<h2>CHAPTER 43</h2>
<h3>SURVEY OF THE THEORY OF VALUE</h3>
<h4>§ I. REVIEW OF THE PLAN FOLLOWED</h4>
<div class="sidenote">The cycle and order of economic study</div>
<p>1. <i>The beginning and end of economic study is man.</i> Before leaving the
more theoretical and abstracter part of the theory of value, it may be
well, at the cost of some repetition, to restate and review the
relations of the various parts of the argument. Intent on details of the
theory of value the student is in danger of losing its broader
perspective.</p>
<p>The proposition with which this section opens was accepted as our
axiomatic starting-point. It was not so in the older political economy;
men too often were looked upon rather as a means to an end, namely, the
creation of wealth. This proposition refers to all classes, not to a
small group of men. The aim of economic study is democratic, being the
welfare of all men. Economics does not purpose, however, to explain
man's action with reference to all things. It asks and attempts to
answer the question: "Why does man attach value to certain things and
actions; why does he measure them in certain ratios as expressed in
terms of each other; and why do these ratios change with changing
conditions?" This purpose has determined the order of our study.
Beginning with an analysis of the nature of wants, and of the mental
process of valuing consumption goods, the circle of inquiry widened to
the problem of valuing things whose relation to wants is more remote and
indirect (though not less important).</p>
<p>The problem of future uses, the major part of the theory<span class="pagenum"><SPAN name="Page_413" id="Page_413">[Pg 413]</SPAN></span> of value,
leads back to the question of the use man makes of things—a field
claimed by the moralist, but one that cannot be neglected by the
economist. Economics is not the whole science of social relations. It is
a restricted part of the field. But it comes into relation with great
practical questions that touch all sides of life. Thus economics
broadens and unites with the general stream of sociology. In the pursuit
of our study one comes back to the starting-point and cause of
value—human wants and the use made of wealth to gratify them. The
circle is completed. We have surveyed, rapidly and imperfectly it is
true, the whole range of economic inquiry.</p>
<div class="sidenote">The unit in value problems</div>
<p><i>2. The central point in economic study is the simplest problem of
exchange value.</i> The first look at the economic world reveals so many
things that have relation to wants, and relations so complex, that the
mind is confused. The object of science is to simplify; it seeks unity
in the midst of chaos. Relations exist between wants and things that
certainly never can gratify them directly. Where is the simplest aspect
of the problem to be found? Evidently in the exchange of consumption
goods, for these are in closest touch with wants. Out of the complex of
direct and indirect goods, those few which are at the moment gratifying
wants must be somewhat abstractly, but logically, set apart and studied.
In the simplest problem, the exchange of the most typical consumption
goods, is the key to the larger problem of value. If one could follow it
step by step into its complexer relations, he might hope to understand
everything in economics.</p>
<div class="sidenote">Former or conventional conceptions of rent and interest</div>
<p>3. <i>The problems of rent and of time-value are successive steps in the
explanation of the exchange value of indirect agents.</i> The term rent has
been so variously defined that no caution to the student as to its use
can be deemed superfluous. Until recently economists sought to confine
the term to the income from natural resources (or land). Rent, in their
conception, was the income from one group of goods, physically
distinguishable from another group of goods, called<span class="pagenum"><SPAN name="Page_414" id="Page_414">[Pg 414]</SPAN></span> capital, which were
supposed to yield interest. That is, rent and interest was each supposed
to bear much the same relation to a particular set of durable agents;
the difference between them was primarily in the agent that yielded them
(though there were other complicating thoughts) rather than in the
aspect of value they represented.</p>
<div class="sidenote">Rent and time-value as here used</div>
<p>Rent as defined in this volume has the much broader meaning of the
usufruct of any material agent as contrasted with the use-bearer.
