The Intellectual Foundations of Political Economy | Pepperdine University | School of Public Policy

The Intellectual Foundations of Political Economy

The Austrian School


Natural Value:

BOOK 5, The Natural Cost Value of Products

by Friedrich Von Wieser

Chapter I Chapter VIII
Chapter II Chapter IX
Chapter III Chapter X
Chapter IV Chapter XI
Chapter V Chapter XII
Chapter VI Chapter XIII
Chapter VII  

Chapter 1

The Law of Costs

Production goods which are capable of being employed in several ways receive their value, as we are aware, from the value of the least of their products, the production of which is economically permissible; that is, from the marginal product or from their contribution to the product. This value attaches equally to all similar articles or similar items of a productive stock, even to those which are actually employed in more remunerative ways. In a stock of iron each part has an equal value with every similar part in the stock, based on the marginal contribution. It is the same with a stock of coal; the same with any available supply of labour of equal quality; the same with any other production good. Assume that, in a productive stock of the class a, the item put to the most insignificant use gives a product of 1, every item in the stock will have the value of 1; every item of the class b has the value of 2, if the marginal productive contribution of the class be 2, and every item of the class c has the value of 3, if the marginal productive contribution amounts to 3.

Now, as a rule (the exceptions will be discussed later on) production goods retain that value which is ascribed to them before the beginning of the production -- in anticipation of the best possible result, -- after the completion of the process of production; that is to say, they retain it still in the products which they have been transformed into. To take the former figures, the product of the elements 10a + 10b + 10c, will, as a rule have the value 10 + 20 + 30 + 60, and the product of the elements 10a + 20b + 10c, will have the value 10 + 40 + 30 = 80.

This law may be expressed differently according as we state it from the side of production goods or from that of products.

In the former case it runs thus: -- similar production goods maintain, as a rule, in every product, first, a similar value, and second, that value as it attaches to them through their marginal productive contribution. This is the correct formula. As the law of costs is usually understood, however, the second clause would be left out; thus giving a formula for relative values, but not for absolute amounts of value.

In the latter case the law runs thus: -- the value of a product is, as a rule, a complex obtained by multiplying the quantity of production goods employed by the value of the productive unit, or -- taking into consideration the fact that every product is always produced from several productive factors -- it is a sum of such complexes (10a + 10b + 10c, or 10a + 20b + 10c, and so on). From this formula, which indicates the absolute amounts of value, there follows another for the relations of value. It is that the values of products which have one productive factor in common are, to each other, in respect of this common factor, as the quantities of it requisite for their production. This is the correct formula. As usually understood the law runs more briefly thus; -- the values of products are to each other as the costs requisite for their production. This, again, is merely a relative, not an absolute expression. Closer consideration shows that it is not possible to apply this relative formula so long as it stands alone. The amount 10a + 20b + 10c is not twice as great as the amount 10a + 10b + 10c, but twice as great only as regards the factor b; the general relation can only be established when the absolute values of a, b, and c, are known. If a = 10, b = 20, and c = 30, the ratio is as 80 to 60; if b = 100, it is as 240 to 140.

In the Ursprung des Werthes I called products which have one productive factor in common Productionsverwandt, which may be rendered in English as "cognate." They represent, as it were, the descending line of this factor, and stand to one another in collateral relationship. All products made from the same quality of iron are cognate. Many products are cognate to each other in more than one respect, e.g. products of iron in the making of which have been expended similar kinds of labour or similar fuel. Understood in this sense, it is always cognate products to which the law just stated refers.

This is the well-known law of costs. The task now lies before us to explain and prove it.(1*)

NOTES:

1. I have formulated the law of costs only with relation to the so-called costs of production. Besides this we speak sometimes of costs, when we refer to expenses of purchase. By this is meant the sums of money a buyer has to expend to obtain possession of goods. An exactly analogous law obtains as regards these costs. All sums of money of equal amount destined for the purchase of goods ave equal value to the one owner, and all goods purchased for money -- under certain assumptions entirely analogous to those conditions which hold as regards the law of costs in production -- have to the one owner a value in proportion to their costs of purchase (see Book II, chap. ii). The law of costs of production has, however, a more far-reaching importance than the law of costs of purchase, inasmuch as it is not, like the latter, limited subjectively, but also holds as regards objective exchange value. In consideration of these more far-reaching effects it is entitled to a special statement.

Sax has stated the conception of costs still more comprehensively (see chap. 56 in his Grundlegung der Staatswirthschaft). Nevertheless, important though the results thus obtained may be, it appears to me that, for the reason just stated, it is right to hold by the narrower conception of the costs of production, as against this wider one.

In connection with the present book, see Ursprung des Werthes, pp. 97, 103, and 146; further, in Böhm-Bawerk's Werth, pp. 61 and 534; as also Sax, p. 327; and, finally, the parts referring to this subject in Jevons and Walras. Menger does not treat of costs.

Back to Top

Chapter 2

The Conception of Costs

Whatever economic production goods a man has within his disposal, whether lands, capital, or labour power, he counts part of his wealth -- although they do not directly increase his satisfactions; and he does so with just as much right as he counts those consumption goods wealth which permit of direct enjoyment. The possession of production goods gives the promise of acquiring consumption goods later. Production, therefore, not only creates value, it also destroys value. Only so long as one is taken by surprise at the emergence of productive value, in that it is unexpected, is it reckoned as pure gain. When the Phoenicians -- as the fable goes -- accidentally came upon glass among the ashes, only the gain of production would be present to their minds; but whoever, thereafter, began to produce glass, and in doing so was obliged to pay attention to the materials of its production, would learn perforce the destructive part of production. If production, on the one side, brings forth products, it limits, on the other, the producing powers. On this account it is every one's duty to see that his production is always directed towards the greatest possible result, in case he should consume more value than he will eventually gain.

This circumstance receives more distinct form and emphasis in the case of production goods capable of many and various employments. Here care must be taken to choose those employments which will prove the most economically efficient, both as regards kind and amount. Circulating capital or labour power devoted to any one production, is thereby absolutely withdrawn from all others; the same is true of fixed capital, and even of unconsumable land, during the period of the production to which they are devoted. In consideration of this fact the devotion of means of production to individual undertaking must always be well considered. It is necessary, for this end, that the man who resolves on the making of one special product, should form an exact idea of the value of all the other products whose manufacture is thereby rendered impossible. But how can this be done? It is done by taking account of the value of their common economic factors of production. In these factors the value of all "cognate" products, without exception, is incorporated. Productive value, consequently, occupies a position of mention among the whole circle of cognate products. Whenever the value of any class of products falls or rises, and thereby either the extension or the limitation of other branches of production is demanded,(1*) the effect is first communicated to productive value, and is then passed on from productive value. The products and the value of the products adjust themselves, in each individual case, to the productive value, and the productive value indicates the limit of production common to all.

In this way we reach the point of view from which production goods are conceived of as costs. The first element in it is that the productive employment figures as outlay, as sacrifice, as loss; the second is that, in virtue of this, attention is called to the equalisation of several connected productions. To say that any kind of production involves cost, simply implies that the economic means of production, which could doubtless have been usefully employed in other directions, are either used up in it, or are suspended during it. Costs are production goods when these are devoted to one individual employment, and, on account of their capacity of being otherwise employed, take the shape of outlay, expenditure.(2*) The measure for estimating costs is always the productive marginal utility, as it is found on consideration of all the employments economically permissible.

Thus only those production goods which we have already (in Book III. chap. xii) called "cost goods," as opposed to "monopoly goods," can be regarded as costs. Productive elements which admit of only one kind of employment, do not share the multiplicity of conditions necessary for the emergence of what we recognise as costs. A mineral spring, which can be used only by drawing off its contents and putting them into bottles, must, obviously, stand in a quite different relation to the value of the product from the unskilled labour which fills the bottles, but is capable of a hundred other uses besides. "Monopoly goods" simply take to themselves the value of the products imputed to them, and do not conduct it back again to these products, as do "cost goods," -- while cost goods are the parent goods of the great productive relationships, within which they act as combining forces and equalisers of value. The more various the employments of any productive element are, and the shorter the processes are, -- as this continually necessitates new deliberations as to how the goods are to be employed next -- the more does their employment in production obtain the character of a sacrifice whose amount must be well weighed if the proper balance of production is to be maintained. Unskilled labour and the commonest kinds of floating capital, are, consequently, the goods to which the conception of costs most frequently applies.

NOTES:

1. If, for instance, the price of cotton thread is reduced, thread manufacturers will not pay the former price for cotton yarns. But if cotton spinners are compelled to quote a lower price to thread manufacturers they cannot ask a higher price from cloth weavers. Thus the weavers get their raw material cheaper because of the fall in the price of the cognate product, thread, and this tends to an extension of the cloth manufacture. -- W.S.

