1. Malthus was a prolific and inconsistent writer on the subject of value.[109] His statement of the “empirical” laws of value was able, and materially advanced the theory in English political economy, but when he comes to the problem of the measure of value, as a part of what we call the philosophical account, his writings are of so little worth that it would be a waste of time to consider them in full. He was a great temporizer and user of makeshifts in questions of principle. Malthus denied the validity of Ricardo’s labor-cost regulator, but defended the labor-command measure, which in turn Ricardo rejected. He had a direct correspondence controversy with the latter on the subject of these two standards, but what we have left of this correspondence is in many places almost unintelligible to a modern student, unless read with infinite care.[110]

2. In his Principles, Malthus opens his discussion by drawing the established distinction between value in use and value in exchange; but immediately after this he makes an important alteration in the order of presentation of ideas, as followed by Smith and Ricardo. He begins with the “empirical” account of value. In consequence, when he turns to the question of the relation between labor cost and value, he is led to adjust the labor theory to the previously developed empirical theory. As pointed out in the introductory chapter of this essay, this was the beginning of the process which has resulted in the pushing aside of the labor theory in English political economy. Ricardo had been led, with injurious results, to adjust the “empirical” to the “philosophical” account.

In a history of the law of supply and demand, or of the law of entrepreneur’s costs, the statement Malthus gave these principles would be of great importance.[111] Here we are concerned with his version of these principles only to the extent necessary to show the different setting they give the labor theory from that in Ricardo’s work.

3. We find that in the view of Malthus, the primary principle of exchange value, or the principle of broadest application, is the law of supply and demand. The law of entrepreneur’s costs is a secondary principle.

And even in those competitive manufactures where conditions are most favorable to the law of costs, alterations of the demand and supply are constantly overcoming the influence of cost. Therefore, the cost rule is not only limited in action, but it is directly subordinate to the rule of supply and demand.

Cost of production “can do nothing but in subordination” to the principle of supply and demand.[114]

Malthus follows Smith precisely in naming the components of entrepreneur’s costs—wages, profits and rent—but prefers to call the normal value requisite to cover these expenses, instead of natural price, the “necessary price,” “because the term necessary better expresses a reference to the conditions of supply.”[115] What he means by the statement that the relation of supply to demand not only determines temporary market prices but also natural prices as defined by Adam Smith, is that wages of labor depend on the supply of labor, and the “profits” of capital and rent of land in the same way on the supplies of these agents.[116] Ricardo took an entirely different view of the relation of the two “empirical” principles. In his work he takes no account of the law of supply and demand until in Chapter XXX, where he admits that this rule holds good of monopolized commodities, and, indeed, of all other commodities for a limited period.[117] But, in a letter to Malthus, he wrote:

Of course Ricardo was always conscious of the fact that cost of production can influence exchange value only by way of influencing supply. At the very outset of his chapter on value in his Principles he states:

Ricardo’s view was virtually this: The rule of supply and demand tells us practically nothing, but in those cases where we cannot get a further principle we will let it count as a law of value. But wherever the law of labor cost applies, the principle of supply and demand ceases to be of importance.

An attempt to determine whether Ricardo or Malthus was right would involve us immediately in a discussion of the ultimate relation of cost in all its forms to value, which, so far as we do enter into it, we hope to make the culmination of this essay. Which view is the more profound, and whether an ambiguity in the word value is involved in the controversy, are questions by no means easy to answer.

4. With this general theory, that the empirical law of costs is “subordinate” to the law of supply and demand, as a starting-point, Malthus proceeds to a thorough criticism of Ricardo’s law of labor cost. In the indictment which he brings against this principle, we may for ourselves distinguish seven counts (indicated by the numbers in brackets). These counts really fall into two classes. The first main contention is that Ricardo considers the relation between entrepreneur’s cost (“necessary price,” as Malthus calls it; “natural price,” or cost in “labour and profits,” as Ricardo calls it) and actual market values too intimate. There are three sources of variation of actual from natural prices which should be emphasized. There are [1] the temporary market alterations of prices, too rapid to be met by changing the volume of production; [2] monopoly in the product itself, or some raw product used in its making; [3] seasonal fluctuations in all products of the soil.

The second main contention[120] is that Ricardo overestimates the degree of control exercised by labor cost over natural price. Note the following comprehensive passage:

The claim is in unequivocal language that “well-known causes of constant and universal operation” destroy the proportionality of value to labor cost.

It will be observed that the four points made in this citation all concern influences which make the entrepreneur’s expenses of production out of proportion to the total quantity of labor which his outlay of money directly and indirectly remunerates. For instance, the fifth point regarding the use of imported raw-material or machinery refers to the fact that $1,000 worth of production goods bought abroad by an entrepreneur may have cost more or less labor than $1,000 worth of raw-material of home production. As Ricardo himself points out (in Chapter VII of his Principles), the exchange value of an imported commodity does not depend on its labor cost abroad compared with the home labor cost of the goods against which it exchanges. But the $1,000 spent by one entrepreneur counts just the same as that spent by another in determining the “necessary price” of the respective commodities which they produce. Thus there is here one source of disproportionality between necessary prices and actual labor costs.

