Economics the Political Science

PART 1 of 2

Vic H. Blundell

[Published by the Economic and Social Science Research Association,
1983. A bound edition of this pamphlet remains in print and is
available thru the Henry George Foundation of Great Britain

"We shall test the validity and relevance of economic concepts and economic laws and we shall note how some of these have been rejected, corrupted or ignored by both the classical economists and the modern economists alike ...

"Other sciences are comparatively free from political influence. ...But economics is a necessary tool of politics, which sectional interests utilise with great vigour, producing a cornucopia of economic fallacies to sustain their arguments."


The Rule of Nature

The words "political economy" originally meant the economy of the state as opposed to the domestic or individual economy. "Political" (from the Greek "politikos") meant pertaining to the state or nation; "economy" (from the Greek "oikonomos") meant simply household.

When the word political was dropped and the word "economics" used, the subject matter itself was expanded to embrace concepts not strictly related to the original study. This, with a change of emphasis, has led to the neglect and downgrading of some of the most important concepts and principles dealt with by the classical economists, who invariably entitled their treatises "political economy" and referred to the subject matter as a science. Thus: "the science of political economy."

Henry George, in his own The Science of Political Economy[1] makes the point that the use of the term began at a time when, in economics, the distinction between scientific laws and man-made laws was not clearly made, and the economy of the community or "body-politic" was assumed to be the business of the state to regulate or control[2]. It was not until the advent of the French Physiocrats, led by Francois Quesnay (1694-1774), that the subject matter was treated as a science and this distinction made clear.

Physiocracy meant "the rule of nature" and the Physiocrats, with their cry of Laissez-Faire! argued that it was no business of the state to regulate and control the "body politic" -- this could safely be left to natural economic laws. The Physiocrats used the term "political economy" to mean the science of natural laws in the production and distribution of wealth divorced from politics. The term remained in use throughout the time of the classical economists and, although "economics" as taught today is allegedly separate from the study of politics, in that it is supposed to eschew value judgments, it nonetheless implicitly accepts the original notion that it is the business of the state to intervene in economic affairs rather than to leave them to individuals in the community.

It is difficult to argue today (though many do) that governments should abstain entirely from intervention in the economic life of the country, particularly when the problems needing attention are the result of previous intervention. But the primary purpose of the study of political economy should be to establish the existence and function of the laws of economics, because political nostrums are too frequently foisted upon the people in ignorance or defiance of these laws, with consequent failure of purpose.

This book, entitled Economics -- the Political Science, has the emphasis upon "political", using the word in its present-day sense. Other sciences are comparatively free from political influence -- some entirely (mathematics) and others to a more limited extent (medicine). But economics is a necessary tool of politics, which sectional interests utilise with great vigour, producing a cornucopia of economic fallacies to sustain their arguments and, when confronted with propositions based upon economic laws, they frequently deny that economics is a science at all.

We shall test the validity and relevance of economic concepts and economic laws and we shall note how some of these have been rejected, corrupted or ignored by both the classical economists and the modern economists alike. This should enable us to appraise, from sound premises, both criticisms and expositions of currently-held economic ideas.

We can start with the basic law of political economy -- the law upon which all other laws of economics depend and which by many has not been fully comprehended or has been misunderstood, or denied.

It is the law that "man seeks to satisfy his desires with the least necessary exertion." It results in the "invisible hand" of Adam Smith where each man acting in his own self-interest (in economic transactions) automatically furthers the interests of others. It is the basis of the division of labour, the law of competition, the law of variable proportions, etc.

It need hardly be said that this fundamental law of political economy does not mean that man always succeeds in achieving "least exertion", though he always aims for it. Lack of requisite knowledge may hamper or defer his objective; others may attempt and succeed in thwarting him, but his objective will be the same. Further, in pursuance of an even more dominant desire, a subsidiary desire may be satisfied with more exertion than was either necessary or (in isolation) desirable. But this confirms rather than invalidates the basic law, e.g., a man will take a longer route to a shop to satisfy his desire for an evening newspaper in order to visit an inn to satisfy an even stronger desire for a drink; or a man will walk to his destination in his desire for exercise, using more exertion than would be necessary if he went by car. Legislation affecting economic action in society which attempts to override this basic law is really attempting to legislate against human nature.

It is frequently alleged that economics is a heartless science, that man, unless he orders things differently, is at the mercy of economic forces which produce poverty, hunger, unemployment, etc.; and that economic theory lacks compassion and humanity and that society should not blindly follow the dictates of economic theory.

