AN INTRODUCTION
TO THE
THEORY OF VALUE
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AN INTRODUCTION
TO THE
THEORY OF VALUE
ON THE LINES OF
MENGER, WIESER, AND BÖHM-BAWERK
BY
WILLIAM SMART, M.A., D.PHIL., LL.D.
ADAM SMITH PROFESSOR OF POLITICAL ECONOMY,
UNIVERSITY OF GLASGOW
MACMILLAN AND CO., LIMITED
ST. MARTIN’S STREET, LONDON
1920
_COPYRIGHT._
First Edition 1891.
Second Edition 1910.
Third Edition 1914.
Fourth Edition 1920.
GLASGOW: PRINTED AT THE UNIVERSITY PRESS
BY ROBERT MACLEHOSE AND CO. LTD.
To
W. S. H.
PREFACE TO THE SECOND EDITION,
1910
This little book was written in 1891, when I was fresh from my
translations of Böhm-Bawerk and somewhat overborne, perhaps, by the
ideas of his school. It has been out of print for many years, and,
although often pressed to republish it, I refrained, for the reason
that a busy life had prevented me returning to the later developments
of that school. But I still feel, as I did when I wrote it, that my
English-speaking colleagues have never given sufficient attention to
that side of the one Theory of Value (for there is only one, however
much individuals may emphasise the demand side or the supply side)
which Jevons first laid stress on. Having now mortgaged my life to
what seems to me the greater claim of writing the Economic Annals of
the Nineteenth Century, the most I can do is to reprint the edition of
1891, with a few verbal alterations, submitting it as no more than it
originally professed to be—an Introduction to the theory which lies
at the centre of Political Economy, and must occupy the mind of the
young economist for many years of his apprenticeship. The few who may
be interested to know what place I give, after many years of teaching,
to doctrines which had so great a part in forming my economic views,
will find it suggested, perhaps, in Appendix II., entitled “Theory of
Value: the Demand Side.” It is a summary of lectures, which I put into
the hands of my students to be studied along with Book III. of the
classic which has moulded modern economic thought, Professor Marshall’s
_Principles_.
WILLIAM SMART.
UNIVERSITY OF GLASGOW,
_November, 1910_.
PREFACE TO THE FIRST EDITION
This book has few pretensions to originality. The theory is that
enunciated by Menger and Jevons, and worked out by Wieser and
Böhm-Bawerk. I have done little more than take it out of its German
setting, and pass it through my own mind. As the translator of
Böhm-Bawerk’s _Capital and Interest_ and _The Positive Theory of
Capital_, I may claim to have more than a superficial acquaintance with
the work of the Austrian school, and this must form my credentials for
the present _Introduction_. At the same time I must emphasise that it
claims to be no more than an introduction. I do not consider that the
last word on Value has been said by the Austrian school, but that seems
to me no reason why the principles of the new theory should remain any
longer beyond the reach of the ordinary English student. And in case it
be said that I have stopped short of the most interesting part of the
_Natürlicher Werth_, the application of the Value theory to the theory
of Distribution, I may explain that, in justice to Professor Wieser,
I have preferred to put the translation of that most brilliant and
suggestive book into the capable hands of one of my students.
WILLIAM SMART.
QUEEN MARGARET COLLEGE,
GLASGOW.
CONTENTS
CHAP. PAGE
I. INTRODUCTORY 1
II. THE ANALYSIS OF VALUE 9
III. THE DIFFERENCE BETWEEN UTILITY AND VALUE 13
IV. THE SCALE OF VALUE 18
V. THE MARGINAL UTILITY 29
VI. DIFFICULTIES AND EXPLANATIONS 35
VII. COMPLEMENTARY GOODS 42
VIII. SUBJECTIVE EXCHANGE VALUE 47
IX. FROM SUBJECTIVE TO OBJECTIVE VALUE 52
X. PRICE 55
XI. SUBJECTIVE VALUATIONS THE BASIS OF PRICE 61
XII. COST OF PRODUCTION 67
XIII. FROM MARGINAL PRODUCTS TO COST OF PRODUCTION 74
XIV. FROM COST OF PRODUCTION TO PRODUCT 78
XV. CONCLUSION 84
APPENDIX I 87
APPENDIX II 91
INDEX 103
WRITERS AND BOOKS REFERRED TO
CARL MENGER
(Professor in the University of Vienna),
_Grundsätze der Volkswirthschaftslehre_, Vienna, 1871.
