CHAPTER IX

JOHN STUART MILL

1. Though Mill regarded his exposition of the theory of value with great satisfaction—a fact that has occasioned innumerable thrusts at him since—his contributions to the whole subject were not great, considering the work of Ricardo, the criticisms of it by Malthus, and the abundance of suggestions in the writings of Senior. His terminological faults are gross, and in many places his thought is very loose. His entire discussion of value, above all, lacks precision. By value is to be understood exchange value, general power of purchasing, and Mill insists strongly on the necessity of keeping in mind that a general rise or fall of value so defined is “unthinkable.” Value is purely a relative term. The conditions essential to value are utility and difficulty of attainment. Difficulty of attainment may “consist in an absolute limitation of supply” or in “the labour and expense requisite to produce the commodity.”[155] When, in the latter event, labor is applied under conditions of diminishing returns, a third case of value is distinguished for separate treatment. Following Malthus in his important innovation of giving the “empirical account” precedence, Mill begins with the assertion that the law of value of the first class of things—namely, those under an absolute limitation of supply—is merely the law of supply and demand.

“There is another law for that much larger class of things which admit of indefinite multiplication.”[156] This is a law of entrepreneur’s costs of production. While demand and supply rule alone in a certain field, and rule over the oscillations of value in all fields, in the case of reproducible goods,

“they themselves [_i. e._ demand and supply] obey a superior force, which makes value gravitate towards Cost of Production.... Demand and Supply always rush to an equilibrium, but the condition of stable equilibrium is when things exchange for each other according to their cost of production.”[157]

Cost is called now by Ricardo’s words “natural value;” now by Malthus’s, “necessary price.” Cost of production is defined as follows, in the chapter which summarizes the theory of value:

“Cost of production consists of several elements, some of which are constant and universal, others occasional. The universal elements of cost of production are the wages of the labour and the profits of the capital. The occasional elements are, taxes and any extra cost occasioned by a scarcity value of some of the requisites.”

With respect to rent, Mill follows Ricardo for the general rule, instead of Malthus and Senior:

“Rent is not an element in the cost of production of the commodity which yields it; except in the case (rather conceivable than actually existing) in which it results from, and represents, a scarcity value. But when land capable of yielding rent in agriculture is applied to some other purpose, the rent which it would have yielded is an element in the cost of production of the commodity which it is employed to produce.”[158]

If Mill had followed the lead given in the last sentence to its logical end, the result ought to have been the inclusion of ground-rent as an element in entrepreneur’s costs. But, in spite of these concessions, he thought of rent habitually as failing to enter into price, and thus failing to be a cause of disproportionality between labor-cost and value.

2. The profit of capital is stated explicitly to be the remuneration of abstinence, but nothing is made to depend on this.[159] Abstinence is not elevated into a position logically coördinate with labor, nor are the two conceived of together as constituting subjective costs, as distinguished from entrepreneur’s costs, consisting in profits and wages.[160] While the language of Mill in diverse places shows that he was well enough aware of the difference between the two main forms of cost, so little was this essential distinction ever ready in his mind that he is able to say, without realizing the offence, just as Ricardo does: “Besides the natural and necessary elements in cost of production—labour and profits....”[161] When the time comes to develop the traditional philosophical account of value, abstinence is forgotten. Labor alone comes to the front. The aberration, due to profits, of the value of products from the standard required by labor cost, is treated not in a “philosophical” account like Senior’s, which endeavors to include and explain the case, but is regarded as an exception to the “philosophical” explanation, or as an error in it.

3. There is a place in his book where Mill wavers in the decision to include profits in cost of production. The probable explanation of his hesitancy is of considerable interest, for it suggests the internal weakness of the theory that cost in any form is the essence of value. His doubt arises in connection with the familiar case of the relative values of a cask of wine and a piece of cloth, originally costing the same amount of labor in their production. The difficulty arises from the fact that the wine alone continues to increase in value through mere lapse of time:

“The wine and the cloth were made by the same original outlay. Here then is a case in which the natural values, relatively to one another, of two commodities, do not conform to their cost of production alone, but to their cost of production plus something else.”

