Chapter XI: The Ultimate Relation of Cost to Value (3)

The exchange value of a good varies inversely with the supply of it presented to the body of consumers. The larger the supply, the lower is the price equivalent which must be reached as the marginal determining point of its market price.[267] A change of supply alters exchange value only because it changes the marginal price equivalent.[268] In the social market, the purchasing powers of all the various products over one another depends upon their relative supplies. So far as cost of production in any form exercises any degree of control over the value of a good, it can act solely by way of influencing the supply of the good. The phenomenon of the apparent regulation of the exchange values of products by their entrepreneur’s costs, is but a part of a large process in which cognate (or “fellow”) products adjust their relative supplies and their exchange values to one another, to the end that the common production goods entering into all of them may produce equal productive contributions or shares of exchange value per unit in all of their productive applications.[269] The relation of the pain costs of products to their exchange values is limited to one of mere proportionality.[270] The pain cost of a product may be calculated in two very distinct ways, giving total pain cost or marginal pain cost. The total pain cost of a good, consisting in all the labor and abstinence ever endured to bring it into existence, is quite an indeterminate quantity,[271] and its influence upon the exchange value of a good is very remote and irregular. The larger part of total labor cost, the part which includes the labor directly applied to commodities, plus the labor indirectly applied by being directly applied to the raw material and machinery immediately used in their production, and so on for the few nearest generations of machines, this being the part which excludes the infinitesimal bits of labor cost expended far in the past, can be shown positively not to be in proportion to their exchange values. For commodities produced at a higher expense of rents of all kinds (as opposed to wages) have exchange values out of proportion to this calculable part of their total costs.[272] We find that the control of _marginal_ cost over value is closer than that of total cost. If it were not for the existence of innumerable grades and classes of skilled labor, the supplies of produced goods would be so adjusted that their exchange values would be in proportion to their respective marginal costs. But on account of skill, we must here again characterize the influence of subjective cost as remote and irregular.

In conclusion, it is true, speaking in very loose and general terms, we may say the exchange value of a good depends both upon its utility and its costliness to mankind. But it would not be proper to say that cost and utility are equal and coördinate regulators of value. Therefore, Professor Marshall’s shears simile is not to be commended. The most noteworthy changes in exchange values have been produced by discoveries which reduced the labor cost of goods. But the amount of the reduction thus produced in the exchange value of a particular commodity could have only the roughest correspondence with the amount by which its relative pain cost was reduced. Also, for reasons already shown, we know that neither before or after these changes was it possible for exchange values to be in proportion to relative pain costs, whether total or marginal costs be taken. Furthermore, all alterations of exchange values produced by cost changes are effected solely by alteration of the value-determining utility itself. Utility has a much more direct and intimate relation with value in either form than cost. Value may exist without cost and cost may be expended without occasioning value. Value never exists without utility and utility (not in the sense of Smith’s “use-value,” but the effectual utility, the utility which measures the satisfaction conditioned by a good) never exists without value. Cost affects value solely by influencing utility itself. From this comes the all-important conclusion that whenever any of the numerous and permanent forces are active which interfere with the influence of cost, value follows the utility and not the cost.

FOOTNOTES

[1] Chap. xiv of book v, 4th ed., 1898, pp. 554-570.

[2] Value was in this connection used in another sense than pure exchange value, but the difference of significance was never satisfactorily explained.

[3] _Natural Value_, edited by Wm. Smart (London, 1893), pp. xxvii-xxix. Von Wieser gives but three pages of the preface of _Natural Value_ to the writings of Adam Smith and Ricardo on value. But in this brief though profound passage, he has not only suggested what I believe to be the true interpretation of the theories of Smith and Ricardo, but he has also made the greatest single contribution to our understanding of the subsequent course of English thought on the subject.

[4] Rent of land was excluded by Ricardo, but included by Smith and Malthus, and also by J. B. Say.

[5] The Austrian writers are accustomed to call this the “empirical law of costs.”

[6] The detailed history given in the following chapters will, it is believed, substantiate this view. The development of the law of entrepreneur’s costs will be traced only so far as is necessary in order to understand the history of the labor theory, but it is indispensable to follow the general lines of its progress if we are to perceive the “setting” of the labor theory.

[7] Mill granted certain exceptions to the proposition that rent cannot “enter into price,” but placed no emphasis upon them.

[8] _Wealth of Nations_, 2d Thorold Rogers ed., 1880, pp. 31-2. All subsequent page references are to this edition, volume 1.

[9] P. 34.

[10] Referring to the words just quoted, Mr. Ingram says: “This sentence, which on close examination will be found to have no definite intelligible sense, affords a good example of the way in which metaphysical modes of thought obscure economic ideas.” _History of Political Economy_, p. 94, note.

[11] Chap. v. “Of the Real and Nominal Price of Commodities, or of their Price in Labour and their Price in Money.” Chap. vi. “Of the Component Parts of the Price of Commodities.” Chap. vii. “Of the Natural and Market Price of Commodities.”

[12] P. 49. At the same time many important assertions in the “philosophical account” are not restricted to primitive conditions.

[13] It is true that an article’s cost in labor may instead mean its cost in productive power. The cost in this case is at bottom the utility of some other article which might have been created by this productive power had it not been employed in making the first article. In the same sense we speak of a thing as costing money.

[14] P. 29, in chap. iv.

[15] It has been suggested by many writers that the germ of practically every theory of value is found in the _Wealth of Nations_. That is probably true, if we except the utility theory, which associates quantity of value with _quantity of utility_, a conception absolutely foreign to Adam Smith’s thought.