FRIEDRICH VON WIESER
(Professor in the University of Prague),
_Ueber den Ursprung und die Hauptgesetze des wirthschaftlichen
Werthes_, Vienna, 1884.
_Der natürliche Werth_, Vienna, 1889,
translated as _Natural Value_, Macmillan & Co., 1893.
EUGEN V. BÖHM-BAWERK
(Honorary Professor in the University of Vienna),
_Grundzüge der Theorie des wirthschaftlichen Güterwerths_,
published in Conrad’s _Jahrbücher_, 1886.
_Geschichte und Kritik der Kapitalzius-theoriem_,
Innsbruck, 1884, translated as _Capital and Interest_,
Macmillan & Co., 1890.
_Positive Theorie des Kapitales_, Innsbruck, 1889,
translated as _The Positive Theory of Capital_,
Macmillan & Co., 1891.
W. STANLEY JEVONS
(Professor in University College, London),
_The Theory of Political Economy_, 2d edition,
Macmillan & Co., 1879.
CHAPTER I
INTRODUCTORY
There is an understanding among economists, dating at least as far
back as Adam Smith, that, in economic science and discussion, the
ordinary terms of the industrial world are to be used in the sense
generally attached to them in that industrial world. In many respects
this has been unfortunate: the science is bound for ever to a loose
nomenclature. It is particularly unfortunate for English political
economy, which has not the possibility, so enviable in German science,
of combining a new predicate with an old stem in such a way that the
combined word is exact and yet not unfamiliar. Hence very many terms in
economics have a long and chequered history attached to them, according
as economists, in writing their systems, have tried either to follow
the usage of the market and the street, or to free themselves from the
vexatious restraint.
No term affords a better illustration of this than the word Value. It
is deeply rooted in popular conception and in popular speech. Of all
words used in economic theory, it has most need of exact definition,
because there the theory of value occupies the chief place. Yet the
history of economic science is strewn with the wrecks of theories of
value.
Every one knows Thornton’s story of how Sydney Smith retired from the
Political Economy Club, because his chief motive for joining it had
been to discover what Value was, while all he had discovered was that
the rest of the Club knew as little about the matter as he did! Every
one, too, has smiled at Mill’s statement, made in 1848, that there was
nothing in the laws of value which remained for him or for any future
writer to clear up. And many felt sympathy with Jevons when he threw
the term overboard altogether, declaring that neither writers nor
readers could avoid the confusion so long as they used the word.
But although it might be possible, by a very strict attention to proof
sheets, to keep the word out of a book, it would not be possible to
keep it out of the economist’s mouth, any more than it would be to
banish it from ordinary speech. And—happily, as it seems to me—the
recent writings of the Austrian school have shown that we may retain
the old familiar word, and yet attain the exactitude of scientific
nomenclature.
There is a time-honoured classification to which is due much of the
present confusion. In the _Wealth of Nations_ (Book i. chap, iv.),
occurs the following passage:
“The word Value, it is to be observed, has two different meanings,
and sometimes expresses the utility of some particular object, and
sometimes the power of purchasing other goods which the possession of
that object conveys. The one may be called ‘Value in use,’ the other
‘Value in exchange.’ The things which have the greatest value in use
have frequently little or no value in exchange; and, on the contrary,
those which have the greatest value in exchange have frequently little
or no value in use. Nothing is more useful than water: but it will
purchase scarce anything; scarce anything can be had in exchange for
it. A diamond, on the contrary, has scarce any value in use, but a very
great quantity of goods may frequently be had in exchange for it.”[1]
[1] The division is as old as Aristotle. “Of everything which we
possess there are two uses both belonging to the thing as such, but not
in the same manner; for one is the proper and the other the improper or
secondary use of it. For example, the shoe is used for wear, and it is
used for exchange; both are uses of the shoe.”—_Politics_ (Jowett), § 9.
