any of his classical
predecessors.
5. To answer this question, it is first necessary to inquire how far
effective competition is realized in actual industry (_i. e._, in English
industry, and for purposes of present-day theory, English industry of
Cairnes’s time is a very proper system to consider); for wages and
profits will be in proportion to the sacrifices undergone “wherever, and
only so far as competition prevails among producers,” and laborers and
capitalists have an “effective choice” in selecting from the various
occupations in the industrial field. First, Cairnes gives a very clear
explanation of the process by which the flow of capital and labor
can be redistributed over the industrial field without the transfer
of individual units already specialized.[182] This disposes of some
exaggerated and erroneous ideas regarding the failure of competition; but
the next step is taken by Cairnes himself, who points out an important
limitation of competition not emphasized by previous writers. This
limitation applies only to the competition of laborers:
“The competition of capital being as we have seen, effective
over the entire industry of each commercial country, it follows
that so much of the value of commodities as goes to remunerate
the capitalist’s sacrifice ... will correspond throughout the
range of domestic industry with that portion of the cost which
falls to the capitalist.”[183]
Not so in the case of labor:
“What we find, in effect, is, not a whole population competing
indiscriminately for all occupations, but a series of
industrial layers, superposed on one another, within each of
which the various candidates for employment possess a real
and effective power of selection, while those occupying the
several strata are, for all purposes of effective competition,
practically isolated from each other.” ... “We are thus
compelled to recognize the existence of non-competing
industrial groups as a feature of our social economy.”[184]
6. It follows from this that the exchange relations of commodities
produced by laborers in different industrial groups are “not governed by
the principle of cost of production.” And the result is much complicated,
because even a single commodity is “very frequently” the product of the
labor of more than one industrial group.[185] The terms of exchange
between two commodities will be “governed by more than one principle.”
“So far as the two commodities are the products of workmen in
competition with each other, their values will be governed by
cost of production, but so far as they proceed from workmen
not in mutual competition, they will be governed by that other
principle, yet to be ascertained, which governs normal values
in the absence of competition.”[186]
It “generally happens that the bulk of the value of each commodity
follows one law, ... while a small remaining element is governed” by the
other law.[187] This unsatisfactory idea is at times better expressed in
another way, namely, the law of costs governs a good’s value in exchange
with commodities produced by the same order of laborers, but not in
exchange with commodities produced by different orders.
“The true conception of the law of cost is thus, not of a law
governing universally the values of any class of commodities,
but that of one governing the values of certain commodities in
certain exchanges.”[188]
7. We come now to the second coördinate principle of value, existing in
addition to the principle of cost of production, and held to divide with
it the control of actual values. This is the so-called law of reciprocal
demand. It is simply Mill’s law of reciprocal demand as developed by him
to explain international values, applied by Cairnes to the “strictly
parallel case” of inter-group values. International and inter-group
values, or the relative prices of the products of different nations or of
different groups,
“do not vary at random irrespective of rule or measure, but
exhibit precisely the same tendency to gravitate towards a
central point as is manifested in those exchanges which are
governed by cost of production.”[189]
These words surely attribute a very exact control of values to the
“principle of reciprocal demand.” But after perusing a very interesting
piece of text (pp. 99-105), in which Cairnes applies Mill’s doctrine of
international value, point by point, to the problem of non-competing
groups, we come upon a very important difference between this principle
and that of cost in respect to control of values.
“They each ... furnish a centre about which market values
gravitate; but there is this difference between the two
cases: The centre furnished by Cost of Production stands
related to the fluctuations of the individual commodity; that
supplied by Reciprocal Demand to the average fluctuations
of considerable aggregates of commodities. A reduction in
the cost of producing a hat will lower its price.... But an
alteration in the reciprocal demand of two trading nations
(or of two non-competing groups) will act upon the price not
of any commodity in particular but of every commodity which
enters into the trade. What such an alteration necessitates is
a change in the _average_ terms on which the trade is carried
on; but _it decides nothing as to the details by which the
required average shall be attained and maintained_.... In
the interchanges of non-competing domestic groups, what the
reciprocal demand of the groups determines is the average
relative level of prices within each group; the distribution
of price among the individual products being regulated by
the cause which governs value within it, namely, cost of
production.”[190]
It develops that the law of reciprocal demand fails completely of being
a principle coördinate with, and similar to, that of costs. Instead
of ruling exchange values in the same way as cost of production, only
in another field, it turns out that the force of reciprocal demand is
incapable of determining the value of any single good. The principle
of reciprocal demand fails signally of fulfilling Cairnes’s promise of
a principle other than that of cost, which will provide for a central
point of gravitation of inter-group exchange ratios. The purport of the
argument of Cairnes is no more than this: the law of reciprocal demand
merely requires the general level of international exchange values to
be such that in the long run the exports of a nation just discharge its
liabilities, or, in other words, that its exports and imports will be led
to balance, except for the payment of interest on foreign debts, cost of
carriage to foreign ship-owners, _etc._ Cairnes applies the law without
changing line or point to interchange between non-competing groups.
8. It is not necessary, in view of our present purpose, to enter
further into the nature of the law of reciprocal demand. The question
of importance to us is the effect on the labor-cost theory of value
of the doctrine of non-competing groups. Cairnes’s famous doctrine
merely adds emphasis to a point already made by Senior, namely, that
the wages of skilled labor are out of proportion to the amount of labor
cost remunerated. Though Cairnes rejects the definition of cost as
entrepreneur’s cost, his whole argument signifies that subjective cost,
or pain cost, can control market value only by way of controlling the
wages and interest elements which compose entrepreneur’s cost. As for
the element of interest, Cairnes, like Senior, holding interest to be
paid for abstinence, places it upon an independent basis of subjective
cost, and makes it logically coördinate with wages; and Cairnes would
treat the difficulty of interest, or the difficulty of “the different
proportions of fixed and circulating capital,” not as Ricardo did, but
precisely as Senior did.[191] As for the element of wages cost, the
doctrine of non-competing groups signifies that the comparative wages
cost of different commodities may fail to represent their comparative
labor costs, or specifically, that they do so fail, when we compare the
cost of commodities produced by different non-competing groups. Even if
labor cost were the only kind of subjective cost that the entrepreneur
has to remunerate, true labor cost would still fail to control exchange
values, because the comparative wage expenses of entrepreneurs are not in
proportion to the true amount of labor remunerated in each case.
In the view of Cairnes, skill as such cannot be called an element in cost
of production. But skill may be, and generally is, he continues,
“an indication of that which is an element in cost—namely, the
sacrifice whether in the form of labor or abstinence, undergone
in acquiring the skill.... The point to be attended to is that
the addition made to the cost of production [_i. e._ by the
employment of skilled labor] is in proportion ... [only] to the
sacrifice.”[192]
If competition were effective between groups of laborers, it would result
that wages would be forced to correspond with the disutility of labor in
all employments, skilled or unskilled (the disutility of acquiring the
skill being weighed by the competitors along with the daily disutility of
the occupation). In the absence of effective competition—namely, under
the actual conditions of non-competing groups—skilled labor generally
receives a wage beyond that proportionate to the comparative disutility,
past and present, incidental to it.