[16] P. 31.

[17] P. 49.

[18] P. 34.

[19] P. 30.

[20] In this instance the word “standard” is used in a sense sufficiently general to include a regulator (_i. e._, a measuring cause) and a mere measure. A standard is “1. Any measure of extent, quantity, quality or value.” ... “2. Any fact, thing or circumstance forming a basis for adjustment and regulation.” _Standard Dictionary._

[21] What Adam Smith has to say of the relation of these standards, one to the other, comes in connection with the account for advanced society, where he discards the labor-cost standard but retains the labor-command measure.

[22] P. 32.

[23] _Ibid._

[24] Chap. x, of book i.

[25] P. 106.

[26] In one place Smith puts forward a naive and uncritical explanation of the reward to skill, comparable to his explanation of the division of labor as due to a propensity of men to truck and barter. “If ... one species of labour requires an uncommon degree of dexterity and ingenuity, _the esteem which men have for such talents will naturally_ give a value to their produce superior to what would be due to the time employed about it.” P. 49.

[27] P. 34.

[28] _Ibid._

[29] P. 35.

[30] In criticising the labor-command standard of Smith, Ricardo has made virtually the same point as the above (pp. 8-14, Gonner ed. Ricardo’s _Principles_). By _riches_ Smith cannot mean what Ricardo means by this term in his famous chapter on the antinomy of value. (Chap. xx, “Value and Riches, their Distinctive Properties.”) If by reason of scarcity, wine should come to command in exchange more labor than formerly, Smith would have to say that a given quantity of wine becomes more riches. This Ricardo would not say.

[31] _Principles_, p. 8.

[32] P. 36. The following passage (p. 38) exhibits perfectly Smith’s general theory of the relation of labor, the precious metals, and grain to value as a dynamic problem. “Labour, therefore, it appears evidently, is the only universal as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places. We cannot estimate, it is allowed, the real value of different commodities from century to century by the quantities of silver which were given for them. We cannot estimate it from year to year by the quantities of corn. _By the quantities of labour we can, with the greatest accuracy, estimate it both from century to century and from year to year._ From century to century corn is a better measure than silver, _because_ from century to century equal quantities of corn will command the same quantity of labour more nearly than equal quantities of silver. From year to year, on the contrary, silver is a better measure than corn, because equal quantities of it will more nearly command the same quantity of labour.”

[33] P. 52.

[34] P. 52.

[35] McCulloch and James Mill were but satellites of Ricardo.

[36] P. 49. Torrens, in his _Essay on the Production of Wealth_, has worked out with great pains a form of proof of this proposition. It is exhibited in a series of dialogues between primitive producers to show that an exchange of goods at a ratio out of proportion to labor-costs is incompatible with recognized motives of trade. His proof is good enough under the tacit assumptions which he makes, including all the conditions of the perfect type of fictitious primitive society used by classical writers.

[37] P. 30.

[38] P. 32.

[39] When Smith speaks of “exchangeable value” as being measured by power to command labor, he is using the only term he has to stand for any or every concept of value distinct from the “value in use” or general utility of free goods.

[40] Its relation to pure objective exchange-value is another question. In Chapter xi of this essay will be found a summary discussion of the relation of disutility cost to value.

[41] The thought in the “final disutility” theories of Gossen, Jevons and Clark, independently worked out by these writers.

[42] These very words were later used by Malthus in his defense of the labor-command standard.

[43] In this sentence we do not assume the commensurability of disutilities incurred by different persons, but the commensurability of the disutilities incident to different occupations. Thus we should all be willing to say that the steamship stoker’s position means harder labor than that of the chief steward of the dining room, but we may be supposed to judge this by comparing our own (imagined) labor as a stoker with our own labor as steward.

[44] _Political Economy_, p. 115.

[45] _Letters of Ricardo to McCulloch_, p. 153.

[46] _Ibid._, p. 132.

[47] _Letters to McCulloch_, p. 153. This shows that Ricardo was not satisfied in principle with his treatment of the value of scarcity goods.

[48] _Natural Value_, Author’s Preface, p. xxviii.

[49] _Principles_, Gonner ed., p. 6.

[50] J. B. Say, _Mélanges et Correspondance d’Économie Politique_, Paris, 1833, pp. 93-4.

[51] _Principles_, p. 6.

[52] Dietzel, _Theoretische Socialökonomik_, Leipzig, 1895, pp. 228-30.

[53] Quoted in _Letters of Ricardo to Malthus_, p. 165, n.

[54] For this he is accused of reasoning in a circle. As far as any defense by Marx himself is concerned the charge goes home. Assuming the productivity theory of wages (which is entirely inconsistent with Marx’s theory of wages) it is quite permissible to say that labor which has a higher wage (or value) contains more units of productive power, more efficiency units, than that receiving a lower wage.

[55] P. 13.

[56] P. 14.

[57] P. 16.

[58] This explanation of the workings of competition is beautifully written both by Smith and Ricardo—is _classic_ in fact.

[59] P. 65. The italics are the present writer’s.

[60] “It is necessary for me to remark that I have not said because one commodity has so much labour bestowed upon it as will cost £1,000 and another so much as will cost £2,000 that therefore one would be of the value of £1,000 and the other of the value of £2,000, but I have said that their value will be to each other as two to one, and that in those proportions they will be exchanged. It is of no importance to the truth of this doctrine whether one of these commodities sells for £1,100 and the other for £2,200, or one for £1,500 and the other for £3,000,” _etc._ Gonner ed., p. 39.

[61] _Principles_, p. 39, n. The same statement is made in _Letters to Trower_, p. 153.

