Formalized Theories of Value

Formalized Theories of Value

The Followers of Adam Smith: Ricardo, Senior, Mill, Marshall

For more than twenty-five years no serious criticism was raised against Adam Smith's analysis of value. Then a great economist arose, who, although associated with the classical tradition, in some respects took issue with and overshadowed the founder of the school himself. David Ricardo (1772-1823) was the son of a London stockbroker, who at an early age made a fortune in the stock exchange and then retired to study and write in the field of economics. In analyzing the process of evaluation Ricardo assumed that competitive conditions existed. He ruled out the short-term market value as non-essential, and dealt exclusively with the long-term or normal value. Both scarcity and the quantity of labor required to produce articles influenced their value. Certain objects which could not be reproduced at all had their value set by scarcity alone, he believed. There were really so few of these that they did not need to be considered in the development of value theory. The economic life of the nation was carried on with commodities which could be produced in infinite quantity if sufficient labor were expended in their production. For these, labor costs set the basis of value. Since rent was paid on land only in terms of its superiority over the poorest land under cultivation, and capital was merely stored-up labor, logic indicated that only labor contributed to value. Qualitative differences in labor, as, for example, between skilled and unskilled, between the professional man and the common laborer, were of no moment since the market had long ago adjusted the differences and these were subject to little variation because of the power of custom.

In spite of the tenacity with which Ricardo held to the pure labor theory of value, changes of titles to chapters in successive editions of his Principles of Political Economy and Taxation, published in London in 1817, indicate his dissatisfaction with the labor theory. The new titles forecast a clear modification of the power of labor alone to determine value. His efforts to discount the influence of profits and rents on value appear to most economists either as outright failures or as the exercise of arbitrary power to define terms in such a way as to reinforce his theory of value.

The next of the great economists in the classical tradition was Nassau Senior (1790-1864), a man trained in the legal profession but who spent the greater part of his life as a teacher of economics. Senior built upon the foundations laid by Smith and Ricardo, but he was closer to the former than to the latter in his conception of value. He disapproved of Ricardo's labor theory of value and tried to show that it was a misplaced emphasis which led people to confuse the fact that labor was necessary, with a limited supply, and thus with value. It was Senior's belief that scarcity was a fundamental aspect of value whether the scarcity arose because of the difficulty in applying labor or because of natural causes. But he added that the costs of production, which include expenses of capital as well as labor cost, also influence value. Of the expenses of capital—he said that these were but the necessary payments for the sacrifice of present enjoyment which made possible the accumulation of capital. Senior thus provided the ingredients for the commonly accepted theory of value developed later by Alfred Marshall and the so-called neoclassical school.

Before describing the views of the neo-classical economists on the subject of value a mention of the position of John Stuart Mill is in order. His contention was that two factors were responsible for value, utility and difficulty of attainment. Actually, however, this could be demonstrated only by reference to specific things. Drawing heavily upon the analysis made by Samuel Bailey (1791-1870) who first attacked the Ricardian labor theory of value, Mill said that commodities fall naturally into three categories: those absolutely limited in supply; those which can be increased indefinitely by the application of labor; and those whose quantity can be increased but only at increasing costs. Of the first he said value depends solely on supply and demand. With the second class of commodities the law of supply and demand still operates, but value is determined by the cost of production which includes wages, usual profits, and—in exceptional cases— rent. Market prices might vary from true value, but competition would tend to make prices gravitate toward the cost of production—since supply would tend to increase or decrease to the point of lowest possible profitable production. In the third class of commodities it was indicated that cost of production again determines value, and price tends to rise to highest costs incurred in producing the necessary supply.

It remained for Alfred Marshall (1842-1924) to rework the old classical theory of value into something which would stand the test of modern industrialism and large-scale business enterprise. He was Professor of Economics at Cambridge University, England, from 1885 to 1908. Schooled in the classics and well trained in mathematics, he was well fitted to do the work of synthesizing and revitalizing economic theory. Marshall made value problems the center of his system of economics. His chief contribution lay in bringing together and harmonizing the utility and the cost of production theories of value. Not so much in England, but on the Continent and in America, theorists had revolted against the cost of production theory in favor of utility. To these writers it was essentially the power of a good to satisfy human wants which gave it value, not what was spent in producing it. A homely illustration provided Marshall with his insight into value theory. A pair of scissors did not cut with either the upper blade or the lower blade alone, but with both together. However, value theory is not quite so simple, he commented; and proceeded to show why. Value is almost entirely influenced by demand when a short-run point of view is taken, for once goods are on the market the consumers' willingness to purchase determines the price. In the long run, said Marshall, supply is important—the price of a commodity cannot vary greatly from the expenses incurred in producing it.

This exposition of Marshall's brought to the classical theory of value new life and a sense of reasonableness. Yet there existed, and probably still exist, economists who take exception to the classical doctrine, and who because of their differences of viewpoint have strongly advocated a revision of classical theories. The principal objection was that in attempting to be objective and scientific, the classical theories dealt only with the external aspects of economic phenomena. Specifically, in emphasizing exchange values, utility or use value was neglected, when actually utility was more important in understanding value than any of the more obvious characteristics of exchange.

Another deviation from the classical doctrine is found in the work of Karl Marx and other socialists. The socialists extended the labor theory of value to further limits, using it as a tool both in an economic and an ethical sense to prove their contention that rent, interest, and profits were unjustifiable charges upon the true values created by labor alone.