Usufruct is a conception most intimately related to that of consumption
goods, but is logically one step further removed from want. Time-value,
as here considered, is a broader conception than that of contract
interest, for it has to do with the all-pervading element of time in its
influence on value. Some rents are logically, and in practical business
as well, not measured over periods of time, but at the moment of their
accrual. The measurement of time differences is mainly required in
setting a valuation upon a more or less permanent use-bearer. This
process, which is capitalization, has only recently been recognized to
be the discounting of all the future uses to their present worth. While
in its essence this is merely a problem in exchange value, it is the
highest, subtlest, and most difficult of such problems. Its
understanding presupposes rent, just as rent presupposes the analysis of
wants and marginal utility. It is the outer zone of the value problem,
carrying the thought of value years away (all but an eternity away) from
present enjoyment.</p>
<div class="sidenote">Different stages in value</div>
<p>While both rent and time value are widened so that each applies in some
manner to all durable agents, it is a grave error to conclude hastily
that the intention is to make synonymous the old terms rent and
interest. Rent and time-discount remain essentially different stages in
the value problem. Actual concrete net <i>economic incomes</i> as they arise
<i>are always rents</i>. Interest never accrues in a concrete form except
under the interest contract for a money loan (a contract income, not an
economic income), and this evidently is a species of contract rent.
Time-value is a phase of value connected<span class="pagenum"><SPAN name="Page_415" id="Page_415">[Pg 415]</SPAN></span> logically with investment, or
the calculation of future earning power; rents are both actual and
expectative, or future, but as realized incomes they always express
present earning power. Together, rent and capitalization embrace the
whole problem of valuing durable material agents.</p>
<div class="sidenote">Wages and profits related</div>
<p>4. <i>Wages and profits are of the same genus, the value of human services
of different grades.</i> The attempt has been made in the foregoing
treatment to show the unity between the problems of wages and profits,
and to point out the difference between the conditions that surround
them. Through the common characteristic, social utility, the employer's
service can be compared with the most ordinary or the most artistic
labor. Profits and wages, therefore, are simply different aspects of the
same question. A common power, or principle, is found in all objects of
value, a power to gratify human wants. In the variety of human services
and in material goods must be sought this unity.</p>
<p>The different kinds of services range from direct to most indirect
goods. The commonest labor may serve welfare at the moment or may be
embodied in a form to be used years later. In that light, wages seems a
more complex problem than either rent or capitalization. But the moment
the service embodies itself in a material good with future uses the
general theory of capitalization applies to it.</p>
<h4>§ II. RELATION OF VALUE THEORIES TO SOCIAL REFORMS</h4>
<div class="sidenote">"Orthodox" political economy</div>
<p>1. <i>The earlier theories of political economy implied a dismal view of
the future of the masses.</i> The theory of value one holds is sure to
affect his view of economic progress and of social reform. The theories
from the middle of the eighteenth to the middle of the nineteenth
centuries, however varied they were in other respects, nearly all gave a
gloomy view of the condition of the laboring-men. The physiocratic
school in France, the so-called "orthodox" economists in England (that
is, the writers from about 1800 to 1850 that were in<span class="pagenum"><SPAN name="Page_416" id="Page_416">[Pg 416]</SPAN></span> sympathy with the
landholding or commercial classes), and the socialistic or
laboring-class theorists, all inclined to this view. It was while this
view prevailed that Carlyle characterized political economy by the term
still sometimes heard—"the dismal science." The thinkers of that time
started their study of value at wages, and assumed that population would
always increase so fast as to force labor to a bare subsistence. The
other shares (or the other classes of society) were supposed then to
absorb all the surplus income. Economics to-day is not especially
lugubrious, and its more cheerful note is due as well to its changed
theory of value as to the evidence of advancing welfare among the
masses.</p>
<div class="sidenote">The gloomy socialistic theory</div>
<p>2. <i>The socialistic theory of value, akin to the other, holds that
capitalists absorb all the benefits of progress.</i> The socialists (of the
radical school) claim that their theory is merely the logical conclusion
to be drawn from the old "orthodox" theory, stated in its extremest
form. Usually, however, the orthodox theorists softened and modified
greatly the statement of their harsher views. The socialists have not
been willing to recognize any ameliorating conditions. They say:
economic theory shows that under a competitive condition of society the
laboring-man must be forever ground down in helpless misery; therefore
the only hope of the laboring masses is to do away with competitive
society and to substitute for it central, governmental control of all
industry. They did not and do not attempt to distinguish carefully the
part of production, due to brains and effort, from the part due to
ownership of capital. The socialist theory is a plan for political
agitation rather than a scientific theory of value. It was originated or
elaborated by men such as Karl Marx, Frederick Engels, and Ferdinand
Lasalle, as labor leaders and political agitators, who found a ready
weapon in the bungling economic analysis of the time. The claim of a
scientific basis for socialism has continued to be proudly made by their
followers, but it has a tottering support in their defective theory of
value.</p>
<p><span class="pagenum"><SPAN name="Page_417" id="Page_417">[Pg 417]</SPAN></span></p>
<div class="sidenote">George's single-tax theory</div>
<p>3. <i>The single-tax theory of value is that ground-rent automatically
absorbs all benefits of progress.</i> This is the most notable example of a
plan of social reform growing out of an abstract theory of value. While
the socialists first had their plan of social reform (or revolution), in
whose support Marx's fanciful theory of value was invented, Henry George
appears first to have got hold of a theory of value that suggested his
plan of social reform. Studying the political economy of Ricardo and
Mill, he accepted their ideas regarding the hopeless outlook of the
laboring classes, and their conception of the theory of ground-rent with
its false implication that landowners get all the surplus in society.