Cairnes himself refused to regard his innovations as causing any
substantial damage to the older theories, for of his whole doctrine of
non-competing groups, he says:
“In effect the point in question is of little more than
theoretic importance. As a point of theory it is proper to
notice it, but the circumstance it deals with has little
sensible effect on the facts of exchange.”[193]
9. In the opinion of Cairnes, then, there is a failure of the law
of costs due to a _failure of competition_. Since Ricardo expressly
postulated “perfect competition” as a condition essential to his theory,
it might seem as if the difficulty of non-competing groups is one
against which he has taken the necessary precautions. This, however, can
hardly be the case. Ricardo’s discussion of the subject of skilled labor
is so indefinite that his intentions, with respect to the meaning of the
words “perfect competition” in this connection, are not obvious. But,
in all probability, Ricardo could not have meant that the postulate of
perfect competition provides against the wages of skilled labor being
in excess of those of common labor. For if he had meant this, he would
not have written the section he gives us on skilled labor.[194] In this
he says, in effect, that the degree in which different kinds of skilled
labor enjoy higher wages does not change greatly from time to time
(this itself an error), and that nothing more need be said, since he is
considering only the causes of _change of “relative” values_ (this is
also incorrect).
We will take it for granted, then, that by his assumption of free
competition Ricardo did not intend to abstract from the difficulty of
skilled labor. We certainly could not approve of such a procedure if he
had adopted it; for there is so little tendency for actual competition to
remove the superior remuneration of skill, that this tendency should not
be recognized among legitimate or effective static forces.[195]
The conclusion is that Ricardo did not examine the problem of skilled
labor sufficiently, and that the work of Senior, and especially of
Cairnes, shows that in this problem there resides a grave difficulty for
the labor theory. Neither Senior nor Cairnes took occasion specifically
to point this out themselves. To discover that such is the effect of
their writings becomes the task of the historian of theory. Though
Cairnes refuses to give the name “cost” to entrepreneur’s expenses,
at bottom his teaching means that the labor cost “philosophy” of
value cannot be true, because it is in conflict with the more certain
“empirical” laws of value.
CHAPTER XI
THE ULTIMATE RELATION OF COST TO VALUE
1. The history contained in the preceding ten chapters covers but a
limited number of English writers. At the time of writing, a short list
of economists was drawn up in advance, which enumerated the thinkers at
that time generally regarded as the leaders in the development of the old
English political economy. It was stated at the outset that the purpose
was to review the opinions of these writers only. An endeavor was made
to define this purpose as being to make an _intensive_ rather than an
_extensive_ study of the history of English theory. By an extensive study
we should mean the effort to discover writers who have made important
contributions to the thought the history of which is being traced,
but have been previously unrecognized or insufficiently accredited.
Such examinations into the history of English economic literature will
probably in the immediate future result in important alterations in what
might be called our accepted lists of chief writers. It will be found
that thinkers now supposed to have expressed the doctrines of their time
with the greatest clearness and power were in some cases surpassed in
these points by writers at present almost or quite forgotten. Or it will
be found perhaps that new ideas—such for instance as the conception of
marginal utility—really originated earlier than at present supposed.
A brief time elapsed between the writing of the tenth and the eleventh
chapters of this essay. But in this period there has been published
a discussion of the work of some earlier British economists, which
establishes beyond a doubt that the marginal utility theory of value was
conceived and formulated in most excellent fashion by an English writer
as early as 1833, two decades before Gossen and a generation before
Menger, Jevons and Walras. The English writer was W. F. Lloyd, Professor
of Political Economy at Oxford. A full description of Lloyd’s theory,
with citations showing the excellence of its statement, appeared in _The
Economic Journal_, over the signature of Professor Seligman, of Columbia
University.[196] Professor Seligman has called attention to still another
writer of great consequence because of his contributions to the theory of
value. This is Mountifort Longfield who, as Professor Seligman states,
in 1833 gave an able exposition of what is now the modern doctrine of
marginal demand and marginal cost.[197]
Avoiding the larger task involved in the extensive study of the history
of the theory of value in England, the present monograph has endeavored
to interpret the labor theory as it passed through the minds of some nine
economists beginning with Smith and ending with Cairnes. The history
is that of a subjective-cost philosophy of value and the difficulties
of its application to explain the facts of industry. According to
this philosophy, or this ultimate explanation, utility is a condition
essential to the existence of value, but cost or difficulty of attainment
is the _essence_ of value. The idea was elucidated by a variety of
figures of speech. Utility was conceived as a sort of resting-ground
for value, but the height of value upon this ground, the value as an
_amount_, was held to be determined by or measured by cost of production.
Thus Ricardo wrote to J. B. Say:
The utility of things is incontestably the _foundation_ of
their value, but the degree of their utility cannot be the
measure of their value.... The difficulty of [a thing’s]
production is the sole measure of its value.[198]
Karl Marx was accustomed to speak of value as “a congelation of human
labor,” and to speak of a useful object, or an object made useful in the
process of production, as a sort of receptacle for value.
In his involved “philosophical” account of value, as we termed it, Adam
Smith taught that the value, or “real worth,” of a good is measured
equally well by the amount of labor which it has cost to produce, or by
the labor which it can command in exchange. When, however, Adam Smith
turns his attention to the proximate principles of value in the actual
competitive market, we find him confessing that the theory which he
first developed applies without modification only to a primitive state
of society, without land rent and interest on capital. In this primitive
state the amount of labor which a commodity costs determines the amount
of labor which it can command in exchange. Under the conditions of
advanced society, the rent of land and the “profits of stock” must come
out of the exchange value of the product, and the labor cost of the
latter, which is paid for by wages, no longer determines its value.[199]
If we take advantage of modern terminology, and throw Adam Smith’s
theory into our own words, we make its precise significance clearer. It
means virtually that the exchange value of a good in the fully developed
social economy is determined by its _entrepreneur’s_ or _money_ cost of
production, so far as it is determined by cost at all. Competition must
be perfect to enable cost to determine actual values. Entrepreneur’s
cost is composed of expenditures for wages of the labor, rent of the
land, and “profits” of the capital necessary for production. The labor
cost of producing the commodity determines only the amount of the wages
cost to the entrepreneur. The other elements helping to make the total
of entrepreneur’s cost are not determined by the labor cost of producing
the commodity. Thus the exchange value of a good is determined by its
entrepreneur’s cost, but this latter is not determined by labor cost,
and consequently the exchange value of the good is not determined by
labor cost. The existence of rent and interest destroys the regulation
of exchange values by labor cost. It must be kept in mind that all this
is very much more explicit than what Adam Smith said. It signifies that
the labor-cost philosophy of value cannot be true—perhaps Smith would
say only that it is imperfect or not precisely true—because it is in
conflict with a more certain empirical law of value, namely, the law of
entrepreneur’s cost.
