Value and distribution; an historical, critical, and constructive study in economic theory, adapted for advanced and post-graduate work

Front matter

^\ FEB 28 II

ChapruD- Copyright No.

Shelti^lZ..

Preface

THE last quarter of the nineteentli century lias witnessed more than one noteworthy advance in economic theory. Some of this work has been embodied in permanent form, as in the publications of the Austrian school of economists; much of it, however, is scattered through various magazines and journals, and its importance is unrecognized because no effort has as yet been made to bring it together as a coherent whole. One of the purposes of the present volume is to give more permanent form to this scattered work and to bring it, as well as that of the Austrian economists, into some sort of corelation with the work of the so-called orthodox school of economists. Again, it will be found that in the endeavor to give coherence to the work of previous writers certain concepts or theories are developed that have not been clearly stated elsewhere, — concepts which more or less seriously modify the hitherto accepted views of value and distribution.

The fact from which all studies of distribution must start is the price of commodities, and what we have to determine is how this price is divided among the several parties to the transaction. From this it follows that any adequate study of distribution

VI

PREFACE.

must be prefaced by an examination of the phenomena of value and price. In keeping with this I have devoted the first part of the present volume to an attempt to answer the vexed question, What do we mean by value and price ?

In the discussion of the problem of distribution, the question of the equity of the distribution has been consciously and purposely avoided. The importance of this phase of the subject cannot well be exaggerated ; but the laws according to which the social product is distributed should first be clearly defined before we attempt to determine whether or not this distribution is equitable. Nothing is gained either by confounding the two problems or by inverting the order of the inquiry. In the present volume I shall strictly confine myself to the first of these problems, or to a purely theoretic study of the laws under which the several shares in distribution are determined.

In the earlier days of the present investigation I regarded it strictly as a monograph, and addressed myself to those who are familiar with the whole range of economic theory. As the work progressed, however, it seemed that by some modifications and additions it might be made available for the ordinary advanced student or for those who had only been over the ground covered by the usual text-book. With this larger audience in mind, I was persuaded to adopt the topical form for the presentation of the subject. The shifting from one audience to

PREFACE. Vii

another during the progress of the work has resulted in an unevenness which could only be eliminated by a careful rewriting of the entire book. The pressure of other interests renders this practically impossible.

In the desire to secure a clear and coherent view of a rather wide range of economic phenomena, I have been compelled to ignore many details whose discussion, though interesting and important, might confound the reader, or at least obscure his view of the main lines of the argument. Again, it may be that a greater wealth of illustrations would have helped rather than hindered the argument. If so, it is an omission which the intelligent teacher can readily supply.

In conclusion, I have to thank Professor F. W. Speirs, of the Philadelphia Manual Training School ; Professor H. E. Seager, of the University of Pennsylvania, and Professor John L. Stewart, of Lehigh University, for a careful reading of the manuscript and for valuable criticisms and suggestions. Again, I have especially to thank Professor H. C. Whitaker, of the Philadelphia Manual Training School, who spent several weeks with me in a revision of the original manuscript, thus enabling me to see all parts of the argument through the eyes of another. It was at his suggestion that the topical form was adopted. This has undoubtedly added much to the clearness of the entire argument.

Introduction

PAGE

A necessary relation exists between the economic theories and the

economic phenomena of a time and people xix

Contrast between the economic phenomena in England during the

first and last quarters of the nineteenth century ....... xx

The corresponding change in economic theory is not yet complete . xxii

Part I.— Value. Chaptee I

THE COST THEORY OP VALUE.

I. THE EARLIER COST THEORY.

1. Paradoxes of value explained by the Cost Theory 20

2. Free goods eliminated from economic consideration 20

3. Scarcity goods eliminated because of their rare occurrence ... 21

4. The Law of Cost only applicable to freely reproducible goods . 21

II. THE MARGINAL COST THEORY.

5. The graphical representation of Marginal Cost Theory .... 22

6. Kicardo's statement of the Marginal Cost Theory 23

CHAPTEE II.

