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For millennia, literally, scholars and theorists have tried to deduce
how items attained their 'value'. From pre-Christian to pre-Keynesian
times, various strands of thought have proposed (often divergent)
explanations for this phenomenon. In this paper Martin Fogarty
analyses the 'value' propositions of several prominent thinkers,
loosely grouped as Pre-Classical, Classical and Neo-Classical
theorists.
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"He who cannot draw on 3000 years of history is living merely from
hand to mouth"-Goethe
The debate on the theory of value, which was initiated in Ancient
Greece and which became dormant during the Middle Ages, later
re-emerged at the close of the seventeenth century to dominate
economic thought for the next 200 years. Even today its primary
importance is such that Schumpeter claimed that "the problem of value
must always hold the pivotal position, as the chief tool of analysis
in any pure theory that works with a rational schema." Similar
hypothetical solutions varied from time to time. Henceforth, it is the
intention of this paper to trace the history of value-theories from
the late 1600's to the late 1800's which is crucial to an
understanding of economic thought today.
Considering that this piece is hyperbolic in scope, the analysis shall
be narrowed down to the following structure. Firstly, an overview to
the essay shall be created by briefly sketching Aristotelian,
Scholastic and Mercantilistic views on value. Secondly will follow an
analysis of the contribution of pre-classicalist writers like Petty,
Cantillon, Galiani and Law to the debate. Thirdly, the supply oriented
theory of value put forward by classical economists like Smith,
Ricardo, Marx and Mill shall be examined. Fourthly, Jevons and
Mengers' neo-classical attempt to replace the classicalists with their
demand oriented theory of value will be scrutinised. Finally, both
Walras' and Marshall's respective resolution to the conflict shall be
investigated by individually accommodating the interactions of both
supply and demand as determinants of value within their overall
economic framework.
Early Economic Thought
The first great landmark in the long and tortuous intellectual
struggle with the riddle of value, was laid by the philosophers of the
Athenian Academy in the 4th century BC. It was Aristotle (384-322) who
held that the source of value was based on need, without which
exchange would not take place. Originally, it was he who distinguished
between value in use and value in exchange- "Of everything which we
possess, there are two uses; For example a shoe is used for wear and
it is used for exchange". Despite these novel insights, the legacy of
Aristotle is minimized due to his lack of investigation in this area.
While the Scholastics later adopted and accommodated these views to
Christian thought, like the Aristotelian philosophers before them,
economics was not regarded as an independent discipline but merely as
an integral part of ethical and moral philosophy. As a result, the
debate on value was centred and henceforth retarded by a normative
approach - what value should 'justly' be, instead of what actually is.
During this period, utility was widely held as the determinant of
value with only a minority of theorists such as St. Thomas Aquinas
(1225-1274) and John Duns Scotus (1265-1308) taking note of the cost
of the production side. However, historians commonly excuse the
schoolmen for their lack of insight on value as "Early medieval
society was not a suitable environment for an unrestricted play of
forces of supply and demand."
The search concerning value was continued in the direction of utility
by early mercantilists during the 16th and the first half of the 17th
century. The supremacy of this argument was highlighted in 1588 when
Bernardo Davanzati unsuccessfully attempted to construct a utility
theory of value in Lecture On Money. It is not surprising that they
concentrated on the determinants of the demand for goods (utility),
since the merchants' profits depended on the exploiting of the
difference between the market buying and the selling prices rather
than controlling the production process. For medieval theorists, value
depended not on any intrinsic value but on utility and scarcity.
Shakespeare's Richard III battle plea "A horse, a horse, my kingdom
for a horse" epitomises the subjective approach to value of this era.
Yet despite the failings and limitation of this one-sided method, this
period is viewed as embryonic with regard to value theories, and one
which would spawn subsequent economic developments.
Pre-Classical Thought
It was only at the end of the seventeenth century when economists
following a Cartesian philosophy of deduction, broke away from the
dominant mercantilistic utility view and looked for a solution in the
cost of production. William Petty (1623-1687) who was influenced by
the scientific advances of his era, abandoned the subjective theory of
value and instead objectively searched for the natural and intrinsic
laws of reality - of which 'natural value' was one of them. According
to Petty, the market price ('actual price') of any commodity would
fluctuate perpetually around its natural value ('natural price'). The
determinants of this natural value were deduced as the factors of
production - land and labour.
