The true nature of value

Preface

It was not until the early 70' s, when the money question had become a political issue of sufficient gravity to overshadow other questions growing out of the Civil War, that it had more than a passing interest for the average citizen and voter. Prior to that time I had vaguely shared, or at least had not rejected, the popular belief that the premium on gold was largely or wholly due to the speculative manipulations, or traitorous machinations, of a powerful but unscrupulous group of rebel sympathizers on the stock exchange. Indeed, I think I was at one time disposed to agree with those who advocated punishment for those who were responsible for this apparent evil. I say " apparent" evil because I was so situated that I could not help perceiving that as the premium on gold rose or fell, staple products, both agricultural and manufactured, domestic and foreign, tended to advance or decline proportionately. While the popular tendency was to regard each increase in the premium on gold as objectionable, advances in the prices of other products, especially

Vl PREFACE those of domestic origin, obviously had their compensations.

Finally, it began to dawn upon my mind that there might be some truth in the contention of those who maintained that the premium on gold was largely, if not wholly, due to the fact that its value, like that of other commodities, was expressed in terms of a depreciated currency, and that it was not gold that went up but currency that went down, and vice versa. Evidently there were two sides to the money question, and I became imbued with a desire to investigate it more thoroughly.

I soon arrived at the conviction that since money was universally accepted as the standard of value, the only way to have a perfect understanding of the money question was to discover exactly what was meant by the term "value." The most common definitions of this term at that time were "power in exchange" and "purchasing power," but they did not make clear what constituted or conferred value, nor what measured it. I accordingly read work after work by the leading authors on the subject, but without being able to find any exposition of the nature of value that appealed to me as correct or complete, or one that furnished a practical working-theory applicable to the busi-

PREFACE vii ness affairs of every-day life — a test, by the way, by which every theory of value will ultimately have to stand or fall. I was thus thrown upon my own resources and compelled to analyze the matter for myself. The theory of value that follows is the result of a practically uninterrupted study of the subject for a period of over thirty years.

As this book is designed to assist those who, like myself, wish to understand the money problem and to arrive at a correct solution of the various social problems that confront us, it has been my constant endeavor to put my theories into the simplest possible form and language.

Since there are some points of resemblance between my exposition of this theory and that of Bastiat, a French author who, it appears, formulated a service theory of value during the last century, I desire to explain, in justice to myself, that my conclusions were reached quite independently of any knowledge of Bastiat 's theories or writings. Indeed, it is only recently that my attention was called to the fact that this writer, neglected or forgotten by political economists of the present day, had formulated a service theory somewhat similar to mine, though I am told, far less complete. Every line of my work, from chap, ii on, was written and put in viii PREFACE its present form before I learned of the contributions of Bastiat quoted in the introductory chapter. These quotations were brought to my attention and compiled for me by a distinguished writer on economics and professor in one of our great universities to whom I had submitted the result of my labors, and to whom I am greatly indebted for criticism and suggestions as to its arrangement for publication. My definite conception of Objective Hindrances as the measure of that service utility that alone constitutes Value should relieve me of the charge of ambiguity that I learn has been brought against the Service Theory as presented by Bastiat — a defect, by the way, that, judging by my own experience and his recognized genius, would, but for his premature death, have been remedied by him.

In my judgment the theory presented by me in the following pages explains much that has heretofore seemed vague and inexplicable, and it throws much light not only on economic, but on social, and ethical questions. I shall show that equity demands that compensation should always be in proportion to the service rendered, a result that is automatically secured whenever free competition is established; but that human greed impels every man to strive for a monopoly

PREFACE ix which would enable him to demand and secure compensation, not on the equitable basis of the utility of his service in supplying a product, — that is, in rendering it available for use — but on the inequitable basis of the utility of the product itself.

Chap, xiii contains a practical application of the Service Theory to a discussion of Metallic and Paper Money. The perfect adaptedness and entire sufficiency of this theory as a means of throwing needed light upon obscure phases of this subject should be manifest to the unprejudiced reader. If this chapter seems to contain repetitions of matter that has necessarily appeared in preceding chapters, it is not by oversight but by intention, in order that the discussion of money, the unit or standard of value, might be complete in itself. Incredible as it may seem to those who are now resting in fancied security, the " money question," which in every country and in every age has come, and in the very nature of things must come, to the surface in times of great financial stress, can never be permanently settled until a true conception of the nature of that value of which it is the recognized standard has been conclusively established.

