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IRVINE



2

HISTORY AND CRITICISM OF THE
LABOR THEORY OF VALUE



STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW

EDITED BY THE FACULTY OF POLITICAL SCIENCE OF
COLUMBIA UNIVERSITY

Volume XIX] [Number 2



JEISTOKY AKD CRITICISM

OF THE

LABOR THEORY OF VALUE

IN ENGLISH POLITICAL ECONOMY



BY

ALBERT C. WHITAKEE, Ph.D.,

Sometime University Fellow in Economics, Columbia University ;
Instructor in Economics, Leland Stanford Junior University




THE COLUMBIA UNIVERSITY PRESS

THE MACMILLAN COMPANY, AGENTS
LONDON : P. S. KING & So\

1904



COPYRIGHT, 1904,

BY
ALBERT C. WHITAKER



CONTENTS



CHAPTER I

GENERAL OUTLINES OF THE HISTORY OF THE LABOR THEORY

{ I. Scope of the present history 9

{ 2. Great diversity of early opinions on value 10

3. The two main ideas, the "philosophical" and the "empirical"

accounts of value 12

CHAPTER II

ADAM SMITH'S PHILOSOPHICAL OR PRIMITIVE ACCOUNT OF VALUE
8 I. Interpretation of Smith's doctrine of value rendered difficult by

a plurality of explanations 16

1 2. Preliminary observations concerning the use of the terms

"labor" and "value" .... 19

2 3. The two distinct labor standards in the primitive account the

"labor cost" and the "labor command" standards .... 20

I 4. Smith's conception of quantity of labor 22

{ 5. The labor and the corn measure of value in different times and

places 24

CHAPTER III

THE EMPIRICAL ACCOUNT OF ADAM SMITH

i I. Abandonment of the labor-cost standard for the conditions of

real society 29

| 2. The labor-command standard retained as still valid 30

CHAPTER IV

CRITICISM OF THE THEORIES OF ADAM SMITH

i i. Principal argument for the labor-command standard a theory

of labor as undifferentiated or potential commodity 3*

8 2. Complete failure of this theory to afford an ultimate philosophy

of value 34

{ 3. The concept of labor as disutility cost suggests later valid

theories, but fails to lead to a satisfactory result 36

263] 5



$ CONTENTS [264

FACE

| 4. The arguments, by which Smith supports the labor-command
standard, prohibit its use under the conditions of advanced
society 39

CHAPTER V

RICARDO AND THE TRUE CLASSICAL LABOR THEORY

{ I. General estimate of Ricardo's theory 41

{ 2. At foundation an attempt to reconcile the "philosophical"

and ' ' empirical ' ' accounts 42

| 3. Preliminary conditions of the theory laid down by Ricardo

himself 44

{ 4. How determine quantity of labor ; unsatisfactory treatment of

skilled labor ; labor indirectly applied 46

{ 5. The introduction of interest on capital as an element in cost

of production (i. e., enterpreneur's cost) 49

t 6. In Ricardo's conception, interest enters into Natural Price or

Normal Value, though he does not make this clear 50

5 7. Essence of Ricardo's explanation of the complication of interest. 52

{ 8. Peculiarly roundabout form of statement of the same .... 53

\ 9. Ricardo's explanation of the complication also positively mis-
leading 55

\ 10. Summary 56

CHAPTER VI

MCCULLOCH, JAMES MILL AND TORRENS. ANTICIPATION OF MARx's
THIRD VOLUME

$ I. The interest which attaches to these three minor writers ... 61

{ 2. Samples of McCulloch's extravagant dogmatism 62

? 3. McCulloch anticipates Marx's solution of the "organic compo-
sition of capital" complication 64

I 4. James Mill's complete misapprehension of the nature of the

interest difficulty 70

{ 5. False move made by Torrens in defining the concept of entre-
preneur's cost 74

{ 6. Shallow attempt of Torrens to avoid the interest difficulty by a

theory of " accumulated labour " 76

CHAPTER VII

THE EMPIRICAL THEORY AS DEVELOPED BY MALTHUS

I I. Malthus a prolific writer on value, and opponent of Ricardo . 79
I 2. An important transfer of emphasis from the "philosophical"

to the ' ' empirical ' ' account 79



365] CONTENTS 7

PACE

I 3. The law of costs made subordinate to the law of supply and

demand 80-

5 4. Detailed criticism of Ricardo's labor-cost theory 83

? 5. Majority of these points of criticism provided for by Ricardo

himself 85

{ 6. Difference between the two economists partly one of emphasis :

ultimate gain of Malthus' theory 86

{ 7. Note on the question of the invariable measure of value for alt

times and places 88

CHAPTER VIII

SENIOR

{ i. Opening of his discussion very unfavorable to old labor cost

philosophy 93

8 2, Originates a consistent conception of subjective cost of produc-
tion, labor and abstinence 95

