THE THEORY OF VALUE AND THE THEORY OF PRICES
In most English treatises on economics, a price means a sum of money given
in exchange for a commodity, or the ratio between the money and the
commodity, or the ratio between the value of the money and the value of the
commodity. In any case, price as a rule involves the idea of money. With
the Germans, on the other hand, _Preis_ means any exchange ratio (or a
quantity of commodities of any sort given in exchange for a good), whether
or not one of the terms of the ratio involves money, and the distinction
between price and value (_Preis_ and _Wert_) is, commonly, the distinction
between the measure and the thing measured, or between "relative value" and
"absolute value" in Ricardian phrase.[198] The conception of price has been
broadened by some later writers in English, however, to correspond with the
German usage, notably by Professor Patten,[199] and by Professor
Schumpeter,[200] in an English article contributed recently to the
_Quarterly Journal_. I do not care to argue a merely terminological
question, and I readily concede that there are disadvantages in departing
from familiar usage. But, on the other hand, since I am convinced that
ratios of exchange in general, and money prices in particular, are
generically the same, while ratios of exchange and values are generically
as unlike as it is easily possible for two things to be, I shall use the
term price in this wider meaning, and confine the word value, in the
exposition of my own theory, to the non-relative meaning.
The distinction between prices in this sense and absolute values appears in
Adam Smith and in Ricardo. These writers do not adhere very strictly to
either meaning of the term, value, however.[201] The conception of absolute
values is lost by J. S. Mill, and the distinction which he draws in
connection with the problem of the standard of deferred payments (not so
called by Mill) is between values (relative) and _cost of production_.[202]
In Cairnes, the two conceptions are hopelessly confused on a single
page,[203] while Marshall's whole treatment runs in terms of price.
In what follows, I wish to generalize the conception of price, to show the
function of the price concept in economics, to distinguish carefully
between the theory of value and the theory of prices, and to see what light
the theory of value outlined in this book throws upon the problems of the
price analysis.
In chapter II, the distinction between "absolute and relative values," or,
in our present phrase, between values and prices, was sufficiently
indicated not to need further elaboration here. The relation between them
was made clear--the absolute value must first exist before the price, which
is the expression of the value of a good in terms of some other valuable
object which is chosen as a measure, can be determined. In fact, _two_
values, the value of the good measured, and the value of the good which is
to serve as the measure, must first exist, as absolute quantities, before a
price-ratio can be made between them, and their "relative values" shown.
In the chapter on the psychology of value, the notion of price was
generalized, and we spoke of the price measure of values of non-economic
sort. This notion is one of very general application and one of
significance for the whole realm of social and psychical phenomena: not
merely where the question of exchanging economic goods is involved, but
wherever choice among alternative goods, or courses of action, or men, or
institutions, or works of art, or other objects of value, is necessary, we
_compare_ them with each other, we _measure_ them by each other, we _price_
them in terms of each other. We arrange them in _scales_ of value, or in
series, seeing which is higher and which lower. Where only two goods are
involved, we may call either the measure, depending on the point of view.
But where many goods are to be compared, it is highly convenient to pick
out some one as the common measure of all, so that they may be reduced to
common terms. For measuring economic goods, money is, of course, the
standard, or common measure _par excellence_, for most purposes. If we are
measuring the value of the political institutions of various countries, we
usually take the institutions of our own country, with which we are most
familiar, as the common measure or standard. Or, in measuring the moral
systems, or the literary masterpieces, of other countries, we again find
those of our own people the most convenient standard. But it is significant
of the correctness of our general point of view that values of different
species may be measured in terms of each other. _Money_, in particular, is
a very general measure, which may serve for many values outside the
economic sphere. Thus, I have pointed out how legal values may be measured
in terms of money, as when the fine for one offense is five dollars, and
that for another twenty-five. Gabriel Tarde[204] points out that by
comparing the theatre receipts of theatres representing different dramatic
schools we may compare the vogues of each, or that by comparing the income
of the clergy in different periods we may get some index of the variations
of religious sentiments. He suggests that while money as a measure of
economic values usually functions in exchange, it may, as a measure of
beliefs or other social forces, function through gifts, through popular
subscriptions to build this or that statue, for the support of scientific
work or philanthropies, or even through thefts: "Quelquefois meme c'est par
des vols ou se montre la perversion d'un esprit sectaire, l'aberration et
la profondeur de ses convictions passionees."
