CHAPTER I

GENERAL OUTLINES OF THE HISTORY OF THE LABOR THEORY OF VALUE

1. The following history of the labor theory of value begins with Adam Smith, not because it is supposed that Political Economy was born with the _Wealth of Nations_, but because no other work written affords so convenient a starting-point to the historian who has no desire to press his investigations into regions too remote from modern interests.

After Adam Smith, the writers to be considered are Ricardo and Malthus, McCulloch, James Mill and Torrens, Senior, John Stuart Mill, and Cairnes. In the next great treatise after that of Cairnes, the _Principles of Economics_ of Marshall, there is nothing left of the labor theory of value, except a note at the end of a chapter on the general theory of the equilibrium of supply and demand.[1] This note, “On Ricardo’s Theory of Value,” endeavors to state the ultimate relations of cost, utility and value in such a manner that Ricardo’s explanation of value is made to appear as a statement true as far as it goes, which errs only in being incomplete, and which is completed, not refuted, by the utility theory. This view will be taken up in the last chapter of the present essay. But no separate chapter is devoted to Professor Marshall’s work, because, as a matter of fact, the Ricardian labor theory finds no place in the text of his _Principles_. From Smith to Cairnes, the list of writers given above was selected as well calculated to exhibit the general line of development of English political economy. No attempt has been made to discover writers outside of this list, although it is not denied that such writers may not at present receive due credit for their influence upon the development of economic theory. Making no attempt at what might be called a discursive or _extensive_ study of the field, this history will be confined to an _intensive_ study of the chief writers. If it be found that certain of the above list of writers contributed nothing but error to the theory of value—and such is the case with three of them—even such a conclusion is deemed to be of historical value.

2. With the limits of our field thus defined, attention should first be called to a fairly prevalent, but mistaken, impression regarding the so-called classical labor theory of value. It is frequently assumed that this theory of value was a simple and absolute dictum, supported in substantial unanimity by a considerable body of writers, called collectively “the classical school.” There is, no doubt, sufficient resemblance among these writers in their general tendencies of thought to justify the term “classical school;” but with respect to their views on the central problem of value, it is their differences of opinion that at present need emphasis, just as it is these differences which take the modern reader by surprise when he first undertakes a detailed study of their writings. Instead of finding the minds of the early English economists dominated by a single labor theory, having the merit of great directness and simplicity, the historian of the theory is confronted with an appalling jumble of ideas on the relation of labor to value. Ricardo, it is true, defended the simple thesis that the exchange value of a commodity is governed by its cost of production in labor, but it is sometimes forgotten that he hedged this doctrine about with several important qualifications and conditions. Furthermore, there was not a contemporary or subsequent writer who did not differ from Ricardo in important points of theory. Taking Smith, Malthus, Ricardo, McCulloch, Torrens, and James Mill together, we find labor sometimes conceived of as _disutility cost_, at other times as _productive power_, without any recognition of the distinction between these concepts. Yet this distinction may be of great importance in certain propositions of theory. We find McCulloch at one time claiming that the value-determining labor employed in the production of a commodity includes the operations of machines and inanimate objects, which are “philosophically just as truly labor as human exertions.” Torrens maintained that value is governed by cost of production in “accumulated” labor, and James Mill held interest on capital to be really wages of labor, an absurd thought absolutely foreign to Ricardo’s theory. In addition to the _labor-cost regulator_ of value, there was the _labor-command measure_ of value, the measure of the value[2] of a good for all times and places, alleged to be afforded by the amount of labor which could be commanded by it or had in exchange for it. The principal defender of this measure, Malthus, did not believe in the labor-cost regulator. It was asserted that the “value of labor” is the same in all times and places. When this value is inadvertently identified with _exchange value_, which must, of course, be measured by the commodity wages of labor, some highly interesting arguments are necessitated to show that real wages are in some sense or other the same in all times and places, in spite of the fact that, as commonly understood, they are by no means the same. We find a “corn measure” of value first proposed as a convenient index to the true labor measure. But, strange to say, later we run upon a proposal to take an “arithmetic mean between corn and labor” (_i. e._, between their prices) as the “least defective measure” of “intrinsic value in exchange.” _Cost of production_ was used without any distinguishing adjectives to indicate concepts so distinct as entrepreneur’s cost and labor cost (presumably “disutility cost”). In consequence there arose a dispute, which was at the time nearly unintelligible, as to whether or not profits (_i. e._, interest on capital) are a part of cost of production.