Ricardo adopted the labor-cost philosophy of value virtually as a
premise, and the most important parts of his reasoning on the subject are
concerned with removing or minimizing the empirical difficulties with
this philosophy.[200] In the end he admitted that interest is an element
in that form of cost which exercises the most direct and compelling
influence on exchange values. He made concessions, which pursued to
their logical outcome, signify that the existence of interest throws the
exchange values of goods out of proportion to their pure labor costs
of production. We have seen how he put this concession in a peculiar
and misleading manner.[201] As for rent of land, Ricardo hastens to
repudiate Adam Smith’s admission that it also is a source of difficulty
to the labor theory. He gets rid of rent by explaining that the exchange
values of commodities are regulated by the quantity of labor required for
production on the least fertile land in use, or the quantity required
to produce the most expensive portions of the supplies. In modern
phraseology, he urged that it is not the actual labor cost of a good but
its marginal labor cost, which regulates its value. Ricardo himself used
that fatally ambiguous formula, “rent does not enter into price.” Having
removed rent by making the value determining cost marginal, and having
minimized the difficulty of interest, Ricardo proceeded as if the labor
theory were, for the sake of argument, intact.
The chief purport of the work of Malthus was, first, to deny Ricardo’s
right to disregard the interest difficulty and, second, to reaffirm Adam
Smith’s opinion that land rent also throws values out of relation to
labor costs. Turning now to Senior, who was the next writer to suggest
a worthy and new idea, we find that in the view of this economist the
existence of land rent and interest as elements in entrepreneur’s cost is
fatal to the labor theory. But Senior explained interest as the reward
for abstinence, just as wages are the reward for labor. In his view
labor and abstinence are independent, co-ordinate elements in subjective
cost.[202] However, the more important idea that can be extracted from
Senior’s reasonings is that wages as actually paid are not in proportion
to the quantities of labor engaged in different employments. For in his
view all skilled labor gains a wage which really includes a rent to
“scarce natural talents.”[203]
Summing up the results of Senior’s argument for ourselves (since he
himself did not make the present applications of his doctrines), the
labor theory requires that the entrepreneur’s costs of commodities
should be in proportion to their labor costs, but entrepreneur’s costs
are out of proportion to labor costs, not only because they include rent
of land and interest on capital, but because the very payments of wages
themselves may be out of proportion to the comparative amounts of labor
employed and remunerated. When we say that entrepreneur’s costs are out
of proportion to labor costs, we do not mean that they are in excess
of wages cost, though they are this, but that for commodity A to cost
the same quantity of labor as commodity B, is not a sign that the two
commodities have the same entrepreneur’s costs. In other words, relative
entrepreneur’s costs are not determined by relative labor costs.
John Stuart Mill took Ricardo’s view of land rent and of interest, but
took Senior’s view that skilled labor occasions the entrepreneur an
expense out of proportion to the _quantity of labor_ remunerated. That
is to say, he held that the higher wages of skill do not represent a
higher labor cost. This opinion he adopted without at the same time
taking up Senior’s particular use of the term, “rent to talents.” As we
concluded at the end of Chapter IX, it may be said that Mill followed
Ricardo more closely than any other of his predecessors on the question
of the relation of labor to value. Turning to Cairnes we note that this
writer gave one sentence in his book to the doctrine of land rent, and in
this he acquiesced in the judgment of Ricardo and J. S. Mill. But Cairnes
adopted a position with reference to interest identical with that assumed
by Senior, and his theory of “non-competing groups” merely emphasizes the
claim that the amount of wages paid in different employments is not a
test of the quantities of labor employed.
Taking the whole period covered in this history, we see that a goodly
number of points of criticism were raised against the pure labor-cost
theory. The reader may have noted that all these points were implicit in
the work of Senior, and in his alone. Does the entrepreneur’s payment of
land rent, of interest on capital, and his payment of a superior wage
to skilled labor (a wage out of proportion to the disutility of skilled
labor), make impossible the theory that labor cost regulates value? Is
it not possible that labor cost may be conceived in some way, perhaps as
“marginal cost,” or “social marginal disutility,” such that the exchange
values of the products of industry can be shown to depend upon the labor
cost of these products? In the following pages the writer will try to
give an answer to this question, so far as it lies in his power. It will
be indispensable to bear with a considerable number of preliminaries. The
ultimate relation of cost (in any or all of its forms) to value, cannot
be discussed with any success, unless the parties to the discussion have
reached some understanding as to the relation of utility to value and as
to the meaning of other proposed laws of value than cost laws. Merely a
moderate acquaintance with the contemporary literature of economic theory
gives complete assurance that the necessary understanding just mentioned
cannot be presumed to exist, but must be established as carefully as
possible.
2. Historically, there have been two distinct conceptions of cost—at
least in English political economy—namely, (1) labor cost, and (2)
entrepreneur’s cost. Logically, there are two elementary forms of cost,
(1) pain cost, and (2) potentiality cost. The first consists in the
human discomforts or undesirable feelings incidental to the production
of wealth, whether the disutility of labor, or that of “abstinence” or
“waiting.” This is also frequently called “true,” “real,” or “subjective”
cost. The terms “true” and “real” are hardly commendable, for the other
elementary form of cost is quite as real as this. The word “subjective”
is genuinely distinctive, but probably less so than the generic term
“pain.”
The second elementary form of cost is that emphasized chiefly by the
Austrian writers. In the making or acquisition of economic products,
certain scarce agents are either destroyed, or else for the time being
employed in a way that excludes their employment in the production of
other goods. We may say that the production of any given good involves
the destruction of certain productive agents, or, permitting a convenient
liberty of expression, of the uses of agents from which other goods
might have been produced. Thus with the emergence of one good the
possibility of some other good is excluded. Professors von Wieser and
Böhm-Bawerk, who have written the best explanations of the relation
of this form of cost to value, have suggested no distinctive name for
it. The reason appears to be that they consider this as the only form
of cost which requires especial explanation, since, as they hold, it is
the only kind of cost which can be correlated with value. In an article
in the _Quarterly Journal of Economics_,[204] Professor D. S. Green
has suggested the term “opportunity cost” for the Austrian conception.
Professor H. J. Davenport, having in mind the same conception, refers to
it as “sacrifice cost.”[205] Professor Heinrich Dietzel speaks of the
same cost as “_Nutzeneinbusse_.”[206] This concept has also in various
places been designated “social cost.” Though this cost is social in
a certain comparatively irrelevant sense in which the other kind of
cost is not social, the term “social cost” is not a good one because
it lacks distinctiveness. There is nothing intrinsically social about
potentiality cost, nor would the other elementary form of cost, that is,
pain cost, be best designated “individual cost.” Both forms would appear
in an isolated individual economy, for instance in our fictitious but
highly useful Crusoe economy. “Sacrifice cost” is ambiguous, because the
word “sacrifice” is used as often as not, though perhaps improperly, to
signify the discomfort or pain endured in production. A term is needed to
distinguish a form of cost from pain cost. “Potentiality” cost appeals to
the writer as being a term somewhat better than “opportunity” cost. When
certain common production goods, capable of being turned to the making of
more than one kind of thing, are used up to make a given thing, their
potentiality to make an alternative thing is destroyed. The potentiality
cost of a commodity is measured by the highest other value that might
have been obtained if this commodity had not been produced from the
productive agents entering into it.
