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An inquiry into the formulations and implications of Say's law of markets

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An inquiry into the formulations and implications of Say's law of markets

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Content AN INQUIRY INTO THE FORMULATIONS A N D IMPLICATIONS OF SAY’S LA W OF MARKETS by Ahmed Kooros A T h esis P re se n te d t o th e FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In P a r t i a l F u lf illm e n t o f th e R equirem ents fo r th e Degree MASTER OF ARTS (Economics) January 195$ UMI Number: EP44755 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. UMI EP44755 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. UM T Dissertation Publishing Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 4 8 1 0 6 - 1346 U N IV E R SITY O F S O U T H E R N C A L IF O R N IA GRADUATE SC H O O L UN IV ER SITY PA RK LO S A N G E L E S 7 S c . s t K e s . This thesis, written by A H M ED KOOROS ^ ^ under the guidance of hi-3.— Faculty Committee, ^ ^ ^ 1 and approved by all its members, has been pre- e/L/J sented to and accepted by the Faculty of the Graduate School, in partial fulfillment of the requirements for the degree of .................... . MASTER. OF ARES....................................... D a te.................J .m u a x j.. 195.8....... Dean Faculty Com m ittee Chairman * • c i M U * L ^ TABLE OF CONTENTS CHAPTER PAGE ! I . INTRODUCTION 1 B asie p r i n c i p l e s o f C l a s s i c a l E conom ists ................................. 2 I I . THE LA W OF MARKETS 13 F o rm u latio n o f th e Law o f M arkets . . . 13 The meaning o f th e Law o f M arkets • 14 The o r i g i n o f th e ’’ro u g h ly sp e ak in g ” i n t e r p r e t a t i o n ................... 16 P h y s io c r a ts and th e Law o f M arkets • 21 The o r i g i n o f th e ’’r i g i d ” i n t e r p r e t a t i o n o f th e Law o f M a r k e t s .................................................... 23 The fo under o f th e ’’r i g i d ” Law o f M a r k e t s ........................................... 24 Im p lic a tio n o f th e Law o f M arkets • 25 C r i t i c s o f th e Law o f M a r k e t s ........ 26 I n t r o d u c t i o n .................................................... 26 M althus v i s - a - v i s R icardo . . . . . 26 M a lth u s’ th e o ry o f v a lu e and p r o f i t . 27 David R ic a rd o ’s th e o ry o f p r o f i t and v a lu e i n c o n tr a s t to M althus . . . . 32 The o r ig in o f R ic a rd o ’ s t h e o r e t i c a l e r r o r ................................................................... 37 CHAPTER I I I I . 111 PAGE Sismonde de Sism ondi .................................. 3 8 K arl M a r x .............................................................. 43 John A tk in H o b s o n ...................................... 52 John M. K e y n e s ..................................................... 57 F i r s t n o v e l t y ................................................ 5$ Second n o v e lty — an advancement ov er M a r x .................................................... 63 P ro p e n s ity to c o n s u m e ............................. 64 R i c a r d o i s t s .............................................................. 70 J . S. M i l l ......................................................... 70 A lfre d M a r s h a l l ........................................... 73 THE LABOR THEORY OF V A L U E .................................. 77 I n tr o d u c tio n .............................................................. 77 The th e o ry o f v a lu e u nder m e rc a n tilis m . 79 The t r a n s i t i o n o f th e th e o ry o f v alu e from th e f o re ru n n e rs o f Adam Smith t o c l a s s i c a l .................... S i N a tu ra l p r ic e ................................................ S3 Adam S m i t h s th e o ry o f v a l u e ........................ SS The p e rio d o f th e Glasgow L e c tu re s . SS C a p ita l ac cu m u latio n i n th e W ealth o f N a t i o n s .................................. 90 The fo rm u la tio n o f th e th e o ry o f v a lu e i n th e W ealth o f N atio n s . . 92 CHAPTER IV PAGE ’’Value i n u s e ” and ”v alu e i n exchange” ..................................................... 97 E v a lu a tio n o f S m ith ’ s th e o ry o f v a l u e .............................................................. 99 R ic a rd o ’ s tre a tm e n t o f th e la b o r th e o ry o f v a lu e . * • 103 R ic a rd o ’ s th e o ry o f v alu e p r i o r to 1 8 1 7 ......................................................... 106 The th e o r y o f valu e i n th e P r i n c i p l e s , f i r s t e d i t i o n and t h i r d e d i t i o n • . 113 R ic a rd o ’s concept o f a b s o lu te v a lu e ...................................... 119 The e v a lu a tio n o f R ic a rd o ’ s th e o ry o f v a l u e ............................................................ 120 M arx’ s th e o ry o f v a lu e ...................................... 126 M arx’ s c r i t i c i s m o f th e above a r g u m e n t * • 128 M arx’ s th e o ry o f v a lu e ............................. 131 C o r r e la tio n o f th e th e o ry o f v a lu e w ith r e a l i t y .................................................... 136 C onversion o f s u rp lu s v a lu e in to p r o f i t .............................................................. 140 G eneral e v a lu a tio n .................................................... 142 CHAPTER PAGE BIBLIOGRAPHY ............................................................................................. 149 APPENDIX A—M athem atical r e s ta te m e n t o f th e Law o f M arkets • • • • • • • • • • • • 161 APPENDIX B— The Law o f M arkets and th e th e o ry o f p r i c e .......................................................................... 169 ACKNOWLEDGMENTS I w ish to acknowledge w ith g r a tit u d e th e h e lp and v a lu a b le su g g e s tio n s o f P ro f e s s o r Spencer D. P o lla r d , D octor F ra n k lin 7 . W alker, and D octor John E . E l l i o t t . j T h e ir c o n s ta n t i n t e r e s t , encouragem ent, and c r i t i c i s m , I I 1 more th a n a n y th in g e l s e , made th e w r i tin g o f t h i s t h e s i s j p o s s i b l e . A lso, I owe a s p e c ia l d eb t o f g r a tit u d e to D octor R. L. Meek, whose o b s e rv a tio n s on th e th e o ry o f v alu e have h elp ed me to surmount many o b s ta c le s . None o f th e s e , how ever, m ust be h e ld r e s p o n s ib le f o r th e argum ents p u t forw ard i n t h i s t h e s i s , o r f o r any e r r o r s and m i s i n t e r p r e t a t i o n s t h a t rem a in . M oreover, I am g r a t e f u l to D octor A rth u r Knodel o f th e D epartm ent o f Languages, who su p p lie d th e French t r a n s l a t i o n s in c o r p o ra te d i n t h i s t h e s i s - A N INQUIRY INTO THE FORMULATIONS A N D IMPLICATIONS OF SAY’S LA W OF MARKETS CHAPTER I INTRODUCTION The m o n o p o lis tic p o l i c i e s o f m e rc a n tilis m and i t s th e o ry o f f o r e ig n tr a d e were th e b a s ic t a r g e t s o f I c r i t i c i s m by C la s s ic a l E co n o m ists. Adam Smith and i ! David R icardo endeavored t o expose th e f a l l a c i e s o f m e r c a n t i l i s t th e o ry , which h elp ed them win t h e i r p la c e i n th e h i s t o r y o f economic th o u g h t. The t o t a l e f f e c t was an academ ic c o n tr ib u tio n to p o l i t i c a l economy. S tep by s te p , th e elem en ts o f new sc ie n c e emerged from t h a t c r i t i c i s m on m e rc a n tilis m and were g r a d u a lly u n ite d i n to th e system o f id e a s out o f which Adam Smith p u b lish e d h i s W ealth o f N a tio n s . He was fo llo w ed by David R icardo and T. R. M althus who c o n s tru c te d th e f i r s t P r in c ip le s o f th e modern economy. T h e r e a f te r , f o r o ver a hundred y e a r s , R icardo se rv e d a s th e fo u n ta in h e a d f o r th e developm ent o f economic th e o r y . ' I t was " R ic a rd o Ts g r e a t c o n t r i b u t i o n ,” 3-The term C la s s ic a l E conom ists i n t h i s p ap er i s used t o mean t h a t group o f men who were concerned w ith economic c o n d itio n s and th e p ro c e ss o f p ro d u c tio n . This sch o o l d a te s from S ir W illiam P e tty t o R icardo i n E ngland, and from B o i s g u i l l e r t t o Sism ondi i n F ra n c e . T his term seems to have been used by K arl Marx. See M arx1s A C o n trib u tio n t o th e C r itiq u e o f P o l i t i c a l Economy7 t r a n s l a t i o n - b y N. E . S tone (U Eicago: C h a rles h • n e r r , 1904), p . 56; and C a p ita l, A C r i t i c a l A n a ly sis o f C a p i t a l i s t P ro d u c tio n (lew York: I n t e r n a t i o n a l.. Publ'i sh'Ir's"," T9Vn"7 T - ”53' * w rote H. H o lla n d e r, th e American R ic a rd ia n s c h o la r , t h a t co n v e rted ’’economic s p e c u la tio n from d etach e d in q u ir y o r s p e c i f i c t h e o r i z a t i o n in to an i n t e g r a l l y r e l a t e d body o f p r i n c i p l e s . To t h i s e x t e n t, R icardo i s to be re g a rd e d a s 2 I th e tr u e fo u n d er o f th e sc ie n c e o f ec o n o m ic s.” C a p ita l- j ism was re g a rd e d as a s t a b l e , perm anent, and f i n a l form o f developm ent. In th e h i s t o r y o f s o c ia l th o u g h t th e emergence o f th e sc ie n c e o f p o l i t i c a l eeonomy was epoch-m aking, because i t was r u le d by i t s own la w s . In fo c u s in g th e a t t e n t i o n t o th e u n ity o f economic phenomenon, C la s s ic a l E conom ists d em o n strated th e in te rd e p e n d e n c y o f f a c t o r s o f which th e system was composed. I . BASIC PRINCIPLES OF CLASSICAL ECONOMISTS S e v e ra l im p o rta n t p r i n c i p l e s h e ld a ce n t r a l p la c e i n c l a s s i c a l d is c u s s io n s and have been th e p a r t i c u l a r t a r g e t o f r e c e n t c r i t i c i s m . F i r s t , money was viewed as o n ly a medium o f exchange. The m ajo r im p lic a tio n o f t h i s p r in c ip l e was t h a t a change i n th e q u a n tity o f money, sin c e i t would change p r ic e s e q u a lly , would sim ply r a i s e o r low er th e p r i c e s o f a l l th in g s u n ifo rm ly . ^H. H o lla n d e r, ’ ’R ic a r d o ,” The E n cy c lo p ae d ia o f th e S o c ia l S cie n ces (New York: The M acm illan Company, TOST, XTI17 ’ m - . _ _ _ R icard o , a s th e advocate o f t h i s p r i n c i p l e , was combat in g th e "L ockian” n o tio n t h a t th e r a t e o f i n t e r e s t i depended on th e abundance o r s c a r c i t y o f money. I t i s tr u e t h a t th e common th re a d ru n n in g th rough th e w r i tin g s o f alm ost a l l m e r c a n t i l i s t w r i t e r s was th e n o tio n t h a t money, i f n o t synonymous w ith w e a lth , i s a t any r a t e an e s s e n t i a l in g r e d ie n t in th e w e a lth o f a n a t io n . I t was a n o tio n which Adam Smith p i l l o r i e d as a p a te n t a b s u r d ity , and which J . M * Keynes r e h a b i l i t a t e d a s an i n t u i t i v e r e c o g n itio n o f a c o n n e c tio n betw een th e q u a n tity of money and low i n t e r e s t - r a t e s in s tim u la tin g in v e stm e n t and employment.-^ At th e same tim e th e r e were w r i t e r s such as S ir Dudley N orth and S i r W illiam P e tty who, i n c o n t r a s t to John Locke, were b eg in n in g to p reac h t h a t i n t e r e s t - r a t e s depended n o t on th e abundance o r s c a r c i t y o f money, b u t on th e demand f o r and supply o f i n d u s t r i a l c a p i t a l or 1 1 s t o c k .” S ir Dudley North s a id : 3 J . M. Keynes, i n h i s 'P r e f a c e t o th e French e d i t i o n o f The G eneral Theory o f Employment, I n t e r e s t , and Money,” s a id , ” 1 have d isc o v e re d i t in th e id e a t h a t th e r o le o f th e r a t e o f i n t e r e s t i s t h a t o f e q u i l i b r a t i n g n o t th e demand and su p p ly f o r new c a p i t a l goods, b u t th e demand and su p p ly o f money, t h a t i s to say th e demand f o r l i q u i d funds and th e means o f s a t i s f y i n g i t . W e have th u s r e tu r n e d to th e th e o ry o f th e o ld e r eco n o m ists p r i o r to th e 1 9 th c e n tu ry . T his t r u t h was d is c e rn e d v e ry p r e c i s e l y by M o n te sq u ie u .” T r a n s la tio n by Peacock i n I n t e r n a t i o n a l Economic P ap ers (Number l+: London: M acm illan Company, 1954), p* 6$. I t i s not low I n t e r e s t makes t r a d e , b u t Trade in c r e a s in g th e S tock o f th e N atio n makes I n t e r e s t low . . . . Gold and S i l v e r . . . a re n o th in g but th e W eights and M easures by which T ra ff ic k i s more c o n v e n ie n tly c a r r ie d on th a n could be done w ith o u t them: and a ls o a p ro p e r Fund f o r a su rp lu sa g e o f S tock to be d e p o s ite d i n . 4 This m ight be reg ard ed as th e groundwork f o r th e f i r s t p r i n c i p l e o f th e c l a s s i c a l p ro p o s itio n s * Since money r e p r e s e n te d , a c c o rd in g to C la s s ic a l Econ o m ists, o n ly a sim ple means o f exchange, e i t h e r f o r c a l c u l a t i o n o r as a medium o f exchange, i t could make no d if f e r e n c e t o p ro d u c tio n , hence could n o t a f f e c t th e system o f e x c h a n g e - r a tio s . T his p r in c ip l e made th e th e o ry o f v a lu e th e c e n tr a l theme o f c l a s s i c a l d is c u s s io n . Interw oven w ith t h i s f i r s t p r in c ip l e was th e p r i n c i p l e which was embodied i n th e famous Law o f M arkets, which h i s t o ry h as a s s o c ia te d w ith th e name o f J . B. Say. But th e f i n a l fo rm u la tio n o f th e p r in c ip l e owes more to David R icardo th a n to J . B* S ay. John S* M ill contended t h a t th e m e rit o f s t a t i n g th e p r i n c i p l e , i n E ngland, belonged to James M ill who: . . . had s e t f o r t h th e c o r r e c t d o c trin e w ith g r e a t fo rc e and c le a r n e s s in an e a r l y pam phlet, c a lle d f o r t h by a tem porary c o n tro v e rs y , and e n t i t l e d Commerce D efended; th e f i r s t o f h i s w r i tin g s which 4 s i r Dudley N orth, D isc o u rse s Upon Trade (E dinburgh: r e p r in te d by J . B a lia n ty n e and Company, 1S 22), pp.^ 1 , 4, and 16. 5 a t t a i n e d any c e l e b r i t y , and which he p r iz e d more a s hav in g been h i s f i r s t in tr o d u c t io n to th e f r ie n d s h ip o f David R icard o , th e most v alu ed and most in tim a te f r ie n d s h ip o f h i s l i f e . 5 T his p r i n c i p l e was sponsored by R ic a rd o , sin c e i t was j th e c o r o l l a r y o f h i s la b o r th e o ry o f v a lu e and ra n th ro u g h o u t th e w r itin g s o f th e R ic a rd ia n School* I n th e deeade o f th e 1920’ s th e r e a l i t y o f th e s e c l a s s i c a l p r i n c i p l e s was q u e s tio n e d by a few members ft o f th e Cambridge School i n th e c o n tro v e rs y o v er th e assu m p tio n o f " p e r f e c t c o m p e titio n ” and th e co n c e p tio n o f c o s t s . John M. Keynes denounced th e c l a s s i c a l t e n e t s i n h i s l e s s academ ic w ork, n o ta b ly The End of L a is s e z - F a ire i n 1926* In th e same y e a r S r a f f a , by h i s p a th -b re a k in g a r t i c l e in th e Economic J o u r n a l, r a is e d some im p o rta n t q u e s tio n s c o n c ern in g th e inadequacy o f th e co n c e p tio n of c o s t s . The c o n tro v e rs y on th e s e p r i n c i p l e s , which was assumed by N e o -C la s s ic a l E conom ists t o have been s t i l l e d , became more a p p a re n t a f t e r th e appearance of K eynes’ ^John S t u a r t M ill, P r in c ip le s of P o l i t i c a l Economy (A shley e d i t i o n ; London: Longman, 1909), P* 563. H* Dobb, "Cambridge S c h o o l," The E n cyclopaedia o f th e S o c ia l S c ie n c e s (New York: The M acm illan Company, T 93T T 7 v; m-yrr.— The G eneral Theory of Employment, I n t e r e s t , and Money i n 1936* This c o n tro v e rs y re q u e s tio n e d c l a s s i c a l assu m p tio n s which were a c c e p te d o r were p assed u n n o tic e d by N e o -C la s s ic a l E co n o m ists. As f a r as Keynes was co n cern ed , t h i s was an o p p o rtu n ity f o r r e p a i r and reco n s t r u c t i o n o f th e fo u n d a tio n w ith more l a s t i n g m a te r ia l s which would s u i t p r e s e n t c o n d itio n s . A ccepting D r. Paul SweezyTs v ie w p o in t, G o ttf r ie d H ab e rle r h a s s a id , "The K eynesian a t t a c k s , though th e y ap p e ar t o be d ir e c te d a g a in s t a v a r i e t y o f s p e c i f i c t h e o r i e s , a l l f a l l to th e ground i f th e v a l i d i t y o f Say*s Law i s assumed One i n t e n t i o n o f t h i s t h e s i s i s to t r a c e th e h i s t o r i c a l fo rm u la tio n o f th e Law o f M arkets from i t s embryo to th e f i n a l sta g e o f developm ent. The second c h a p te r i s devoted to t h i s t a s k . In th e f i r s t p a r t of th e second c h a p te r an a tte m p t i s made to e lu c id a te th e m eaning o f th e Law o f M ark ets, and t o show t h a t w hile Le Trosne l a i d down th e fo u n d a tio n o f th e Law o f M arkets, l i e a r d o gave i t f i n a l f o rm u la tio n . The n o tio n t h a t money i s o n ly a medium o f exchange was th e backbone o f ^ G o ttf rie d H a b e rle r, "The G eneral T h eo ry ," The New Economics: Keynes* I n f l u ence on Theory and P u b lic P o lic y , Seymour E . H a r r i s , e d i t o r ( New Y ork: A lfre d 'A'."""Knopf, 1 9 5 0 ), p . 173* 7 J Le T ro s n e ’ s and P h y s io c r a ts ’ argum ents t h a t th e e i r c u l a - i t i o n o f com m odities seems to be th e r e s u l t o f th e movement o f th e money. The main p re o c c u p a tio n o f th e P h y s io c r a ts was th e anatomy o f c a p i t a l , th e forms i t j ! ta k e s i n c i r c u l a t i o n , and th e c o n n e c tio n o f t h i s p ro c e s s j to th e p ro c e s s o f accu m u latio n o f c a p i t a l . W ith them, th e o r i g i n o f p r o f i t was t r a n s f e r r e d from th e p ro c e ss o f c i r c u l a t i o n t o th e p ro c e ss o f p ro d u c tio n . The u n d e r ly in g assu m p tio n o f t h e i r re a s o n in g was t h a t o n ly la b o r , w hich c r e a te s p r o f i t , i s p r o d u c tiv e . In t h i s view th e v a lu e and p r o f i t a re d e riv e d not from c i r c u l a t i o n b u t from p ro d u c tio n ; i n c o n t r a s t t o th e m onetary and > m e r c a n t i l i s t system , money n e c e s s a r ily a p p e a rs as a ’’c o u n te r" i n th e p ro c e s s o f exchange o f a commodity betw een p u rc h a s e rs and s e l l e r s . The same view was m a in ta in e d by R ic a rd o , who argued t h a t money o n ly h e lp s i n th e exchange o f com m odities by p ro v id in g a l i n k betw een s a le s and p u rc h a s e s . A more prom inent aim o f t h i s t h e s i s i s t o show th e im p lic a tio n s o f th e Law o f M arkets i n c l a s s i c a l and modern t h e o r i e s . I t i s f a i r to s t a t e t h a t th e c e n t r a l theme o f C l a s s i c a l Economics was c a p i t a l accum ulation, and economic developm ent. In a n a ly z in g and stu d y in g s o c i e t y , C l a s s i c a l E conom ists were convinced t h a t c e r t a i n c o n d itio n s had been n e c e s s a ry f o r economic developm ent. To Adam Smith one fundam ental c o n d itio n f o r ac cu m u latio n was t h a t T ,th e lo w est o rd in a r y r a t e o f p r o f i t m ust alw ays be som ething more th a n what i s s u f f i c i e n t t o com pensate th e o c c a s io n a l l o s s e s t o w hich e v e ry $ employment o f sto e k i s e x p o s e d .” And t h i s p r o f i t , o r a d d e d -v a lu e , must form an " in s u ra n c e fund”9 in te n d e d f o r re p ro d u c tio n and ex p an sio n o f th e d i v i s i o n o f la b o r . Thus th e a p p r o p r ia tio n : o f newly added-V alue, a v a lu e o ver and above th e v a lu e advanced by th e p ro d u c e r, i s an a c t perform ed w ith in th e p ro c e s s o f p ro d u c tio n i t s e l f and forms an e s s e n t i a l elem ent o f i t . T h e re fo re , th e scope o f Adam Sm ith*s e n q u iry was th e anatomy o f com m odity which com prises p r o f i t i n i t s p ro d u c tio n as th e r e s u l t o f c a p i t a l i s t p ro c e s s o f p r o d u c tio n . In t h i s p ro c e s s money was c o n sid e re d sim ply a medium o f exchange. R icardo f u l l y a c c e p te d th e th e o ry o f Adam Smith re g a rd in g th e r e s o l u t i o n o f th e v a lu e o f a g g re g a te produce i n to wages and "a d d ed -v alu e " b u t h e , o f c o u rse , e lim in a te d r e n t as an e s s e n t i a l elem ent o f i t * So ^Adam Sm ith, An In q u iry in to th e N ature and Causes o f th e W ealth o f N atio n s (few York: The Modern L ib ra r y , 173777 P • 96 • ^K arl Marx, C a p i t a l , A C ritiq u e o f P o l i t i c a l Eeonomy (Volume I I ; C hicago: C h a rles H. K e rr, 1 ^0 2 ), p . 420. 9 ! R icardo s t a r t e d h i s e n q u iry w ith th e d e te rm in a tio n o f ' th e m agnitude o f th e v a lu e o f commodity by la b o r tim e ! whieh i s th e m a n if e s ta tio n o f la b o r pow er. To him th e 1 t V I su b sta n c e o f v a lu e was la b o r . The g r e a t e r o r s m a lle r J I ' i ! th e la b o r tim e used to produce a commodity, th e g r e a t e r : i o r s m a lle r th e v a lu e o f i t . Bu t what he f a i l e d t o a p p re c i a t e was th e c o n n e c tio n o f la b o r tim e and money. Thus he h e ld th e e rro n e o u s th e o ry o f money— t h a t money i s o n ly a medium o f exchange— and th e n m a in ta in e d th e Law o f M a rk e ts. Thus th e Law o f M arkets was a c o r o l l a r y o f th e c l a s s i c a l la b o r th e o ry o f v a lu e , a th e o ry which was th e h e a r t o f c l a s s i c a l d o c t r i n e . Smith and R icardo h e ld t h a t ag g re g a te v a lu e o f o u tp u t i s alw ays g r e a t e r th a n a g g re g a te v a lu e o f in p u t, as lo n g a s some la b o r i s employed i n th e p ro c e s s o f p ro d u c tio n . But th e y could n o t see how t h i s ad d ed -v alu e co u ld be r e a l i z e d by th e c a p i t a l i s t . T his view le d them t o ig n o re th e p o s s i b i l i t y o f g e n e ra l g l u t . T his " c o n tr a d ic tio n " betw een th e o ry and th e r e a l w orld i n S m ith rs and R ic a rd o r s a n a ly s is does n o t, how e v e r, i n d ic a t e t h a t t h e i r th e o ry o f v a lu e was f a l l a c i o u s and unsound. C o n tra riw is e , b o th Sm ith and R icardo lau n ch ed t h e i r i n v e s t i g a t i o n by c o r r e c t l y d e f in in g th e "component p a r t s " o f th e v a lu e o f th e com m odities and 10 f i > th e t o t a l v a lu e -a d d e d in c o rp o ra te d i n them, and th e n d em o n strated how th e s e ’’component p a r t s ” form th e rev en u es f o r d i f f e r e n t c l a s s e s o f s o c i e t y . Adam Smith : b e lie v e d t h a t i n b o th " o ld ” and ’ ’modern” s o c i e t i e s a j * commodity a c q u ire s v a lu e , o r exchangeable v a lu e , b ecau se j i t i s th e p ro d u c t o f l a b o r . Then he showed how t h i s v a lu e f a l l s in t o ’’w ages, p r o f i t , and r e n t . ” C o n s is te n tly sp e a k in g , Adam Smith should have s a id t h a t th e o r i g i n o f exchangeable v a lu e i s la b o r i t s e l f , b u t he tu rn e d around i n th e o p p o s ite d i r e c t i o n and s a id t h a t ’’w ages, p r o f i t , and r e n t a re th e th r e e o r i g i n a l so u rc e s o f a l l revenue 1 0 as w e ll a s [ th e o r ig in ] o f a l l exchangeable v a l u e . ” David R icard o , who a p p ro v in g ly s a id ’’Adam Sm ith, . . . a c c u r a te ly d e fin e d th e o r i g i n a l so u rc e s o f exchangeable v a l u e , ”11 ac ce p ted S m ith ’ s i d e n t i f i c a t i o n o f exchangeable v a lu e w ith th e c o s t o f p r o d u c tio n . R ic a rd o , who f i r s t d e fin e d th e o r i g i n o f v a lu e as th e la b o r power in c o r p o ra te d i n commodity, l a t e r , l i k e Sm ith, tu rn e d around' 1^Sm ith, o£. c i t . , p . 52. ^ D a v id R icard o , On th e P r in c i p l e s o f P o l i t i c a l Economy and T ax a tio n (Volume I o f The' WorFs and C orrespondence o f t)avid R ic a rd o , ed'l'ted by P • S r a f f a and M. H. Dobb• 10 Volume's: Cambridge: Cambridge U n iv e r s ity P re s s , 1 9 5 1 -1 9 5 5 ;, P- 13* 11 • ! and argued t h a t th e c o s t o f p r o d u c tio n , w ages, and ; p r o f i t a re th e o r ig in o f exchangeable v a l u e . i Mow, i f th e "component p a r t s " a re th e o r i g i n j o f th e exchangeable v a lu e , and i f th e v a lu e o f th e j o u tp u t i s g r e a t e r th a n th e v a lu e o f in p u t, i . e . p ro d u c- j i t i o n i s p r o f i t a b l e , th e n R ieard o assumed t h a t i t i s i n e v i t a b l e t h e o r e t i c a l l y " t h a t com m odities would always f in d a m arket [b ecau se p ro d u c tio n i s p r o f i t a b l e ] and some consumers would be f o r them who had an e q u iv a le n t [com m odities o f eq u a l exchangeable v a lu e ] to g iv e f o r th e m ."^ 2 C hapter I I I , on la b o r th e o ry o f v a lu e , i s d esig n ed t o show S m ith 1s and R ic a rd o T s t h e o r i e s o f v a lu e and t h e i r b a s ic t e c h n i c a l e r r o r . In th e same c h a p te r an a tte m p t i s made t o t r a c e th e o r i g i n o f th e la b o r th e o ry o f v a lu e th ro u g h t o i t s f i n a l form , made by Marx, which was an "em endation" and " e x te n s io n " o f th e c l a s s i c a l th e o ry o f v a lu e . I t w i l l a ls o be shown t h a t u n d er M arx’s la b o r th e o ry o f v a lu e , and h i s model o f expanded re p ro d u c tio n , th e r e i s no room f o r th e Law o f M arkets u n le s s th e Law f u l f i l l s th e re q u ire m e n ts - * - 2David R ic a rd o , L e t t e r s — J u ly 1&21 to 1&23 (Volume IX o f The Works and (Correspondence oT David R ic a rd o , e d ite d b y P . S r a f f a and M. H. Dobb. TO Volumes; Cambridge: Cambridge U n iv e rs ity P r e s s , 1951-1955), P- 13- 1 12 | in tro d u c e d by M arx’ s t h e o r i e s o f v a lu e and a c c u m u la tio n , i . e . t h a t p r o f i t i s r e a l i z e d by c a p i t a l i s t s and th e j p r o p o rtio n o f c a p i t a l s used i s th e same f o r a l l in d u s - i t r i e s . I A f i n a l aim i s to show th e r e l a t i o n s h i p o f modern ! I t h e o r i e s to th e Law o f M a rk e ts. The s e c tio n on K eynes, i n th e second c h a p te r , i s employed f o r t h i s p u rp o se . I t i s f a s h io n a b le , to d a y , t o prove o r d isp ro v e one c o n te n tio n m a th e m a tic a lly a f t e r v e r b a l e x p la n a tio n . Appendix A i s a sym bolic r e s ta te m e n t o f th e Law o f M a rk e ts. In t h i s appendix th e w r i t e r h as endeavored t o show t h a t i f money i s ta k e n i n t o c o n s id e r a tio n , th e Law o f M arkets does n o t h old t r u e . t I ----------------------------- -------------------------------------- CHAPTER I I THE LA W OF MARKETS j The Law o f M arkets was a p r i n c i p l e which ra n l i k e ! a "red th re a d " th ro u g h th e e n t i r e body o f c l a s s i c a l th e o r y . One purpose o f t h i s p a p e r i s to t r a c e th e h i s t o r i c a l fo rm u la tio n o f t h i s Law from i t s em bryonic s ta g e to i t s f i n a l f o rm u la tio n . I . FORMULATION OF THE LA W OF MARKETS An overwhelm ing m a jo r ity o f h i s t o r i a n s o f economic th o u g h t have re g a rd e d Je an B a p tis te Say a s th e fo u n d er o f th e Law o f M arkets* They e i t h e r r e f e r to th e second e d i t i o n o f S ay ’ s T r e a tis e o f P o l i t i c a l Economy, C hapter 15, o r make s p e c ia l i n t e r p r e t a t i o n and c a l l i t S ay ’s Law o f M a r k e t s . B u t th e imm ediate John F red B e ll, A H is to ry o f Economic Thought (New York: Ronald P re ss Company, 1^3T7~p^~~2¥5l~~^^:l^es Gide and C h a rle s R i s t , A H is to ry o f Economic D o c trin e from th e Time o f th e P h y s io c ra ts t o th e Fre~sent Bay (B oston: B. C.