CONDITIONS UNDER ■WHICH THE COST THEORY

FAILS.

I. THE CONTENTION OF THE AUSTRIAN ECONOMISTS.

7. Exceptions admitted by Ricardo 25

8. Additional exceptions 26

II. CASES IN "WHICH THE CONTENTION OF THE AUSTRIANS

FAILS.

9. Marginal Cost Theory holds for products of better land, etc. . . 27

10. Marginal Cost Theory holds for products of fixed capital ... 27

HI. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS MAY BE SUSTAINED.

11. Patents, Tarifis, etc 28

ix

X CONTENTS.

CHAP TEE III.

THE UTILITY THEORY OF VALUE.

I. THE EARLIER UTILITY THEORY.

PAGE

12. The failure of the Earlier Utility Theory to explain the para-

doxes of value 30

II. THE MARGINAL UTILITY THEORY OF VALUE.

13. Gossen and his work 32

14. Jevons, Walras, and Menger 84

15. Bohm-Bawerk's statement of the Theory of Marginal Utility . 35

16. Graphic illustration of the Marginal Utility Theory 37

(a) Value per Unit versus Total Value 38

(b) Total Value versus Total Utility 38

17. The Marginal Utility Theory and the paradoxes of value ... 39

(a) Why are air and water valueless, and why is iron of less

value than gold ? 39

(fi) "Why did the Dutch East India Company destroy a portion of their crops ? 40

CHAPTEE IV.

CONDITIONS UNDER ^WHIOH THE UTILITY THEORY

FAILS.

18. Bohm-Bawerk's admitted exceptions to the Law of Marginal

Utility 43

19. How Bohm-Bawerk would escape from the consequences of

these admissions 45

(a) The Elimination of the marginal pair of sellers ... 46

(6) The Elimination of one of the two marginal buyers . . 47

20. The defect in the analysis of the Austrian economists 48

(a) The Marginal Utility Theory rests upon the unwar-

ranted assumption of free competition among consumers 48

(b) Marginal Utility Theory fails because the marginal

consumer frequently secures a surplus 50

CHAPTEE Y.

THE MONOPOLY THEORY OF PRICE.

I. THE PRICE OF A SINGLE GOOD.

21. Normal Value and Price 65

22. Other conditions under which Marginal Utility determines Price 56

23. The diagram of the Austrian economists 58

24. Diagram of the Monopoly Theory of Price 58

II. THE PRICE OF COMPLEMENTARY GOODS.

25. The confusion in the Austrian treatment of complementary

goods 60

26. Complementary goods an ordinary case of scarcity price ... 61

CONTENTS. xi

CHAPTEE YI.

VALUE AND PRICE.

PAGE

27. Subjective Exchange Value is not a primary phenomenon of

value 64

28. Use and Exchange Value versus Value and Price 65

CHAPTEE VIL COST AND PRICE.

I. THE LAW OF COST AND THE PRICE OF FREELY REPRO- DUCIBLE GOODS.

29. The Law of Cost is here an exact law 68

30. Cost is here a direct cause of Value 69

II. THE LA\V OF COST AND THE PRICE OF SCARCITY GOODS.

31. A substitute always possible 71

32. The substitute is in last resort a freely reproducible good ... 73

CHAPTEE YIII.

DISTRIBUTION AND THE THEORIES OP UTILITY, VALUE, AND PRICE.

33. Society is interested in the increase of Total Utility 74

34. The individual interested in the increase of Total Value .... 75

35. Disadvantages of the orthodox attitude 77

36. Advantages and disadvantages of the Austrian attitude .... 78

Book I.— Rent. Chaptee I

THE RENT OP LAND.

I. FUNDAMENTAL PROPOSITIONS.

37. An Agrarian doctrine 83

38. Eent does not enter into the determination of price 84

39. Diagram of rent 85

40. Kent due to difference in fertility and distance from market . . 87

41. Law of Diminishing Keturns . . . 88

42. Effect of Improvements 88

Xll CONTENTS.

II. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF RENT.