5. What is the position of Ricardo with respect to these seven counts? He acknowledged all but the claim that rent causes an aberration of normal value from the position required by labor cost. That is, in the language of the day he denied that “rent enters into price.” He not only acknowledged, but himself stated the other points. How fully he treats the question of the different proportions of “fixed and circulating” capital, we have seen.[122] As for the “acknowledged” effects of taxation, the reference is to Ricardo’s own statements, scattered throughout his various chapters on taxation, that this and that tax will raise prices. Ricardo was perfectly aware of the effects of monopoly, and of the influence of temporary oscillations of supply and demand.[123]

The old question whether “rent enters into price” could very properly be discussed in a history of the labor theory of value. Since, however, the question is large enough to warrant separate discussion, and has in recent times received it in many prominent places, we shall be content merely to point out the conflict between Malthus and Ricardo, and to take the stand that recent discussion has shown that ground rent enters into price in the same sense as wages, or interest on capital other than land. Ricardo said rent does not and cannot enter in the least degree into price. Says Malthus:

6. We have here the remarkable instance of two writers nearly agreed on the number of exceptions to a principle, but quite disagreed as to what remains of the principle. The labor cost of a commodity in a modern market can influence its exchange value only by means of influencing its entrepreneur’s cost. Thus any cause which weakens the connection between the value of a commodity and its entrepreneur’s cost of production, thereby also weakens its connection with labor cost. Therefore, the first three points made by Malthus to show that entrepreneur’s costs do not exercise perfect control over actual market-values are relevant to the dispute about the labor-cost regulator. But, as the reader has observed, the three exceptions to the law of money costs are only such as have always been made to any proposition of static theory. A static law of value is supposed only to govern normal value under competitive conditions. It is perfectly legitimate to put emphasis upon the causes of the variation of actual values from static standards, but on the principle, now so well understood, that actual conditions can be fully understood only by the preliminary establishment of static laws, the first three points of criticism made by Malthus, and admitted by Ricardo, must be judged to leave the law of costs a perfectly valid principle.

If the only causes of variation of actual exchange values from the standard of labor costs were those causes which operate to weaken the law of entrepreneur’s costs, the Ricardian labor theory would remain a principle of the utmost importance. The attacks which the labor-cost theory cannot withstand are those directed against its validity as a static principle. It is an undisputed static principle that exchange values are in proportion to entrepreneur’s costs. Therefore, every time a cause is shown which throws entrepreneur’s costs out of proportion to labor cost, a heart-thrust is given the theory of the labor-cost regulator. To the list of causes of this kind granted by Ricardo, Malthus added one, an important one; or rather, he persisted in retaining what Adam Smith considered to be such a cause—rent of land. Malthus then discovered no new point; but he marshaled many points in an able manner. Considering only the weighty part of his case, his argument is that entrepreneur’s costs consist of wages, interest, and rent; that wages alone stand for labor cost;[125] that therefore the existence of the other two elements makes the total entrepreneur’s cost decidedly out of proportion to labor cost. This signifies not only that entrepreneur’s costs are composed of outlays in excess of payments for labor, but that when one entrepreneur’s cost is compared with that of another the two will (barring an accidental coincidence) not be to each other as the respective labor costs entering into them (through wages). Two commodities may have equal exchange values and equal entrepreneur’s costs, but one may cost twice as much labor as the other, because the latter may cost more rent or interest than the former. Ricardo denied the influence of rent, and assumed that interest preserves fairly constant proportions with the wage element. In our judgment, Ricardo was much the profounder of these two economists, but Malthus made the fortunate gain of presenting the empirical principles of value at the outset of his work, and in this way was led to adjust the labor theory to them, instead of doing the reverse, as Ricardo did.

Note on the Question of the Invariable Measure of Value in all Times and Places.

7. Adam Smith made several general assertions concerning the power of a labor standard to measure value in all times and places. If mankind should live under conditions free from the rent of land and interest on capital, according to Smith the quantity of labor which commodities cost might properly be regarded as commensurate with the quantity which they command in exchange. Under actual conditions the command standard alone will apply. Ricardo became a steadfast critic of the idea that the labor-command standard could be thus used. He believed it to be impossible to find an invariable measure based on labor cost of production (as distinguished from labor commanded in exchange); but he made statements which implied that if a commodity existed which cost the same quantity of labor throughout time, it would be an invariable measure of “real value.” Then again he faltered in this view because “profits” enter into the cost of production of different articles in different degrees. The writer has found himself unable to reach a complete understanding of Ricardo’s section on this subject, Section vi of Chapter 1. Malthus always defended the labor-command standard of Smith, though in a vacillating way. In the end he adopted it in an unqualified form. (In the 2d and last edition of his Principles, the text being written just before his death.) With his last published discussion, appearing in 1836, the question practically disappeared from English political economy. Referring to this question, John Stuart Mill said: “it is necessary to touch upon the subject, if only to show how little there is to be said about it,” and concludes that the measure sought is impossible. J. B. Say wrote that “an invariable measure of value is a pure Chimera.”[126] Torrens expressed his judgment in words quoted from Lord Lauderdale: “Lord Lauderdale has justly observed that the search of economists after a measure of exchangeable value, is just as irrational and as hopeless as was that of the alchemists in quest of the philosopher’s stone.”[127] Well might the discussion be condemned by contemporaries and neglected by subsequent economists, for, especially in the lengthy writings of Malthus, the question was involved in distracting confusion, while the comparatively brief passage Smith devoted to the subject contains fatal contradictions.