“ H eath and Company,“T 9 l 5 ) , p* l l 5 ; G o ttf r ie d H a b e rle r, "The G eneral T h eo ry ," The New Economics: K eynes’ In flu e n c e on Theory and P u b lic Pol i c y , Seymour E . H a rris* e d i t o r ("New York: A lfre d A. Knopf, 1 9 5 0 ) , p p . 173-17o; Lewis H. Haney, H is to r y o f Economic Thought (New York: The M acm illan Company, 1 9 W n p p . 335-360; A lv in Hansen, A Guide t o Keynes (New York: M cGraw-Hill, 1*953), PP« 3 -2 5 ; Seymour E . H a rris ( e d i t o r ) , The New Economics: K eynes’ I n f l u ence on Theory and P u b lic Po lic y (New York: A lfre d A. Knopf, 1 9 5 0 ), p p . 27, 4 ?, "52, 543; J* M. Keynes, The G en eral Theory o f Employment, I n t e r e s t , and Money ( New York: M a rco u rt, 1936 ) , p* 26; I c o n te n tio n o f t h i s p ap er i s t o show th a t J . B* Say d id n o t and could n o t e s t a b l i s h th e Law o f M arkets* ! The meaning o f th e Law o f M a rk e ts* The fo llo w in g ! passag e from R ic a rd o 1s P r in c ip le s h as been th o u g h t by 2 some eco n o m ists to e x p re s s f u l l y th e essen c e o f th e Law o f M arkets: 1 (C ontinued) L* R* K le in , The K eynesian Revolut-ion (New York: The M acm illan •Company,' 1 9 4 7 ) , pp• 44-46; P aul Lam bert, "The Law o f M arkets P r io r t o J* B* Say and th e Say-Ma-ithus ; D e b a te ," I n t e r n a t i o n a l Economic P ap ers (Number 6; ■ London: M a c m il la n ,1 9 5 6 ), p p . 7-22; A. P . L e rn e r, "The R e la tio n o f Wage P o l i c i e s and P ric e P o l i c i e s , " American , Economic Review, Supplem ent, XXIX (March, 1 9 3 9 ), 138; I John L in tn e r, ^The Theory o f Money and P r i c e s , " in ; H a r r i s , o p . c i t «, p. 528; Lloyd M e tz le r, "Keynes and th e 1 ! Theory ox B u sin ess C y c le ," i n H a r r is , op* c i t ■, p . 439; ! H. N e is s e r , "G eneral O v erp ro d u ctio n : A atudy o f S ayTs j Law o f M a rk e ts," Jo u rn a l o f P o l i t i c a l Economy, XLII j (A ugust, 1 9 3 4 ), 433-465; Toan R obinson, E ssay s i n th e I Theory o f Employment (second e d i tio n ; Oxford: "BI { BlackweTT, 1 9 4 7 ), p* 183; P» N* R o sen stein -R o d an , "A ; C o -o rd in a tio n o f th e G eneral Theorie-s o f Money and j P r i c e s , " Economica, XVI (A ugust, 1936), 268; P aul j .Sam uelson, "The G eneral T h eo ry ," In H a r r i s , 0£* c i t * , I p . 147; Joseph Schum peter, H is to ry o f Economic A n a ly s is j (New York: Oxford U n iv e r s ity 'P re ss,“T 9 5 4 ), PP* 615-625; | P aul Sweezy, "Keynes, th e E co n o m ist," i n H a r r is , op* c i t p p . 104-108; Joseph S p e n g le r, "The P h y s io c r a te s anc[ S ayTs j Law o f M a rk e ts," J o u rn a l o f P o l i t i c a l Economy, L I I I ! (December, 1 9 4 5 ), 341-342. j I i ^Sweezy, op. c i t . , pp. 104-105; H a b e rle r, j op. c i t . , p* 173* I i 15 ! Demand i s o n ly lim ite d by p r o d u c tio n . No man ; p ro d u c e s , b u t w ith a view to consume o r s e l l , and ' he n e v e r s e l l s , b u t w ith an i n t e n t i o n to p u rchase j some o th e r commodity, which may be u s e f u l to him , j o r which may c o n tr ib u te to f u tu r e p ro d u c tio n . By j p ro d u cin g th e n , he n e c e s s a r i l y becomes e i t h e r th e i consumer o f h i s own goods, o r th e p u rc h a s e r and consum er o f th e goods o f some o th e r p e rs o n . . . . P ro d u c tio n s a re alw ays bought by p r o d u c tio n s , o r ; by s e r v ic e s ; money i s o n ly th e medium by which th e change i s e f f e c t e d . 3 T his p a s s a g e , ’’ro u g h ly s p e a k in g ,” may e x p re ss th e essen c e o f th e Law o f M ark ets, b u t i t does n o t convey th e " r i g i d ” i n t e r p r e t a t i o n o f th e Law o f M arkets which s tu d e n ts o f econom ics have b een accustom ed to l e a r n . Abba L e rn e r h as s t a t e d : Very ro u g h ly sp e a k in g , S ay’ s Law p o in ts out t h a t th e demand f o r th e o u tp u t o f any in d u s tr y (o r firm o r in d iv id u a l) comes from th e s u p p lie s o f a l l the o th e r i n d u s t r i e s (o r firm s o r i n d i v i d u a l s ) . T h is i s b ecau se th e s e s u p p lie s t r a n s l a t e d , i n t o money c o n s t i t u t e th e demand f o r th e o u tp u t o f th e f i r s t i n d u s t r y (a s w e ll a s f o r each o t h e r ’ s o u tp u t) . A g e n e ra l r e s t r i c t i o n o f supply would b r in g about a g e n e ra l r e s t r i c t i o n o f demand, an d , t h e r e f o r e , could n o t be depended upon to in c re a s e p r o s p e r i t y . T o ta l demand i s n o t in d e p en d en t o f t o t a l su p p ly M L e rn e r h as a ls o rem arked: S ay ’s Law i s u s u a lly found in a more r i g i d form th a n th e r u le g iv e n abo v e. I t d e c la r e s n o t m erely ^David R ic a rd o , On th e P r i n c i p l e s o f P o l i t i c a l Economy and T a x a tio n (Tolume I o f The WorEs and C orrespondence o f David R ic a rd o , e d ite d by P . S r a f f a and M. If. Dobb. 10 Volumes: Cambridge: Cambridge U n iv e r s ity P r e s s , 1951-1955), pp* 290-291• ^ L e rn e r, op. e i t ., p. 158. 16 ] in te rd e p e n d e n c e b u t e q u a l i t y betw een t o t a l supply and t o t a l demand. . • . T his was to show t h a t a lth o u g h a s e c tio n o f th e economy may g e t in to tr o u b le by p ro d u cin g to o much r e l a t i v e l y to th e r e s t o f th e economy, a g e n e ra l o v e rp ro d u c tio n i s im p o s sib le s in c e i t c r e a te s i t s own dem and.5 What R ic a rd o ’ s p assag e and L e r n e r ’ s i n t e r p r e t a t i o n mean j i s t h a t any in c re a s e i n t o t a l incom e, r e s u l t i n g from an j i in c re a s e i n p ro d u c tio n , would be sp e n t e n t i r e l y on in v e stm e n t and consum ption g o o d s. And t o t a l demand ( r e c e i p ts ) would n e c e s s a r i l y be eq u a l to t o t a l c o s t o f p ro d u c tio n p lu s normal p r o f i t . No l o s s could r e s u l t . In t h i s p ro c e s s money was l e f t o u t o f th e p i c t u r e . Money was c o n s id e re d a s ”o nly a medium o f e x c h a n g e .” In summary, th e r e a re two ways to fo rm u la te th e Law o f M arkets: (1) th e ’’ro u g h ly sp e a k in g ” i n t e r p r e t a t i o n — t o t a l demand i s n o t in d e p e n d e n t o f su p p ly , and (2) th e ’ ’r i g i d ” i n t e r p r e t a t i o n — t o t a l demand i s i d e n t i c a l l y e q u a l t o t o t a l s u p p ly . The o r i g i n o f th e ’ ’ro u g h ly sp e a k in g ” i n t e r p r e t a t i o n * C hapter XXII on ”Des D ebouches,” i n th e f i r s t e d i t i o n (1$03) of J . B. S ay’ s T r a ite d ’economie p o l i t i q u e , was only th r e e pages lo n g . The main concern o f t h a t c h a p te r was t o r e p u d ia te th e m e r c a n t i l i s t 5I b i d . , p . 160 c o n c e p tio n t h a t th e ex p an sio n o f m a rk e ts and th e : I in c r e a s e o f w e a lth i s dependent upon th e abundance o f money and on in c r e a s e o f e x p o r ts . Say s a id , i n 1&03: Each p ro d u c e r pro d u ces s u b s t a n t i a l l y more o f a g iv e n good th a n he w i l l h im s e lf consume. . . . To s a t i s f y h i s n ee d s, e v e ry p e rso n r e q u i r e s a d i v e r s i t y o f consum ers. The exchange o f t h e i r p ro d u e ts a g a in s t; th e p ro d u c ts o f o th e r s opens to th e s e p ro d u c ts what i s known as a m a rk e t. . . . I t i s n o t an abundance o f money t h a t im proves m a rk e ts so much a s an abundance o f o th e r p ro d u c ts g e n e r a lly . . . . In t h i s p ro c e ss o f double exchange, money a c t s m erely a s a c o u n te r, once exchange h as ta k e n p la c e , i t w i l l be found t h a t p ro d u c ts have been p a id f o r w ith p r o d u c ts .6 The meaning o f t h i s passag e i s t h a t p ro d u c tio n c o n s t i t u t e s a s u f f i c i e n t o u t l e t f o r i t s e l f . T his view p re su p p o se s money t o be only a medium o f exchange. Thomas Tooke, i n h i s e n q u ir ie s on c u r r e n c y d i s t i n g u is h e s money u sed a s c a p i t a l from money used as c u rre n c y - He p o in ts out th e f a c t t h a t money i n i t s f u n c tio n as c a p i t a l undergoes a r e f l u x to i t s p o in t o f i s s u e , w h ile th e money p erfo rm in g th e f u n c tio n o f mere c u rre n c y does n o t undergo any tr a n s f o r m a tio n . The main ^ Je an B. Say, T r a ite d ^ co n o m ie p o l i t i q u e ( P a r is : D e t e r v i l l e , 1 8 0 3 ), C hapter X X lI, p p . 153-154* ? Thomas Tooke, An In q u iry in t o th e C urrency P r i n c i p l e ; th e C onnection o f th e C urrency w ith P r i c e s , and th e E xpediency o f a S e p a ra tio n o f Is s u e from Banking ( secoiid e d i t i o n ; Lonion: Longman G reen, 1 8 4 4 ), C h ap ters I and I I I . problem h e re i s t o expound th e r e l a t i o n o f money to c a p i t a l , and t o e x p la in th e p ro c e s s by which money i s c o n v e rte d i n t o c a p i t a l . The Law of M arkets c o n c e n tr a te s on th e i n t e r dependence o f p ro d u c tio n and consum ption, and re g a rd s t o t a l demand and t o t a l supply as i d e n t i t i e s * T his view n e g le c ts th e f a c t o r s w hich a re a b le to g e n e ra te m al ad ju stm e n t betw een demand and su p p ly . I f supply c r e a te s i t s own demand, and ’’money a c t s m erely a s a c o u n t e r ,” o r money fu n c tio n s as means o f c i r c u l a t i o n , th e t r a n s a c tio n i s a b a r t e r i n w hich com m odities w ith eq u al v a lu e a re exchanged* I t i s a p ro c e s s o f p ro d u c tio n where businessm en s e l l in o rd e r t o b u y . For a R ic a rd ia n & th e o ry o f v a lu e t h i s i s e s s e n t i a l . A ccording t o R ic a rd o ’s Labor Theory o f Y alue, th e v a lu e o f o u tp u t i s alw ays g r e a t e r th a n th e v a lu e o f i n p u t . Hence th e v a lu e o f o u tp u t i s e q u a l to th e v alu e o f in p u t p lu s th e valu e o f th e la b o r-p o w e r c o n ta in e d i n th e o u t p u t • I f th e Law o f M arkets h o ld s t r u e , i t i s c l e a r l y assumed o t h a t t h i s ’’a d d e d -v a lu e ” i s r e a l i z e d . I t was th e m e rit o f M a ith u s ’ c r i t i c i s m t o d em o n strate t h a t , u n d er c e r t a i n ^See b e lo w ,'p a g e s 1 0 4- 1 2 0 . ^By r e a l i z a t i o n i s meant th e tra n s f o r m a tio n o f ad d ed -v alu e in to p r o f i t and w ages, and a p p r o p r ia tio n o f p r o f i t by th e c a p i t a l i s t . 19 c irc u m sta n c e s— d e f ic ie n c y o f demand— t h i s " a d d e d -v a lu e ” | may n o t be r e a l i z e d by p ro d u c e rs . In th e c l a s s i c a l i te rm in o lo g y , th e c o s t o f p ro d u c tio n o f th e o u tp u t— t o t a l c o st p lu s norm al p r o f i t — exceeds m arket p r ic e so t h a t : p ro d u c e rs ta k e a l o s s . In t h i s case f u r t h e r p ro d u c tio n l would n o t o c c u r. Then i n r e a l i t y R ic a rd o ’ s th e o ry o f — \ v a lu e and i t s im p lic a tio n — th e Law o f M arkets—would meet w ith c o n t r a d i c t i o n . L et us remember t h a t a c c o rd in g | ! to R ic a rd o ’ s law o f v a lu e com m odities o f eq u a l v a lu e a re I exchanged. I f th e v alu e o f in p u t i s , f o r th e sake o f argum ent, te n d o l l a r s and ’’v a lu e -a d d e d " i s two d o l l a r s th e t o t a l v a lu e o f o u tp u t i s tw elv e d o l l a r s . A ccording to R ic a rd o ’ s law o f v a lu e th e o u tp u t v alu ed a t tw elv e d o l l a r s i s exchanged w ith a commodity whose t o t a l v alu e i s tw elv e d o l l a r s . In th e R ic a rd ia n w orld b o th p a r t i e s to th e exchange r e c e iv e normal p r o f i t . The f a l l a c y o f 10"L ’echange q u i se f a i t de deux v a le u r s e g a le s n* augmente n i ne dim inue l a masse d es v a le u r s sub- s i s t a n t e s dans l a s o c i e t e . L’echange de deux v a le u r s ! in e g a le s • * • ne change r i e n non p lu s a l a somme des ! v a le u r s s o c i a l e s , b ie n q u ’ i l a jo u te a l a fo rtu n e de l ’un ee q u ’i l 6 te de l a f o rtu n e de 1 ’ a u t r e , " Say, o p . c i t ., C h ap ter I , p p . 344-345* The t r a n s l a t i o n fo llo w s : 1 T TKe exchange t h a t ta k e s p la c e betw een two eq u al v a lu e s n e i t h e r augments n or d im in is h e s th e mass o f th e v a lu e s s t i l l c u r r e n t i n s o c i e t y . N e ith e r does th e exchange o f two u n eq u al v a lu e s change a n y th in g i n th e sum o f s o c ia l v a lu e s , a lth o u g h i t adds t o th e fo rtu n e o f th e p erso n who ta k e s i t from someone e l s e ’s f o r tu n e ." 20 ! th e Law o f M arkets becomes obvious when th e r e a l p ro c e ss o f p ro d u c tio n i s o b serv ed - In a c t u a l i t y p ro d u c tio n re a c h e s a s t a n d s t i l l a t th e p o in t o f th e r e a l i z a t i o n o f maximum p r o f i t * In r e a l l i f e people buy a t h i n g , tra n s fo rm i t , and th e n s e l l i t i n o rd e r t o make "e x t r a money* T t I f th e y do n o t r e a l i z e "e x t r a - money, T t th e y d is c o n tin u e p ro d u c tio n . Such i s , in d e e d , th e t r a n s - / a c tio n i n which money f u n c tio n s a s c a p i t a l . In a tr u e sen se l i m i t s t o in v e stm e n t and p ro d u c tio n , a t a c e r t a i n r a t e of p r o f i t , must be ta k e n i n t o c o n s id e r a tio n , not th e f a c t o r s which l i m i t exchange The e x p o s itio n o f S ay Ts c o n fu sio n can be found i n th e w r itin g s o f some h i s t o r i a n s o f economic th o u g h t. C h a rles R is t h as s ta te d : "P ro d u c ts a re g iv e n i n exchange f o r p r o d u c ts ,” i s a happy p h ra s e , b u t i t i s not i n t r u t h v e ry p ro fo u n d . I t sim ply g iv e s e x p re s s io n t o an id e a t h a t was q u ite f a m i l i a r to th e P h y s io c ra ts and to Sm ith, nam ely, t h a t money i s b u t an in te rm e d ia ry H r * R* M althus s a i d , "W hatever may be th e number o f in te rm e d ia te a c t s o f b a r t e r which may ta k e p la c e i n re g a rd t o com m odities—w h eth er th e p ro d u c e rs send them to C hina, o r s e l l them i n th e p la c e where th e y a re p ro duced, th e q u e s tio n as to an ad eq u ate m arket f o r them depends e x c lu s iv e ly upon w hether th e p ro d u c e rs can re p la c e t h e i r c a p i t a l s w ith o r d in a ry p r o f i t s so a s to en a b le them s u c c e s s f u lly to go on w ith t h e i r b u s in e s s ," in D e f in itio n s i n P o l i t i c a l Economy (London: J . M urray, 1&27T, p'; 7'cr.----------------------------------- 21 which i s a c q u ire d o n ly to be passed on and exchanged f o r a n o th e r p r o d u c t .12 P h y s io c r a ts and th e Law o f M a rk e ts. I t i s tim e t o re c o g n iz e Le T ro s n e ’ s r i g h t f u l a u th o rs h ip o f th e p r o p o s itio n o f the'"Law o f M arkets .13 The s i m i l a r i t y I o f th e fo rm u la tio n o f th e Law o f M arkets made by Le Trosne and Say i s s t r i k i n g . The fo llo w in g example w i l l show how Say tu rn e d to account th e w r i tin g s o f th e P h y s io c r a ts , i n h i s day q u ite f o r g o tt e n , fo r th e purpose o f expanding h is own c o n t r i b u t i o n . His most c e le b r a te d sa y in g , ”on n T a c h e te des p r o d u its q u ’ avee des p r o d u i t s , ” ru n s a s fo llo w s i n Le T ro sn e ’ s De l ’i n t e r e t S o c ia l (1777): ”Les p ro d u c tio n s ne se p a ie n t q u ’ avec des p r o d u c tio n s ."1 ^ l^G ide and R i s t , oj>. c i t », p . 115* Knut W ic k se ll s a id t h a t ’ ’th e v i c t o r y ox th e P h y s io c r a tic sc h o o l p ro duced a sudden change, f o r acco rd in g to i t s th e o r y , e s p e c i a l l y as fo rm u la te d by J . B. Say, goods must alw ays exchange o th e r g o o d s ,” i n L e c tu re rs on P o l i t i c a l Economy (London: R outledge and Kegan P a u l, L im ite d , 194-9), p . 135» 13L am bert, o£. c i t . , p . 9* l^ K a r l Marx, C a p i t a l , A C r itiq u e o f P o l i t i c a l Economy (Volume I ; C hicago: (Jharles H. ^rF7~T9tT2T7 p . 1&2, fo o tn o te 1 . The t r a n s l a t i o n i s as fo llo w s: ’’P ro d u c tio n can o nly be p a id by p r o d u c tio n .” Of the Classical Economists, Mcculloch named i Jo s ia h Tucker ( 1 7 5 2 ), M engotti ( 1 7 9 2 ), and an anonymous j 1 a u th o r o f S ketch of th e Advance and D ecline of N atio n s j (1795) as th e f o re ru n n e rs o f Say.*^ Tucker m ight be ! th e f i r s t who supposed th e i m p o s s i b i l i t y o f g e n e ra l slum ps. This p r o p o s itio n was n o t from th e s ta n d p o in t o f p ro d u c ts , b u t o f em ployment. He th e o r iz e d t h a t a lth o u g h th e r e could be s e c tio n a l s u r p lu s e s o f l a b o r , no g e n e ra l s u rp lu s i s p o s s i b l e . L ik ew ise, M cculloch a rg u e s t h a t M en g o tti had o r ig in a te d th e Law o f M a rk e ts. What M engotti had s a id , t h a t " p ro d u c ts a re p a id f o r only w ith p r o d u c ts ," was a n t i c i p a t e d by Le Trosne i n 1777 The a u th o r o f S ketch o f th e Advance and D eclin e o f N atio n s a s s e r te d : To suppose t h a t t h e r e may be a p ro d u c tio n o f com m odities w ith o u t a demand, p ro v id e d th e s e com m odities be o f th e r i g h t s p e c ie s , i s as ab su rd as to suppose t h a t th e rev en u e s o f th e s e v e r a l in d iv i d u a ls composing th e s o c ie ty may be to o g r e a t f o r t h e i r consum ption. 1*7 r . M cculloch, The P r in c ip le s of P o l i t i c a l Economy ( f o u r th e d i t i o n ; E d in b u rg h : A. C• B lack , l83'6), ppT 2T&-217 • ^ L e T rosne, De l 1 i n t e r e t S o c i a l , p . 609: "Les p ro d u c tio n s ne se p a tT e n t q u T a v e c 'd e s p r o d u c tio n s ," quoted by K arl Marx, C a p ita l, A C r i t i c a l A n a ly sis o f C a p i t a l i s t P ro d u c tio n (New York! In te rn a 1 1 o n al P u b lis h e r s , 1 9 4 7 ), P* 1 4 1 , fo o tn o te 2 . •^Q uoted by M cculloch, ojo. c i t . , p p . 216-217• 2 3 j I t should be supposed t h a t t h i s s ta te m e n t co v e rs what | I l Say covered in th r e e pages* 1 The o r ig in o f th e "r i g i d " i n t e r p r e t a t i o n o f th e Law o f M a rk e ts. M ention was made t h a t th e " r i g i d " m eaning o f th e Law o f M arkets i s th e p r o p o s itio n t h a t a g g re g a te i s eq u a l to a g g re g a te . James M ill p u t th e m a tte r c l e a r l y : The p ro d u c tio n o f com m odities c r e a t e s , and i s th e one and u n iv e r s a l cause w hich c r e a t e s , a m ark et f o r th e com m odities p ro d u ced . . . . A n a t i o n 1s power o f p u rc h a s in g i s e x a c tly m easured by i t s annual p ro d u c e . The more you in c re a s e th e an n u al p ro d u c e , th e more by t h a t v e ry a c t you ex ten d th e n a t io n a l market. . . . The demand o f a n a tio n i s alw ays e q u a l to th e produce o f a n a t i o n .l o A cc o rd in g ly , s in c e exchange i s a d o u b le -sid e d p ro c e s s , th e r e i s no p o s s i b i l i t y o f g e n e ra l o r o v e r - a l l e x c e ss o f p ro d u c tio n . T his im p lie s t h a t th e in c re a s e d d e s ir e o f each p a r ty to b a r t e r h i s p ro d u c ts w i l l be b alan ce d by th e in c re a s e d d e s ir e o f th e o th e r . W ith l i t t l e r e f e r e n c e to r e a l e v e n ts , such argum ent seems a dogm atism . But th e d o c trin e i s more th a n a ta u to lo g y i n so f a r a s i t e s t a b l i s h e s an i n t e r r e l a t i o n s h i p i n economic s o c i e t y . T his view r e j e c t s ^ J a m e s M il l, Commerce D efended: An Answer t o th e Arguments by w hich Mr. S pence, Mr. C aH bett, and o th e rs have a tte m p te d to Prove t h a t Commerce i s n o t a Source o f M ational WealTh (London: C. & R. B aldw in, 1BUB), p . $T7 2k th e namount o f demand" a s an in d ep en d en t v a r i a b l e . Money and demand were r e j e c t e d as in d e p e n d e n t f a c t o r s i n th e d e te rm in a tio n o f e x c h a n g e -v a lu e s • ! I j The fo u n d e r o f th e "r i g i d ” Law o f M a rk e ts . C h ap ter 22 o f th e 1§03 e d i t i o n of S a y ’s T r a i t e ’ d ’economie p o l i t i q u e was aimed t o r e j e c t th e m e r c a n t i l i s t view which had m a in ta in e d t h a t m ark et c o n s is ts i n abundance o f money and t h a t th e in c re a s e o f w ea lth i s dependent, on in c re a s e o f e x p o r ts . T h ere, Say h e ld t h a t o th e r p ro d u c ts as w e ll as money make s a le s e a s y . C hapter 22 o f th e 1&03 e d i t i o n became C h ap ter 15 o f th e 1&14 e d i t i o n which was e n la rg e d and p o lis h e d . The 1314 e d i t i o n app eared b e fo re he was com missioned from th e Bank o f F rance t o E ngland i n December o f 1314, where he d is c u s s e d th e q u e s tio n w ith R icard o and M a lth u s. Mean w h ile , M i l l ’s Commerce had come out i n two e d i t i o n s i n 1303, i n which th e Law o f M arkets was d e s c rib e d and i t s s ig n i f ic a n c e f o r th e q u e s tio n s o f o v e r-p ro d u c tio n was s t r e s s e d . T his argum ent, t h a t th e Law o f M arkets was founded by James M il l, was p ro claim ed by K a rl M arx.1^ i^ K a r l Marx, A C o n trib u tio n t o th e C ritiq u e o f P o l i t i c a l Economy, t r a n s l a t i o n by N. E. Stone (C hicago: C h a rle s H. K e rr, 1 9 0 4 ), p* 123* See a l s o h i s T h e o rie s o f S u rp lu s V a lu e , t r a n s l a t i o n by G. A. Bonner and E . B urns (New York: I n t e r n a t i o n a l P u b lis h e r s , 1952), p . 369* 25 t i M. H. Dobb, com paring S a y 's work w ith James M i l l ’ s w ork, fo llo w s Marx i n a t t r i b u t i n g th e Law of M arkets on t o James M ill. W hatever th e argum ent i s , a s Hans N e is s e r h as I ! s u g g e s te d , Say red u ced th e Law o f M arkets ,to a ta u to lo g y \ I when he s a i d , "au f a i t , on ne p r o d u it v e r ita b le m e n t que lo rs q u e to u s l e s s e r v ic e s p r o d u c tif s e t a n t p a y e s, le p r o d u it v a u t se s f r a i s de p ro d u ctio n * " 2- * - Im p lic a tio n o f th e Law of M a rk e ts « The Law o f M arkets im p lie s th e fo llo w in g c a u s a l c h a in o f a n a ly s is : ( 1 ) th e p ro c e s s o f p ro d u c tio n i s supposed t o be a b a r t e r o o exchange in which " v a lu e ” i s exchanged f o r " v a lu e ," * * ( 2 ) money i s o n ly a medium o f exchange o f com m odities, ( 3 ) th e r e f o r e t o t a l demand i s e q u a l to t o t a l su p p ly , (4 ) t o t a l r e c e i p t s a re always eq u al to t o t a l c o s t p lu s H. Dobb, P o l i t i c a l Economy and C a p ita lism (r e v is e d e d i t i o n ; New York: I n t e r n a t i o n a l P u b lis h e r s , 1 9 4 5 ), PP. 40-45- 2-*-J. B. Say, Cours Complet d'econom ie P o liti q u e P ra c tiq u e (second e d i t i o n ; P a r is : G u illau m e, IS 4O), T ro is p a r t i e , D iv. 1 , C hapter I I I , quoted by N e is s e r , o p . c i t . , p . 433, f o o tn o te 4* The t r a n s l a t i o n o f th e p assag e i s a s fo llo w s : "As a m a tte r o f f a c t , p ro d u c tio n i s not r e a l l y ac h iev e d u n t i l , once th e c o s ts o f p ro d u c tio n have a l l been p a id , th e p ro d u c t i s w orth th e c o s ts o f p r o d u c tio n ." 22For a com prehensive e x p la n a tio n o f t h i s s t a t e ment see below pages 136-140* 26 ‘ norm al p r o f i t , (5) any in c re a s e i n income from an in c r e a s e i n o u tp u t would a l l be sp e n t e i t h e r on con sum ption goods o r new in v e stm e n t goods, (6) in c r e a s e s i n demand would be e q u a l to in c r e a s e s i n c o s ts in c lu d in g p r o f i t s , (7) no lo s s need be in c u r r e d , and ($) th e r e f o r e th e r e i s no p o s s i b i l i t y o f g e n e ra l o v e rp ro d u c tio n and c r i s i s . I I . CRITICS OF THE LA W OF MARKETS I n t r o d u c t i o n . The c o n tro v e rs y t h a t c e n te re d around th e Law o f M arkets d iv id e d , in th e e a r l y y e a rs o f th e n in e te e n th c e n tu ry , in t o a number o f s e p a ra te b ra n c h e s . The f i r s t p a r t o f t h i s s e c tio n u n d e rta k e s to i n v e s t i g a t e th e M alth u s-R ic ard o c o n tro v e rs y . M althus v i s - a - v i s R ic a rd o . There had a lre a d y b ee n a d is c u s s io n betw een M althus and R icardo a s to w h eth er a c r i s i s i s due t o d e f ic ie n c y o f demand. R icard o contended t h a t a f a l l i n th e r a t e of p r o f i t could cause a c r i s i s . T h is c o n tro v e rs y ended i n 1^15 w ith th e p u b lic a t io n o f M a lth u s’ two pam phlets on r e n t and th e Corn Laws and R ic a rd o ’ s E ssa y s on P r o f i t s , i n th e fo llo w in g s ta te m e n t by R icard o : A ccum ulation o f c a p i t a l h a s a te n d en cy to low er p r o f i t s . Why? Because ev e ry a c c u m u latio n i s a tte n d e d w ith in c re a s e d d i f f i c u l t y i n o b ta in in g 27 food, u n le s s i t i s accom panied w ith im provem ents i n a g r i c u l t u r e ; i n which case i t h as no ten d en cy t o d im in ish p r o f i t s . I f th e r e were no in c r e a s e d d i f f i c u l t y p r o f i t would n ev e r f a l l , b ecause th e r e a re no o th e r l i m i t s t o th e p r o f i t a b l e p ro d u c tio n o f m a n u fa ctu res b u t th e r i s e o f w ages. I f (w ith ) e v e ry ac cu m u latio n o f c a p i t a l we could ta k e a p ie c e o f f r e s h f e r t i l e la n d t o our I s la n d , p r o f i t s would n e v e r f a l l . 23 And i n th e same l e t t e r R icard o re c o g n iz e d t h a t " th e c o n s id e r a tio n o f money v a lu e ” m ight be th e fo u n d a tio n o f th e d if f e r e n c e betw een h im s e lf and M althus on th e Law o f M a r k e t s . ^ T h e r e a fte r th e t o p i c , "ten d en cy f o r th e r a t e o f p r o f i t to f a l l , " and th e re q u ire m e n ts f o r a th e o ry o f v a lu e became th e c e n t r a l theme o f t h e i r d isa g re em e n t M a lth u s* Theory o f Value and P r o f i t A businessm an may argue t h a t th e v a lu e o f h i s commodity i s d eterm in ed by w hat th e consumers a re p re p a re d to p ay . F u rth e rm o re , he may argue t h a t th e component p a r t s o f th e v a lu e of h i s commodity are 23p av id R ic a rd o , The Works and C orresp ondence o f David R ic a rd o , e d i te d by F . S r a f f a and M * H» Dobb ( Volume VI* Cambridge: U n iv e r s ity P re s s , 1951-1955), p . 162. H e r e in a f te r t h i s w i l l be r e f e r r e d t o as W orks. 2^ I b i d . , p . 164* R. M alth u s, P r in c i p l e s o f P o l i t i c a l Economy (second e d i tio n ; London: ¥ . P ic k e rin g , 1&36-)-, p p . 293- 336; a ls o R ic a rd o , Works, Volume IX, p p . 346-349* 28 com pensation f o r th e la b o r and raw m a t e r i a l s he h as p u rc h a se d , and d e p r e c ia tio n and o b so le sc e n c e , p lu s ; g iv e n p e rc e n ta g e p r o f i t . P r o f i t , a c c o rd in g to t h i s view , i s som ething which b u y e rs c o n tr ib u te to th e owner o f a commodity. Suppose, f o r th e sake o f argum ent, t h a t a commodity c o s ts a p ro d u cer f i f t e e n d o l l a r s — e ig h t d o l l a r s f o r raw m a t e r i a l s , two d o l l a r s f o r d e p r e c ia tio n and a llo w a n c e s, and f iv e d o l l a r s f o r la b o r c o s ts — th e n th e v a lu e o f t h i s commodity w i l l be f i f t e e n d o l l a r s p lu s f iv e d o l l a r s ( p r o f i t i s assumed t o be o n e - th ir d o f t o t a l c o s t) as p r o f i t , which i s tw en ty d o l l a r s . Such i s th e l i n e o f M althus* argum ent. M althus d e fin e d th e v alu e o f a commodity i n te rm s o f ’’th e amount o f la b o r which a commodity can command” i n th e m a rk e t.