In keeping with his mathematical nature, Petty attempted to reduce his
theory of value to a labour one only, by looking for a 'par' value for
land in terms of labour forces. In the political Anatomy of Ireland
(1691), he states that the unit of measure consisted of "The
easiest-gotten food of the respective countries of the world"- average
daily diet necessary to sustain a worker. Although he successfully
anticipated the classical-Marxian theory of subsistence wages and
surplus, he also inherited the endless difficulties associated with a
labour cost theory of value.
Richard Cantillon (168?-1734) who was another practitioner of the
Cartesian approach also began with the labour-and-land theory of
value. Although, similar to Petty in that he reduces the determinants
of intrinsic value in terms of one factor, unlike him, Cantillon, who
was influenced by French agrarian protectionists, chose land.
Cantillon finds his 'par' value by equating the value of a labourer
with that of twice the produce of the land he consumes, while allowing
for variations in the labourers' skills and status. Once this 'par'
value is calculated, the intrinsic values of any good can be reduced
to land only. With his assumptions of constant returns to scale,
Cantillon provides us with his land theory of value. He also
originally shows us how resources were allocated between different
markets when the market price diverges from his intrinsic 'land'
value. Unfortunately, Cantillon's land theory, like Petty's labour
theory, was only a true description of value in highly specific cases.
Meanwhile the medieval subjective approach to value was continued by
another branch of pre-classical economists which included people like
Nicholas Barbon (1640-1698) who thought that the natural value of
goods was simply represented by their market price. For him "the value
of all wares arise from their use; things of no use, have no value, as
the English phrase is, they are good for nothing". Furthermore, on the
continent, the Italian Ferdinando Galiani (1728-1787) borrowed the
early mercantilistic writings of Davanzati and Montanari on the
subjective nature of value. He devoted his time to developing a theory
of utility value and even implicitly described the notion of
diminishing marginal utility. His deductions just "lacked the concept
of marginal utility" of the neo-classical economists, Jevons and
Menger.
Although Galiani vaguely accounted for the cost of production in his
utility value theory, he failed to develop it into a fully-fledged
supply and demand analysis. This monumental project was taken up by
the Scotsman John Law (1671-1729). In his Essay on a Land Bank, Law
outlined the old water / diamond paradox of value, in which
comparatively 'useless' diamonds are more highly valued than the more
'useful' water and reconciled the mystery by using a supply and demand
analysis. Unlike his predecessors and his immediate successors (until
Walras and Marshall), Law used both demand and supply factors in
determining the value of a good which has a use in society. Henceforth
any changes in the value of goods were due to a change in the quantity
supplied or demanded.
Although John Locke (1632-1704) in, Some Considerations on the
Consequences of Lowering of Interest and the Raising the Value of
Money, had developed a theory of price determination earlier, it
lacked the clarity, precision and understanding of Law. In Money and
Trade Considered, Law corrects Locke's unpolished value by stating
that "The prices of goods are not according to the quantity in
proportion to the vent, but in proportion to the demand" .
Surprisingly, Law's early solution to value theory gained little
following owing probably to his failed financial operations in France.
Even more surprisingly has been the reduction of Law's contributions
in this area to mere footnotes in the mainstream economic history
books. Unfortunately, for the development of value theory, this
dualistic analysis was suppressed for almost 200 years, until its
resurrection at the close of the 19th century.
Classical Thought
The publication of Adam Smith's (1723-1790) Wealth of Nations in 1776
heralded the rise of the classical school and swung the value debate
back towards Petty's objective labour theory of value. According to J.
Niehans, the classical emphasis on the labour cost was "a step
backward" compared to the pre-classical analysis. Indeed, Smith who
borrowed the water / diamond paradox from Law without acknowledging
it, failed to resolve the riddle and the resulting relationship
between use-value and use-exchange, by mistakenly focusing on total
rather than marginal utility.
His confusion is further shown in his experimentation with three value
theories. He provided a labour cost and a labour command theory of
value for a primitive society and finally a cost of production theory
for an advanced one. In his "Nation of hunters" analogy, Smith's
notion of labour cost of value is determined by the quantity of labour
which is measured by wages which is also extended to his labour
command theory- "Value of any commodity.......to the person who
processes it and who means not to use or consume it himself, but to
exchange it for other commodities, is equal to the quantity of labour
which enables him to purchase or command" . However, when he perceived
that if wages were not the same proportionate part of final prices of
all goods, he then realised that his labour theory of value for an
advanced economy would not hold. Instead, it appears that he opted for
a cost of production value theory consisting of land, labour and
capital value theory .
David Ricardo (1772-1823) who adopted Smith's abandoned labour
hypothesis tried to avoid his circular reasoning of measuring labour
with wages. Instead he felt that value depended upon the quantity of
labour necessary for production which would be calculated by time.