Commonly, indeed, money performs even this function, that of measuring
currents of belief, passion, enthusiasms, etc., through the process of
exchange, and, ordinarily, it is difficult to get any single current
separately. We simply get the resultant of an equilibrium of a complex of
forces in economic values. But sometimes a single factor stands out so
prominently that we can abstract from the rest, and let money changes
measure changes in it alone. For example, during the three days of the
battle of Gettysburg, the premium on gold, as measured in terms of Federal
paper, fell from forty-five per cent to twenty-three and a fourth per
cent.[205] For the market, this means simply a change in the economic value
of Federal paper. But for one who cares to look even superficially behind
the scenes, it means an increased volume of belief in the triumph of the
Federal arms--a belief that at once affected economic values, and was
measured in terms of money. Or, the economist may abstract a single legal
factor, as a tax law, and measure its influence on the assumption that the
rest of the situation is constant, in the well-known laws of shifting and
incidence.
Such clean-cut instances are not the rule, however. The organic complexity
of the social forces lying back of economic values makes it difficult to
disentangle single elements, and measure their force. For one thing,
variations in one factor usually mean movements in the others. If we may
borrow terms from chemistry, while the economist may give us a
_qualitative_ analysis of these forces, it is hard for him to give us a
_quantitative_ analysis. And the characteristic of pure economic theory has
been its effort to get quantitative, quasi-mathematical laws. The "pure
theorist," therefore, does well to start with a quantitative value concept
(a convenient shorthand or symbol for the infinite complexity that lies
behind it), a value quantity in which the net outcome of social
interactions does precisely manifest itself, and study the laws which it
manifests. His chief interest is, not in the origin of economic value
itself, but in the changes in quantities in value in different goods and
services as these manifest themselves in the market, and submit themselves
to economic measurement. In a word, his chief interest is, not in value,
but in _prices_.[206] And the great bulk of pure economic theory, and
practically all that is of greatest importance in pure theory, is in the
theory of prices, and not in the theory of value. Lest I be misunderstood,
the qualification must be repeated: prices here mean, not money-prices, but
prices in the generic sense. In this sense of the word price, it is just as
accurate to speak of the price of money in terms of commodities, or of a
composite of commodities, as to speak of prices of commodities in terms of
money.
That is to say, the economist gives himself little concern, in his
quasi-mathematical study, as to the ultimate nature of the social forces
that manifest themselves in the market. A host of forces lie back of
demand, but the economist puts the phenomena of demand into a curve which
is the function of two variables, one a quantity of money, and the other a
quantity of goods. Lying back of these quantities of goods and money, and
giving meaning to the curve, are the more fundamental quantities, the value
of the goods and the value of the money. Further than this, for the
purposes of his quasi-mathematical, pure theory, the pure economist has no
real occasion to go--in proof of which it need be remarked simply that the
most divergent theories as to the nature of value, none of them adequate if
the theory set forth in this book be true, have not prevented the
development of a vast, highly organized, and immensely useful body of price
doctrine, shared by economists of many schools. If only the economist have
a quantitative value concept, he can do wonders. And, if the question be
regarding relations between factors where the question of the value of
money may be ignored, he may often safely abstract from the idea of value,
and speak simply of money quantities, and relative changes in these money
quantities. Such is, indeed, Professor Marshall's procedure in a large part
of his great work. Professor Davenport's contention that, from the
standpoint of the entrepreneur, the whole thing may be looked at in
pecuniary terms, is true of many problems. Cost for the entrepreneur is
simply a money matter. And while, for the more fundamental analysis, we of
course must insist that a host of psychic forces determine what those money
costs shall be, our analysis will justify the contention that it is
impossible to treat them in any but price terms, in a precise and
quantitative manner. They are too complex. Certainly labor-pain and
abstinence, looked on as abstract individual feeling-magnitudes, will not
explain the supply-prices of labor and capital, any more than individual
"utilities" will explain demand-schedules. And we may add that the terms
"social cost" and "social utility" can, in our scheme, get no meaning that
will make them useful. The social value concept seems to us absolutely
essential for the validation of the whole procedure of the price analysis,
and to be implied in every step in it, but the only meaning we can find for
the concept of social marginal utility would be one which would make it
identical with social value; and against that there are two objections:
first, it would be superfluous, and second, it would be misleading. "Social
utility" can get only a vague, analogical meaning in our scheme. Instead of
explaining social value, it would itself present a problem.[207] A measure
of social economic value in terms of a feeling-magnitude which an
individual can appreciate is not to be had. Value can be measured and
quantitatively handled only in terms of _price_.
