Chapter XI · THE ULTIMATE RELATION OF COST TO VALUE (continued 2)

As was virtually pointed out by Malthus,[259] the presence of rent and interest charges in entrepreneur’s costs is an insuperable obstacle in the way of the theory that a commodity’s total labor cost is proportionate to its exchange value. If, however, an attempt is made to correlate marginal labor cost and exchange value, the difficulties of rent and interest are eliminated. When we say that these difficulties are eliminated, we do not mean that they are arbitrarily set aside, or that we merely run away from them: but the marginal labor cost of a commodity is not affected by the payment of rent and interest. For instance, if wheat is being produced at the same time on land of the best and land of the poorest grade, a large rent will be paid out of the total wheat product on the former soil, and little or no rent may be paid out of the total product on the latter, and yet the cultivation will be carried to the point which makes the marginal product of labor and the marginal labor cost of wheat the same on both grades. The same observations may be applied to rent of capital (or interest, as we call it when it is calculated as a percentage of the value of the rent-bearing agent).[260]

The great difficulty in the way of the theorem that the marginal labor costs of commodities are in proportion[261] to their exchange values, is the problem of skilled labor. The best way to show the effect of skilled labor upon comparative marginal costs is first to eliminate it temporarily from the problem, and show what the relation of marginal labor cost would be to exchange value, if there were only common labor throughout society. If all labor were of a single grade, all commodities which are products of labor would have exchange values in proportion to their respective marginal disutility costs. This would be true whether the products are consumption goods or are merely production goods which are used in making further products. Some valuable goods are not products of labor. Such are bodies of ore lying in their natural state, standing timber, etc. These production goods have no disutility cost, marginal or total, and consequently their exchange values have no relation to cost. Their supplies are determined independently of human agency. Ore at the surface, crushed or smelted ore, are, however, products of labor, and so long as only a part of the known existing ore of mines is removed—a part remaining untouched because of too high cost—the supply of any product resulting from the combination of labor and native ore-bodies, will depend upon marginal labor cost.[262]

The homogeneous labor force (which we have assumed temporarily) will distribute itself among all the various industries in society in proportions determined by the marginal product in each industry. Capital will also distribute itself throughout the system of industries, tending, of course, in the long run, to appear in each industry in such proportions as will, apart from inequalities of risk, produce everywhere an equality of its returns. Assuming the distribution of capital to have reached a condition of equilibrium—it being no part of our present task to follow out a theory of interest—let us try to show that labor will distribute itself over the field of industry in such a manner that exchange values will be proportionate to marginal labor costs. If labor flows from one industry to another, the total output of the first industry will decline and that of the second will increase. The change in the supplies of the respective products of these industries will alter the exchange values of these articles. Different distributions of labor among industries will give rise to different relative supplies of commodities and different exchange values. As the supply of labor in any industry increases, its marginal product decreases. If all occupations possessed the same disutility, the supply of labor would be so distributed that its marginal product would have the same exchange value in all industries. But if some occupations necessitate higher disutility costs than ordinary, the supply of labor obtainable for those industries will decrease until the exchange value of the marginal product is raised till it compensates for the superior disutility.[263] If one commodity is produced at a higher disutility cost (to the labor directly employed upon it) than another, the marginal product of labor in it will have a higher exchange value. If 6 A in one industry and 1 B in another make the marginal product of a labor-day, 6 A will exchange for 1 B, provided the disutility of labor is the same in both employments. But if it costs more disutility to produce 6 A than 1 B, the relative supplies of A’s and B’s would be so adjusted that 6 A will exchange for more than 1 B. Thus a superior disutility cost raises the exchange value of a commodity, in order that this commodity may afford a superior value product to labor. Labor-power is a peculiar production good. Like other production goods of manifold productive uses, its expenditure constitutes potentiality cost; but it is unlike others in that human pain cost is an ever-present incident to its expenditure. The distribution of labor power among different productive uses is not governed solely with reference to its share of value derived from the product, but is governed in part with reference to the pain-cost involved in the production of the product. A higher disutility necessitates a higher share of exchange value. Thus it comes to pass that this most disposable and important of production goods will distribute itself among products in such a manner that these products will have exchange values in proportion to their marginal pain costs. This result is brought about solely by control of the relative supplies of these products, the exchange values of which are all derived from utility solely after the method described in the utility theory.

When we introduce the question of skill into the problem, we find that the supplies of many kinds of labor are limited not with reference to the disutility of the tasks performed, but are limited solely because the requisite brain-power, ingenuity or strength are scarce. The marginal product of such labor is raised by the limitation of its supply. Thus, it is a truism that many occupations of the lowest disutility afford very high wages, and that in the vast majority of cases high wages are not caused by high disutility, but by scarcity of competent persons. Suppose the commodity A is scarce, is of high exchange value, and is the marginal product of a skilled labor day. Article B is the product of a day of the lowest kind of labor. One A may well exchange for three or four B. Yet the marginal labor cost of A is, in the typical case, even less than that of B, for the skilled laborer ordinarily suffers less pain cost per day than the unskilled. Hence, the exchange values of these products are quite out of proportion to their comparative marginal disutility costs. The existence of non-competing groups, first emphasized and named such by Cairnes, is then a fatal obstacle in the way of the adjustment of exchange values to comparative marginal costs.

