Value and distribution

Front matter

A CRITICAL AND CONSTRUCTIVE STUDY

By

HERBERT JOSEPH DAVENPORT

Preface

Were it ever important to decide in what degree, if at all, a writer may claim priority in the development of doctrine, the task would be a peculiarly difficult one in the case of the present book. The truth, however, rather than any personal ascription of it being the important matter, it becomes worth while to reflect that for several decades and, indeed, in the main since the time of Adam Smith, economic theory has been in possession of doctrines enough for a reasonably complete, consistent, and logical system of thought — if only these doctrines had been, with a wise eclecticism, properly combined and articulated.

The emphasis in the present volume upon the entrepreneur point of view in the computation of costs and in the analysis of the process by which distributive shares are assigned, has nothing new in it; it was necessary only that the point of view be clearly distinguished, consistently held, and fully developed.

The present writer has emphasized opportunity cost; but this doctrine is everywhere implied in economic discussion; the marvel is that it has been there only unconsciously or half consciously. As far as the present writer is informed, D. I. Green was the first to formulate the doctrine in entire definiteness — the present writer the first to give it systematic application.

To making precise the concept of profit and to elucidating the relations of profit to cost some contribution has perhaps been made in the present book.

The insistence that rent is a part of cost of production, in full parallel with other outlays, follows necessarily from the acceptance of the entrepreneur point of view; the doctrine is as old as entrepreneurship. Nor is it new in economic discussion; political economy began there, but viii PREFACE

wandered afield in search of labor determinants of value and of labor standards of value measurement. Cannan has perhaps best led in the return to the better way.

The cancellation of the distinction between value-determined and value-determining costs was inevitable when once this return was accomplished.

Likewise there is little in the marginal analysis that can be offered as new; Ricardo applied it fractionally; the moderns have merel}^ extended the applications : it only remained to point out some aspects and limitations of its service.

Precisely so of utility and of its modern refinements; but the relativity of utility on the demand side, and of cost on the supply side, of the market equation, has seemed in especial need of emphasis. But on the demand side all this was fully worked out by Marshall twenty years since.

The competitive entrepreneur rendering of the capital concept was fairly well held as far back as the work of Say and of Malthus : Clark, Fisher, and Fetter have contributed greatly to the widening of the concept of capital socially considered; Cannan and Veblen to the individualistic emphasis : the elaboration of the loan- fund doctrine was perhaps left still to be done.

Interest theory, in that formulation which, by title of adequate recognition, systematization, and development, Fetter has rightly made his own, is traceable at least as far back as Say; was adequately formulated — but the result of it unseen — by Wieser and by Clark, and was by the latter valiantly battled for. But, as it seems to the present writer, the relations of concrete productivity to time discount are impossible of explanation otherwise than with the acceptance of the competitive rendering of the capital concept, and with the recognition of the loan- fund subdivision of competitive capital.

Something also has perhaps been accomplished in these pages toward the elucidation, for working purposes, of the distinction between the primary and the secondary dis-

PREFACE IX

tributive processes and of their interactions ; nothing very serious appears to be the matter with present society from the point of view purely of the traditional production distribution; the difficulties mostly relate to the secondary process.

Evidently, then, if anything worth the doing has been accomplished here, any implication of which the author would disclaim further than is inevitably implied in getting oneself published, this cannot be so much in any contribution of new doctrine as in the selection, delimitation, and articulation of the old. To this end the necessary thing has, in the main, seemed to be to rid the science of doctrines that do not belong in it, e. g., labor-time, labor-pain, utility, and marginal-utility determinants or measures of value; real costs; marginal fixation of price or of distributive shares; price-determined and price-determining costs or distributive shares; instrument margins; marginal-productivity distribution; price measures of utility; the social organism; fundings of productive agents; the tripartite classification of productive factors.

And if all, or any considerable part of this, has really been accomplished, it is enough.

Chicago, August io, 1907

Table Of Contents

CHAPTER PAGE

I. Vamous Cost Concepts i

II. Adah Smith 8

Chapter II Adam Smith

After making it clear in his introductory chapter that the population of a country is better or worse off accordingly as the total product "bears a greater or smaller proportion to those who are to consume it/' Adam Smith goes on to assert that, for the most part, the average share of consumers must depend upon the skill and dexterity of the labor, but also, in some part, "on the proportion between the number of those employed in useful labor and of those who are not so employed. Whatever be the soil, climate, etc., the abundance or scarcity of its annual supply must, in that particular situation, depend upon these two circumstances," And so, with any particular situation given or assumed, the labor of a nation "is the fund which originally supplies it with all the necessaries and the conveniences of life." This we have termed the labor-purchase doctrine of cost.

