CHAPTER VI

MCCULLOCH, JAMES MILL AND TORRENS. ANTICIPATIONS OF MARX’S THIRD VOLUME.

1. The three minor writers, McCulloch, James Mill, and, to a less degree, Torrens, were imitative expounders of the Ricardian political economy. While their views were not identical with those of Ricardo, they were accustomed to explain themselves by pointing out wherein they differed from the master. In this history they are of interest because each endeavored to state the labor-cost theory in a more arbitrary form than did Ricardo himself. This chapter could well be entitled, “The Labor Theory Running Riot.” McCulloch and Mill endeavored to reason out of existence the qualification Ricardo placed in the doctrine on account of interest, and Torrens thought he avoided the difficulty by stating that value is determined by cost in “accumulated labor.” An interesting fact in the literary history of the labor theory, and one which, to the best of my knowledge, has not hitherto been brought to light, is that McCulloch anticipated Karl Marx’s solution of the “organic composition of capital” problem. Marx closed his theory of value, in the first volume of _Das Kapital_, with the confession that, to all _appearances_, the facts of market values contradict the theory. He promised, however, to show, in a later volume, that in _reality_ there is no contradiction.[74] When the second volume appeared only to defer to the third the promised solution, “a regular prize essay contest” sprang up in Germany, and endured for ten years, in which the participants endeavored to forecast what Marx’s solution would be. No one was successful.[75] The answer to the enigma, as it appeared in the posthumous third volume of _Das Kapital_, is precisely the one McCulloch gave to the same question.

1. MCCULLOCH.

2. We shall not retrace the general lines of Ricardo’s exposition as they reappear in McCulloch’s writings.[76] In the course of the numerous editions of his _Principles_, and in his other observations upon value, this writer managed to commit nearly every conceivable blunder that could connect itself with the labor theory.[77] From time to time, Ricardo mildly reproved his disciple for his rigidity:

“You go a little farther than I go in estimating the value of commodities by the quantity of labour required to produce them. You appear to admit of no exception or qualification whatever, whereas I am always willing to allow that some of the variations in the relative value of commodities may be referred to causes distinct from the quantity of labour necessary to produce them.”[78]

The cases of the value of standing timber, previous to the employment of labor upon it, or of the value of old wine, which Ricardo freely confessed were beyond his philosophy of value,[79] had no terrors for McCulloch. In his abandonment to dogma, he solves the difficulty with ease by the following definition, one of the most crassly ridiculous originalities in the annals of political economy. It finds a place in this history to illustrate to what extremes the labor theory could be carried:

“Labour may properly be defined to be any sort of action or operation, whether performed by man, the lower animals, machinery, or natural agents, that tends to bring about any desirable result.”[80]

The distinction between the operations of men and those of machinery and natural agents is

“on the whole objectionable because it gives countenance to the idea that there is some radical difference between the labour of man and of machinery, etc., whereas, in so far as the doctrines and conclusions of political economy are concerned, they are in all respects the same.”[81]

Consider the example of a cask of wine, which is entirely finished as far as labor bestowed on it is concerned, and now possesses a certain exchange value. If let stand a few years it will be found to possess additional value. To force this case, McCulloch has decided to define whatever it be that “works” in the wine to be labor, and thus to affirm that the increased value is occasioned by the increased quantity of labor employed upon it. Malthus has made a rare criticism on this idea that cannot be omitted:

“There is nothing that may not be proved by a new definition. A composition of flour, milk, suet, and stones is a plum-pudding; if by stones be meant plums. Upon this principle Mr. McCulloch undertakes to show that commodities do really exchange for each other according to the quantity of labour employed upon them: and it must be acknowledged that in the instance which he has chosen he has not been deterred by apparent difficulties.”[82]

Should we grant McCulloch’s definition of labor, the explanations which he bases upon it involve an uncommonly “vicious” circle. Having included in labor any of the operations of all “nature” which tend to produce a desirable result, he is forced to place aside desirable natural operations that are “gratuitous.”[83] Having no way to measure natural operations by themselves, he decides, in effect, that whenever a commodity is found which possesses an exchange value in excess of that which would be proportionate to its cost in human labor, the thing to do is to add in enough labor of natural forces to restore the desired proportionality. Subsequently he adopted another line of reasoning, incompatible with this one, but his later method of establishing the absolute truth of the labor-cost theory was of the same calibre.[84]

3. The fatal difficulty in which the Marxian theory of value culminated, due to the fact, as Marx described it, that the “organic composition of capital” is, for technical reasons, different in different industries, is the same as the difficulty of “fixed and circulating” capital, which occupied so large a share of Ricardo’s and McCulloch’s attention. The problem as discussed by Marx differs from Ricardo’s greatly in terminology, and considerably in certain other external features, but the identity of the two in essence can easily be shown.