^6 Commandable la b o r i s th e q u a n tity o f l a b o r which can be h i r e d , a t th e c u r r e n t wage r a t e , from th e r e c e i p t s o b ta in e d from th e s a le o f a g iv e n commodity. A ccording ^T. R. M althus s a id , ’’The la b o u r which a com m odity can command i s a m easure o f i t s v a l u e , ” i n The Measure o f Value (London: J . M urray, 1 3 2 3 ), p . 6 1 . AI'so',’ Ih"TTis"" E )e fin itio n s i n P o l i t i c a l Economy, op. c i t . , p . 2 1 4 , he s a i d , ” l t i s p r e c i s e l y because th e la F o u r which a commodity w i l l o r d i n a r i l y command m easures th e la b o u r a c t u a l l y worked up i n i t w ith th e a d d itio n s o f p r o f i t s , t h a t i t i s j u s t i f i a b l e t o c o n s id e r i t as a m easure o f v a lu e . I f th e n th e o rd in a ry v a lu e o f a com m odity be c o n s id e re d a s d eterm ined by th e n a t u r a l and n e c e s s a ry c o n d itio n s o f i t s su p p ly , i t i s c e r t a i n t h a t th e la b o u r which i t w i l l o r d i n a r i l y command i s above th e m easure o f th e s e c o n d i t i o n s .” 29 t o M alth u s, any f a l l and r i s e i n th e amount o f p r o f i t shows an e q u iv a le n t f a l l o r r i s e i n th e v alu e o f th e i j commodity. T his a n a ly s is shows t h a t M althus had a i v i s i o n o f where th e d i f f i c u l t y l i e s . M althus e n u n c ia te d j th e f a c t t h a t th e check on re p r o d u c tio n i s th e r e a l i z a t i o n o f p r o f i t . In c o n t r a s t to th e Law o f M ark ets, he d e c la re d i t im p o s sib le f o r p ro d u c tio n to c o n s t i t u t e an o u t l e t f o r f u r t h e r p ro d u c tio n , u n le s s th e p r ic e t h a t th e owner o f p ro d u c tio n g e ts f o r th e p ro d u c tio n i s s u f f i c i e n t to e n a b le him t o h i r e more men th a n b e f o r e . I f th e p ro d u c e r produces a commodity w ith , suppose, te n men, he does not r e p e a t th e p ro d u c tio n i f th e p r ic e t h a t he g e ts f o r t h a t commodity can o n ly h i r e nine men. M althus sh o u ld r e c e iv e c r e d i t f o r th e d e m o n stra tio n o f th e f a l l a c y o f th e Law o f M arkets, a lth o u g h h i s th e o ry o f v a lu e i s s u p e r f i c i a l . M althus s a i d , ’’P r o f i t s c o n s i s t o f th e d if f e r e n c e betw een th e v a lu e o f th e c a p i t a l advanced, and th e v a lu e o f th e commodity when so ld o r u s e d . " ^ T his i s sim ply M a lth u s 1 th e o ry o f p r o f i t t h a t m a in ta in s p r o f i t o r ig - 2?M althus, D e f in itio n s i n P o l i t i c a l Economy, p . 241* 30 opt i n a t e s upon ”a l i e n a t i o n ” — th e p r o f i t which i s r e a l i z e d th ro u g h s a l e . T his means t h a t g a in s on one s id e alw ays in v o lv e l o s s e s on th e o t h e r . There i s no a d d i tio n t o | th e n a t io n a l incom e. T his means t h a t i f com m odities a re s o ld a t t h e i r v a lu e (v alu e i n th e R ic a rd ia n s e n s e —v a lu e j o f in p u t p lu s la b o r-p o w e r c o n ta in e d i n o u tp u t) , th e r e j w i l l emerge no p r o f i t . M althus so lv ed t h i s problem by p ro v id in g a n o th e r c l a s s , u n p ro d u c tiv e consum ers: r e n t - r e c e i v e r s ,^9 who p u rch ase w ith o u t s e l l i n g and consume w ith o u t p ro d u c in g . T his c l a s s c r e a te s ” a s u f f i c i e n t demand” who re c e iv e a c o n s id e r a b le p o r tio n o f th e annual income w ith o u t pay in g f o r i t , and e n r ic h th e p ro d u c e rs by g iv in g them back i t s sh a re f o r th e p u rch ase o f t h e i r com m odities. A ccording t o M alth u s, and i n c o n t r a s t to R icard o and Say, demand o f th e ^u n p ro d u ctiv e c l a s s ” f o r consumer goods i s an im m ediate c o n d itio n f o r f u r t h e r p d M althus was n o t o r i g i n a l in h i s th e o ry o f p r o f i t . S i r James Denham S te u a r t had s a id , ” In th e p r ic e o f goo d s, I c o n s id e r two th in g s as r e a l l y e x i s t i n g , and q u ite d i f f e r e n t from one a n o th e r; th e r e a l v a lu e o f th e com m odities, and th e p r o f i t upon a l i e n a t i o n , ” i n P r in c i p l e s o f P o l i t i c a l Economy ( i n The Works, P o l i t i c a l , M e ta p h is ic a l, and C h ro n o lo g ic a l o f th e L ate S i r James S t e u a r t , C o lle c te d by G eneral S irT a m e s S t e u a r t , th e Son. 6 Volumes; London: P r in te d f o r T. C a d e ll and W. D av is, 1 $ 0 5 ), p* 244; q uoted by Marx in T h e o rie s o f S u rp lu s V alue, p . 41* ^ M a lth u s , P r i n c i p l e s o f P o l i t i c a l Economy, p p . 39P-413* 31 p r o d u c tio n . M althus argued t h a t i t was p o s s ib le f o r p ro d u c tio n to o u tru n consum ption, th u s e a u sin g a f a l l i n p r ic e s and j i n p r o f i t s , and a consequent " g l u t ” and c y c l i c a l change j in t r a d e I n c o n t r a s t t o Say and R ic a rd o , M althus i h e ld t h a t : I t h as been th o u g h t by some v e ry a b le w r i t e r s , t h a t a lth o u g h th e r e may e a s i l y be a g lu t o f p a r t i c u l a r com m odities, th e r e can n o t p o s s ib ly be a g l u t o f com m odities i n g e n e r a l. . • . t h i s d o c t r in e , how ever, . . . ap p e ars to me . . . to be u t t e r l y unfounded. • • • I t i s by no means tr u e t h a t com m odities a re alw ays exchanged f o r com m o d it ie s . The g r e a t mass o f com m odities i s exchanged d i r e c t l y f o r la b o u r, e i t h e r p r o d u c tiv e o r u n p ro d u c tiv e ; and i t i s q u ite obvious t h a t t h i s mass o f com m odities, compared w ith th e la b o u r w ith which i t i s t o be exchanged, may f a l l i n v a lu e from a g lu t j u s t as any one commodity f a l l s i n v a lu e from an e x c e ss o f su p p ly , compared e i t h e r w ith la b o u r or w ith money.31 M althus b e lie v e d t h a t com m odities "may f a l l in v a lu e ," th e p r o f i t may f a l l , n o t from a r i s e i n wages b u t from a f a l l i n th e p r ic e o f com m odities due t o a d e f i c i e n t demand. And t h i s was l i k e l y t o o ccu r i f c a p i t a l ac cu m u latio n p roceeded to o r a p i d l y , p a r t i c u l a r l y i f t h i s ac cu m u latio n o c c u rre d a t th e expense o f a d im in ish e d consum ption. I t a p p e ars t h a t R ic a rd o , James M il l, and Say were s to n e - d e a f to what M althus was 3 ^ I b i d . , p p . 3 2 ^ - 3 2 9 * I b i d . , p p . 3 1 5 - 3 I 6 j s a y in g . As M althus s a id , i t was b ec au se : j . . . th e y were c o n sid e re d com m odities as i f th e y i were so many m a th em atic al f i g u r e s , o r a r i t h m e t i c a l c h a r a c t e r s , th e r e l a t i o n o f which were to be com- i p a re d , in s te a d o f a r t i c l e s of consum ption, which ! m ust, o f c o u rs e , be r e f e r r e d to th e numbers and ; w ants o f th e co n su m ers.3 2 j \ ! M althus r e f u te d th e Law o f M arkets f o r th e se i ! re a s o n s : (1 ) th e demand f o r p ro d u c e r goods i s a f u n c tio n o f th e demand f o r consumer goods;33 ( 2 ) t h e r e f o r e a d e f i c i e n t demand, f o r consum ption c a u ses sav in g t o be re d u c e d , c o n se q u e n tly income would f a l l ; 3^- and (3 ) th e amount o f income depends on th e c o st a c t u a l l y in c u r r e d , p r o f i t s and lo s s e s o f e n tre p re n e u r s would be d eterm in ed : when goods a re s o l d . 35 1 ! David R ic a rd o 1s Theory o f P r o f i t and Value i n C o n tra st to M althus36 In th e f i r s t e d i t i o n (1&17) o f h i s P r i n c i p l e s , I R icardo to o k Say t o ta s k f o r sa y in g t h a t v a lu e , r i c h e s , ! _________________________________________________________________________________________ 1 i 32 i b i d . , p p . 3 1 6-317. 3 3 I b i d . t p . 32d. j 34 i b i d . , p p . 323-324. s 35i b i d . , p p . 316-317; P ro f e s s o r Lambert h as ' p re s e n te d a s c h o la r ly e x p o s itio n o f t h i s p a r t , op. c i t . , ! p p . I d - 19- j ; 36por a com prehensive tr e a tm e n t o f R ic a rd o 1s i th e o ry o f v a lu e see below , pages 1 04- 1 2 0 . 33 and u t i l i t y were synonymous. R icard o s a id : M. Say ap p e a rs to me t o have b een s i n g u l a r l y u n f o r tu n a te i n h i s d e f i n i t i o n o f r i c h e s and v a lu e . . . . R ich es, he [Say] o b se rv e s, c o n s is ts o n ly o f th in g s which have a v a lu e i n th e m s e lv e s . • • • Now, i f mankind a t t a c h value to a th in g , i t i s on acco u n t o f th e u s e s to which i t i s a p p l ic a b le . T h is f a c u l t y , w hich c e r t a i n th in g s have o f s a t i s f y in g th e v a r io u s w ants o f m ankind, I c a l l u t i l i t y . To c r e a te o b je c ts t h a t have a v alu e o f any k in d i s t o c r e a te r i c h e s , s in c e th e u t i l i t y o f th in g s i s th e f i r s t fo u n d a tio n o f t h e i r v a lu e , and i t i s th e v a lu e o f th in g s which c o n s t i t u t e s r i c h e s . . • • P ro d u c tio n th e n i s a c r e a t i o n , n o t o f m a tte r b u t o f u t i l i t y , and i t i s m easured by th e v a lu e a r i s i n g from th e u t i l i t y o f th e o b je c t p ro d u ced . The u t i l i t y o f any o b je c t, a c c o rd in g to g e n e ra l e s tim a t i o n , i s p o in te d o u t by th e q u a n tity o f o th e r com m odities f o r which i t w i l l exchange. T his v a l u a t i o n , a r i s i n g from th e g e n e ra l e s tim a te formed by s o c i e t y , c o n s t i t u t e s what Adam Smith c a l l s v a lu e i n exchange . . . what we may more b r i e f l y d e s ig n a te by th e te rm v a l u e .37 R icardo h e ld t h a t th e v a lu e o f a commodity was d e t e r m ined by th e la b o r tim e n e c e s s a ry to produce i t . R ic a r d o 's view im p lie s t h a t econom ics sh o u ld p r im a r ily be concerned w ith a th e o ry o f v a lu e and p ro d u c tio n i n which exchange o f p ro d u c tiv e f o r c e s d e te rm in e s th e v a lu e of com m odities. I t im p lie d , f i r s t , t h a t th e q u a n t ity o f money, w hich was viewed a s a medium o f exchange and a s ta n d a rd o f v a lu e , was n o t r e le v a n t t o th e d e te r m in a tio n o f v a lu e and exchange r e l a t i o n s . T his im p lic a tio n r e q u ir e d 3?Ricardo, Works, Volume I , p . 279, fo o tn o te . 34 a p r i n c i p l e and a method o f p ro d u c tio n i n w hich money - should be c o n s id e re d o n ly a s a medium o f ex ch an g e. T h is opened th e way f o r th e a c c e p ta n c e -^ o f th e d o c trin e o f th e Law o f M arkets i n which th e c i r c u l a t i o n o f com m odities in v o lv e s a n e c e s s a ry e q u ilib r iu m o f p u r- j ch a se s and s a l e s , because ev ery p u rch ase i s a ls o a s a le ! and v ic e v e r s a — i . e . , t h a t e v e ry s e l l e r a ls o b r in g s h i s b uyer t o m arket w ith him . T h e re fo re th e r e co u ld n ev er be a problem o f g e n e ra l or a ll- r o u n d e x c e ss o f p ro d u cts* A ccording to t h i s d o c t r in e , a s money i s n e g le c te d i n th e d e te rm in a tio n o f exchange v a lu e , so f o r th e same re a s o n th e amount o f demand co u ld be n e g le c te d as a f a c t o r i n d e te rm in in g th e p ro c e s s o f p ro d u c tio n and ex ch an g e. F i n a l l y , R ic a r d o Ts view im p lie d t h a t p r o f i t was u n iq u e ly d eterm in ed by th e r a t i o o f th e v a lu e o f la b o r - power t o th e v a lu e o f com m odities i n g e n e r a l, and th e s e two were in d e p en d en t o f each o t h e r . T his f i n a l view im p lie d th sit th e r a t e o f p r o f i t could n o t be in c re a s e d e i t h e r by an in c r e a s e i n th e q u a n tity o f money o r by an in c r e a s e o f consum ption. The e s se n c e o f t h i s im p lic a - ^ R i c a r d o s a id , "In d e e d , th e r e a re many p a r t s o f M. S ayr s work to which I can c o n f id e n tly r e f e r i n sup p o r t o f th e d o c tr in e which I m a in ta in , • * • a lth o u g h i t m ust be co n fe sse d t h a t th e r e a re a ls o v a r io u s o th e r p a s sa g e s i n which a c o n tr a r y d o c tr in e i s m a in ta in e d ," i n Works, Volume I , p . 2$1. 35 t i o n was based on th e assu m p tio n t h a t a r i s e i n wages can ta k e p la c e w ith o u t any e q u iv a le n t r i s e o f p r i c e s , b u t w ith p r o f i t s f a l l i n g . R ic a rd o T s d isa g re e m e n t w ith M althus on th e th e o ry o f v alu e was c lo s e ly connected w ith th e s u b je c t o f p r o f i t * R icardo w rote t o M althus: You f in d f a u l t w ith my m easure o f v a lu e , you say , b ecause i t v a r i e s w ith th e v a ry in g p r o f i t s o f o th e r com m odities. T his i s I acknowledge an im p e rf e c tio n i n i t when used to m easure o th e r com m odities i n which th e r e e n te r s more o r l e s s o f p r o f i t s th a n e n t e r s i n t o my m easu re, b u t you do n o t a p p e a r t o see t h a t a g a in s t your m easure th e same o b je c tio n h o ld s good, f o r your m easure c o n ta in s no p r o f i t a t a l l , and th e r e f o r e n e v e r can be an a c c u r a te m easure o f v a lu e f o r com m odities which do c o n ta in p r o f i t s . 39 M althus w anted t o d e fin e v alu e i n term s o f ”th e amount o f la b o u r which a commodity can command,” w hereas R icardo i n s i s t e d on h i s own d e f i n i t i o n t h a t v a lu e con s i s t e d i n th e amount o f la b o r r e q u ire d t o produce th e commodity i n q u e s tio n . A ccording t o M a lth u s, a f a l l i n p r o f i t i s a f a l l i n com m odity-values. To R ic a rd o , th e v alu e o f a commodity w i l l f a l l o n ly i f i t r e q u ir e s l e s s la b o r , and t h i s w i l l r e s u l t i n a lo w er r a t e o f p r o f i t i f la b o r f a i l s t o f a l l i n p r i c e . F r o m any a n g le , th e 3 9 n ic a rd o , W orks, Volume IX, p . 346* ^ R i c a r d o , Works, Volume IX, p p . 343-349• 36 th e o ry o f v a lu e was th e m ain l i n k which connected th e c l a s s i c a l argum ent t o g e t h e r , and th e th e o ry o f valu e became th e e s s e n t i a l f e a tu r e o f c l a s s i c a l P o l i t i c a l Economy. Because o f t h i s sim ple f a c t , th e w r i t e r has been c o n fro n te d w ith th e need f o r a com prehensive e x p lo r a tio n o f th e o b je c tiv e th e o ry o f v a lu e . I t would be f a i r to argue t h a t th e Law o f M arkets was a c o r o lla r y o f R icard o * s th e o ry o f th e exchange o f com m odities. The cru x o f R ic a rd o Ts argum ent was a p r e c is e i n t e r p r e t a t i o n o f p r o f i t a s a c a te g o ry o f incom e. A lthough R icard o a tta c h e d c h i e f im p o rtan ce to th e a n a ly s is o f th e movements o f th e c l a s s re v e n u e , th e n a tu re o f p r o f i t , i t s g e n e r a tio n , and th e re a s o n f o r i t s emergence rem ained u n e x p la in e d . I t s n e c e s s i t y was sim ply assum ed. P r o f i t s w ere re g a rd e d by R icard o as a q u a n t ity whose s iz e was d eterm in ed by th e v a lu e o f th e p ro d u c t and th e p r ic e o f w ages. R icard o argued t h a t p r o f i t depended not on th e s iz e o f th e " g ro s s p ro d u c e ," n o t on th e p r o d u c tiv i ty o f c a p i t a l , b u t on th e r a t i o o f wages to th e v a lu e o f th e p r o d u c t I n 1$15, i n a l e t t e r t o M a lth u s, R icardo arg u ed : ^Ricardo, Works, Volume I, pp. 2B9-292. 37 I most d i s t i n c t l y a llo w t h a t any ca u ses which te n d t o make c a p i t a l l e s s i n demand w i l l low er p r o f i t s , b u t I contend t h a t th e r e a re no c a u ses w hich w i l l f o r any le n g th o f tim e make c a p i t a l l e s s i n demand, however abundant i t may become, b u t a c o m p a ra tiv e ly h ig h p r ic e o f food and la b o u r; —t h a t p r o f i t s do n o t n e c e s s a r i l y f a l l w ith th e in c re a s e o f th e q u a n tity o f c a p i t a l because th e demand f o r c a p i t a l i s i n f i n i t e and i s governed by th e same law a s p o p u la tio n i t s e l f . They a re b oth checked by th e r i s e i n th e p r i c e o f fo o d , and th e consequent in c re a s e i n th e v a lu e o f la b o u r . I f th e r e were no such r i s e what could p r e v e n t p o p u la t i o n and c a p i t a l from in c r e a s in g w ith o u t l i m i t ?42 The O rig in o f R icard o * s T h e o r e tic a l E r r o r The o r i g i n o f R icard o * s t h e o r e t i c a l e r r o r i n a c c e p tin g th e Law o f M arkets should be so u g h t i n h i s th e o ry o f exchange o f com m odities and u n f in is h e d th e o ry o f p r o f i t . R icard o o m itted th e v a lu e o f raw m a te r ia l s from th e t o t a l v a lu e o f a commodity. He th o u g h t t h a t th e v a lu e o f a commodity i s composed o f la b o r tim e a p p lie d im m ed iately to th e commodity, p lu s th e la b o r “which i s bestow ed on th e im plem ents, t o o l s , and b u i l d in g w ith which such la b o u r i s a s s i s t e d . ”^ I t i s tr u e t h a t th e p r o p o rtio n i n which raw m a te r ia l e n t e r s in t o a commodity does n o t a f f e c t th e v a lu e o f th e commodity ^ R i c a r d o , W orks, Volume VI, l e t t e r from R icardo to M althus d a te d O ctober 17, I&1 5 . ^Ricardoj Works, Volume I, p. 1. and th e r e l a t i v e q u a n t i t i e s o f la b o r c o n ta in e d i n th e com m odities, b u t i t does a f f e c t th e s u r p lu s - la b o r tim e / c o n ta in e d i n com m odities. G ranted t h a t com m odities a re exchanged a t t h e i r v a lu e , what R icard o s t a t e d i s not th e v a lu e o f com m odities, b u t th e c o s t o f p ro d u c tio n which i s th e c a p i t a l advanced f o r t h e i r p ro d u c tio n p lu s th e av erag e p r o f i t . A nother r e l a t e d e r r o r o f R icardo i s t h a t he assumed a g e n e ra l r a t e o f p r o f i t f o r d i f f e r e n t i n v e s t m ents o f c a p i t a l o f e q u a l s iz e expended i n wages In o th e r w ords, i n d i f f e r e n t s p h e re s o f p ro d u c tio n c a p i t a l s o f e q u a l s iz e employed i n p aying wages d e t e r mine th e averag e r a t e o f p r o f i t , r a t h e r th a n th e t o t a l c a p i t a l em ployed. I t i s a m e rit o f M a lth u s’ c r i t i c i s m t h a t he t r i e d h ard to b r in g t h i s l a s t p o in t to R ic a rd o ’ s a t t e n t i o n . Sismonde de S ism o n d i. The im m ediate im pact o f th e c r i s e s o f 13.15 and 1313-1319 i n E ngland g e n e ra te d th e f i r s t e n q u ir ie s in to th e n a tu re o f economic m al- a d ju s tm e n ts . P erhaps th e s e e a r l y c r i s e s were enough t o r e v e a l to th e w orld th e u n r e a l i s t i c a s p e c ts o f th e Law ^Ricardo, Works, Volume I, pp. 20-21. 39 o f M a rk e ts. A ll contem porary tr a d e r e p o r t s , p e r i o d i c a l s , and t r a v e l e r ’ s n o te s t o l d o f th e l o s s e s s u s ta in e d by E n g lis h m e rc h a n ts. The problem s o f d u l l m a rk e ts , o v er p ro d u c tio n , fre q u e n t b a n k ru p tc ie s f o r th e f i r s t tim e p ro v id ed a ground f o r th o s e t h e o r i s t s who c r i t i c i z e d l a i s s e z f a i r e . In F ra n c e , Sismonde de Sism ondi c r i t i c i z e d th e contem porary s o c ie ty u n d er th e p ro v o c a tio n o f economic m a la d ju stm e n t. Sism ondi e x p la in e d t h a t th e im p etu s f o r h i s s o c i a l c r i t i c i s m came from E ngland and e s p e c i a l l y h e r f i r s t c r i s i s o f 1$07* He saw ’’th e p eo p le o f England a re d e s t i t u t e o f com fort now, and o f s e c u r i t y f o r th e f u t u r e . ”^5 ffe co n ceiv ed o f th e so u rce o f th e e v i l i n th e c a p i t a l i s t p ro d u c tio n and th e d i s t r i b u t i o n o f incom e. T h is became th e cru x o f th e problem o f ac cu m u latio n o f c a p i t a l w ith w hich Sism ondi was so much c o n c e rn e d . The m ain p o in t of h i s c r i t i c i s m a g a in s t C l a s s i c a l E conom ists was t h a t c a p i t a l i s t p ro d u c tio n was encouraged t o expand i n d e f i n i t e l y w ith o u t any re g a rd to consum ption, which 1 5 P re fa c e t o th e second e d i t i o n o f Nouveaux P r in c ip e s d ’Economie P o liti q u e au De La R ich esse ''fens Les R ap p o rts A v e c L a P o p u l a tio n , quoted~"by Rosa Luxemburg, The A ccum ulation o f C a p ita l (New Haven: Yale U n iv e r s ity •Press";' 195X1', p p .“ 175-177'” " was d eterm in ed by in c o m e .^ He argued: By n e g le c tin g a q u a l i t y so e s s e n t i a l to be d e te rm in e d , Say and R icard o have a r r iv e d a t th e c o n c lu s io n , t h a t consum ption i s an u n lim ite d pow er, or a t l e a s t h av in g no l i m i t s b u t th o s e o f p ro d u c tio n , w h ils t i t i s i n f a c t lim ite d by income. . . . They announced t h a t w h ate v er abundance m ight be produced, j i t would alw ays f in d consum ers, and th e y have i encouraged th e p ro d u c e rs to cause t h a t g lu t i n th e m a rk e ts , w hich a t t h i s tim e o c c a sio n s th e d i s t r e s s o f th e c i v i l i s e d w o rld ; w hereas th e y should have forew arned th e p ro d u c e rs t h a t th e y could o n ly reck o n on th o s e consum ers who p o sse sse d in co m e.47 Thus, Sism ondi u n d erto o k an i n v e s t i g a t i o n o f th e th e o ry o f income and i t s d e te r m in a n ts . Then, he d is tin g u is h e d income from c a p i t a l , a d i s t i n c t i o n w hich he c a lle d " th e m ost a b s t r a c t and d i f f i c u l t q u e s tio n o f p o l i t i c a l econ omy." But he n ev e r got beyond th e sh a llo w p o in t t h a t " c a p i t a l " i s th e income o f th e w orking c l a s s a p p r o p ria te d by th e c a p i t a l i s t s . T his was th e way, he a rg u e d , t h a t th e p u rc h a s in g power o f th e w orking c l a s s would be d e s tro y e d , and t h i s would check f u r t h e r p ro d u c tio n . H is panacea f o r t h i s m alad ju stm en t was in c r e a s in g th e com pensation f o r l a b o r . In c o n t r a s t t o R icard o and 46sism o n d i, in h i s p re fa c e t o Nouveaux P rin c ip e s s a i d , "What i s th e f r u i t o f t h i s immense ac cu m u latio n o f w e a lth ? Have th e y had any o th e r e f f e c t th a n t o make e v e ry c l a s s p a rta k e o f e a r e , p r i v a t i o n and th e d anger of com plete ru in ? " i n Luxemburg, i b i d . 4 7 I b i d . , p p . 1 79-lS O . S ay, he argued t h a t th e "demand f o r la b o r , o r th e o f f e r , o f more and more wages in com pensation f o r t h i s l a b o r , " i s th e cause o f p r o s p e r i t y , n o t th e i n e v i t a b l e " r e s u l t from an in c r e a s e o f p r o d u c tio n ." In su p p o rt o f j th e s e view s he r e f e r r e d t o M a lth u s, who m a in ta in e d th e same th e o ry i n E n g lan d . I t m ight be s a i d , w ith f e a r o f much d i s p u t e , t h a t th e backbone o f S ism o n d i’ s c r i t i c i s m o f th e Law o f M arkets was t h a t goods could n o t be so ld i n any q u a n tity t h a t c o u ld be w ish ed , b u t p ro d u c tio n depends on th e income o f s o c ie ty and i t s consum ptive c a p a c i t y . ^ T his j gave b i r t h to Sism ondian u n d er consum ption th e o r y . M ention sh o u ld be made t h a t Sism ondi d id not n e g le c t th e im p o rtan ce o f a c c u m u la tio n o f c a p i t a l and ^ S is m o n d i s a i d , "Mr. M alth u s, on th e o th e r h an d , h a s m a in ta in e d in E n g lan d , a s I have t r i e d t o do on th e C o n tin e n t, t h a t consum ption i s not th e n e c e s s a ry co n se quence o f p ro d u c tio n , t h a t th e needs and d e s i r e s o f man, though th e y a re t r u l y w ith o u t l i m i t s , a re o n ly s a t i s f i e d by consum ption i n so f a r a s means o f exchange go w ith them . . . . A ccording to o u r view , i f th e demand f o r la b o u r h a s n o t preced ed and d eterm in ed p r o d u c tio n , th e m arket w i l l be flo o d e d , and th e n new p ro d u c tio n becomes a cause o f r u i n , n o t o f e n jo y m e n t," in Luxemburg, i b i d . , p • 219 • ^9I b i d . , p . 213. 42 i t s r e l a t i o n w ith economic g ro w th .50 But he saw th e c lu e to th e p u z z le o f a c c u m u la tio n i n th e o r g a n iz a tio n o f c a p i t a l i s t s o c i e t y . He s a id ; I beg you t o r e a l i z e t h a t i t i s n o t th e m achine, new d is c o v e r ie s and in v e n tio n s , n o t c i v i l i z a t i o n to which I o b j e c t , b u t th e modern o r g a n iz a tio n o f s o c i e t y , an o r g a n iz a tio n which d e s p o ils th e man who works o f a l l p r o p e r ty o th e r th a n h i s arm s, and d e n ie s him th e l e a s t s e c u r i t y i n a r e c k le s s o v e r b id d in g t h a t makes f o r h i s harm and to which he i s bound t o f a l l a p r e y .51 There i s no doubt t h a t th e i n t e r e s t s o f th e w orking c l a s s were a t th e core o f S ism o n d iTs c r i t i c i s m . 5®Sismondi s a id , ”S u re ly I have n e v e r d en ied t h a t s in c e th e tim e of L ouis XIV f ra n e e h as been a b le t o double h e r p o p u la tio n and t o q u ad ru p le h e r consump t i o n , as he c o n te n d s . I have o n ly claim ed t h a t th e . in c r e a s e o f p ro d u c ts i s a good i f i t i s d e s ir e d , p aid f o r and consumed; t h a t , on th e o th e r hand, i t i s an e v i l i f , th e r e b e in g no demand, th e o nly hope o f th e p ro d u c e r i s to e n t ic e th e consum ers o f a r i v a l in d u s try * s p r o d u c ts . I have t r i e d to show t h a t th e n a t u r a l co u rse o f th e n a tio n s i s p r o g re s s iv e in c r e a s e o f t h e i r p r o p e r ty , an in c re a s e co n sequent upon t h e i r demand f o r new p ro d u c ts and t h e i r means t o pay f o r them , b u t t h a t i n consequence o f o u r i n s t i t u t i o n s , o f o ur l e g i s l a t i o n h av in g robbed th e w orking c l a s s o f a l l p r o p e r ty and every s e c u r i t y , th e y have a ls o been sp u rre d to a d is o r d e r ly la b o u r q u ite o u t o f to u ch w ith th e demand and w ith p u rch asin g power, which a c c o rd in g ly o n ly a g g ra v a te s p o v e r ty ,” i n Luxemburg, i b i d . , p . 2 1 4 * 5 ^ -Ib id ., p p . 216-217. . 43 K arl Marx Marx argued t h a t i n a s i t u a t i o n where c a p i t a l a c c u m u la tio n expanded and th e su p p ly o f la b o r-p o w e r a v a ila b le i n th e m ark et approached e x h a u s tio n th e change i n th e r a t i o o f c o n s ta n t ^2 to variable^3 c a p i t a l was a s s o c ia te d w ith a f a l l i n th e r a t e o f p r o f i t . The s ig n i f ic a n c e o f th e "te n d en c y o f th e r a t e o f p r o f i t t o f a l l " was co nnected w ith Marx*s r e f u t a t i o n o f th e Law o f M arkets* Marx accu sed th e c l a s s i c a l Law o f M arkets o f c o n c e n tra tin g so e x te n s iv e ly on th e in te rd e p e n d e n c e o f p ro d u c tio n and consum ption, o f su p p ly and demand, a s I to t r e a t them r e a l l y a s i d e n t i t i e s , and hence t o ig n o re th e v e ry f a c t o r s t h a t were cap ab le o f g e n e ra tin g d i s e q u ilib r iu m betw een th e s e e le m e n ts . Marx argued t h a t 5 % a rx d e f in e s c o n s ta n t c a p i t a l as " t h a t p a r t o f c a p i t a l , th e n , w hich i s r e p r e s e n te d by th e means o f p ro d u c tio n , by th e raw m a t e r i a l , a u x i l i a r y m a t e r i a l and th e in s tru m e n ts o f la b o u r , does n o t, i n th e p ro c e s s o f p ro d u c tio n , undergo any q u a n t i t a t i v e a l t e r a t i o n o f v a l u e ," i n C a p ita l, A C r itia u e o f P o l i t i c a l Economy, Volume I , p T f Z T T ------------------------------------------------------- 53Marx d e f in e s v a r ia b le c a p i t a l a s " t h a t p a r t o f c a p i t a l , re p re s e n te d by la b o u r-p o w e r, d o e s , i n th e p ro c e s s o f p ro d u c tio n , undergo an a l t e r a t i o n o f value* I t b o th re p ro d u c e s th e e q u iv a le n t o f i t s own v a l u e , and a ls o p ro d u ces an e x c e s s , a s u r p lu s - v a lu e , which may i t s e l f v a ry , may be more o r l e s s a c c o rd in g t o circum s t a n c e s ," i n C a p i t a l , A C r itiq u e o f P o l i t i c a l Economy, Volume I , p p . 