CHAPTER I.

VALUE AND THE STANDARD OF VALUE.

_Definition of Value._

A clear conception of the meaning of the term _value_ is the first essential to a discussion of the subject of money.

Under the general term _value_ the older economists recognized two distinct conceptions, which they distinguished as _value in use_ and _value in exchange_.

To the former they gave little attention, merely stating that while it was essential to value in exchange, the latter was not proportional to nor determined by the former, and citing air and water as familiar examples of objects having great utility, or use value, yet having little or no exchange value.

Modern economists--chiefly those of the Austrian school--have analyzed the subject more thoroughly, especially the relation between the two conceptions, and have shown that utility or subjective value, as it is generally termed by them, is an expression both of human desire and of the quantity of the necessary commodity available to satisfy such desire.

The utility of a thing grows less as the quantity of it increases, and it is the utility of the last increment of supply, or the marginal utility, that determines the subjective value of the whole supply, and it is the ratios between these subjective values that determine exchange values. Air and water, for instance, have no great utility, as viewed by the older economists, except where the supply is limited; ordinarily, their abundance makes their utility, or use value, small.

It is not essential to the purpose of this work to enter into an abstract discussion of the theory of value further than is necessary to make clear the fact that the present analysis in no way lessens or invalidates the distinction between the two conceptions of value noted by the earlier economists,--a fact which has been overlooked by some who have accepted the marginal utility theory. The distinction remains, broad and clear. The one conception, whether called "value in use," "marginal utility," or "subjective value," pertains wholly to the relation which a single good, or unit group of goods, bears to a single individual, or society unit, in respect to human well-being, and has no reference or relation to any other individual or other good.

The other conception, called "objective value," or "exchange value," is dual in its nature, involving in all cases two or more commodities. Abstractly, it is _the ratio at which commodities may be exchanged for each other_, or, since such ratio for a unit of one commodity is expressed by the amount of another given for it, the exchange value of a thing is the quantity of some other thing that will be evenly exchanged for it, or, considered in a general sense, the amount of commodities in general it will exchange for,--_its general purchasing power_, in short.

This latter conception--exchange value--is the one that principally concerns us in discussing the subject of money. It is also the conception generally in mind when the simple term _value_ is used either by economists or by the general public, and wherever the term is used in this work without qualification it is to be understood in that sense.

The Austrian economist, E. von Böhm-Bawerk, says, in his "Positive Theory of Capital," p. 130:--

"Value in the subjective sense is the importance which a good, or a complex of goods, possesses with regard to the well-being of a subject."

"Besides the expression 'value in exchange,' English economists use, quite indifferently, the expression 'purchasing power,' and we Germans are beginning in the same way to put in general use the term _Tauschkraft_."

The value of a thing may be considered either in a particular sense, with reference to some other specified thing, or it may be considered in a general sense, with reference to all other things considered as a whole. We may say the value of a bushel of wheat is two bushels of corn, meaning that these two commodities exchange for each other in that ratio; or we may speak of the value of wheat having risen or fallen, meaning that its general purchasing power, or the ratio between that and all other things taken as a unit or a whole, has increased or decreased.

The term must invariably be used or considered in a general sense, unless otherwise specifically stated, for we must always have some other thing in mind besides the one whose value we are considering; while if no other is stated, commodities in general (taken as a whole) is that thing.

Value being a ratio, it is impossible for all values to rise or fall simultaneously. The sum of subjective values may increase or decrease,--indeed it is one of the great objects of human endeavour to increase the sum of want-satisfying power,--but the sum of the ratios between these subjective values is constant. As one term of any ratio rises relative to the other, the second necessarily falls as regards the first.

This principle is so universally recognized that quotations might be given from almost every work on political economy in support of it. The following will be sufficient, however, as regards both the definition of value and this principle.

John Stuart Mill says, in his "Principles of Political Economy":--

"Value is a relative term. The value of a thing means the quantity of some other thing, or of things in general, which it exchanges for. The values of all things can never, therefore, rise or fall simultaneously. There is no such thing as a general rise or a general fall of values. Every rise of value supposes a fall, and every fall a rise."

Again, he says:--

"Things which are exchanged for one another can no more all fall, or all rise, than a dozen runners can each outstrip all the rest, or a hundred trees all overtop one another."

Prof. S. N. Patten says, in "Dynamic Economics," p. 64: "Objective values, however, are never a sum, but only a relation between subjective values. There can never be high or low objective values of commodities as a whole. It is therefore impossible to add to or subtract from them."