2. This definition requires a slight readjustment only in so far as interest and land rent (see below, Book V. chaps. xi and xii) are reckoned among costs. Interest and rent -- or the goods which constitute them -- are not production goods; they are simply elements of the production calculus as production goods are.

Back to Top

Chapter 3

Foundation of the Law of Costs

The value of costs determines the value of products in two ways. In general it determines it indirectly, by regulating the supply produced; but, in individual cases, it determines it directly by communicating the amount of its own value without any intermediary.

First: as regards the indirect action of costs. In the value of the costs is expressed the expectation of the greatest possible return from production. In order to fulfil this expectation, the relation between the amounts of all cognate products turned out must be well weighed and proportioned. If too much be produced in any one direction a loss will have to be borne elsewhere, which will be more sensible than the gain resulting from the over-production. If too little be produced in any one direction a similar loss will be felt, which it will be impossible to make good by over-production elsewhere.

Whether too much or too little has been produced is seen exactly in the value. If the value of products -- as it results from the equation between supply and demand -- is less than that of the costs, too much has been produced; the costs which should have brought forth products having higher value have brought forth only goods having less value. Where the value of the product exceeds that of the costs, too little has been produced -- with one exception which will be mentioned shortly; -- the costs have not been employed entirely in bringing forth products of the highest value the very anticipation of which gave the costs their value. If products, then, are to be produced neither over nor under cost they must be produced exactly at cost value, if they are to find the most economically advantageous distribution of production.

If we ask why products thus produced -- neither under nor over costs -- have value, and why they have definite amounts of value, we shall doubtless find that they have themselves alone to thank for it. They create it out of their utility, taking into consideration the amounts produced. The circumstance that costs of a certain value have been expended in making them, is of no consequence as regards their value. The cost value does not determine the use value; the use value exists of itself, and sanctions the cost value.

Second: as regards the direct action of costs. Under certain circumstances it is economically permissible to produce things whose use value exceeds their cost value, while they must, none the less, be estimated at their cost value. This direct action is the most striking of the two. Assume that the amount of costs necessary for an article has the value of 6, and that the first article produced has a use value of 10, while the use value of a second article would amount to only 1 (compare Book I. chap. iv and Book III. chap. viii): the production must be confined to one article. How is it to be valued? This will depend upon circumstances. In a moment of extreme danger a weapon will be estimated according to its use value. But suppose a man to be leisurely preparing and equipping himself for an adventuresome journey, he will not think of valuing the best of weapons more highly than the materials and labour available for the purpose of producing and reproducing them. The loss of the weapon can always be made good -- supposing one has the necessary leisure and means for its reproduction -- by a sacrifice in costs, the amount of which is certainly less than the importance possessed by the weapon itself in a moment of urgent need. A good having a use value equal to 10, and a cost value equal to 6, must be estimated at 6, so long as its reproduction is possible and the satisfaction of want is not prejudiced by the delay.

The same argument as leads to our valuing at marginal utility any single item of a stock which happens to be actually devoted to satisfying a want of higher grade, leads to our valuing at cost value and no more, a product whose specific use value exceeds its cost value, supposing we have also in our possession the means of producing and reproducing it at the proper moment. For, as, in the one case, the marginal use is really the only use threatened, so, in the other, the cost value is the only value threatened. Here is a new application of the marginal law.

Cases of the kind just described attract particular notice on account of the fact that the influence of costs upon the value of products is independent of amounts produced. If the cost value, in the example just given, rise from 6 to 9, or fall to 2, one product only will be produced, and its value likewise will follow the changes of the cost value, and rise to 9 or fall to 2, without the amounts produced being changed. Ricardo, with the keenness of observation peculiar to him, pointed to the consideration of those instances, in which the value of the product adjusts itself to the cost value without any change of amounts, as a very important one from the point of theory. As a matter of fact it is so, although Ricardo was wrong in the place he gave it. He wished to prove from it that costs are fundamentally an independent source of value, whereas, as a matter of fact, it proves simply that costs may, in certain isolated cases, directly determine the amount of the value of products. It is, however, chiefly decisive in that it gives us an insight into the connections of the process of valuation such as could scarcely be obtained otherwise. It gives us, indeed, the most unequivocal and umdeniable application of the marginal law that it is possible to find anywhere.

Moreover, even in this case, the fact that costs have been expended is of no importance as regards the value of products. The decisive circumstance is, that costs could again be expended, and secure a higher utility at a less sacrifice of utility.(1*)

NOTES:

1. The foundation of the law of costs given in the text appears to be applicable only to natural value, and not to exchange value or price. But it is also applicable to them. The proximate explanation of the validity of the law of costs, in the case of price, is that producers are not willing to sell under cost, and -- where there is free competition -- are not able to sell over cost. But why is it that they will not sell in the former case, and why does competition make it impossible to sell in the latter? In the last resort it is because every one applies for himself, as well as he is able, the natural laws of valuation, and those laws bring him to that amount of product, or that valuation of what is produced, from which the law of costs results. Competition -- i.e. the efforts of others who apply the same natural laws -- then forces him to give expression, in the price which he asks from the consumers, to the valuation which he has made for himself. The actual position of price depends, therefore, essentially upon the actual position of competition, particularly on how far the efforts of competition are limited by the "hindrances to equalisation." These "hindrances" are peculiarly strong in international trade, in which, accordingly, the law of costs holds only very slightly.

Back to Top

Chapter 4

Conditions Under Which the Law of Cost Obtains

It is unnecessary to say that products only come under the law of costs. The products which principally come under this law are those which are produced frequently, regularly, and in large amounts, and, in particular, those in the production of which cost-goods are exclusively employed. Products whose manufacture is strictly and narrowly limited by confessedly monopoly goods do not experience the influence of costs at all. All alterations in costs in such cases go, not to products, but to the monopoly factors of production; every dilution of costs raises, and every increase lowers, the value of these factors.(1*)

Such products too as are to be re-employed in production -- i.e. all produced concrete forms of capital, or "capital goods," as we may call them for convenience sake -- come under the law of costs. Thus the valuation of capital becomes an exceedingly complicated matter. One has always to combine two things; -- the return to the capital and its costs. Both amounts stand in mutual relation, and tend, so far as possible, towards equality. The greater the value of the return, the greater the costs that may be expended in producing it; and the greater will be the expenditure of costs, so far as is practicable and necessary: the smaller the requisite expenditure of costs, the smaller will finally be the value of the return, whether this result from the fact that production finally is correspondingly extended, or from the fact that the valuation of the utility is directly pressed down to the level of the costs. If a machine does very good work, that is a cause for valuing it highly; but if it can be cheaply produced, the machine itself, and, finally, its products also, will find a low value. The costs of producing capital transmit their effects right down to the fruits of the capital, however remote these may be, so long as they fall within the producer's field of vision, and can be taken into consideration in the estimates of value.

Products which come under the law of costs do not, however, come under it in all circumstances. To do so they must come under consideration as products, i.e. as dependent upon the elements from which they are formed. If they are estimated independently, if they are valued in isolation and for themselves, their own utility alone -- or their marginal utility -- will determine their value, without their productive marginal utility being taken into consideration at all.

This is most clearly seen in the case of the immediate determination of value by costs. Why in this case is the valuation made according to costs? Because the products can always be obtained again at the sacrifice of the costs, and, just on that account, only when they can be obtained at this sacrifice. If the possibility of their reproduction be excluded through any circumstance whatever -- say e.g. that the import of some article is stopped by a blockade, or that demand has increased so rapidly that production cannot keep pace with it, -- the value will be estimated at the full amount of the utility (or marginal utility) which the products are expected to give. As a rule, there are such abundant supplies of all products -- partly in the possession of private householders, partly in the larger stores of producers and merchants -- that people are provided against the smaller increases in demand. Valuation by costs is suspended only in the case of large and permanent disturbance of production. If reproduction remains possible, although at a higher outlay than before, -- not, however, coming up to the height of utility, -- the law of costs will still obtain, only that the determining amount of costs will have risen. If demand decrease, or unforeseen supplies increase the stock, to such an extent that the marginal utility falls below the amount of costs, the law of costs will be suspended until marginal utility shall have so far risen as to render production again practicable.

The same applies where costs do not directly determine value, but determine, in the first instance, only the extent of production. The influence of costs ceases so soon as, and so far as, the possibility of production ceases. Here again may be observed the same influence of accumulated stocks -- that, through the medium of them, all smaller disturbances in the provision for want are equalised.(2*)

When the disturbances which caused the suspension or imitation of the law of costs are over, it again becomes active. So far as is at all possible, men try to conduct production according to a universal plan which embraces all the productions "cognate" at the time. Isolated production prevents complete utilisation of the means of production; it limits provisions for human want too greatly at certain points, while going too far in other directions, or, what is still worse, leaving production at certain points entirely alone. On this account there is always a tendency to return to the most comprehensive conditions of production, and thus, so far as is possible, to the valuation according to costs.