FAOE

43. Adam Smith 89

44. Criticism of Smith 90

45. Anderson 91

46. Malthus 95

48. Eicardo 97

49. Criticisms of Eicardo 99

CHAPTEE II.

THE GENERAL DOCTRINE OF RENT.

I. THE DOCTRINE IN ENGLISH ECONOMICS.

50. Whately on the General Doctrine of Eent 102

51. J. S. Mill on the General Doctrine of Eent 103

52. Walker on the Eent of entrepreneur 104

53. Marshall on the Eent of capital 105

54. Clark and Hobson on the General Doctrine of Eent 106

II. THE DOCTRINE IN GERMAN ECONOMICS.

55. Busch on the Eent of labor 107

66. Hufeland on the General Doctrine of Eent 108

(a) Eent of land 108

{b) Eent of capital .109

(c ) Eent of labor 109

(d) Eent of unternehmer 109

57. Mangoldt on the General Doctrine of Eent Ill

(a) Eent of land 112

(b) Eent of capital 112

(c) Eent of labor , . . . . 113

(d) Eent of unternehmer 114

58. Schaffle on the General Doctrine of Eent 116

59. The Austrians on the General Doctrine of Eent .,.,... 117

BOOK n.— PROFIT.

CHAPTEE I.

PROFIT A PRICE-DETERMINING- SURPLUS.

I. RENT AND PROFIT AND THEIR POINTS OF DIFFERENCE.

60. Eent an individual, Profit a group surplus 122

61. Eent a differential, Profit a marginal surplus 122

62. Eent a limited monopoly, Profit a monopoly surplus 123

63. Eent a price-determined, Profit a price-determining surplus . . 124

64. Competing differential concepts 126

II. INTEREST AND PROFIT AND THEIR POINTS OF DIFFERENCE.

65. Interest a normal, Profit a monopoly surplus 127

CONTENTS.

CHAPTEE II.

Xlll

PROFIT AND THE CONCEPT OF A NO-RENT LAND.

PAGE

66. Mill's admissions and their logical result 129

67. Mill inadvertently includes a marginal surplus, or Profit under

Kent 131

68. Eent the differential surplus in a single industry 132

69. Hobson's objections to this use of the term Eent 133

70. Objections to Walker's use of the term Profit 135

71. The suggested use of the terms Eent and Profit 137

BOOK in.— INTEREST.

CHAPTEE I.

EARLIER IDEAS IN REG-ARD TO INTEREST.

I. USURY IN LESS DEVELOPED SOCIETIES; INTEREST IN HIGHLY

DEVELOPED SOCIETIES.

72. Aristotle 139

73. Calvin 140

II. INTEREST A RETURN FOR THE USE OF .WEALTH AND NOT FOR

THE USE OF MONEY.

76. Adam Smith 143

CHAPTEE II.

THE EXPLOITATION THEORY OP INTEREST.

77. The contention that the value of all goods is measured by quan-

tity of labor 145

(a) Eicardo and the case of scarcity goods 146

(6) What labor is the standard of value ? 149

78. Contention that capital is not an original and independent source

of value 152

(a) Natural goods are sometimes original powers 152

(b) Capital an independent power 153

79. The contention that the whole product belongs in equity to the

laborer 154

CHAPTEE III.

THE USB THEORY OP INTEREST.

80. Menger's statement of the Theory 160

81. Criticism of Menger's statement 162

XIV

CONTENTS.

CHAP TEE lY.

THE EABLIER PRODUCTIVITY THEORY OP INTEREST.

I. CONTINENTAL WRITERS FAIL TO SEE THAT INCREASE IN

PRODUCT DOES NOT NECESSARILY MEAN AN INCREASE IN VALUE.

PAGE

83. Eiedel 165

II. ENGLISH WRITERS SAW THAT INCREASE IN PRODUCT DOES

NOT NECESSARILY MEAN AN INCREASE IN VALUE, BUT FAILED TO SUPPLY THE ELLIPSIS IN THE ARGUMENT.