This latter quotation, as well as the preceding one from von Böhm-Bawerk,--both exponents of the marginal utility theory,--may help to correct a quite prevalent impression that this later theory does not distinguish between the two conceptions of value, and that because the sum of subjective values may increase, the sum of objective or exchange values can increase also.

_Supply and Demand._

All economists recognize the fact that the immediate determiner of value is the relation between supply and demand. These terms in their economic sense mean something more than mere desire and mere quantity. _Supply_ means the amount offered in exchange, and _demand_ means not only a desire, but a desire coupled with the ability and willingness to give other commodities in exchange for the one wanted.

In this sense the terms are strictly correlative. The supply of a commodity (that is, the amount offered) may be considered as equivalent to a demand for some other commodity, or for commodities in general. We may say, then, that the value of any commodity is determined by the ratio that the demand for that commodity bears to its supply; or by the ratio that the demand for that commodity bears to the demand for some other commodity,--or commodities in general, when the term _value_ is used in a general sense and not with reference to some other specified thing only. (The objection that has been made by some writers that a ratio could not logically exist between a desire [demand] and a quantity [supply], does not apply to these terms in their economic sense; for, as above stated, they are something more than a mere desire and a mere quantity, and the expression is translatable into the other expression, "ratio between the demand for one commodity and the demand for others in general.")

The statement of the later economists that exchange value depends on, and is determined by, the ratio between subjective values in no way conflicts with the above statement that value is determined by the ratio between demand and supply, for the demand for a commodity is determined by its subjective value and by that alone, and must vary with it. Hence, as the quantity of anything increases and its subjective value lessens, the demand for it relative to the quantity of other articles also lessens, and its value falls, and _vice versa_.

This close connection between value and the ratio between demand and supply--value rising as the ratio increases, and falling as it grows less--is true in all cases. No other factor can affect the value of any commodity except by altering the relation or ratio between these two.

Cost of production is a more remote factor that enters into the determination of value in most but not in all cases, through its effect on supply. It is used, like the term _value_, in two senses, a subjective and an objective sense. In the former it means the pain of labour and waiting that must be undergone to produce the good that is being considered,--the negative pleasure given to get the positive pleasure to be derived from that good. In its objective sense--the sense in which it is generally used--cost of production means the goods that must otherwise be given for, bartered or set against those desired; in a simple case of direct production, it means the goods that might have been produced, in lieu of those that have been produced, with the same subjective cost; in more complex cases, it means the sum of the goods sacrificed, in the shape of raw materials, rent, wages, interest, etc., to get the one produced.

When the value of a commodity falls to or below the cost of production, or even when it approaches it so closely as to reduce the margin between the two--the producer's profit--below that in other industries, then, men will cease to produce the one and turn their labour and capital to producing the others which offer greater profit, thus lowering the supply of the abandoned product and raising that of the more profitable, thereby affecting the value of both.

The effect of this operation of the law of cost is to equalize profits and make the values of things conform to their cost or be proportional thereto.

The law can only operate when men are free to turn their labour from one industry to another. Hence arises the important exception to the law, that the values of goods produced by a monopoly are not affected by their cost of production. Only under free competition does the law operate in full force. As monopoly becomes a factor cost ceases to be, and, when the monopoly is complete, cost has no weight whatever in the determination of value.

For analogous reasons, cost enters but partially into the determination of the value of such goods as are dependent more or less on luck or chance for their production, as in the case of precious stones, gold, silver, etc.

_The Standard of Value._

We may use the value of anything as a measure by which to compare the values of any and all other things, but as all the factors that determine value are variable, the value of everything is variable. Any value may rise with reference to some other value, and at the same time fall with reference to a third.

By what standard, or invariable measure at all times and places, can we compare the values of goods to determine their constancy or variability?

We must not forget that there are two kinds of value, and that it is a standard of exchange value we are seeking. So far as it may be possible to formulate a standard of subjective value, it must consist of the pain or inutility of labour; for this kind of value pertains only to a single good, and cannot be referred to other goods without confusing it with the other conception. We cannot measure the absolute pleasure a good will give to an individual except by the pain he will undergo to get it. It is not a standard for this sort of value we want. It was evidently some such conception as the above--confusing, however, not only the two kinds of value but the two descriptions of labour--that led Adam Smith to consider labour as the ultimate standard of value. He appears also to have confused the idea of a standard of value with that of a determiner of value.