The error in this reasoning is in assuming that it is within the province of man to defy, regulate, change or ignore economic laws so as to produce a more acceptable arrangement of the production and distribution of wealth.

But economic laws are neutral. Like the sunshine and the rain, they fall upon the just and the unjust alike and, although one may meddle with the effects of economic laws, the thrust or tendency of these laws cannot be varied or changed.

This is not to deny that compassion, humanity or social justice have a place in the arrangements of man-kind, but such considerations properly belong in that branch of philosophy known as ethics or, as others will have it, the study of moral laws. For the purpose of arriving at a better state of society, both studies are necessary. They must be combined but kept separate, in the same way that the study of the generation of energy in an engine must be a separate study from that of inertia or friction, yet both combined to get the engine moving.

An important proviso in predicting the course of an economic law is, ceteris paribus -- in more popular language, "other things remaining the same."

The fact that few things remain constant for any length of time in a country's economy explains the difficulty of economic forecasting; the variables tend to swamp the constants. It is, of course, in forecasting the course of the economy that major disagreements among economists arise.

This, however, does not mean that all forecasting (based upon sound economic theory) is unreliable for, often, known variables can be allowed for and a margin of error established, but without a knowledge of economic laws, forecasting would be downright impossible.

Economic laws are no more precise than many laws in physics and chemistry, where time lags play an important part in their operation. Thus laws are tendencies, though immutable. Water will always seek its own level, but may not achieve it instantly; it may take time, but the pressure or tendency is always there. Economic laws function in similar fashion. What often happens when an economic law asserts itself over a legislative one is that another law is enacted to deal with the new situation.


Wealth and the Confusion of Terms

It is now necessary to examine the nature of wealth, the subject matter of political economy, for -- surprising though it may seem - a consistent and unambiguous definition of the word has not yet been agreed among economists and this has important consequences, as we shall see.

Before we proceed, however, a question which may already have presented itself is why professors of political economy not only fail to agree among themselves on the causes of and cures for our many economic ills, but also fail to agree on the fundamental concepts and principles upon which the science must rest. No wonder there is a widespread belief that economics is not a science.

To what extent professors of political economy today are precluded by the nature of their employment from an objective approach to their subject it might well be hard to establish -- if it could be established at all. Henry George in his introduction to his The Science of Political Economy[3] made some interesting observations on the effect that politically-motivated parties had upon the teaching establishments:

"In the supreme practical importance of political economy we may see the reason that has kept and still keeps it in dispute, and that has prevented the growth of any body of accepted and assured opinion.

"Under existing conditions in the civilised world, the great strength among men is for the possession of wealth. Would it not be irrational to expect that the science which treats of the production and distribution of wealth should be exempt from the influence of that struggle? …Economic truth, under existing conditions, has not merely to overcome the inertia of indolence or habit; it is in its very nature subject to suppressions and distortions from the influence of the most powerful and vigilant interests. It has not merely to make its way; it must constantly stand on guard. It cannot safely be trusted to any selected body of men, for the same reasons that the power of making laws and administering public affairs cannot be so trusted. Colleges and universities, though ostensibly organised for careful investigation and honest promulgation of truth, are not, and cannot be, exempt from the influences that disturb the study of political economy, they are especially precluded under present conditions from faithful and adequate treatment of that science. For in the present social conditions of the civilized world nothing is clearer than that there is some deep and wide-spread wrong in the distribution, if not in the production, of wealth. This is the office of political economy to disclose, and a really faithful and honest explication of the science must disclose it.

"Whoever accepts a chair of political economy must do so under the implied stipulation that he shall not really find what it is his professional business to look for."

Strong words but how true is this today? Are there influences, of whatever nature, that hinder objectivity in our schools and colleges?

Whatever our views on this matter, at least we should remain sceptical and on guard against innocent or contrived pitfalls into which we may be led by those to whom we are expected to look for guidance on economic matters.

To return to the subject of wealth. As we know, in defining terms the ideas or concept precedes the definition. In scientific study we label a concept for identification, being careful not to use that word for any other concept without qualifying words -- although even this can have its dangers.