If society were ever to arrive, in its economic life, at such perfection and control that no plan of production ever miscarried, that there was no interruption in exchange, that no unforeseen loss of goods happened, that all acquisitions of goods could be anticipated to the fullest extent and in the most exact degree, that, finally, the demands should never vary or, at least, that the variations should always be adequately anticipated: -- in such circumstances the law of costs would be the only form in which the general law of value would appear as regards those goods in respect to which it holds. It is not to be expected that any disposition of affairs could bring social economy to such perfection. Even in the most perfect condition of society there will be changes, such as must for the moment limit or extend the sphere over which the law of costs holds sway.

If the socialists expect that, in their future state, valuation by costs will be all-sufficient, they are in error, unless man is able to exert such mastery over the natural conditions of the life of goods, that no harvest shall ever fail, or, indeed, be overabundant; and, moreover, unless the national life can be assured of a perfectly peaceful course, such as can be conceived of only when war has ceased, when invention is no more, and when no new need ever emerges.

NOTES:

1. Thus in the cotton thread trade neither changes in wages nor in the price of raw material seem to affect prices; they only increase or decrease profits. -- W.S.

2. Up to a certain point costs do -- even in such cases as these -- directly determine value. All goods that can be supplemented from stocks in warehouses and the like, which stocks again can be renewed through production, thereby appear to us directly as mere combinations of their productive elements. And to this extent it may be said that, on the whole, the cases where costs directly determine value predominate.

Back to Top

Chapter 5

The Determining Amount of Costs

The circumstance, as such, that a good has involved costs, and that it has involved a certain amount of costs, does not determine its value. Not only must the conditions under which the law of costs obtains be fulfilled, but the justifiable amount of costs must be observed.

It is only the "socially necessary" costs, the smallest amount of costs required, that determines value, whether the determination is "indirect" or "direct." In cases of "indirect" determination, cost value requires the sanction of use value. Whatever is expended uselessly receives no value, and whatever is superfluously expended, -- expended in excess of what is necessary to obtain the utility -- receives no value. In cases of "direct" determination of value, the important thing from the first is the outlay requisite for reproduction.

The value of products which are economically produced with the smallest cost, must consequently alter should there be, later on, any change in the determining amount of costs. And, in particular, if the amount of costs should become less, the value of commodities produced at the old dearer rate must fall, from the moment when the new and cheap goods are capable of meeting the demand, or even sooner than this, so far as the old stocks are large and dare not be held back in view of the increasing production.

It may be that all the products in demand cannot be produced at the one cheapest rate of cost. Then, of necessity, the amount of costs must rise. The value of goods produced at different costs is determined throughout by the highest cost necessary; the portion which has been produced at the greatest expense must be valued correspondingly high, if it is permissible to produce it at all at so great an expense; and the other portion, which has been produced more cheaply, must be valued equally high, because all products of equal quality must have equal value.

All these propositions are well known both theoretically and practically, so far as regards exchange value. It is of interest for us to know that they also obtain as regards natural value.

Back to Top

Chapter 6

The Law of Costs and the General Law of Value

If the statement of the law of costs just laid down be correct, there can be no doubt regarding its relation to the general law of value.

Between costs and utility there is no fundamental opposition. Costs are goods valued, in the individual case, according to their general utility. The opposition between costs and utility is only that between the utility of the individual case, and utility on the whole. Whoever thinks of "utility" without thinking of "costs," simply neglects, in the utility of one production, the utility of the others. And whoever produces, in the individual case, at the least cost, produces, on the whole, with the highest utility, inasmuch as he thus saves all the opportunities of utility possible, and consequently in the long run utilises all these opportunities to the utmost extent.

Thus where the law of costs obtains, utility remains the source of value. More than this, marginal utility remains the measure of value. The only thing is that utility and marginal utility are no longer determined in a one-sided way within the limits of each particular group of products, but over the entire field of cognate production. Over this field it is always the common productive marginal utility that decides. The result of the productive combination 10a + 10b + 10c possesses the common marginal utility of all productive goods of the class A ten times, and so with the classes B and C. It consequently stands in a definite ratio of value to the product resulting from 10a + 20b + 10c, and this ratio corresponds to the general law of value, according to which separate parts of a stock are to be valued by multiplying the number of items by the marginal utility. Even products which, in outward appearance and destination, are entirely different from one another, if traced back to the productive elements of their manufacture come ultimately into the same value relations as do the separate parts of a stock. A cupboard and a table are in themselves different goods; reduced to their productive factors they are of the same nature, belong to the same class of supply, and receive a corresponding expression of value. The law of costs is a peculiar and complicated conception of the general law of value, used in a peculiar and complicated case, vis. where the connection of goods with one and the same stock is not apparent from their outward appearance, but can only be recognised after reduction to the productive elements of their manufacture.

This statement would be imperfect if we did not add that the law of costs as regards products is by far the most usual form assumed by the general law of value. Products of almost every kind are continually being reproduced, and consequently their value must continually be decided by comparing the amount of the productive supplies with the amount of the productive demand. The vast majority of changes in value are occasioned by the changes which occur in the coming forward of production goods (or in their production, where they are themselves objects of production), as also by technical changes, or changes in the conditions of production which make the quantity of costs necessary to produce the goods greater or less. Thus it happens that variations in the value of products are traceable, in the majority of cases, to some cause which is to be found in production goods. Even in cases where the change of value first arises in the demand and in the products, the effect of this circumstance communicates itself, through the medium of the cost goods, to the cognate products, and causes their value to rise or fall. A product which is "cognate" with a hundred others, will, in all probability, be affected a hundred times by changes in their supply and demand relations, for once that it is affected by a change in its own relations; and all these influences are communicated to it from outside through the cost value. And thus it is that changes in any single supply and demand must pass without leaving any trace, unless they chance to be exceedingly comprehensive, and are, therefore, capable, as against the supply and demand over the whole circle of cognate production, of disturbing the determining marginal utility.

The phenomena of costs are, therefore, a new proof of how greatly the objective conditions of the existence of goods influence the value of goods. How far the value of goods, in its final form of "cost value," is from being the mirror of that subjective fact from which it is derived -- the value of wants! The circumstance that cognate products are produced by different quantities of the same productive elements, brings their subjective valuations into a ratio, the terms of which are derived entirely from the objective conditions of production; while the impulses which call for their emergence, as well as the absolute value amounts of the elements whose multiples enter into the ratio, remain subjective, and thus prove the subjectivity of the source and nature of value.

It was impossible that the influence of costs upon the value of products could escape the observation of economists. None the less has recognition by economic theory of the law of costs remained for long very imperfect. It was conceived of only as a relative law -- that the value of products was as the quantity of costs; but as to what was the nature of costs, whence they themselves receive their measure, what absolute amounts might accrue to the value of products, -- on these points economists were no more capable of saying anything than they were capable of explaining the numerous contradictions which were inevitable so long as costs were conceived as the final cause of the value of products. Possibly it is the greatest triumph of the theory of marginal utility that it fully explains the obscure conception of costs, with which every other theory had to reckon, and with which no theory could come to any reckoning. The labour theory alone has attempted it, but it has thereby -- as we shall go on to show -- introduced into theoretic political economy the greatest errors that have ever been perpetrated within its sphere.

Back to Top

Chapter 7

The So-Called Costs of Production of Labour

Through a very strange error in judgment the classical school of political economy has put forward the proposition that the exchange value of human labour also is determined by costs of production.

The costs of production of human labour -- if we substitute the prosaic personal meaning of this expression for the impersonal and figurative one would be the costs of producing the labourer. What a monstrous idea! Can it be that there is a "production" of labourers in the same sense as there is a production of material things? Has such a thing ever been said even in the darkest ages of barbarism? Surely another name at least might have been chosen. But leaving the name, let us get to the substance.

The substance is, that, by the cost of production of labour is meant the necessary cost of maintaining the labourer and his family; the means of subsistence which the labourers themselves regard as the minimum necessary to keep themselves in life, in strength, and in ability to work, to bring children into the world, and to bring them up to labour. And as the price of goods can never stand permanently either above or below the costs of production, so it is asserted that the wages of labour can never stand permanently either above or below the existence-minimum. Of course, this proposition can never be understood to apply to any but the commonest and worst paid form of labour, seeing that the better paid labour does raise itself above the lowest wage level that can be considered permissible.

On the one side, so far as regards the impossibility of sinking below the minimum, there is, as a fact, a close, indeed a frightful analogy between the law of wage and the law of costs. Where the labourer has no other income to spend than his wage, wages cannot indeed fall permanently below the amount marked by the prices of the necessary means of subsistence. If the means of subsistence are scarce and dear, a higher wage must ultimately be conceded. Misery and death are the imperious forces which bring about this result, inasmuch as they reduce the number of labourers until the reduced supply has raised wages sufficiently to cover the necessaries of life.