[62] The difficulty of rent is escaped through the Ricardian theory of rent. The present writer is persuaded that the classical theory of rent is unsound in this respect.

[63] Pp. 24-6.

[64] The distinction between the two kinds of capital was stated to be a question of degree in the first section on this subject.

[65] P. 24.

[66] P. 35.

[67] Ricardo’s theory that a rise of interest must accompany a fall of wages and _vice versâ_ is not an essential part of the present problem. Interest acts as a cause of deviation of exchange value from proportionality to wages cost, whether this particular theory of wages and interest be adopted or not.

[68] Compare the same unconscious shifting of ground in the discussion of skilled labor.

[69] P. 5. _Principles._

[70] See also Ricardo, himself: “The value of almost all commodities is made up of labor and profits.” _Letters to Malthus_, p. 225.

[71] _i. e._, wages.

[72] P. 34.

[73] _Letters to McCulloch_, p. 71.

[74] _Das Kapital_, 1st ed., pp. 285, 286, 508, n. See Böhm-Bawerk, _Karl Marx and the Close of his System_, p. 24.

[75] Böhm-Bawerk, _op. cit._, p. 26.

[76] The writings herein referred to are his _Principles of Political Economy_, 4th ed., Edinb., 1849, and his extensive notes on Adam Smith’s text in the McCulloch edition of the _Wealth of Nations_, 4 vols., Edinb., 1828.

[77] In his _Capital and Interest_, pp. 97-102, Böhm-Bawerk devotes a few pages to McCulloch’s theory of interest, which is interwoven with his theory of value. Böhm-Bawerk concludes: “McCulloch’s utterances on the subject are one great collection of incompleteness, irrationality and inconsistency.” The examples of McCulloch’s reasonings cited by Böhm-Bawerk show the above judgment to be scrupulously just.

[78] _Letters of Ricardo to McCulloch_ (_Pub. Am. Econ. Assn._, Vol. 10), pp. 131-2.

[79] See passage from a letter to McCulloch, quoted _ante_, p. 42.

[80] McCulloch’s edition of the _Wealth of Nations_, vol. iv, note 1, p. 75.

[81] _Ibid._, p. 77.

[82] Malthus, _Definitions_, pp. 100-101.

[83] McCulloch ed. _Wealth of Nations_, vol. iv, pp. 77-78.

[84] _Principles_, 4th ed., pp. 371-3.

[85] We omit the qualification regarding “socially necessary” labor, and the theory of skilled labor as “condensed labor,” as not required for our present point.

[86] If one granted, for the sake of argument, both the labor-cost law of value and the iron law of wages, we should still lack the slightest justification for deriving the latter as a corollary from the former. The only theoretical basis of the iron law of wages is a rigid Malthusian law of population, or labor supply, the alleged law so greatly abhorred by Marx and all socialists.

[87] The elaborate special terminology developed by Marx for the problem (not followed here) will be found explained in full in Böhm-Bawerk’s excellent essay previously cited. This little book presents Marx’s theory of value, the “contradiction” and the outcome, in the clearest possible form. It would be useless to infringe on the territory covered by this work, but Dr. v. Böhm-Bawerk did not mention the existence of the same “contradiction” in classical English theory.

[88] _Das Kapital_, v. iii, p. 131; quoted by Böhm-Bawerk, _op. cit._, p. 49.

[89] “Die organische Zusammensetzung des Kapitals,” _Das Kapital_, vol. iii, p. 124.

[90] Vol. iii, p. 138. See Böhm-Bawerk, _op. cit._, p. 67 _et seq._ There are other arguments advanced by Marx for the redemption of his theory, considered in order by Böhm-Bawerk, but that given is the first and principal one. The second is that the law of value governs the _movement of prices_. This is analogous to, if not identical with, Ricardo’s claim, that changes in labor-cost are the causes of changes of values. See _ante_, pp. 54-5.

[91] Pp. 55 _et seq._

[92] _Principles_, 4th ed., p. 371 (1849). The italics are mine.

[93] McCulloch edition of the _Wealth of Nations_, vol. iv, note viii, p. 200.

[94] “Dass die Abweichungen vom Werth ... sich gegeneinander aufheben.” _Das Kapital_, vol. iii, p. 140. James Mill, in _Elements of Political Economy_, pp. 112-113 (1826), said the same thing. When the general rate of wages varies, for “the aggregate of commodities, taken all together, there is neither fall nor rise.”

[95] _Elements of Political Economy_, London, 1826. This statement probably came from Malthus, who laid down the general lines of the theory of value in this same way in 1820.

[96] P. 96.

[97] Pp. 96-7.

[98] Pp. 99-100. The italics are mine.

[99] Pp. 102-3.

[100] P. 104.

[101] _Essay on the Production of Wealth_, London, 1821, p. 51. Torrens considered his theory of “exchangeable value” quite original, (Preface, p. 7.)

[102] P. 51.

[103] P. 53.

[104] P. 50.

[105] “Empirical,” in the particular sense of this term, adopted in the opening chapter of this essay.

[106] Pp. 39-40. See also Preface, p. 7. This theory does not occupy a prominent place in his book. The sum of accumulated and immediate labor is what Ricardo considers to be the total labor cost of a good—under the name of labor indirectly and directly applied.

[107] Presumably, in its turn, “_accumulated_.”

[108] Explanation of this follows shortly.

[109] In his _Principles_, 1st ed., 1820, and 2d ed., 1836, which was considerably altered from the first. _The Measure of Value Stated and Illustrated_, a pamphlet of 1823, and the _Definitions in Political Economy_ may be mentioned, but the text of the two editions of the _Principles_ suffices for any except the most minute investigation of his views.