In 1902 I sought and obtained permission to

PREFACE present my views on the question of value before the American Economic Association at its annual meeting in Philadelphia, on December 28; but the paper I read on that occasion was only a brief summary of the subject as far as then worked out.

Confident that my theory will stand every test that can be applied to it, I now submit it to the public.

Rufus Farrington Sprague

Greenville, Mich.

Oct. 21, 1907

Contents

IAPTER PAGE

I. Introduction i

§ i. Aim to Explain Exchange Value . . 3

Chapter I Introduction

§ i. It should be clearly understood at the beginning that the purpose of this study is to ascertain the true principles regulating exchange value, as they work in the markets of today. However differently the case may here be presented from that found in modern treatises, the object aimed at is not the less an explanation of exchange value.

Since the value of the service is fully insisted upon in the following exposition, it seems best to present herewith Bastiat's service theory, in a brief but careful way, in order that the differences and resemblances may be noted by the reader. My own analysis, however, which is presented in these pages, was fully worked out, it is needless to say, without any knowledge of Bastiat's treatment.

§ 2. Bastiat's service theory was propounded in his Harmonies Economiques, as the pivotal part of his whole conception of the science of political economy. 1 It will be best to give this theory in his own words:

1 The quotations have been taken from Stirling's translation: Harmonies 0} Political Economy, by Frederic Bastiat, translated

Let us analyze the co-operation of nature of which I have spoken. Nature places two things at our disposal — materials and forces.

Most of the material objects which contribute to the satisfaction of our wants and desires, are brought into the state of utility which renders them fit for our use only by the intervention of labour, by the application of the human faculties. But the elements, the atoms, if you will, of which these objects are composed, are the gifts, I will add, the gratuitous gifts, of nature

It is very evident, that if man in an isolated state must, so to speak, purchase the greater part of his satisfactions by an exertion, by an effort, it is rigorously exact to say that prior to the intervention of any such exertion, any such effort, the materials which he finds at his disposal are the gratuitous gifts of nature

I add now, and by anticipation, that things begin to possess value only when it is given to them by labour. I intend to demonstrate afterwards that everything which is gratuitous for man in an isolated state is gratuitous for man in his social condition, and that the gratuitous gifts of nature, whatever be their utility, have no value. I say that a man who receives a benefit from nature directly and without any effort on his part, cannot be considered as rendering himself an onerous service, and, consequently, that he cannot render to another any service with reference to things which are common to all.

from the French, with a notice of the life and writings of the author, by Patrick James Stirling, London, John Murray, i860, 8vo, pp. xl+298. The sixth volume of (Euvres completes de Frederic Bastiat, Guillaumin et Cie, Paris, 1870, contains the Harmonies unabridged. The (Euvres choisies, i2mo, edited by Felix Alcan, omits the whole discussion of value, and is of little use.

INTRODUCTION 5

Now, where there are no services rendered and received, there is no value.

All that I have said of materials is equally applicable

to the forces which nature places at our disposal

But these natural forces, in themselves, and apart from all intellectual or bodily exertion, are gratuitous gifts of Providence, and in this respect they remain destitute of value through all the complications of human transactions

The irresistible tendency of the human mind, stimulated by self-interest, and assisted by a series of discoveries, is to substitute natural and gratuitous co-operation

for human and onerous concurrence What is the

result of it ? This, that in every product the gratuitous element tends to take the place of the onerous; that utility, being the result of two collaborations, of which one is remunerated and the other is not, Value, which has relation only to the first of these united forces, is diminished, and makes room for a utility which is identically the same, and this in proportion as we succeed in constraining nature to a more efficacious co-operation. So that we may say that mankind has as many more satisfactions, as much more wealth, as they have less value. Now the majority of authors having employed these three terms, utility, wealth, value, as synonyms, the result has been a theory which is not only not true, but the reverse of true 2

Thus, the definition of the word Value, in order to be exact, must have reference not only to human efforts, but likewise to those efforts which are exchanged or exchangeable. Exchange does more than exhibit and measure

2 Stirling's translation, pp. 61-63.

values — it gives them existence. I do not mean to say that it gives existence to the acts and the things which are exchanged, but it imparts to their existence the notion of value.

Now, when two men transfer to each other their present efforts, or make over mutually the results of their anterior efforts, they serve each other; they render each other reciprocal service.