232-233• 44 th e c r u c i a l p r e s u p p o s itio n o f R icard o was: That th e b o u rg e o is mode o f p ro d u c tio n i s th e a b s o lu te mode o f p r o d u c tio n , and c o n se q u e n tly i s a mode o f p ro d u c tio n w ith o u t any p r e c i s e s p e c i f i c c h a r a c t e r , t h a t what i s s p e c i f i c i n i t i s o nly fo rm a l. I t i s t h e r e f o r e n o t p o s s ib le f o r him to adm it t h a t th e b o u rg e o is mode of p ro d u c tio n c o n ta in s w ith in i t s e l f a b a r r i e r to th e f r e e developm ent o f th e p ro d u c tiv e f o r c e s , a b a r r i e r which comes t o th e s u r fa c e i n c r i s e s , and i n c i d e n t a l l y i n o v e rp ro d u c tio n — th e b a s ic phenomenon i n c r i s e s . R icardo- saw . T“ t h a t th e l i m i t l e s s " d e s ir e " f o r a l l k in d s o f use v a lu e s i s c o n s ta n tly s a t i s f i e d , on th e b a s i s o f a s t a t e o f th in g s i n which th e mass o f p ro d u c e rs rem ains more o r l e s s r e s t r i c t e d to n e c e s s i t i e s , i n w hich t h i s v e ry c o n s id e ra b le mass o f p ro d u c e rs th e r e f o r e rem ains more o r l e s s e x c lu d ed from th e consum ption o f w e a lth — i n so f a r a s w e a lth o v e rs te p s th e c i r c l e o f th e n e c e s s a ry means o f s u b s is te n c e . A ll th e d i f f i c u l t i e s which R icardo and o th e r s r a i s e a g a in s t o v e rp ro d u c tio n , e t c . , r e s t on th e f a c t t h a t th e y e i t h e r look on b o u rg e o is p ro d u c tio n a s a mode o f p ro d u c tio n i n w hich no d i s t i n c t i o n e x i s t s betw een p u rch ase and s a l e - d i r e c t b a r t e r — o r th e y re g a rd i t a s s o c i a l p r o d u c tio n , o f such a k in d t h a t s o c ie ty d i s t r i b u t e s i t s means o f p ro d u c tio n and p ro d u c tiv e f o r c e s as i f a c c o rd in g t o a p la n , i n th e degree and m easure i n which th e y are n e c e s s a ry f o r th e s a t i s f a c t i o n o f i t s v a r io u s n eeds; so t h a t to each sp h ere o f p ro d u c tio n f a l l s th e q u o ta o f s o c i a l c a p i t a l r e q u ir e d f o r th e s a t i s f a c t i o n o f th e need to w hich i t c o rre s p o n d s . T his f i c t i o n a r i s e s e n t i r e l y from th e i n a b i l i t y to g ra s p th e s p e c i f i c form o f b o u rg e o is p ro d u c tio n ; and t h i s ' i n a b i l i t y i n tu r n from th e o b s e s s io n t h a t b o u rg e o is p ro d u c tio n i s p ro d u c tio n pure and s im p le .54 5^-Marx, T h e o rie s o f S u rp lu s V a lu e , p p . 406-407* L 45 Though th e o v e rp ro d u c tio n o f c a p i t a l was a d m itte d , th e o v e rp ro d u c tio n o f com m odities was d e n ied by R ic a rd o . P r e c is e ly because c a p i t a l i s t p ro d u c tio n i s p ro d u c tio n f o r th e sake o f p r o f i t , " o v e rp ro d u c tio n o f c a p i t a l " becomes p o s s i b le i n th e sense o f a volume o f c a p i t a l ac cu m u latio n i which i s i n c o n s i s t e n t w ith th e m ain ten an ce o f th e form er l e v e l o f p r o f i t . 55 Marx s a id : There i s p e r i o d i c a l l y a p ro d u c tio n o f to o many means o f p ro d u c tio n and n e c e s s i t i e s o f l i f e t o p e rm it o f t h e i r s e rv in g as means f o r th e e x p l o i t a t i o n o f th e la b o r e r s a t a c e r t a i n r a t e o f p r o f i t . Too many com m odities a r e produced t o p e rm it o f a r e a l i s a t i o n o f th e v a lu e and s u rp lu s - v a lu e c o n ta in e d i n them u n d er th e c o n d itio n s o f d i s t r i b u t i o n and con sum ption p e c u l i a r t o c a p i t a l i s t p r o d u c tio n , t h a t i s , to o many t o p erm it o f th e c o n tin u a tio n o f t h i s p ro c e s s w ith o u t e v e r r e c u r r in g e x p l o s io n s • I t i s n o t a f a c t t h a t to o much w e a lth i s p ro d u ced . But i t i s t r u e t h a t th e r e i s p e r i o d i c a l o v erp ro d u c t i o n o f w e a lth i n i t s c a p i t a l i s t i c and s e l f - c o n tr a d ic to r y form . . . . The c a p i t a l i s t mode of p ro d u c tio n , f o r t h i s re a s o n , m eets w ith b a r r i e r s a t a c e r t a i n s c a le o f p ro d u c tio n which would be in a d e q u a te u n d er d i f f e r e n t c o n d itio n s * I t comes t o a s t a n d s t i l l a t a p o in t d eterm in ed by th e p ro d u c tio n and r e a l i s a t i o n o f p r o f i t , n o t by th e s a t i s f a c t i o n o f s o c i a l n e e d s .56 A lthough th e f a l l i n g r a t e o f p r o f i t as c a p i t a l accu m u lates h as become th e backbone o f r e c e n t b u s in e s s 55i b i d . t p p . 422-427. 56pjarx, C a p i t a l , A C r itiq u e o f P o l i t i c a l Economy, Volume I I I , p . 303 * 46 c y c le t h e o r i e s , i t h as been supposed t h a t M arxf s th e o ry was in co m p lete b ecause i t d id n o t e x p la in why a f a l l in th e r a t e o f p r o f i t sh o u ld red u ce in v e s tm e n t. I t i s g ra n te d t h a t Marx d id n o t r e f e r t o th e r e l a t i o n betw een p r o f i t , r a t e o f i n t e r e s t , and th e volume o f c u r r e n t , >^ - - i - ,1,1 1 -1 |_|, n il, I I - |,n , j in v estm en t* But as M. H. Dobb h as r e m a r k e d , M a r x c l e a r l y d is tin g u is h e d betw een th e sepa r a t e in f lu e n c e o f th e tw o . Marx s a id : I f we o bserve th e c y c le s o f v a r i a t i o n , i n which modern in d u s tr y moves alo n g . . . we s h a l l f in d , t h a t a low r a t e o f i n t e r e s t g e n e r a lly co rre sp o n d s t o p e r io d s o f p r o s p e r i t y , o r o f e x t r a p r o f i t , a r i s e o f i n t e r e s t to th e t r a n s i t i o n betw een p r o s p e r ity and i t s r e v e r s e , and a maximum o f i n t e r e s t up t o a p o in t o f extrem e u su ry t o th e p e r io d o f c r i s e s . The r a t e o f i n t e r e s t re a c h e s i t s h ig h e s t p o in t d u rin g c r i s e s , when money must be borrow ed i n o rd e r to m eet paym ents a t any c o s t . S in ce a r i s e o f i n t e r e s t im p lie s a f a l l i n th e p r ic e o f s e c u r i t i e s , t h i s o f f e r s a t th e same tim e a f i n e o p p o rtu n ity to p e o p le w ith a v a i l a b l e m o n e y -c a p ita l, who may a c q u ire p o s s e s s io n a t c u t - r a t e p r i c e s o f such i n t e r e s t - b e a rin g s e c u r i t i e s a s must a t l e a s t r e g a in t h e i r av erag e p r ic e i n th e r e g u la r cou rse o f t h i n g s , a s soon as th e r a t e o f i n t e r e s t f a l l s a g a i n . 5$ A c c o rd in g ly , Marx contended t h a t a t th e c r u c i a l p e rio d when a c r i s i s was g e rm in a tin g th e r a t e o f i n t e r e s t te n d e d 57pobb, o p . c i t ., p p . 116-117• 5%[arx, C a p i t a l , A C r itiq u e o f P o l i t i c a l Economy, Volume I I I , p p . 423-424* 47 t o r i s e . W hether M arx’ s em phasis i s a s c i e n t i f i c one, i t i s b e lie v e d t h a t changes i n th e r a t e o f i n t e r e s t p la y , ; t to d a y , a much s m a lle r r o le i n c u r t a i l i n g a re c e s s io n * M arx’s r e f u t a t i o n o f th e Law o f M arkets i s n o t one o f u n d erco n su m p tio n . H is th e o ry i s n o t u n d e r consum ption i n th e sense t h a t in v e stm e n t n e c e s s a r i l y c a u ses o v e rp ro d u c tio n u n le s s some new so u rc e o f con sum ption demand a p p e a rs o r i n th e way t h a t c r i s e s a re e lim in a te d by h ig h e r w ages, o r c r i s e s a re caused by d e f ic ie n c y o f consum ption so t h a t c r i s i s s t a r t s i n th e consum ption goods i n d u s t r i e s . There a re two o f te n - quoted p a ssa g e s which i n t e r p r e t M arx’ s th e o r y as u n d e r consum ption. The f i r s t p assag e i s : j The c o n d itio n s o f d i r e c t e x p l o i t a t i o n and th o se o f th e r e a l i s a t i o n o f s u r p lu s - v a lu e a re n o t id e n t i c a l . They a re s e p a ra te d l o g i c a l l y a s w e ll a s by tim e and s p a c e . The f i r s t a re only l im ite d by th e p ro d u c tiv e power o f s o c i e t y , th e l a s t by th e p ro p o r t i o n a l r e l a t i o n s o f th e v a r io u s l i n e s o f pro d u c t i o n and by th e consuming power o f s o c i e t y . T his la st-n a m e d power i s not d eterm in ed e i t h e r by th e a b s o lu te p ro d u c tiv e power n o r by th e a b s o lu te consuming pow er, b u t by th e consuming power based on a n t a g o n is t ic c o n d itio n s o f d i s t r i b u t i o n , which re d u c e s th e consum ption o f th e g r e a t mass o f th e p o p u la tio n t o a v a r ia b le minimum w ith in more o r l e s s narrow l i m i t s . The consuming power i s fu rth e rm o re r e s t r i c t e d by th e te n d en cy to accu m u late, th e g re e d f o r an e x p a n sio n o f c a p i t a l and a p ro d u c tio n o f s u r p lu s - v a lu e on an e n la rg e d s c a l e . 59 5 9I b i d . , p . 286 48 The second p assag e re a d s as fo llo w s: The l a s t cause o f a l l r e a l c r i s e s alw ays rem ains th e p o v e rty and r e s t r i c t e d consum ption o f th e m asses a s compared t o th e ten d en cy o f c a p i t a l i s t p ro d u c tio n t o d evelop th e p ro d u c tiv e f o r c e s in such a way, t h a t o n ly th e a b s o lu te power of consum ption o f th e e n t i r e s o c i e t y would be t h e i r l i m i t *60 What th e s e p a ssa g e s r e a l l y mean i s t h a t th e amount o f p r o f i t r e a l i z e d on e x i s t i n g sto c k o f c a p i t a l depends on th e t o t a l volume o f consum ption p lu s t o t a l volume o f in v e stm e n t a t th e tim e . T h e re fo re any in c r e a s e o f consum ption would in c r e a s e p r o f i t . But in c re a s e d i n v e s t m ent, w h ile i t m ight te m p o ra rily have a s im ila r e f f e c t i n in c r e a s in g demand, p r e c i p i t a t e d th e problem o f changing co m p o sitio n o f c a p i t a l , and hence a f a l l i n th e r a t e o f p r o f i t i n th e n e a r f u t u r e . Marx argued t h a t th e c o n t r a d i c t i o n betw een "p ro d u c tiv e power" and "consuming power" was th e e s se n c e o f th e q u e s tio n o f c r is e s * I f i t i s assum ed, by some w r i t e r s , t h a t t o Marx consum ption was a l i m i t i n g f a c t o r on th e r e a l i z a t i o n o f s u rp lu s v a l u e , i t i s e v id e n t t h a t th e la b o r su p p ly was a c r u c i a l l i m i t i n g f a c t o r i n th e c r e a tio n o f s u r p lu s - v a lu e i n th e f i r s t i n s t a n c e . Marx w r o te : I t i s p u r e ly a ta u to lo g y t o say t h a t c r i s e s a re eaused by th e s c a r c i t y o f s o lv e n t consum ers, o r o f a p ay in g consum ption. The c a p i t a l i s t system does 6 0 I b i d . , p . 568. 49 n ot know any o th e r modes o f consum ption b u t a paying one, e x c e p t t h a t of th e p au p e r o r o f th e " t h i e f . ” I f any com m odities a re u n s a le a b le , i t means t h a t no s o lv e n t p u rc h a s e rs have been found f o r them , i n o th e r w ords, consum ers (w hether com m odities a re bought i n th e l a s t in s ta n c e f o r p ro d u c tiv e o r I n d iv id u a l con su m p tio n ). But i f one were to a tte m p t to c lo th e t h i s ta u to lo g y w ith a sem blance o f a p ro fo u n d e r j u s t i f i c a t i o n by sa y in g t h a t th e w orking c l a s s re c e iv e to o sm all a p o r tio n o f t h e i r own p ro d u c t, and th e e y i l w ould be rem edied by g iv in g them a l a r g e r sh a re o f i t , o r r a i s i n g t h e i r w ages, we sh o u ld r e p l y t h a t c r i s e s a r e p r e c i s e l y alw ays p reced ed by a p e rio d i n which wages r i s e g e n e r a lly and th e w orking c l a s s a c t u a l l y g e t a l a r g e r sh a re o f th e an n u al p ro d u c t in te n d e d f o r consum ption. From th e p o in t o f view o f th e a d v o c a te s o f " s im p le ” ( I ) common s e n s e , such a p e r io d should r a t h e r remove a c r i s i s * I t seem s, th e n , t h a t c a p i t a l i s t p ro d u c tio n co m p rises c e r t a i n c o n d itio n s w hich a re in d e p e n d e n tly o f good o r bad w i l l and p e rm it th e w orking c l a s s to e n jo y t h a t r e l a t i v e p r o s p e r i t y o n ly m o m e n ta rily , and a t t h a t alw ays as a h a rb in g e r o f a coming c r i s i s . ©1 A lthough th e t h e o r i e s o f underconsum ption were re p u d ia te d b o th by Marx and E n g e ls ,^2 i t h a s had c o n s id e ra b le 6 ^-Marx, C a p ita l, A C ritiq u e o f P o l i t i c a l Economy, Volume I I , p p . 475-476• ^ F r i e d r i c h E n g els rem arked: "But now, u n f o r tu n a t e l y , th e underconsum ption o f th e m a sse s, th e l i m i t a t i o n o f th e consum ption o f th e m asses t o t h a t n e c e s s a ry f o r ' s u b s is te n c e and r e p r o d u c tio n , i s n o t a new phenomenon. I t h as e x i s t e d a s lo n g a s th e r e have been e x p l o i t i n g and e x p lo ite d c l a s s e s . . * . U nderconsum ption o f th e m asses i s a n e c e s s a ry c o n d itio n o f a l l forms o f s o c ie ty b ased on e x p l o i t a t i o n , hence a ls o o f th e c a p i t a l i s t i c form ; b u t o nly th e c a p i t a l i s t i c form o f p ro d u c tio n f i r s t b r in g s i t to c r i s e s . The underconsum ption o f th e m a sses, t h e r e f o r e , i s ,also a p r e r e q u i s i t e o f c r i s e s and p la y s i n them a r o le w hich h as lo n g b een re c o g n iz e d ; b u t i t t e l l s us j u s t as l i t t l e about th e ca u ses o f th e p r e s e n t e x is te n c e o f c r i s e s as i t does about t h e i r e a r l i e r a b s e n c e ," i n A n ti-D u h rin g (C hicago: C h a rle s H. K e rr, 1 9 3 5 ), P« 299^---------------- 50 p o p u la r it y i n M a rx is t c i r c l e s . I t was g iv e n a s p e c ia l "M a rx ist" v a r i a n t by Rosa Luxemburg, who c r i t i c i z e d Marx f o r n e g le c tin g t h i s a s p e c t & M arxTs a n a ly s is o f c a p ita lis m was i n re g a rd t o e n la rg e d r e p r o d u c tio n , which does n o t view th e p ro c e s s o f p ro d u c tio n and exchange as a w h o le. He r e j e c t e d th e Law o f M arkets which viewed p ro d u c tio n and exchange a s a w hole, a c o n tin u o u s b a r t e r - p ro c e s s o f goods a g a in s t goods, a sim ple r e p ro d u c tio n i n which t o t a l demand would in c re a s e p a r i p assu w ith t o t a l su p p ly because th e y were i d e n t i c a l . The Law o f M arkets seemed an e v a s io n o f th e r e a l problem . The crude form o f th e underconsum ption th e o r y , t h a t in v e stm e n t p e r se c a u se s c r i s e s , a s r e p r e s e n te d i n th e w r i tin g s o f Sism ondi and R o d b e rtu s, seems to have been re g a rd e d by Marx as to o s u p e r f i c i a l to a f f o r d an ad eq u ate answ er to th e Law o f M arkets* U n fo rtu n a te ly M arxTs a n a ly s is o f b u s in e s s cy cle w a s l e f t t o u s i n a n u n f i n i s h e d s t a t e . A s S c h u m p e t e r ♦ s a id , Marx c o n s id e re d c r i s e s , i n g e n e r a l, a s an e s s e n t i a l form o f c a p i t a l i s t l i f e . Marx th o u g h t t h a t c a p ita lis m 63Rosa Luxemburg c r i t i c i z e d some o f th e t r a d i t i o n a l fo rm u la tio n s o f underconsum ption t h e o r i e s , b u t she c r i t i c iz e d Marx f o r n o t g iv in g to o much em phasis on th e r e a l i z a t i o n o f s u rp lu s v alu e th ro u g h th e consuming power o f s o c i e t y . Op. c i t ♦, C h ap ter IX, p p . 155 @t seq., and C h ap ter XXIY, p p . 324-326. I 51 from i t s em bryonic sta g e h a s .b e e n a s s o c ia te d w ith b u s in e s s c y c le s ^ S c h u m p e te r s a i d , "We m ust t r y t o c o l l e c t M arx’ s c o n t r ib u t io n s to a fundam ental o r ’ c a u s a l ’ e x p la n a tio n o f th e c y c le , t r y i n g t o f in d o u t, a s so many o th e r s have t r i e d b e fo re u s , w hether any d e f i n i t e th e o ry o f i t can be a t t r i b u t e d t o Marx even though he n e v e r penned one e x p l i c i t l y . The f i r s t s te p i s e a s y . Marx c l e a r l y v is u a l i z e d t h a t th e ’d e c e n n ia l c y c l e ’ t h a t ( ’i n t e r r u p t e d by s m a lle r o s c i l l a t i o n s ’ ) ru n s alo n g i n a sequence o f p h a se s (o r ’p e r i o d s , ’ as he s a id ) o f av erag e a c t i v i t y , p r o s p e r i t y , o v e rp ro d u c tio n , c r i s i s , and s ta g n a tio n i s ’c h a r a c t e r i s t i c of modern i n d u s t r y ’ and n o t m e re ly th e r e s u l t o f a s e r i e s o f in c id e n t s o r a c c i d e n t s . And he d e f i n i t e l y lo c a te d i t s so u rce i n th e p ro c e s s o f accum ula t i o n . But beyond t h i s , one th in g o n ly i s c e r t a i n , I nam ely, t h a t he t r e a t e d t h i s p r o c e s s , in c lu d in g th e i in c re a s e i n p ro d u c tiv e c a p a c ity i t b r in g s ab o u t and th e ! ’i n d u s t r i a l r e s e r v e army i t c r e a t e s , ’ as a movement away I from e q u ilib r iu m , and c r i s e s a s th e c a ta s tr o p h e s which p e r i o d i c a l l y r e - e s t a b l i s h e q u ilib r iu m and, by means o f r a d i c a l d e s t r u c t i o n o f c a p i t a l v a lu e s , r e c r e a t e th e c o n d itio n s f o r p r o f i t a b i l i t y o f b u s in e s s . . . . He ^ c e r t a i n l y was not an a d h e re n t o f any n a iv e o v e rp ro d u c tio n th e o ry o f c r i s e s i n th e sen se o f F o u r i e r ’s c r i s e s p l e t h o r i q u e s . Nor sh o u ld he be s a d d le d , as he f r e q u e n tly h a s b een , b o th by f r ie n d s and f o e s , w ith t h a t u n d er consum ption th e o ry w hich a s s o c i a t e s c r i s e s w ith in a d e quacy o f l a b o r ’s p u rc h a s in g power and w hich, t o th e laym an, seems so c l o s e ly co n n ected w ith e x p l o i t a t i o n . But t h i s th e o ry b e lo n g s t o R odbertus and n o t to Marx, who, l i k e th e good econom ist he was, was q u ite aware o f i t s w eakness and r e p u d ia te d i t i n so many w o rd s. T h is , f i n a l l y , we seem t o be l e f t w ith th e f a l l i n g r a t e o f p r o f i t — th e consequence, w ith Marx, n o t o f ac cu m u latio n p e r se b u t o f th e r e l a t i v e in c re a s e i n c o n s ta n t a s a g a in s t v a r ia b le c a p i t a l — and s e v e r a l p o s s i b i l i t i e s do i n f a c t come i n t o view o f h a rn e s s in g t h i s ’ la w ’ to se rv e th e pu rp o se i n h an d . To b e g in w ith , t h i s ’la w ’ can l i v e on th e h ig h e s t l e v e l o f a b s t r a c t i o n . F u r th e r , th e r e i s no q u e s tio n b u t t h a t p r o s p e r ity p e r io d s a re p e rio d s o f supernorm al in v e stm e n t and t h a t th e r e s u l t i n g in c re a s e i n p ro d u c tiv e c a p a c ity h as an e ffe c t upon p r ic e s and p r o f i t s t h a t need n o t be o f c a u s a tiv e , b u t must alw ays 52 John A tk in Hobson* In r e p u d ia tio n o f th e Law o f M ark ets, Sism ondi advanced a th e o ry w hich became th e b a s i s o f th e v a rio u s d o c tr in e s o f u n d erco n su m p tio n . In r e c e n t y e a rs th e th e o ry o f underconsum ption h as had a r e v i v a l . Much o f t h i s h a s been due t o th e advocacy o f J . A* Hobson o v er a number o f y e a rs* He expounded th e d o c tr in e i n a n o v el m anner, b u t along l i n e s which i n e s s e n t i a l s w ere t r a d i t i o n a l . In th e fo llo w in g s e c tio n th e r e l a t i o n s h i p betw een Hobsonian th e o ry o f underconsum ption and th e Law o f M arkets w i l l be exam ined. One may v e n tu re th e o p in io n t h a t g e n e ra l o v e rp ro d u c tio n , which would c r e a te a g g re g a te lo s s e s i n th e system , i s e s s e n t i a l l y a d e f l a t i o n a r y phenomenon, w h eth er i t i s a b s o lu te o r r e l a t i v e d e f l a t i o n . 65 On th e o th e r hand, th e th e o r y o f underconsum p t i o n i s th e most im p o rta n t nonm onetary th e o ry o f c r i s e s 64 (C ontinued) be o f c o n s id e r a b le , im p o rta n c e . F i n a l l y , M a rx ist ac cu m u latio n le a d s t o unemployment and te n d s t o u n d e r mine th e i n d u s t r i a l s t r u c t u r e t h a t e x i s t s a t any tim e ( d e s t r u c t i o n o f s m a lle r and l e s s e f f i c i e n t firm s and so o n ). Marx seems t o have r e a l i z e d , how ever, t h a t none o f th e s e elem en ts w i l l r e a d i l y e x p la in th e c y c l i c a l form o f th e p ro c e s s o f a c c u m u la tio n and s t i l l l e s s th e o cc u rren c e o f c r i s e s . In any c a s e , p e rh a p s w is e ly , he d id n o t commit" h im s e lf to an e x p la n a to ry h y p o th e s is c l e a r l y based upon any o r a l l o f th e m .” Op. c i t . , p p . 7 4 9 -7 5 0 . ~ 65Ne i s s e r , op. c i t . , p . 4 4 0 . i n th e n in e te e n th c e n tu r y . The u n d e rly in g assu m p tio n o f th e underconsum ption th e o ry i s t h a t even though th e m onetary i n s t i t u t i o n s do n o t h an d icap th e flo w o f money, underconsum ption w i l l b r in g about g e n e ra l o v e rp ro d u c tio n and a g g re g a te l o s s e s . I t i s f l a t l y assumed t h a t th e p u rc h a s in g power o f th o s e income r e c e i v e r s who u t i l i z e t h e i r incom es p r im a r il y f o r th e a c q u i s i t i o n o f consum er’ goods in c r e a s e s a t a d im in ish e d r a t e so t h a t th e su p p ly o f consumer goods can not be p u r c h a s e d ,a t i t s c o s t p r ic e T h e re fo re c r i s e s s t a r t f i r s t i n th e sp h ere o f consumer goods i n d u s t r i e s . A ccording t o u n d erconsum ption th e o r ie th e ad ju stm e n t o f p ro d u c tio n to demand i s im p o ssib le . The e s s e n t i a l assum ption o f th e th e o ry o f u n d e r consum ption, a c c o rd in g t o M a ith u s, a s f a r a s i t i s r e l a t e d t o th e Law o f M ark ets, i s t h a t fu n d s n o t sp e n t on consum er’ s goods w i l l not be in v e s te d . I t I s im p lie d t h a t a l o s s i n th e d ep artm en t of consumer goods in d u s t r i e s ham pers in v e stm e n t i n b o th d e p a rtm e n ts o f i n v e s t ment good i n d u s t r i e s and consumer goods i n d u s t r i e s . But a c c o rd in g to th e H obsonian th e o ry o f u n d e r consum ption, th e d e s t r u c t i o n o f p u rc h a sin g power was p r im a r ily caused by h o a rd in g and l i q u i d a t i o n , and te rm in a te d r a p id ly when th e c o f f e r s o f th e r i c h began t o o v erflo w w ith c o in s , o r to e x p o rt o v e rp ro d u c tio n 54 abroad* Hobson s a id : The o b je c t o f p ro d u c tio n i s t o p ro v id e " u t i l i t i e s and co n v en ien ces" f o r consum ers, and th e p ro c e s s i s a c o n tin u o u s one from th e f i r s t h a n d lin g o f th e raw m a t e r i a l t o th e moment when i t i s f i n a l l y consumed a s a u t i l i t y or a c o n v e n ie n c e . The o nly use o f c a p i t a l b e in g to a id th e p ro d u c tio n o f th e s e u t i l i t i e s and co n v en ien ces d a i l y or w eekly consumed. Now s a v in g , w h ile i t in c r e a s e s th e e x i s t i n g a g g re g a te o f c a p i t a l , sim u lta n e o u s ly re d u c e s th e q u a n tity o f u t i l i t i e s and co n v en ien ces consumed; any undue e x e r c is e o f t h i s h a b i t m u st, t h e r e f o r e , cause an ac c u m u la tio n o f c a p i t a l in e x c e s s o f t h a t which i s r e q u ir e d f o r u s e , and t h i s e x c e ss w i l l e x i s t in th e form o f g e n e ra l o v e r-p ro d u c tio n * W e a re th u s b ro u g h t t o th e c o n c lu sio n t h a t th e b a s i s on w hich a l l economic te a c h in g s in c e Adam Sm ith h a s sto o d v iz* t h a t th e q u a n t ity a n n u a lly produced i s d eterm in ed by th e a g g re g a te s o f N a tu ra l A g en ts, C a p ita l, and Labour a v a i l a b l e , i s e rro n e o u s , . A. Hobson had been th e p r i n c i p a l exponent o f th e view o f th e e x p a n s io n is t te n d e n c ie s o f c a p ita lis m i n te rm s o f underconsum ption i n th e home m a rk e t. He a t t r i b u t e d th e d e s ir e f o r e x p a n sio n t o th e re a s o n t h a t "th e b u s i n e s s ' i n t e r e s t s o f th e n a tio n a s a whole a re s u b o rd in a te d to th o s e o f c e r t a i n s e c t i o n a l i n t e r e s t s t h a t u su rp c o n tr o l o f th e n a t u r a l r e s o u r c e s and use them f o r t h e i r p r i v a t e g a i n ." The assu m p tio n o f t h i s th e o ry i s t o show t h a t t h i s p r i v a t e g a in c o n s i s t s i n a c c e ss to m a rk e ts ab ro a d , b ecau se o f th e la c k o f m ark ets t h a t i s caused by th e l im ite d consum ption o f th e m asses o f th e p o p u la tio n a t home. Hobson s a id , "W hatever i s produced i n E n g lan d , can be consumed i n E ngland, p ro v id e d t h a t th e income o r power to demand com m odities i s p ro p e r ly d i s t r i b u t e d . An i n t e l l i g e n t p r o g r e s s iv e community . . . can f in d f u l l employment f o r an u n lim ite d q u a n tity o f c a p i t a l and la b o u r w ith in th e l i m i t s o f the- c o u n try which i t o c c u p ie s ," i n Im p e ria lism (London: G. A lle n and Unium, L im ite d , 193&), PP« 76-7$, e t . s e a • T his c l e a r l y im p lie s t h a t h ig h wages would remove th e n e c e s s ity f o r e x p a n sio n t o f in d new m a rk e ts ab ro ad . > L 55 and t h a t , on th e c o n tr a r y , th e q u a n t ity p ro d u ced , w h ile i t can n e v e r exceed th e l i m i t s imposed by th e s e a g g re g a te s , may b e , and a c t u a l l y i s red u ced f a r below t h i s maximum by th e check t h a t undue sa v in g and th e co n seq u en t ac cu m u latio n o f o v e r su p p ly e x e r t s on p r o d u c tio n , i . e . t h a t i n th e norm al s t a t e o f modern i n d u s t r i a l com m unities, consum ption l i m i t s p ro d u c tio n and n o t p ro d u c tio n co n su m p tio n .67 H ere, i t i s obvious t h a t Hobson c o n c e iv e s h o a rd in g a s an a b n o rm a lity w hich c a u se s th e d e s t r u c t i o n o f p u rc h a s in g power and im pedes f u r t h e r p r o d u c tio n . M oreover, he m a in ta in e d t h a t i f h o a rd in g s a re in v e s te d , th e r e i s s t i l l a ten d en cy f o r consum ption to la g b eh in d pro d u c t i o n . T h is l a t t e r m alady r e s u l t s , Hobson co n ten d ed , from i n e q u a l i t y o f income d i s t r i b u t i o n and w ag e-lag b eh in d p r i c e s B u t as J . M. Keynes s t a t e d , Hobson o v erlo o k ed th e f a c t o r s which a re caused by h o a rd in g , ^ H o b so n and Mummery, P h y sio lo g y o f I n d u s tr y , p p . i v - v i , quoted by Keynes i n T h e G e n e ra l Theory o f Employment, I n t e r e s t and Money, op. c i t . , p p . 6 &J. A. Hobson, The Economics o f D i s t r i b u t i o n (New York: M acm illan, 1'900), p p . 