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The Ultimate Standard of Value

By Holly Hicks,2014-11-30 10:36
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     There are certain unsettled questions in economic theory that have been handed down as a sort of legacy from one generation to another. The discussion of these questions is revived twenty or it may be a hundred times in the course of a decade, and each time the disputants exhaust their intellectual resources in the endeavor to impress their views upon their contemporaries. Not unfrequently the discussion is carried far beyond the limits of weariness and satiety, so that it may well be regarded as an offence against good taste to again recur to so well-worn a theme. And yet these questions return again and again, like troubled spirits doomed restlessly to wander until the hour of their

    deliverance shall appear. It may be that since the last discussion of the question we have made some real or fancied discoveries in the science, and some may think that these throw new light upon the old question. Instantly the old strife breaks forth anew, with the same liveliness as if it possessed the charm of entire novelty, and so it continues year after year, and will continue, until the troubled spirit is at last set free. In this class we find the question -- What is the "ultimate standard of value," (dem letzten Bestimmgrunde des Wertes der Guter)? The content over this question began as early as the days of Say and Ricardo. More recently the German, Austrian, Danish and American, English and Italian Economists have taken it up, so that the contest has assumed an international character. The present generation has indeed some justification for again renewing the discussion. It cannot be denied that of late we have made some important additions to the sum of our knowledge in regard to the theory of value. This at first resulted in an increase in the number of conflicting opinions, but if we are not greatly mistaken, the present phase of this difference in opinion is due to a positive misunderstanding, which stands as a rock of offence in the path of explanation. I believe that this fatal misunderstanding may now be definitely and finally removed, by an investigation which need possess no other merits than those of care and exactness, and that this will result in permanently advancing the controversy by several pace. In this belief I venture upon a step which otherwise it would be difficult to justify, and propose to add yet another victim to the hecatombs already offered upon the altar of economic theory, though, owing to the necessity of pedantic thoroughness in such an investigation, it is a sacrifice which may not commend itself to some of our readers.

I. THE PROGRESS AND PRESENT POSITION OF OPINION.

     Since the time when Economics first became a science, there have been two rivals for the honor of being considered the "ultimate standard of value", the utility that the goods afford, and the cost of their attainment. Any tyro who take up this question of the "value of goods" will invariably start out with the idea that we value goods because, and in the measure that, they are useful to us. He will, therefore, incline to the opinion that the ultimate cause of the value of goods is to be found in their utility. But this naive opinion is soon disturbed by a thousand practical experiences. It is not the most useful things, as air and water, but the most costly things that show the highest value. Again, in innumerable instance, it is undoubtedly true that value and price do accommodate themselves to cost of attainment, and so at the very outset the spirit of dissent was introduced into the theory of

    value, and has remained there until the present day. There was either this divergence of opinion, or a division of the field of value phenomena into two sections, that of utility and that of cost; or, finally, both domain and opinions were divided. The classical theory of value, as is well known, divided the domain of the phenomena of value. A distinction was drawn between "value in use" and "value in exchange." The "value in use" of goods was thought to rest entirely upon utility, but beyond this passing reference to the domain of utility the classical theory did not trouble itself about value in use. In "value in exchange," a distinction was made between monopoly or scarcity goods on the one hand, and freely reproducible goods on the other. The value of goods of the first class, e.g., wines of rare vintage, statue or picture by leading artists, rare old coins, patented inventions, was thought to depend upon the demand for them, and this in turn depended upon their utility. The value of goods of the second class was thought to depend upon their cost of production, or, as it has been more accurately stated, since the time of Carey, upon their cost of reproduction. To this, as we know from experience, the value and price of all freely reproducible goods tends, in the long run, to conform. As we have said, the classical theory does not enter into any discussion of "value in use." It also practically ignore the value of scarcity goods, holding, that instance of such value are few in number and of little importance. The stress was thus thrown upon the value of freely reproducible goods. In this way it came about that "cost" was held to be the "ultimate standard of value." This view did not escape frequent and serious, though for the most part, unsuccessful attacks. Say, MacLeod and many other celebrated or little known writers have, at one time or another, attacked this cost theory of value. It was urged that things that are not useful do not have value, no matter how high their cost of production or of reproduction may be, and therefore that high cost can only result in high value, when associated with a correspondingly high utility. From this the further conclusion was eagerly drawn, that the correspondence between value and cost, which is not to be denied, does not result from value regulating itself according to cost, but rather from cost regulating itself according to value, since higher costs are only undergone when, from the outset, correspondingly higher value are anticipated. This line of argument, however, is itself open to serious and very manifest objections. It might be urged that just as there can be no value without utility, no matter how great the cost may be, so there can be no value without cost, no matter how great the utility may be. This is manifest in the familiar instances of air and water. The adherents of the cost theory had so much of direct experience in their favor, confirmed as this was by the undeniable interdependence of cost and value, that they for a long time had the advantage in this