84. Lauderdale 168

85. Malthus 170

86. Ellipsis in the argument of the advocates of productivity . . . 171

III. INCREASE IN PRODUCT IS NOT A NECESSARY CONDITION OF

INTEREST.

87. Bohm-Bawerk fails to recognize the cause of the confusion . . 171

CHAPTEE Y.

THE ABSTINENOB THEORY OP INTEREST.

88. Senior's statement of the Theory 173

89. Lasalle's philippic 175

90. Bohm-Bawerk's contention 176

91. Keply to Bohm-Bawerk 176

92. Another objection to the Abstinence Theory 177

93. Keply to this objection 179

94. Still another objection to the Abstinence Theory , . 180

CHAPTEE YI.

Introduction To The Exchange Theory Of Interest

95. Capital is concerned with time utilities 183

96. The rationale of machine methods of production 186

97. Machine production not a necessary condition of interest . . . 186

98. The definition of capital 187

99. Difficulties encountered by this definition 188

CHAPTEE YII.

THE EXCHANGE THEORY OP INTEREST.

1. PRESENT GOODS ARE WORTH MORE THAN FUTURE GOODS.

100. Diflferences in provision and underestimate of the future . . . 192

101. Eoundabout methods of production 193

102. Technical superiority of present goods 193

CONTENTS. XV

CHAPTEE VIII.

CRITICISM OP THE EXCHANGE THEORY OP

INTEREST.

I. ARE PRESENT GOODS WORTH MORE THAN FUTURE GOODS?

PAGE

103. Admitted exceptions to this contention 195

104. Additional exceptions 196

105. These exceptions are not fatal to the Exchange Theory of

Interest 198

n. ABSTINENCE IN THE EXCHANGE THEORY OF INTEREST.

106. Interest measured hy marginal abstinence 200

107. Abstinence recognized in the Exchange Theory 200

(a) Difference in provision 200

(6) Underestimate of the future 201

III. IS THE TECHNICAL SUPERIORITY OF PRESENT GOODS A NECESSARY CONDITION OF INTEREST?

108. Technical superiority an increase in quantity of product . . . 202

109. Defects in Bohm-Bawerk's reasoning 203

(a) Technical superiority not an independent cause of

value 204

(6) The technical superiority of present goods does not

necessarily result in an increase in value 206

(c) Technical superiority of present goods is not an essential condition of interest 210

CHAPTEE IX.

THE MARGINAL PRODUCTIVITY THEORY OF INTEREST.

I. COMPETING CONCEPTS OF CAPITAL.

110. Capital as a sum of concrete commodities 214

111. Capital as a mobile, homogeneous fund 214

II. RATE OF INTEREST FIXED BY MARGINAL PRODUCTIVITY.

112. Clark on the mobility of capital 217

CHAPTEE X.

THE NORMAL-VALUE THEORY OF INTEREST.

I. INTEREST A PROBLEM IN NORMAL VALUE.

113. The source of Bohm-Bawerk's error 223

114. Bohm-Bawerk's confused recognition of the part played by

abstinence 225

115. Statement of the Normal-Value Theory 228

Xvi CONTENTS.

BOOK IV.— WAGES.

CHAPTEE I.

THE "WAGES FUND DOCTRINE.

I. THE EARLIER ADVOCATES OF THE THEORY. p^^j,

116. Adam Smith ; . 232

117. James Mill 233

118. Ricardo 233

II. THE LATER ADVOCATES AND CRITICS OF THE THEORY.

119. J. S. Mill's statement of the theory 235

(a) Mill's contention that Trades Unions cannot increase

wages 236

120. Longe's criticism of Mill 237

121. Thornton's theory of price and wages 238

122. The importance of Thornton's theory of price not generally

recognized 241

123. One source of confusion in Thornton's discussion 244

124. There is no fund set apart for the payment of wages 247

125. Mill's reply to Thornton 250

126. Wages are aifected by the productivity of labor 252

127. Cairnes's attempt to rehabilitate the doctrine 253

128. The element of truth in the Wages Fund Doctrine 254

129. The source of the confusion , 255

CHAPTEE II.