But it is fair to say that Adam Smith does not, at this particular point, make much of this doctrine, or attempt to apply it as an explanation of the value relations between goods. But in chapter v the step is fully taken :

Labor was the first price, the original purchase money that was paid for all things. It was .... by labor that all the wealth of the world was originally purchased; and its value to those .... who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command.

It is, however, to be noted that the reasoning according to which labor is the first purchase price holds only when the "particular situation" is assumed; so much as this must be taken for granted as somehow given in the reckoning, a continent, or island, or country, in which the labor is put forth ; and only such degree of "originality" in production can be imputed to the labor as may be worked out by regarding the situation, the habitat, as a passive rather than as an active fact — as opportunity rather than as productive power. For whatever value there is in the distinction between condition and cause, the environment must, in this view, stand as the condition and labor as the cause. But none the less must the productive output differ with differences in environmental opportunity; the terms of the exchange between man and nature must vary with the varying opportunities for production, labor having a greater or less producing power with the varying bounty or niggardliness of the environment. And so, while, socially speaking, the labor- fund-purchase idea is a cost doctrine of the labor sort, it is such by the very fact that it is social in character and treats the whole product as a unit purchased by the whole of the labor applied. But evidently, so far as the product is taken as a whole, as a. unit, and as set over against the total of labor producing it, no key is given to the exchange relations between different portions of this product. Even for the Crusoe case, his different units of effort could be represented in products of equal utility, only upon the assumption of absolute uniformity of advantages in the conditions of production, that is, upon the assumption of no extensive or intensive land differentials, and so of no law of diminishing returns of any sort. And likewise also, Crusoe himself must always remain at one level of vigor, alertness, and intelligence. That is to say, not merely homogeneity in environmental conditions, but absolute homogeneity in labor quality must be assumed, in order that either for an individual or for society the labor-fund-purchase doctrine could, as a cost doctrine, be adapted for service either as a measure or as a determinant of exchange relations. And it may be remarked in passing and as awaiting a more exhaustive discussion later, that precisely the same defects inhere in all applications of labor time, labor pain, or labor value, as cost measures or as cost determinants, unless possibly as somehow worked out from the point of view of the employer rather than of the isolated or self-employed producer.

And precisely this change in point of view is to be remarked in the chapter immediately following upon Smith's introduction. This is the chapter containing the famous pin illustration of the advantages of division of labor : perhaps, it is said, the larger application of this principle to manufactures explains the higher productivity of these as lo VALUE AND DISTRIBUTION

against agriculture, and the greater opulence of advanced and manufacturing peoples as against backward and agricultural peoples.

The most opulent nations, indeed, generally excel all their neighbors in agriculture as well as in manufacturing; but they are commonly more distinguished by their superiority in the latter than in the former. Their lands are in general better cultivated and, having more labor and expense bestowed on them, produce more in proportion to the extent and natural fertility of the ground.

But oddly enough, Smith remarks, the products are not cheaper with these better methods and time-saving devices : despite the fact that corn lands are better cultivated in England than in France, and in France than in Poland, corn in Poland is as cheap as in France, and in France as in England: "This superiority of produce is seldom more than in proportion to the superiority of labor and expense." But note the phrase, "labor and expense." Does Smith mean more labor in point of time, or merely more expensive labor, labor paid on a higher wage level? Surely — questions of density of population aside — it cannot be more labor in point of time. In fact, in view of the especially marked productiveness of manufacturing industries, it is only the choicer grades of land or of land power that can profitably be utilized; the return per unit of labor should thereby be of still more marked superiority. Thus, on any basis of labor cost in terms of time or of pain, lower rather than higher values must obtain. There is nothing for it but to shift the point of view to that of employer's outlay, — as Smith does, — to labor-value cost under competitive production, where labor value appears under the guise of wage payments commanded by labor as a productive fact. But note that, in this view, labor-value cost is not a pain or a life value, imposing as cost its value upon the product, but is merely the market value of labor as an agent of production. The case is more nearly one where the product is reflecting value back upon the labor agent.

ADAM SMITH II

And yet, if such is the case, it must be- difficult, as Smith sees, to explain the undoubted fact that agricultural products bear often the higher price in the opulent country. The high value of the labor when employed in agriculture must find its explanation not merely in the high value of the agricultural product, but in the high productiveness of labor employed in manufactures.