8. We may now essay a partial summary of the results which have been reached up to this point. The end of the theory of value is primarily to explain exchange value. The only workable definition of this term is purchasing power. The purchasing power of a commodity is measured objectively in terms of the physical units of some other particular good, except when we are speaking of the concept of an article’s general purchasing power. This, its purchasing power over all other commodities,[264] is measured as some kind of mean or average of all its particular purchasing powers. What mean, it is no part of our task to enquire. All goods which possess exchange value also possess that other kind of worth which we termed “esteem value.” Every commodity derives its exchange value solely from its esteem value, or, speaking with precision, from its esteem values. For a commodity has a separate esteem value to each individual person who can utilize it. If society were as one man,[265] the exchange values of goods would be but the exponents of their relative esteem values. In other words, if a physical unit of one commodity exchanged for two units of another, the reason would be merely because the first possessed twice as much esteem value to all society as a unit of the second. But the esteem value of an article is a much more definite thing than a social estimate, i. e., an “average” (or typical) estimate of worth. The esteem value of a good to a person is the measure of the amount of that person’s satisfaction conditioned upon the enjoyment of the good. Goods existing in superfluous abundance give satisfaction but do not condition it, and hence lack esteem value. Taking for granted the amount of an individual’s income, the esteem value which a good has for him determines his price equivalent for that good.[266] The market price, or exchange value, of a good is a resultant from (never in any sense an average of) the individual price equivalents placed upon it by the body of individual consumers.

The exchange value of a good varies inversely with the supply of it presented to the body of consumers. The larger the supply, the lower is the price equivalent which must be reached as the marginal determining point of its market price.[267] A change of supply alters exchange value only because it changes the marginal price equivalent.[268] In the social market, the purchasing powers of all the various products over one another depends upon their relative supplies. So far as cost of production in any form exercises any degree of control over the value of a good, it can act solely by way of influencing the supply of the good. The phenomenon of the apparent regulation of the exchange values of products by their entrepreneur’s costs, is but a part of a large process in which cognate (or “fellow”) products adjust their relative supplies and their exchange values to one another, to the end that the common production goods entering into all of them may produce equal productive contributions or shares of exchange value per unit in all of their productive applications.[269] The relation of the pain costs of products to their exchange values is limited to one of mere proportionality.[270] The pain cost of a product may be calculated in two very distinct ways, giving total pain cost or marginal pain cost. The total pain cost of a good, consisting in all the labor and abstinence ever endured to bring it into existence, is quite an indeterminate quantity,[271] and its influence upon the exchange value of a good is very remote and irregular. The larger part of total labor cost, the part which includes the labor directly applied to commodities, plus the labor indirectly applied by being directly applied to the raw material and machinery immediately used in their production, and so on for the few nearest generations of machines, this being the part which excludes the infinitesimal bits of labor cost expended far in the past, can be shown positively not to be in proportion to their exchange values. For commodities produced at a higher expense of rents of all kinds (as opposed to wages) have exchange values out of proportion to this calculable part of their total costs.[272] We find that the control of marginal cost over value is closer than that of total cost. If it were not for the existence of innumerable grades and classes of skilled labor, the supplies of produced goods would be so adjusted that their exchange values would be in proportion to their respective marginal costs. But on account of skill, we must here again characterize the influence of subjective cost as remote and irregular.

In conclusion, it is true, speaking in very loose and general terms, we may say the exchange value of a good depends both upon its utility and its costliness to mankind. But it would not be proper to say that cost and utility are equal and coördinate regulators of value. Therefore, Professor Marshall’s shears simile is not to be commended. The most noteworthy changes in exchange values have been produced by discoveries which reduced the labor cost of goods. But the amount of the reduction thus produced in the exchange value of a particular commodity could have only the roughest correspondence with the amount by which its relative pain cost was reduced. Also, for reasons already shown, we know that neither before or after these changes was it possible for exchange values to be in proportion to relative pain costs, whether total or marginal costs be taken. Furthermore, all alterations of exchange values produced by cost changes are effected solely by alteration of the value-determining utility itself. Utility has a much more direct and intimate relation with value in either form than cost. Value may exist without cost and cost may be expended without occasioning value. Value never exists without utility and utility (not in the sense of Smith’s “use-value,” but the effectual utility, the utility which measures the satisfaction conditioned by a good) never exists without value. Cost affects value solely by influencing utility itself. From this comes the all-important conclusion that whenever any of the numerous and permanent forces are active which interfere with the influence of cost, value follows the utility and not the cost.