THE RESIDUAL CLAIMANT THEORY OF "WAGES.

130. Profits the residual share according to the earlier economists . 256

131. Cairnes's statement of the Eesidual Claimant Theory of Wages 257

132. Walker's Residual Claimant Theory of Wages 258

133. Criticism of Walker's theory 260

CHAPTEE III.

THE PRODUCTIVITY THEORY OF WAGES.

I. THE GENERAL PRODUCTIVITY THEORY OF V,^AGES.

134. Walker's contention 265

II. MARGINAL PRODUCTIVITY THEORY OF WAGES.

135. Concrete and abstract concepts of labor 267

136. The abstract fund remains constant while concrete forms

change 269

137. The rate of wages determined by the marginal productivity of

labor 270

CONTENTS. XVU

III. THE ELEMENT OF TRUTH IN THE WAGES FUND DOCTRINE.

PAGE

138. Capital constant, population increasing 271

139. Population constant, capital increasing 272

140. A certain best ratio of capital and labor 272

141. Application to the "Wages Fund Doctrine 273

IV. OBJECTIONS TO THE MARGINAL PRODUCTIVITY THEORY.

142. "What determines the margin of production ? "What limits the

supply of labor ? 274

CHAPTEE lY.

THE MALTHUSIAN THEORY OP WAG-ES.

L THE EARLIER MALTHUSIAN THEORY OF WAGES.

143. The pressure of population upon subsistence 276

144. The function of misery and vice 277

145. The standard of life 277

146. The pressure not remote but immediate 278

147. The issue between Malthus and Godwin 279

II. THE LATER MALTHUSIAN THEORY OF WAGES AND THE CON- DITIONS OF PROGRESS.

148. Virtue and intelligence as checks to population 281

149. Increase of the food supply an essential condition of progress . 282

150. Manufactures and an advancing standard of life 283

151. Progress depends on the supply of capital as well as on the

supply of land 284

152. Malthus's changed view of society 287

153. The unfair treatment of Malthus 288

CHAPTEE y.

THE NORMAL VALUE THEORY OP 'WAG-ES.

I. THE GAIN AND ABSTINENCE OF LABOR.

154. Clark's failure to recognize the abstinence of labor 291

1 55. Patten on the abstinence of labor 293

156. Clark's restatement of Patten's contention 294

II. A NORMAL VALUE OR AN EXCHANGE THEORY OF WAGES.

157. The time utilities of labor 297

158. The exchange by the laborer of present for future goods . . . 299

159. Confusion in Patten's use of the terms cost and surplus . . . 299

160. The modification of Patten's diagram 302

161. The Normal Value Theory only applies to normal conditions

in a progressing society 302

162. Failure to secure this gain due to loss of mobility 304

I

Xvill CONTENTS.

EESUME.

I, VALUE.

PAGE

163. The Cost Theory and its failure 305

164. The Utility Theory and its failure . 305

165. Price determined between limits 306

166. Cost and price 306

II. DISTRIBUTION,

169. Interest 309

171. Factors of production versMS different forms of surplus . . . . 312

172. An essentially different scheme of distribution from that pro-

posed by Clark 316

INTRODUCTION.

It has frequently been remarked that there is a necessary correspondence between the economic theories and the economic phenomena of a time and people. The economist, like every other purveyor of truth, is, to a greater or less extent, " cribbed, cabined, and confined" by the facts of his immediate environment. Strive as he may to forecast the future, his speculations seldom far outrun the progress of material phenomena. Indeed, there is always a grave danger that his theories will crystallize in such fixed and definite forms that they will fail to respond to the never-resting progress of the events they are supposed to explain. Nowhere does this find more apt illustration than in the utter lack of correspondence between theory and phenomena in the third quarter of the nineteenth century. Again, in the almost revolutionary change in the whole status of the theories of value and distribution which the last quarter of the century has witnessed, we have a belated attempt to bring our theories into some sort of harmony with the existing facts.