I say then, Value Is the Relation of Two Services EXCHANGED. 3

The materials and forces given by God to man gratuitously, at the beginning, have continued gratuitous, and are and must continue to be so through all our transactions; for in the estimates and appreciations to which exchange gives rise, the equivalents are human services, not the gifts of God. 4

As Mr. Cairnes 5 has shown, Bastiat added nothing new in asserting the gratuitousness of the gifts of nature; but he failed to understand that even a gratuitous gift of nature might be limited in supply and thus acquire value; he failed to see that a gratuitous gift might not be in such abundance as to be common to all. Hence, he was in error in insisting that only "that portion of utility which is due to human labour becomes the object of exchange." This theory would not explain why a diamond picked up on the seashore might bear a high price.

3 Stirling's translation, pp. 107, 108. 4 Ibid., p. 221.

s Essays, IX, pp. 327-37.

Introduction

With Bastiat, however, value depends upon the service rendered, and varies with the magnitude of the service; and all exchange is an "exchange of services." Hitherto, Bastiat has excluded gratuitous gifts of nature from having any influence on value; but by his use of the word " service" he introduces under it all the omitted elements of value other than human effort. The ambiguity, or equivocal meaning of "service," has thus been pointed out by Cairnes as covering up a gross fallacy. But what Bastiat has to say on this point is contained in the following passages :

To make an effort in order to satisfy another's wants is to render him a service. If a service is stipulated in

return, there is an exchange of services If the

exchange is free, the two services exchanged are worth

each other Less effort implies less service, and

less service implies less value. 6 ....

I take a walk along the sea-beach , and I find by chance a magnificent diamond. I am thus put in possession of a great value. Why ? Am I about to confer a great benefit on the human race ? Have I devoted myself to a long and laborious work ? Neither the one nor the other. Why, then, does this diamond possess so much value ? Undoubtedly because the person to whom I transfer it considers that I have rendered him a great service, — all the greater that many rich people desire it, and that I alone can render it. 7

6 Stirling's translation, pp. 44, 45. 7 Ibid., p. 113.

The reason for a natural gift of nature having value is thus the power of the object to satisfy a widely felt want, coupled with the limitation set by nature to objects possessing this capacity. And yet Bastiat had earlier denied value to gratuitous gifts of nature. Again, while saying he finds value wherever an exchange of services takes place, he also makes the following admission regarding gratuitous gifts of nature: Frequently a material substance; sometimes forces furnished gratuitously by nature; always human services interchanged, measuring each other, estimating, appreciating, valuing one another, and exhibiting simply the result of that valuation — or Value. 8

In connection with the value of land he sets forth his doctrine on this particular point more fully:

[Land] has value, in fact, because it can be no longer acquired without giving in exchange the equivalent for this labour [the labour expended upon it]. But what I contend for is, that this land, on which its natural productive power had not originally conferred any value, has no value yet in this respect. This natural power, which was gratuitous then, is gratuitous now, and will be always gratuitous. We may say, indeed, that the land has value, but when we go to the root of the matter we find, that what possesses value is the human labour which has improved the land, and the capital which has been expended on it. 9

8 Stirling's translation, p. 124. 9 Ibid., pp. 249, 250.

INTRODUCTION

Yet, in regard to land on which nature has conferred desirable fertility, he presents the case of a possible objector, and in the paragraph next following he gives his answer:

Everyone [says the objector] who purchases a land estate examines its quality, and pays for it accordingly. If, of two properties which lie alongside of each other, the one consists of a rich alluvium, and the other of barren sand, the first is surely of more value than the second, although both may have absorbed the same capital, and to say truth, the purchaser gives himself no trouble on that score

The answer to the objection now under consideration is to be found in the theory of Value explained in the fifth chapter of this work [Harmonies], I there said that value does not essentially imply labour; still less is it necessarily proportionate to labour. I have shown that the foundation of value is not so much the pains taken by the person who transfers it as the pains saved to the person who receives it; and it is for that reason that I have made it to reside in something which embraces these two elements — in service. I have said that a person may render a great service with very little effort, or that with a great effort one may render a very trifling service. The sole result is, that labour does not obtain necessarily a remuneration which is always in proportion to its intensity, in the case either of a man in an isolated condition, or of man in a social state. 10