It is too late to devise new scientific terms and we are stuck with the term wealth. What we must do is grasp its general meaning and sharpen its image by excluding under its heading contrary or different concepts for which other words are readily available through similar usage. Thus, the concepts of nature, man and man's products and the subdivision of man's products into what we loosely call tools of production, should, in order to avoid confusion, have separate distinguishable terms. This, however, has not been done (except by Henry George) throughout the whole history of economic thinking and today, economic terms are not only used loosely, but also the same terms are often used with different meanings and the same meanings often expressed with different terms.

Thus, the concept of the resources of nature, instead of being rigidly confined to the classical economists' own term "land" is frequently included with man's products under the heading wealth or capital.

The word property is often used when land is meant but, while all land may be designated property, not all property is land. Thus the words "the rights of property" or "the earnings of property" when used in economic discussions serve only to confuse the issue.

In the purely legal sense of the term, land includes all that is attached to it, so buildings become, in this context, land. The legal profession may have its own problems but there is no room for this kind of confusion in economics.

Henry George in his The Science of Political Economy (Chapter I Book II) listed twenty-four different definitions of wealth used among as many writers on political economy and quotes Professor Perry (Elements of Political Economy, 1866) thus:

"The meaning of the word wealth has never yet been settled; and if political economy must wait until that work be done as a preliminary science will never be satisfactorily constructed.... Men may think and talk, and write, and dispute till doomsday, but until they come to use words with definiteness, and mean the same thing by the same word, they reach comparatively few results and make but little progress."

The situation was no better fifty years later when J.E. Symes, Principal of University College, Nottingham, in his Political Economy (1906) makes the following statement:

"By wealth we mean all material objects of human desire which are not to be obtained for nothing.

"There are three kinds of wealth: --

(1) Such material gifts of nature as can be monopolised (natural wealth);

(2) Such material products of labour as are direct objects of human desire;

(3) Such material products of labour as are devoted to the production of other objects of desire."

This confusion extends to the author's discussion on wages:

"The remuneration for ability is analogous to rent (of land) if the ability is natural; but to interest if the ability is acquired." Neither Samuelson[4] nor Lipsey[5] , whose works are standard texts for universities, bother to define wealth. Lipsey refers only to the "national product" and "national incomes". Samuelson follows a similar line and refers to the distribution of goods and services and their scarcity.

B.V. Marshall, senior lecturer in economics at Portsmouth College of Technology, has written a 750-page volume, in which wealth is classified as follows:

"(i) Wealth as the property of individuals, (ii) Wealth as the property of firms, (iii) Wealth as the property of public authorities."

J.L. Hanson, one time senior lecturer on economics at Huddersfield College of Technology, another widely-read writer on economics and author of seven books on the subject, also classifies wealth into three groups: (1) personal wealth, (2) business wealth and (3) social wealth, the latter including publicly-owned "property", schools, libraries and "assets" of nationalised industries and coal mines.

Honor Croome, whose book The Approach to Economics[6] has gone into at least ten editions, and who was a student of the London School of Economics, says that national wealth is the wealth owned by all the persons inhabiting the national territory. By implication, wealth, although not strictly defined, appears to include anything that has a value.

Another author, Arthur Coe, to whom no economic qualifications are credited, says in his book The Economics for Everyman[7] that political economy is neither an art nor a science but a system of conduct and legislation founded upon science and which directs the arts. This is basically a quotation from Ruskin who, whatever his virtues in other fields, was certainly no economist nor was he ever regarded as one. Coe, despite his plea for clear definitions (page 14), says on page 158 that the capital of a country consists of the means of production available to it and may be divided into three categories: (1) the workers, (2) land and minerals and (3) machinery, tools and tackle. It is therefore not surprising that his book is a mass of confusions and contradictions.

It would appear that the most astute writers of economic textbooks avoid a definition of wealth and those who do attempt a definition usually end up in confusion and inconsistencies.

When we consider that slaves (labour) and paper money (a written promise) have both been included in the term wealth, we arrive at the situation when all the factors of production and the means of exchange, along with the products themselves, have been designated wealth!

It can be seen that failure to distinguish the products of man from the gifts of nature -- and from man himself -- has obscured their function in the economy and consequently the economic as well as the ethical implications of private ownership of these factors.

It was easy in the days of slavery to defend, by implication, the ownership of slaves by including them under the term wealth, or using the substitute word "property" so that in defending the rights of slave owners one was merely defending the rights of property!

In like manner is the significance of land, with all its vital economic ramifications, obscured when it is regarded simply as a form of wealth.