In saying this, I do not mean to impeach that more abstract procedure which
speaks of abstract units of value, and uses arithmetical numbers which
designate no particular commodities, or algebraic symbols, or even ordinary
speech, to indicate quantitative relations among different sums of these
abstract units. Such procedure is thoroughly correct, and often highly
convenient, if one be dealing with highly general laws, or if one wish to
avoid any complications from changes in the value of any concrete
commodity which might be chosen as the standard of value. Only, I would
insist, such procedure is simply an abstraction from the price concept, and
so presupposes it. A unit of value, in the concrete, must be the value of
some particular concrete good, which is chosen as the standard. _What_ good
is chosen is a purely arbitrary matter, determined by convenience. Abstract
value, apart from valuable things, is an utter impossibility--only a
Platonic idealism or mediaeval realism could hold the contrary view. And, in
order to show how many units of value there are in a good, we must compare
it with another good, whose value is the unit, unless, indeed, we
arbitrarily choose as our unit the good in question, and say that its value
is one unit, or several units, in case we arbitrarily define the unit as a
fraction of its value. But clearly this latter procedure would tell us
nothing after all as to the amount of the value in the good. It would be a
purely formal process--like renaming a "hocus-pocus" and calling it two
"Abracadabras." Any real measuring--and real measuring is essential for any
quantitative manipulation--implies _two_ things, one of which shall serve
as the measure of the other. The conception of abstract _units_ of value,
therefore, is an abstraction from the price conception, and presupposes
it.[208]
A valid price procedure, in my view, is essentially this: we take our
quantitative value concept, summing up the multitudinous social forces
which determine values: then we assume a given set of ethical, legal, and
social values of a non-economic sort,[209] as a sort of frozen framework
within which our economic values are to operate, and which shall remain
constant during the investigation: then, measuring the economic values in
terms of a common unit, we let them exert their influence on the situation,
and see what results follow. We vary first one and then the other, and see
what readjustments any change involves. Since the situation is so
infinitely complex, we bring about this artificial simplicity in thought,
that we may study the tendencies one by one. But a given economic change
will work out its consequences fully only on the assumption that other
economic changes are not occurring. We can in thought let them vary one by
one, but they do in fact all vary at once. And further--and for this fact
price theory has made no allowance--the "frozen framework" of legal, moral,
and other non-economic social values, is not "frozen." Changes in economic
values lead to readjustments, not only in the other economic values, but
also in the legal, ethical, and other values of the framework. These last
are fluid, psychic forces, just as truly as are the economic values. They
change because of changes in the economic values; they initiate changes in
the economic values; and they initiate changes which deflect the tendencies
of changes in the economic values. So that, even though we premise a
thoroughly organic theory of social value, in which the influence of the
non-economic social values, working _through_ the economic values, is
carefully provided for, we still have to correct the results of our price
analysis, before applying it to practice, to account for changes in the
non-economic values working to deflect the tendencies which the economic
values would lead to if the other values had remained constant.
This last, of course, most economists in practice constantly try to do.
Present day discussions of practical economic problems are rich in data of
a non-economic sort. In practice the economist recognizes that his mission
is, not to see how far a few abstract factors will go in the explanation of
economic life, but rather, to _explain_ that economic life by any means in
his power, though he ransack heaven and earth in the process.