\ 3. Approaches a theory of final equivalence of utility and disutility. 96

\ 4. Values produced would be in proportion to subjective cost of

production were there no rents 98

{ 5. Remarkable extension of the rent concept ..'.'.'.'.... . 99

\ 6. The universal prevalence of rent in real life nullifies the law of

subjective costs 101

{ 7. Net result of Senior's reasonings very destructive of labor-cost

theory '..'..'.'.".' 102

CHAPTER IX

JOHN STUART MILL

{ I. Begins with "empirical" laws of supply and demand, and of

eriterpreheurs costs .'.,.'.' 104

$ 2. Scant attention paid to subjective cos'ts . .' 106

$ 3. Wavers concerning inclusion of "profits" in cost: an illustra-
tion of the inadequacy of the ancient philosophy of value . . 107

{ 4. Follows Ricardo, without the slightest improvement in his ex-
planation of the interest complication 108

'i 5. Departs from Ricardo in admitting that case of skilled labor

necessitates qualification of the labor-cost theory HO

\ 6. Summary : the labor theory weakened ; comparison with Mal-
thus and Senior 112

CHAPTER X

CAIRNES

\ I. Cost of production, as ultimate regulator of value, defined in

purely subjective terms 114



8 CONTENTS [266

PACK

i 2. Wages and interest, being rewards, cannot be costs 116

4 3. Conception of the " average sacrifice " 117

| 4. The problem of the influence of subjective cost upon exchange

value, more clearly stated than ever before 118

{5. The theory of " non-competing groups " IIQ

$ 6. Consequent limitation of law of costs 120

$ 7. And resort to a principle of "reciprocal demand," which fails

to replace the law of costs 121

{ 8. Cairnes' theory of non-competing groups signifies that the ex-
istence of skilled labor is fatal to the Ricardian labor theory . 123
I 9. Ricardo's assumption of perfect competition does not foreguard

against the difficulty of skilled labor 124

CHAPTER XI

THE ULTIMATE RELATION OF COST TO VALUE

| I. Net result of English discussion from Smith to Cairnes . . . 127

I 2. Classification of cost concepts 135

{ 3. Necessary preliminaries concerning the concepts of value and

utility 140

i 4. Essential features of the pure utility theory ; the supply of

goods taken for granted 146

5 5. Explanation of the law of entrepreneur's cost in the light of

the utility theory 155

} 6. The modern refined labor theory the marginal equivalence

of utility and disutility considered first in the isolated

economy 165

J 7. The relation of marginal subjective cost to exchange value in

the developed social economy 177

I 8. Summary ' 191



CHAPTER 1

GENERAL OUTLINES OF THE HISTORY OF THE LABOR THEORY

OF VALUE

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

After Adam Smith, the writers to be considered are
Ricardo and Malthus, McCulloch, James Mill and Torrens,
Senior, John Stuart Mill, and Cairnes. In the next great
treatise after that of Cairnes, the Principles of Economics of
Marshall, there is nothing left of the labor theory of value,
except a note at the end of a chapter on the general theory
of the equilibrium of supply and demand. 1 This note, "On
Ricardo's Theory of Value," endeavors to state the ultimate
relations of cost, utility and value in such a manner that
Ricardo's explanation of value is made to appear as a state-
ment true as far as it goes, which errs only in being incom-
plete, and which is completed, not refuted, by the utility
theory. This view will be taken up in the last chapter of
the present essay. But no separate chapter is devoted to
Professor Marshall's work, because, as a matter of fact, the
Ricardian labor theory finds no place in the text of his Prin-
ciples. From Smith to Cairnes, the list of writers given

'Chap, xiv of book v, 4th ed., 1898, pp. 554-570.
267] 9



I0 LABOR THEORY OF VALUE [268

above was selected as well calculated to exhibit the general
line of development of English political economy. No
attempt has been made to discover writers outside of this
list, although it is not denied that such writers may not at
present receive due credit for their influence upon the de-
velopment of economic theory. Making no attempt at what
might be called a discursive or extensive study of the field,
this history will be confined to an intensive study of the
chief writers. If it be found that certain of the above list
of writers contributed nothing but error to the theory of
value and such is the case with three of them even such
a conclusion is deemed to be of historical value.