But how is it as regards the other side? Is it true that wages can never rise permanently above the costs of subsistence? Is there the smallest analogy, or even an apparent analogy, between the pressure exercised by the cognisance of cheaper conditions of production upon the valuation of products, and the pressure which might be exercised upon the valuation of labour by cognisance of cheaper conditions of life? Economists of the classical school assert that there is, and thereby they bring again into the question motives which have as little in common with the considerations that govern the production of goods, as the law of nature, which says that he who can find no means of sustenance must die, has with the considerations that govern the manufacturer who discontinues a business when it fails to return him its costs. The motive which is called upon to prove that wage cannot maintain itself above the minimum of subsistence is the power of the sexual instinct. If means of subsistence become cheaper and more abundant, there is the more room for increase of population, for marrying, producing children, and supporting them. The supply of labourers can go on increasing, and wages go on diminishing, until the maximum of population possible to maintain, and the existence minimum of wage, are again reached. This result is possible. But must it ever happen? Does it always happen? What has experience to say? It speaks plainly enough -- so plainly that even those who assert that the law of costs obtains for labour find themselves forced to add to that law certain clauses which amount to nullifying it. Thus a clause is added which says that what determines wage is that amount of subsistence which the labourers themselves regard as the permissible minimum, since experience shows that the minimum wage differs from time to time, from place to place, and from nation to nation. But this clause cancels the law. If the opinion of the labourer is to be decisive, there can be no more talk of a compulsory, objective, fixed standard of wage. In yet another direction experience speaks still more conclusively. We notice everywhere that the wage for different kinds of labour is of varying amount. Only some of the labourers, and that not by any means the majority, are always held down to the lowest possible wage. But how could this be the case if the whole position of labour were entirely governed by the power of sexual impulse as is asserted? Would not the supply of labour under such a supposition be overwhelmingly large, -- as a rule, and in the long run at all events, -- and wages be reduced to the minimum in all branches of production? Would not all wages be equally low? The fact that higher wages are continuously maintained in the higher branches of labour, is a clear proof that the height of wage continues to be determined by considerations which are too powerful to admit of their favourable results being suspended by the sexual instinct; or -- what amounts to the same thing -- that the sexual impulse does not possess that destructive power which is ascribed to it. And if it does not possess this as regards one class of labour, it is impossible to see why it should be held necessary as regards the other class.

If the law of costs were true as regards wages of labour, it would also be true as regards the natural value of labour. The forces which are relied on to prove the law of costs in regard to labour, would, of necessity -- if they do act as is asserted of them -- have an equal effect under any social organisation. If the sexual impulse were possessed of such surpassing strength, it would, even in a communistic state, increase the number of labourers to the highest point which could be maintained at the existence minimum; only that here, where the labouring class would include the whole nation, the consequences would be so much the more comprehensive and destructive. To-day's "iron law of wage" would be extended in the future to an iron law of universal misery.

Modern economists are almost unanimous in repudiating the application of the law of costs to labour in its older and cruder form, but, on the other hand, they concede to the consideration of the costs of maintaining the labourer another effect. It is the effort of every class of labourers, they say, to retain the level of life to which they have once attained, making their claim of wages in correspondence therewith and striving to realise their claim, besides regulating their marriages and the size of their families in conformity. The wage, once become customary, is said to have a tendency to maintain itself as a permanency, and to resist the tendencies which would press it down. This law also, if it were a true law of wage, would have to be recognised as a natural economic law, as it also is founded upon a universal force. Experience, however, does not seem to justify it. Do not wages continually rise and fall? It is to be feared that the quite intelligible wish of the worker to retain a standard of income once reached has not the efficacy ascribed to it, of resisting the chances of an unfavourable issue to labour. If the return to labour falls, the natural value of labour falls, without being in the least prevented by the previous customary level of comfort, and it is in the highest degree likely that its exchange value will fall along with it. For although these do not by any means invariably coincide, -- do we not often see wages falling short of natural value? -- as things are, it may be considered an exceedingly rare occurrence that wages are in excess of natural value. The result which might be expected from the postponing of marriage and production of children would, in any case, come much too late; it could only be felt after years, in a succeeding generation, when circumstances would probably have been long before completely changed. Of course, the desire to obtain the highest possible income is a motive which cannot be considered as quite insignificant among the many motives determining the return from production. It is as fraught with consequences as are intelligence, skill, favourable natural circumstances. But why should this motive be brought prominently forward only as regards the return to labour? Is it not equally powerful as regards the products obtained from land and capital? And why should its influence be limited to the amount of income once obtained? Does it not go beyond this to the procuring of fresh income? The truth is that men endeavour to make all productive returns as large as ever their personal capacities will allow, and that the returns so obtained determine the value of the productive factors, -- of labour, as of all the others. It is impossible to consider it even plausible, that a cause shall be effective as regards labour alone, by which the level of wage once reached obtains a peculiar power to maintain itself permanently unimpaired.

Here too the modern economists, who advance such theories, probably do so merely in order to bring the law of wage into correspondence with the general law of the price of commodities. In one as in the other, they start with the false assumption of a fundamental opposition between costs and utility, and wish to find value between the "upper margin of utility" and the "under margin of costs." But even supposing such an opposition did exist, it would not at all events be in the least applicable to labour. It is not possible to force labour into all the economic categories in which material goods by their nature are placed. A producible article is a good, that is, a useful thing -- in two respects; firstly, in virtue of its effects -- the effects in which it is "of use"; and, secondly, in virtue of its origin and upkeep, in which respects it is materially a matter of property. Labour can only be regarded as a thing in the former respect: in respect of its useful effects the economic use of labour may and ought to be considered. In the latter respect, labour is an affair of persons, and its origin and upkeep cannot be decided by purely economic considerations. It is overstepping the permissible sphere of economic control when the attempt is made to interfere with the personality of the labourer without regard to other considerations; and economic theory goes beyond its sphere when it claims to explain the facts of personal life exclusively by economic considerations.(1*)

NOTES:

1. As labour is not the product of the labourer's means of subsistence, so, conversely, the means of subsistence cannot be regarded as the productive factors of labour. In other words, the labourer's means of subsistence are not capital. If labour be a good of the second rank, producing any kind of good of the first rank -- a consumption good -- the labourer's fund of subsistence is in no way a good of the third rank, producing the labourer; it is again merely a good of the first rank, a consumption good for the labourer. This has a result of great importance as regards value. Value is communicated, as we have seen, first from the want for goods of the first rank, and then from these to the goods of second rank, and so on through all the ranks. If means of subsistence were capital, they would receive their value from the value of the service rendered by the labourer. But as they are simply means of subsistence, they receive their value from the wants which they provide for.

Back to Top

Chapter 8

The Cost Theories

I have hitherto almost entirely refrained from criticising outside theories of value. Up to this point, the subject of costs, none of these contains any foreign element whatever. What renders them inadequate is chiefly their inadequate explanation of the true elements of value. Should I have succeeded -- as I scarcely dare hope -- in proving beyond dispute the theory to which I have given my adhesion, all other theories in themselves are thereby confuted inasmuch as it completes what they began. Where they have said only half, the whole has been said; where they have only approximated to truth, the truth itself has been found. But it is otherwise -- though of course only in the case of some of them, -- with those theories which derive the value of goods from costs. They appeal to a foreign element which does not lie in the path I have chosen to follow, and must therefore be dealt with, as it were, on a bye-path of criticism. At the same time, it must be said that this foreign element contains so much that is plausible, that there would be a presumption against any one who passed it by without remark, and a suspicion that his statement did not embrace the entire truth.

As I said, it is only some of the theories of costs with which we are here concerned.

All such theories have this one point in common, that they place costs and utility in opposition to each other, and explain them as dissimilar principles of value. They differ, however, in their manner of treating the principle of costs. Some limit themselves to collating the individual elements of costs, and showing their influence upon value, without answering, or even bringing up, the essential and fundamental question as to what costs really are, and whence they obtain their influence and economic importance. Criticism of these theories is superfluous. They contain no error to criticise. Their fault lies in their silence; in their stopping short at the very heart of the subject.