The labor of the rich country .... is never as much more productive (in agriculture) as it commonly is in manufactures The corn of the rich country, therefore, will not

always come cheaper to market than that of the poor.

The ultimate reasoning for all this is as follows : The high value productivity in manufactures necessitates that such agriculture as is followed should also be highly value productive; this high alternative productiveness imposes upon the employer a high wage outlay. Thus, in terms of employers' outlay, the higher "labor and expense" bestowed in the more opulent country affect the greater product to such a degree that the prices are often the higher in the opulent country.

That Smith worked out fully all the steps of the argument, or was conscious of all the implications of the situation as he outlined it, is obviously not to be asserted ; but it is clear that he is within the field of competitive costs and of exchange values as distinguished from collective cost and social income. More than half consciously he is employing the notion of outlay cost; impliedly, but not consciously, he is making use of the principle of displacement-opportunity cost, in one of its most typical forms. He has, in truth, outlined a situation in which, as a question of labor investment, or of social and collective efifort, labor-purchase cost, corn is cheap instead of dear, but where as a question of competitive cost it is, because of the displacement conditions, high in cost and dear in price and in exchange value.

It is doubtless on some such basis as this that, after mentioning use value, he distinguishes between value in exchange and real value; by real value is meant laborburden value as the norm of value, that value which traces back to the ultimate cost — the real price, the natural price — a concept which seems to waver between the labor-purchase idea of cost and the labor-value idea.

But later, in chapter v, there is a distinct enunciation of labor-pain cost, expressed as a value quantity, as the determinant of the real value of labor. Whatever difficulties market values may offer, Smith takes it as clear that, in the isolated economy, equal volumes of labor must always be of equal value to the laborer, because, possible variations in his personal equation aside, "he must always lay down the same portion of his ease, his liberty, and his happiness." One might suppose that with the assumption of a necessary uniformity of labor pain attendant upon equal quantities of labor, there is assumed a uniformity in opportunity and in product; such, however, is not the thought; no matter how great the volume of product in a day, the aggregate value will be invariable ; it is the commodity units that must do the varying, since "it is their value which varies, and not that of the labor which produced them." Labor is their real price and having in itself a value, it carries this value over to the product. Here there is a distinct announcement of the labor- value-cost doctrine, and an implied and unconscious, but equally distinct, repudiation of the doctrine of opportunity cost; that is to say, the real value of the product, being irrespective of the volume of it, must the more clearly be uninfluenced by any question of possible alternative product.

In this fifth chapter, there is also some foreshadowing of the distinction between riches and value later made so prominent by Ricardo. Smith says that "every man is rich or poor according to the degree in which he can afford the necessaries, conveniences, and amusements of human life." Possibly he would himself have been puzzled to say whether the term "afford" implied the concept of fund or of flow, possessions or income ; but in any case, the thought of riches rests upon enjoyment utilities as the test. However, he believes that inasmuch as under division of labor each man produces but the smallest part of what he consumes, obtaining through exchange the results of others' labor, one "must be rich or poor according to the quantity of labor which he can command." That is to say, the amount of necessaries, conveniences, and amusements is, after all, reducible to terms of command of labor — a labor-purchase rather than labor-origin basis for value. So the value of any commodity that one has produced to sell "is equal to the quantity of labor which it will enable him to purchase or command. Labor, therefore, is the real measure of the exchange value of all commodities."

Noting carefully that we are now arrived at a doctrine of exchange value and not of real value, the perplexity presented by the very first line of the next paragraph will disappear ;the thought here reverts to the primary, the real-value concept: "The real price of everything, what everything really costs the man who wants to acquire it, is the toil and trouble of acquiring it" — labor cost of some sort: but "what everything is really worth to the man who has acquired it is the toil and trouble which it can save to himself and which it can impose upon other people."

Here is a definite enunciation of his antithesis of real price to exchange value. Real value is the labor it took; but when once you have the thing and are estimating the quantum of it as riches, its wealth to you as a salable thing, its utility in exchange, you look simply to the toil and trouble which you can make it shield you from by imposing this toil and trouble on someone else. When you command from another his money or his goods, you are, in final analysis, levying on his labor. "What is bought with money or with goods is purchased by labor, as much as what we

acquire by the toil of our body These things contain

the value of a certain quantity of labor which we exchange for what is supposed .... to contain the value of an equal quantity."

