Economics the Political Science
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 --
Part 1 of 3]
"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
"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 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
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
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
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
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
"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 into
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 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
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.