[110] Ricardo’s part is contained in his published letters to Malthus, as well as those to McCulloch and Trower, but the letters of Malthus to Ricardo have not, to my knowledge, been found for publication, except one given in _Letters of Ricardo to McCulloch_, (_Pub. Am. Ec. Assn._, 10, Nos. 5-6) p. 161.

[111] The law of supply and demand is not so simple as to preclude a variety of ways of stating it, and the meaning of such conceptions as _intensity of demand_, _equilibrium_ or _balance_ of supply and demand, _etc._, requires careful reasoning to define. The history of the law in English political economy would be concerned mainly with Malthus, J. S. Mill, Cairnes and Marshall.

[112] _Principles_, 1st ed., pp. 73-4.

[113] _Ibid._, 74-5.

[114] _Ibid._, 76.

[115] _Ibid._, p. 83.

[116] The claim regarding the subordination of the law of costs is set forth emphatically as follows: “If it appears generally that the cost of production only determines the prices of commodities, as the payment of it is the necessary condition of their supply, and that the component parts of this cost are themselves determined [_i. e._, as values] by the same causes which determine the whole, it is obvious that we cannot get rid of the principle of demand and supply by referring to the cost of production. Natural and necessary prices appear to be regulated by this principle, as well as market prices, and the only difference is that the former are regulated by the ordinary and average relation of the demand to the supply, and the latter when they differ from the former depend upon the extraordinary and accidental relations of the demand to the supply.” _Principles_, 1st ed., pp. 84-85.

[117] Gonner ed., p. 376.

[118] _Letters to Malthus_, p. 176. Malthus’s contrary opinion is defended at length by him in Sec. 11 of Chap. xi, on value, in the _Principles_, 1st ed.

[119] Gonner ed., p. 6. The same thought is expressed in the first paragraph of Chapter xiii, p. 171.

[120] The case is not presented by Malthus as one of two main arguments with seven counts in total, but all except this division and the numbering are his.

[121] 1st ed., pp. 104-5. This passage happens not to reappear in the 2d ed., but all the points in it are still maintained there.

[122] As Malthus said in another place, “The effects of slow or quick returns, and of the different proportions of fixed and circulating capitals, are distinctly allowed by Mr. Ricardo, but in his last edition he has much underrated their amount. They are both theoretically and practically so considerable as entirely to destroy the position that commodities exchange with each other according to the quantity of labour which has been employed upon them, but no one that I am aware of has ever stated that the different quantity of labour employed on commodities is not a much more powerful source of difference of value.” _Measure of Value Stated and Illustrated_, pp. 12-13.

[123] We have not happened upon a passage by Ricardo referring to the third count, respecting good and bad crops, but Ricardo would undoubtedly have considered that it did not invalidate his position. If agricultural capital and labor remain the same in quantity while good and bad crops alternate, the _cost of production per unit of crop_ varies as well as the price. When the wheat crop is good the cost per bushel is low. The price per bushel would also be low. If good crops mean low cost and low value at the same time, they probably do not mean sinking of value and cost in the same degree. The consequent deviation of value from cost is probably what Malthus had in mind.

[124] 1st ed., pp. 102-3.

[125] The strange attempt of James Mill to show that the interest element stands for labor also, mistook, as we showed in Chapter vi, the replacement fund of an entrepreneur for his interest fund.

[126] In his notes in a French edition of Ricardo’s _Principles_, “_Des Principes de l’Economie Politique et de l’Impôt_,” 2d ed. Paris (1835), note, p. 12.

[127] _Essay on the Production of Wealth_, p. 65.

[128] The principle of this choice had very little in common with the principle of the various “multiple standards of value” since proposed.

[129] 1st ed., pp. 128-9.

[130] 1st ed., p. 129.

[131] See _ante_, p. 27, n.

[132] 2d ed., p. 96.

[133] 2d ed., p. 57.

[134] Prepared as the article on “Political Economy” in the _Encyclopædia Metropolitana_, 1836, but appearing as a separate work in numerous reprints from this. Page references are good for any edition. The table of contents looks systematic at first blush, but study of the text, especially the part on the theory of distribution, soon dispels any illusions concerning this point.

[135] Senior was, in my judgment, indebted fully as much to Malthus and Say as to Ricardo. To all appearances much of interest in the writings of Cairnes must have been suggested by the work of Senior.

[136] _Political Economy_, p. 6. These are the three constituents of _wealth_, but things composing wealth are defined to be the same as things of value. Curiously the qualification of transferableness is held not to exclude personal talents from the category of wealth, for these are considered to be things “imperfectly transferable.” A lawyer transfers his talents to me when I hire him to plead my case. See pp. 9-10.

[137] P. 24. A similar passage, not so well expressed, is found in Malthus, _Principles_, 1st ed., p. 74.

[138] P. 101.

[139] See _ante_, chap. vi, § 2.

[140] P. 58. Scrope, an English writer, 1833, said: “Profit is to be viewed in the light of a compensation for abstaining for a time from consumption in personal gratification.” Mentioned by Böhm-Bawerk, _Capital and Interest_, p. 271. “But,” continues Böhm-Bawerk, “this same idea which his predecessors merely touched on, Senior has made the center of a well-constructed theory of interest.”

[141] P. 100.

[142] P. 97.

[143] P. 97. _Cf._ p. 105.

[144] But yet of all English writers previous to Jevons, he develops the explanation most compatible with the utility theory of value.