    constantly recurring strife. A remarkable shifting of the scene was brought about by the appearance of the theory of marginal utility. The main points in this theory I may safely assume to be well known. Its corner-stone is the distinction between usefulness in general, and that very definite and concrete utility, which, under given economic conditions, is dependent upon the control over the particular good whose value is to be determined. According to this theory, value arises as a rule -- that there are exceptions is expressly emphasized from the utility of goods, not however from some abstract and ever-varying usefulness which cannot be definitely measured, but from that use or useful employment (Nutz Verwendung), which in a definite concrete case is dependent upon the control over the particular good. Since of all the possible useful employments to which the good may be put, it is not the most important, but the least important, that a rational being would dispense with first, the determining utility is the smallest or least important utility among all the useful employments to which a good may be put. This determine its value and is called the marginal utility. This more exact form of the use theory of value meets in a clear and definite way the objection urged against the older "use" theory of value; namely, that free goods, no matter how useful they may be, have no value. The answer is, that since thee free goods exist in superabundant quantities, there is for us no utility dependent upon a concrete quantity of the same, as a single glass of water or a single cubic metre of air. Their marginal utility therefore is zero. Again, this theory of marginal utility gives us the basis for a new and vigorous attack upon the cost theory of value. Considered from one point of view, the cost that determines the value of any product represents nothing else than the value of the producers' goods. If now, as we are compelled to do in a scientific investigation, we inquire how we are to determine the value of these producers' goods, we find that this, too, in the last resort is determined by marginal utility. The cost therefore exercises, as it were, only a vice-regency. It cannot be denied that under certain circumstance it governs the value of certain products, but it is itself, at least in most cases, governed by a still higher ruler, namely, "marginal utility." Cost, therefore, is for the most part merely a province in the general kingdom of utility, and it is to this last that we must concede the position of the universal "ultimate standard of value." This proposition was first placed in opposition to the prevailing classical theory, in a bold and uncompromising way, by Jevons. "Value depends entirely upon utility", this writer emphatically declare in the very. beginning of his great work on "The Theory of Political Economy." This proposition has since found even clearer and more exact statement at the hands of the Austrian Economists, nor have we even yet entirely escaped from this newest phase of the