2. With the limits of our field thus defined, attention
should first be called to a fairly prevalent, but mistaken,
impression regarding the so-called classical labor theory of
value. It is frequently assumed that this theory of value
was a simple and absolute dictum, supported in substantial
unanimity by a considerable body of writers, called collec-
tively " the classical school." There is, no doubt, sufficient
resemblance among these writers in their general tendencies
of thought to justify the term " classical school;" but with
respect to their views on the central problem of value, it is
their differences of opinion that at present need emphasis,
just as it is these differences which take the modern reader
by surprise when he first undertakes a detailed study of their
writings. Instead of finding the minds of the early Eng-
lish economists dominated by a single labor theory, having
the merit of great directness and simplicity, the historian of
the theory is confronted with an appalling jumble of ideas
on the relation of labor to value. Ricardo, it is true, de-
fended the simple thesis that the exchange value of a com-
modity is governed by its cost of production in labor, but it
is sometimes forgotten that he hedged this doctrine about
with several important qualifications and conditions. Fur-



269] GENERAL OUTLINES II

thermore, there was not a contemporary or subsequent writer
who did not differ from Ricardo in important points of
theory. Taking Smith, Malthus, Ricardo, McCulloch, Tor-
rens, and James Mill together, we find labor sometimes con-
ceived of as disutility cost, at other times as productive
power, without any recognition of the distinction between
these concepts. Yet this distinction may be of great im-
portance in certain propositions of theory. We find Mc-
Culloch at one time claiming that the value-determining
labor employed in the production of a commodity includes
the operations of machines and inanimate objects, which are
" philosophically just as truly labor as human exertions."
Torrens maintained that value is governed by cost of pro-
duction in " accumulated " labor, and James Mill held in-
terest on capital to be really wages of labor, an absurd
thought absolutely foreign to Ricardo's theory. In addi-
tion to the labor-cost regulator of value, there was the labor-
command measure of value, the measure of the value x of a
good for all times and places, alleged to be afforded by the
amount of labor which could be commanded by it or had
in exchange for it. The principal defender of this measure,
Malthus, did not believe in the labor-cost regulator. It was
asserted that the " value of labor " is the same in all times
and places. When this value is inadvertently identified with
exchange value, which must, of course, be measured by the
commodity wages of labor, some highly interesting argu-
ments are necessitated to show that real wages are in some
sense or other the same in all times and places, in spite of
the fact that, as commonly understood, they are by no means
the same. We find a " corn measure " of value first pro-
posed as a convenient index to the true labor measure. But,

1 Value was in this connection used in another sense than pure ex-
change value, but the difference of significance was never satisfactorily
explained.



I2 LABOR THEORY OF VALUE [270

strange to say, later we run upon a proposal to take an
"arithmetic mean between corn and labor" (i. e., between
their prices) as the " least defective measure " of " intrinsic
value in exchange." Cost of production was used without
any distinguishing adjectives to indicate concepts so distinct
as entrepreneur's cost and labor cost (presumably " disutil-
ity cost"). In consequence there arose a dispute, which
was at the time nearly unintelligible, as to whether or not
profits (i. e., interest on capital) are a part of cost of pro-
duction.

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

1 Natural Value, edited by Wm. Smart (London, 1893), pp. xxvii-
xxix. Von Wieser gives but three pages of the preface of Natural
Value to the writings of Adam Smith and Ricardo on value. But in
this brief though profound passage, he has not only suggested what I
believe to be the true interpretation of the theories of Smith and Ri-
cardo, but he has also made the greatest single contribution to our
understanding of the subsequent course of English thought on the
subject.



271] GENERAL OUTLINES 3

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



14 LABOR THEORY OF VALUE [272

" profits " of stock, and the rent of land * which must be
paid to obtain their production. This is the " empirical "
account. The principle discovered is that now known as
the law of entrepreneur's costs. 2

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

1 Rent of land was excluded by Ricardo, but included by Smith and
Malthus, and also by J. B. Say.

*The Austrian writers are accustomed to call this the "empirical law
of costs."

8 The detailed history given in the following chapters will, it is be-
Keved, substantiate this view. The development of the law of entrepre-
neur's costs will be traced only so far as is necessary in order to under-



273] GENERAL OUTLINES 15

Adam Smith and Malthus considered ground-rent to be
a " component part " of entrepreneur's cost (not that they
employed the term entrepreneur's cost), co-ordinate with
wages and " profits of stock." Ricardo never stated a law
of entrepreneur's cost plainly, formally, as such, though he
gave it an obscure recognition as a source of difficulty to the
pure labor theory of value. But he influenced its form pro-
foundly, for when the doctrine passed into the hands of
J. S. Mill, the latter removed the rent of land from among
the elements of cost, leaving wages and interest. 1

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

stand the history of the labor theory, but it is indispensable to follow
the general lines of its progress if we are to perceive the "setting"
of the labor theory.