More precise and clearer than Smith, Ricardo stated that "Possessing
utility, commodities derive their exchangeable value from two sources
: from their scarcity and from the quantity of labour required to
obtain them." Although he acknowledged that value could be determined
by scarcity alone (e.g. rare documents), he felt that these were
insignificant cases. His value theory therefore only applies to freely
reproducible goods in competitive markets.
Discarding Smith's labour command and cost of production theories of
value, Ricardo attempted to prove his labour theory of value against
its inherent difficulties. To bolster his hypothesis, he used time as
a measure of labour quantity, accommodated the different skills of
labour by comparing wages to productivity and also assumed that
capital influence on value was neutralised since it was merely stored
up in labour. He also added a theory of land rent, in which he claimed
that rent is price determined (not price determining) and provided
reasons why profits had varying effects on value (different capital
intensive industries). Despite these attempts, Ricardo in the end was
forced to accept that there were other forces affecting value which
prevented a pure theoretical labour theory of value. Nevertheless he
still believed that it was the quantity of labour to produce goods
that was the crucial element in his calculation.
Karl Marx's (1818-1883) approach to value was essentially Ricardo's
labour theory of value. According to Marx, the values of "All
commodities are only definite masses of congealed labour time." As an
advocate of Ricardo's original theory, he also followed and built on
his solutions to the labour value theory's inherent deficiencies.
Although Marx used the classical concepts of value he applied his vast
philosophical and sociological knowledge to reach conclusions in
Capital that diverged radically from them. In his labour theory, he
developed his original rate of exploitation (s'=s/v) and its resulting
critique of capitalism-"Derriere le phenomene du profit se cache la
realite do surtravail." Like Aristotle, exchange of value or more
appropriately exchange of 'just' value had for Marx, moral and
judicial implications as well as economic ones.
Despite John Stuart Mill's (1806-1873) claim to the continuity of
Ricardo's labour theory of value, his work in retrospect was closer to
Marshall and to the approaching neo-classical school. Mill gave up the
classical-Ricardian search for absolute value for his belief that "The
value which a commodity will bring in any market is no other than the
value which, in that market, gives a demand just sufficient to carry
off the existing supply." Although lacking the tools of the supply and
demand schedules, Mill clearly recognised the effects of demand on the
supply in different time periods of a value theory. Although he
acquired a more advanced comprehension on the subject of value than
his contemporary theorists did, unfortunately it led him to
prematurely and embarrassingly state in 1848 that "Happily, there is
nothing in the laws of value which remains for the present or any
future writer to clear up; the theory of the subject is complete."
Neo-Classical Thought
Although the origins of modern utility theory can be traced back to
Mountifort Longfield in 1834 at Trinity College Dublin it was William
Jevons (1835-1882) with his Theory of Political Economy and Carl
Menger's (1840-1921) Principles of Economics who both developed the
new tool of marginal analysis in 1871 as a means of understanding
value. For the rising neo-classical school in the 1870s, the classical
cost of production theory of value seriously lacked generality -
especially in determining value of goods with inelastic supply curves.
Instead, Jevons and Menger separately formulated their marginal
utility theory, in which it was calculated that "Value depends
entirely on utility." Like Davanzati in the 16th century, they felt
that no matter what costs were incurred in producing a good, when it
arrived on a market its value would depend solely on the utility the
buyer expects to receive.
Menger used his marginal utility table to explain the old water /
diamond paradox. The value of diamonds was greater than the value of
water because it was marginal utility and not total utility that
determines consumer choice and hence value. From this they also argued
that value comes from the future and not past production. Henceforth,
the factors of production are not price-determining but
price-determined, as Jevons clearly states- "Cost of production
determines supply, supply determines final degree of utility, final
degree of utility determines value." Jevons and Menger like their
predecessors before, erred in trying to find a simple one-way, cause
and effect relationship between value, and in their case utility. It
took the intellect of Leon Walras and Alfred Marshall to see that both
the cost of production (supply) and utility (demand) were
interdependent and mutually determinant of each other's values.
Leon Walras (1834-1910) also independently discovered the concept of
marginal utility although he went beyond Jevons and Mengers
application of it to merely a utility value theory. He did not see
their simple and direct causal link from subjective utility to value.
Instead, he saw a complex interrelated and interactive economic
system. In his Elements of Pure Economics, he created his theoretical
model of General Equilibrium as a means of integrating both the
effects of the demand and supply side forces in the whole economy.