If it be correct that pain cost and potentiality cost are the two
elementary kinds of cost, what is the relation of the two historical
forms of cost, labor and entrepreneur’s cost, to these? Just as the
word labor stands for two distinct things, toil and productive power,
so may “labor cost” mean either pain cost or potentiality cost. If the
term labor cost is used without a qualifying adjective or explanatory
phrase, it would naturally call up in most minds the conception of pain
cost. But labor force is the most disposable of all productive agencies,
and when the productive power of labor (what the entrepreneur buys)
is used up in the production of a given commodity, we have a perfect
example of potentiality cost. As we have seen, Adam Smith used labor
at different times, both in the sense of toil or disutility and in the
sense of productive power or potential commodity. Ricardo, to the best
of the writer’s knowledge, said nothing to indicate definitively which
of these concepts he designated by the term labor. In the writer’s
judgment the presumption is that by the labor cost which regulates the
exchange value of commodities, Ricardo meant what we call pain cost. At
one place, Ricardo said “difficulty of attainment” is the true measure
of value. It seems almost assured that this must mean “pain cost.” When
cost is conceived as the ultimate essence of value, the cost will almost
certainly be pain cost or “real cost.” It is interesting to note that
Professor Dietzel, in arguing that the Ricardian labor theory of value is
perfectly reconcilable with all that holds good in the utility theory,
states that labor cost must be conceived solely as “_Nutzeneinbusse_,”
_i. e._, utility-sacrifice, or potentiality cost. When the labor theory
is founded upon the conception of labor as toil (“Unlust”), he considers
it to be “built upon sand.”[207]
We see that it is possible to mean either pain or potentiality cost by
the words “labor cost.” Labor as “pain” and labor as productive power are
not the same thing but the first is incident to the second. It remains
to consider the relation of entrepreneur’s expense to the two elementary
forms of cost. Torrens desired to exclude the money outlays of the
entrepreneur in interest charges from the money cost of production of a
good. That is, he maintained that what he called “profits,” the chief
constituent of which was interest, is no part of cost of production. This
view was never adopted by any subsequent economist of weight. The very
simple reasons why it is indefensible were mentioned in the chapter on
Torrens. Conceding then that interest is a part of entrepreneur’s cost,
the relation of the latter to “pain cost” can be stated in a few words.
The total “pain cost” of any article, which is produced by entrepreneurs,
finds its remuneration in those payments which go to make up _cost_ from
the view-point of the entrepreneur. The point to be held fast, a point
already emphasized, is that the subjective costs of goods so produced
can influence their exchange values only by way of influencing their
entrepreneur’s costs.
The relation of entrepreneur’s expense to potentiality cost is less
simple and familiar than the foregoing. It will best be taken up in a
subsequent section after we have endeavored to state the gist of the
utility theory of value. We may conclude the present discussion of cost
concepts by noting that there are several ways of reckoning or analyzing
entrepreneur’s cost. (1) Adam Smith’s method, adopted by Malthus, is set
forth in the following definite words written by the latter: “The cost of
producing any commodity is made up of all the wages, all the profits, and
all the rent which ... are necessary to bring that particular commodity
to market in the quantity required.”[208] (2) Perhaps the most approved
modern method of analyzing the elements in entrepreneur’s cost is merely
into wages and interest. In this case rent paid for the use of land is
treated in the same way as rent paid for buildings or for machinery or
power. (3) The most direct treatment of entrepreneur’s cost defines it
shortly as including the prices of all the productive agencies used up in
the making of the product, or as the value of raw material, machinery,
and labor power “entering into” the product. It is always necessary to
explain immediately that some production goods are in no sense consumed
in the making of the product. Such are the land and buildings. Some
production goods are consumed only in very small part in the making of
a single product. The total money cost of a product is according to one
system divided into “prime cost” and “establishment cost.” The former
includes the prices of all those elements which are entirely used up in
making the product. The latter includes the product’s due share of the
money cost of the rest of the establishment, worn to a certain extent or
occupied for a time in its making. Numerous practical formulæ are in use
to aid in the difficult problem of imputing to the product its due share
in the various general charges. A second necessary explanation connected
with the third form of calculating entrepreneur’s cost is that, since
the prices of the production goods have to be paid before the product
is finished, each price must be increased by interest for the time of
its advance, to give the complete cost of the product. In order to state
the relation of entrepreneur’s expense to potentiality cost, it is not
necessary to discuss in full the mutual relations of the various modes
of calculating entrepreneur’s cost. Such a discussion would, it seems to
the writer, involve us in the theory of interest and indeed in the entire
theory of distribution. Fortunately it is sufficient for our present
ends to point out that all forms of analyzing entrepreneur’s cost must
be based upon the third, or, as we might call it, the practical method.
If it is desired to reduce the cost of a product to wages and interest,
the practical cost of the article as defined above will have to be
ascertained as a starting-point. We will be content in a later section to
trace the connection between potentiality cost and the practical form of
entrepreneur’s cost.
3. It is impossible to give the term _value_ any one meaning. The word is
so ambiguous that Jevons advocated its abandonment. The central thought
of the value concept seems to be _capacity to excite desire_, but there
are two grand kinds of economic value which are best designated, (1)
exchange value and (2) esteem value.[209] The exchange value of an
article has often been defined as a ratio—or specifically, as the ratio
in which the unit of measure of the article exchanges for a multiple, or
fraction, of the unit of measure of any other determinate thing[210]—and
again as the quantity of that other thing for which it exchanges. But
both of these conceptions are involved in metaphysical difficulties which
make them impossible to employ in actual reasoning, and all writers are
accustomed to make assertions about exchange value which are not in
the least true of these, their purely formal, definitions. Walsh has
shown most clearly that the only conception of exchange value free from
difficulty is that of _power_ in exchange. Exchange value is the power in
a thing by means of which its owner is enabled to command other things
possessing a similar power.[211] This power is measured objectively by
the physical quantity of some other thing selected for the purpose, but
the value is not that quantity, though speaking elliptically we may say
the value of a coat is twenty bushels of wheat or twenty dollars. The
exchanging power in our daily thought is always and properly referred to
the thing and not to the man or owner. When the thing is gone the power
is gone. The purchasing power of a twenty-dollar piece does not reside in
the holder.[212] It goes without saying that this power can exist in an
article only when there is another thing for which it can be exchanged
and when there are men to effect the exchanging. It is not implied that
articles of commerce have the power to exchange themselves in market
places without human intervention. But the purchasing power resides in
the article; it is always referred to the article in our thought, and it
leads to nonsensical results to run counter to our commonest and most
practical forms of thought and endeavor to locate it elsewhere.
The end of the theory of value is to explain the causes which govern
exchange values, or practically, market prices. Other conceptions of
value than exchange value derive their just importance in political
economy only from the aid they may render in this explanation. This
defines the place of the conception of esteem value. A finished
explanation of exchange values is impossible without a theory of esteem
values, just as an ultimate explanation of the counterbalancing powers
of different objects in the scales is vain without the general law of
gravitation. The power of an apple to counterbalance two eggs might have
been thought of as a matter purely relative between apples and eggs,
before the general conception was framed of the common attraction exerted
by the earth upon both apples and eggs. Exchange values were once stated
to be “purely relative.” The objectionable point in the statement lies in
the adverb “purely.” For exchange values are derived from esteem values
very much as weights, or powers to counterbalance, are derived from the
earth’s attraction. That is, these two derivations are generally similar.