It will be noted that a distinction is frequently made between national wealth and the wealth of individuals and that certain things usually regarded as wealth to the individual are not necessarily regarded as part of the wealth of a nation.

But what of land owned by an individual? Is this part of the national stock of wealth? One might be tempted to answer yes. Is not land property, or wealth? Not so, and not merely because we wish to define land differently but because it is essentially different. A moment's reflection shows that the ownership of land is not the ownership of wealth, but the ownership of a factor without which wealth could not be produced.

The confusion of land with wealth is due largely to regarding wealth as being anything that has a value -- which land certainly has. Thus, including land under the term wealth because it has value obscures the fact that the ownership of land makes people wealthy not because land is wealth, but because it enables them to abstract wealth from others for permission to produce. The best example of this is in crop-sharing where the owner of land, simply by virtue of ownership, claims a share of the crop (wealth).

Theories of value have had an important effect upon the confusion as to the nature of wealth and more importantly, upon claims to it, and these theories will be the subject of the next chapter.


Develoment of the Labour Theory of Value

Abstract notions of value would appear to be of little importance today and concrete notions of value are taken care of in the market place -- so why bother? The fact is that the different concepts of value -- and there are many - have conditioned our economic thinking in subtle ways and have insidiously impinged upon ethical judgments.

Despite the volumes that have been written on the subject and the confidence of their authors, there is still uncertainty as to the nature of value and its place in current economic thinking.

Peter F. Drucker who, as a writer, lecturer and expert on business management, enjoys a worldwide reputation, has called for a new theory of value. The need for this he explains in an article: "Towards the Next Economics" published in The Public Interest, 1980 (National Affairs Inc.). But more on his views later.

In making a definition of wealth, economists found they were obliged to refer back to value. They sensed that, while all wealth appeared to have value, not all things considered to have value fitted in with their conception of the nature of wealth.

Value was linked with utility, fresh air and water had utility and yet in one sense they had no value.

To overcome this difficulty the idea of scarcity was introduced. Things, to have value, had to be scarce, that is, they could not be had for nothing. Thus, fresh air, water, pebbles on the beach, etc., have no value because they are not scarce although they may have utility.

But even this concept did not resolve the matter. The more scarce the article, the more valuable it was, yet this led to the absurdity that, if the quantity of goods in a country became more plentiful, then they were less valuable and the nation had suffered a decline in wealth. Nor could it be satisfactorily held that, if goods became scarce, this constituted an increase in wealth.

Wealth, value and utility (usefulness) could not be brought together in an acceptable relationship.

It was Adam Smith in his Wealth of Nations who established the distinction between "value in use" and "value in exchange", although the idea did not originate with him. This resolved part of the difficulty. Value in use, or usefulness, had no direct relationship with value in exchange or market value, and this usefulness did not dictate market value. Diamonds had little use but a high exchange value. One can see how useful a screwdriver, a needle or a can-opener, can be when one considers the alternatives, but these articles, though having a high value in use, have a very modest exchange value. Used stamps, a penny-farthing bicycle, or Bernard Shaw's fountain pen, have little or no value in use, but have an exchange value well demonstrated if they are put up for auction. The first edition of a book is certainly no more useful than a modern edition, yet such a book would exchange for many times more than the modern one.

Subsequent economists, however, while accepting the terms of distinction between value in use and value in exchange, got confused over the distinction itself, and this confusion has remained right through the marginal utility theory to the present day.

The marginal utility theory of value, once it became established as a substitute for the labour theories of value, was slavishly followed by writers of economic textbooks, as a glance through those now in current use will testify. But some economists now reject it, as Henry George[8] did when it first became current.

George Soule, in his Ideas of the Great Economists[9] says of the marginal utility theory:

"All this is very ingenious, but how relevant is it to the real economic world? The extreme mechanistic abstraction of the theory raised doubts. Picture a befuddled consumer, making out an expenditure budget on a form far more intricate than an income-tax blank, drawing up schedules of preference for all his wants, deciding on the last unit of each product he would buy at a given price. Of course no consumer ever does such a thing. Even businessmen make no deliberate marginal calculations; their records contain no equations and graphs of the sort found in economic textbooks. ...

"What can you do with a theory like this? Carried out to all its implications of general equilibrium, and revealing an allocation of resources in such a way as to offer consumers exactly what they want in the order of preference in which they want it, at the lowest possible prices, the theory is little more than an impressive elaboration of Adam Smith's "invisible hand" that leads everyone to serve the best interests of all if only he intelligently pursues his own advantage."