[145] P. 101.

[146] P. 101.

[147] Pp. 91-2. P. 128, the question of nomenclature is discussed all over again. Rent is “the revenue spontaneously offered by nature or accident.”

[148] Pp. 91, 128-135. For general argument to justify inclusion of personal qualities within _wealth_, see pp. 9-10.

[149] _Ibid._, pp. 129-30. Some of the extraordinary earning power or ability of the laborer may be the result of education and training for which sacrifices have been made. Such abilities are “_immaterial capital_,” and the part of the whole wages due to them is really profit on this capital (p. 130). Then wages of skilled or professional labor may contain rent for inborn talents, _profit_ for abilities acquired through the sacrifice called abstinence, and _wages_ for the real disutility of labor incurred. “Forty pounds a year would probably pay all the labour that [a lawyer] undergoes in order to make, we will say, £4,000 a year. Of the remaining £3,960 probably £3,000 may be considered rent” (p. 134). “The intellectual and moral capital of Great Britain far exceeds all her material capital, not only in importance, but even in productiveness.” _Ibid._

[150] P. 114.

[151] P. 112. The payment of rent in every case is but the wedging in of a slice between value and the remuneration for cost of production.

[152] Pp. 100-101.

[153] P. 129.

[154] In an unobtrusive position further on in the book he adopts the labor-command standard, but without discussion. “The best standard of value for philosophical purposes appears to be the command of labour.” This appears to be an uncritical and passing acquiescence in the views of Malthus.

[155] _Principles_, 6th ed., vol. i, pp. 546-7. The language is uncritical. Absolute limitation of supply is not a case of difficulty of attainment, but a case of value apart from questions of difficulty of attainment. Senior’s analysis was superior.

[156] Vol. i, p. 552.

[157] Vol. i, p. 561.

[158] Vol. i, p. 589.

[159] Vol. i, p. 568.

[160] The socialists’ attacks upon abstinence as a cost are really directed against the _ethical_ coördination of it with labor.

[161] Vol. i, p. 574.

[162] Vol. i, pp. 569-70.

[163] Vol. i, p. 507.

[164] Mill emphasizes the fact that he is considering the causes of variations in values. It remains true that both he and Ricardo should have considered the causes of statical aberration of values from the standard of labor cost.

[165] It may be useful to recall the explanation Ricardo made of his position with regard to this point. “I have not said, because one commodity has so much labour bestowed upon it as will cost £1000 and another so much as will cost £2000 that therefore one would be of the value of £1000 and the other of the value of £2000, but I have said that their value will be to each other as two to one.... It is of no importance to the truth of this doctrine, whether one of these commodities sells for £1100 and the other for £2200, or one for £1500 and the other for £3000.” (Gonner ed. Ricardo’s _Principles_, p. 39.) The interest qualification signifies that the commodities may exchange at other ratios than two to one.

[166] Vol. i, p. 566.

[167] Vol. i, pp. 566-7.

[168] Vol. i, p. 590.

[169] See Ricardo, _Principles_, p. 83. “Let us suppose that all commodities are at their natural price, and consequently that the profits of capital in all employments are exactly at the same rate, or differ only so much as, in the estimation of the parties, is equivalent to any real or fancied advantage which they possess or forego.”

[170] _Some Leading Principles of Political Economy Newly Expounded._ London, 1874.

[171] A third point might be taken up were it not for the fact that Cairnes’s treatment of it is hardly worthy of consideration. This is his rebuttal against the then newly appeared utility theory of Jevons. Cairnes seems to have had virtually no understanding of the point Jevons was trying to make.

[172] P. 9.

[173] See Marshall’s _Principles_, 3rd ed., p. 172, note, and also the reference there cited, _Fortnightly Review_, April, 1876.

[174] P. 41. Cairnes claims, with great justice, that his term “normal value” or “normal price” is superior to the old terms “natural” and “necessary” price (p. 46).

[175] P. 82.

[176] P. 88. It is a waste of terms to call the duration and quantity of labor the same thing, and consequently to consider the quantity of labor cost and quantity of labor different things. Smith and Ricardo merely touched on this matter, but the former says in a passage incorporated also by the latter in his text: “There may be more labour in an hour’s hard work than in two hours early business;” or quantity of labor is the product of duration multiplied by disutility per unit of time; and this is the preferable usage.

[177] P. 97. Abstinence is described as a “negative” sacrifice except for the “small positive element of risk.”

[178] P. 50.

[179] P. 58.

[180] P. 95.

[181] Pp. 62-3.

[182] Pp. 65-70.

[183] P. 74.

[184] Pp. 72-3. Cairnes makes the same classification of the industrial population into groups that Mill made. For criticism and a new classification see Giddings, “The Persistence of Competition,” _Political Science Quarterly_, vol. ii, p. 69 _et seq._; and J. B. Clark, “The Limits of Competition,” _ibid._, p. 45 _et seq._

[185] P. 76. “Very frequently” ought really to be “nearly always.”

[186] P. 76.

[187] P. 80.

[188] P. 80.

[189] P. 98.

[190] Pp. 105-6. The italics are mine except for the word “average.”

[191] That is to say, for Senior and Cairnes, interest is no longer an unexplained difficulty in the way of the cost philosophy of value, but the conception of cost has been widened so as to include and explain the case of interest. Cairnes has no longer a labor-cost philosophy, but a subjective cost philosophy of value.

[192] P. 84.

[193] P. 78.

[194] _Principles_, chapter i, section iii. _Cf._ chap. v, sec. iv of the present essay.