301 e t s e q . R e c e n tly P ro f e s s o r E a r l J . H am ilton h as shown liEat "p r o f i t i n f l a t i o n th ro u g h a la g o f wages b eh in d p r i c e s ” was a f a c t o r which " f a c i l i t a t e d th e I n d u s t r i a l R e v o lu tio n d u rin g th e second h a l f o f th e e ig h te e n th c e n tu ry ." ^ He h a s a ls o found out t h a t th e la g o f wages b eh in d p r ic e s "te n d ed to r a i s e a h y p o th e tic a l a v e ra g e - o f 1 0$ p r o f i t s i n 1 7 4 1 -5 0 t o 14$ i n 1 7 5 1- 6 0 , 19$ i n 1 7 6 1- 7 0 , 22$ i n 1771-& 0, 24$ i n 1 7 ^ 1 -9 0 , and 42$ i n 1791-1& 00," i n " P r o f i t I n f l a t i o n and th e I n d u s t r i a l R e v o lu tio n o f 1 7 5 1 - 1&00." Q u a rte r ly J o u rn a l o f E conom ics, LYI (F e b ru a ry , 1 9 4 2 ; , 257, 262. 56 nam ely, "th e p o s s ib le r o l e o f changes i n th e r a t e o f i n t e r e s t and in th e s t a t e o f b u s in e s s c o n fid e n c e , f a c t o r s which he (Hobson) ta k e s a s g i v e n . I t i s ro u g h ly th e same charge made on Marx who d id not c o r r e l a t e th e te n d e n c y o f th e r a t e o f p r o f i t to f a l l w ith i n t e r e s t r a t e and in v e s tm e n t- d e c is io n s . The fo llo w in g p o rtm an teau q u o ta tio n i n d i c a t e s th e Hobson l i n e o f th o u g h t: I t sh o u ld be c l e a r t h a t th e c a p i t a l o f a community cannot be a d v a n ta g e o u sly in c r e a s e d w ith o u t a sub se q u en t in c r e a s e in consum ption o f com m odities • • • Every in c r e a s e i n sa v in g and i n c a p i t a l r e q u i r e s , in o rd e r t o be e f f e c t u a l , a c o rre sp o n d in g in c re a s e i n im m ed iately f u tu r e consum ption. . • • And when we say f u tu r e consum ption, we do not r e f e r t o a f u tu r e o f t e n , tw e n ty , o r f i f t y y e a rs h en c e, b u t to a f u tu r e t h a t i s b u t l i t t l e removed from th e p r e s e n t . . . . I f in c re a s e d t h r i f t or c a u tio n in d u c e s p eo p le t o save more i n th e p r e s e n t , th e y m ust c o n se n t to consume more i n th e f u t u r e . . . . No more c a p i t a l can e c o n o m ic a lly e x i s t a t any p o in t i n th e p ro d u c tiv e p ro c e s s th a n i s r e q u ir e d to f u r n is h com m odities fo r th e c u r r e n t r a t e of consum ption. . . • I t i s c l e a r t h a t my t h r i f t i n no w ise a f f e c t s th e t o t a l economic t h r i f t o f th e community, b u t o n ly d e te rm in e s w hether a p a r t i c u l a r p o r tio n o f th e t o t a l t h r i f t s h a l l have been e x e rc is e d by m y se lf o r by somebody e l s e . W e s h a l l show how th e t h r i f t o f one p a r t o f th e com m unity h a s power to f o rc e a n o th e r p a r t to l i v e beyond t h e i r incom e. . . . Most modern eco n o m ists deny t h a t consum ption co u ld by any p o s s i b i l i t y be i n s u f f i c i e n t . Gan we f in d any economic fo rc e a t work which m ight i n c i t e a community to t h i s e x c e s s , and i f th e r e be any such f o r c e s a re th e r e n o t e f f i c i e n t cheeks ^Keynes, op. cit», p. 366. i 57 p ro v id e d by th e mechanism o f commerce? I t w i l l be shown, f i r s t l y , t h a t i n e v e ry h ig h ly o rg a n ise d i n d u s t r i a l s o c ie ty th e r e i s c o n s ta n tly a t work a fo rc e which n a t u r a l l y o p e r a te s t o induce e x c ess o f t h r i f t ; se c o n d ly , t h a t th e checks a lle g e d to be p ro v id e d by th e mechanism o f commerce a re e i t h e r w h o lly in o p e r a tiv e o r a re in a d e q u a te t o p re v e n t g rav e com m ercial e v i l . . . • The b r i e f answ er which R ic a rd o gave t o th e c o n te n tio n s o f M aithus and Chalm ers seems to have been a c c e p te d as s u f f i c i e n t by m ost l a t e r e c o n o m is ts . " P ro d u c tio n s are alw ays bought by p ro d u c tio n s o r by s e r v ic e s ; money i s o n ly th e medium by which th e exchange i s e f f e c t e d . ” Hence th e in c re a s e d p ro d u c tio n b e in g alw ays accom p a n ie d by a c o rre s p o n d in g ly in c re a s e d a b i l i t y to g e t and consume, th e r e i s no p o s s i b i l i t y o f Over p ro d u c t i o n . 70 71 Thus, w h ile th e " R i c a r d o i s t s ," a s w i l l be shown l a t e r , have ig n o re d th e im p o rtan ce o f th e demand f u n c tio n f o r c a p i t a l , and th e r o le and f u n c tio n o f money, Hobson o v erlo o k e d th e s ig n i f ic a n c e o f th e r a t e o f i n t e r e s t John M. Keynes The p u b lic a t io n o f K eynes1 famous th e o ry o f th e g e n e ra l l e v e l o f employment, i n 1 9 3 6 , h a s in tro d u c e d ^ H o b so n and Mummery, pp.- 27, 50, 51, 69, 113, 1 0 0 , 1 0 1 , quoted i n i b i d . , p p . 363-369* ^ B y " R ie a r d o is t" i s m eant th o s e who have e x p l i c i t l y o r i m p l i c i t l y ac ce p ted th e e sse n c e o f th e Law o f M a rk e ts, w h ile " r e j e c t e d ” o r abandoned R ic a rd o f s th e o ry o f v a l u e . ^^Keynes s t a t e d t h a t th e o v e rlo o k in g o f t h i s f a c t by underconsum ption t h e o r i s t s caused " t h e i r th e o ry f a i l e d o f c o m p le te n e ss ," o|>. c i t . , p . 3 7 0 . 5& th e p o s s i b i l i t y o f s u s ta in e d unemployment i n modern s o c i e t y . In c o n t r a s t t o R icard o and th e R i c a r d o i s t s , who were accustom ed to th in k in g i n term s of th e Law o f M arkets and co u ld e a s i l y o v erlo o k d e p r e s s io n s , Keynes p re s e n te d a system o f " c r i s i s econom ics" which was th e p ro d u ct of th e c r i s i s o f th e e a r l y t h i r t i e s . The "New Econom ics" h as exposed th e r e s t r i c t i v e n e s s o f th e assu m p tio n s o f th e c l a s s i c a l and R ie a r d o is t d o c t r in e s and t h e i r rem o te n ess from a w orld o f l a r g e - s c a l e unem ploym ent . F i r s t n o v e l ty . The f i r s t n o v el and s t r i k i n g f e a t u r e o f K eynes’ th e o ry was t h a t i t s t i r r e d up c o n tro v e rs y and r a is e d q u e s tio n s on what f o r long had p a sse d f o r a c c e p te d wisdom. The w r i t e r w ish es t o ta k e th e b r i l l i a n t n o te s o f P au l S w eezy^ and G o ttf r i e d H a b e r l e r ^ a s h i s t e x t . Both Sweezy and H a b e rle r have con ten d ed t h a t th e b a s i s o f K eynes’ c r i t i c i s m o f R i c a r d o is t s i s th e " f l a t r e j e c t i o n " o f th e Lawwof M arkets *^5 ^ S w e e z y , o £ . c i t . , p p . 1 0 2- 1 0 9 * ? ^ H a b e rle r, o p » c i t . , pp. 161-1&0. 7 5 i b i d ., pp. 104-105, 173* 59 A f te r th e e a r l y fo rm u la tio n s o f th e Law o f M a rk e ts, and a f t e r Say and J- S. M ill were fo rc e d t o red u ce i t t o a mere ta u to lo g y , th e c o n te n t and im p lic a t i o n s o f th e Law had been so confused t h a t n e o - c l a s s i c a l w r i t e r s r a r e l y made u se o f i t . R ic a rd o , in h i s fo rm u la t i o n o f th e Law o f M a r k e t s , 76 m a in ta in e d t h a t money i s " n e u t r a l ” i n th e p ro c e s s o f p ro d u c tio n and consum ption. Thus, th e Law o f M arkets d en ied th e p o s s i b i l i t y o f h o a rd in g o r h o ld in g w e a lth i n l i q u i d o r money form in s t e a d o f a s s e c u r i t i e s , c a r r y in g a r i s k o f c a p i t a l l o s s when th e m arket p r i c e ch a n g es. The c h i e f n o v e lty o f Keynes* th e o r y was t h a t th e r a t e o f i n t e r e s t was t r e a t e d a s p u re ly m onetary phenomena, d eterm in ed by th e l i q u i d i t y p r e f e r e n c e . T his view m o d ifie d and com pleted th e c l a s s i c a l supply-and-dem and f o r r e a l sa v in g s th e o r y , and im p lie d t h a t th e r a t e o f i n t e r e s t co u ld be low ered by th e m onetary p o lic y o f th e governm ent and th e c e n t r a l b an k . Thus th e r a t e o f i n t e r e s t a p p e a rs to p la y a c r u c i a l r o l e i n Keynes* t h e o r e t i c a l sy stem . In Keynes* w ords, " th e r a t e o f i n t e r e s t i s a h ig h ly p s y c h o lo g ic a l phenom ena.”77 I t i s not a payment f o r " w a itin g ” o r 7 ^ R icard o , W orks, Volume I , p p . 290-292. 77Keynes, op. c i t . , p . 2 0 2 . 60 " a b s tin e n c e , ” b u t f o r not h o a r d i n g ; ^ f o r p a r tin g w ith ! l i q u i d i t y . In p la c in g l i q u i d i t y - p r e f e r e n c e a t th e bottom o f th e i n t e r e s t r a t e , Keynes g e n e ra liz e d a c r i s i s phenomenon i n t o a u n iv e r s a l p r i n c i p l e . And t h i s le d him to p o s tu l a te an independence f o r th e r a t e o f i n t e r e s t i n r e l a t i o n t o th e m a rg in a l e f f i c i e n c y o f c a p i t a l . In K eynes1 system a d e c lin e i n th e r a t e o f i n t e r e s t in c r e a s e s th e inducem ent t o i n v e s t , w h ile a r i s e i n th e r a t e o f i n t e r e s t re d u c e s th e inducem ent to i n v e s t . H i s t o r i c a l l y , th e r a t e o f i n t e r e s t does not ap p ear t o v i t a l l y a f f e c t th e r a t e o f in v e s tm e n t. M ordacai E z e k ie l h a s shown t h a t f o r th e U nited S t a t e s , f o r th e y e a rs 1 9 2 1 -1 9 4 0 w hich he s tu d ie d , "no ev id en ce c o u ld be found t h a t r e d u c tio n s i n th e i n t e r e s t r a t e s tim u la te d in v e s tm e n t. ”79 a com prehensive e m p iric a l su rv e y , conducted f o r E ngland by a group o f Oxford U n iv e r s ity s c h o la r s , b ro u g h t f o r t h th e fo llo w in g 7% b r d . , p . i $ 2 . ^ M o rd a c a i E z e k ie l, " S t a t i s t i c a l I n v e s t i g a t i o n s o f S av in g , Consum ption, and Investm ent,-" American Economic R e v ie w ,-XXXII {June, 1 9 4 2 ), 306* 61 r e s u lts :^ ® 1 . There i s alm o st u n iv e r s a l agreem ent t h a t s h o r t- te r m r a t e s o f i n t e r e s t do n o t d i r e c t l y a f f e c t in v e stm e n t e i t h e r i n s to c k q /( in v e n to r i e s ) o r i n f ix e d c a p i t a l . . . . The e f f e c t o f changes i n th e r a t e o f i n t e r e s t i s to o sm all i n com pari son w ith th e p r o f i t m argins t o make any d i f f e r e n c e . / 2 . The m a jo r ity [ o f businessm en in te rv ie w e d ] deny t h a t th e lo n g -te rm r a t e o f i n t e r e s t a f f e c t s in v e stm e n t d i r e c t l y . . . . The m a jo r ity who deny i t s im p o rtan ce g iv e a s t h e i r re a s o n s e i t h e r t h a t th e y do not need to borrow f o r e x te n s io n or t h a t i t i s to o sm a ll an elem ent i n com parison w ith d e p r e c i a t i o n , o b s o le s c e n c e , th e u n c e r t a i n t y o f th e m ark et f o r t h e i r p ro d u c t. The re a s o n s g iv e n by th e B r i t i s h busin essm en f o r th e i n e f f e c t i v e n e s s o f th e i n t e r e s t r a t e on in v e stm e n t d e c is io n s r e f l e c t w ith s p e c ia l fo rc e two lo n g -ru n ^ T h i s stu d y i s composed o f two p a p e rs : one by H. D. A nderson, "The S ig n if ic a n c e of th e l a t e of I n t e r e s t , " Oxford Economic P a p e rs , I (O c to b er, 193$), 1-13; th e o th e r b y Meade and P . W. Andrews, "Summary o f R e p lie s t o Q u e stio n s on th e E f f e e t s o f I n t e r e s t R a te ," Oxford Economic P a p e r s , I (O c to b er, 1 9 3 $ ), 14-31* The stu d y was conducted th ro u g h in te r v ie w s w ith a s e le c te d number o f B r i t i s h b u sin e ssm e n . ^ - I b id *, p . 2$. The re a s o n s g iv e n by American m a n u fa c tu rin g c o r p o r a tio n s f o r th e d is c r e p a n c ie s betw een p lan n ed and a c t u a l e x p e n d itu r e s f o r new p la n t and e q u ip ment i n 1 949 w ere: changed s a l e s and e a r n i n g s 1 o u tlo o k , changes i n th e p la n t and equipm ent su p p ly s i t u a t i o n , and changes i n p la n t and equipm ent c o s t s . " A v a i l a b i l i t y and c o s t" o f d e b t and e q u ity f in a n c in g were b a r e ly m e n tio n e d , w h ile changes i n th e r a t e of i n t e r e s t was n o t m entioned a t a l l . See Irw in F rie n d and Joan B ro n fe n b re n n e r, " B u sin e ss In v estm en t and T h e ir R e a l i z a t i o n ," The Survey o f C u rre n t B u sin ess (W ashington: Government P r i n t i n g tJT fic e , December, 1 9 5 0 ) , pp* 1 1- 2 2 . 62 economic tr e n d s which Keynes ig n o re d i n t h i s c o n n e c tio n . One i s th e s e c u la r d e c lin e o f i n t e r e s t r a t e s o ver th e p a s t h a l f c e n tu ry and m o r e ; ^ th e o th e r i s th e growing te n d en cy o f c o rp o r a tio n s to s e l f - f i n a n c i n g .^3 The more i n d u s t r i e s draw on t h e i r own re s o u r c e s f o r in v e stm e n t p u rp o se s, th e l e s s th e y need to b o rro w . The l e s s th e y borrow , th e l e s s th e i n t e r e s t r a t e a f f e c t s in v e stm e n t d e c i s i o n s . A U n ited S t a t e s D epartm ent o f Commerce stu d y of th e " F in a n c ia l E x p e rie n c e " o f a r e p r e s e n t a t i v e sample o f la r g e and medium s iz e American m a n u fa c tu rin g f irm s , co v e rin g th e y e a rs 1 9 2 7- 1 9 5 1 , h as shown t h a t th e p ro p o r tio n s o f firm s whose i n t e r e s t paym ents amounted to 10 p e r c e n t or more o f p r o f i t s b e f o r e ta x e s and i n t e r e s t have d e c lin e d from 40 p e r c e n t f o r 1 9 2 7 to l e s s th a n ^ 2Board o f G overnors o f th e F e d e ra l R eserve System , Banking and M onetary S t a t i s t i c s (W ashington: Board o f G overnors o f th e F e d e ra l R eserve System , 1943)» p p . 44$, 469; and f o r d a ta s in c e 1940 see U. S« Bureau o f F o re ig n and Dom estic Commerce, The Survey o f C u rren t B u s in e ss— 1949 S t a t i s t i c a l Supplem ent (W ashington: Government' P r in tin g O f f ic e , 1949)• ^ s t a t i s t i c s a r e g iv e n f o r th e y e a rs 1 9 2 2 -1 9 3 7 in : Temporary N a tio n a l Economic Com m ittee, V erbatim Record P ro c e e d in g s (Volume I I ; WashingtonT""Government 'P r in tin g O f f ic e , March 25 t o May 29, 1939)* S t a t i s t i c s f o r a s e le c te d group o f f i f t y - s i x i n d u s t r i a l c o rp o ra t i o n s , f o r th e y e a rs 1 9 3 0- 1 9 3 a re g iv e n i n th e same volum e, p p . 44 7 e t s e q . 63 6 p e r c e n t f o r 1 9 5 1 For a l l American c o r p o r a tio n s , i . e . in c lu d in g p u b lic u t i l i t i e s , e t c . , as w e ll as th e m a n u fa c tu rin g i n d u s t r i e s , i n t e r e s t paym ents a re shown t o have amounted to $ p e r c e n t o f e a rn in g s b e f o re ta x e s and i n t e r e s t i n 1 9 5 2 , i n c o n t r a s t t o 12 p e r c e n t j u s t b e fo re World War I I , and t o 30 p e r c e n t In th e l a t e 1 9 2 0»s. I t would seem, th e n , t h a t th e r o le o f i n t e r e s t r a t e as one o f th e p r i n c i p a l d e te rm in a n ts o f th e r a t e o f in v e s tm e n t, and so o f b u s in e s s c y c le s , w hich Keynes a s s ig n e d to i t , h a s been d escen d in g to th e v a n is h in g p o in t a s th e r a t e o f i n t e r e s t has gone down and a s c o r p o r a tio n s , i n any e v e n t, have been draw ing l e s s and l e s s on o u ts id e so u rc e s t o fin a n c e t h e i r in v e stm e n t n e e d s • Second n o v e lty — an advancem ent o v er M arx. Keynes co nnected th e c u r r e n t r a t e o f in v e stm e n t and m a rg in a l e f f i c i e n c y o f c a p i t a l w ith th e r a t e o f i n t e r e s t . He . S. Bureau o f F o re ig n and Dom estic Commerce, The Survey o f C u rre n t B u sin ess (W ashington: Government P r in t in g Of T ic e , November, 1 9 5 2 ), p p . 7-13• S . D epartm ent o f Commerce, M arkets A f te r th e Defence E xpansion (W ashington: Government P r in t in g O f f ic e , 1 9 5 2 ), p p . 42-43* For s im ila r r e s u l t s c o n s u lt F . A. L u tz , "The I n t e r e s t R ate and In v estm en t i n a Dynamic Economy," American Economic Review, XXX? (December, 19451, 64 showed t h a t th e new in v e stm e n t would be p o s s ib le i f th e i n t e r e s t r a t e s were lo w er th a n th e m a rg in a l e f f i c i e n c y o f c a p i t a l . Keynes summed up h i s th e o ry by sa y in g : . . . g iv e n th e p sy ch o lo g y o f th e p u b lic , th e l e v e l o f o u tp u t and employment as a whole depends on th e amount o f in v e s tm e n t. I p u t i t i n t h i s way, n o t b ecau se t h i s i s th e o n ly f a c t o r on w hieh a g g re g a te o u tp u t d ep en d s, b u t b ecau se i t i s u s u a l i n a complex system to re g a rd a s th e causa cau san s t h a t f a c t o r w hich i s most prone t o sudden and wide f l u c t u a t i o n . More co m p reh en siv ely a g g re g a te o u tp u t depends on th e p r o p e n s ity t o h o a rd , on th e p o lic y o f th e m onetary a u t h o r i t y a s i t a f f e c t s th e q u a n tity o f money, on th e s t a t e o f c o n fid e n c e c o n c e rn in g th e p ro s p e c tiv e y i e l d o f c a p i t a l - a s s e t s , on th e p r o p e n s ity t o spend, and on th e s o c i a l f a c t o r s w hich in f lu e n c e th e l e v e l o f th e money w age. But o f th e s e s e v e r a l f a c t o r s i t i s th o s e which d e te rm in e th e r a t e o f in v e stm e n t whieh a re m ost r e l i a b l e , s in c e i t i s th e y which a r e in flu e n c e d by o u r view s o f th e f u tu r e ab o u t w hich we know so l i t t l e . 86 I t i s now g e n e r a lly u n d e rsto o d t h a t in v e stm e n t i s a h ig h ly dynamic component o f th e n a t io n a l incom e. Changes i n n a t io n a l income a r e ex p e cte d from changes in g o v ern ment e x p e n d itu re s and p r i v a t e in v e s tm e n t. And th e r e le v a n t f a c t o r s d e te rm in in g in v e stm e n t a r e : ( l j ^ m a rg in a l < * < *W ,'* J'*~r<in uniTT-Tnr „ | | _ _ ji,n um iF i n ~lr ~ ' ■■■-"" » '■ ■ ■ ■ ■ '........... ‘ '' " ■ —..... •............... *" - * I T ~ ~ e f f i c i e n c y o f c a p i t a l , ( 2 ) r a t e o f i n t e r e s t , and ( 3 )_ th e c o s t o f new in v e s tm e n t. P ro p e n s ity to consum e. Interw oven w ith th e above p o in t i s K eynesT assu m p tio n about th e consum ption- ^ K eynes, op. c i t . , pp. 191-193* 65 f u n c tio n , which i s th e r a t i o o f sp ending t o income a t d i f f e r e n t l e v e l s o f incom e. The p la c e which Keynes a s s ig n e d t o consum ption i n th e fo rm a tio n o f th e a g g re g a te j j l e v e l o f economic a c t i v i t y was b ased on two com plem entary • j assu m p tio n s: o n e ,/ t h a t consum ption i s a d e c lin in g p ro - : p o r tio n o f th e n a t io n a l income; th e o th e r , t h a t i n v e s t - ' m ent, th ro u g h th e m u l t i p l i e r , d e te rm in e s t h a t l e v e l o f incom e. I t fo llo w s t h a t th e volume o f consum ption depends on th e r a t e o f in v e stm e n t and incom e. y) I t i s im p e ra tiv e t h a t consum ption does n o t depend on income a lo n e , b u t h e lp s c r e a te i t . Nor i s in v e stm e n t th e s o le d e te rm in a n t o f th e l e v e l o f income and so of th e r a t e o f consum ption. Consumption depends n o t only on th e c u r r e n t incom e, b u t a ls o on p a s t and ex p e cte d f u tu r e income and o th e r v a r i a b l e s . T ru ly , consum ption and in v e stm e n t a re in te rd e p e n d e n t f o r c e s . A tte n tio n should be fo c u se d oh two p r o p o s itio n s : (1) a c c o rd in g t o Keynes, a l l income o r i g i n a t e s i n in v e stm e n t; and ( 2 ) a c c o rd in g t o u n d e rc o n s u m p tio n !s ts , a l l in v e stm e n t o r i g i n a t e s i n im m ediate consumer demand. Under p r e s e n t m ethods o f p ro d u c tio n th e bonds betw een p r o d u c tio n and consum ption a re n o t so lo o se a s Keynes v i s u a l i z e d , n or so im m ediate a s th e u n d e rc o n s u m p tio n ists c la im . \ t 66 K e y n e s ’ a s s i g n m e n t o f p r i m a c y t o i n v e s t m e n t o v e r i i c o n s u m p t i o n w a s , b y an d l a r g e , a r e a c t i o n a g a i n s t b o t h t h e u n d e r c o n s u m p t i o n i s t s w h o , i n g i v i n g c o n s u m p t i o n t h e p r i m a c y , e n d o w i t w i t h i n d e p e n d e n c e i n t h e f o r m a t i o n o f b u s i n e s s c y c l e s , a n d a g a i n s t S a y , w ho p o s t u l a t e d a v i r t u a l l y u n b r e a k a b l e u n i t y b e t w e e n p r o d u c t i o n an d c o n s u m p t i o n . . B u t h e h i m s e l f u n d e r e s t i m a t e d t h e d e g r e e o f i n d e p e n d e n c e b e t w e e n i n v e s t m e n t an d c o n s u m p t i o n . I t i s f a i r t o a s s u m e t h a t t h e m a i n t e n a n c e o f t h e r a t e o f p r o f i t a n d t h e m a i n t e n a n c e o f a r o u g h p r o p o r t i o n a l i t y b e t w e e n i n v e s t m e n t an d c o n s u m p t i o n a r e e s s e n t i a l t o t h e c o n t i n u e d o p e r a t i o n o f t h e s y s t e m . ^ E x p a n d e d i n v e s t m e n t u n d e r p r e s e n t s y s t e m o f p r o d u c t i o n j u s t i f i e s i t s e l f o n l y i n t h e p o s s i b i l i t y o f t h e r e a l i z a t i o n o f p r o f i t . The Law o f M a r k e t s p o s t u l a t e d s u c h s t r o n g b o n d s b e t w e e n p r o d u c t i o n a n d c o n s u m p t i o n a s t o p r e c l u d e t h e e m e r g e n c e o f a n y m a r k e t p r o b l e m s , i n t h e s e n s e o f l i m i t a t i o n s t o t h e a g g r e g a t e c o n s u m e r dem and an d h e n c e t h e p o s s i b i l i t y o f a g e n e r a l " g l u t . ” A c c o r d i n g t o t h e Law o f M a r k e t s , K e y n e s r e m a r k e d : R* H i c k s , A C o n t r i b u t i o n t o t h e T h e o r y o f T r a d e C y c l e ( O x f o r d : 'Clarendon P r e s s , 1<J50"), Chapter I . 67 I t i s n a t u r a l t o suppose t h a t th e a c t o f an i n d i v i d u a l , by w hich he e n r ic h e s h im s e lf w ith o u t a p p a re n tly ta k in g a n y th in g from anyone e l s e , must a ls o e n r ic h th e community a s a w hole; so t h a t an a c t o f in d iv i d u a l sa v in g i n e v i t a b l y le a d s to a p a r a l l e l a c t o f in v e s tm e n t. F o r, once m ore, i t i s in d u b ita b le t h a t th e sum o f th e n e t in c re m e n ts o f th e w e a lth o f in d i v i d u a l s must be e x a c tl y e q u a l t o th e a g g re g a te n e t in c re m e n t o f th e w e a lth o f th e community. Those who th in k i n t h i s way a re d e c e iv e d , n e v e r t h e le s s , by an o p t i c a l i l l u s i o n , w hich makes two e s s e n t i a l l y d i f f e r e n t a c t i v i t i e s a p p e a r to be th e sam e. They a re f a l l a c i o u s l y su p p o sin g t h a t t h e r e i s a nexus which u n i t e s d e c is io n s t o a b s t a i n from p r e s e n t consum ption w ith d e c is io n s t o p ro v id e f o r f u tu r e consum ption; w hereas th e m o tiv es which d eterm in e th e l a t t e r a re n o t lin k e d i n any sim ple way w ith th e m o tiv es which d eterm in e th e fo rm e r . 88 I f th e Law o f M arkets were a c c e p te d , th e r i s e i n t o t a l p ro d u c tio n sh o u ld in d u ce a c o rre sp o n d in g in c r e a s e i n demand f o r b o th p r o d u c e r s 1 goods and consum ers’ g o o d s. T his r e q u ir e s p a r i p a ssu in c r e a s e o f consum ption as th e r e s u l t o f th e in c re a s e i n incom e. Then u n q u a li f i e d a c c e p ta n c e o f th e Law o f M arkets le a d s t o th e c o n c e p tio n o f th e economy a s an u n s ta b le system i n which a s l i g h t e x p a n sio n s e t s o f f a c u m u lativ e upward movement. But th e r e s t r i e t i v e n e s s o f K eynes’ assu m p tio n s— o f th e dependence o f consum ption on th e income l e v e l and o f th e unique r o le o f in v e stm e n t in th e d e te r m in a tio n o f ^ K e y n e s ,, op* c i t . , p p . 2 0 -2 1 . T his p assag e i s u n d e r th e h ead in g where Keynes r e f u te d th e c l a s s i c a l Law o f M a rk e ts. 68 i t h a t l e v e l o f income— com pelled him to make th e s t i l l f u r t h e r assum ption t h a t th e consum ption-incom e r e l a t i o n s h ip i s a s ta b le r e l a t i o n s h i p . A c tu a lly , f o r th e v a s t mass o f consum ers t h i s r e l a t i o n s h i p i s h ig h ly u n s t a b l e . Numerous s t u d i e s have shown t h a t t h i s r e l a t i o n s h i p v a r i e s n o t o n ly i n l i n e w ith th e p r o p e n s ity to consume, b u t i n re sp o n se to changing p r ic e l e v e l s , t o f u tu r e incom e, and to p a s t incom e. E liz a b e th G ilboy h a s rem arked t h a t f o r th e m iddle income f a m ilie s " e x p e n d itu re s on a number o f ite m s in c r e a s e f a s t e r th a n incom e, and t o t a l e x p e n d itu re s p r e s s h ard on th e t o t a l in c o m e ."^9 i n a n th e p o stw ar y e a r s , U nited S ta te s D epartm ent o f Commerce s t u d i e s have shown t h a t consumer e x p e n d itu re s exceeded t h e i r av erag e ( 1 9 2 9- 1 9 4 1 ) consum ption-incom e r e l a t i o n s h i p .90 ^ E l i z a b e t h G ilb o y , "The P ro p e n s ity to Consume," Q u a r te r ly J o u rn a l o f E conom ies, L I I I (November, 1 9 3 8 ), 138-14G. See a ls o - Hans S ta e h le , " S h o rt-P e rio d V a r ia tio n s i n th e D i s t r i b u t i o n o f Incom e." Review o f Economic S t a t i s t i c s , XIX (A ugust, 1 9 3 7 ;, 133-141, f o r s im i l a r r e s u l t s b ased on s t a t i s t i c s f o r Germany. Also S . W * W oytinsky, " R e la tio n s h ip Between Consum ers1 E x p e n d itu re s , S a v in g s, and D isp o sa b le Incom e," -Review of Economic S t a t i s t i c s , XXVIII (F e b ru a ry , 1 9 4 6 ), 1 - lT f S. W. W oytinsky, "P ostw ar Economic P e r s p e c tiv e s ," S o c ia l S e c u r ity B u l l e t i n (W ashington: S o c ia l S e c u r ity B o ard , Ja n u a ry , 1946)• 9®U. S . Bureau o f F o re ig n and D om estic Commerce, The Survey o f C u rren t B u sin ess (W ashington: Government P r i n t i n g Office"^ Jan u ary and November, 1950 and A p r il, 1951)- 69 Keynes s a id : P r a c t i c a l l y I o n ly d i f f e r from th e s e sc h o o ls o f th o u g h t [u n d e rc o n s u m p tio n is ts ] i n th in k in g t h a t th e y may la y a l i t t l e to o much em phasis on in c re a s e d consum ption a t a tim e when th e r e i s s t i l l much s o c i a l ad v an tag e to be o b ta in e d from in c r e a s e d in v e s tm e n t. T h e o r e t i c a l l y , how ever, th e y a re open to th e c r i t i cism o f n e g le c tin g th e f a c t t h a t t h e r e a re two ways to expand o u t p u t .91 I t seems t h a t Keynes t r e a t e d in v e stm e n t and e x p e n d itu re on consum ption a s two in d e p e n d e n t q u a n t i t i e s , and t o t a l income can be in c re a s e d by expanding e i t h e r o f t h e m . 92 He p o in te d o u t: M oreover, th e dism ay and u n c e r t a i n t y a s to th e f u tu r e which accom panies a c o lla p s e in th e m a rg in a l e f f i c i e n c y o f c a p i t a l n a t u r a l l y p r e c i p i t a t e s a sh a rp in c r e a s e i n l i q u i d i t y - p r e f e r e n c e — and hence a r i s e i n th e r a t e o f i n t e r e s t . Thus th e f a c t t h a t a c o lla p s e i n th e m a rg in a l e f f i c i e n c y o f c a p i t a l te n d s to be a s s o c ia te d w ith a r i s e i n th e r a t e o f i n t e r e s t may s e r io u s ly a g g ra v a te th e d e c lin e in in v e s tm e n t. But th e e s se n c e of th e s i t u a t i o n i s to be found, n e v e r t h e le s s , i n th e c o lla p s e i n th e m a rg in a l e f f i c i e n c y o f c a p i t a l , p a r t i c u l a r l y i n th e case o f th o s e ty p e s o f c a p i t a l which have been c o n t r ib u t in g m ost t o th e p re v io u s phase o f heavy new in v e s tm e n t. L iq u id i ty - p r e f e r e n c e , e x c e p t th o s e m a n if e s ta tio n s o f i t which a re a s s o c ia te d w ith in c r e a s in g tr a d e and s p e c u la tio n , does n o t in c re a s e u n t i l a f t e r th e c o lla p s e i n th e m a rg in a l e f f i c i e n c y o f c a p i t a l .93 9 lK ey n es, o p . c i t . , p . 