    old struggle between cost and utility as the ultimate determinants of value. The present contest is notable, not merely for the number and scientific rank of those who are parties to it, among whom may be found many of the ablest economists of all countries, but also because of the extraordinary variety of opinions advanced. Instead of two opposing conceptions, we find a whole series of separate and seemingly unrelated opinions, each of which is held with the greatest persistence. The most extreme opinion at one end of the series is that which finds statement in Jevons' proposition, that "value depends entirely upon utility." It must, however, be added that while Jevons occasionally give statement to this proposition in the above sweeping and uncompromising terms, yet the doctrine as expounded by him contains elements which necessarily lead to a limitation of this proposition. The addition of these necessary, though not highly important limitations, give us the doctrine as taught by the Austrian economists.(1*) They, therefore, stand next to Jevons in the series of opinions. Their position is that cost does not officiate as the original and ultimate determinant of value, except in a comparatively limited number of unimportant cases.(2*) The great majority of value phenomena are subject to the dominion of utility. This dominion is exercised in some cases directly, but in a still greater number of cases indirectly. When exercised indirectly the value is, of course, first determined by certain costs, but closer analysis shows that these costs are themselves determined by utility. At the other extreme end of the series, we find the eminent Danish economist, Scharling, who would establish cost (under the title of "difficulties of attainment") as the sole ruler over the entire domain of value; over value in use, as well as over value in exchange; over the value of freely reproducible goods, as well as over the value of scarcity goods.(3*) Quite close to Scharling, who is a very pronounced opponent of the theory of marginal utility, we find the acute American thinker, J.B. Clark, who is a no less decided adherent of that theory. This illustrates how strangely confused the controversy has become. Clark also make cost the general and ultimate "standard of value," though in a different sense from Scharling. According to Clark, the final and determining condition is the amount of personal fatigue, pain or disutility which is imposed upon the laborer by the last and most fatiguing increment of his day's work.(4*) Somewhat nearer the middle of our series, though still not far from the cost end, we find those writers who, with certain modifications, uphold the old classical theory. It is here that we find the learned and contentious Dietzel,(5*) of Bonn, who so divide the field of value that the value of scarcity goods is determined by utility, while the value of freely reproducible goods is determined by the cost. His position differs from the classical theory, in that he divide the

    domain of value in use between utility and cost, in the same way that he divide the domain of value in exchange. The classical theory, on the other hand, puts the use value entirely under the dominion of utility. Quite close to Dietzel, we find the Italian economist, Achille Loria, and the able American defender of the classical school, Professor Macvane. The latter has recently attacked the position of the Austrian economists, in two polemical papers of great acuteness. His interpretation of the Austrian theory, however, is not always accurate, nor always free from polemic exaggeration. His chief objection is that their conception of cost as "a sum of producer's goods possessing value" is obsolete and untenable. He holds that the only genuine economic cost of production is labor and abstinence (more correctly, waiting), which, in the case of freely reproducible goods, are the final and entirely independent regulators of value.(6*) Where opinions vary so widely from one another, some one is usually found who will take a middle course, hoping to find a solution for the problem in the golden mean. This mission of conciliation has been undertaken in this case by no less eminent economists than Professor Marshall, of Cambridge,(7*) and Professor Edgeworth, of Oxford.(8*) Both of these writers incline toward the theory of marginal utility, but have perched themselves very nicely upon the middle round of the ladder, from which vantage-ground they send forth gentle blame and conciliating applause to both parties in the discussion. Jevons and the Austrian economists are censured for exaggerating the importance of marginal utility, while the adherents of the classical theory are taken to task for underrating its importance; the truth, they say, lies in the middle. Scarcity goods, without doubt, have their value determined entirely by utility. In the case of freely reproducible goods the demand is governed by utility, and the supply by cost; since the price is determined by the interaction of these two factors, one cannot say either that utility alone or that cost alone determines value; but rather that utility and cost cooperate with each other in the determination of price, like, to use Professor Marshall's figure, the two blades of a pair of shears.(9*) Criminal lawyers of long experience are wont to apply to obscure and complicated cases the motto: Cherchez la femme! For my own part, when, in our science, I find many clear and able thinkers at odds about a given point, I usually ask myself, where is the ambitious or elusive concept with which they are playing. In this case we need not search far afield; it is the concept of "cost."