From his general law that the value of a commodity is governed by its labor cost,[85] Marx made a law of wages follow as a corollary, namely, that the value of labor, its exchange-value, or wages, is governed by its cost of production in labor. It is very hard to find a labor-cost of production of labor, so, by an act of logical legerdemain, this becomes the labor-cost of labor’s _subsistence_.[86] The value _produced by_ labor depends upon the duration of its exertion; but, says Marx, the _exchange value of_ labor is a different thing. If laborers commonly work ten hours a day for their employers, while six hours of labor will produce a day’s _subsistence_, the value produced by a day of labor is as ten, while the wages paid for it are—in virtue of the general law of value—as six. The difference between the value produced by labor and the value of labor—in this case (adopting the labor-cost unit of value) four hours of value—is the famous “_surplus-value_,” and the four hours a day is called the surplus labor time. We shall have to adopt a special and _purely temporary_ terminology to describe the complication in this theory about to be discovered.[87] By value we mean exchange-value, unless otherwise specified. The outlay of value made by an entrepreneur in labor, raw-material, machinery, _etc._, returns to him in the course of time a certain value of products, which is greater than the outlay required to produce them. The excess of this value over the outlay we shall call the “profit fund.” Now, according to Marx, _surplus-value is the sole source of this profit fund_. The reasoning to support this runs as follows: The entrepreneur’s investments in machinery and raw-material, says Marx, cannot contribute anything to this fund. For, according to the labor dialectic, all the value these goods can contribute to their products is derived from their own labor-costs, and the law of value forces the entrepreneur to pay this value for them in full. They can, therefore, afford him no surplus. But the _labor_ he buys is a different kind of thing. It, and it only, as just explained, gives more value to the product than he is forced by the law of value to pay for it.

We are now face to face with the great difficulty. If surplus-value is the sole source of the profit fund, the profit funds of different business units ought to be in proportion to the surplus labor time immediately exploited in them. Since the surplus labor time in each day of labor depends on the general rate of wages, there is a general rate of surplus labor time per labor day—_e. g._, four hours in ten—and the profit fund of every business would be directly in proportion to the number of laborers it employed. This is absolutely not the case in fact. “It appears, therefore,” says Marx, “that here the theory of value is irreconcilable with the actual movement of things.”[88]

For technical reasons, the proportions in which the entrepreneur’s outlays are invested in labor on the one hand, and other production-goods on the other hand, are different in different lines of business. The make-up of the entrepreneur’s outlay with respect to these proportions Marx calls the “organic composition” of his capital.[89] The facts of life are that equal capitals, in the sense of equal outlays, in different employments tend to produce equal “profit funds,” regardless of their organic composition. Now what the profit fund actually turns out to be, depends on the selling price or value of the product. If we take a capital spent _in large proportion_ for labor, the large amount of surplus labor time exploited ought to give the product a value very much in excess of the outlay, and afford a large profit fund. If we take a precisely equal capital, spent in very small proportion for labor, and almost entirely for machinery, _etc._, the relatively small amount of surplus labor time exploited ought to make the value of the product not nearly so great as that of the first capital.

Since Marx frankly admits that in fact competition makes _the value of these products equal instead of unequal_, how does he “solve the contradiction” and redeem his theory? The actual “profit” (as defined here temporarily) afforded by the selling-value of the products is, throughout society, on the average, say 20 per cent. of that value. Where the “organic composition of capital” in a particular industry happens to be such that the profit which ought to be produced according to the theory is also the actual profit, here the _value_ of the product required by the theory will be the same as the actual value. But in some industries where the proportion of labor purchased in the total outlay is low, the actual value will be above the theoretical value, whereas in other industries, under reverse conditions, the actual value will be below the theoretical value. Now, concludes Marx, _the variations of actual values_ (called by Marx simply “prices”) _above and below the theoretical or labor values_ (called by Marx simply “values”) _counterbalance or cancel one another, and the total actual values of all commodities collectively remain equal to their total labor values_.[90]

The “theoretical values,” so-called above, are those which would be in proportion to labor costs. The law of labor cost declares that the value of any given commodity is determined by its cost in labor. In admitting that in fact actual particular values do not follow this law, Marx has abandoned the law. (For a consideration of the erroneous claim that the average rate of surplus-value determines the average rate of profits, the reader may refer to Böhm-Bawerk’s essay.)