George thus came to believe that, with private ownership in land,
competition steadily robbed all but landlords, even the non-landholding
capitalist, of any share in the benefits of progress. This theory of
value is thought to explain all the poverty in the world. It calls, in
the single-taxer's opinion, for a radical measure of reform, namely, the
taking of all rent of land for public purposes as a common instead of an
individual income. If the theory of value on which it is based were
sound, the doctrine would have irresistible reasons in its favor; if it
is false, most of the argument falls to the ground, though there may
still be substantial reasons of a different nature for the exceptional
treatment of ground-rents for purposes of taxation.</p>
<div class="sidenote">Recent hopeful theories of wages; Walker's</div>
<p>4. <i>Recent theories of value assign to labor a more hopeful position.</i> A
most optimistic theory of wages is "the residual claimant theory,"
presented by Francis A. Walker. His view was that the various shares of
production, such as land-rent, the income from machinery, etc., and the
enterpriser's profits, were fixed by forces independent of wages, and
any increase in the product must therefore fall to the laborer as the
residual claimant. This conclusion has the one merit of explaining
somehow the rise in wages in the past century, but the fallacy of its
method is too evident to call for exposure. Not to enter into the
details of the method, it is<span class="pagenum"><SPAN name="Page_418" id="Page_418">[Pg 418]</SPAN></span> enough to note that it involves the
circular reasoning that land-rent is a surplus over cost of production,
and is fixed regardless of wages, whereas the cost of production itself
is made up of money wages.</p>
<div class="sidenote">Clark's wage theory</div>
<p>Another American economist, John B. Clark, is led by his theory of
profits to a most hopeful conclusion as to the future of wages. Profits
he considers to be essentially the reward for improvements in productive
processes, which gradually accrue to the general benefit. As profits
thus disappear, the average wage-earner is correspondingly uplifted, a
conclusion quite as hopeful as that of Walker. In discussing profits
above, dissent from the narrow conception of their source has been
expressed.</p>
<p>Some facts lend support to every one of these theories of social
progress, but other facts refuse to be harmonized. The temptation to get
a simple, dogmatic explanation of value should be resisted. When the
interrelation of the factors is recognized there is little likelihood of
concluding that some one of them will absorb all the benefits of
progress. One is not driven to the extreme either of optimism or of
pessimism. While the theory of value is not in itself a theory of
society, it greatly influences social conclusions. Clear economic
analysis is a condition to sound thinking on practical questions.</p>
<h4>§ III. INTERRELATION OF ECONOMIC AGENTS</h4>
<div class="sidenote">Organic nature of the productive process</div>
<p>1. <i>The industrial process is a unity and the different agents bear an
organic relation to each other.</i> The problem of value is not one of
physical division; it is one of logical analysis, and this is not
possible in isolation or without the competition of men. Production as
now carried on is a social process; the determination of market price is
a social process. The different agents are complementary goods, each
necessary to the best use of the various other agents. The value of seed
is not to be found apart from the use of the ground; or the value of the
leather apart from the shoemaker or the<span class="pagenum"><SPAN name="Page_419" id="Page_419">[Pg 419]</SPAN></span> thread he uses. When these
things are brought together in society their value is found by the
comparison and measurement of marginal utilities. Economic forces, like
other classes of forces, act and react upon each other. Two bodies
attract each other in space; two chemicals uniting are both transformed
into a substance differing from either. The economic result of materials
and men coöperating is something differing from either factor, yet
dependent on both.</p>
<div class="sidenote">The conventional divisions of economics</div>
<p>2. <i>The divisions of the older political economy are aspects of the
general problem of value.</i> The divisions conventional in the text-books
on political economy, namely, "production, exchange, distribution, and
consumption," have not been observed in the plan of this work. It has
not seemed possible to accept the view that each of these phases of the
vital economic process could be discussed completely apart from the
others. <i>Consumption</i> must be studied at the beginning, as the basis of