Thus, so far as all this may be made consistent, it means that real price or real value is always the labor of attainment; but whether this labor is conceived as in itself a value, or merely as burden, is not so clear. Exchange value is the labor that a thing will by sale protect the owner from, or that in purchase it will cost the buyer, in inducing him to let go of a product produced by his own labor. And thus exchange value seems to have a real and ultimate basis in real value.

Sometimes also Smith seems to talk of a fourth sort of value, a value which covers the temporary disturbances and variations from exchange value. And it is added that "though labor be the real measure of exchangeable value of all commodities, it is not that by which their value is commonly estimated." Labor is so different in intensity, skill, and direction, that it is not easy to find any accurate measure; but a sort of rough equality in kind is worked out through the higgling and bargaining of the market. Popular thought, however, does not make any recourse to labor as the measure, at least no conscious recourse ; most people can understand commodities, concrete palpable objects, but labor is "an abstract notion which, though it can be made sufficiently intelligible, is not altogether so natural and obvious."

All of which seems to mean that, rightly understood, it is possible to reduce labor to a homogeneous fund. Of time? Evidently not. Of pain? This also will not serve Of value? But if this be a value dependent upon the product, and derived from the product, it is clear enough that homogeneity is attainable and is actually attained, but homogeneity only in terms of the very value that it is summoned to explain, a view which would, in the last analysis, conceive labor as receiving value rather than as determining it. And upon the basis that labor derives its value from the value of the product, labor is not competent to give value, unless possibly through some opportunity-cost analysis, later to receive attention.

And now we are called upon to note that Smith uses his labor doctrine or doctrines for three different purposes, purposes essentially distinct in nature, though almost hopelessly confused in the course of his discussion. At one time

ADAM SMITH I5

labor is treated as the determinant source of all value, precisely as, in the mechanical sense, it is the creative source of some commodity products. At another time attention is directed primarily or exclusively to the discovery of a medium of measure, a mode of expression, a common denominator, into which values may be resolved and by which they may be made homogeneous and comparable, a standard of value expression. Or, finally, the investigation directs itself toward the discovery of a standard of deferred payments, a medium of comparison over wide intervals of time.

Selecting the third of these aspects as first in the order of discussion, it would perhaps be fair that not much be expected from a writer of the eighteenth century, in view of the confusion of tongues lasting without amelioration well over into the twentieth.

Proceeding from the general point of view of the doctrine that labor is the source and the measure of value in ordinary relations, Smith declares for labor as the ideal standard of deferred payments. But since some concrete and tangible fact, in terms of which payment can readily be made, is regarded as desirable, Smith inclines to advise, for long-time purposes, corn, and, for short-time purposes, silver, as the standard commodity.

Equal quantities of labor will at distant times be purchased more nearly with equal quantities of corn, the subsistence of the laborer, than with equal quantities of gold and silver, or perhaps with any other commodity. Equal quantities of corn, therefore, will, at different times, be more nearly of the same value, or enable the possessor to purchase or command more nearly the same quantity of the labor of other people.^

It is, indeed, true "that equal quantities of corn will not do it exactly," for standards of consumption vary; other commodities, however, hold command over labor by virtue

^Adam Smith, Wealth of Nations, chap. v.

solely of their command over the subsistence of labor and in proportion thereto. Thus

a rent reserved in corn is liable only to the variations in the quantity of labor which a certain quantity of corn can purchase. But a rent reserved in any other commodity is liable, not only to the variations in the quantity of labor which any particular quantity of corn can purchase, but to the variations in the quantity of corn which can be purchased by any particular quantity of that commodity f

the dangers of departure from the labor standard are therefore squared.

Evidently this might do, if only it were safely to be assumed not only that all that laborers earn they spend in subsistence, but also that corn is the only subsistence commodity; it would then be true that other commodities could command labor only in the measure that they were exchangeable for corn; corn would, then, fall short of an ideal labor standard only in the degree that the laborer's dole of corn were a varying one.

At any rate, as Smith believes, since corn spells subsistence, corn must approximate more closely to the labor standard than would any other commodity.

Nothing is made here of a doctrine of some currency later, that wages in terms of money must rise or fall with every rise or fall in the price of corn, to the result that the laborer's corn wages must remain a practicably unvarying quantity. It is, indeed, held that in short-time relations real wages in terms of command over subsistence necessities vary widely. "The subsistence of the laborer, or the real price of labor, as I shall endeavor to show hereafter, is very different upon different occasions ;" and so, while "the real value of a corn rent" — its labor significance — "varies much more from year to year" than that of a money rent,

it varies much less from century to century But the value

of silver, though it varies greatly from century to century, seldom varies much from year to year, but frequently continues the same, or very nearly the same, for half a century or a century together In the meantime the temporary and occasional

^ Adam Smith, op. cit., chap. v.