Peter Drucker, who, as mentioned above, is calling for a new theory of value, is himself reverting to a labour theory of value, although in his article it is not specifically expressed in those terms.

To see the whole argument in perspective, we must trace the theories of value from their recognised beginnings and observe how and why some of the controversies arose.

In The Wealth of Nations (which is as far back as we need to go for our purpose) Adam Smith, in expounding his labour theory of value, said that the exchange value of an article is equal to the quantity of labour which it can purchase:

"Labour is the real measure of the exchangeable value of all commodities. Toil and trouble is the real cost of acquiring anything. The possession of things saves the toil of acquiring them. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity."

Smith, however, said that, although labour was the real measure of exchangeable value of all commodities, it is not that by which their value is commonly estimated. Smith saw the problem of attempting to measure labour in any uniform way. There were different forms of effort, there was skilled and unskilled labour, there was experience, ingenuity, etc. His conclusion was that, although labour was the originator of value, its measure could be found only in the market place.

One can see the truth of this when one considers the abortive use of labour which results in a product not in demand, unsaleable, out of fashion, or lacking in those qualities which an alternative or improved product may offer for the same labour cost.

Money, says Smith, is the exact measure of the real exchangeable value of all commodities, but he adds the proviso that this is only true at the time and in the place that the transaction takes place.

Up to this point, Smith's theory of value leaves out that value added to a product by the use of capital. He then says that a man's "stock" (capital) entitles him to a return in exchange for the additional value it has given to the products.

Adam Smith then goes on to include land as a contributor to the value of the finished product and specifies rent as the share of value that goes to the landlord:

"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce ... which, when the land was in common, cost the labourer only the trouble of gathering it."

This rent, says Smith, makes a third component part of the price of commodities, to which he adds:

"The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command."

Thus did Adam Smith arrive at his theory of value, although he later contrasts market value with monopoly value and explains the difference.

Ricardo accepted Smith's labour theory of value and the distinction between value in use and value in exchange. Further, he accepted Smith's contention that "labour is the real measure of the exchangeable value of commodities". But Ricardo questioned that the value of a commodity is made up of the rent of land, profits of capital and wages of labour.

Since rent is a surplus which arises from land above the margin (i.e. after the costs of production have been met), Ricardo argued that rent was not part of the value of a commodity, so, since capital is but stored-up labour, this leaves only labour as the originator of value. This was qualified in this passage:

"There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description. Their value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them. These commodities, however, form a very small part of the mass of commodities daily exchange in the market. By far the greatest part of those goods which are the objects of desire are procured by labour."

When later economists criticised Ricardo, they could not see how rent could not be part of costs of production and therefore part of the value of goods produced.

It is now generally accepted that rent is not part of the unit price of goods although part of the total price of the goods received in the market. Rent, in short, was obtained not as part of the unit price but as part of whole price which was contained in the surplus production of superior land.

The value of an article was therefore the same when derived from no-rent marginal land as when derived from high-rent land.

If it is reasoned that rent contributes to value, it tends to obscure the nature of rent. If, however, rent does not contribute to value but takes a share of production represented by the surplus attributable to above-margin productivity, then rent takes value created by labour on superior land. The politics of this question begin to emerge.

As for capital being mainly stored-up labour, here is Ricardo:

"If we suppose the occupations of the society extended, that some provide canoes and tackle necessary for fishing, others the seed and rude machinery first used in agriculture, still the same principle would hold true, that the exchangeable value of the commodities produced would be in proportion to the labour bestowed on their production; not on their immediate production only, but on all those implements or machines required to give effect to the particular labour to which they were applied."

However, one must be careful how the argument is used. If it were not for the political conclusions derived from theories of value, the matter might be only of academic interest. But when labour claims all the credit for the creation of value, it is again a short step to reason that labour is entitled to all the value created. However, this will obviously not do, for once labour has been paid and the value it created in exchange for it transformed into capital, there can be no further claims by labour for the contribution capital has made.

We now come to John Stuart Mill's views of value. Mill begins his treatise by emphasising the very great importance of the theory of value. It is, he said, fundamental.

"Almost every speculation respecting the economical interests of a society thus constituted, implies some theory of value: the smallest error on that subject infects with corresponding error all our other conclusions; and anything vague or misty in our conception of it, creates confusion and uncertainty in everything else."

