CHAPTER VII

THE EMPIRICAL THEORY AS DEVELOPED BY MALTHUS.

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.

“It has never been a matter of doubt that the principle of supply and demand determines exclusively, and very regularly and accurately, the prices of monopolized commodities, without any reference to the cost of their production; and our daily and uniform experience shows us that the prices of raw products, particularly of those which are most affected by the seasons, are at the moment of their sale determined always by the higgling of the market, and differ widely in different years and at different times, while the labour and capital employed on them may have been very nearly the same.”[112]

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.

“The cost of production itself only influences the price of ... commodities as the payment of this cost is the necessary condition of their continued supply.”

“It follows that the great principle of demand and supply is called into action to determine what Adam Smith calls natural prices as well as market prices.”[113]

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:

“You say that demand and supply regulates (sic) value; this I think is saying nothing; it is supply which regulates value, and supply is itself controlled by comparative cost of production.”[118]

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:

“There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore _their value cannot be lowered by an increased supply_.”[119]

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:

“Under all the variations, therefore, which arise [4] from the different proportions of fixed capital employed, the different quickness of the returns of the circulating capital, [5] the quantity of foreign commodities used in manufactures, [6] the acknowledged effects of taxation, [7] and the almost universal prevalence of rent in the actual state of all improved countries, we must I think allow that ... _it is certainly not_ the quantity of labour which has been employed in the production of each particular commodity which determines their relative values in exchange at the same time and at the same place.”[121]

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