The rest of the cost theories must be judged differently. They give to the idea of costs an entirely distinct meaning; a meaning which is certainly -- taking it all in all -- incorrect; but one which, in view of the largeness of its theoretic intention, may be pardoned, and even regarded with some recognition and respect. This division of the cost theories may be marked by the title of Labour Theories, as the element of labour forms their theoretic starting-point. Ricardo's system indicates the high-water mark of the labour theory; the socialist system is its final consequence. Many writers who reject both of these systems, nevertheless take the fundamental motive of the labour theory into their own systems. In fact, there are very few writers who have kept entirely free from it. The critic has consequently a large task before him. I make no secret of it that to do battle with those views, as developed by economic writers, seems to me a matter of considerably more importance that they arise, in the last instance, from popular opinions widely held. The fundamental idea of the labour theory is foreign to no one; everybody has frequently enough had practical occasion to apply it. But for this, Ricardo's system would never have obtained its great hold, and this circumstance may prepare us to expect in the future ever new formulations of the labour theory, should it not be possible meantime to purify theoretically the popular view, and lead it back from its exaggerations, which are easily traceable to the imperfection of popular reasoning, into its true and incontestable form.(1*)

NOTES:

1. In his Werththeorien und Werthgesetz, in Conrad's Jahrbucher for 1888, W. Scharling, one of the latest writers upon the theory of value, has again traced it to the fundamental motive of the labour theory, although with considerable amplification and modification. He derives value from the difficulty of attainment, or, more exactly, from the amount of effort which he who wishes to acquire an object is spared by attaining his end through exchange. I shall not at this point dwell on Scharling's positive work, but rather refer the reader, in regard to his fundamental motif, to the succeeding chapter. Only, in passing, I may note that, among the efforts which are to give the standard to price, Scharling includes that (p. 558) "which it costs (at an auction) to distance other bidders," or what it costs "to overcome an owner's disinclination to part from his goods." Both of these efforts have their origin in nothing else than the payment of that very price whose standard they are supposed to explain. In this sense there might be included among the difficulties of attainment the fact that thing must be paid for with money, while people are bound to be economical with money. His views on the theory of marginal utility are given, in an illustration cited by Böhm-Bawerk, of a boy to whom "the pleasure of eating an apple is more than seven times but less than eight times that of eating a plum." "Let us Suppose" continues Scharling "that the father comes and says to his boy: 'Our neighbour has given you permission to pull as many apples from his garden as you wish'; the boy will at once alter his opinion as to the relation between apples and plums, although his taste for and his enjoyment in consuming the fruit remains unchanged. But the effort which the possession of one apple saves him from putting forth, is no longer the same." To my mind this illustration, which Scharling advances in opposition to the theory of marginal utility, is really a proof of that theory. In what way has the situation changed after the father's speech? Clearly that the boy may now have as many apples as he will, while formerly he had only one, i.e. the available supply has been increased to superfluity. And thus the result is attained which the theory of marginal utility demands; the valuation of the apples is entirely altered. Scharling's opposition would be justified if it were directed against a theory which made value depend simply upon utility and not on marginal utility. In our theory, along with utility, all the influences are weighed which determine the degree of utilisation, and of estimation of utility, by the supply; indeed, even those influences which determine the amount of supply by the conditions of production.

Back to Top

Chapter 9

The Cost Theories (continued). Labour as an Element in Cost

It cannot well be questioned that, among the costs of any product, the labour necessary for its making comes first. Every product withdraws the labour-power that is devoted to it from other products to which it might have been devoted. There would be nothing further to say on the subject, were it not that labour calls for economic deliberation as to its employment on a second ground besides that of its utility. Labour carried too far becomes a burden, and brings a succession of serious personal evils in its train. Where labour brings pain, strain, or danger, there is good reason to think seriously over these consequences; and, on their account alone, to regard every act of labour as a sacrifice which should be made only if it is certain to be adequately recompensed by its result. It is in this sense that it is commonly said that production "costs" labour, and it is in this sense that most economists conceive of labour as a cost good. Not the utility but the personal sacrifice of the labourer is to determine the economic valuation of labour, and its influence upon the value of commodities.

To decide how much is right in this conception is one of the most difficult tasks of political economy, and, as the theory has developed, one of the most important. Beginning with the idea that labour is valued according to the personal sacrifice it involves, and going on to the wider idea that labour is the only production good, that all products are directly products of labour, and that all costs are labour costs, the conclusion has been reached that the sacrifice of labour necessary for the production of a good is the exclusive source of its cost value, indeed, of its value pure and simple. From its relation to the labour sacrifice the conception of value receives its content, the amount of value its standard. In Adam Smith we find, as was said in the preface, this "philosophical" conception of value coming into collision with a second "empirical" conception. Ricardo's system aims at proving that this "philosophical" conception is almost realised in the empirical formation of value. Finally the socialists roundly demand its complete realisation, and condemn the empirical deviations as disturbances. In connection with this conception of value, a second conclusion, which relates to the origin and aim of human economy, is drawn from the same premises. Human economy derives its origin, in the last resort, from the fact that goods must be obtained at the price of the sacrifice of labour, and the aim of all economy is ultimately to make the sacrifice of labour necessary for the production of goods as small as possible. And thus, when we endeavour to examine the position of labour as a cost good, we find ourselves plunged into the quarrel of theory as to the fundamental questions of political economy.

The opponents of the Labour Theory do not in my opinion give it full justice. They try to overturn it completely, whereas it is by no means entirely false. It is conceivable, only it does not fit in with facts; it is, if the expression may be allowed, philosophically right, but it is not empirically realised.

It is possible to conceive of a condition of economic life under which the single consideration of the sacrifice involved in labour would determine the value, both of labour itself and of all products. The widespread recognition which Ricardo's theory has obtained can only be explained by the fact that it is founded upon a conceivable and attractive fundamental idea. Men learned the meaning of "value" as a whole -- not as a philosophical conception, but as applied to the circumstances of everyday life -- for the first time, and then overlooked the fact that the "value" of actual life was not completely explained. I shall endeavour to formulate with all possible distinctness those conditions under which the labour theory would apply. This is the best means of enabling us to recognise how far these fall short of realisation in existing economic circumstances.

Suppose that a community -- already abundantly provided with all the material auxiliaries for labour -- had at their disposal so great a supply of labour power, and so few wants, that they were able to satisfy completely and without delay any desire that they might happen to feel, simply by putting forth the exertion necessary to produce the means of satisfaction. In this case the means of satisfaction so produced would have no value from the consideration of their utility, because as assumed -- they were to be had immediately at all times and in superfluity. On the other hand, the consideration of the exertion of labour required to produce them must give them value. Every product made and possessed would save an effort; the effort, namely, involved in its reproduction. And, so far, one would have a lively interest in holding on to any possession once obtained. The amount of this interest would depend upon the exertion saved by the possession. A product with a utility expressed by the intensity of 100, and necessitating labour equal to 10, would have a value of 10, and would have no value at all if its reproduction cost no effort.

The conceptions of value and wealth evolved from the assumed circumstances would, formally considered, be such as should arise if value and wealth were derived from consideration of the utility which the goods assure, while, all the time, materially, they would be completely different. Value would be the importance which goods would then have in virtue of the interest every one would feel in securing exemption from the undesirable pain of labour. Wealth would be equivalent to great possessions of goods securing immunity from the pain of labour. The advantage of wealth would be rest. Poverty would not mean want, but only unrest, pain. By a little increase of exertion any advantage of prior possession could soon be overtaken.

That this is not the poverty which the poor man knows: that this is not wealth as men really estimate it: that this is not the value or the economy of which we have any experience: -- requires no proving. If merely by pain men could be rich, the very people who are to-day the poorest would long ere this have become the richest. Nothing in reality is as assumed by the labour theory. Our desires are too great, the material resources at our disposal too limited: our labour power too small. No economical possession can be lost without some enjoyment being lost. The idea of utility cannot possibly be separated from the purposes of economy and the conception of value.

There is only one question that may still be asked. It is whether consideration of the sacrifice of labour does not always enter into the valuation of labour as a cost-good, and thus into the Cost value of all products, alongside of and bound up with the consideration of the utility of labour. But neither is this the case. It could not be so. Such a possibility is excluded, not empirically but logically. Productive labour can never have value on account of the utility which is dependent upon its success or non-success, and also on account of the personal effort which it involves. In what circumstances does an act of labour have use value? When, in event of its failure, the utility has to be given up, because the labour cannot be put forth a second time; or when, in the same case, the repetition of the service demands that another use of the labour be abandoned, and its expected utility with it; in other words, when there is not sufficient labour available to meet the demand, when labour power is not available in superfluity. And in what circumstances would a service be estimated according to the sacrifice involved? When, in event of failure, one would not need to give up the utility, because it could always be obtained again at no greater expense than the repeated effort; in other words, when all the available labour power had not a predetermined and distinct destination, but when there was always free labour power available in superfluity. Labour could only be estimated at once by its utility and by personal effort, if it were at once capable and incapable of repetition; if there were at once a deficiency and superfluity of labour powers. Where the available labour power is less than the demand, labour value will be estimated exclusively according to utility. Where the available labour power is in excess of the demand, it will be valued exclusively with reference to the labour sacrifice.(1*)

Even where labour value is estimated by utility, naturally one does not cease to consider the toils and dangers of labour. And although the consideration of these does not directly enter into the value of labour, it will continue to be a consideration so long as toil is felt to be toil, and danger danger. It may even obtain an indirect influence upon valuation, as it must continue to receive economic consideration in several connections.

These connections may be exactly enumerated.