This mathematical model of simultaneous equations concluded that "In
general equilibrium everything depends upon everything else".
Meanwhile, Alfred Marshall (1842-1924) was also amalgamating the best
of classical analysis with the new tools of the marginalists in order
to explain value in terms of supply and demand. He acknowledged that
the study of any economic concept, like value, is hindered by the
interrelativeness of the economy and varying time effects. As a
result, Marshall who differed from Walras' general schema, instead
used a partial equilibrium framework, in which most variables are kept
constant, in order to develop his analysis on the theory of value.
Marshall divided his study into four time periods. Firstly, in the
market period where time is so short that supply is fixed, value of a
good is determined by its demand. Secondly, in the short-run period,
firms can change their production but cannot vary their plant size,
which allows supply as well as demand to have an effect on value. In
the long-run periods where plant size can be altered, the large
effects of the supply side on value depends on whether the industry of
a particular good has constant, increasing or decreasing costs to
scale. Finally, in the secular period in which technology and
population are allowed to vary, the supply side conditions dominate
value.
For Marshall a correct understanding of the influence of time and
interdependence of economic variables would resolve the controversy
over whether it was the cost of production or utility which determines
value. In general, however he felt that it was fruitless to argue
whether demand or supply determines value as "we might as reasonably
dispute whether it is the upper or under blade of a pair of scissors
that cuts a piece of paper, as whether value is governed by utility or
costs of production." Any attempt to find one single cause of value as
others had unsuccessfully attempted in the past, were doomed to
failure.
Conclusion
>From its origins in medieval times, the historical evolution of the
value debate became locked into a centuries old dialectical conflict
between the objective and subjective approaches. This study has traced
the waves of value theories which oscillated back and forth towards
each approach, until Walras and Marshall accommodated both rivaling
approaches of value within their separate General and Partial
Equilibrium frameworks. Yet John Law in his Essay on the Land Bank,
had provided this supply and demand approach almost two centuries
before which has remained unacknowledged and ignored by most
conventional economic history books. This episode shows the importance
and value of writings from earlier economic theorists who may possess
insights into present day and future problems. Armed with the
knowledge of economic thought from various epochs, current economists
who are inevitably chained to their contemporary condition can
henceforth avoid the theoretical 'cul de sacs' of their ancestors. One
laments the fact that if classical economists had held Goeth's
appreciation, and close investigation of past theorists, economics
might not have been condemned to the fruitless one dimensional (supply
oriented) approach of value theory, until the end of the 19th century.
In the light of this failing in the history of value theory, one
should remember the biblical warning "Those who forget history are con
demned to relive it".
Bibliography
Commentaries :
Deane, P. (1978) The Evolution of Economic Ideas, Cambridge University
Press, Cambridge
Dobb, M. (1973) Theories of Value and Distribution Since Adam Smith,
Cambridge University Press, Cambridge
Gordon, B. (1975) Economic Analysis Before Adam Smith, Macmillan,
London
Gouverneur, J. (1994) Les Fondements de l'Economie Capitaliste
Landreth, H. (1976) A History of Economic Theory, Scope, Method and
Content, Houghton-Mifflin, London
Niehans, J. (1990) A History of Economic Theory, Johns Hopkins
University Press, Baltimore
Roll, E. (1992) A History of Economic Thought (5th ed.), Faber, London
Rubin, I. (1979) A History of Economic Thought, Ink Links Ltd., London
Schumpeter, J. (1991) History of Economic Analysis, Allen & Unwin,
London
Screpanti, E. and Zamagni, S. (1993) An Outline of The History of
Economic Thought, Clarendon Press, Oxford
Spiegel, H.W. (1991) The Growth of Economic Thought (3rd ed.), Duke
University Press, London
Original Texts:
Barbon, N. (1690) A Discourse of Trade, T. Milbourn, London
Jevons, W.S. (1970) The Theory of Political Economy, Penguin,
Harmondsworth
Law, J. (1994) Essay on a Land Bank, Aeon Publishing, Dublin
Law, J. (1996) Money and Trade Considered with a Proposal for
Supplying The Nation With Money, Augustus M. Kelly, New York
Marshall, A. (1920) Principles of Economics, Macmillan, London
Marx, K. (1974) Capital, Lawrence & Wishent, London
Mill, J. S. (1862) Principles of Political Economy, Parker, son, and
Brown, London
Ricardo, D. (1817) On the Principles of Political Economy and
Taxation, London
Smith, A. (1991) An Enquiry into the Nature and Causes of the Wealth
of Nations, Oxford University Press, Oxford
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