[195] The validity of a theory is not proved if _some_ tendency can be shown to be in keeping with it. The tendency must be _effective_. When the forces that oppose a tendency are relatively great, or the mere obstacles in its way relatively immovable, the tendency cannot be assigned the rank of a force or be laid down as an economic law, not even a static law. True, the difference between an effective and an inoperative tendency is only one of degree. This makes it difficult to decide upon the claims of a proposed law in the particular case, but this is a difficulty which cannot be avoided. The weaker the tendencies taken cognizance of in a given static theory, the more idealistic or refined is that theory. And, at least after a certain point is reached, the more refined the theory becomes, in this sense, the less its degree of validity. To illustrate this, we need but to refer to the present question of skilled labor. Throughout the classical economics runs the idea that the superior remuneration of skill really rewards the extra disutility necessarily undergone in acquiring the skill. Now, if the movement of men among occupations were calculated solely with reference to this disutility, and were free enough, the actual wage of skilled labor could be said to be adjusted to the disutility of the occupation, including the past disutility of acquiring the skill. The extra part of the wage would be a sort of interest on disutility already expended, as suggested expressly by Adam Smith and by Senior. But we need not pursue this idea into its minor complications. The point desired to be made is that the tendency for actual wages of skilled labor to adjust themselves to the disutility of the skilled labor is so submerged (permit a questionable metaphor) beneath other forces, that it makes a theory over-refined to recognize it as a law. I believe it possible to justify nearly all the older theories of value by making a static state to order for each writer, that is, by making one over-refined enough. Put in other words, so far as the older economists were not guilty of self-inconsistencies, their theories could be justified by granting them sufficient _assumptions_. The latter is what we refuse to do. An example of a legitimate static law is that wages tend to equal the specific value-product of labor, as contrasted with the theory that wages tend to adjust themselves to the disutility _of the task_ performed.

[196] “On Some Neglected British Economists,” _Economic Journal_, v. xiii, pp. 357-363.

[197] _Ibid._, p. 527.

[198] See _ante_, pp. 44-5.

[199] Adam Smith nevertheless retains the “labor-command” measure of value as applicable to the conditions of advanced society, for criticism of which see _ante_, pp. 30 and 39.

[200] Since the chapter on Ricardo herein contained was written, it has been suggested to the writer that he is mistaken in attributing any “philosophical” account whatsoever to Ricardo, that in fact Ricardo’s whole treatment is purely empirical. The writer cannot concur in this judgment. It is admitted that Ricardo virtually takes this philosophy for granted, instead of endeavoring to establish it, but the almost appalling confusion into which his exposition of value falls when the difficulty of interest is reached (see _ante_, chap. v, §§ 5-9) can be explained, so it is believed, only according to Wieser’s interpretation of Ricardo’s work. This is, namely, that he is endeavoring to force the empirical principles, or the “facts” of entrepreneur’s cost, to fit the labor philosophy. A thinker who confined himself to a purely empirical analysis would never reach the labor-cost thesis with which Ricardo opens at once his chapter on value and his _Principles of Political Economy_. The thesis is _a priori_, that is, as contrasted with the theory of entrepreneur’s cost. If Ricardo were working with merely an empirical account of value, and were not embarrassed by an uncertain philosophy of value, how would he ever come to speak of the cost of production, which determines value, as consisting of “labor and profits!” He should say “wages and profits.” Again, how would he be led to commence his chapter on “Natural and Market Price,” by the assertion that the market price of a commodity can deviate temporarily from its “natural price, or the quantity of labor which it has cost!” No empirical theory would lead to the statement that the normal price toward which competition forces actual prices is a _quantity of labor_. This natural price is Adam Smith’s “philosophical” natural price or “first price,” namely, labor.

[201] He stated it in the form of an admission that, besides changes in labor cost, there can be a second cause of _variations_ of the exchange ratios between commodities, namely a rise or fall of the general rate of interest. He first stated the second cause to be a fall or rise of the general rate of wages, but in his view this is equivalent to a rise or fall of “profits,” _i. e._, interest. See _ante_, chap. v, §§ 7 and 8.

[202] Senior—the attacks of Marx upon him notwithstanding—was far from assigning to these two elements equal ethical importance.

[203] Senior’s rent to skill is an entirely different form of surplus from that due to the excess of utility produced above disutility incurred in the “earlier” parts of the working day of all labor. So long as the length of the working day is left to the worker himself, he will stop when the terminal utility and disutility are equivalent. All previous parts of the day produce a surplus of utility. This is the surplus which occupies an important place in J. B. Clark’s theory of value. Compare Marshall’s “producer’s” and “consumer’s rents.” Senior’s “rent to scarce natural talents” is explicable only on the supposition that the disutility endured and the return of utility enjoyed by a skilled laborer can be compared with the same quantities for an unskilled laborer. Senior means merely that skilled laborers obtain higher returns at lower sacrifices as compared with unskilled. A certain part of the return enjoyed by the skilled laborer is equivalent to that enjoyed by the common worker; the part in excess of this is the rent. Senior considers it analogous to the rent which goes to lands of superior fertility. Further consideration will be given in a later section to the relation of skill to the labor theory of value.

[204] January, 1894, p. 218.

[205] In the _Journal of Political Economy_, vol. ii, p. 561.

[206] _Theoretische Socialökonomik_, 1895, vol. i, p. 205.

[207] _Theoretische Socialökonomik_, 1895, vol. i, p. 233. Dietzel supposes that Smith conceived of labor solely as “_Unlust_,” but in this he is clearly mistaken. See _ante_, chapter iv.

[208] See _ante_, p. 86.