3. In the confusion, a few main lines of thought can be discerned. There is a theory of value _regulation_, and there is a theory of value _measurement_, which is, as Malthus and others pointed out, a distinct thing from value regulation. The classical theory of value _regulation_ was composed of two separate accounts. That is, these two accounts were of distinct origin and nature, and should have been kept distinct. Instead of this they were more or less fused and the relation between them was always clouded. To this fact is due the great difficulty all must experience in reaching a complete understanding of the classical theory. Though it is for this reason very necessary to give the accounts separate names, it seems impossible to find unobjectionable terms. Professor von Wieser, from whom I have taken the idea that the confusion between these two accounts is the key to the history of the labor theory of value, distinguishes them by the terms “philosophical” and “empirical.”[3]

Adopting these names, in default of better, the “philosophical” account is the answer of the fathers of modern political economy to the general riddle of value, the riddle of its ultimate nature, or essence. At first blush it would seem that things must derive their value from their usefulness. But almost immediately the mind turns to the fact, which has since “classical” days become such a time-honored illustration, that bread is “more useful” than gold, but much less valuable. The usefulness of bread, as it is here understood, is its general or characteristic usefulness, its usefulness as a class of things, its power to preserve our health and strength. Meditating upon the importance of the entire class of utilities represented by bread, one is led to ignore the question whether the specific utility of a particular piece of bread, in the given circumstances of the supply of bread, is not less than the specific usefulness of a particular piece of gold for purposes of ornament, in the given circumstances of the supply of gold. This is the line of inquiry which leads to the utility theory. But having passed the place where this road branches off, the earlier speculation on value reached the conclusion that things possessing utility have their values determined by their cost in labor. This answer to the riddle seems foreordained, when once Adam Smith’s “value in use” is adopted as the sole conception of utility. Elaboration and illustration of this philosophy always leads to primitive and “natural” society, where the hunter and fisherman, rent-free and equal, exchange the products of their labor as measured in days. When, however, the attention turns to the market-price of goods in the actual world, it is observed as a matter of business experience, in contrast with speculation with regard to the essence of things, that the exchange value of commodities tends to equal the sum of the wages of labor, the “profits” of stock, and the rent of land[4] which must be paid to obtain their production. This is the “empirical” account. The principle discovered is that now known as the law of entrepreneur’s costs.[5]

The central idea in the “philosophical” account is that labor-cost is the essence of value. It appeals primarily to the reader’s introspective judgment for confirmation. The primitive state of society by which it is illustrated is quite imaginary. The “empirical” account is an outwardly observed tendency of market competition. In the progress of the thought of English economists upon value, the “philosophical” labor-cost account becomes more and more attenuate, until in the _Principles_ of Professor Marshall, as before observed, nothing remains of it but a note on “Ricardo’s Theory of Value.” Professor Marshall’s general theory of the equilibrium of normal demand and supply is the classical “empirical” account enlarged and greatly improved, with some of the more general laws of the newer utility theory incorporated into the whole to serve as the ultimate principles of demand. While the “philosophical” account was fading away, the “empirical” account was becoming virtually the whole theory of value. Strange to say, Ricardo contributed very little to the advancement of the empirical account as such. The direct line of descent of this doctrine is traceable from Smith’s _Wealth of Nations_, through the _Principles_ of Malthus and J. S. Mill, to Marshall. Neither Ricardo nor Cairnes can be considered to stand in the line.[6]

Adam Smith and Malthus considered ground-rent to be a “component part” of entrepreneur’s cost (not that they employed the term entrepreneur’s cost), co-ordinate with wages and “profits of stock.” Ricardo never stated a law of entrepreneur’s cost plainly, formally, as such, though he gave it an obscure recognition as a source of difficulty to the pure labor theory of value. But he influenced its form profoundly, for when the doctrine passed into the hands of J. S. Mill, the latter removed the rent of land from among the elements of cost, leaving wages and interest.[7]

While many points of detail will appear in the following pages, it will be found necessary to trace the relations of the two great accounts of value, the “philosophical” and the “empirical,” in the writings of every economist hereafter considered.