Mill was so confident that he solved all the problems of value that he wrote:

"Happily there is nothing in the laws of value remaining for the present or any future writer to clear up; the theory of the subject is complete."

Mill accepts Adam Smith's distinction between value in use and value in exchange but accuses him of falling into ambiguity in his exposition of it.

"Things (Smith says) which have the greatest value in use have often little or no value in exchange, which is true, since that which can be obtained without labour or sacrifice will command no price, however useful or needful it may be. But he proceeds to add that things which have the greatest value in exchange, (as diamonds do for example) may have little or no value in use. This is employing the word 'use' not in the sense in which political economy is concerned about, but in that other sense in which use is opposed to pleasure. Political economy has nothing to do with the comparative estimation of different uses in the judgment of a philosopher or of a moralist. The use of a thing in political economy means the capacity to satisfy a desire or serve a purpose. Diamonds have this capacity in a high degree and, unless they had it, would not bear any price. Value in use is the extreme limit of value in exchange. The exchange value of a thing may fall short to any amount of its value in use; but that it can ever exceed the value in use implies contradiction. It supposes that persons will give to possess a thing more than the utmost value which they themselves put upon it as a means of gratifying their inclination."

Here Mill is guilty of ambiguity and confusion himself. As Henry George in his The Science of Political Economy points out:

"Mill, after accepting the distinction between value in use and value in exchange and stating that only value in exchange has any relevance in political economy attempts to show some kind of relationship between the two kinds of value."

If (as Henry George states) Adam Smith was wrong in saying that the exchange value of a thing may be more than its use value, could Mill be right in saying that the exchange value of a thing may be less than its use value? If value in use is the highest limit of value in exchange, is it not necessarily also the lowest limit?

All this may seem highly irrelevant to the main issue but, as Henry George points out, it put "value in use" back into the realms of political economy and paved the way for the marginal utility theory of value.

Thus, although Mill endorsed the labour theory of value and the distinction between value in use and value in exchange, he left the door open for future theories of value that would contradict it.

To summarize:

The labour theory of value, displaced by the marginal utility theory of value for reasons which invite the question of objectivity, is by no means disposed of, despite its ambiguities, and the marginal utility theory is not now so universally accepted as it once was.

Adam Smith established the distinction between value in use (usefulness) and value in exchange (market price) and also between the originator of value (labour) and the determinator of value (the market). He acknowledged the contribution made to value by capital. Though sound to this point, Smith then included land as a contributor to value (value in exchange) by stating that its rent enters into value and thus into the price of commodities.

Finally, Smith said that the value of land and of capital could be measured in terms of labour, i.e. how much labour these could command in exchange:

"Labour is the real measure of the exchangeable value of all commodities."

Ricardo differed from Smith on two major points. The first was Smith's inclusion of the rent of land as a contributor to the value of commodities. Later economists, right up to the present day, support Ricardo in his statement that rent is a surplus over costs of production and therefore cannot enter into unit prices, which are determined at the margin of production.

Ricardo also argued that, since capital is but stored labour, labour is the sole originator of value. This is not easily sustainable when one considers that labour that has been turned into capital (with the use of land!) is no longer labour and can in no way be regarded or treated as such in discussing, in economic terms, the distribution of wealth. This really semantic argument apart, Ricardo came more closely to a logical exposition of the labour theory of value.

John Stuart Mill had little to add to Ricardo's analysis and, while accepting the distinction between value in use and value in exchange, confused this distinction and reintroduced use value back into the theory of value.


Karl Marx on Value

In Volume I of Das Kapital[10], Karl Marx sets out his labour theory of value and, although he modifies it in Volume III, it is his first exposition that is generally understood to represent his view despite the significant changes made in Volume III.

In Volume I, Marx argued thus:

Use value, or utility, has no place in political economy: it is exchange value only that has relevance (this follows Adam Smith and Ricardo). Exchange value is a quantitive relation between things. If any given number of things have the same exchange value, then each represents an exchange value replaceable by any of the others. This indicates that there is a factor common and reducible to them all. This factor is labour. After the exclusion of usefulness or utility, commodities "have only one common property left, that of being products of labour." If things are of equal exchange value, this merely means that each contains the same amount of human labour.[11]

There is in Marx's theory the assumption that everything that has value is the product of human labour, that only through labour does value express itself.