In this sentence Mill excludes “profits” from cost. But he continues: “Unless, indeed, for the sake of generality in the expression, we include the profit which the wine merchant _foregoes_ during the five years in the cost of production of the wine.”[162] The word “foregoes” (not italicized by Mill) is uncalled for. The wine merchant does not get profits he foregoes elsewhere, but the profits he makes from the added value of the wine. They might be greater or less than the profits foregone elsewhere. The forces tending to make them equal to those elsewhere relinquished are precisely the same in this case as in any other. If they are greater, more five-year-old wine will be brought to the market and its price will fall, and if they are less the reverse will happen. What is the difference between this case and the case of an ordinary industrial product that Mill should falter so? Does capital (using the term in the sense defined by J. B. Clark), the fund of wealth employed in production, play different rôles in the two cases? Not in the least. Suppose a fund of capital is embodied in a certain quantity of raw material for a certain length of time until the same becomes final product. The final product, besides covering all other expenses, affords a sum of value equal to the capital invested in materials plus the interest on it. The difficulty felt in the case of the wine was undoubtedly that no tools, machinery, or labor were employed upon it during the time of its improvement in value. The changes working within it effected its increase in value merely by augmenting its utility to users of wine. The increase of value, secondly, affords a “profit” or interest. This profit may strike the mind as a surplus over cost to the entrepreneur, but the relation of this interest to the value of the final product is precisely the same as in any common case of manufacture. Interest as a cost can influence the value of the product only by influencing its supply. To discover the essential nature of value, we must lay bare the causes which determine what the value of a given supply is, independently of its cost. Cost and value may, in certain cases, tend to make mutual adjustments, but these are effected only by means of changes in supply. Value is not determined by cost _per se_, or, that is to say, cost is by no means of its essence. In the ordinary case, if one capital is employed for a longer time than another, the outwardly active process of production is continued for a longer time. If extra profit accrues through a time when labor works and wheels turn, it is easy to say that profits must be paid, and therefore the value of the product must be of such and such an extent. But in an instance where the value increases without the whirl of wheels and the manipulation of tools, the phenomenon naturally presents itself to the mind in an unfamiliar aspect. The wine merchant remains passive, and it seems plain that instead of his expense dictating what the value of the wine shall be, the truth is, he takes what the causes independently determining the value of the wine give him. Beyond a doubt there is a relation of cost to value, but there are instances where the ultimate philosophy that cost is the very essence of value applies with such unsatisfactory results that any but the most doctrinaire classical economist must falter and hasten on.

4. If “profits” are a part of entrepreneur’s cost of production, the question which confronted Ricardo must reappear. Does not the variety of the proportions in which fixed and circulating capital are combined in production, free values from the regulation of labor cost? The consideration of this question in Mill’s _Principles_ is accompanied by unpardonable blunders in terminology. Mill’s mind seems here completely tradition-ridden. The havoc is wrought in the use of terms by adopting the view that besides labor cost influencing value, wages also influence it. In the topical analysis (Table of Contents, vol. i, p. 15) the outline of the chapter on cost of production proceeds as follows:

“Principal element in cost of production, quantity of labour. Wages not an element in cost of production, except in so far as they vary from employment to employment.”