[209] For an excellent discussion of the term “esteem value” see Walsh, _The Measurement of General Exchange Value_, pp. 1-6. The writer is greatly indebted to Walsh’s discussion of the value concept. The two kinds of value here distinguished are the same as those designated objective exchange value and subjective value by the Austrian writers.

[210] As, for instance, by Pantaleoni, _Pure Economics_, p. 123.

[211] This definition by itself does not of course make clear the ultimate source of this power. For proximate and practical purposes the weight of a pound nugget of gold might well be defined as its power to counterbalance in the scales a certain piece of metal, the standard troy pound. This definition contains no hint of the common source of the counterbalancing power of both weights. In the same way the above-given definition of exchange value ignores a certain common source of all exchange values.

[212] For a discussion of certain avoidable objections that have been made to the concept of purchasing power, see Walsh, _op. cit._, pp. 7 and 8.

[213] It takes little discernment to see that this statement is not equivalent to saying that the formulation of a theory of value is a greater accomplishment than was the formulation of the law of gravitation. The writer does not plead guilty to implying that.

[214] See _Grundsätze der Volkswirthschaftslehre_, Wien, 1871, p. 78. “Der Werth ist die Bedeutung, welche concrete Güter oder Güterquantitäten für uns dadurch erlangen, dass wir in der Befriedigung unserer Bedürfnisse von der Verfügung über dieselben abhängig zu sein uns bewusst sind.” Menger gives this as a definition of value simply, but it is of course a definition of that particular kind of value which we have agreed to call “esteem value.”

[215] Of course this power in the good exists only in relation to some human being. It is perfectly true that the good would have no such power if there were no man to use it, and that its power may change as the condition of the man using it is changed, and that its power over one man is different from its power over another. For these reasons, utility has often been declared to be subjective, as if it resided in the mind of the man. Whether it is subjective or objective depends precisely upon what one means by these terms. Practically we may say that our habitual thought correctly refers the utility to the good and conceives it as an attribute belonging to the good in virtue of its common physical properties. The utility of the good does not exist in the mind except in the sense in which all things exist in the mind. We should at least say that utility has objective reference. The satisfaction belongs to the mind, the utility to the good. The utility is a sort of objective counterpart or projection of the satisfaction.

[216] “Gossen’s law.”

[217] That is, it applies only where goods are held in stocks by individual consumers. Thus the “esteem” value of a piano commonly has nothing to do with “marginal” utility. Only if consumers were to own pianos in stocks—to use several at once—would there be grounds for speaking of the marginal utility of a piano. For further consideration of this point see the next section.

[218] Professor v. Wieser explains that the reason why we attribute a superior importance to a good that has marginal utility as compared with a good that is superabundant, is because we have a “natural indifference” toward goods in general, which can only be overcome when the good is so scarce that its absence would decrease our satisfactions. _Natural Value_, p. 29. This would seem to be explaining the thing by itself. The ultimate origin of this “natural indifference” is what calls for explanation.

[219] _Positive Theory of Capital_, book iv, especially chap. iv.

[220] As Professor Macvane exclaims, the Austrians seem to reason as if the good fairies determined what the supply of commodities shall be. See _The Quarterly Journal of Economics_, vol. v, p. 24. Concerning Professor Macvane’s general attacks on the Austrian position, it is only fair to say, however, that he appears in the main issues entirely to miss the point of the utility theory. See also the same journal, vol. vii, p. 255, and the _Annals of the American Academy of Political and Social Science_, vol. iv, p. 348.

[221] This enquiry must constitute the first part of the theory of exchange value, since it is quite beyond dispute that cost in any form can influence exchange value only by influencing supply. Value will rest at the level of cost only when the supply of the good is at just the proper point. When the supply is at any other point, as in the case of monopolies, value no longer rests at the level of costs. But value is still determined by certain other influences. The description of these is the first problem.

[222] If the good be of a kind held by consumers in stocks, it should go without saying that instead of a buyer being entirely excluded by a rise of price, only the marginal increments of his purchases may be excluded.

[223] Employing Professor Marshall’s terminology we would say that the “social demand schedule” is a _resultant_ from combining all the “individual demand schedules.”

[224] See his _Introduction to the Theory of Value_, p. 37.

[225] See his _Theoretische Socialökonomik_, 1895, p. 282.

[226] As pointed out in section 2 of this chapter.

[227] Or at any rate, if not by decreasing their marginal utility, by decreasing their marginal price equivalent. See the section just preceding.

[228] Explanation of the principles in accordance with which the various classes of production goods share in the value of the product is but a part of the theory of distribution viewed in a particular way.

[229] The use of some kinds of production goods cannot be increased without increasing to the same extent the use of certain other kinds in the same production, but it can be shown that this does not change the general principle of the case.

[230] When a single-use production good is short-lived instead of durable, so that it receives its value from its product in one payment, instead of a series of payments in time, we do not call its value return a “rent.” Its value is nevertheless “price-determined” in the same sense as the rents just discussed and belongs to the same category as these rents.

The term “price-determined rent” has, among professed followers of Ricardo (such as Professor Marshall who holds to Ricardo’s theory in the main), come to mean the income to a durable single-use production good. In the most unfortunate terminology of the Ricardian school—which the writer believes can be traced back to their ultimately false philosophy of value—a “price-determined rent” is one which “does not enter into price.” But the leading exponents of present-day Ricardian doctrine are now agreed, it seems, that when a production good is capable of more than one application—as land to wheat or fruit or pasture—its rent _does enter_ into the price of its product. Therefore they mean by a price-determined rent, not the rent of such a good, but the rent of a single-use production good.