First, before undertaking any labour a man has to consider whether the utility outweighs the effort. Only those acts of labour whose result outweighs the hardship entailed can be reasonably performed. Herein, moreover, is contained the reason why labour, estimated by amount of hardship alone, is less highly valued than when it receives its value from its return. This also gives rise to another important issue. The circumstance that expenditure of labour is felt to be a burden, must somewhat affect the selection of employments to which it is devoted. It may occur, as Sax (see note) has forcibly shown, that a less useful employment of labour is chosen before a more useful one, because the latter requires comparatively a greater amount of exertion.

Second, when labour is once decided on its performance must always be ordered in such a way that the toil and danger are made as light as possible.

Third, the fact that labour is felt to be a burden has the effect of curtailing somewhat the supply of labour as a whole. If labour were not burdensome and exhausting; more labour would be expended than is. And thus the use value of labour is, as we have already suggested, indirectly affected, by being placed at a slightly higher level on account of the diminished supply. Services of equal utility, but of different degrees of hardship, are so regulated in regard to value that the more troublesome labour is more highly appraised. But this result can only ensue when the supply is really diminished. Wherever the fear of toil and danger does not have an actively deterrent effect, or where it is overcome by the presence of other motives to such an extent that the supply remains undiminished, the value of labour does not increase. Experience shows that the most wearisome, wearing, and least healthy of employments are valued least highly, because they are the most easily accessible to the great majority, and are consequently the most amply supplied. In the communistic state it would not, in all probability, be in any wise different. The great majority of the citizens will always be suited for the coarsest kind of work only, and those kinds of work are at once the most burdensome and the simplest. And while the communistic state would be plentifully supplied with this sort of labour, so that it could be employed down to the smallest possible return in utility, the better labour powers, in virtue of their more limited number, would require to be economised and have careful consideration given to their employment, just as happens to-day. Utility and not toil would, in general, afford the standard for the valuation of personal services.

But we are not finished with our consideration of the labour theory. Its greatest errors relate to the valuation which it gives to capital as an element in cost.(2*)

NOTES:

1. It is not at all impossible that, at one and the same place, there may be a lack of labour in certain departments -- e.g. skilled labour -- while there is superfluity in the available supply in others -- e.g. common hand labour. In such a case the services of the former are estimated by utility, and the latter by amount of hardship. Under primitive economic conditions the "supply of labour power" is frequency too large; not until there has been a considerable advance in civilisation does it become the rule that labour is insufficient. Further, even the labour power of one and the same individual may be too small as regards certain requirements of labour, and at the same time too great as regards others. It happens almost invariably that labourers whose capacity for performing some particular form of service is not sufficient to meet the economic demand for such services, have always sufficient capacity remaining to meet the trifling necessity for labour in their own private lives. With this is connected the fact that labour power is never entirely worn out; after performing the labour of his particular vocation, man refreshes and restores his energy best by light and distracting employments. Even in a country where the economic demand for labour is entirely insufficient, there are not lacking occasions in which labour may be estimated according to the amount of hardship involved. Every individual is continually finding such occasions; and every one thus learns from his own experience the fundamental motif of the labour theory.

2. See Ursprung des Werthes, p. 103, and also Böhm-Bawerk's Werth, p. 42, and, on the opposite side, Sax, chapter 45. Sax, starting from the correct proposition that only those goods should be produced whose utility outweighs the burden of labour they involve, appears to me to go rather far in the conclusions he draws, when he says: "If the Unlust connected with the want in question (i.e. the Unlust which originates from the want not being satisfied) is less than that of the burden of labour, then the desire for the good will be a passive one. The want itself ceases to be felt." Only in so far as the desire is "active" does the expected product receive a value in thought. That, as I have said, seems to me to go too far. In considering whether a thing should be made or not, the value, as derived from the expected utility, will be estimated undiminished; and, at the same time, the expected toil will be weighed as a thing by itself. If I hunger but am too lazy to work, I still continue to feel the hunger, and thus estimate the value of food according to the measure of my hunger; only it may happen that the presentation of this value is not sufficient to overcome my laziness.

Back to Top

Chapter 10

The Cost Theories (continued). Capital as an Element in Cost

In any compete estimate of costs there can be no doubt that the figures representing the necessary consumption of capital must be added to the costs of labour. Of two products costing equal amounts of labour, that one must be dearer for which the greater consumption of capital is required. Thus it has been calculated ever since capital was possessed by man, and thus it will continue to be calculated, even in the communistic state. The necessity for it is so obvious that even the adherents of the labour theory bow before it. Even they admit that the costs of capital co-operate in determining the value of products. There is nothing for it but to try and reconcile their theory with this incontestable fact. To do this there is only one resource, but one so singular that only a kind of theoretical infatuation could avail itself of it. If all costs go back in the last resort to labour, and if the existence of capital-costs cannot be denied, capital-costs must ultimately go back to labour-costs -- capital must be labour.

The attempt to reduce capital to labour has been made in two ways, both of them following out the same fundamental idea. Labour must be shown to be the primary economic element, and capital represented as a secondary or derivative form of it. Labour value appears as the primitive economic value from which capital value is derived.

The first of the two efforts made to prove this proposition is deduced from the manner in which capital works. The effect of all capital is either to save labour or to increase the result of labour. Does not a machine save human labour? Does it not bring it to greater productiveness? As a matter of fact, there are forms of capital which are able to render services as human labour renders them, and which can, to that extent, be substituted for labour. But can this be maintained of all capital? What labour power, for example, does a raw material replace? And, on the other hand, it may undoubtedly be said of many kinds of labour, with equal right, that their effects are either to save capital or to increase capital. Capital frequently supplants labour, but frequently also labour supplants capital. Where wages are low every undertaker will save his capital and employ more labourers.

The second attempt is much more important. It points to the origin of capital. Here we go back to the first beginnings of the acquisition of capital. All capital has, in the last resort -- says this theory -- been obtained by labour, and on this ground all capital ultimately represents labour. In the most varied forms, and illustrated by a perfect wealth of examples, this thought finds itself in many writers. It is found in Adam Smith and Ricardo, and it is triumphantly adopted by the socialists in order to make good their contention that all costs are labour-costs, and that capital is simply "materialised labour."

It is not easy to imagine greater contradictions than the labour theory presents when it takes up this line -- more particularly in the extreme socialistic conception of it. Let the reader judge! First, the economic valuation of labour is explained by the peculiar nature of labour -- that its employment necessitates personal sacrifice. Then capital, after being recognised as materialised labour, and so labour that has become impersonal, is subjected to the same valuation; -- a proceeding for which there is no possible justification. First, it is asserted that labour is the only productive power; that it alone produces, creates goods, creates value; that capital is merely its dead instrument: and then capital emerges from its shell and becomes labour, which contributes its part in determining the cost value of goods. At first it is asserted that capital and labour stand in the strongest opposition to one another, and then every distinction disappears save the one, that capital, like labour, may indeed give value, but may not, like it, receive value. Materialised labour is labour, but no share in the return shall be imputed to it.

It would not be right to entirely reject a theory on account of its contradictions. There might be a kernel of truth in it, and that kernel might be rejected along with the rest. We shall, therefore, submit the contention we are discussing to a further test, though, truth to tell, it will only be to find that seldom, if ever, has so small a truth been clothed in so much error.

As we have seen, products are valued by their costs only when they can be reproduced for the amount of the same. Capital, as a rule, consists of products, and this proposition applies to capital as to other products. Capital may be valued according to its costs in so far as it can be reproduced for the amount of the costs. The costs actually expended since the beginning of history in gradually forming our present capital -- and it may be noted in passing that no one knows the amount of these costs, and that there has never been offered a less accurate standard for any measurement whatever -- are taken as little into consideration as any costs which, though actually expended, would never again be so expended. If all that was wanted economically to replace the capital consumed was to regain it by labour, then capital might be economically measured by labour alone, and would represent economically nothing but labour. If, for instance, coal consumed could be replaced simply by the labourers bringing new coal to the surface, without any assistance whatever beyond the labour of their hands, the coal would be worth just so much labour as was needed to bring it to the surface. If a machine could be made by labourers, without any other assistance than that afforded by other labourers collecting for them valueless materials, and simply using their bodily strength to shape and combine them, the value of this machine would be measured by the quantity of labour that had been expended upon it. So long, however, as capital is consumed in order to produce capital, the factor of capital cannot be dismissed from among the costs of capital, and, therefore, from the costs of all the products of capital; and, so long as it is credited with the use value which experience assures us may be received from it, this factor will continue to be counted alongside of labour in the estimates of costs.

The idea that capital represents labour and nothing more, may be held so long as economists draw their examples, as they usually do, from the circumstances of a Crusoe or a savage, where the chief features are the slaying of wild animals, primitive bows and arrows, bark canoes, rude axes, and the like -- where capital, so to speak, is always conceived of in a state of nature. In face of the complicated economical phenomena of a wealthy and developed society the idea loses all weight. The labour theory, with its assumptions which take no count of historical development, was well enough in a science belonging to the time when men spoke of Natural Rights and the Philosophy of Nature. At that period of history this theory was worth being taken up by any gifted genius who could make it throw a first ray of light into the dark mass of economic phenomena. Even at a later period it might have tempted some thoughtful mind to give a thorough systematic examination to its illusive ideas. But for men who have gone through the school of the founders of our science, and have had the benefit of all the experience and elaboration of these founders, and of their successors, it is only worthy of a schoolboy to hold for ever by the opinions of the first teachers. A great thought may in the long run turn into a childish error.