ADAM SMITH i?

price of corn may frequently be double, one year, of what it had been the year before.

Thus, in general purchasing power, as tested by the labor standard, "from year to year silver is a better measure than corn," while "from century to century corn is a better measure than silver." ^

But the attempt to find in labor a common denominator of value had this much at least in its favor — that if labor would not serve for the purpose, nothing else was at hand

^Ibid., chap. v.

This is not the place for an adequate discussion of the general problem of the standard of deferred payments ; little more, indeed, can be attempted here than to put in the interrogation points. It is, however, evident that Smith's reasoning assumes the long-time tendency of wages to approximate either to the subsistence-minimum requirement, or to the standard-of-living requirement. His argument rests upon the assumption that, over long periods of time, corn varies little in its command over labor. Presumably this stability of relation is due to the assumed connection between population increase and the necessities of subsistence or the established requirements of existence. Thus, while by improvements either in technique or in the conditions of environment, labor might for a considerable period be more generously rewarded in products, this condition, it is thought, is, after all, certain to be a temporary one, population tendencies being safely to be relied upon to take up the slack, whether that slack be reckoned as a differential above the absolute requirements for living, or above some standard of consumption below which laborers will refuse to reproduce themselves.

There may be reasons enough to condemn this attempted justification of the corn standard by the labor standard, consistently with retaining faith in the labor standard itself; it therefore remains to inquire to what extent Smith's acceptance of the labor standard was justifiable in the light of the theoretical equipment of his time, and to what extent and with what modifications it may serve for the purposes of more modern theory.

There was for Smith, at all events, this much of justification for the acceptance of the labor standard — that, in his view, to refuse it would be abandon all hope of any standard, while the acceptance of it would assimilate the standard of deferred payments to the standard of value for current exchanges — a consummation still (though perhaps for no very evident reason) devoutly desired by many monetary theorists. To Smith, as to most economists of later years, the problem of deferred payments presented itself as a value problem. Conceived as such, the degree of development of theory in Smith's time could possibly have afforded nothing better or other than this labor standard ; nor, indeed, has later theory achieved anything more, so far as, for deferred-payment problems, cost and value solutions have been the object of search. For it is clear that value conceived merely as a ratio of exchange affords no clue to a deferred-payment standard. Only when, as the essence or significance or determinant of value, some that would. It may not yet be clear on precisely what grounds this common denominator was so pronouncedly a desideratum; but, for whatever it was worth, the labor measure was the only thing possible for the time. And it may fairly be questioned whether later thought, in its endeavor to substitute utility for labor cost as a value determinant, thus stating the payment problem in terms of utility truly, but only of utility as working itself out in terms of value expression, has been able to do more upon the utility side than to repeat the error made upon the cost side, that, namely, of seeking to compare things which in their fundamental nature offer no basis of comparison; with value

underlying principle is discovered, is it possible to adopt as a deferred-payment basis a value standard. Whether or not the multiple standard or some variable subsistence or standard-of-living standard may not now be regarded as preferable, it is perhaps sufficient for present purposes to point out that these are standards of utility, rather than of cost or of value, and therefore do not, in strictness, concern this stage of the discussion.

But it may none the less be possible to justify the labor standard as held by Smith without appeal to value categories.

It is evident that the labor and the standard-of-living standards must in the long run come to coincide, or at all events must always be in process of approaching coincidence. The total consumption of wealth depends upon the total productive efficiency of society : average consumption is the derivative of average production. Standards of living express the general or average efficiency in production, as reflected in the habits and customs of consumption. It is, no doubt, true that if the increase in the per-capita output of wealth is rapid, the felt necessities of adequate living may somewhat lag behind the opportunity afforded by the level of production ; but it remains true that the new level of production is all the while in process of becoming fixed as a new level of requirement. In the meantime, however, as the history of the last hundred years abundantly shows, there is, because of this phenomenon of lagging — this slack between the lately acquired power and the earlier established need — room for some shortening of the labor day. None the less a commodity standard of payment which should coincide with the labor standard must be a standard expressive of the changes taking place in labor productiveness ; not, however, productiveness in terms of corn alone, but productiveness in terms of those commodities, whether corn or other, for which incomes are expended — that is, productiveness expressed in terms of the derived consumption.