The point desired to be made here, is that Ricardo’s difficulty of “fixed and circulating” capital is the same as that in the Marxian theory. Ricardo stated that variations in the proportions in which fixed and circulating capitals are combined in different industries introduces a second cause of change in the relative value of a commodity. The first cause is change in the quantity of labor required to produce a commodity; the second is a change in the general rate of wages. In the chapter in this history devoted to Ricardo, it has been argued at length[91] that what Ricardo said was only a round-about explanation of the fact that the values required by the labor theory are not the same as actual values.

McCulloch, following Ricardo, discusses the same problem in the same way, and concludes that changes in the rate of wages will cause variations of values aside from the influence of pure labor cost. But he adds to what Ricardo has said, attempting a justification of the pure labor-cost theory on the grounds that it regulates average value. I trust what has been said will make it clear that McCulloch’s defense is identical in essence with that of Marx, though different in form. McCulloch wrote as follows, in 1849:

“It should also be observed, that though fluctuations in the rate of wages occasion some variation in the exchangeable value of _particular_ commodities, they neither add to nor take from the _total value_ of the entire mass of commodities. If they increase the value of those produced by the least durable capitals, they equally diminish the value of those produced by the more durable capitals. Their aggregate value continues, therefore, always the same. And though it may not be strictly true of a particular commodity, that its exchange value is directly as its cost, or as the quantity of labour required to produce it and bring it to market, it is most true to affirm this of the _mass of commodities taken together_.”[92]

McCulloch also expressed the same thought twenty-one years earlier, in 1828. Though a change of the rate of wages may cause a particular commodity to vary from its “real value,”

“the exchangeable value of some other commodity must vary to the same extent in a contrary direction.”[93]

Marx says the same, and concludes that the variations of the actual from the theoretical values cancel one another.[94] Both McCulloch and Marx were involved in a hopeless endeavor to overcome the difficulty of interest.

2. JAMES MILL.

4. James Mill held that value depends, in the first instance, on demand and supply, but ultimately upon cost of production.[95] Cost of production consists of cost in capital and labor combined, but the capital element can be reduced to labor, and in the last resort quantity of labor cost determines the exchange value of commodities.[96] But there is an argument which is brought to controvert this conclusion.

“It is said that the exchangeable value of commodities is affected by time, without the intervention of labour; because, when profits of stock must be included, so much must be added for every portion of time which the production of one commodity requires beyond that of another.”[97]

Mill takes the regular example of the cask of wine, worth twenty sacks of flour now—because it cost the same amount of labor—but worth more if kept in a cellar some years. Now, he says, the objection here is that there is an addition of value without an application of more labor, and that therefore quantity of labor does not regulate value. But

“this objection is founded on a misapprehension with respect to the nature of profits. Profits are, in reality, the measure of quantity of labour; and the only measure of quantity of labour to which, in the case of capital, we can resort. This can be established by rigid analysis. If two commodities are produced, a bale of silk, for example, for immediate consumption, and a machine, which is an article of fixed capital; it is certain, that if the bale of silk and the machine were produced by the same quantity of labour, and in the same time, they would exactly exchange for one another: quantity of labour would clearly be the regulator of their value. But suppose that the owner of the machine, instead of selling it, is disposed to use it, for the sake of the profits which it brings; what is the real character and nature of his action? Instead of receiving the price of his machine all at once, he takes a deferred payment, so much per annum: he receives, in fact, an annuity, in lieu of the capital sum; an annuity fixed by the competition of the market, and which _is therefore an exact equivalent for the capital sum_. Whatever the proportion which the capital sum bears to the annuity, whether it be ten years’ purchase, or twenty years’ purchase, such a proportion is each year’s annuity of the original value of the machine. The conclusion therefore is incontrovertible: as the exchangeable value of the machine, had it been sold as soon as made, would have been the practical measure of the quantity of labour employed in making it, one-tenth or one-twentieth of that value measures also a tenth or a twentieth of the quantity of labour.”[98]