To the manufacturer who owns it, as to the labourers whom it aids, and as indeed to every one, a machine is an instrument, capable of certain useful work, whose production necessitates a certain consumption of labour, of other machines, of tools, and so forth. What must people think of a science which casts aside this simple definition, and informs the manufacturer that, in his machine, he possesses merely the "materialised" labour, the "previous" labour, of all those who have ever contributed anything towards the complete machine since the making of the first rough tool onward? It is an ingenious way of looking at things, no doubt, but one that lends extraordinary little aid towards advancing the practical purposes of economic life. What buyer has ever paid a price, or seller demanded one, what producer ever expended costs, or what chancellor ever laid a tax upon value, based upon such a consideration as this? Is it conceivable that any one will ever allow his economic conclusions to be guided by such a consideration? After all, in economic theory we must make up our minds whether we intend to explain economic life, or to pursue after useless and fanciful ideas.

Back to Top

Chapter 11

The Cost Theories (continued). Interest as an Element of Cost

In calculating the cost value of his products every undertaker, in addition to the value of the capital consumed, includes interest upon the whole capital sunk and bound up in the production, even on that which remains unconsumed, for the period during which the capital must remain sunk. It is a matter of familiar observation that the exchange value of products, in so far as it is influenced by costs, expresses also the interest thus calculated. If the production of one article costs merely labour and circulating capital, while that of another requires, in addition to the same expenditure of labour and circulating capital, a large outlay of fixed capital, the second product (neglecting, of course, the quota for amortisation) will be considered the more valuable by the interest on the whole fixed capital. The question now arises whether we have, in this circumstance also, a phenomenon of natural value; whether it is in the interest of society generally, or merely in that of the individual undertaker, that interest should be calculated among costs, and whether this principle would require to be observed in the communistic state also.

There is something that strikes one as peculiar in the idea of including interest among costs. Torrens' objection is well known. Interest, he says, is profit, and must first be earned through production as the surplus of return over costs. Thus it is impossible to reckon it among costs.

From the point of terminology Torrens' objection is certainly justified. If we wish, on the one hand, to fix the net return, we shall not impute interest to costs, but if, on the other hand, we are seeking for the cost value of products, interest must be included. In these two cases the term "costs" is used in an entirely different sense. And this is an error in so far as the double meaning remains unnoticed, and is, in any case, a misfortune, whether noticed or not. It would be better to have a second name for the second use of the term.

When we put the name on one side, and examine the actual matter of Torrens' objection, we come to a different conclusion. Here the objection entirely breaks down. It proves too much. It is not only interest that is derived from the return and its value, but the value of capital itself. Torrens' argument expanded runs thus: -- the value of products is first; interest, capital value, the value of production goods generally, second. Right enough up to this point we have come to the same conclusion, and argued from it that production goods have, as against products, no independent power to create value. On the other hand, we have acknowledged that they do possess the power to equalise the value of products. In virtue of this power, and of no higher one, do they influence cost value generally, and this power cannot be denied to interest, on account of its origin in the return, so far, that is to say, as the conditions in this case are similar to those which hold as regards the elements of costs hitherto considered.

This, as a matter of fact, is the case. As we know, there is a constant tendency towards a uniform rate of increment for all capital in one and the same market, and, on the whole, the rate is realised. From this it follows, on the one hand, that nothing can be produced whose use value does not at least yield the universal increment on capital -- which is an indirect determination of the value of products by interest, in the way of determining the amounts produced. And it follows, on the other hand, that every product whose use value, regarded by itself, might yield a somewhat higher increment, can be valued only according to the universal rate of interest, to the extent that it can be reproduced at the price of the same which is a direct determination of value. If things may not be produced under the general rate of interest, and if they cannot be valued above the general rate of interest, their final value must, along with the other elements of costs, include the interest according to the amount and duration of the capital employed.

The principle of including interest among costs follows from a plan of production which aims at obtaining the highest rate of increment from every employment of capital. And as it results from this, so again has it a reflex influence in controlling the plan and giving it definite limits. If interest were not estimated among costs, or were not estimated on the whole amount of capital expended, or for the entire length of time during which the capital remains employed, the distribution of capital goods among the individual branches of production could not be so related as to attain the highest possible rate of increment. It would then be permissible to employ capital where it only covered its consumption, but brought no increment, or where it did not obtain the highest increment, or the increment on the whole amount of capital sunk, or the increment over the whole period of time when it was sunk in the productive process.

Under certain circumstances it is necessary to include even compound interest among costs; that is to say, when the period of time during which the capital is sunk exceeds the period at the end of which interest would usually be expected. Products are themselves re-employed as interest bearing capital, and it is therefore so far profitable to find productions which have a shorter process. The products of longer processes of production must receive an equivalent against this advantage of having interest on interest at an earlier date, and they obtain it by a corresponding increase in their use value. Only in this way is the highest degree of utilisation in production as regards time obtained and regulated.

Connected with this is an exceedingly curious conclusion.

In the cost value of products, undertakers include the interest due to that portion of their money capital which they must hold, for paying the wages of their labourers, until the sale of the products takes place. In the communistic state this money capital would not be required. It would, therefore, appear that, in the communistic state, the interest expenditure in production would be correspondingly lower, and that the present manner of doing is so far opposed to the natural laws of valuation. As a matter of fact this is not the case; in this point also the interest of the undertaker is identical with that of the community at large, and leads to the economic valuation of goods. The undertaker, in including the interest on his wage fund, simply estimates and expresses -- with reference to human labour -- the differences in time of employment. It is not the same thing to employ ten labourers during one year or to employ one labourer during ten years, any more than it is the same thing to employ a capital of £100 for one year or a capital of £10 for ten years. In the former case as in the latter, the principles of economic action require that, besides ordinary interest, compound interest also be reckoned to the value of the product, if a proper distribution of production is to be attained.

It needs no explanation that, in virtue of this, production is the more limited the longer the period of the process, for the reason that a corresponding increase in the value of the product is required to make the longer process appear sufficiently profitable. Productions of very long duration must yield a very rich return if they are to bear the burden of the interest which accumulates up till the time when they yield their first return.

Back to Top

Chapter 12

The Cost Theories (continued). Land Rent as an Element in Cost

Land -- understanding the word in that familiar theoretical sense which refers to the indestructible part of land -- suffers no loss of substance in production. Among the costs of agricultural products, consequently, there is nothing to be calculated for what we may call the "substance-value" of land. Ricardo goes farther than this, and affirms that the rent of land, like the value of land, cannot enter into costs. This contention is entirely in harmony with his theory that rent is a net differential rent, only ascribable to the better classes of land employed, while the poorest classes, those which are available in superfluity, yield no rent. If the classes of land which are last employed are free and bear no rent, the determining costs will, as a matter of fact, be made up without consideration of rent, simply by the sum of costs in capital and labour which are applied to the poorest classes of land. The rent yielded by the better qualities of land originates, as we know, from the surplus return of products which they assure to equal costs of capital and labour and equal value of products. Rent is, therefore, derived from the return, without finding expression in the value of the products.

It is otherwise if rent is not merely a differential but a general one. A general rent must enter into costs just as interest does. It must be included in the calculation if the determining amount of costs is to be obtained. Where all qualities of lands and all powers of the land, even those of the lowest class, are required to meet the demand, and all bear rent, the circumstance that classes of land of the poorest quality are devoted to a definite production, and so "tied up" throughout the duration of that production, is not a matter of economic indifference. For, so long as they remain tied up, their services are withheld from other productions to which they might have been devoted. In case of failure, their rent, which would otherwise have been obtained, is lost. Their rent consequently belongs to and must be included in the cost of the products.

For Ricardo it is of primary importance to persist in maintaining the foregoing contention, that land rent is always differential. His economic system cannot dispense with the proposition depending upon it, that rent does not enter into the value of products. He imagines it possible to bring the value of products under a general law, and consider them simply as multiples of units of capital and units of labour. The intervention of interest already forms a disturbing element in his law, but he believes himself able to prove that the disturbing element thus introduced is of no great importance. But if, besides, the element of rent plays a part in the value, the whole laborious structure of his theory falls to the ground, and his attempt to derive the value of products from labour, and to unite empirical amounts of value with amounts philosophically demanded, is completely overturned.

For the theory of value which we represent, on the other hand, it is a matter of entire indifference whether the circumstances are such that rent remains purely differential, and thus does not enter into the value of products, or are such as cause rent to become general, and thus to enter of necessity into the value of products. The one case fits into our system as well as the other.