This exposition is criticized by Cairnes in that Bastiat selected the term "service" expressly io TRUE NATURE OF VALUE

because its meaning was equivocal; for the latter is shown to hold that value depends upon other conditions than human effort — such as the utility of the object, the limitation of its supply, or the superiority of some agents furnished by nature over others. And here Bastiat falls away from any theory original to himself, and accords more or less with the exposition of value given by many other authors. His purpose in desiring to show that, under a regime of freedom, all exchanges were " services for services," was to make an argument in favor of the essential justice of all that takes place in the industrial world. This, however, could not logically be done by taking refuge under an equivocal term, "service." He tried to make the term connote not only a benefit conferred upon another, but also "a moral judgment on the facts to which it was applied." 11

It would be well for our purposes to report in further detail the working of Bastiat's theory of service as a regulator of value. 12

A multitude of circumstances may augment the relative importance of a Service. We find it greater or less, according as it is more or less useful to us — according as a greater or less number of people are disposed to render it to us — according as it exacts from them more or less

11 Cairnes, op. cit., p. 342.

12 The gist of it is to be found in Stirling, pp. 106-26.

INTRODUCTION II labour, trouble, skill, time, previous study, — and according as it saves more or less of these to ourselves. Value depends not only on these circumstances, but on the judgment we form of them; for it may happen, and it happens frequently, that we esteem a service very highly because we judge it very useful, while in reality it is hurtful. 13

If, in laying down the general principle, that Utility is the foundation of Value, you mean that the Service has value because it is useful to him who receives it and pays for it, I allow the truth of what you say. It is a truism implied in the very word service.

But we must not confound the utility of the air with the utility of the service [which forces air into a diving bell]. They are two utilities distinct from each other, different in nature, different in kind, which bear no proportion to one another, and have no necessary relation. There are circumstances in which, with very slight exertion, by rendering a very small service, or saving verv little trouble, I may bring within the reach of another an article of very great intrinsic utility. 14

Nature has so constituted me that I must die if I am deprived of an opportunity, from time to time, of quenching my thirst, and the well is a league from the village. For this reason, I take the trouble every morning to fetch the water of which I have need, for in water I have recognized those useful qualities which are calculated to assuage the suffering called thirst. Want, Effort, Satisfaction — we have them all here. I have found Utility — I have not yet found Value.

But, as my neighbour goes also to the fountain, I say to him — "Save me the pains of this journey — render me

I 3 Stirling, op. cit., p. 109. n Ibid., p. in.

the service of bringing me water. During the time you are so occupied, I shall do something for you, I shall teach your child to spell." This arrangement suits us both. Here is an exchange of two services and we are enabled to pronounce that one is worth the other. The things compared here are two efforts, not two wants and two satisfactions; for by what common standard should we compare the benefit of drinking-water and that of learning to spell. 15

We may say with propriety that water is useful, because it has the property of allaying thirst; and it is the service which has value, because it is the subject of a convention previously debated and discussed. So true is this, that if the well is brought nearer, or removed to a greater distance, the Utility of the water remains the same, but its Value is diminished or increased. Why ? Because the service is less or greater. The value, then, is in the service, seeing that it is increased or diminished according as the service is increased or diminished. 16

I give utterance to no paradox when I affirm that Utility and Value, so far from being identical, or even similar, are ideas opposed to one another. Want, Effort, Satisfaction: here we have man regarded in an Economic point of view. The relation of Utility is with Want and Satisfaction. The relation of Value is with Effort. Utility is the Good, which puts an end to the want by the satisfaction. Value is the Evil, for it springs from the obstacle which is interposed between the want and the satisfaction. But for these obstacles, there would have been no Effort, either to make or to exchange; Utility would be infinite, gratuitous, and common, without

j s Sterling, op. cit., p. 112. > 6 Ibid., p. 113.

INTRODUCTION 13

condition, and the notion of Value would never have entered into the world. In consequence of these obstacles, Utility is gratuitous only on condition of Efforts exchanged, which, when compared with each other, give rise to Value. The more these obstacles give way before the liberality of nature and the progress of science, the more does utility approximate to the state of being absolutely common and gratuitous, for the onerous condition, and, consequently, the value diminish as the obstacles diminish. 1 7

In respect of scarcity, the point on which, according to Cairnes, he lays himself open to criticism, is treated by Bastiat as follows :