II. THE VARIOUS MEANINGS OF THE WORD "COST."

     The term "cost", like many of the other terms employed in political economy, is used, both in scientific discussions and in practical life, in several different senses. Even when in a general way we agree in saying that the "cost of production" of a good is the sum of the sacrifices involved in the creation of the good, this, by no means, guarantees that we all have the same thing in mind. In the estimation of these sacrifice, we may employ several different methods of measurement. Thee give us results which, under certain circumstances, will differ not merely with reference to the terms employed, but also with reference to the phenomena indicated by these terms. First of all, we may distinguish between what might be called the "synchronous" and the "historical" methods of estimating sacrifices. According to the former, we take a unit of the total sacrifices as the basis for our reckoning, a unit which contains an increment of all the forms of sacrifice, which, at any instant, must enter into the production of the commodity. In the production of cloth, for instance, we consume at the same time, yarn, looms (wear and tear), the labor of weavers, coal, etc., beside a great many subordinate aids to production. By this method we usually arrive at a very extensive list of production sacrifices. In order to obtain a single expression for this aggregate, or for the height of the cost, we must bring these various elements in production under a common denominator. This may be done by estimating them all according to their value or price. Hence, by this synchronous method of reckoning, the cost equals the aggregate of the means of production, that have been sacrificed in the creation of the commodities, estimated according to their value. This is undoubtedly the sense in which the term cost is understood in practical business life. It is in this way, that the manufacturer, the farmer and the merchant reckon their cost. This, too, is the sense in which Professor Marshall employs the term when he speaks of the "money cost of production,"(10*) and in my own writings about value and capital, I usually employ the term cost in the same way. Usually but not always, because for certain purposes another mode of estimating sacrifices, become important and may not be neglected. This is the historical method. It is quite manifest that many of the concrete forms of goods, which we today are compelled to sacrifice to purse of production, are themselves the product of past and more original sacrifices. For example, the wood and coal that we consume to-day in the production of cloth, and likewise the machine which we wear out, are themselves the product of previous sacrifices of labor. If we go behind these material commodities to the sacrifice which the human race has suffered in successive periods of time, in bringing them into existence, or if you like the sacrifices necessary to reproduce them, the list of the historical production sacrifices would be greatly simplified. It would include two, or at most three,

    elements. First of all come labor, which without doubt is the most important of these elements. Then come a second to which many economists have given the name, abstinence. Perhaps a third might be added, namely, valuable original natural power; though many might decline to regard this last as a sacrifice. For our present purse, the extension of the discussion to the last two elements, about which there may be some question, is not at all necessary. We may indeed leave them entirely out of the discussion, and take the most important of the above elements -- labor -- as the representative of the elementary production sacrifices. Of course we do not mean that we would either deny or overlook the co-operation of the other elements; but, in the question which here interests us, these elements play a part in no way different from that played by labor, so that the result obtained for the latter may in a general way be regarded as true of the other elementary production sacrifices. It is therefore hardly necessary to repeat the same argument for the other elements. As I have already remarked, the historical mode of viewing cost is regarded by Professor Macvane as the only correct method;(11*) whether or not he is right we have yet to inquire. It is employed by Professor Marshall in the statement of his conception, of "the real cost of production."(12*) In numerous instances I also have had occasion to make use of it, as when I endeavor to show that capital does not possess original productive power. Again, when in explaining the operation of the law of cost,(13*) say in the iron industry, I declare in a brief way, that the necessary means of production are mines, direct, and indirect labor.(14*) According to this historical method of reckoning cost, labor may be regarded as the chief representative of all production costs. But the sacrifice arising from the expenditure of labor may itself be measured by different standards or scale. We can measure it either according to the amount of the labor (i.e., the duration of the labor), according to the value of the labor, or, finally according to the amount of the pain or disutility, which is associated with the labor. Obviously, through the use of these different standards of measurements, one will arrive at very different formulas for expressing the amount of the costs. If, for instance, one were asked: What is the cost of production of a certain piece of cloth? he would answer according to the first scale or standard, twenty days' labor; according to the second (if a day's labor cost say eighty cents), labor to the value of sixteen dollars, and according to the third, a certain sum of pain or disutility, which the laborer must endure. But it is important that we should here see clearly, that this involve more than a mere difference in the terms employed. For according as we employ one or the other of these scales or standards, our estimate of the actual amount of the cost of any commodity will vary. They will not only be different, but may even positively contradict each other. Suppose, for