[231] A plausible argument could be made to show that we have Ricardo’s authority for maintaining that price-determined rents must not be considered a part of entrepreneur’s cost. For Ricardo said “rent cannot enter in the least degree into price.” But there can be no question that by this he meant that rent cannot enter into cost of production. As was frequent with him, he did not say precisely what he meant. Malthus had said that cost of production includes wages, “profits,” and rent, and that profits and rent, not being paid for labor, prevented the regulation of value by pure labor cost. Ricardo admitted that profits enter into cost but minimized the difficulty thus granted in the labor theory. On the contrary he denied that rent enters into cost. The first paragraph of his chapter on rent shows it to be his purpose in that chapter to justify this denial. Later he stated his contention as being that rent cannot enter into “price,” instead of cost.

Now Ricardo frequently thought of cost as being composed of “labour and profits”! In most places we can make his reasonings clear only by substituting for this hybrid concept a plain concept of entrepreneur’s cost. If Ricardo habitually meant entrepreneur’s cost by the words “cost of production,” then his famous doctrine comes to signify that price-determined rents are not properly a part of entrepreneur’s costs. As far as the present writer can see, our decision in this regard is purely a matter of arbitrary choice between two possible definitions of entrepreneur’s cost. As far as Ricardo is concerned, he had no clear and definite concept or concepts of cost. Into _potentiality cost_, a price-determined rent assuredly does not enter.

[232] The value of the iron may fall earlier in time than the value of its products, because entrepreneurs using it know beforehand that the increased products of pig will have to be sold lower.

[233] _Principles of Economics_, 4th ed., 1898, p. 428.

[234] Professor Clark’s theory appeared first in the _New Englander_ for 1881. Gossen’s statement of the same fundamental idea was much earlier, but the strange fate of his work is known to all. Professor Clark’s theory of value was developed by him independently of Gossen and of Menger and Jevons as well.

[235] See the _Distribution of Wealth_, chap. xxiv.

[236] So large an increment as an hour is taken merely as a matter of convenience. There is a certain form of attack upon all marginal methods of theorizing in economics which is always met by making the increments infinitesimal. It is hardly necessary to guard against that attack here.

[237] The curious reader would find it of interest to compare Professor Smart’s statement that the value of a good is almost always in the end measured by a “foreign utility.” “The value of a horse may be measured by the foreign utility of a summer vacation.” See _Introduction to the Theory of Value_, pp. 37-8. Much dialectical exercise of interest could be had by comparing fully the precise formulæ of “marginal” utility developed by the Austrian economists and Prof. Clark’s formula. Clark’s theory is at bottom in harmony with the Austrian, but goes further.

[238] See _op. cit._, p. 380.

[239] _Ibid._ p. 389.

[240] _Cf._ _ante_ p. 145.

[241] A brief comparison of the Austrian concept of “marginal utility” with Clark’s concept of “effective utility” may be of interest. Many kinds of goods are divisible into parts without changing their economic nature. Grain is a good example. A piano is an example of the other kind of good, the unit good. When a given good is divisible into increments, the Austrians point out that the value of any or every increment depends purely upon the satisfaction afforded by the last used or least useful increment. Putting it in another way, they say the marginal utility of the good is the actual utility of the last increment, and value depends on marginal utility. The very essence of this principle is that the value of a thing, as for instance first increment, does not depend on its own exact utility. Professor Clark, developing his thought in his own way, and using a different terminology, goes further than the Austrians, but along the same line. The “effective” utility of a good is not its own utility, but is that other least utility produced by the same amount of labor. The Austrians state that the value of any bushel of wheat depends on the utility of the “last” bushel, because if any bushel is removed the result will be that the last bushel is really given up, or any bushel is in effect the last. Clark points out that among goods which are all freely reproducible, the value of the product of any unit of labor time depends on the utility of the least useful product produced by a unit of labor time, though this other least useful product be an entirely different kind of good and not an increment of the same kind of good. Many minute questions in this connection we may pass for lack of space.

[242] Without attempting a systematic classification of kinds of causes, we all know that such is our notion of cause that we can conceive of many causes which bear no assignable quantitative relation with their effects (_i. e._, effects for which they are partly responsible). The pressure of an electric button “caused” the Hell Gate explosion (after conditions—_i. e._, other causes—were prepared) but the amount of pressure put upon this button, or the size of this button, had nothing to do with the quantity of the explosion or the amount of work done in the explosion. We are permitted to speak of the act of pressing the button as a cause, but not as a regulator (except with respect to the _time_ of the explosion, an irrelevant consideration here), for a regulator is a cause the quantity of which determines the quantity of the effect. It should be noted that when the quantity of the cause is compared with the quantity of the effect, to show that the former regulates the latter, the quantity of the cause must be established independently of the quantity of this same effect; otherwise the fallacy of reasoning in a circle is committed. This digression does not lead us so far astray from the theory of value as might be supposed. This precise fallacy has been committed time and again in the reasonings that have been brought to the support of the labor theory of value. For instance when the term “labor” is used to signify disutility or cost (instead of productive power) by the expounders of the “difficulty of attainment” philosophy of value, and it is asserted that the labor cost of a good regulates its value, the objection is soon encountered that skilled labor produces a greater value per day than common. Thereupon it is frequently explained that skilled labor is condensed, or counts as more labor per day than common. As a matter of fact, we all know that in the vast majority of cases, skilled labor, measured independently of the value produced by it, and measured as a quantity of labor in the sense of disutility, is less labor per day than common toil.