3 2 5 * 9 2 o sc a r Lange, ,T The R ate o f I n t e r e s t and th e Optimum P ro p e n s ity t o Consume,” Econom ica, V (F e b ru a ry , 1938), 25- 93Keynes, op. c i t . , p. 316. A lthough consum ption and in v e stm e n t were re g a rd e d as th e m ain d e te rm in a n ts o f th e l e v e l o f o u tp u t, th e way i n w hich th e d o c tr in e was p ro c la im e d was such a s to c a l l a t t e n t i o n upon in v e s tm e n t. T his gave h i r t h t o th e " s t a g n a t io n t h e s i s ” w hich re g a rd e d d e f ic ie n c y o f i n v e s t ment as b e in g r e s p o n s ib le f o r c h ro n ic s ta g n a tio n o f a m ature c a p ita lis m . I l l . RICARDOISTS J . S . M i l l . M alth u s, i n c o n t r a s t to th e Law o f M a rk e ts, contended: I t i s by no means t r u e t h a t com m odities a re alw ays exchanged f o r com m o d ities. The g r e a t mass o f com m odities i s exchanged d i r e c t l y f o r la b o u r , e i t h e r p ro d u c tiv e o r u n p ro d u c tiv e ; and i t i s q u ite obvious t h a t t h i s mass of com m odities compared w ith th e la b o u r w ith which i t i s t o be exchanged may f a l l i n v a lu e from a g l u t j u s t as any one commodity f a l l s i n v a lu e from an e x c e ss o f s u p p ly , compared e i t h e r w ith la b o u r o r w ith money.94 M althus h e ld i t to be a n a t u r a l ten d en cy f o r a l l com m odities t o f a l l i n v alu e r e l a t i v e l y t o la b o r as c a p i t a l ac c u m u la tio n e x p a n d s. To M althus* argum ent, John S t u a r t M ill r e p l i e d : — 94M althus, P r in c i p l e s o f P o l i t i c a l Economy, 71 Demand f o r com m odities i s n o t demand f o r la b o u r . The demand f o r com m odities d e te rm in e s in what p a r t i c u l a r b ran ch of p ro d u c tio n th e la b o u r and c a p i t a l s h a l l be employed; i t d e te rm in e s th e d i r e c t i o n o f th e la b o u r; b u t not th e more o r l e s s o f th e la b o u r i t s e l f , o r o f th e m ain ten an ce o r payment o f th e la b o u r . These depend on th e amount o f th e c a p i t a l , o r o th e r funds d i r e c t l y devoted to th e su ste n a n c e and re m u n e ra tio n o f la b o u r . I t i s to common a p p re h e n s io n , a paradox; and even p o l i t i c a l ec o n o m ists o f r e p u t a t i o n , I can h a r d ly p o in t t o any, e x c e p t Mr. R ic a rd o , and M. Say, who have k e p t i t c o n s ta n tly and s t e a d i l y i n v ie w .95 By "demand f o r la b o u r" M ill in te n d e d to mean n o t demand i n te rm s o f money, b u t demand i n te rm s o f com m odities. T his was a c t u a l l y a r e p e t i t i o n o f th e c l a s s i c a l d o c tr in e o f th e Law o f M a rk e ts, a c c o rd in g t o w hich th e c o n fig u ra t i o n o f demand was i r r e l e v a n t to th e d i s t r i b u t i o n o f th e p ro d u c t betw een p r o f i t and w ages. J . C. M ill, i n an o f te n -q u o te d p a s s a g e , s a id : D e a rth , o r s c a r c i t y , on th e one hand, and o v e r su p p ly , o r i n m e r c a n tile la n g u a g e , g l u t , on th e o th e r , a re i n c id e n t t o a l l com m odities . . . which c o n s t i t u t e s th e means o f payment f o r com m odities. I t i s sim ply com m odities* Each p e r s o n T s means o f p ay in g f o r th e p ro d u c tio n s o f o th e r people c o n s i s t s o f th o s e which he h im s e lf p o s s e s s e s . A ll s e l l e r s a re i n e v i t a b l y and ex v i te r m in i b u y e rs . Could we su d d en ly double th e p r o d u c tiv e powers o f th e c o u n try , we sh o u ld double th e su p p ly o f com m odities 95John S t u a r t M il l, P r i n c i p l e s o f P o l i t i c a l Economy (A shley e d i t i o n ; London: Longman, 1909), p p . 7 9 ^ 3 0 . 72 | i n e v e ry m a rk e t; b u t we sh o u ld , by th e same s tr o k e , j double th e p u rc h a s in g pow er. Everybody would b rin g j a double demand as w e ll as su p p ly : everybody would be a b le to buy tw ice as much, b ecause everyone would have tw ic e as much to o f f e r i n e x c h a n g e .96 The c o r o l l a r y o f t h i s s u p p o s itio n , as Keynes deduced, i s t h a t any p a r t o f income which i s n o t consumed i s in v e s te d . F u rth e rm o re , t h i s d o c tr in e sought t o develop a n .e x p la n a tio n o f p r o f i t a lo n g th e l i n e o f " r e a l c o s t" f o r which p r o f i t s was th e e x c h a n g e -e q u iv a le n t. The " c o s t o f p ro d u c tio n " th e o ry of J . S . M ill t r e a t e d valu e as b e in g governed by th e wages p lu s an averag e r a t e of p r o f i t . I t was n o t an e l a b o r a tio n o f R ic a rd o Ts th e o r y , b u t a s R. L. Meek h as s a i d , ^ s in c e i t in c lu d e d no e x p la n a tio n o f p r o f i t , r e j e c t e d th e c r u c i a l problem s which R ic a rd o Ts system had p re s e n te d w ith o u t e v e r having s o lv e d . The " c o s t o f p ro d u c tio n " th e o ry o f v a lu e so lv ed n o th in g , b ecause i t l e f t th e d e te rm in a tio n o f th e " c o s t 96i b i d . , p p . 556-55$; quoted by Keynes, o £ . c i t * , p. IS. ^ R . L. Meek, S tu d ie s i n th e Labour Theory o f Value (New York: I n te r n a tio n a T P u b lis h e r s , 1 9 5 6 ), p p . 243-247* D r. Meek, i n c o n t r a s t to Je v o n s, M a rs h a ll, and K eynes, e s t a b l i s h e s th e f a c t t h a t M ill d e c is iv e ly , r e j e c t e d R ic a rd o f s co n cep t o f r e a l o r a b s o lu te v a lu e and th e th e o ry he had b ased upon i t . In h i s concept o f " r e l a t i v e v a l u e ," and vague " la b o u r - p lu s - a b s tin e n c e th e o ry o f p r o f i t , " J . S . M ill paved th e way f o r th e "M arginal R e v o lu tio n ." o f p r o d u c tio n ” u n e x p la in e d .* ^ Due t o th e c o n fu sio n on th e o r i g i n o f p r o f i t , i t s im provem ent, and i t s c o l la p s e , J . S. M ill was u n ab le t o expand h i s v is i o n o f f i n a n c i a l c r i s i s i n t o a th o ro u g h and s y s te m a tic t h e o r e t i c a l a n a ly s is - 99 A lfre d M a r s h a ll. I t h a s w rongly been assumed t h a t th o s e N e o -C la s s ic a l E conom ists who have w r i t t e n on b u s in e s s c y c le s and money have c o m p le te ly abandoned th e Law o f M a rk e ts. W hether such a claim i s c lo s e t o f a c t o r n o t depends on th e q u e s tio n : What a re th e c a u se s o f c r i s i s ? A lfre d M a rsh a ll sought th e cau ses o f c r i s i s in th e " o r g a n iz a tio n o f p ro d u c tio n and o f credit,"-*-®^ w h ile he m a in ta in e d th e Law of M a rk e ts, from h i s Pure Theory o f D om estic V alu es to th e P r i n c i p l e s . He s a id : 9% dw in Cannan s a i d , " S e n io r i s a t l e a s t e n t i t l e d to th e c r e d i t o f h av in g seen t h a t p r o f i t s had n o t been s a t i s f a c t o r i l y e x p la in e d . . * . J . S . M i l l , on th e o th e r hand, seems t o have been t o t a l l y unaware t h a t a n y th in g was l a c k i n g ," i n H is to ry o f T h eo ries o f P ro d u c tio n and D i s t r i b u t i o n (second e d i t i o n ; London: P. S. King and Son, l903) p• 214. ^ H a b e r l e r , o£* c i t . , p p . 1 7 3 - 1 7 6 * lO ^A lfred M a rs h a ll, P r i n c i p l e s o f Economics ( e ig h th e d i t i o n ; New York: The M acm illan Company, 1 9 3 3 ), p p . 6 dS, 7 1 0- 7 1 1 . 74 ! And i t h a p p e n s t h a t i n e c o n o m i c s , n e i t h e r t h o s e e f f e c t s o f k n ow n c a u s e s , n o r t h o s e c a u s e s o f k n ow n e f f e c t s w h i c h a r e m o s t p a t e n t , a r e g e n e r a l l y t h e m o s t i m p o r t a n t . ”T h a t w h i c h i s n o t s e e n ” i s o f t e n b e t t e r w o r t h s t u d y i n g t h a n t h a t ”w h i c h i s s e e n . ” E s p e c i a l l y i s t h i s t h e c a s e i f we a r e n o t d e a l i n g w i t h som e q u e s t i o n o f m e r e l y l o c a l o r t e m p o r a r y i n t e r e s t , b u t a r e s e e k i n g g u i d a n c e i n t h e c o n s t r u c t i o n o f a f a r - r e a c h i n g p o l i c y f o r t h e p u b l i c g o o d ; o r i f , f o r a n y o t h e r r e a s o n , w e a r e c o n c e r n e d l e s s w i t h i m m e d i a t e c a u s e s , t h a n w i t h c a u s e s o f c a u s e s — c a u s o e c a u s a n t e s . 1 0 1 B y c o m p a r i s o n w i t h m o s t m o d e r n w r i t i n g s , h i s a p p r o a c h t o i n t e l l e c t u a l p r o b l e m s i s r e a l i s t i c . I t i s a v i r t u e w h i c h ow ed i t s o r i g i n t o t h e f a c t t h a t h e h a d s u f f i c i e n t p h i l o s o p h i c b a c k g r o u n d t o a p p r e c i a t e s o m e t h i n g o f t h e c o m p l e x c h a r a c t e r o f t h e r e l a t i o n b e t w e e n a b s t r a c t i d e a s a n d r e a l i t y . A l f r e d M a r s h a l l s a i d : T he o n l y e f f e c t i v e r e m e d y f o r u n e m p lo y m e n t i s a c o n t i n u o u s a d j u s t m e n t o f m e a n s t o e n d s , i n s u c h w a y t h a t c r e d i t c a n b e b a s e d o n t h e s o l i d f o u n d a t i o n o f f a i r l y a c c u r a t e f o r e c a s t s ; a n d t h a t r e c k l e s s i n f l a t i o n s o f c r e d i t — t h e c h i e f c a u s e o f a l l e c o n o m i c m a l a i s e - - m a y b e k e p t w i t h i n n a r r o w e r l i m i t s . 1 0 2 M a r s h a l l , a f t e r q u o t i n g a p p r o v i n g l y M i l l Ts s t a t e m e n t o f t h e Law o f M a r k e t s , c o n t i n u e s t o a r g u e : B u t t h o u g h m en h a v e t h e p o w e r t o p u r c h a s e t h e y m ay n o t c h o o s e t o u s e i t . F o r w h e n c o n f i d e n c e h a s b e e n s h a k e n b y f a i l u r e s , c a p i t a l c a n n o t b e g o t t o s t a r t n ew c o m p a n i e s o r e x t e n d o l d o n e s . P r o j e c t s f o r n ew r a i l w a y s m e e t w i t h n o f a v o u r , s h i p s l i e i d l e , a n d t h e r e a r e n o o r d e r s f o r n ew 1 Q 1 I b i d . , p p . 77S-779 1 Q 2 I b i d . , p . 7 1 0 s h i p s . There i s s c a r c e ly any demand f o r th e work of n a v v ie s , and not much f o r th e work o f th e b u ild i n g and th e engine-m aking t r a d e s . In s h o r t th e r e i s b u t l i t t l e o c c u p a tio n in any o f th e t r a d e s which make f ix e d c a p i t a l . Those whose s k i l l and c a p i t a l i s s p e c i a l i z e d i n th e s e t r a d e s a re e a rn in g l i t t l e , and th e r e f o r e buying l i t t l e o f th e produce o f o th e r t r a d e s . O ther t r a d e s , f in d in g a poor m arket f o r t h e i r goods, produce l e s s ; th e y e a rn l e s s , and th e r e f o r e th e y buy l e s s : th e d im in u tio n o f th e demand f o r t h e i r w ares makes them demand l e s s o f o th e r t r a d e s . T h u s, com m ercial d i s o r g a n i z a t io n s p re a d s : th e d is o r g a n i z a t io n o f one tr a d e th ro w s o th e r s out o f g e a r, and th e y r e a c t on i t and in c r e a s e i t s d i s o r g a n i z a t i o n . The c h i e f cause o f th e e v i l i s a w ant o f c o n f id e n c e .1 0 3 ^-03I b i d . , p p . 710-711* In a f o o tn o te , p p . 7 1 1 - 712, r e f e r r i n g to th e s e p a s s a g e s , M a rsh a ll acknow ledges: T tThe q u o ta tio n from M ill and th e two p a ra g ra p h s which fo llo w i t a re rep ro d u ced from The Economics o f I n d u s t r y , I I I , i 4 , p u b lis h e d by my w ife and m y se lf i n - T&79- They i n d ic a t e th e a t t i t u d e which most o f th o s e , who fo llo w i n th e t r a d i t i o n s o f th e c l a s s i c a l e c o n o m ists, h o ld a s to th e r e l a t i o n s betw een consum ption and p r o d u c tio n . I t i s t r u e t h a t i n tim e s o f d e p re s s io n th e d is o r g a n i z a t io n o f consum ption i s a c o n tr ib u to r y cause t o th e co n tin u a n c e o f th e d is o r g a n i z a t io n o f c r e d i t and p r o d u c tio n . But a remedy i s n o t to be g o t by a s tu d y o f consum ption, as h a s b een a lle g e d by some h a s ty w r ite r s * Ho doubt th e re i s good work to be done by a stu d y o f th e in f lu e n c e o f a r b i t r a r y changes i n f a s h io n on em ploym ent. But th e m ain stu d y needed i s t h a t o f th e o r g a n iz a tio n o f p ro d u c tio n and o f c r e d i t . And, tho u g h eco n o m ists have not y e t succeeded i n b r in g in g t h a t stu d y t o a s u c c e s s f u l i s s u e , th e cause o f t h e i r f a i l u r e l i e s i n th e profound o b s c u r ity and e v e r-c h a n g in g form o f th e problem ; i t does n o t l i e i n any in d i f f e r e n c e on t h e i r p a r t t o i t s supreme im p o rta n c e . Economies from b e g in n in g t o end i s a stu d y o f th e m utual a d ju stm e n ts o f consum ption and p ro d u c tio n when th e one i s u n d er d is c u s s io n , th e o th e r i s n ev e r out o f m in d .” 76 j D e sp ite t h i s r e c o g n itio n t h a t "though men have th e power to p u rch ase th e y may n o t choose t o u se i t , " M a rsh a ll d id n o t go on t o d evelop a th e o ry o f e f f e c t i v e demand b ecause i t a p p e a r s , as Keynes p o in te d o u t, t h a t M a rs h a llT s o ld id e a " t h a t i f peo p le do n o t spend t h e i r money i n one way th e y w i l l spend i t i n a n o th e r" was j "n e v e r r e p u d ia te d o r ro o te d out o f th e b a s ic assu m p tio n s o f h i s [ M a r s h a llf s] t h o u g h t." 1® * 1 ' The ca u ses o f c r i s e s a re n o t sought i n th e o v e rp ro d u c tio n o r underco n su m p tio n , b u t i n th e m inds o f th o s e on whom b u s in e s s o r g a n iz a tio n r e s t s . The "cause o f th e e v i l " i s n o t th e c o lla p s e o f th e m a rg in a l e f f i c i e n c y o f c a p i t a l , b u t th e sudden c o lla p s e o f c o n fid e n c e . The remedy would be th e r e s t o r a t i o n o f f a i t h and c o n fid e n c e . I f co n fid e n ce had been resum ed, p r o s p e r ity and norm alcy would have been p re v a l e n t . 104j£eynes, op. c i t . , p . 20 and f o o tn o te . Keynes, h e r e , r e f e r s t o M a r s h a llfs Economics o f I n d u s t r y , p . 17, where M a rsh a ll s a y s , " I t -is h o t good Tor tr a d e to have d r e s s e s made o f m a t e r i a l which w ears o u t q u ic k ly , f o r i f p eo p le do n o t spend t h e i r means on buy in g new d r e s s e s th e y would spend them on g iv in g employment t o la b o r i n some o th e r w ay." CHAPTER III THE LABOR THEORY OF "VALUE* I . INTRODUCTION T he R i e a r d o - M a l t h u s d i s a g r e e m e n t o n t h e Law o f M a r k e t s w a s c e n t e r e d a r o u n d t h e t h e o r y o f ' v a l u e a n d t h e t h e o r y o f m o n e y . R i c a r d o w r o t e t o M a l t h u s : I c a n n o t a g r e e w i t h y o u w h e n y o u s a y t h a t " w i t h o u t s u p p o s i n g c a p i t a l t o b e t a k e n fr o m t h e l a n d t h e t h r o w i n g o f n ew o b j e c t s o f d e s i r e i n t o t h e m a r k e t w i l l i n c r e a s e t h e v a l u e o f t h e w h o l e m a s s o f c o m m o d i t i e s i n t h e c o u n t r y , e s t i m a t e d e i t h e r i n m o n e y , o r i n c o r n a n d l a b o u r " — a n d i t i s b e c a u s e I t h i n k t h a t t h e r e w i l l n o t b e a g r e a t e r v a l u e o f c o m m o d i t i e s t o b e e x c h a n g e d f o r t h e r a w p r o d u c e , o r f o r m o n e y , t h a t I c o n c l u d e n o i n c r e a s e d p r o f i t s w i l l a n y w h e r e b e m a d e . . . # I t i s h e r e , I t h i n k , t h a t o u r d i f f e r e n c e r e s t s . ♦ • * M r. S a y , i n t h e n ew e d i t i o n o f h i s b o o k , s u p p o r t s [ i t a l i c s n o t i n t h e o r i g i n a l ] , I t h i n k , v e r y a b l y t h e d o c t r i n e t h a t dem an d i s r e g u l a t e d b y p r o d u c t i o n . Demand i s a l w a y s a n e x c h a n g e o f o n e c o m m o d ity f o r a n o t h e r . . . . I t a p p e a r s t o me t h a t t h e c o n s i d e r a t i o n o f m o n e y v a l u e m ay b e t h e f o u n d a t i o n o f o u r d i f f e r e n c e o n t h i s p o i n t . 1 *The w r i t e r i s in d e b te d t o D r. R. Meek f o r comments and c o r r e c t io n s made on an e a r l y d r a f t o f t h i s p a p e r. -'-David R ic a rd o , L e t t e r s — 1&1Q- 1&15 (Volume VI o f The Works and C orrespondence o f D a v id R ic a r d o , e d i te d by P. S r a f f a and M. H. boFE>. T O ” "Volumes; Cambridge: Cambridge U n iv e r s ity P r e s s , 1951-1955), p p . 163-164* Pages 7 -1 2 o f t h i s p a p e r show a c l o s e r c o n n e c tio n o f th e Law o f M arkets and th e la b o r th e o ry o f v a l u e . R e c e n t l y , i t h a s b e e n a g r o w i n g f a s h i o n t o i g n o r e j t h e r e l e v a n c e o f t h e t h e o r y o f v a l u e t o t h e s t r u c t u r e j o f p r o p o s i t i o n s w h i c h c o n s t i t u t e s e c o n o m i c s c i e n c e . The m o s t s i g n i f i c a n t c o n t r i b u t i o n o f Adam S m it h a n d D a v id R i c a r d o t o p o l i t i c a l e c o n o m y w a s t h e c r e a t i o n o f a u n i f y i n g q u a n t i t a t i v e p r i n c i p l e w h i c h e m p o w e r e d th e m t o m ake d e t e r m i n i s t i c s t a t e m e n t s a b o u t t h e g e n e r a l r e l a t i o n s h i p s b e t w e e n t h e c o n s t i t u e n t s o f " n a t u r a l p r i c e , " o r " c o s t o f p r o d u c t i o n . " The h e a r t o f t h i s p r i n c i p l e c o n s i s t e d o f a t h e o r y o f v a l u e . The e s s e n t i a l f u n c t i o n s o f t h e o r y o f v a l u e h a v e b e e n , a c c o r d i n g t o e c o n o m i s t s w ho m a i n t a i n e d l a b o r t h e o r y o f v a l u e , t o s o l v e t h e p r o b le m o f t h e v a l u e o f a c o m m o d it y a n d t h e d i s t r i b u t i o n o f n a t i o n a l i n c o m e . I t i s n o t b e c a u s e o f t h e p r o b le m o f t h e v a l u e o f a c o m m o d it y i s t h e o r e t i c a l an d t h e p r o b le m o f d i s t r i b u t i o n i s p r a g m a t i c , b u t b e c a u s e t h e l a t t e r p r o b le m d e p e n d s o n t h e f o r m e r o n e . M. H . D obb h a s s a i d : A p r i n c i p l e o f v a l u e i s n o t a d e q u a t e w h i c h m e r e l y e x p r e s s e s v a l u e i n t e r m s o f som e o n e o r o t h e r p a r t i c u l a r v a l u e : t h e d e t e r m i n i n g c o n s t a n t s m u s t e x p r e s s a r e l a t i o n s h i p w i t h som e q u a n t i t y w h i c h i s n o t i t s e l f a v a l u e . 2 % . H . D o b b , P o l i t i c a l E c o n o m y a n d C a p i t a l i s m (N ew Y o r k : I n t e r n a t i o n a l P u b lis h e r s , 1 9 4 5 ), PP» 9 -1 0 . 79 j T h i s w a s t h e r e a s o n t h a t R i c a r d o r e j e c t e d : " s u p p l y a n d dem and" e x p l a n a t i o n s , s i n c e s u c h a n a p p r o a c h j s o u g h t a n e x p l a n a t i o n o f v a l u e i n t e r n s o f i n d e t e r m i n a t e I q u a n t i t i e s a n d s u b j e c t i v e f a c t o r s * A c c o r d i n g t o e c o n o m i c t h e o r i s t s w ho h a v e m a in t a i n e d l a b o r t h e o r y o f v a l u e , a n e c o n o m i c t h e o r y m u st b e q u a n t i t a t i v e i n f o r m . W ith t h e C l a s s i c a l E c o n o m i s t t h e e x c h a n g e - v a l u e o f a c o m m o d ity w a s d e f i n e d i n t h e | p u r e l y r e l a t i v e s e n s e o f t h e a m o u n t o f o t h e r c o m m o d i t i e s j ! f o r w h i c h i t w a s c u s t o m a r i l y e x c h a n g e d . A d e t e r m i n a t e ; j i | s o l u t i o n o f t h e s e e x c h a n g e - r a t i o s w a s f o u n d i n t h e j p r i n c i p l e t h a t t h e s e r a t i o s w e r e g o v e r n e d b y t h e q u a n t i t y ! \ o f l a b o r t i m e t o p r o d u c e t h e g i v e n c o m m o d it y . ! i T h i s s o l u t i o n c o n s t i t u t e d t h e f a m o u s l a b o r t h e o r y o f v a l u e . R i c a r d o h a s b e e n g i v e n c r e d i t f o r d i s c o v e r i n g t h i s p r i n c i p l e . I t i s t h e p u r p o s e o f t h i s p a r t t o s t u d y t h e h i s t o r i c a l d e v e l o p m e n t o f t h e l a b o r t h e o r y o f v a l u e fr o m i t s e m b r y o t o i t s b e s t s u c c e s s i v e a m e n d m e n ts a n d e x p l a n a t i o n s . I I . THE THEORY OF VALUE UNDER MERCANTILISM The c o n c e p t o f " j u s t p r i c e , " a s a g r o u n d f o r t h e C a n o n i s t a p p r o a c h t o t h e t h e o r y o f v a l u e , h a d m o re i n common w i t h t h e c l a s s i c a l a p p r o a c h t h a n t h e o n e a d o p t e d b y m e r c a n t i l i s t s . " J u s t p r i c e " w a s d e f i n e d i n t h e w ay j 80 j I ; | t h a t " re m u n e ra tio n sh o u ld be p r o p o r tio n a te t o o u tla y i ! - ! | and e f f o r t i n p r o d u c tio n . ”-5 I t was a common agreem ent ! ( on th e p o in t o f e q u iv a le n c e betw een c o s t and rew ard; i t h i s was a d e q u a te , i n th e tim e o f A quinas, to d e m o n stra te ; { th e " j u s t ” d i s t r i b u t i o n . ; I i As th e im p e rso n al m ark et to o k over th e ta s k o f r e g u la tin g p r i c e s , th e C a n o n is t1 s con cep t o f j u s t p r ic e w ith e re d away. The t r a n s i t i o n from c o s t o f p ro d u c tio n ' approach t o " c o n v e n tio n a l p r ic e " ap p ro a c h , w hich to o k p la c e d u rin g M e rc a n tilis m , was t o th e b e n e f i t o f m er- j i I . c h a n ts and t r a d e r s . T h is p ro c e s s o f t r a n s i t i o n emerged j a s th e prim a f a c i e ground f o r th e j u s t i f i c a t i o n o f th e ' g a in s o f m e rc h a n ts. C o n v en tio n al p r i c e , th e p r ic e c u s to m a r ily p aid and r e c e iv e d , was j u s t p r ic e to th e m e r c a n t i l i s t s . The m e r c a n t i l i s t s argued t h a t th e p r ic e charged by s e l l e r , and p a id by p u rc h a s e r , depends on th e " u t i l i t y " o f th e commodity t o b o th s e l l e r and p u r c h a s e r . T his approach was b ased on th e s u b je c tiv e v a l u a ti o n o f th e consum ers. In summary, th e v a lu e o f a commodity was i d e n t i f i e d w ith i t s a c tu a l m ark et p r i c e . The demand and su p p ly d eterm in ed th e l e v e l o f t h i s v a lu e . F i n a l l y th e ] 3r . L. Meek, S tu d ies in the Labor Theory— o f Value (New York: In tern ation al P u b lish ers, 195677 P* 12* & L co n eep t o f " i n t r i n s i c v a lu e ," o r u t i l i t y , as d i s t i n c t j from m arket p r i c e , emerged The c r u c i a l p o in t was t h a t s in c e th e m erch an ts , had c o m p a ra tiv e ly l i t t l e c o n tr o l o v er th e p ro c e s s and | c o s t o f p r o d u c tio n , t h e i r p r o f i t s were re g a rd e d a s b ein g p a id by th e consum ers, "and th e o n ly form o f p r o f i t to a t t r a c t any g r e a t d eg ree o f a t t e n t i o n was th e T p r o f i t upon a lie n a tio n * se c u re d i n commerce. j The t r a n s i t i o n o f th e th e o ry o f v a lu e from th e fo re ru n n e rs o f Adam Smith to c l a s s i c a l . In th e l a t e s e v e n te e n th c e n tu r y , e s p e c i a l l y i n E n g lan d , th e c o s t o f j i ' ■ p ro d u c tio n approach t o th e th e o r y o f v a lu e was r e v iv e d . ! ' A ccording t o t h i s c o n c e p tio n , th e " r e a l " o r " tr u e " v alu e o f a commodity was e q u a l to p r ic e y ie ld e d upon i t s s a le m inus p r o f i t . The more f r u i t f u l changes i n th e o rg an i z a t i o n o f p ro d u c tio n aimed to in c r e a s e p r o f i t were p o s s ib le th ro u g h th e d i v i s i o n o f la b o r and new te c h n ic a l in v e n tio n s . The fundam ental p r e c o n d itio n o f any change was th e abundant su p p ly o f wage l a b o r e r s . I t i s from ^-Nicholas B arbon, N ich o las Barbon and a D isc o u rse o f Trade (B a ltim o re : The Lord B a ltim o re P re s s , 1905), pp. 1 3 -1 6 , 39, 41* ^Meek, 0£ . c i t . , p . !?♦ $2 t h i s d isc o v e ry t h a t th e la b o r th e o ry o f v alu e o f th e ! C l a s s i c a l E conom ists d a te s* T here a re numerous docum ents ‘ | " i i w hich acknowledge th e c o n t r ib u t io n s o f la b o r which "makes ' i ' : ! th e f a r g r e a t e s t p a r t o f th e v a l u e o f th in g s we en jo y j j i i n t h i s w orld* B ut, by and l a r g e , th e r e was no i n t e n t i o n ; i I t o d eterm in e th e v a lu e o f com m odities by la b o r tim e . ; i F o re ru n n e rs o f Adam Smith som etim es im p lie d t h a t la b o r c r e a te d th e u t i l i t y or u s e -v a lu e o f com m odities. John Locke s a id : : I th in k i t w i l l be b u t a v e ry m odest co m p u tatio n : j t o sa y , t h a t o f th e p ro d u c ts o f th e e a r t h u s e f u l t o j i th e l i f e o f man, n i n e - te n th s a re th e e f f e c t s o f I ! la b o u r . Nay, i f we w i l l r i g h t l y e s tim a te th in g s a s j I th e y come t o o u r u s e , and c a s t up th e s e v e r a l j I exp en ses ab o u t them —what i n them i s p u r e ly owing ! t o n a tu re and what t o la b o u r — we s h a l l f in d t h a t i n ; { m ost o f them n in e ty - n in e h u n d re d th s a re w h o lly to 1 I be p u t t o th e ac co u n t o f la b o u r .? | i The g r e a t changes which to o k p la c e i n th e p e rio d I ( u n d er c o n s id e r a tio n d iv e r te d th e a t t e n t i o n o f eco n o m ists from th e f i e l d o f exchange t o th e sp h e re o f p ro d u c tio n , and sponsored th e c o n c e p tio n t h a t la b o r was th e "c au se " o r "so u rc e " o f w e a lth and v a l u e . T h is , how ever, should ^John Locke, Two T r e a t i s e s o f C iv il Government (Everym an's L ib ra ry e d i t i o n ; London: J . M. t>ent, 1953), p . 136* He b e l ie v e d , " I t i s la b o u r , th e n which p u ts th e g r e a t e s t p a r t o f v a lu e upon la n d , w ith o u t which i t would s c a r c e ly be w orth a n y th in g ; i t i s t o t h a t we owe th e g r e a t e s t p a r t o f a l l i t s u s e f u l p r o d u c ts ," p . 137* ?Ibid., p. 136. ^ 3 j n o t be u n d e rsto o d to mean t h a t th e y th o u g h t i n te rm s j o f a la b o r th e o ry o f v a lu e , b u t i t does i n d i c a t e t h a t ■ th e y began " to look i n th e d i r e c t i o n " o f a th e o ry o f v a lu e b ased on l a b o r . N a tu ra l p r i c e . B efore th e e ig h te e n th c e n tu ry , g e n e r a lly , p r o f i t had ap p eared as " p r o f i t upon a l i e n a t i o n . " I t a r i s e s "o u t o f th e f a c t t h a t th e p r ic e o f ! th e goods i s g r e a t e r th a n t h e i r r e a l v a lu e , o r t h a t th e j t I goods a r e s o ld above [ i t a l i c s i n th e o r i g i n a l ] t h e i r | & j v a l u e . " 0 But i n th e e ig h te e n th c e n tu ry p r o f i t appeared i as a sh a re u n iq u e ly a s s o c ia te d w ith th e use o f " sto c k " I i n th e employment o f w a g e -la b o r. The key to th e h i s - ! i i t o r i c a l e v o lu tio n o f th e th e o ry o f v a lu e i n c l a s s i c a l ! d o c tr in e sh o u ld be sought i n th e em ergence o f p r o f i t on " s to c k " as an income a c cru ed to th e " u n d erta k er" ^ S i r James S te u a r t was th e one, a f t e r th e P h y s io c r a ts , who rep ro d u ced th e co n cep t o f " p r o f i t upon a l i e n a t i o n . " See K arl Marx, The T h e o rie s o f S u rp lu s V a lu e , t r a n s l a t i o n by G. A. Bonner arid E . B urns (New YorkT I n t e r n a t i o n a l P u b lis h e r s , 1952), p p . 