This passage, like much else in Adam Smith, does not bear all that
has been read into it by subsequent economists. It does not say that
Use Value and Exchange Value are two great branches of one universal
conception of Value. Nor does it say that they are entirely different
conceptions. It merely says that the word has two different meanings.
What concerns us, however, is the use that economists have generally
made of this passage. They have quoted it with approval; shown that the
two kinds of value do not by any means coincide; and have then gone on
to discuss the latter as “economic value,” or “what we mean by value in
political economy.” The best thing we can do, meantime, is to try to
forget this old classification, and begin anew.
It scarcely requires proving that Value, in whichever of its various
senses the word is used, does not express any inherent property of
things. Very often, indeed, we can scarcely help thinking of Value as a
quality of a material object,—particularly when the object is one of
universal desire, such as gold coin. But Walker’s monetary formula,
“Money is that money does,” may remind us that the value even of gold
coin is given it by the service it renders in a highly organised
community, and that, if to any substitute can be given the confidence
that gold commands, the same value will attach to it—“attach” but not
“inhere.” Sometimes, again, value is so strongly a personal experience
that we are tempted to think of it as purely a subjective matter, and
this is particularly the case among people who understand Ruskin’s
famous words, “There is no Wealth but Life.” The different value set
upon any work of art by different individuals, classes, or nations, is
sufficient proof of this.
But although it is almost impossible to use the term without
suggesting an inherent property,[2] Value in all its forms implies
a relation. The word seems to arise fundamentally in the relation of
Means to End, and will accordingly take various forms according to
the “end” conceived of. This end may be, directly, the Wellbeing of
man, whether conceived of as the ideal good of humanity, or the social
ideal current at the time, or the realisation of individual character,
or merely the gratification of individual desire. Or it may be some
mechanical or technical result, which has no direct reference to
personal wellbeing, or at least admits of being considered, for the
moment, as a merely objective or intermediate result. Corresponding to
these two classes of “ends,” we may divide the phenomena of value into
Subjective—or Personal—Value and Objective Value. The expressions are
not by any means perfect,[3] but they are the terms generally used by
the Austrian school, and they are perhaps the best we can get.
[2] “Value is the life-giving power of anything; cost, the quantity of
labour required to produce it; price, the quantity of labour which its
possessor will take in exchange for it. ‘Value’ signifies the strength,
or ‘availing’ of anything towards the sustaining of life, and is
always twofold; that is to say, primarily, intrinsic, and secondarily,
effectual. Intrinsic value is the absolute power of anything to
support life. A sheaf of wheat of given quality and weight has in it a
measurable power of sustaining the substance of the body; a cubic foot
of pure air, a fixed power of sustaining its warmth; and a cluster of
flowers of given beauty, a fixed power of enlivening or animating the
senses and heart. It does not in the least affect the intrinsic value
of the wheat, the air, or the flowers, that men refuse or despise
them. Used or not, their own power is in them, and that particular
power is in nothing else. But in order that this value of theirs may
become effectual, a certain state is necessary in the recipient of it.
The digesting, breathing, and perceiving functions must be perfect
in the human creature before the food, air, or flowers can become of
their full value to it. The production of effectual value, therefore,
always involves two needs: first, the production of a thing essentially
useful; then the production of the capacity to use it.”—_Munera
Pulveris_, i. § 12.
I quote this passage, partly on account of its suggestiveness, partly
to show how impossible it would be to reconcile any such definition of
value either with ordinary language or with economic science.