When an entrepreneur pays a certain sum for a machine, which he uses up in production, at the end a certain sum of value produced stands in the place of, and is imputed to, the destroyed machine. This sum of value is normally greater than the value of the machine, being sufficient, in fact, to replace the machine and leave a marginal fund of value, which we call interest. But Mr. Mill’s text discloses the fact that it is the gross value of the product of the machine which he designates by the term “profit.” If the machine lasts ten years, the entrepreneur receives these gross profits in ten annual installments. In purchasing the machine he has remunerated the labor which was expended in its production. Now he receives back that remuneration in ten parts. _Competition makes these ten parts the “equivalent” of the original whole._

“It thus appears that profits are simply remuneration for labour. They may, indeed, without doing any violence to language, hardly even by a metaphor, be denominated wages: the wages of that labour which is applied, not immediately by hand, but mediately by the instruments which the hand has produced.”[99]

Such was the puzzle of value in “classical” times that a thinker of repute could resort to explanations shallow almost beyond belief. It is the italicized line, of course, which begs the question. The assertion that the gross return from a machine is the exact _equivalent_ of its cost price, might mean that the sum total of the “annuities,” in which the entrepreneur receives this return, is _equal_ to the cost price of the machine to him. In this case the statement is simply false. But if the intention be to admit that the sum of annuities is more than equal to the cost price, the plain import of the admission is unconsciously concealed under the word “_equivalent_.” For the excess of the value of the product of the machine which affords this surplus in the annuities is precisely the value out of proportion to the cost of the product in labor indirectly applied to it, that is, applied through the machine. To return to the cask of wine, _by hypothesis_, its value is in excess of proportionality to the quantity of labor it has cost. And yet Mr. Mill sets about to explain that its value is, nevertheless, in proportion to the quantity of labor it has cost, because it is a general principle that “profits” are “really wages of labour.” In fact,

“the case of the wine in the cellar coincides exactly with that of a machine worn out in a year, which works by itself without additional labour. The new wine, which is one machine is replaced by its produce, the old wine, with that addition of value which corresponds with the return to capital employed upon the land [in Mill’s view, the capital that sets the rate of interest for all other]; and the account which is to be rendered of the one return, is also the true account of the other.”[100]

Although Mr. Mill has taken trouble to show that it is a misapprehension to suppose that difference in the time required to produce commodities throws their values out of proportion to their labor costs, he now caps the climax of his strange argument by explaining, directly after Ricardo, how a rise or fall in the general rate of wages will alter the exchange ratios of commodities, irrespective of changes in their labor costs. As explained in the chapter on Ricardo, this is but an indirect way of showing that the existence of interest is fatal to the law of labor cost, and that the length of time through which interest must be taken is a material factor in determining the cost of production of commodities. The failure of Mr. Mill, as a disciple of Ricardo, to understand the real meaning of the master’s qualification of the labor-cost law, serves but to prove the assertion already made, that Ricardo’s round-about argument on this subject was most misleading. As for Mr. Mill, his treatment of the interest difficulty was a bungle from first to last.

3. TORRENS.

5. Torrens explains at great length why commodities cannot be exchanged in primitive society on any other basis than that of labor cost; but concludes that the forces which produce this result in early times cause products to exchange, under advanced conditions, according to their capital cost. A commodity’s cost in capital, measured as the money outlay of the capitalist-employer, is its “natural price.” Actual exchange value does not, as Ricardo and Malthus say, tend to settle at _natural price_, because there is a permanent difference between these quantities, and this difference constitutes “profits.”[101] It is true that writers who claim that the actual price tends to come to the “natural price” include profits in natural price,

“But this classification is highly unphilosophical and incorrect.”[102] “We cannot assert that the profit of stock is included in the cost of production, without affirming the gross absurdity that the excess of value above the expenditure, constitutes a part of expenditure.”[103]

The difference of view between Malthus and Torrens is easily explained. Malthus means by natural price, normal value. Torrens has in mind one variety of the “natural price” of the “philosophical” account of value.

“Natural price is that which we must give in order to obtain the article we want from the great warehouse of nature, and is the same thing as cost of production.”[104]

In primitive times this was labor; in present times it is capital.