4 0 -4 1 * 9 In r e a l i t y , th e term " e n tre p re n e u r" sh o u ld be co n fin e d t o th e f u n c tio n , and th e " u n d e rta k e r" t o th e p e rso n who f u l f i l l s t h a t f u n c tio n i n an i n d i v i d u a l i s t i c sy stem . See i t s h i s t o r i c a l emergence i n M. H. Dobb, On Economic Theory and S o c ia lis m (New York: I n t e r - n a tF o n a l" " P u b lis h e rs , 1 9 5 5 ), p • 9 , fo o tn o te 1. £ 4 em ploying w a g e -la b o r. But th e cru x o f th e problem was th e j u s t i f i c a t i o n o f th e o r i g i n o f th e p r o f i t . T his j i p ro c e s s was c o n fro n te d w ith th e ways i n which p r o f i t , i a s a new c a te g o ry o f incom e, sh o u ld be d i f f e r e n t i a t e d j i from i n t e r e s t on money, r e n t o f la n d , and wages o f la b o r.I® There were a ls o o b s ta c le s i n th e way o f i n t r o - : d ucing th e concept o f th e av erag e r a t e o f p r o f i t . P r o f i t , f o r th e C l a s s i c a l E co n o m ists, was n o t t r e a t e d u n d er th e h ead in g o f r e n t , wage, o r i n t e r e s t . ; T his d i f f e r e n t i a t i o n betw een p r o f i t on th e one hand, and j r e n t , wage, and i n t e r e s t on th e o th e r hand, paved th e j ! way f o r th e f u l l developm ent o f th e c l a s s i c a l t h e o r i e s j | and c l a s s i c a l co n cep t o f n a t u r a l p r i c e . j i The f i r s t r e s u l t o f th e r e c o g n i tio n o f th e con cep t o f " n a t u r a l p r ic e " was t h a t C l a s s i c a l E conom ists a c c e p te d th e id e a t h a t com m odities, i n th e lo n g ru n u n d er com peti t i v e c o n d itio n s , te n d ed t o s e l l a t t h e i r " n a tu r a l p r i c e . " T his " n a tu r a l p r ic e " in c lu d e d th e " n a tu r a l" r a t e o f 11 p r o f i t . The c o n d itio n i n which a commodity i s so ld Adam Sm ith, An I n q u iry i n to th e N ature and Causes o f th e W ealth oT N atio n s (New York: The Modern L ib r a r y , 19T 7), pp* 5I P 5T , '57, 90. H e r e in a f te r r e f e r r e d t o a s W ealth o f N a tio n s . H T he f u l l r e c o g n itio n o f t h i s f a c t was v e ry slow t o come a b o u t. Adam S m ith, a t l e a s t , em phasized i t s s i g n i f i c a n c e . P r i o r t o th e p u b lic a t io n o f th e W ealth o f N a tio n s , R ichard C a n til lo n , Joseph H a r r i s , and W illiam Temple made c o n t r ib u t io n s to t h i s r e c o g n i tio n . I a t th e " n a tu r a l" r a t e of p r o f i t was d e fin e d as a s i t u a - | t i o n o f e q u i l i b r ium i n wh ic h demand and su p p ly were e q u a l. " N a tu ra l p r ic e " was co n sid e re d as th e p r ic e o f com m odities charged a t th e c o n d itio n o f e qu i l i b r ium . "The a c tu a l p r ic e a t whic h any commodity i s commonly so ld . . • may e i t h e r be above, o r below , o r e x a c tly th e same w ith i t s n a t u r a l p r i c e . "^2 ^he developm ent o f th e th e o ry o f v a lu e was s u b s t a n t i a l * The new " c o s t o f p ro d u c tio n " d o c tr in e made th e p r i c e s s u b o rd in a te t o law i n l | c o n t r a s t t o th e e a r l i e r t h e o r i e s which e x p la in e d th e i j p r i c e s w ith a r b i t r a r y f o r c e s . I t i s t r u e t h a t th e i ; C l a s s i c a l E conom ists were not s a t i s f i e d w ith th e d o c tr in e i i o f " c o s t o f p r o d u c tio n " — th e lo n g -ru n c o m p e titiv e p r ic e was e q u a l to th e c o s t o f p r o d u c tio n , w ith th e norm al r a t e o f p r o f i t —which assumed th e wages and th e r a t e o f p r o f i t were in d e p e n d e n t f a c to r s * Such an assum ption i s a b s o lu te l y i l l e g i t i m a t e when a g g re g a te econom ics i s u n d er i n v e s t i g a t i o n , ^ p a r t i c u l a r l y when i t was recognized •^ S m ith , o p . c i t . , p . 56; see a ls o p p . 60, 99* Dobb h a s su g g e ste d t h a t " t h i s was th e re a so n f o r w hich R icard o r e j e c t e d mere 1 su p p ly and demand* e x p la n a tio n s . . . b ec au se such t h e o r i e s sought an e x p la n a tio n o f v alu e i n te rm s o f q u a n t i t i e s which could only be t r e a t e d a s in d e p e n d e n t in c irc u m s ta n c e s which p re c lu d e d th e p r i n c i p l e from h av in g th e r e q u i s i t e g e n e r a l i t y , " i n P o l i t i c a l Economy and C a p ita lis m , p . 10. 36 t h a t commodity p ro d u c tio n and i t s p r ic e d e te rm in a tio n was ”s u b je c t t o la w .,T The C l a s s i c a l E conom ists were i n t e r e s t e d in c a p i t a l , th e rew ard o f c a p i t a l , and th e ac cu m u latio n o f c a p i t a l , b ec au se th e s e were th o u g h t o f a s th e so u rce o f th e abundance and grow th o f w e a lth . And t o C la s s ic a l E co n o m ists, t h e r e f o r e , th e th e o ry o f v a lu e had t o be c a p ab le o f e x p la in in g how th e l e v e l o f p r o f i t was d e t e r m ined. I t would be a c i r c u l a r argum ent to assume th e le v e l o f p r o f i t a s a d e te rm in a n t o f v a l u e . The h i s t o r i c a l developm ent o f th e id e a t h a t l a b o r was th e so u rce o f v a lu e was a s s o c ia te d w ith ”th e d i v i s i o n o f la b o r ” i n s o c ie ty . I f s o c ie ty i s d e fin e d as an a s s o c i a t i o n o f a group o f p ro d u c e rs who l i v e by exchanging th e p ro d u c t o f t h e i r l a b o r , th e n i t i s tan tam o u n t t o sa y in g t h a t th e s e p ro d u c e rs exchange th e q u a n t i t i e s o f t h e i r s o c i a l la b o r . And e v e n tu a lly we may s t a t e t h a t th e v a lu e o f t h e i r p r o d u c t— i t s p u rc h a sin g power o r a b i l i t y t o command o th e r com m odities in exchange— i s a q u a l i t y w hich i s bestow ed upon i t by th e la b o r fo rc e o f th e s o c ie ty . S i r W illiam P e tty should be c o n s id e re d a s th e o r i g i n a t o r o f th e id e a t h a t th e q u a n t ity o f la b o r to & 7 produce a commodity d e te rm in e s i t s ex c h an g e-v alu e T his id e a evolved from th e argum ent t h a t a commodity assum es v alu e as th e r e s u l t o f th e e x p e n d itu re o f s o c i a l e f f o r t upon i t . ' Also th e id e a o f th e m u tu al i n t e r dependency o f th e p ro d u c e rs o f com m odities, w hich was t i e d t o o th e r s o c ia l r e l a t i o n s , became th e b a s i s o f th e id e a t h a t exchange v a lu e o f a commodity i s d eterm in ed by th e q u a n t ity o f la b o r t o produce i t . T his n o tio n o r ig in a te d w ith P e t t y . l ^ S i r W i l l i a m P e t t y , E c o n o m ic W r i t i n g s o f S i r W i l l i a m P e t t y (V o lu m e I ; C a m b r id g e : C a m b r i d g e U n i v e r s i t y P r e s s , 1 S 9 9 ), P P - 43, 50-51* - ^ i b i d . ? Volume I , p . 260; Volume I I , p p . 473-474- ! B ernard M andeville m ight be c o n s id e re d as th e f i r s t one who r e a l l y c o r r e l a t e d th e d i v i s i o n o f la b o r i n s o c ie ty w ith th e elem ent o f v a l u e . He s a i d , "By S o c ie ty , I u n d e rsta n d a Body P o l i t i k , i n which Man . . . i s become a D i s c i p l i n e C re a tu re , t h a t can f in d h i s own Ends i n L ab o u rin g f o r o t h e r s , and where u n d er one Head or o th e r Form o f Government each Member i s r e n d e r T d S u b s e rv ie n t to th e W hole. . . ." i n The F ab le o f th e -B e es; o r . P r iv a te V ic e s , P u b lic B e n e f its , e d ite d by D ouglas Garmon (London: W ish art and Company, 1 9 3 4 ), P- 347, 260. A lso, Benjam in F ra n k lin s a i d , "To f a c i l i t a t e exchange, men have in v e n te d Money p ro p e r ly c a l l e d a medium o f ex ch an g e, becau se th ro u g h o r by i t s means la b o u r i s exchanged f o r la b o u r , or one commodity f o r a n o th e r . • . . Trade i n g e n e ra l b e in g n o th in g e l s e b u t th e exchange o f la b o u r f o r la b o u r , th e v a lu e o f a l l th in g s i s . * • m ost j u s t l y m easured by la b o u r ," i n Works o f th e L ate D o cto r Benjam in F ra n k lin (Volume I I , second edition;""New York: Samuel C a m p b e l l , 1 7 9 4 ), pp * 263-264* E v e n D a v id Hume p o p u l a r i z e d t h e i d e a t h a t c o m m o d i t i e s p r o d u c e d f o r e x c h a n g e c o n s i s t e d e s s e n t i a l l y o f a m a s s o f c r y s t a l l i z e d s o c i a l e f f o r t , i n E s s a y s (V o lu m e I ; L o n d o n : P r i n t e d f o r A . M i l l e r , 1767T 7pp* 293-294, 315- S3 A c c o r d i n g l y , t h e e x p e n d i t u r e o f hum an l a b o r w a s r e g a r d e d , b y e a r l y C l a s s i c a l E c o n o m i s t s , a s t h e r e a l c o s t o f p r o d u c t i o n * T he t h e o r y o f v a l u e b a s e d o n t h i s V n o t i o n , i t w a s a r g u e d , w a s a b l e t o e x p l a i n t h e o r i g i n ' an d t r a n s f o r m a t i o n o f p r o f i t , f o r w h i c h t h e C l a s s i c a l E c o n o m i s t s s h o w e d s o m uch i n t e r e s t . 1 I I I . A D A M SMITH*S THEORY OF VALUE P e r h a p s i t m i g h t b e b e t t e r t o d i v i d e S m i t h f s c o n t r i b u t i o n t o t h e t h e o r y o f v a l u e i n t o t w o p e r i o d s . The f i r s t i s t h e p e r i o d i n w h i c h Adam S m it h w a s p r o f e s s o r o f m o r a l p h i l o s o p h y a t G l a s g o w U n i v e r s i t y . G la s g o w L e c t u r e s , w h i c h i s t h e c o l l e c t i o n o f l e c t u r e s o f Adam i i S m it h a t G la s g o w U n i v e r s i t y , i s a v a i l a b l e t o d a y . The s e c o n d p e r i o d c o n t a i n s t h e c o u r s e o f t i m e i n w h i c h v a l u e t h e o r y w a s f o r m e d i n t h e W e a lt h o f N a t i o n s « T he p e r i o d o f t h e G l a s g o w L e c t u r e s . The r o l e p l a y e d b y t h e " a c c u m u l a t i o n o f c a p i t a l " a p p e a r s s e c o n d a r y i n t h e c o u r s e o f t h e G la s g o w L e c t u r e s . I n t h i s p e r i o d S m it h d i d n o t b e l i e v e t h a t t h e " a c c u m u l a t i o n o f c a p i t a l " i s t h e p r im e f o r c e o f e c o n o m i c g r o w t h . •^A dam S m i t h , L e c t u r e s o n J u s t i c e , P o l i c e , R e v e n u e , a n d A r m s , D e l i v e r e d i n t h e U n r v e r s ' i t y o f G la s g o w b y Adam S m it h fcfa n n a n e d i t i o n : O x f o r d : C l a r e n d o n P r e s s , 1 3 9 6 ). 69 S m ith ’s tr e a tm e n t of p r o f i t and i t s n a tu re i s n eb u lo u s i n th e Glasgow L e c tu r e s ; a t l e a s t i t h a s no c o r r e l a t i o n t o th e " n a t u r a l ” r a t e o f p r o f i t developed i n th e W ealth o f N a tio n s . The amount o f p r o f i t was assumed t o depend on th e d eg ree o f r i s k , th e monopoly p o s i t i o n , e x p e rie n c e , e t hoc genus omne.1? In t h i s p e rio d p r o f i t was n o t a t t r i b u t e d t o th e amount o f sto c k em ployed. The d i s t i n c t i o n betw een ’’wages o f la b o u r ” and " p r o f i t o f s t o c k , ” r e f e r r e d to above, i s n o t d e m o n stra te d i n th e co u rse o f th e Glasgow L e c tu r e s . S tep by s te p th e problem o f "what r e g u l a t e s th e p r ic e o f com m odities” a p p e a rs a s c r u c i a l . Smith argued t h a t th e p r ic e o f c e r t a i n com m odities v a r i e s around an av erag e o r c e n t r a l p r i c e . He lin k e d th e c e n t r a l p r i c e o f a commodity t o th e " n a t u r a l ” p r ic e of labor.^9 Then, i f a commodity i s so ld a t a p r ic e which 1*7I b i d . , 215, 216, 219, 221, 223, 225« l g I b i d . , p . 173- l ^ j b i d . , p . 176* Sm ith argued t h a t "a man th e n h a s th e n a t u r a l p r i c e o f h is la b o u r , when i t i s s u f f i c i e n t to m a in ta in him d u rin g th e tim e o f la b o u r , to d e fra y th e expense o f e d u c a tio n , and to com pensate th e r i s k o f n o t l i v i n g lo n g enough, and of n o t su c cee d in g i n th e b u s in e s s . When a man h as t h i s , th e r e i s s u f f i c ie n t encouragem ent to th e la b o u r e r s , and th e commodity w i l l be c u l t i v a t e d t o th e p r o p o s itio n o f dem and.” 90 c o v e r s t h e n a t u r a l p r i c e o f l a b o r , S m it h a r g u e d , t h e c o m m o d it y i s s o l d a t i t s n a t u r a l p r i c e . S m it h d o e s n o t e x p l a i n , a t t h i s p o i n t , t h e o t h e r c o n s t i t u e n t s o f n a t u r a l p r i c e . I n r e g a r d t o m a r k e t p r i c e , S m it h a r g u e d t h a t i t : i s d e t e r m i n e d b y t h e r e l a t i o n s h i p b e t w e e n t h e a v a i l a b l e j i i s u p p l y a n d t h e e f f e c t i v e d e m a n d . The m a r k e t p r i c e t e n d s , ! a c c o r d i n g t o S m it h i n t h e c o u r s e o f L e c t u r e s , t o w a r d t h e n a t u r a l p r i c e a s t h e r e s u l t o f " t h e c o n c u r r e n c e o f d i f f e r e n t l a b o u r e r s . " * ' ® The e x p l a n a t i o n o f t h e r e a s o n s f o r t h e l i m i t a t i o n s o f t h i s a n a l y s i s i s n o t w i t h i n t h e s c o p e o f t h i s p a p e r . I n c o n c l u s i o n , a f t e r h a v i n g e x a m in e d " w h a t c i r c u m s t a n c e s r e g u l a t e t h e p r i c e o f c o m m o d i t i e s , " i n t h e s e c t i o n d e a l i n g w i t h " m on ey a s t h e m e a s u r e o f v a l u e , " h e a r g u e d t h a t , "We h a v e sh o w n w h a t r e n d e r e d m o n e y t h e m e a s u r e o f v a l u e , b u t i t i s t o b e o b s e r v e d t h a t l a b o u r , n o t m o n e y , i s t h e t r u e m e a s u r e o f v a l u e . ” 2 -^ T h i s b e c a m e , a c t u a l l y , t h e g e r m o f t h e l a b o r t h e o r y o f v a l u e i n t h e W e a l t h o f N a t i o n s » C a p i t a l a c c u m u l a t i o n i n t h e W e a l t h o f N a t i o n s . The b a s i c p a t t e r n o f r e l a t i o n s h i p b e t w e e n t h e " t h r e e 2° I b i d . , p p . 1 76-179. 2 1 I b i d . , p . 132. 91 g r e a t , o r i g i n a l and c o n s t i t u e n t o r d e r s ” (wage, r e n t , pp and p r o f i t ) which emerged i n th e W ealth o f N atio n s was o f fu ndam ental im p o rta n c e . C o n seq u en tly , averag e o r n a t u r a l r a t e o f p r o f i t was re g a rd e d a s a s e p a r a te c o n s titu e n t o f th e n a t u r a l p r ic e o f c o m m o d ities.2^ Thus, th e ac cu m u latio n o f c a p i t a l a p p e a rs to be th e c e n t r a l theme around which th e W ealth o f N atio n s i s c o n s tr u c te d . I t i s c o n s id e re d a s th e p r e r e q u i s i t e f o r th e growth o f a n a t io n . Smith s a id : The annual produce of th e la n d and la b o u r o f any n a tio n can be in c re a s e d i n i t s v a lu e by no o th e r m eans, b u t by in c re a s in g e i t h e r th e number of i t s p ro d u c tiv e l a b o u r e r s , o r th e p ro d u c tiv e pow ers of th o se la b o u r e r s who had b e fo r e been em ployed. The number of i t s p ro d u c tiv e la b o u r e r s , i t i s e v id e n t, can n e v e r be much in c r e a s e d , b u t i n consequence o f an in c r e a s e of c a p i t a l , o r o f th e fu n d s d e s tin e d f o r m a in ta in in g them . The p ro d u c tiv e powers o f th e same number o f la b o u r e r s can n o t be in c r e a s e d , b u t i n consequence e i t h e r o f some a d d i tio n and improvem ent to th o s e m achines and in s tru m e n ts which f a c i l i t a t e and a b rid g e la b o u r; o r o f a more p ro p e r d i v i s i o n and d i s t r i b u t i o n of em ployment. In e i t h e r case an a d d i tio n a l c a p i t a l i s alm o st alw ays r e q u i r e d . 2 4 2 2 sm ith , W ealth o f N a tio n s , p . 52. 23sm ith a rg u e s , h e r e , t h a t T ri t i s th e sto c k t h a t i s employed f o r th e sake o f p r o f i t , which p u ts in to n a tio n s th e g r e a t e r p a r t o f th e u s e f u l la b o u r o f ev e ry s o c i e t y . The p la n s and p r o j e c t s o f th e em ployers o f sto c k r e g u la te and d i r e c t a l l th e most im p o rta n t o p e ra t i o n s o f la b o u r, and p r o f i t i s th e end p roposed by a l l th o s e p la n s and p r o j e c t s , ” i n i b i d . , p . 249* 2Z*-Ibid., p. 326 92 T h e re fo re , a cc u m u la tio n o f c a p i t a l in c r e a s e s th e power o f a n a tio n i n th r e e ways: (1) in c r e a s e s n a t io n a l incom e, 2^ (2 ) optimum a l l o c a t i o n o f c a p i t a l betw een d i f f e r e n t c h a n n e ls ,2^1 and (3) f i n a l l y , optimum a l l o c a t i o n o f r e s o u r c e s wi t h i n a p a r t i c u l a r employment as s e le c te d * 27 The a c c u m u latio n o f c a p i t a l i n t h i s p ro c e s s was s tu d ie d w ith s p e c i f i c r e f e r e n c e to th e " th r e e g r e a t , o r i g i n a l and c o n s t i t u e n t o r d e r s ” t h a t s ta n d i n d e f i n i t e r e l a t i o n s h i p t o one a n o th e r and to th e economic m a te r ia l s o f s o c i e t y . i The fo rm u la tio n o f th e th e o r y o f v a lu e i n th e I W ealth of N a tio n s . The c h a p te r on ”0 f th e O rig in and i I Use o f Money" b e g in s w ith t h i s s ta te m e n t: 1 When th e d i v i s i o n o f la b o u r h a s been once th o ro u g h ly e s t a b l i s h e d , i t i s b u t a v e ry sm all p a r t o f a man’s w ants w hich th e produce o f h i s own la b o u r can s u p p ly . He s u p p lie s th e f a r I g r e a t e r p a r t o f them by ex changing t h a t s u rp lu s i p a r t o f th e produce of h i s own la b o u r , w hich i s o v er and above h i s own consum ption f o r such p a r t s o f th e produce o f o th e r m en’ s la b o u r as he h a s o c c a sio n f o r . E very man th u s l i v e s by e x c h an g in g , o r becomes i n some m easure a m erchant and th e s o c ie ty i t s e l f grows to be what i s p r o p e r ly a com m ercial s o c i e t y . 28 25i b i d . , p p . 3 2 ^ - 3 2 9 * 2 6I b i d . , p . 421. 27I b i d . , p . 260. 2% b i d . , p . 24- T h e re fo re , a c c o rd in g t o Adam S m ith, th e th e o ry o f v a lu e sh o u ld s p rin g and o r i g i n a t e from th e d i v i s i o n o f la b o r i n s o c i e t y . There i s in te rd e p e n d e n c y among l a b o r e r s i n a s o c i e t y . This in te rd e p e n d e n c y i s in te rw o v e n w ith th e exchange o f com m odities w hich i s th e esse n c e o f s o c i a l a c t i v i t i e s .^9 V alue, th u s , i s a s o c ia l r e l a t i o n s h i p . • A commodity a c q u ir e s exchange v a lu e , Smith a rg u e d , a s f a r as i t i s th e p ro d u c t o f l a b o r , and groups o f la b o r e r s i n a s o c i e t y . And i t i s i n t h i s sen se t h a t Sm ith argued la b o r i s th e cause o r so u rc e o f v a l u e . I t i s tr u e t h a t Sm ith argued t h a t a commodity | a c q u ir e s v a lu e b ecau se i t i s th e p ro d u c t o f s o c ia l j l a b o r , b u t he d id n o t p ro ceed to arg u e t h a t th e s o c i a l j la b o r i s th e su b sta n e e o f th e v a lu e o f a commodity. j r~—---------------— Smith argued t h a t th e e x t e n t o f th e v a lu e o f a commodity ^ I b i d . , p p . 12-13: " I t I s th e g r e a t m u l t i p l i c a t i o n o f th e p ro d u c tio n o f a l l th e d i f f e r e n t a r t s , i n consequence o f th e d i v i s i o n o f la b o u r , i n a w e ll-g o v e rn e d s o c i e t y , ’t h a t u n iv e r s a l opu len ce which e x te n d s i t s e l f t o th e lo w e st ra n k s o f th e p e o p l e . ’ E very workman h as a g r e a t q u a n tity o f h i s own work t o d is p o s e o f beyond w hat he h im s e lf h a s o c c a sio n f o r , and ev ery o th e r workman b e in g e x a c tly In th e same s i t u a t i o n he i s e n a b le d to exchange a g r e a t q u a n tity o f h i s own goods f o r a g r e a t q u a n t i t y , o r what comes t o th e same t h i n g , f o r th e p r ic e o f a g r e a t q u a n t ity o f t h e i r s . He s u p p lie s them w ith w hat th e y have o c c a sio n f o r , and th e y accom odate him as amply w ith what he h as o c c a sio n f o r , and a g e n e ra l p le n ty d i f f u s e s i t s e l f th ro u g h a l l th e d i f f e r e n t ra n k s o f th e s o c i e t y . ” 94 depends on th e method o f th e m easurem ent o f th e v a lu e . The " r e a l_ m&asure” o f a commodity, Smith a rg u e d , i s th e "power o f p u rc h a s in g o th e r g o o d s .” In o th e r w ords, th e " r e a l m e asu re” o f th e v a lu e o f a commodity was th e q u a n tity o f la b o r f o r w hich i t would exchange on th e m a rk e t. I t was th e commandable la b o r r a t h e r th a n la b o r embodied i n commandable la b o r which was th e m easure o f v a l u e . I t was s a id above t h a t Smith was b a s i c a l l y con ce rn e d w ith th e ac c u m u la tio n o f c a p i t a l a s th e so u rce and c r i t e r i o n o f p r o g re s s and grow th o f a s o c i e t y . And th e d e p th and s iz e o f th e ac cu m u latio n o f c a p i t a l can be d e m o n stra te d , Sm ith arg u e d , i n te rm s o f th e employment o f p ro d u c tiv e la b o r e r s i n th e p ro c e s s o f .p ro d u c tio n . Commodities made by th e s e " p r o d u c tiv e ” w o rk ers should be s o ld a t p r i c e s which com prise c o s t o f p ro d u c tio n p lu s " n a t u r a l ” r a t e o f p r o f i t and r e n t . F or th e a p p r o p r ia t i o n o f th e d if f e r e n c e betw een th e p r ic e o f o u tp u t and i n p u t , a v a lu e th e o ry app eared in d is p e n s a b le . And Sm ith*s co n cep t o f commandable la b o r as th e " r e a l m easu re” o f v a lu e m ight be co nnected l a r g e l y w ith h i s a n a ly s is o f th e p a r t i c u l a r problem o f ac cu m u latio n o f c a p i t a l . C h ap ter f iv e o f th e f i r s t volume o f W ealth o f N a tio n s , u nder th e t i t l e ”0 f th e R eal and Nominal P ric e o f Com m odities, or o f T h e ir P ric e i n L abour, and 95 ; T h e ir P ric e i n M oney,” s t a r t s w ith : E very man i s r i c h o r poor a c c o rd in g t o th e d eg ree I i n which he can a f f o r d to e n jo y th e n e c e s s i t i e s , ' c o n v e n ie n c e s, and amusements o f human l i f e . But a f t e r th e d i v i s i o n o f la b o u r h a s once th o ro u g h ly ta k e n p la c e , i t i s b u t a v e ry sm a ll p a r t o f th e s e w ith which a man’ s own la b o u r can su p p ly him . The f a r g r e a t e r p a r t o f them he m ust d e r iv e from th e la b o u r o f o th e r p eo p le and he m ust be r i c h o r poor a c c o rd in g to th e q u a n t ity o f t h a t la b o u r which he can command, o r which he can a f f o r d t o p u rc h a s e . The v a lu e o f any commodity, t h e r e f o r e , t o th e p e rso n who p o s s e s s e s i t , and who means n o t t o use o r consume i t h im s e lf , b u t t o exchange i t f o r o th e r com m odities, i s eq u a l t o th e q u a n t ity o f la b o u r which i t e n a b le s him t o p u rch ase or command. L abour, t h e r e f o r e , i s th e r e a l m easure o f th e exchangeable v a lu e o f a l l com m odities. The r e a l p r i c e o f e v e ry t h i n g , what ev e ry th in g r e a l l y c o s ts t o th e man who w ants to a c q u ire i t , i s j th e t o i l and tr o u b le o f a c q u ir in g i t . What e y e ry i t h i n g i s r e a l l y w o rth t o th e man who h a s a c q u ire d 1 i t , and who w ants to d is p o s e o f i t o r exchange i t f o r som ething e l s e , i s th e t o i l and tr o u b le which j i t can save t o h im s e lf , and w hich i t can impose upon o th e r p e o p le . What i s bought w ith money o r w ith goods i s p u rch ased by la b o u r , a s much as what we a c q u ire by th e t o i l o f our own body. That money o r th o s e goods in d e ed save u s t h i s t o i l . They con t a i n th e v a lu e o f a c e r t a i n q u a n t ity o f la b o u r which we exchange f o r what i s supposed a t th e tim e to J c o n ta in th e v a lu e o f an eq u a l q u a n t i t y . Labour was ( th e f i r s t p r i c e , th e o r i g i n a l purchase-m oney t h a t was p a id f o r a l l t h i n g s . I t was n o t by g o ld o r by s i l v e r , b u t by la b o u r , t h a t a l l th e w e a lth o f th e w orld was o r i g i n a l l y p u rch ased ; and i t s v a lu e , to th o s e who p o s s e s s i t , and who w ant to exchange i t f o r some new p r o d u c tio n s , i s p r e c i s e l y eq u a l to th e q u a n t ity o f la b o u r , which i t can e n a b le them to p u rc h a se o r command.30 30lbid., pp. 30-31. T h is p assag e d e c la r e s t h a t th e " r e a l w orth" o r " r e a l v a lu e ” o f a p ro d u c t t o i t s owner depends upon i t s commandable l a b o r . Second, i t d i s t i n g u i s h e s " c o s t ” from " r e a l v a l u e ," and f i n a l l y h i s m easu re, Sm ith a rg u e d , t i s a r e a l one sin c e i t e x p la in s th e s o c i a l r e l a t i o n s h i p s ly in g b e n e a th th e e x t e r n a l phenomena o f ex ch an g e. : i "The q u a n t ity o f la b o u r which i t ought commonly t o p u rc h a s e , command, o r exchange f o r , " Smith arg u ed , i s r e g u la te d by " th e q u a n t ity o f la b o u r commonly employed i i n a c q u ir in g o r p ro d u cin g any com m odity." He arg u ed : i I In t h a t e a r l y and rude s t a t e o f s o c ie ty w hich J p re c e d e s b o th th e a c c u m u la tio n o f sto c k and th e J a p p r o p r ia tio n o f la n d , th e p r o p o r tio n betw een th e : q u a n t i t i e s o f la b o u r n e c e s s a ry f o r a c q u ir in g d i f f e r e n t o b je c ts seems t o be th e o n ly c irc u m sta n c e 1 w hich can a f f o r d any r u l e f o r ex changing them f o r : one an o th er* I f among a n a tio n o f h u n te r s , f o r exam ple, i t u s u a lly c o s ts tw ic e th e la b o u r t o k i l l a b e a v e r which i t does to k i l l a d e e r , one b e a v e r sh o u ld n a t u r a l l y exchange f o r o r be w orth two d e e r . I t i s n a t u r a l t h a t what i s u s u a lly th e produce o f two days o r two h o u rs la b o u r , sh o u ld be w orth double ' o f what i s u s u a lly th e produce o f one d a y Ts o r one j h o u r ’ s la b o u r . . . In t h i s s t a t e o f t h i n g s , th e I whole produce o f la b o u r b elo n g s to th e la b o u r e r ; and th e q u a n tity of la b o u r commonly employed i n a c q u ir in g o r p ro d u c in g any commodity, i s th e o nly c irc u m sta n c e w hich can r e g u la te th e q u a n t ity o f la b o u r which i t ought commonly to p u rc h a s e , command ; o r exchange f o r . 31 j 31Ibid., pp. 47-4& 97 As soon as sto c k h a s accum ulated i n th e hands o f p a r t i c u l a r p e r s o n s , some o f them w i l l n a t u r a l l y employ i t i n s e t t i n g t o work i n d u s t r i o u s p e o p le , whom th e y w i l l su p p ly w ith m a t e r i a l s and s u b s is te n c e in o rd e r t o make a p r o f i t by th e s a le o f t h e i r w orks, j o r by what t h e i r la b o u r adds to th e v a lu e of th e ; m a t e r i a l s . In exchanging th e com plete m an u factu re e i t h e r f o r money, f o r la b o u r, o r f o r o th e r goods, o v er and above what may be s u f f i c i e n t t o pay th e p r ic e o f th e m a t e r i a l s , and wages o f th e workman, som ething m ust be g iv e n , f o r th e p r o f i t s o f th e u n d e r ta k e r o f th e work who h a z a rd s h i s sto c k i n t h i s a d v e n tu re . The v a lu e which th e workmen add t o th e m a t e r i a l s , t h e r e f o r e , r e s o lv e s i t s e l f i n j t h i s case in t o two p a r t s , o f which th e one pays J t h e i r w ages, th e o th e r th e p r o f i t s of t h e i r em ployer j upon th e whole s to c k o f m a t e r i a l s and wages which j he a d v a n c e d .32 I The m eaning o f th e above q u o ta tio n s i s t h a t th e r e g u l a t o r j i o f v a lu e , " in t h a t e a r l y and rude s t a t e o f s o c i e t y , ” was J i i th e q u a n t ity o f la b o r embodied i n com m odities, w h ile , i n 1 modern tim e s , th e c o n s t i t u e n t s o f " n a tu r a l p r i c e ”—w ages, p r o f i t s , and r e n t s - ^ — a t th e e q u ilib r iu m l e v e l r e g u la te v a l u e . "Value i n u s e ” and "v alu e i n ex c h a n g e . ” The ground f o r th e d i s t i n c t i o n betw een " v a lu e i n u s e ” and I "v a lu e i n e x c h a n g e ,” m a in ta in e d by C l a s s i c a l E co n o m ists, can be found in th e v e ry o fte n -q u o te d p a ssa g e o f Sm ith: 3 2I b i d . , p . 