1 Mill granted certain exceptions to the proposition that rent cannot
"enter into price," but placed no emphasis upon them.



CHAPTER II

ADAM SMITH'S PHILOSOPHICAL OR PRIMITIVE ACCOUNT OF

VALUE.

i. THERE is a veritable multiplicity of explanations of
value in the Wealth of Nations, which makes a history of
Adam Smith's views on this subject extremely difficult writ-
ing. Many a wise or philosophical sort of observation
may be correct in a general way, or largely true, and yet not
be precisely true. Perhaps the greater part of what Adam
Smith has said on the nature of value consists of reflections
of this kind, and the student of his text can never be certain
that he really planned to describe the laws of value with that
precision which modern theory at least hopes to attain.
Still there are some exact theorems laid down. The lan-
guage in which these are expressed is uniformly flowing
and makes good reading; but it seems to be more an elo-
quent appeal against the shallow mercantilist view of wealth,
than an attempt at a painstaking analysis of the facts of
value. The following thoroughly typical passage from the
chapter, "Of the Real and Nominal Price of Commodities,
or of their Price in Labor and their Price in Money," is
truly a call to people to look away from money as the sole
measure of wealth and regard the real source of wealth.
But in spite of this it happens to end in a precise proposition
or theory of value :

" Wealth, as Mr. Hobbes says, is power. But the person
who either acquires, or succeeds to a great fortune, does not
16 [274



275] ADAM SMITH'S PHILOSOPHICAL ACCOUNT if

necessarily acquire or succeed to any political power, either
civil or military. * * * * The power which that posses-
sion immediately and directly conveys to him, is the power
of purchasing, a certain command over all the labour, or over
all the produce of labour which is then in the market. His
fortune is greater or less, precisely in proportion to the extent
of, his power; or to the quantity either of other men's labour,
or, what is the same thing, of the produce of other men's
labour, which it enables him to purchase or command. The
exchangeable value of everything must always be precisely equal
to the extent of this power which it conveys to its owner."

From which Adam Smith concludes that labor is " the real
measure of the exchangeable value of all commodities."
The exact meaning of the conclusion, it must be observed,
is not plain. If " exchangeable value " meant mere ex-
change value in the modern sense the power of a good to
exchange for some quantity of another good objectively
measured in weight, volume, or length then money would
afford a measure of this value quite as reliable as labor and
far more convenient. What is intended by " exchangeable
value " is a question we may approach later, but whatever
exact meaning we take for this term, we find that the series
of general observations preceding the conclusion does not
prove this conclusion as a precise proposition. This pas-
sage is typical of the chapter. Painstaking study of Smith's
theory or theories of value is also made difficult by occa-
sional lapses into very loose terminology. For an instance,
we find the sentence, " equal quantities of labor, at all times
and places, may be said to be of equal value to the laborer." *

1 Wealth of Nations, 2d Thorold Rogers ed., 1880, pp. 31-2. All sub-
sequent page references are to this edition, volume i.

8 P. 34-



!g LABOR THEORY OF VALUE [276

The context shows that, in all probability, value here means
disutility .*

The several different minor theories of value given by
Adam Smith are not woven into a whole by him. The stu-
dent of his views approaches his great work with a respect
that amounts to awe, and it takes time to force himself to
the conclusion that there is a part of the Wealth of Nations
which, though profoundly suggestive, is not entirely con-
sistent. The attempt, instinctively made by the commen-
tator, to find a hidden consistency behind the various in-
compatible utterances, to discover a hypothesis upon which
the contradictions may be declared apparent only, is, accord-
ing to the belief of the writer, fore-doomed to complete
failure.

Within the plurality of explanations of value two main
divisions are discernible, the first contained in Chapter V,
and the second in Chapters VI and VII of Book I. 2 These
are the " philosophical " and the " empirical " accounts dis-
tinguished in the first chapter of this essay. The first of
these is in its place stated in general terms, as if uncondi-
tionally true, but when the empirical account is reached, a
considerable part of what had been said previously is re-
stricted to " that early and rude state of society which pre-
cedes both the accumulation of stock and the appropriation
of land." 3 For this reason what has been called the " phil-


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Online LibraryAlbert C. (Albert Conser) WhitakerHistory and criticism of the labor theory of value in English political economy → online text (page 1 of 16)