Torrens really attempted an “empirical” law,[105] namely, that the exchange values of commodities are _determined by_ their cost in capital to the entrepreneur, but are in excess of the cost by a constant percentage. Exchange values are still determined by the cost, because the percentage of this excess is reckoned on the cost. In criticism of this, it is easy to show that, as an empirical account, the only possible way of defining entrepreneur’s cost to show that it does regulate value is to include interest (“profits”) in the cost. The “philosophical” account is brought to bear on the law of entrepreneur’s costs only to injure its statement. Interest is a part of the cost of any particular commodity, in the sense that it must be paid to call forth capital to aid in its production, just as wages must be paid to call forth labor. If interest be excluded from entrepreneur’s costs, the statement of Torrens that the value of the product will still be in proportion to cost cannot bear the slightest examination. The total process of the production of most goods is conducted by a series of entrepreneurs. If we take any two commodities of equal market value, the briefest consideration will show that their costs of production (in the sense employed by Torrens), merely to the last entrepreneur making them, may be quite unequal. As Ricardo pointed out, if one commodity takes longer to market after the entrepreneur makes his outlay than another, the amount of profits which its market value must afford will be greater, so that its cost (as Torrens defines it) must be less. But considering the entire cost of production to the series of entrepreneurs, the “profits” of each entrepreneur increase the necessary money outlay of the next entrepreneur succeeding him, who uses the product of the first as production goods. If Torrens should permit the profits of entrepreneurs earlier in the series surreptitiously to be included in the cost to later entrepreneurs, he would be abandoning his definition of cost. But if he excludes this element of profits to the whole series from the cost to the whole series, it is not true (for the same reason which applied to the case of the single entrepreneurs) that the values would be in proportion to costs of production.

6. Unfortunately, the influence of the philosophical account upon the thought of Torrens did not exhaust itself in the havoc it played with his theory of entrepreneur’s cost. Perforce, he must give a new version of the theory of labor cost intended to bring it into complete harmony with the empirical law of costs. This theory is:

“it is always the amount of capital, or _quantity of accumulated labour_, and not the sum of accumulated and immediate labour expended on production, which determines the exchangeable value of commodities.”[106]

No definition is given of “accumulated labor” other than that implied in the sentence above: “the amount of capital, _or_ accumulated labour.” Torrens defines capital to be the raw-material, machinery, and _subsistence of labor_ necessary to production. The “accumulated labor” which a product costs must be, in his view, the labor[107] which its raw-material costs, plus that which the machinery used up for it costs, plus—_not_ the labor actually employed on it in connection with this machinery, but plus the labor which the _subsistence_ of this labor has _cost_![108]

Since Torrens himself offers no explanation why this newly-defined quantity of labor cost should regulate value, we are not in duty bound to go very far into his fantastic conception. Just as labor theorists generally proved that labor cost is the regulator of value by the simple process of showing that utility is not, so, I suppose, Torrens shows that labor cost, as he defines it, regulates value because as defined by Ricardo it does not. An astonishing thing about his conception is that the labor _directly applied_ to a thing is not a part of its labor cost! To the money outlay of the capitalist-entrepreneur for machinery and for raw-material corresponds the labor cost of these goods. To the money outlay in wages must correspond either the labor cost directly remunerated by these wages, _or else_ the labor cost of the things the laborers buy with their money wages (subsistence). Both of these cannot be represented by these wages, otherwise some labor cost would be counted twice over. For instance, the labor employed directly on a pair of shoes would be part of the labor cost of production of the shoes; but somewhere else it would be counting as the cost of production of hats, or what not, according to the employment of the laborer of whose subsistence these shoes became a part. Having made the absurd choice to count this labor (the direct labor cost of the shoes) as part of the cost of hats, upon the general principle thus adopted, Torrens cannot count labor, directly applied, as part of the cost of the thing to which it is applied. From this it follows that the direct labor cost of a machine or a piece of raw-material cannot be counted as a part of the real labor cost which determines its value. As a consequence, it is interesting to note that none of the labor directly applied to a commodity, or directly applied to any production goods used up in it, is a part of its labor cost. If Mr. Torrens had been pressed by a critic in his day, he could well have defied any man to locate the Torrens labor cost of an article to show that it _does not_ correspond to the value of the article.