exchange value, and again at the end, when the circle of thought has
returned to the use man makes of wealth; and it pervades the whole
subject of value, for back of every price is the potential utility of
the good. <i>Exchange</i> is coextensive with the whole process of associated
industry; for wherever there is a price, there is exchange. Subjective
value outside a market forms a small, though not negligible, part of the
problem for the student of to-day. <i>Production</i> is implied in every
exchange, as exchange is in all social production. They are, indeed, but
different phases of the larger phenomenon, the economic process. Nor is
<i>distribution</i>, considered in its impersonal or economic form, any other
than the logical valuing of the shares of the factors in economic
production. Impersonal distribution is coextensive with economic
production. Whatever a good, logically considered, contributes to value
in production, that is its share of the product. Personal distribution,
it is true, brings in other great influences which have been partly
considered, but which will be treated more fully in the division to
follow, on the influence of the state in the distribution of income.</p>
<p><span class="pagenum"><SPAN name="Page_420" id="Page_420">[Pg 420]</SPAN></span></p>
<div class="sidenote">The broadest principle of value</div>
<p>3. <i>The law of diminishing returns is the broadest principle of value.</i>
The one character common to all goods is that their importance varies
with their quantity in any given connection. This is true of direct
goods whose power to gratify wants falls as the supply grows; it is true
of indirect goods, whose technical importance diminishes as the quantity
increases, and which when taken at any given cost can be applied, after
a point, only with diminishing advantage. The gradual extension of the
marginal principle from land used in agriculture to every conceivable
economic agent is the most important development of the last century of
economic theory.</p>
<div class="sidenote">Generality of the law of value</div>
<p>It being true that things are measured by the utility of the unit used
last, logically considered, the least change in the combination alters
the value of all the factors. Practical economic problems, therefore,
are dynamic, not static. The view that the shares of the different
factors are fixed by quite separate laws has not been accepted here. The
law of rent is the same as the law of wages in its essential point and
principle. It is a general law of value applied to a particular kind of
want-gratifier. The law of substitution likewise is a general law, for
within limits some substitution of factors is always possible along the
margin. That being true, every movement of price creates its own
resistance; substitutes will be found for materials, demand will
decline, and a new equilibrium of price will be attained.</p>
<div class="sidenote">Mutual employment of the factors</div>
<div class="sidenote">An ever changing problem</div>
<p>4. <i>The factors and agents of production mutually furnish the field of
employment for each other.</i> Each factor is dependent for its technical
efficiency on the presence of the other factors. If labor is plentiful
and machines are scarce, machines bear a high rent. In accordance with
the law of diminishing returns, the last unit of labor in that case
contributes little to the product, and labor gets low wages, while more
is attributed to the machine. Each machine thus may be considered to
offer a field for the employment of labor. If population increases and
land remains fixed, the need for<span class="pagenum"><SPAN name="Page_421" id="Page_421">[Pg 421]</SPAN></span> food raises the rental value of land.
But if population increases slowly, and capital and science progress,
the field for the employment of labor is enlarged; and if new lands are
opened up or new resources are discovered beneath the surface of the
land, the field for labor is still more enlarged and a greater share is
attributed to labor. This changing character of the problem must be
recognized; no share is foreordained in size.</p>
<p>The pursuit of the analysis of value along the lines of marginal utility
thus leads to conclusions far less mechanical, and, to the superficial
student, less simple than were the doctrines prevailing in the older
economics. But the conclusions are, let us hope, more exact and more
applicable to the real world, enabling the student to arrive at juster
views of the present interests and of the future welfare of society.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_422" id="Page_422">[Pg 422]</SPAN></span></p>
<h2>DIVISION B—RELATION OF THE STATE TO INDUSTRY</h2>
<hr class="chap" />
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