When cost is used in a sense which makes labor one of its elements, wages are not an element in so far as they vary from employment to employment, or in any other way. In the sense of cost in which wages are an element, the variation of the latter from employment to employment is an irrelevant consideration. Again we find such an observation as the following: “The relative wages of the labour necessary for producing different commodities affect their value just as much as the relative quantities of labour.”[163] In the chapter on Ricardo, we saw how this form of expression originated, and determined what the comparatively simple truth is which it so awkwardly conveys. Wages cost, instead of affecting values “as much as” labor cost, does the whole of the affecting; and labor cost affects values only as it affects wages cost. The end of it all is, Mill concludes, with Ricardo (and without improvement upon Ricardo), that a variation of the general rate of wages alters the exchange relations of commodities produced with different combinations of “fixed” and “circulating” capital, independently of the comparative labor costs of the same. What is true of Ricardo’s statement is true of this. The proposition regarding the effect of a change of the general rate of wages (or of the rate of profits, for one must always accompany the other in the view of Ricardo and Mill) upon “relative values,” may be a true dynamical principle; but the qualification of the original labor-cost theory of value which is contained in this is statical. Exchange values are statically out of proportion to comparative labor costs, without any reference to changes in rates of wages and profits.[164] The reason is that interest is an element in entrepreneur’s costs as well as wages. Of the total of wages plus interest, in some cases interest may be 30 per cent., in other cases 60 per cent., or virtually any other per cent. Values being in proportion to the total, cannot be in proportion to either element alone.[165]

5. Up to the present point, Mill has not taken a decided stand in favor of any qualification of the labor-cost theory which Ricardo had not also approved. In his treatment of skilled labor he admits of a further qualification. Ricardo handled the subject in a very unsatisfactory manner. While he gave the appearance of finding no difficulty for his law of value in skilled labor, he unconsciously evaded the real question at issue. Mill writes:

“When the wages of an employment permanently exceed the average rate, the value of the thing produced will, in the same degree, exceed the standard determined by mere quantity of labour. Things, for example, which are made by skilled labour, exchange for the produce of a much greater quantity of unskilled labour; for no reason but because the labour is more highly paid.”[166]

The plain implication of this passage is that skilled labor receives remuneration out of proportion to the quantity of labor rewarded. Therefore it is also implicit that quantity of disutility is what determines quantity of labor. Since labor cost operates upon exchange values only by way of wages cost, in so far as wages cease in fact to be an accurate index of real labor cost, a new difficulty is created for the labor theory—one very important in principle. Mill himself lays little emphasis upon this point. He regards the superior remuneration of skilled labor as due virtually to a failure of perfect competition. In presenting the subject in this light, he anticipates the important theory of non-competing groups later developed by Cairnes:

“We have before remarked that the difficulty of passing from one class of employments to a class greatly superior, has hitherto caused the wages of all those classes of labourers, who are separated from one another by any very marked barrier, to depend more than might be supposed upon the increase of the population of each class, considered separately; and that the inequalities in the remuneration of labour are much greater than could exist if the competition of the labouring people generally could be brought practically to bear on each particular employment.”[167]

It is hardly necessary or advisable to define perfection of competition in such broad terms as to make it require that the remuneration of skilled labor should be reduced to the standard of disutility of labor. In any event, the tendency of remuneration to approach such a level is ineffective, and therefore negligible. Static principles may be conditioned upon assumptions contrary to fact, but the assumptions are never to be made so violent that the law is not an effective force which must be apprehended before dynamic reality can be explained. Under perfect competition, properly defined, skilled labor is still a thorn in the flesh of the old theory of value.

6. It remains to summarize Mill’s view of the relation of labor cost to exchange value, and to compare it with the views of Ricardo, Malthus and Senior. In Mill’s own language we find the following summary: If one thing exchanges for more than another, the cause must be that “it requires for its production either a greater quantity of labor,” or (1) “a kind of labour permanently paid at a higher rate,” or (2) “the capital which supports that labour must be advanced for a longer period,” or, lastly, (3) “the production is attended with some circumstance which requires to be compensated by a permanently higher rate of profit.” “Of these elements, the quantity of labor required for the production is the most important; the effect of the others is smaller, though none of them is insignificant.”[168]

The qualification which we have numbered one (1) is an addition to Ricardo’s list of qualifications. Number two (2) is Ricardo’s own work; and of number three (3) he is aware, though he abstracts from it with his customary facility.[169] In the end, we may say that Mill placed more stress on qualifications of the labor theory than did Ricardo. Senior made both ground rent and the superior wages of skilled labor causes of qualification of the labor-cost theory. Mill took Senior’s view of skilled labor, but took his stand with Ricardo on the general question of ground rent.