    instance, that a certain commodity A require for its production twenty days' labor, which is paid for at the rate of eighty cents per day; again let us assume that a certain other commodity, B, require thirty days' labor, which is paid for at the rate of forty cents per day. Now if we employed the first scale or standard, we would reach the conclusion that the cost of A was less than the cost of B, (twenty against thirty days' labor). By the application of the second, we reach the directly opposite conclusion, that the cost of A is greater than the cost of B (labor to the value of sixteen dollars against labor to the value of twelve dollars). It is also clear that even though we assume that the labor in these case is equal, either in amount or in value, this does not necessitate the conclusion that the amounts of pain or disutility are equal. The labor of a great artist, which perhaps is paid the highest of any form of labor, may not only not cause him any pain, but may even yield him, quite independent of all economical considerations, a large measure of pleasure. It might therefore very readily happen that by the application of the third standard, the cost of a commodity would seem very small, while its cost, according to the other two standards, would seem very large, and conversely. This short resume of the uses that have been made of the term "cost of production" makes it clear, that if we would avoid idle disputation, all further discussion of this subject must be preceded by the consideration of a preliminary question. A question which, for the most part, has been neglected by those who have taken part in the general discussion. The whole controversy, in its final issue, turns upon the famous "law of cost," which holds that the value of the majority of goods, namely, those which may be regarded as freely reproducible, adjusts itself in the long run according to the cost of production. As to the actual manifestation of such a law, there can be no question. Its existence is empirically proven, and so far as the actual fact is concerned is unanimously acknowledged by all parties to the discussion. The real question is as to the deeper meaning, the final theoretical conclusions, which may be deduced from this empirically established law of cost. But before we can enter upon any inquiry in regard to this deeper meaning, we must first know in what sense the term "cost" is to be employed. That it cannot at one and the same time, have all of the above enumerated meanings, the preceding example make very manifest. If the cost of a commodity A, taken in one sense is higher, and taken in another sense is lower, than the cost of a commodity B, it is manifest that the price cannot, at one and the same time, be adjusted in both senses according to the cost. In that event the price of the commodity A would at one and the same time be higher and lower than the price of the commodity B. Our most pressing problem, therefore, is to find a solution for that preliminary question, to which we have

    referred, a question which finds statement in the title of the following chapter.

    III. For Which of the Different Meanings of the Word "Cost" is it Really True That, According to The Experience of Industrial Life, Prices Adjust Themselves According to Cost

     It is undoubtedly true for the value sum of the synchronously reckoned cost; or for what Professor Marshall calls the "money cost of production." This is the cost from which, in practical life, the "law of cost" receive its most direct and effective confirmation. The action of the merchant is determined by the amount which he must expend for all the necessaries of production. If the price of the ware is not sufficient to cover this outlay, he cease to bring the ware to market; conversely, if the price yields a fair surplus over and above this outlay, the producers increase the supply until the price, in the above sense, is adjusted according to the cost. It is therefore, from the standpoint of the practical man's estimate of the money cost of production, that the "law of cost" is always demonstrated. Even such writers as Professor Marshall have recourse in the first instance, to this method of proof.(15*) We do not mean to say that this "law of cost" is only true for the synchronous method of reckoning money cost. On the contrary, it is in a certain sense applicable also to the historically reckoned cost; and it is this extension of it which, since the time of Adam Smith, has excited the greatest interest among writers on the theory of value. The only question is, to which of the different conceptions that are included under the historical method of reckoning cost may this be applied. There is no doubt that it is true -- in that approximate way in which any "law of cost" can be true -- of the primary elements of cost, labor and abstinence, measured according to their value. We might put this in a more concrete form as follows: In those goods that generally obey the "law of cost," the price of the finished product tends to an approximate equality with the total sum, that must be expended in wages and interest during the whole course of its production. This proposition, I believe, is common to all theories of value including the classical (see A. Smith and J.S. Mill), and really follows as a logical consequence from the older theories. We have said that the price, say of cloth, tends to adjust itself to the money cost of producing cloth. This consists in part of the wages and interest, which are paid directly in this industry (the wages of weavers); also, in part, of the money expended for the consumption and durable goods sacrificed in its production, for instance, the yarn consumed. But here again, the money price of yarn, according to our proposition, would tend to adjust itself to the spinner's money cost. This again consists, in part,

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