Economics the Political Science
PART 1 of 2
Vic H. Blundell
[Published by the Economic and Social Science
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 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. 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
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
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
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
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
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 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
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
"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
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
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
"There are three kinds of wealth: --
(1) Such material gifts of nature as can be monopolised
(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 nor Lipsey , 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 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
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
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
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
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
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 did when it first became current.
George Soule, in his Ideas of the Great Economists 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
Thus did Adam Smith arrive at his theory of value, although he
later contrasts market value with monopoly value and explains the
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
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
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
"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
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
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.
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, 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.
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
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
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."
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
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"
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
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