[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.
[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.
[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.
[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.