Here as elsewhere analogies can be pressed too far. The derivation of
the exchange values of different goods in the social market from the
esteem values put upon these goods by the consumers, or purchasers
in the society, is a process indefinitely more difficult to explain
than the relative weights of ponderables.[213] Given the gravity of
separate objects it is but a step to explain their relative weights, but
given the esteem values of different economic commodities it is a long
road to follow the process through which these determine the exchange
values of the same commodities. If esteem value be the gravity behind
exchange value, the case is rendered complex in that each good possesses
a separate esteem value for every different consumer whereas there is
but one earth to attract each object whose relative weight we desire to
explain.
In the judgment of the writer, the best definition of esteem value is
“the significance (_Bedeutung_) which concrete goods attain in our
estimation when we realize that we are _dependent_ upon them for the
satisfaction of some want.” This is a loose translation of the definition
formulated by Carl Menger in 1871.[214] The individual good attains value
not simply when it is capable of affording us satisfaction, but when
it _conditions_ the satisfaction. Goods existing in superfluity give
satisfactions but do not _condition_ them, hence any unit of such goods
possesses no value. The removal or destruction of a unit occasions the
loss of no satisfaction. Menger’s definition was a triumph of theory in
stating the relation of value to human satisfaction and to utility.
The law of marginal utility is but a corollary of the principle
involved in this definition. The utility of a good is its power to
afford satisfaction.[215] When goods occur in stocks of like units
the phenomenon of “marginal” utility emerges. As the stock of such
goods to be used by a consumer within a given time is increased, the
satisfaction afforded by each successive unit declines.[216] The actual
utility of each successive increment is lower than the actual utility
of the preceding increment. The actual utility of the last or marginal
increment is the “marginal” utility of any of the increments. The reason
why the value of any such increment is determined at the height of its
“marginal” utility is only because any one increment conditions merely
the satisfaction afforded by the last or marginal increment. Remove
or destroy any increment and rationally only the satisfaction of the
marginal increment will be given up. In effect any increment is the
marginal one. Thus the law of marginal utility is not the fundamental
law of value. Menger’s definition contains this fundamental law and
gives a universal principle of value. The theorem that value depends upon
marginal utility is merely a deduction from this fundamental principle,
and is of limited scope, since it applies only where there are goods in
stocks.[217]
An absolutely essential point to be kept in mind is that the value of
an object is not derived from the sacrifice made to obtain it. On the
contrary we make the sacrifice because the object has this value. The
value is first, the sacrifice second. The only means of estimating how
much sacrifice or discomfort we can afford to undergo to obtain an object
is by judging its value to us _previously_ to and _independently_ of the
sacrifice. If the labor cost, say, determined the value, we could expend
labor cost regardlessly in producing any objects whatsoever. But this is
just what we cannot do. We must have a care when we expend labor. A care
for what? For the value of the result. The value of the object is derived
from the satisfaction which it can afford, but it is attributed to the
object only when it is the indispensable condition of that satisfaction.
When a particular object conditions some satisfaction of ours, it
possesses a superior power over our welfare to that possessed by a good
which, while it affords us satisfaction, does not condition it. It would
be a waste of energy to spend it in producing or conserving the thing of
inferior power. The ultimate reason why our minds instinctively assign
a superior importance to the things of higher power over our welfare
is that such instincts contribute to our fitness in the struggle for
existence. The things of lower rank possess merely utility. The things of
higher rank possess a superior power which we recognize and distinguish
as _value_. Lack of this distinction would lead to a waste of energy in
the modifications which we effect in our environment.[218]
4. Let us consider now the essential features of the utility theory of
value. According to this doctrine the sole source of value is human
satisfaction. The thought is well conveyed, though the expression may
be somewhat loose, by saying that the only inherently valuable thing
is satisfaction, and that the value of satisfaction is passed out to,
or attributed to, any external object upon which the satisfaction is
dependent. Human satisfactions are quantities, for they are capable of
being _more_ or _less_. But they are inexact and wavering quantities.
Similarly, the esteem values of goods, derived from the satisfactions
conditioned by these goods, are quantitative, but are incapable of exact
or constant numerical expression. The exchange values of goods are exact
and relatively constant quantities. Nevertheless, exchange values are
assuredly founded upon esteem values. The description of the process by
which these wavering and more or less uncertain esteem values determine
the exact and definite exchange values of goods, is perhaps the most
difficult part of the utility theory. But without this part—commonly
called the “theory of price”—the utility doctrine remains a mere torso.
Böhm-Bawerk’s theory of price is the only attempt that has been made to
complete the utility theory in this direction, which is at once well
known and authoritative.[219] Though the fundamental lines of this
explanation are correct, it is in externals at least defective in two
noteworthy respects. In the first place, one of its principal assumptions
is untrue to the typical conditions of exchange under the division of
labor. This assumption consists in supposing that sellers’ subjective
valuations are effective factors in determining price in the market of
an organic society. In Böhm-Bawerk’s theory, the reader will recall,
the miniature but supposedly typical market is assumed to consist of a
number of sellers owning horses and a number of buyers desiring them.
The first step in the argument is to assign a money expression to the
esteem or “subjective” value of a horse to each buyer and each seller.
Then if these money expressions, or “price equivalents,” are higher
for some one buyer than for some one seller an exchange of money for a
horse is possible between the two. If buyer B values a horse at $45 and
seller S at $40, B can afford to part with, and S can afford to take for
a horse any sum of money over $40 and under $45. By considering all the
price equivalents of sellers on one side and of buyers on the other side,
Böhm-Bawerk shows us that for every given combination of such figures in
a market there is a certain definite number of sales possible, and these
sales must take place at a price fixed between the price equivalents of
the last buyer and the last seller. In other words, the market price will
be fixed between the money valuations set upon a horse by the “marginal
pair.” The region so delimited by the marginal pairs becomes narrower
as the number of buyers and sellers entering the market increases. Thus,
in a large market the price is virtually determined to a point. The
difficulty with this theory is that under the division of labor, sellers
make products for the market, in view of the market price, and make them
in numbers and keep them in stocks far in excess of their own needs.
Under the division of labor, the lowest price at which a seller will
part with a commodity is not set by the marginal utility or subjective
value of the commodity to him. A theory of price applicable to the modern
market must not employ the subjective valuations of sellers as a factor
in price determination.
In the second place, Böhm-Bawerk’s theory of price is misleading, since
it obscures the fact that the Austrian theory of value always assumes the
supply of the goods whose value it is to explain. The Austrian writers
themselves teach us that the value of a good depends upon the supply of
it. The theory of marginal utility explains very well why an increase of
supply lowers value or a decrease raises value. But if there should be
any cause which limits or regulates the supply of goods with reference to
their value, _by some kind of an adjustment to value_, this cause would
be both a cause and a regulator (or at least a part regulator) of value.
Cost of production in some ultimate form is by many writers supposed to
be such a cause. The human “pain cost” of producing goods is of equal
importance in theory with the human pleasure gain had from utilizing the
goods. The value of an addition to the stock of a given sort of goods
always furnishes a motive for the increase of the stock. Any cause which
limits the supply at a certain point in the face of this human desire
for the increase is a cause of value. True, it is a cause more remote
than utility, but still a cause of value. Since the Austrian writers
virtually ignore the cause or causes governing supply (and thus governing
or helping to govern marginal utility itself), the doctrine of price
which they advance ought to rest openly and squarely upon the assumption
that the supply of the good is taken for granted. In Böhm-Bawerk’s theory
of price, the total supply of horses in the miniature market is simply
assumed, not accounted for.[220] If horses were more plentiful in this
market the sellers’ price equivalent would be lowered and the market
price would turn out lower. It is a fair criticism that Böhm-Bawerk
obscures the important point of the dependence of price upon supply, by
assigning sellers and buyers an arbitrary series of money valuations as
the very first step in his argument.