[3] For instance—to say nothing of the fact that all economic ends
must be subjective—of the four ways indicated above in which Wellbeing
may be conceived, the three first may be considered objective as
compared with the subjective fourth, while the wellbeing of man
generally—particularly the ideal good—may very well be called the
only objective end in contrast to the accident of a technical result.
But, as it is impossible to keep the economic vocabulary clear of the
philosophical, we may be satisfied if these names are definite enough
to keep before our minds the broad lines of the division indicated
above.
Value, in the subjective sense, we may call, generally, the importance
which a good is considered to possess with reference to the wellbeing
of a person. In this sense, a good is valuable to me when I consider
that my wellbeing is associated with or dependent on the possession of
it—that it “avails” towards my wellbeing.
Value, in the objective sense, is a relation of power or capacity
between a good and an objective result. In this sense, a good has value
when it has the power of producing—or “avails” towards—some objective
effect. There are, consequently, as many objective values as there are
objective effects. Thus while the subjective value of coal to me is
the amount of “good” I get from the fire, its objective value is the
temperature which it maintains in the room, or the amount of steam
it can raise in the boiler, or the money it brings me if I sell it.
This kind of value is very much synonymous with the word “power” or
“capacity”; it is as common to speak of “heating power” as of “heating
value.”
There is no doubt that “Value” is generally used, in ordinary language
and thought, in both these senses. But there is also no doubt that
powers or values of the latter sort _in general_ do not enter into
economic study at all. We have nothing to do with the heating value
of coal, or the resisting power of iron, or the fattening properties
of oil-cake; these are purely physical or technical matters. But,
inside this class of Objective Values, there is one species which has
a peculiarly economic interest, and that is, the “power of exchange”
or “purchasing power.” By this is meant the capacity or power of a
good to obtain other goods in exchange. Of course, the word “power”
here is also misleading. No good has this power in itself. It is,
at best, a power conferred on goods by the complex machinery of an
organised economic community, and it does not exist outside of a system
of exchange. It is a power that lies in the connection or relation of
two things, and not in either of the things. Jevons very well called
it a Ratio of Exchange. But it is purely an “objective” relation as
we have defined it; as objective, for instance, as heating power.
When the quarter of wheat in the market exchanges for 25s., we say,
indifferently, that the “exchange value of the wheat is 25s.,” or that
“the purchasing power is 25s.,” or that “the ratio of exchange between
the wheat and the shillings is as 25 to 1.”
It has been the ambition of economists to explain all kinds of value
from a single universal conception, but so far the result has only
been to group heterogeneous elements under a common name. It might be
possible, perhaps, to connect them all under the general conception of
“that which avails,” or under the relation of Means to End; but whether
much is gained by this for economic science is doubtful.[4]
[4] Böhm-Bawerk, like Neumann, while acknowledging that the two
conceptions have many internal and external relations, and that both
spring undoubtedly from one common root, thinks that any more universal
conception, which should embrace them both, would be _ganz leer und
schattenhaft_.
Here, at any rate, we shall follow the line which has led to good
results among the Austrian economists, and consider Subjective and
Objective Value in general as two independent conceptions accidentally
associated in common usage.
But, while this seems true, as regards Subjective and Objective value
_in general_, we shall find that there is a close and necessary
connection between subjective value and that one branch of objective
value just referred to, namely, Objective _Exchange_ Value. In what
follows it will be shown that this latter Value, while, in itself, an
objective, and, as it were, a mechanical power, is a superstructure on
the subjective or personal estimates of value put upon goods by buyers
and sellers within a market. In short, we shall have to vindicate, or
at least defend, Jevons’ assertion, now become a text of the Austrian
School, that “Value depends entirely on Utility.”
From what has been said the reader will be prepared for the claim of
this school, in opposition to Adam Smith and many of his successors,
that, when the word Value is used without qualification, it should
mean Subjective—or Personal—Value, and not Purchasing Power. The first
and the main work of the theory of value, then, is to inquire into the
nature, causes, and standard of Subjective Value.