Further, there are certain exceptions to the proposition that a differential rent cannot enter into the value of products. Alongside of those employments of land which may be regarded as the principal ones, and of those forms of rent which might be called the original ones, there exist others which are secondary and derivative. The principal employment of fertile land is in agriculture, but the building of a factory upon land suitable for cultivation is an example of a secondary employment, -- of an employment, to express it otherwise, for which land in general will be less required, and which in itself would never exhaust the available supply of lands, as the agricultural demand might easily do. If a fertile field is employed as site for a factory the agricultural rent which, in other circumstances, might be expected from it, will have to be surrendered. The sacrifice of this rent means an outlay of costs which cannot be neglected in calculating the costs of the factory's products. Whatever the amount of the rent, it must be deducted from the value of the products made on that building ground, and it is not till the remainder covers the costs of capital and labour that the calculation is complete.

The case is similar with the ground-rents of dwelling-houses. Ground-rent in a large town is never a simple differential rent. At the periphery of the town, house-rent finds its measure in agricultural rent, and rises towards the business centre, according to desirability of situation. The more valuable for cultivation the land round about the town is, the dearer will be the houses in that town. To this extent agricultural rent acts as a universal element of costs in the calculation of house-rents. The differential rents received from favoured sites do not make houses dearer, but are rather a result of the high valuation placed upon houses in a favourable situation. And in so far as the need for dwelling-houses and the need for business premises compete with each other, does the one employment of land act upon the other as an element of costs.

In following out this line of thought we see that Ricardo's proposition gradually loses its applicability almost entirely, as the cultivation of land becomes very artificial, and the uses of land multiply. The various employments begin to compete with each other, and one has always to make choice among several; thus the differential rents which are surrendered take effect as costs. Ricardo's proposition that the rent of land does not enter into costs, can be legitimately applied only to land devoted of necessity to one distinct use, such as mines, vineyards, and the like.

Back to Top

Chapter 13

The Service of Individual Economic Value in National Economy (1*)

The supreme principle of economic action being utility, value presents a means by which to grasp the utility of goods in a simplified and comprehensive manner, and so to control the employment of goods. Thus we have described the service of value in economy generally, in doing which we have assumed that value is estimated according to natural laws, and that we are concerned with the valuation of goods in stocks, or marginal valuation.

The return value of production goods and the cost value of products are likewise phenomena of natural marginal value. They afford us a simplified and widely comprehensive estimate of utility in the most complicated circumstances of production. The most heterogeneous kinds of production goods obtain a common measure of valuation through their common products: their return values are multiples of the value of the common marginal products. The most heterogeneous products receive a common measure of valuation through their common elements of cost; their cost values are multiples of the value of the common cost goods. Different return values, or different cost values, bear the same relation to one another as amounts of goods which are multiples of the same unit. In this way it becomes possible to estimate these value relations in figures, although the value and the amounts of value have their origin in the incalculable intensities of want.

And yet, it is not this consideration that attracts our attention at this point. Now when we have pursued the main threads of the much-tangled web of productive combinations, first from the return up to the co-operating production goods, and then back again from the cost goods to the products, another consideration forces itself to the front: namely, that in any larger economy whatever, particularly in such a one as has the compass of a national economy, and is based upon a complicated system of production, it is quite impossible to dispense with value if we wish to have any clear notion of the utility of goods. A Robinson Crusoe does not require the aid of value; he can arrive at a right decision in every instance by simply testing what manner of treatment is likely to secure him the greatest amount of utility on the whole. In a national economy, on the other hand, with a complicated system of production, it is impossible in any way to make the necessary economic decisions by testing the utility of goods on the whole. No one can take in the total result of a community's production at a glance. There are too many goods, and too many possible employments of goods, to permit of making one survey of the whole, and one comparison on the whole. Things must be gone into individually; utility must be divided up, and every good have measured out to it its share in the total result; then only is it possible to recognise individually which are the poorer, which the more profitable, and which the best. But how otherwise is utility to be measured out to individual goods than by applying to them the methods of marginal valuation, the principle of which is, to give them that utility which is dependent on the smallest quantity of goods that is yet practically taken into consideration?

And, further, the economical employments of goods result from the relations of supply and demand. It appears then that it would be impossible to discover these economical employments if the amounts of supply and demand were not known numerically. But who knows the amounts of supply and demand in the widely-extended economy of a nation, or, indeed, in the world economy, the relations of which make themselves felt everywhere? Wholesale merchants of course try to make themselves acquainted with them, and do as a fact succeed in obtaining certain figures representing what comes from production, which are tolerably exact, especially as regards large production. But, on the other hand, it is almost impossible for them to obtain, with any measure of exactitude, the equally important figures of demand. If, in spite of this, it can be maintained that economy on the whole is capable of adjusting itself to the variations in supply and demand, this is due solely to the aid afforded by marginal valuation. Value, as marginal value, gives expression in the marginal calculation to the effect produced by the existing amounts of supply and demand, even if these amounts have not hitherto been measured. No owner can attempt to get rid of a good, no buyer can be eager to get one, without this circumstance having an effect on the market, and influencing the sensitive medium of value. Although no one is able, and even though no one should attempt, to figure out the amounts of supply and demand, value shows, with numerical exactitude and down to the finest gradations that people usually make in practical life, the relation between supply and demand in so far as these tend to make themselves felt in exchange. Value shows the effect of causes which in themselves are hidden. And through the fact that we adapt ourselves to this effect, this value, it finally becomes possible to adapt ourselves to the causes, the amounts of supply and demand, and thus to regulate an economy with due regard to economic laws. If at any given point of time the value of all goods remains as it has hitherto been, we may be pretty sure of acting economically and according to the standard of economical insight already obtained, if we retain the disposition of all goods in production and consumption unaltered. If value has altered at any point, it is an indication that the present disposition of goods must be changed, and changed in direct accordance with the change of value. Where value has risen there must new goods be directed, be it for production or for consumption: where it has fallen these goods must be withdrawn. and this transferring of goods from one point to another must be continued until all values are brought once more into equilibrium, and for every stock of goods the law of equal valuation of all its units is re-established.

A knowledge of the values of goods, such as has existed in every economy up till now, is consequently, in itself, one of the most valuable of possessions. It is almost as valuable as the possession of the goods themselves, inasmuch as it is the key to their use. The sum of thousands of years of experience concerning the sources of supply of goods, and the suitability or otherwise of the conditions of their production, as well as concerning the amount of demand for them, is represented in the figures of value handed down to us. Were a nation to lose all remembrance of these, it would be an enormous economic misfortune. An almost incalculable period of time, an almost incalculable amount of error and loss, would have to be gone through, before the nation could again obtain mastery over the relations of goods formerly expressed, with numerical clearness, for each individual good by means of value.

By the socialist programme it is proposed to manage the counting of stocks and calculation of demand, in the state of the future, by means of government statistics. Could this plan be sufficiently carried out it would be so far possible to dispense with marginal value. On the other hand, it can never be dispensed with where the finding of an expression for the utility in the individual good is concerned. To dispense with it would be equivalent to giving up the attempt to determine utility in the individual case, and being content with making a general determination as to the direction of production and consumption, leaving out consideration of the quantities which it is desirable to gain or consume.

Here I leave the sphere of conditions of value in private economies. Clearly as I realise the imperfection of what I have tried to do, I yet trust that the reader will have been convinced that exchange value, as expressed in price, is not only governed by price competition, but contains a deeper economic content; that exchange value, although mixed with foreign elements, unites in itself all the essential elements of the natural valuation of goods, the valuation which is indispensable to economic action. If the prices for all similar goods in one and the same market are equal in amount, it is because, in the last resort, the valuations of all similar goods in one and the same economy are equal. If the prices for all goods in one stock are fixed at the marginal point, it is because, in the last resort, the valuations are so fixed. In so far as prices represent natural value, an enormous and arduous mental labour of calculating the exchange value of things is saved. By thousandfold weighing and consideration of the productive and other economical relations, each individual good gets measured out to it that amount of the total return which must be directly imputed to it out of the total amount of the total production, if the goods are to be profitably dealt with. I have chosen the word "Imputation" after much deliberation. It is not only to production goods that return is imputed and distributed; all goods get imputed and distributed out to them the utility which they give only when co-operating with one another. There is no satisfaction that is not prepared for and followed by others; all our satisfactions stand in mutual action and reaction with each other. Every man's means are thus linked together. Individual economic valuation succeeds, nevertheless, in distributing this whole, and imputing to each separate portion of wealth its share of return, in such a way that, as a rule, every one is well advised who, within the sphere of his own individual economy, takes the amount of value thus ascertained as measure for his economic action.

Where exchange value diverges from natural value, something else must of course obtain, but it is beyond our special task to enter on this consideration.

It still remains to show how far natural laws require that individual economic valuation be complemented by the economical considerations of a community, or, more particularly, of a state.

NOTES:

1. See Ursprung des Werthes, p. 165.

Back to Top