The “theory of price,” as the Austrians call that part of their theory
which traces the connection between consumers’ “subjective” values and
market exchange values, must begin with a clear recognition that the pure
utility theory of value assumes outright the extent of the supplies of
all goods. Let us, then, inquire first how the price of a given supply
of consumption goods is determined.[221] If a certain supply of some
consumption good is presented for sale in the social market, there is
theoretically some one price at which just this amount of goods can be
sold. Following Professor Marshall, we may call this the “social demand
price.” At a higher price, only a less supply could be disposed of. At
a lower price more could be sold. The competition of buyers ultimately
prevents this lower price being set. The dependence of the social demand
price of a given supply of goods upon the esteem value of these goods to
the consumers in the social market may be traced as follows:
(1) From _esteem values_ to _price equivalents_. The sum of money which
a consumer would pay for the addition of an article to his possessions
rather than go without that article is called its price equivalent. The
price equivalent must not be confused with the price he may pay actually
to buy the article, namely, the market price. A piano may have a market
price of $600, but have a price equivalent of $1,000 to A. If the market
price of pianos were to ascend to $1,000, A would still purchase one.
But more than $1,000 he would not pay. When A assigns to a piano a price
equivalent of $1,000, this sum of money, of course, has significance
merely as the representative of the indefinite variety of other goods
which A supposes to be within the command of $1,000. Thus A’s ability to
think out price equivalents depends upon the already existing exchange
value of money, or, in other words, upon prices themselves. If the market
prices of carpets, carriages, wines and other things were different from
what they are, the amount of other things commanded by $1,000 would be
altered, and assuredly A’s price equivalent for a piano would change.
Thus the price equivalent of one thing can be named only in view of
previously existing scales of market prices of other things. A consumer
comes to form a conception of the significance of a unit of money to
his welfare. Into the question of the inner nature of this conception we
cannot afford here to push our inquiry. Without this conception he could
not set price equivalents. It is merely a matter of experience that in
fact consumers do set price equivalents. The sole possible explanation
of the fact that when a monopoly raises the price of a consumption good
the sales of it decline, is that some buyers have been excluded because
the price asked for has passed above their price equivalents.[222] The
worth of money to a consumer depends upon the extent of his money income.
Thus the price equivalent set upon a good by any consumer depends (1)
upon the esteem value of that good to him, and (2) upon the extent of
his money income. Given a consumer’s money income, his price equivalents
for various articles will be determined by, and be in proportion to, the
esteem values those articles have for him.
(2) From _price equivalents_ to _market-price_. The price at which a
given supply of a certain good can be sold to a body of consumers is a
_resultant_ from their individual price equivalents for this good. It
is in no sense an average or mean of these price equivalents.[223] This
is best understood by imagining the supply of the good offered in the
market to be increased by one unit. This extra unit must be added to some
person’s stock. It will go normally to the person who will pay the most
for it, but the price of the unit will have to be lowered sufficiently
to bring it down to this person’s price equivalent for a unit. In the
open market, then, the prices of all units will have to be lowered to
the level of the price of this unit. This illustrates the way in which
the social demand price of a given supply of goods is determined at some
individual price equivalent. The price of a given supply is determined at
the point of a marginal individual price equivalent.
In the last section it was asserted that unless a good is possessed in a
plurality of units, that is, in a _stock_, by the individual consumer,
its value will not be determined by _marginal_ utility. The Austrian
writers have made this perfectly clear, but there are innumerable places
in the literature which has sprung up about the Austrian theory, either
expounding or criticizing it, where the value of such a good as a piano
or a furnace is said to depend on marginal utility. Let us suppose
that no person possesses more than one piano. In this case, properly
speaking there is nothing marginal about the value-determining utility
of a piano. There are, however, two methods in vogue of discovering an
alleged marginal utility in such a single unit commodity. The first is
to point out that a piano may serve several uses. For instance, it may
be used to produce music and also as an ornamental piece of furniture.
It is then suggested that one of these uses is greater or less than the
other and is marginal. Some suggest by implication or directly that it
is the least use to which a piano is put which determines its value to
the owner. If it should be suggested in reply that a piano might be used
to conceal a discolored place in the wall, which could equally well be
done by a two-dollar screen, the probable reply would be that it is
only the least use to which the piano can be put _economically_ which
determines its value. Even so acute a writer as Smart[224] is guilty of
this perversion. When it is in the pursuit of such margins, the mind is
far adrift from the true logic of the utility theory. When a piano is
actually used to cover a piece of wall, this is assuredly an “economic”
use of the article. This use does not exclude or hamper any of its other
uses. It is true no one would pay $600 for a piano merely to cover a bad
piece of wall, but very likely few would pay that sum for any one use of
the piano. The truth is, the value of a piano to its user depends upon
the sum of its uses to him. The value of the piano measures the total
amount of satisfaction _conditioned_ upon its possession. When goods
are used in stocks any one unit _conditions_ only the satisfaction had
from the last unit. Thus only does _marginal_ utility—the actual total
utility of the marginal increment—determine value. It is quite futile to
attempt to distinguish between the different uses of a unit commodity and
arrange these in a descending scale and choose a marginal use. When the
unit is taken away all these uses would be sacrificed. Professor Dietzel,
an undiscerning critic and imitator combined of the Austrians, has
stated that it is the “highest use,” the use on the upper margin, which
determines the value of a unit commodity.[225]
A second method of discovering a marginal utility for a piano is to
conceive of the utility of a piano to that possessor who has just been
able to afford the price as the marginal utility of pianos. All men
pay the same price for a given grade of piano, but the rich men have
much higher price equivalents than the poor. If the supply of pianos
to be sold in a given social market be increased, the price will fall.
This fall is interpreted as being caused by a decline in the “marginal
utility” of pianos. There is no justification for this logic in the
utility theory. It is not possible to compare the satisfactions had from
pianos by different persons. It is not possible to imagine the pianos in
society arranged in a series, the pianos of highest utility being those
held by the persons who could afford to pay most and so on. The price
of a piano depends upon the _marginal price equivalent_ of a piano, but
neither the exchange value nor the esteem value of a piano depends upon
_marginal_ utility.
To conclude, all goods derive their exchange values from the esteem
values placed upon them by consumers. The exchange value of a good in
money is determined in a marginal manner by the price equivalents set
upon the good by the consumers. Since the extent of a consumer’s money
income helps determine the price equivalents placed upon all articles by
him, it is impossible to show that these price equivalents depend solely
upon esteem values. But it is still proper to say that the esteem value
of a good is the sole source of its exchange value. A consumer will
assign no price equivalent to a good unless it possess esteem value,
and when he does assign a price equivalent, it will be precisely in
proportion to the esteem value of the good as compared with other goods
which he values.