The most cursory examination of the economic conditions of the first and last quarters of the nineteenth century will reveal a sharp contrast in the

XX INTRODUCTION.

tendency of the phenomena of the two periods. For example, in England, in the first quarter, we find all restrictions of trade giving way before the industrial revolution that was then at its height. The introduction of steam and the substitution of the factory for the home system of industry had well-nigh completed the destruction of the old craft and guild system. The growing power of the new middle class that had arisen with the development of the factory system was now asserting itself. It insisted upon the abolition of the corn laws and, secure in its established industries, was willing to accept a gradual reduction of import duties. In a word, the English economists of the early part of the century were confronted by the phenomena of the rapid breaking down of all those trade restrictions which time and custom had rendered sacred. It is therefore not strange that they should have concluded that the day was not far distant when the ideal of free competition would be realized in the actual facts of industrial life. Indeed, such progress had been made in this direction by the middle of the century that J. S. Mill writes, "scarcity values are rather conceivable than actually existing."

The last quarter of the century has witnessed a rude awakening from this pleasant dream ; the tenthousand-acre farms, the organization of labor in large and compact masses, the aggregation of great masses of capital into an even more complete solidarity, — all evidence the utter collapse of that ideal

INTEODUCTION. Xxi

of free competition which Mill thought was about to be realized. As another has well said, " Just when the disappearance of the last vestige of a volitional restriction of competition was looked for, and the universal application of the ' rule of the market' was confidently expected, we see a wide-spread revival of economic methods and agencies over which ' The Wealth of Nations' was read as a funeral service." *

This rise of the modern system of labor organizations, trusts, etc., has compelled a radical change in the attitude of economists towards the theories of value and distribution. They no longer hold that scarcity values are " rather conceivable than actually existing." Indeed, Mill's contention might well be reversed, since scarcity goods are the rule rather than the exception. It is the recognition of this fact that has constrained many economists to abandon the Cost Theory of Value and to substitute for it the Marginal Utility Theory of Value.

It is, however, strange that the most strenuous advocates of the Marginal Utility Theory of Value have failed to see that this recognition of the general prevalance of scarcity values must compel the readjustment of our theory of distribution. The old scheme, which divided the social surplus into rent, wages, and interest, was based on the assumption of free competition. If this assumption does not cor-

* See The Modern Distributive Process, by Clark and biddings, p. 20.

XXll INTEODTJCTION.

respond with the facts, — if scarcity values do prevail, — then the surplus due to such scarcity value must receive recognition and name in our scheme of distribution. And yet modern economists have, for the most part, either followed Ricardo and confounded this surplus with interest, or have followed Mill in the passage just quoted and confounded it with rent.

Again, economists, especially those of the Austrian school, have insisted so strongly upon the general prevalence of scarcity values among concrete commodities that they have failed to see that in the problem of interest we are dealing entirely with normal value, or with that phenomenon of value in which marginal utility and marginal disutility coincide. Failing to see this, Bohm-Bawerk, formally and in the most uncompromising way, repudiates abstinence as having any part in the determination of interest.

Possibly the most important contribution of American economists has been to the theory of wages ; and yet, though establishing almost every point necessary to the construction of an Exchange Theory of Wages corresponding in all respects to Bohm- Bawerk's " Exchange Theory of Interest," they have failed to recognize the possibility of such a theory of wages.

There is one other change in the drift of economic thought which must also be examined with some care. This is the growing tendency to recognize the

INTRODUCTION. Xxiii

fact that rent is not peculiar to land, but is a general function common to all the factors of production. In German economics this general character of the rent function was recognized as early as 1807, but in English literature it was not until the last quarter of the century that the movement in this direction became at all general. The reason for this delayed recognition by English economists is found in the accent thrown upon the rent of land by the English corn law agitation.