According to Senior, of all the circumstances which determine value, rarity is the most decisive. I have no objection to make to that remark, if it is not that the form in which it is made presupposes that value is inherent in things themselves — a hypothesis the very appearance of which I shall always combat. At bottom, the word rarity, as applied to the subject we are now discussing, expresses in a concise manner this idea, that, caeteris paribus, a service has more value in proportion as we have more difficulty in rendering it to ourselves; and that, consequently, a larger equivalent is exacted from us when we demand it from another. Rarity is one of these difficulties. It is one obstacle more to be surmounted. The greater it is, the greater remuneration do we award to those who surmount it for us. Rarity gives rise frequently to large remunerations, and this is my reason for refusing to admit with the English Economists that i 4 TRUE NATURE OF VALUE

Value is proportional to Labour. We must take into account the parsimony with which nature treats us in certain respects. The word service embraces all these ideas and shades of ideas. 18 18 Sterling, op. cit., p. 141-

DEFINITIONS

Chapter II Definitions

§ i. Wealth is the unconsumed results of the productive efforts of the past still available for consumption or employment as a means of adding to the subsequent well-being of man. Under wealth must also be included lands of superior productivity whose advantages accrue to an individual as a result of a recognition of his property right therein — that is, lands relatively superior to no-rent lands. Since property rights in land, and the advantages which desirable opportunities in production confer upon its possessor, are legally transferable, land enters the economic sphere as having exchange value proportionate to the advantages accruing as a result of such possession and control. Moreover, there should be included under wealth property rights in, and consequent control of, devices for adding to the effectiveness of labor in production ; an illustration of which would be a device protected by a patent right.

Exchange value is the ratio of exchange between two or more articles. It should be equitable to both parties to the exchange. In no case is it conceivable that value inheres in a thing. What value is, is one thing; what causes a commodity to have exchange value, is another thing. The latter is the main object of the present investigation.

§2. Utility is the relation existing between the inherent qualities of a thing and a human need to which it can minister. It is especially to be emphasized that utilities should not be confounded with the qualities of concrete objects, or with the objects themselves. In their relations to the external world, human beings have needs or desires, and there arises from unsatisfied desires what may be defined as discomfort, or disutility.

Utility is the relation of a means to an end. It is not inherent in a thing. It is not constant, but fleeting and transitory; on the other hand, the constituent properties of a thing are not only inherent but constant. The utility or usefulness of a thing as a means of ministering to the well-being of man as an end is neither inherent nor constant. On the contrary, it is wholly contingent and accidental; contingent, not upon man alone, but upon the accident of a subjective condition or need, susceptible of change for the better, to which it can minister. In its last analysis, utility is contingent upon a relation of

DEFINITIONS 19 usefulness between an objective thing, on the one hand — as, for example, a glass of drinking-water — and, on the other hand, a subjective condition of man, as, for example, thirst. All else being equal, the utility of a product increases or diminishes with the greater or less gravity of the need to which it ministers. Since utility is distinct from the inherent properties of a product, it is incorrect to assert that utility inheres in that product. Although utility as has been said, is related to the inherent properties of a product, it is no less related to a man's subjective condition susceptible of change for the better — that is, to a need, to which the qualities of the product can minister. Hereafter, there can be no further need of insisting that utility cannot inhere in the product. The capacity for usefulness of a bucket of water, it is true, is contingent upon its properties and qualities being what they are. But capacity for usefulness is not usefulness, any more than capacity to run is running; in brief, it is clear that but for man there could be no utility. Utility can result only from the use of a product of which utility is predicated as a means of ministering to a specific human need.

Utility is the relation of a means to an end. That is, it is the relation which the means employed bear to the end sought. Regardless of the objective means employed, the sole purpose sought for is augmented well-being. To consider this well-being as greater or less is to consider it quantitatively. As is the quantitative augmentation of well-being secured through the employment, or use, of a thing, such is the quantitative utility of that thing. There is no other measure than augmented well-being of the quantitative utility of a thing. There need be no other measure to render intelligible to us concepts of quantitative usefulness or utility.

§ 3. In viewing man's relation to the objective world outside of him, one is chiefly impressed by the fact that his ever-recurring needs can be ministered to ordinarily only by overcoming the obstacles, or hindrances, interposed by the existing conditions of his environment. This process can be accomplished with gain only on condition that his capacity is such as to enable him to overcome these obstacles and thus to obtain the concrete articles which serve his needs. In the main, satisfactions are obtained only by the process of overcoming the resistances of nature. Viewed from the position of the one wishing to improve his well-being, hindrance is objective. Articles, or satisfactions, freely obtainable without objective hindrance have no