The price of a commodity is a definite and fairly stable quantity,
_e. g._, the price of an oil-stove is $4.50. Is it possible that this
definite price can be said to be determined by the utility of oil-stoves
to consumers? Consumers cannot reduce their estimates of the utility
of articles directly to figures. But, nevertheless, a consumer can
determine upon a sum of money whose general purchasing power he considers
approximately equivalent to the value of an oil-stove to him. The value
of the oil-stove is a wavering quantity, but having struck a money
estimate on the basis of that value, taking it for what it is at the
instant of the decision, this money sum is a definite something that will
be carried in mind as such though the value is indefinite and wavering.
Given these definite “price equivalents” the definite market price is
a resultant from them. The market price of a good is a sort of social
institution and has the momentum or stability of such an institution.
Being once determined, it will not waver as do the numberless individual
estimates of “esteem value” upon which it is founded.
5. If a commodity fetching a definite and exact price, as for instance an
oil-stove selling for $4.50, is produced under competitive conditions,
the apparent and proximate reason why the article has this particular
price is because it costs its manufacturer about this sum of money
to produce it. Putting aside the complications due to the fact that
competition frequently takes place between firms producing at different
costs, the commonest law of exchange value, stated in the usual language,
is that price is “determined by” entrepreneur’s cost of production.
Whether entrepreneur’s cost is reckoned in terms of wages, interest,
and rent; wages and interest alone; or in terms merely of the prices
of all the production goods “entering into” the product, the law of
entrepreneur’s cost, as stated above, reduces itself to the proposition
that the exchange value of production goods “determines” the exchange
value of products. For all forms of calculating entrepreneur’s costs are
based on the simple, practical, or first method of reckoning costs, as
the prices of labor, raw material, machinery, power, _etc._[226]
There is seeming antagonism between the law of entrepreneur’s cost and
the utility theory of value. For, according to the latter, the value of
production goods is derived solely from the value of their products.
Value originates in human satisfaction, flows out to those consumption
goods upon which the satisfaction is immediately dependent (_i. e._, by
which it is conditioned), from these flows out to the production goods
upon which the consumption goods as products are dependent for their
existence. From these on, the flow of value continues to those production
goods which are still farther removed, and so on, rank by rank, until
unproduced agents are reached. Put in other words, raw material,
machinery and similar goods, have value solely because the entrepreneur
can afford to pay for them, and this he can do solely because his
products have value. If value conduction runs from product to production
goods, how can value determination run in the reverse direction, from
production goods to product? If the stream runs from the spring, we know
that the volume of the spring must determine the volume of the stream and
not the contrary. But does not the law of entrepreneur’s cost assert that
the value of production goods _determines_ the value of products? The
solution of the enigma of this apparent conflict of the utility theory
with the great empirical law of cost (in its common form of statement) is
one of the most interesting and important products of the acute thinking
of the Austrian economists.
The difficulty exists solely because many single production goods, such
for example as iron and wood, or pre-eminently common labor, enter into
a variety of products. When several various products are related to
one another by reason of the fact that a common production good enters
into all of them, we may, following von Wieser, call them “cognate
products.” If cognate products A, B, and C are made in part from the
common production good P, P will derive its value from the values of A,
B, and C, but the value of P itself will have a peculiar reactionary
effect, yet to be described, upon the value of these products taken
individually. This reaction is the phenomenon really at the foundation
of the law of entrepreneur’s cost. For an instant permit a supposition
quite contrary to fact. Suppose that A, B, and C are made entirely from
P so that no other production good enters into them. Then the exchange
values of A, B, and C will be derived solely from the “marginal” utility
of these products, but their exchange values are peculiar in this, that
they will be related, will be adjusted, each to the others by reason
of their common origin in P. If a unit of P entering into A attains in
that form a higher value that when entering into B or C, then more A’s
will be made from P and less B’s and C’s. The increase in the supply
of A’s will decrease their value _by decreasing the marginal utility_
of A’s.[227] This process keeps the values of A’s, B’s, and C’s in a
mutual adjustment. If we carelessly confine our view to a part of this
process of adjustment, we see what appears to be a determination of the
value of A, the product, by the value of P, the production good. If
the value of A is out of adjustment with its cost in P, and then the
adjustment is effected, it is the value of A which seems to move to
that of P. The value of P may seem to be the independently determining
factor. As a matter of fact, in the first place, the value of A moves
only when its marginal utility has been altered by a change of its
supply, and in the second place, when it does move toward the value of
P, that of P also moves toward it. It depends on the relative importance
of A’s in comparison with all of the rest of the products of P, how far
the value of A moves and how far the value of P moves in their mutual
adjustment. If it is discovered that the two stars in a “double star”
are approaching each other, we easily conceive that both take part in
the moving. But when an apple falls to the earth it is more difficult
to realize that the earth also falls toward the apple, moving its due
proportion of the distance between them. In the same way, when we see
that the value of some relatively unimportant product remains equal to
its cost of production, we are inclined to state the case as one of
pure determination of value by cost. But this “determination” is but
a part, viewed by itself, of a larger process by which the supplies,
and consequently the values, of cognate products are being adjusted to
one another. The whole truth is that the value of production goods is
determined by the value of their products. Because of the existence
of great common production goods of manifold productive uses, we
have the peculiar reaction of the value of production goods on the
value of products, a part of which process is described in the law of
entrepreneur’s cost.
The case of real life is more complex than the one considered above in
that a plurality of common production goods always enters into a product.
In this more complex case we find an entirely new problem, which rejoices
in the name of the “imputation of the productive contribution,” but
the explanation of the law of entrepreneur’s cost remains exactly the
same in principle as that given for the artificially simplified case.
When a product is made from several production goods, as a carriage
from wood, iron, leather and labor, the value which by anticipation the
production goods derive from the product is divided among them. The share
of value of each production good is called its productive contribution.
The different solutions of the problem of imputing the productive
contribution already offered in the literature of value and distribution,
will not be discussed here.[228] One principle, however, will be taken
for granted. It will be assumed that the productive contribution of any
kind of production good in the value of a particular kind of product
varies inversely with the supply of this production good which is
turned to the making of that kind of product. If product A is made from
production goods P, Q and R, and the amount of P used in producing A’s
is increased—with or without an increase in the amount of Q’s and R’s
used[229]—the productive contribution of a unit of P in the value of A’s
will be decreased.
Considering now the reaction of the value of production goods on the
value of particular products, we may represent the more complex case,
corresponding to real life, by supposing products A, B and C to be made
from production goods P and Q, P and R, and P and S respectively. In
this case the products are cognate only by reason of their relationship
through P. The production goods Q, R and S are not common. Here as before
the supplies and values of the products A, B and C are in a relation of
mutual dependence. The dependence is, however, not so close as in the
first artificially simplified case considered above. In the present case
it is not the values of A, B and C themselves which are brought to an
equilibrium, but it is merely the _productive contributions of P_ in the
values of A, B and C that must reach an equality. If a unit of P obtains
a higher productive contribution in A than in B and C, more P will be
put to the making of A’s and less to the making of B’s and C’s, until
a unit of P attains the same productive contribution in each of these
products. If the amount of P put to the making of A’s is increased, the
supply of A’s will be increased and A’s will decline in value. But the
decline in the value of A’s caused in this manner will fall entirely
upon the productive contribution of P. The decline of value takes place
merely to bring the contribution of P’s in A’s to an equilibrium with the
contribution of P’s in B and C. Abstract as the foregoing formulæ are,
they are nevertheless real. If entrepreneurs were not able to ascertain,
at least approximately, the productive contributions of the various
production goods entering into the product which they manufacture, they
would be unable to tell either how much of each productive factor they
can afford to buy or what price they can pay for it.