In Volume III, Marx argued that the landlord received surplus value from the capitalist as rent, so that rent in fact was part of the surplus value that the capitalist extracted from the worker because, on land above the margin, workers were able to create a surplus above the average rate of profit.

But Marx's exposition of his theory that value expresses the amount of labour congealed in a commodity leaves many questions unanswered. When Marx discarded use value as being irrelevant, it left only market value and, although the market value of a product reflects to a fair degree the ongoing costs of production (labour and capital), it is by no means dependent upon the original value of the labour that went into it, particularly with products that quickly go out of fashion or, through misplaced optimism, fetch in the market less than was expected or nothing at all. Marx met this objection by explaining that the labour involved in such projects does not count as labour: "Labour spent on anything counts effectively only insofar as it is spent on something that is useful for others." This was the "socially necessary labour." But scarcity can bring a different (and higher) value than that represented by the labour embodied in it.

Marx deals with skilled and unskilled labour; identical commodities produced with different amounts of labour; the averaging of skills, and other points, some of which are in anticipation of possible objections to his theory. For Marx, all labour is reducible to what he terms "human labour in the abstract."

In the same way, says Marx, that the rent of land is absorbed into the value of raw materials and contributes to total value, so capital (which is only stored-up labour), contributes to the total labour expended on producing the required commodities. Thus, when a cloth manufacturer buys raw materials, machines and labour, each of these items costs the manufacturer the price of the labour that went into them.

If a capitalist paid rent to a landlord, this was regarded as a cost and it reduced the amount of surplus value he could obtain for himself.

Marx said that there were really only two sources of income: labour and surplus value, both of which were created by labour. Wages were paid from the former, and profits and rent were paid from the latter. This theory of surplus value Marx explains thus:

"The worker produced for his capitalist employer more value than he received in wages. Thus a surplus value arose which was appropriated by the employer in the form of profit."

In describing how this surplus manifested itself, Marx said that the employer did not receive the surplus value as part of the unit price he charged for his goods, but from the additional units produced by the workers in excess of those required to meet his wages. If, for example, six hours working-time per day was sufficient to meet the worker's maintenance (Marx called this the "necessary working time"), then the worker's wage was the equivalent of this. Any extra hours worked in a day (the "surplus working time") was appropriated by the employer, so that, if the worker laboured for ten hours a day, then he was exploited to the extent of four hours a day.

It will be seen that this concept of a surplus arising after costs of production have been met, rather than from an additional profit on each unit produced, is mirrored in Ricardo's theory of rent. Ricardo had, in effect, anticipated a theory of surplus value although he did not describe it as such, and of course arising from a single factor of production -- land.

Marx, in his theory of surplus value, makes a distinction between what he terms "constant capital" and "variable capital" and it is from the latter that the whole of the surplus value comes. This variable capital is that part of capital that the capitalist uses to buy labour and make a profit on.

Constant capital is his machinery, tools, etc. This gives him no return. "Machinery, like every other component of constant capital, creates no new value, but yields up its own value to the product that it serves to beget."[12]

From this it would appear that capitalists would attempt to maximise their labour power and minimise their machinery. And, what of those industries which, in contrast to others, use greater or less proportions of variable capital? Does their rate of profit vary as the rate of variable capital is high or low?

According to this theory, the rate of profit in different industries will vary according to the proportions of variable and constant capital employed in them, and it would, for instance, be folly to replace workers with costly machinery. The replacement of car workers by robots should herald a great diminution of surplus value.

Many critics of Marx raised such objections and, whilst admitting their validity, Marx did not provide an answer, and the theory that, in Marx's own words, "contradicts all experience" remained.

Marx did promise a solution to this "apparent contradiction" but when the opportunity came in Volume III (the solution did not appear in Volume II) the theory was simply revised to state that profit was calculated on the total capital employed. Marx had eventually come round to a 'cost of production' theory not basically different from Smith's and Ricardo's.

Volume III, incidentally, contains some illuminatmg chapters on land rent which firmly establish land monopoly as the basis of all exploitation.

We have not dwelt upon all the aspects of value and surplus value (and the refinement of these theories) contained in Marx's writings. For our limited purpose we have only outlined them as representing a labour theory of value, the political significance of which will be shown later, for, even if his theory of surplus value does not stand up to examination, this does not necessarily dispose of the labour theory of value itself, the unresolved aspects of which are tackled by Henry George in his The Science of Political Economy.

Part 2