These errors were pointed out in part by Ricardo and, in part also, by J. S. Mill and later writers; hence the contention that labour is in any way a standard of value has long been abandoned by the ablest economists. The idea still lingers, however, and is frequently brought forward in current discussions, and for this reason it seems necessary to analyze briefly the relation of labour to value.

Labour is necessary to the production of all commodities, but it is not itself a commodity, nor anything which for itself is desired. It is a force, and, like every force, valuable according to the results it accomplishes. If unproductive, it has no value; if productive, its value varies according to the value of the commodities or utilities it creates. We use the terms "price of labour" or "value of labour," implying that it is the labour which is valued, and which is bought and sold; but the terms are merely a convenience. What is really bought and sold is the commodity or utility such labour has produced or will produce. If it were the labour itself, then the purchaser would receive not only the labour, but the commodity it produced, in exchange for the wages paid,--a double return,--which, of course, is absurd.

Three descriptions of labour may be distinguished in connection with the value of a commodity, viz.:--

(1) The labour expended in its production.

(2) The labour in general it will purchase.

(3) The labour necessary to produce more of it.

The first kind of labour in no way affects the existing supply or demand of the commodity, and is neither a measure of its value nor a regulator or determining factor of such value. Evidences are not lacking to prove that a commodity will frequently not exchange for as much labour as was expended in producing it.

The second kind of labour, the amount in general which a commodity will purchase, depends on the amount of commodities such labour will produce, less the share which goes to capital as its reward; for, neglecting rent or classing it with capital, these two, labour and capital, are joint factors in production and divide between them the total product. It is hardly necessary to observe that labour is continually growing more efficient; that improved skill and methods enable a much larger amount of commodities in general to be produced, with a certain amount of labour, than could formerly be produced; and that labour receives, as its share of such product, a much larger amount than formerly.

It is thus evident, that a commodity which would exchange for the same amount of labour now as formerly, would exchange for a much larger amount of commodities in general now than then, and, if we adhere to our definition of exchange value, would be worth _more_ than formerly; while if labour be taken as a standard of value, it would be worth the _same_. The use of this form of labour as a standard of value is, it will be seen, incompatible with the definition of value. It may serve as a measure of the relative values of two commodities at any particular time and place, just as any third commodity may; but, as Ricardo remarks, "is subject to as many fluctuations as the commodities compared with it."

The same argument applies to the third form of labour--that necessary to produce more of a commodity. This form of labour, however, is one of the factors in the cost of production, and through its effect on cost is one of the more remote factors that determine value, as explained in considering cost of production, but this does not make it in any sense a standard.

We may conclude, then, that labour in any form is not a standard of value; that, as John Stuart Mill observes, it "discards the idea of exchange value altogether, substituting a totally different idea, more analogous to value in use."

Since the values of things can never rise or fall simultaneously, every rise supposing a fall, and every fall a rise, it follows that the values of all taken together must be constant; in other words, that general values cannot change. Thus it is that we find whether any one thing has risen or fallen in value, as between one period and another, only by comparing it with all others,--in short, by its general exchange or purchasing power. If this has increased, then its value has risen; if it has decreased, its value has fallen. It is evidently not necessary that anything should exchange for more or less of _every_ other thing to show a rise or fall of value, but only that it should, on the average, exchange for more or less of all; that its average purchasing power should be greater or less. If it has exchanged at different times for the same amounts, on the average, of all other things, its value, clearly, has remained constant.

This is the only standard, or test, which can be applied to the exchange value of any commodity to determine its constancy or variability, and it is inherent in the very definition of exchange value.

The values of commodities may be compared to the surface of the ocean, which, vexed by winds and tides, is never at rest, every point continually rising or falling as compared with others. As some points rise others fall, yet there is a mean level which does not vary, and by comparison with which the variations of level of any particular point may be determined. So with values, there is a mean or average which is constant, and by referring individual values to that we can determine their fluctuations.

These ideas will become clearer as we proceed to apply them concretely to the special case of money.

Although there can be but one real _standard of value_, invariable at all times and places, yet, as before stated, any commodity may serve as a _measure of value_, and the great convenience subserved, by all the people of any locality or country using the same commodity instead of a number of different ones for this purpose, early led to the adoption of some one commodity in each locality as a "money" to measure values and facilitate exchanges.