When we call to mind the fact that in actual industry most production
goods are themselves products, and that into the majority of final
products nearly all the great common production goods enter, we realize
the stupendous complexity of the relationships of cognate products in
actual life. It is no wonder that ordinarily a whole half of the process
by which the values of all these fellow products are brought to mutual
adjustment escapes our notice. Pig iron derives its value from a thousand
and one kinds of products. When the value of one of these alone is being
brought into adjustment with the value of pig iron, the mass is all on
the side of the pig iron, if we may so express it. In this movement
the single product is seeking a value-equilibrium with all the vast
multitude of other products of pig-iron. It seems itself to effect all
the adjusting. As a matter of fact, it contributes its due share to
the determination of the value of the raw iron. Thus far, we may safely
affirm, the difficulty which, at first sight, the law of entrepreneur’s
cost seems to present to the utility theory has been quite surmounted.
It is a matter of some interest to define as exactly as possible
the relation of potentiality cost to entrepreneur’s cost. When an
entrepreneur, in making his product, uses a production good capable of
other applications, by other entrepreneurs, his product is made at the
expense of potentiality cost. Whether in the isolated or in the social
economy, there is waste whenever a good is produced at a potentiality
cost which is higher than the value of the good itself. A greater value
will be sacrificed to obtain a less. In the isolated economy Crusoe will
easily guard himself against this form of waste. In the social economy,
the competition of entrepreneurs for the supplies of production goods
prevents the same form of waste. Competition being granted, nowhere
will there be found an entrepreneur who uses up production goods to
make a value less than the highest value that these goods could produce
elsewhere. For otherwise the entrepreneurs located at the other points
of higher return would be able to command the production good for their
purposes, and the possibility of profits would furnish them with the
motive to bid for it. If entrepreneurs’ costs always consisted solely in
the value of production goods capable of manifold applications, we could
say that the potentiality cost of a product determined its entrepreneur’s
cost. For the former cost consists in the highest other values that these
production goods may be made to produce elsewhere, and the entrepreneur
will normally have to pay that value for them and no more. His necessary
outlay for a product is thus regulated by its potentiality cost.
But sometimes in the making of a product certain valuable production
goods may be used whose employment does not involve potentiality cost.
These are, of course, production goods capable of being used in this one
product alone. A production good may be capable of making but one kind
of product and yet receive from that product a certain share of value as
its productive contribution. A mineral spring may be so situated as to be
such a production good. A mine is a perfect example. Here a new question
confronts us. Does or does not an entrepreneur’s outlay in the value of
such a production good constitute a part of entrepreneur’s cost? This is
solely a question as to how we choose to define entrepreneur’s cost. It
may be defined either way. But in the event that we define this cost to
include outlays for single-use production goods, it will no longer be
possible to assert that potentiality cost governs entrepreneur’s cost
wholly and in all cases. Let us give an illustration of the question.
If the bottled water of a mineral spring can sell for ten cents in a
neighboring city, and it costs five cents for the bottle and labor and
two cents for transportation, is or is not the three cents per bottle
which remains as the rent (“price-determined surplus”) to the spring a
part of the entrepreneur’s cost of producing bottled mineral water? If
the vender of the water did not own the spring, he would be inclined
to reckon the rent paid for it to its owner as a part of his money
costs. But economists are agreed that the distinction between costs and
surpluses does not hinge on relations of legal ownership. If the producer
of the bottled water owned the spring, he would merely pay the rent of it
to himself. To the present writer it seems that entrepreneur’s cost may
be defined either to be coextensive with potentiality cost, or to exceed
this cost by the inclusion of “price-determined” rents,[230] provided
a consistent usage be maintained. In the one case, entrepreneur’s cost
is determined by potentiality cost; in the other case it is principally
determined by potentiality cost.[231]
In accounting for the value of consumption goods the Austrian theory
takes their supply for granted. In the same way, when the Austrians
come to their explanation of the law of cost they take the supplies of
production goods for granted. If the supply of pig iron brought every
year to the iron market be increased, the supply of the products of
iron will be increased and the exchange values of these products will
fall. The exchange value of pig iron will fall in consequence.[232] At
this point a question—a criticism in behalf of the cost theories of
value—naturally suggests itself. Is not supply ultimately regulated by
cost of production in some form, and is not cost of production thus
either the ultimate regulator of value itself, or at least a joint
regulator with utility? We have suggested here the famous question of
the “reconciliation” of the cost and the utility theories of value.
It is certain that the only form of cost which can exercise ultimate
control over the supply of any produced good is what we have called by
the generic name of “pain cost.” The potentiality cost of a product is
measured in the value of the production goods entering it. But this value
itself depends on the supply of these production goods. The ultimate
cost regulator of the value of both the products and the production
goods cannot be potentiality cost. The influence of potentiality cost
causes the supply of the individual kind of product merely to be
adjusted to the supplies of its cognate products. But potentiality
cost has no influence whatever over the total supply of the production
goods or the absolute supply of the total mass of cognate products. To
appeal to a simple illustration, if a flow or stream of some production
good be supposed to divide into several branches as it proceeds, each
branch representing one of the several cognate products of that good,
the influence of potentiality cost may determine the _relative volumes
of the different product-streams_, but only pain cost—if any cost at
all—can influence the volume of the parent stream, and thus govern the
_absolute volume of all the branches_. Entrepreneur’s cost also, most
obviously, fails as an ultimate regulator of supply. This cost is but the
proximate agency through which the two elementary forms of cost exert
their influences upon the relative and absolute supplies of products.
Undoubtedly the recognition that pain cost is the only form of cost
capable of exerting any ultimate control of value, helps to suggest
that it be called “real cost” or “true cost.” Professor Marshall, for
instance, analyzes cost into two forms, (1) real, and (2) money costs.
6. There is to-day a large following for the doctrine that cost and
utility are joint and equal regulators of value. Professor Alfred
Marshall, for instance, states that “we might as reasonably dispute
whether it is the upper or the under blade of a pair of scissors that
cuts a piece of paper, as whether value is governed by utility or cost of
production.”[233] Historically, there have been developed by economists
two distinct and apparently antagonistic theories professing to afford
ultimate explanations of value; the earlier or cost and the later or
utility theory. But if it can be shown that in reality cost and utility
are but joint regulators of value, recent thinkers hold this equivalent
to a demonstration that the two apparently hostile doctrines are after
all but the two parts of a larger harmonious whole. It is, therefore,
maintained by many that the two opposed schools of value merely failed
to take a broad enough view of the problem. Thus we have ever before us
the interesting question of the reconciliation of the cost and utility
theories. If it be desired to effect a fundamental reconciliation, what
appears to be the most propitious starting point is found in the theory
of the “marginal or final equivalence of utility and disutility,” a
doctrine which originates purely as a theory of “subjective” or esteem
value in contrast with exchange value. The first writer to give this
theory a definite formulation was probably Gossen, but it was J. B.
Clark’s later but entirely independent statement of the same idea which
was first to bring it to the notice of economists generally.[234]