Of course, it is but a commonplace to add that the economist, in practice,
does try to take account of the extent to which his assumptions as to the
legal and social "framework" hold: how far there is real freedom of
competition, how far real "intelligent self-interest," how far mobility of
labor and of capital, how far monopoly privilege, etc. Or, at least, he
usually tries to make himself think that he has done so. It still remains
lamentably true that a great deal of reasoning even on practical problems
is an effort to apply theories without any adequate understanding of the
extent to which the theories grow out of abstractions made for purposes of
study, or any effort to put back the concrete facts from which the
abstraction was made. The practical business man knows how these various
forces operate on values. He studies them, tries to estimate their force in
quantitative price terms, and adjusts his plans to them. If a religious
wave sweeps over a large section of the country, the wholesaler sends in
larger orders for Bibles, and smaller orders for playing cards. If a
rate-reduction agitation is going on, the manufacturer of steel rails and
railroad supplies plans to cut down his output. If trades-unionism grows
strong, employers of labor recognize that they must readjust their
budgets.
FOOTNOTES:
[198] _Cf._ Davenport, _op. cit._, pp. 296-97.
[199] _Theory of Prosperity_, New York, 1902, pp. 16-17, 89.
[200] "On the Concept of Social Value," _Quar. Jour. Econ._, Feb., 1909,
pp. 226-27.
[201] See _Wealth of Nations_, introductory part of chap. VIII of bk. I
(pp. 66-67 of the Cannan ed.) For Ricardo, see _Works_, McCulloch ed.,
London, 1852, p. 15. Adam Smith seems occasionally to use value in the
relative sense, as on p. 183 of vol. II of the Cannan ed. Ricardo, though
indicating that he is concerned only with relative values on the page cited
_supra_, still speaks of values as simultaneously falling, in ch. XX, on
"Value and Riches," which, of course, is impossible on the basis of the
relative concept. There is no point to torturing these passages unduly,
however, in the effort to find our distinctions in them.
Professor Seligman calls my attention to a most interesting forty-page
discussion of the theory of value by W. F. Lloyd, _A Lecture on the Notion
of Value, as Distinguishable not only from Utility, but also from Value in
Exchange_. The lecture was delivered before the University of Oxford, in
Michaelmas Term, 1833, and published, in accordance with the rules of the
foundation which provided funds for the lecture, in London, 1834. The
writer insists on the conception of value as absolute, and devotes pp.
30-40 to a defense of the absolute conception. He cites the passage in Adam
Smith referred to _supra_, in which Smith distinguishes real dearness from
apparent dearness (introductory part of chap. VIII of bk. I). The most
striking thing about this lecture, however, is its anticipation of Jevons's
doctrine of marginal utility, and its emphasis upon the subjective
character of value. The word, margin, is used in virtually the sense in
which Jevons uses it, on p. 16.
The book is very rare,--only three copies, one in Professor Seligman's
library, one in the British Museum, and one in the Goldsmiths' (formerly
Foxwell) Library in London, are known to exist. It seems to have made no
impression upon the economists of the time of its publication. A reprint
to-day would enable the economic world to do belated justice to a very
acute and original thinker. _Cf._ Professor Seligman's article "On Some
Neglected British Economists" in the _Economic Journal_, vol. XIII, esp.
pp. 357-63.
[202] _Principles_, bk. III, chap. XV, par. 2.
[203] _Leading Principles_, editions of 1878 and 1900, pp. 12-13.
[204] _Psychologie Economique_, vol. I, pp. 77-78.
[205] Scott, _Money and Banking_, 1903 ed., p. 60.
[206] _Cf._ Schumpeter, _Quar. Jour. Econ._, Feb., 1909, pp. 226-27.
[207] See _supra_, p. 163, n.
[208] _Cf._ p. 50, n. It is sufficiently clear, I trust, that this argument
is concerned with the relativity of _knowledge_, and not with the
relativity of _value_. We can _know_ things only in terms of our
"apperceptive mass," but that does not mean that things _exist_ only by
virtue of our apperceptive mass. And even knowledge is relative only when
it is "_Knowledge-about_." _Cf._ James, _Principles of Psychology_, vol. I,
p. 221, and _The Meaning of Truth_, p. 4, n.
[209] Marshall accords a limited recognition to our doctrine. See
_Principles_, 1907 ed., p. 35, where he indicates that certain parts of the
theory of value assume the prevailing ethical standards of our Western
civilization, and that prices of various stock exchange securities are
"normally" affected by the patriotic feelings of purchasers, and even
brokers, etc.