In sketching the history of economic theory, however, one must not only keep in mind its correspondence with economic phenomena, but must be persistent in recognizing the continuity in its development. The Abstinence, Productivity, and Use Theories of Interest, for instance, cannot be dismissed as so many vain attempts to solve a difficult problem, but instead they must be seen as parts of a progressive movement in thought which resulted in the Exchange or Normal Value Theory of Interest. In other words, the recognition of this continuity is as essential to the right understanding of the history of economic theory as to the right understanding of any other phase of human endeavor. If this continuity in thought is clearly developed in the historic part of the present study the writer will have attained at least some measure of success.

PART I.

VAIvU K.

VALUE AND DISTRIBUTION.

Chapter I. The Cost Theory Op Value

A RECENT writer has well said, " There are certain unsettled questions in economic theory that have been handed down as a sort of legacy from one generation to another ;" questions that " return again and again, like troubled spirits doomed restlessly to wander until the hour of their deliverance shall appear." Among these is the question, " What is the ultimate standard of value ?" *

Any attempt to answer this question is confronted by certain facts which are usually referred to as the paradoxes of value. These are as follows : 1. The most useful things, like air and water, are usually without value. 2. Useful things, like iron and copper, are not valued as highly as less useful things, like gold or diamonds. 3. By decreasing the supply of a commodity, and consequently the total utility to be obtained from it, the total value may be increased.

* Bohm-Bawerk, Annals of American Academy, September, 1894.

This was done by the Dutch East India Company when it destroyed a portion of the produce of its plantations in order to enhance the price of the balance. We have now to inquire what explanation the cost theory can offer for these paradoxes of value.

I. THE EARLIER COST THEORY.

It was not long before men perceived that in most instances there is a correspondence between the value of a commodity and its cost of production ; nor were they long in recognizing the further fact that this cost could be made to explain at least two of the above paradoxes of value.

1. Paradoxes of Value explained by the Cost Theory. — With regard to the first parodox the solution is evident. Such things as air and water have no value because they have no cost.

The solution of the second paradox is almost as patent : Gold is more valuable than iron because on the whole it costs more than iron.

In the case of the third paradox the solution is not so evident. But then it might be urged that a wilful destruction of commodities is of rare occurrence, that the limitation of supply which is here affected in an arbitrary way is usually determined by the cost of production. In other words, we here have the exception that proves the rule.

2. Free Goods eliminated from Economic Consideration. — Tested by the facility with which these complications were resolved, the advocates of the cost

THE COST THEOEY OF VALUE. 21

theory certainly had a strong case. Yet from the very first they hesitated to accept the logical results of their own reasoning. For if cost determines value, then things like air and water, which have no cost, can have no value. This, however, they were not prepared to admit, but declared that while such goods had "value in use" they had no "exchange value." But having thus established the distinction between these two forms of value they proceed to discuss " value in exchange," and do not trouble themselves any further about " value in use." It is necessary to bear in mind, however, that this did not involve the classical writers in any inconsistency. For the phenomenon of " value in use" was in their minds associated with free goods, and so might fairly be dismissed from economic consideration.

3. Scarcity Goods eliminated because of their Rare Occurrence. — The classical school did not get far in its attempts to apply the cost theory to the actual phenomena of economic life before it was confronted by goods whose value was far in excess of the cost either of production or of reproduction. This is the case with rare wines, pictures by the old masters, etc. It was held, however, that such monopoly or scarcity goods are so small a part of the world's exchanges that they may safely be ignored in any discussion of the general phenomena of value.

4. The Law of Oost only applicable to Freely Reproducible Goods. — Having eliminated both free and scarcity goods from the problem, the only phenomena

22 YALUE AND DISTEIBUTIOIS'.

of value left for the older economists to explain were such as are associated with freely reproducible goods. In regard to such goods, it was held that if the producer does not at least obtain his cost he will cease to produce ; if he secures a surplus above his cost, others will enter that branch of industry and increase the supply of the commodity until the price is forced down to the level of cost. This led the older economists to conclude that in cost we have a more or less exact measure of 'value. So satisfactory did this theory prove to be, so strong its hold upon economic thought, that it was not until the last quarter of the present century that another theory could find even a respectful hearing.