It is doubtful if we can escape this question in theory. The required standard may come as a more modest proposal than that of Adam Smith, but some means of comparing value, as significance (as Menger’s “Bedeutung”) in different times will always be desirable, to say the least. In the recent controversy over the question whether gold is a good standard of deferred payments, practical men decided for gold on other (and sufficient) grounds than any alleged invariability in value, but it was inevitable that the question should suggest itself: What does constitute the same value in different times (i. e. under changed conditions of wealth)? It is the legitimate function of economic theory to wrestle with such questions, whether to conclude that an answer is impossible (for that would be a conclusion, hard to prove and of importance when proved) or that such and such a standard may be established.

The present essay will not attempt the herculean dialectical labor of setting in order and criticising all that Smith, Malthus, and Ricardo wrote on this subject. The labor doctrine as a statical theory is a problem of sufficient proportions in itself to permit specializing upon it. A brief discussion however is added concerning what Malthus wrote upon the subject of the labor-command measure. In the first edition of his Principles, Malthus held that there is no question of possessing a perfect measure of value at different times, but there is a question of choice between various imperfect measures. He was apparently much impressed by the charge that the value of labor changes when the quantity of commodity (i. e. measured in physical units) which it commands, is altered. Accordingly he proposes to take labor and “corn” together, or a “mean between them” as a standard.[128] He proceeds upon the supposition that “when corn compared with labour is dear, labour compared with corn must necessarily be cheap. At the period when a given quantity of corn will command the greatest quantity of the necessaries, conveniences, and amusements of life, a given quantity of labour will always command the smallest quantity of such objects, (and vice versâ); ... If, then, we take a mean between the two, we shall evidently have a measure corrected by the contemporary variations of each in opposite directions.”[129] In this double standard a unit of labor is to be a day of “common” labor. For the use of the standard some unit of corn is necessary. A peck is selected. The reason given for this choice is that this amount may be considered “in respect to quantity as equivalent to a day’s labour.” Accordingly, “any commodity, which at different periods will purchase the same number of days’ labour and of pecks of wheat, or parts of them, each taken in equal proportions, may be considered, upon this principle, as commanding pretty nearly the same quantity of the necessaries, conveniences, and amusements of life; and, consequently, as preserving pretty nearly its real value in exchange at different periods.”[130] In his correspondence with Malthus, Ricardo made the former very uncomfortable in the position taken with respect to the combined labor-corn measure of value. In the second edition of the Principles of Malthus this hybrid standard was abandoned. In principle it was a shallow makeshift. It is needless to say that if the arguments for regarding the amount of commodities purchaseable by a day’s wages, as the unit of wealth, are sufficient, grain should be measured in its “real value” by reference to this standard in the same way as any other important commodity. As was stated in Chapter ii, the corn measure of value was suggested by Smith to serve as a convenient index to the labor measure. Beyond a doubt, Smith spoke of the corn measure in a way to mislead both Ricardo and Malthus; but nothing could be plainer than the words quoted from him to show that corn is used on principle only because it is supposed to remain from age to age in a steady exchange ratio with day labor.[131]

In Malthus’s second edition, the view is taken simply that “standard” labor commanded in exchange is the measure of value in all times and places. There is great difficulty in telling precisely what value, or what kind of value, it is that is measured. It is called “real value in exchange” and “intrinsic value in exchange.” The latter is in one place defined to be “not the general power of purchasing possessed by a particular commodity, but its power of purchasing arising from intrinsic causes, which includes all the causes of whatever kind they may be, which have contributed to the limitation of its supply compared with the demand.”[132] The extrinsic causes of a commodity’s exchange value are the causes of the value of the other commodity in whose quantity the exchange value of the first is expressed.[133] In various other places, “intrinsic value in exchange” is defined as indicating (1) the degree of necessity or convenience to life (1st ed.); (2) the difficulty of obtainment (in some sense supposed to be more inclusive than Ricardo’s labor cost); (3) the degree of the limitation of the supply as compared with the demand. Thinking with such terminology would be like painting portraits with a white-wash brush. If a day of labor in America commanded twice the physical quantity of a given complex of commodities that a day of English labor commanded, Malthus was forced to admit that the simple exchange value of the goods commanded by a unit of American labor was twice that commanded by a unit of British labor. But at the same time his doctrine of the labor measure of value required him to affirm that the “real exchange value” of the goods commanded by a day of labor in the two countries was the same. In this way he was led to contend that two complexes of goods having different exchange values, had the same “real exchange values.” In view of the fact that “real exchange value” is defined virtually as “exchange value as arising from its causes,” the contention is mystifying. One is prone to acquiesce in J. S. Mill’s judgment that the argument of Malthus is a “vain subtlety.”