4$• 33I b i d . , p . 52: "Wages, p r o f i t , and r e n t , a re th e th r e e o r i g i n a l so u rc e s o f a l l revenue as w e ll as o f a l l ex changeable v a l u e . ” J 9$ The word v a lu e , i t i s t o be o b se rv e d , h a s two d i f f e r e n t m eanings, and som etim es e x p re s s e s th e u t i l i t y o f some p a r t i c u l a r o b j e c t , and som etim es th e power o f p u rc h a s in g o th e r goods which th e p o s s e s s io n o f t h a t o b je c t co n v ey s. The one may be c a lle d "value i n u s e " ; th e o th e r , "v a lu e i n ex c h an g e ." The th in g ^ which have th e g r e a t e s t . v a lu e i n use have f r e q u e n tly l i t t l e or no v a lu e | in exchange; and on th e c o n tr a r y , th o s e itfhich have th e g r e a t e s t v a lu e i n exchange have f r e q u e n tly l i t t l e o r no v alu e i n u s e . N othing i s more u s e f u l ; th a n w a te r; b u t i t w i l l p u rch ase a n y th in g ; s c a rc e ; a n y th in g can be had i n exchange f o r i t . A diam ond, j on th e c o n tr a r y , h a s s c a rc e any v a lu e i n u s e ; b u t a v e ry g r e a t q u a n t ity o f o th e r goods may f r e q u e n tly be had i n exchange f o r i t .34 I I The m arket p r i c e o f e v e ry p a r t i c u l a r commodity i s r e g u la te d by th e p r o p o rtio n betw een th e q u a n t ity which i s a c t u a l l y b ro u g h t t o m a rk e t, and th e demand i o f th o s e who a re w i l l i n g t o pay th e n a t u r a l p r ic e o f th e commodity, o r th e whole v a lu e o f r e n t , l a b o u r , , and p r o f i t , w hich must be p a id in o rd e r t o b r in g i t j t h i t h e r . Such peo p le may be c a lle d th e e f f e c t u a l dem anders, and t h e i r demand th e e f f e c t u a l demand; s in c e i t may be s u f f i c i e n t to e f f e c t u a t e th e b r i n g i n g ■ o f th e commodity t o m a rk e t. I t i s d i f f e r e n t from th e a b s o lu te demand. A v e ry p o o r man may be s a id i n some sen se t o have a demand f o r a coach a’ nd s ix ; he m ight l i k e t o have i t ; b u t h is demand i s n o t an ! e f f e c t u a l demand as th e commodity can n e v e r be b ro u g h t to m ark et i n o rd e r t o s a t i s f y i t .35 - ^ I b i d . , p . 2 $ . I n f o o tn o te 24, Cannan commented { t h a t th e background of t h i s p assag e can be found i n ' Glasgow L e c tu re s , p p . 1&2-190, where Sm ith c o n sid e re d money " f i r s t a s th e m easure o f v a lu e and th e n a s th e medium o f p e rm u ta tio n o r ex change. Money i s s a id to have had i t s o r i g i n i n th e f a c t t h a t men n a t u r a l l y f e l l upon one commodity w ith which to compare th e v a lu e o f a l l o th e r com m odities. When t h i s commodity was onee s e le c te d i t became th e medium o f exchange. . . . I t i s v u lg a r ly used as a m easure o f v a lu e because i t i s used as an in s tru m e n t o f commerce or medium o f ex c h an g e ." 3 5 ib id ., p . 56 What i s p e r f e c t l y c l e a r , from th e above q u o ta - j t i o n s , i s t h a t th e "v alu e i n u s e ” i s a p r e c o n d itio n o f ; \ "v a lu e i n ex c h an g e ." A lso, th e m easure o f "v a lu e i n > u se " i s th e s a t i s f a c t i o n o f human w ants and needs* ! F u rth e rm o re , th e second q u o ta tio n shows c l e a r l y t h a t i n i S m i t h s argum ent demand had n o th in g to do w ith th e d e t e r - , ! I m in a tio n o f exchange v a lu e . N e v e rth e le s s , he conceded t h a t demand e x e r t s an in f lu e n c e i n economic l i f e . A lthough e f f e c t i v e demand d e te rm in e s th e m arket p r ic e o f a commodity, t h i s , Sm ith a rg u e d , h a s no g iv e n d i r e c t c o r r e l a t i o n w ith " n a tu r a l p r ic e " and t h e r e f o r e "v alu e i n ex c h a n g e ." t f E v a lu a tio n o f S m ith Ts th e o ry o f v a l u e . To im pinge : upon t h i s i n t e r p r e t a t i o n , Sm ithes th e o r y o f v a lu e should be re g a rd e d a s a " c o s t of p ro d u c tio n " th e o r y — a th e o ry i n I I I which th e " r e a l m easure" o f v a lu e i s commandable l a b o r . i i F i r s t , in o rd e r t o show th e s iz e o f th e v a l u e - c r e a te d and th e p o t e n t i a l a c c u m u la tio n , Smith d iv id e d th e v a lu e o f in p u t from o u tp u t. The d if f e r e n c e betw een th e v alu e o f o u tp u t and v a lu e o f in p u t i s e q u a l t o th e v a lu e - c r e a te d . T his dichotom y h as been a tta c k e d a s b e in g u n s a t i s f a c t o r y . Second, Smith b e lie v e d t h a t th e v a lu e o f la b o r i s i n v a r i a b l e . R icard o o b je c te d t o t h i s " o r i g i n a l e r r o r r e s p e c tin g v a lu e " f o r th e re a s o n t h a t : 100 . . . v a lu e o f la b o u r ( i s ) e q u a lly v a r ia b le b e in g n o t o n ly a f f e c t e d , a s a l l o th e r th in g s a r e , by th e p r o p o rtio n betw een th e su p p ly and demand, w hich u n ifo rm ly v a r i e s w ith e v e ry change i n th e c o n d itio n o f th e community, b u t a ls o by th e v a ry in g p r ic e o f food and o th e r n e c e s s a r i e s , on which th e wages o f la b o u r a re ex p en d ed .36 Connected w ith t h i s p r o p o s itio n , S m ithT s th e o ry o f v a lu e h o ld s t h a t v a r i a t i o n o f th e v a lu e o f a p ro d u c t i s s u b je c t t o th e v a r i a t i o n o f t h a t p ro d u c t betw een wages on one sid e ," and r e n t and p r o f i t on th e o th e r s i d e . T h is ap p eared a s th e c h i e f o b je c tio n o f R icardo t o Sm ith*s th e o r y o f v a lu e . R icard o c r i t i c i z e d Sm ith*s th e o r y o f v a lu e , s in c e th e l a t t e r ig n o re d th e changes i n th e con- I d i t i o n s o f th e p ro d u c tio n o f a commodity. R icard o s a id : | Even i n t h a t e a r l y s t a t e to w hich Adam Smith [ r e f e r s , some c a p i t a l , though p o s s ib ly made and accum ulated by th e h u n te r h im s e lf , would be n e c e s s a ry t o e n a b le him to k i l l h i s game. W ithout some weapon, n e i t h e r th e b e a v e r n or th e d e e r could be d e s tro y e d , and t h e r e f o r e th e v a lu e o f th e s e anim als would be r e g u la te d , n o t s o le ly by th e tim e ! and la b o u r n e c e s s a ry to t h e i r d e s t r u c t i o n , b u t a ls o by th e tim e and la b o u r n e c e s s a ry f o r p ro v id in g th e h u n te r* s c a p i t a l , th e weapon, by th e a id o f which t h e i r d e s t r u c t i o n was e f f e c t e d . 37 36DaVid R ic a rd o , The Works and C orrespondence o f David R ic a rd o , e d ite d by '¥• S r a f f a and M. H. Dobb (Volume I : Cambridge: Cambridge U n iv e r s ity P r e s s , 1 9 5 1-1955), p* 15* H e r e in a f t e r r e f e r r e d to as W orks♦ See a ls o I n tr o d u c tio n to'V olum e I , p . xxxv. 3^Ibid., Volume I, pp. 23-24* 101 R icard o c r i t i c i s e d Sm ith, s in c e th e l a t t e r argued t h a t th e com m odities exchange ac c o rd in g t o th e amount o f la b o r r e q u ir e d f o r t h e i r p ro d u c tio n to : "That e a r l y and rude s t a t e o f s o c ie ty , which p re c e d e s b o th th e a c c u m u latio n o f sto c k and th e a p p r o p r ia tio n o f l a n d ," as i f , when p r o f i t s and r e n t were t o be p a i d , th e y would have some in f lu e n c e on th e r e l a t i v e v a lu e o f com m odities, in d e p en d en t o f th e mere q u a n t ity o f la b o u r t h a t was n e c e s s a ry to t h e i r p r o d u c tio n .3° S r a f f a and Dobb have found th e so u rc e o f t h i s o b je c tio n i n R ic a r d o f s l e t t e r t o James M ill o f December 2$, 1$1&, where R icard o a t t r i b u t e s th e so u rce o f t h i s c r i t i c i s m i n h i s " re a d in g o f th e m a tte r w ith t h a t o f T o r r e n s ."39 f j There R icardo s t a t e d : He (T o rren s) makes i t a p p e ar t h a t Smith says t h a t a f t e r c a p i t a l accu m u lates and i n d u s t r io u s p e o p le a re s e t t o work th e q u a n t ity o f la b o u r employed i s not th e o n ly circ u m sta n c e t h a t d e t e r m ines th e v a lu e o f com m odities, and t h a t I oppose t h i s o p in io n . Now I want t o show t h a t I do n o t oppose t h i s o p in io n i n th e way t h a t he r e p r e s e n ts : me t o do so , b u t Adam Smith th o u g h t, t h a t as i n ! th e e a r ly s ta g e s o f s o c i e t y , a l l th e produce o f { la b o u r b elonged to th e la b o u r e r , and a f t e r sto c k was accu m u lated , a p a r t went t o p r o f i t s , t h a t a c c u m u la tio n , n e c e s s a r i l y w ith o u t any re g a rd t o th e d i f f e r e n t d e g re e s o f d u r a b i l i t y o f c a p i t a l , o r any o th e r c irc u m sta n c e w h a te v e r, r a i s e d th e p r ic e s or exchange valu e o f com m odities, and 3^I b i d . , Volume I , p . 23 f o o tn o te . 39lbid., Introduction to Volume I, pp. xxxv- xxxvii• 10 2 c o n s e q u e n tly t h a t t h e i r v alu e was no lo n g e r r e g u la te d by th e q u a n t ity o f la b o u r n e c e s s a ry t o t h e i r p r o d u c tio n . In o p p o s itio n to him, I m a in ta in t h a t i t i s n o t b ecause o f t h i s d iv is io n i n t o p r o f i t s and w a g e s,— i t i s n o t b ecau se c a p i t a l a c c u m u la te s, t h a t ex ch an g eab le v a lu e v a r i e s , b u t i t i s i n a l l s ta g e s o f s o c ie ty , owing o n ly t o two c a u se s: one th e more or l e s s q u a n t ity o f la b o u r r e q u ir e d , th e o th e r th e g r e a t e r o r l e s s d u r a b i l i t y o f c a p i t a l : —t h a t th e form er i s n e v e r su p ersed ed by th e l a t t e r , but i s m o d ified by i t . 40 T h is view , t h a t i n modern tim e s th e c o n s t i t u e n t s o f " n a tu r a l p r ic e " d eterm in e th e v alu e does n o t, how ever, im ply t h a t Sm ith " r e j e c t e d " th e la b o r th e o r y o f v a lu e . I t i s c e r t a i n l y ab su rd to draw such a c o n c lu s io n . The id e a t h a t r e l a t i o n s o f p ro d u c tio n u l t i m a t e l y d eterm in e th e r e l a t i o n o f exchange i s th e e s se n c e o f th e la b o r th e o ry o f v a lu e As Marx su g g e s te d , S m ith t s f u n c tio n i n th e fo rm u la tio n o f th e la b o r th e o ry o f v a lu e was: . -. . t o d e s c r ib e th e l i v i n g form s i n which t h i s in n e r p h y sio lo g y ( o f b o u rg e o is s o c ie ty ) m a n ife s ts i t s e l f o u tw a rd ly , t o show i t s r e l a t i o n s a s th e y a p p e a r on th e s u r f a c e , and p a r t l y a l s o to f in d a n o m en clatu re and th e c o rre sp o n d in g a b s t r a c t id e a s f o r th e s e phenom ena.42 40 l b i d », Volume V II, p . 377. 4 lK a rl Marx, A C o n trib u tio n t o th e C r itiq u e o f P o l i t i c a l Economy, t r a n s l a t i o n by N. E . Stone ( C hicago: C h a rle s M• K e rr, 1 9 0 4 ), p* 45 p a s sim . See a ls o Dobb, P o l i t i c a l Economy and C a p ita lis m , p . 39 p a s sim ; and Meek, opT c i t . , p p . 7 9 -8 0 . Also K arl Marx, C a p i t a l , A C r i t i c a l A n a ly sis o f C a p i t a l i s t P ro d u c tio n (Mew York: I n t e r n a t i o n a l P u b lis h e r s , 1 9 4 7 ), "p. 74'• 42Marx, The Theories of Surplus Value, pp. 202-203* 103 I n M a r x * s o p i n i o n t h i s w a s t h e " g r e a t ' ch arm " o f t h e W e a l t h o f N a t i o n s T he h i s t o r i c a l t a s k o f S m it h w a s t o p a v e t h e w ay f o r a c o m p l e t e f o r m u l a t i o n o f l a b o r t h e o r y o f v a l u e b y M a r x . I V . RICARDO*S TREATMENT OF THE LABOR THEORY OF VALUE I t w a s s e e n t h a t t h e W e a l t h o f N a t i o n s p r o v i d e d t h e e m b r y o o f t h e l a b o r t h e o r y o f v a l u e w h i c h w a s t h e p r o d u c t o f t h e d e v e l o p m e n t o f t h e e c o n o m i c s y s t e m . No t h e o r y i s e v e r e n t i r e l y n e w . E v e r y i d e o l o g y ^ i s t h e r e s u l t o f t h e s o c i a l i n t e r a c t i o n s o f d e f i n i t e s o c i a l g r o u p s i n d e f i n i t e s t a g e s o f s o c i a l d e v e l o p m e n t w h i c h h a s e m e r g e d i n e a r l i e r g e n e r a t i o n s a n d h a s b e e n c o r r e c t e d , r e f i n e d , a n d m ad e a p p l i c a b l e t o t h e s o c i a l e x i g e n c i e s o f t h e t i m e . N a t u r e i s t h e p r o o f o f t h i s a r g u m e n t . E v e r y t h i n g s h o u l d g o t h r o u g h a r e a l h i s t o r i c a l e v a l u a t i o n i n o r d e r t o r e a l i z e i t s p e r f e c t i o n . D a r w in p r o v i d e d t h e p r o o f t h a t o r g a n i c b e i n g s , p l a n t s , a n i m a l s , a n d m an h i m s e l f a r e t h e p r o d u c t s o f a p r o c e s s o f e v o l u t i o n g o i n g o n t h r o u g h m i l l i o n s o f y e a r s . ^•3i b i d . , p p . 263-264* ^ I d e o l o g y i s h e re d e fin e d as a system o f id e a s about s o c ie ty . 104 The s o c i a l c o n d i t i o n o f E n g la n d i n t h e t i m e o f S m it h w a s d i f f e r e n t fr o m t h a t o f R i c a r d o 1 1 s . A s | H o l l a n d e r p o i n t e d o u t , i n R i c a r d o * s t i m e t h e r e w a s w i d e s p r e a d r e c o g n i t i o n o f t h e f a c t " t h a t E n g l a n d * s : r e s i s t i n g p o w e r d e p e n d e d u p o n t h e f l o u r i s h i n g c o n d i t i o n ' o f h e r m a n u f a c t u r e s a n d t h e m a i n t e n a n c e , u n d i m i n i s h e d , o f i n d u s t r i a l p r o f i t s T h i s m ade t h e e c o n o m i s t s o f t h e t i m e a s s u m e t h a t p r o f i t s c o n s t i t u t e d b y f a r t h e m o s t i m p o r t a n t s o u r c e o f c a p i t a l a c c u m u l a t i o n . ^ I t w a s J a s s u m e d a l s o t h a t s o c i a l s u r p l u s c o n s i s t e d o f p r o f i t s J r a t h e r t h a n r e n t . T h i s m ade t h e s t r u g g l e b e t w e e n t h e i I | l a n d l o r d s a n d i n d u s t r i a l c a p i t a l i s t s a c u t e o v e r s u c h ; J v i t a l i s s u e s a s t h e C o rn L a w s . The c o n c e r n o f t h e C l a s s i c a l E c o n o m i s t s w a s t o a s s i s t t h o s e l e g i s l a t u r e s I a n d e x e c u t i v e s w ho a im e d t o i n c r e a s e t h e w e a l t h o f ; n a t i o n s . A n d t h e i r m a in t a s k w a s t o p r o p o s e p r i n - I I 1 e i p l e s w h i c h c o u l d m ake d e c i s i o n - m a k i n g e a s i e r t o p o l i c y - j i m a k e r s . To t h e m a j o r i t y o f e c o n o m i s t s o f t h e l a t e | ! e i g h t e e n t h a n d e a r l y n i n e t e e n t h c e n t u r i e s , c a p i t a l ^ J . H . H o l l a n d e r , D a v id R i c a r d o : A C e n t u r y E s t i m a t e ( B a l t i m o r e : The J o h n s R o p k i n s P r e s s , 1 9 1 0 ), P* 1 6 . ^ R i c a r d o , W o r k s , V o lu m e I V , p p . 21, 24, 37, 237* ^ S m i t h , W ealth o f N a tio n s , p p . 395, 477; R ic a rd o , Works, Volume TV,~pTTJTT 105 a c c u m u la tio n was c o n s id e re d a s th e cause o f th e in c re a s e o f w e a lth , and economic id e a s were d esig n ed t o make c l e a r th e p ro c e s s o f accu m u latio n * Sm ith c r i t i c i z e d c e r t a i n s o c i a l o b s ta c le s which h andicap p ed a c c u m u la tio n and s o c i a l a t t i t u d e s which d i s - ; couraged i t . But t o Smith th e a p p r o p r ia tio n o f th e s o c i a l s u r p lu s was re g a rd e d a s a seco n d ary and su b o r d in a te o n e . R ic a rd o , on th e o th e r h an d , was b a s i c a l l y concerned w ith th e problem s o f d i s t r i b u t i o n and ap p ro p r i a t i o n o f th e s o c i a l s u rp lu s among f a c t o r s o f p ro d u c tio n . The problem o f a p p r o p r ia tio n was one w ith j im p o rta n t p o l i t i c a l im p lic a tio n s a t th e tim e , s in c e th e , c o n tro v e rs y o ver such v i t a l is s u e s a s Corn Laws and p a r lia m e n ta r y refo rm was growing i n i n t e n s i t y . To so lv e th e q u e s tio n o f a p p r o p r ia tio n o f s o c i a l s u rp lu s i was th e req u ire m e n t o f a th e o ry o f v a lu e , and l a t e r ! ! ; docum ents show t h a t th e developm ent o f R ic a rd o ’s th e o ry o f v a lu e was c l o s e ly a s s o c ia te d w ith th e s o lu t io n o f t h i s pro b lem . I t i s c o r r e c t t o argue t h a t S m ith ’ s " r e a l m easure" o f v a lu e was no lo n g e r a p p lic a b le to th e problem s o f R ic a rd o ’s tim e . In th e h i s t o r y o f th e developm ent o f man, th e o ry should c o rresp o n d t o new f a c t s . The developm ent o f th e la b o r th e o ry o f v a lu e i n th e tim e o f R icard o w as, t h e r e f o r e , a s s o c ia te d w ith th e emergence o f new f a c t s . R ic a rd o ’s th e o ry o f v a lu e p r i o r to 1&17» P r io r I t o 1S17 R icard o was p r im a r ily concerned w ith th e problem , o f c u rre n c y . In th e f i r s t page o f h i s p am p h let, The High P ric e o f B u llio n (1 $ 1 0 ), he s a id : Gold and s i l v e r , l i k e o th e r com m odities, have an i n t r i n s i c v a lu e , which i s n o t a r b i t r a r y , b u t i s dependent on t h e i r s c a r c i t y , th e q u a n tity o f la b o u r bestow ed i n p ro c u rin g them , and th e v a lu e o f th e . ! c a p i t a l employed i n th e m ines which produce them -^° | In t h i s p e rio d R icard o was concerned w ith th e c a u ses o f th e d e p r e c ia tio n o f th e p ap e r c u rre n c y . H ere, R icard o argued t h a t th e p a p e r c u rre n c y was th e r e p r e s e n t a t i v e o f a ” s ta n d a rd m easure o f v a l u e . ” And up t o 1$15 h e , by and l a r g e , a c c e p te d S m ith ’s dichotom y o f u s e -v a lu e j j and e x c h a n g e -v a lu e . j i The gap betw een Ja n u a ry , l & l l , when R icardo p u b lis h e d h i s R eply t o B o san q u en t, and F e b ru a ry , 1&15, when he p u b lis h e d h i s E ssa y s on th e P r o f i t s o f S to c k , j was f i l l e d w ith c o rre sp o n d e n c e , e s p e c i a l l y w ith M a lth u s. ! The main is s u e was w h eth e r a n y th in g o th e r th a n c u rre n c y t c o u ld in f lu e n c e th e r a t e of exchange. But i n August o f j 1^1349 an im p o rta n t problem had emerged f o r R icardo and J ^ R i c a r d o , W orks, Volume I I I , p . 52. ^•9two key l e t t e r s o f M althus to R icardo a re s t i l l m is s in g - - th o s e t o which R ic a r d o ’ s l e t t e r s o f August 10 and 17 o f 1 B13 a re r e p l i e d . 107 M althus* M althus may have r a is e d th e q u e s tio n , as R ic a rd o f s r e p ly i n d i c a t e s , t h a t s in c e 1793 th e r e was I an in c r e a s e o f c a p i t a l and r a t e o f p r o f i t . This c o n tr a d ic te d th e S m ith ia n l i n e o f argum ent t h a t w ith j ! th e ac cu m u latio n o f c a p i t a l th e r a t e o f p r o f i t d e c l i n e s . M althus p ro b a b ly had argued t h a t th e in c r e a s e o f th e r a t e o f p r o f i t was due to th e in c r e a s e d dem and.5® But R icard o s a id : I have l i t t l e d o ubt t h a t f o r a lo n g p e r io d , d u rin g th e i n t e r v a l you m e n tio n , th e r e h as been, an in c r e a s e d r a t e o f p r o f i t s , b u t i t h a s been accom panied w ith such d ec id ed im provem ents o f a g r i c u l t u r e b o th h e re and a b r o a d ,— f o r th e French r e v o lu ti o n was e x c e e d in g ly fa v o ra b le t o th e in c re a s e d p ro d u c tio n of fo o d , t h a t i t i s p e r f e c t l y r e c o n c ile a b le to my th e o r y . My c o n c lu s io n i s t h a t th e r e h as been a r a p id in c r e a s e o f c a p i t a l which h as been p re v e n te d from showing i t s e l f i n a low r a t e o f i n t e r e s t by new f a c i l i t i e s i n th e p ro d u c tio n o f f o o d .51 From t h i s tim e onward th e problem of th e e f f e c t o f an in c re a s e of c a p i t a l on th e r a t e o f p r o f i t became ! R ic a rd o Ts p rim a ry co n c ern . R icard o w ro te , on March 3, ! 1814: | I contend t h a t th e a re n a f o r th e employment of | new c a p i t a l can n o t in c re a s e i n any c o u n try i n th e J same o r g r e a t e r p ro p o r tio n th a n th e c a p i t a l i t s e l f , 5°Ricardo, Works, Volume II, pp. 318-319. 5-*-Ibid., Volume VI, pp. 94-95* loa u n le s s c a p i t a l be w ithdraw n from th e la n d , u n le s s th e r e be im provem ents i n h u sb an d ry — o r new f a c i l i t i e s be o f fe re d f o r th e in t r o d u c t i o n o f food from f o r e ig n c o u n t r i e s ; — t h a t i n s h o r t i t i s th e p r o f i t s i o f th e farm er w hich r e g u la te th e p r o f i t s o f a l l , o th e r t r a d e s , — and as th e p r o f i t s o f th e farm er j m ust n e c e s s a r i l y d e c re a s e w ith e v e ry a u g m en ta tio n ! o f c a p i t a l employed on th e la n d , p ro v id e d no I im provem ents be a t th e same tim e made i n h u sb a n d ry , j a l l o th e r p r o f i t s m ust d im in ish and t h e r e f o r e th e • r a t e o f i n t e r e s t m ust f a l l . . . . N o th in g , I say , can in c r e a s e th e p r o f i t s p erm an en tly on t r a d e , w ith th e same o r an in c re a s e d c a p i t a l , b u t a r e a l l y c h e ap e r mode o f o b ta in in g f o o d . 52 M althus opposed R icardo i n t h i s argum ent and contended t h a t " th e p r o f i t s o f th e farm er no more r e g u la te th e p r o f i t s o f o th e r t r a d e s , th a n th e' p r o f i t s o f o th e r t r a d e s r e g u la te th e p r o f i t s o f th e f a r m e r . "53 i i | A f te r th e E ssa y s t h i s p r i n c i p l e d is a p p e a re d and i s n o t ! i | t o be found i n th e P r i n c i p l e s . i This c o n tro v e rs y was backed by p u b lic i n t e r e s t i n th e q u e s tio n o f th e Corn Laws. In 1&14 th e s u b je c t 52I b i d . , Volume VI, pp. 103-104* j I 53I b i d . , Volume V I, p . 104* S r a f f a s u g g e s ts t h a t " th e r a t i o n a l fo u n d a tio n o f th e p r i n c i p l e o f th e d e t e r m ining r o l e o f th e p r o f i t s of a g r i c u l t u r e , which i s n e v e r e x p l i c i t l y s t a t e d by R ic a rd o , i s t h a t in a g r i c u l - t u r e th e same commodity, nam ely, co rn form s b o th th e I c a p i t a l . . . and th e p ro d u c t; so t h a t th e d e te r m in a tio n ! o f p r o f i t by th e d if f e r e n c e betw een t o t a l p ro d u c t and c a p i t a l advanced, and a ls o th e d e te r m in a tio n o f th e r a t i o o f t h i s p r o f i t to th e c a p i t a l , i s done d i r e c t l y betw een q u a n t i t i e s o f co rn w ith o u t any q u e s tio n o f v a l u a t i o n ," i b i d . , Volume I , p . x x x i. I 109 t o f th e p r o f i t was th e m ain theme i n th e co rresp o n d en ce o f R icard o and M a lth u s. R icardo w rote to M althus: The r a t e o f p r o f i t s and i n t e r e s t must depend on th e p r o p o rtio n o f p ro d u c tio n to th e consum ption n e c e s s a ry t o such p r o d u c tio n ,— t h i s a g a in e s s e n t i a l l y depends upon th e cheapness o f p r o v is io n s , which i s a f t e r a l l , w h atev er i n t e r v a l s we may be w illi n g t o a llo w , th e g r e a t r e g u l a t o r o f th e wages o f l a b o u r . 54 To t h i s c h a lle n g e , M althus r e p l i e d : T his r a t e o f p r o d u c tio n , o r more d e f i n i t e l y sp eak in g th e p r o p o r tio n o f p ro d u c tio n to th e consum ption n e c e s s a ry t o such p r o d u c tio n , seems to be d eterm in ed by th e q u a n tity o f accum ulated c a p i t a l compared w ith th e demand f o r th e p ro d u c ts o f c a p i t a l , and n o t by th e mere d i f f i c u l t y and expense o f p ro d u cin g c o r n . 55 ; F u rth e rm o re , M althus arg u ed : i I do not say t h a t r e s t r i c t i o n s upon th e im p o rta - i t i o n o f f o r e ig n co rn w i l l r a i s e p r o f i t s , i f th e y a re a tte n d e d w ith a d im in u tio n o f c a p i t a l . But I say t h a t th e y m ust n e c e s s a r i l y be a tte n d e d w ith a d im in u tio n o f c a p i t a l , and t h e r e f o r e t h a t th e y must te n d to r a i s e r a t h e r th a n lo w er p r o f i t s . You seem to th in k t h a t th e r e i s no n e c e s s a r y c o n n e c tio n betw een r e s t r i c t i o n s upon im p o r ta tio n and a re d u e - ! t i o n o f c a p i t a l . I th in k on th e c o n tra ry t h a t j th e r e i s an a b s o lu te l y n e c e s s a ry c o n n e c tio n , and t h a t i t i s p r e c i s e l y owing to t h i s c o n n e c tio n , t h a t p r o f i t s do n o t f a l l . . . . The p r o p o r tio n o f demand t o th e su p p ly w hich i s alw ays th e main p o in t m , q u e s tio n , a s d e te rm in in g p r i c e s and p r o f i t s , may i c o n tin u e t o in c r e a s e as i t does i n a l l c o u n tr ie s | th e c a p i t a l o f which i s r e t r o g r a d e . In such 5^-Ibid., Volume V I, p . 10$* 5 5 i b i d ., Volume V I, p . l i i ! no c o u n tr ie s th e e f f e c t i v e demand compared w ith th e su p p ly i s p erm a n en tly g r e a t , and th e p r o f i t s o f sto c k v e ry h i g h . 56 To t h i s q u e s tio n R icardo r e p l i e d : | E f f e c tiv e demand can not augment o r lo n g c o n tin u e as s t a t i o n a r y w ith a d im in is h in g c a p i t a l ; . . . becau se p r o f i t s w i l l augment u n d er a d im in u tio n o f c a p i t a l and p ro d u c e , i f demand t h o ’ d im in ish e d does n o t d im in ish so r a p i d l y as c a p i t a l and p ro d u c e . For th e o p p o s ite re a s o n p r o f i t s w i l l d im in ish when j c a p i t a l and produce in c r e a s e . . . . (A lso) th e demandj m ust n e c e s s a r i l y depend on th e p r i c e a t which th e y j can be a f f o r d e d , and th e p r i c e o f a l l com m odities m ust in c re a s e i f th e p r ic e o f corn be i n c r e a s e d . 57 < | The l e t t e r s o f t h i s p e r io d s u p p lie d two r e s u l t s . One, th e w ell-know n d e b a te o f th e Law o f M arkets was ! i n i t i a t e d .5^ S eco n d ly , th e a c c u m u la tio n o f o r d im in u tio n f I | o f c a p i t a l would a f f e c t p r o f i t th ro u g h i t s e f f e c t on j I ,T th e s t a t e o f th e c u l t i v a t i o n o f l a n d . " 5 9 I ! T his c o n tro v e rs y (which ended i n F e b ru a ry , 1$15 | w ith th e p u b l i c a t i o n o f M a lth u s ’ two pam phlets on r e n t j and th e Corn Laws and R ic a rd o ’ s E ssa y s on P r o f i t ) c u l- ! | m in ated i n R ic a rd o ’ s s ta te m e n t: 5 6 l b i d . , Volume V I, p p . 1 1 6 -1 1 ?. 5?I b i d . , Volume VI, p . 114* 5 ^ I b i d ♦, Volume VI, p . 162 p a s s im . i I 59ibid. Volume VI, pp. 130, 131, 132, 133, 119- Ill i A ccum ulation o f c a p i t a l h as a te n d en cy to low er p r o f i t s . Why? Because e v e ry a c c u m u la tio n i s a tte n d e d w ith in c re a s e d d i f f i c u l t y i n o b ta in in g fo o d , u n le s s i t i s accom panied w ith improvem ent i n a g r i c u l t u r e ; i n which case i t h a s no te n d e n c y to d im in ish p r o f i t s . I f th e r e were no in c re a s e d d i f f i c u l t y , p r o f i t s would n e v e r f a l l , b ecau se th e re a re no o th e r l i m i t s to th e p r o f i t a b l e p ro d u c tio n o f m an u factu re b u t th e r i s e o f w ages. I f w ith e v e ry a c c u m u la tio n o f c a p i t a l we co u ld ta k e a p ie c e o f f r e s h f e r t i l e la n d to our I s la n d , p r o f i t s would n ev er f a l l . . . . I t ap p e a rs to me t h a t th e con s i d e r a t i o n of money v a lu e may^'be th e fo u n d a tio n of o ur d if f e r e n c e on t h i s p o i n t . 60 Up t o t h i s p o in t R icard o d is c u s s e d th e r e l a t i o n betw een th e law o f d im in is h in g r e t u r n s i n a g r i c u l t u r e and th e j f l u c t u a t i o n s o f th e r a t e o f p r o f i t . But i n th e E ssays on P r o f i t s , which came out th r e e weeks a f t e r th e p u b lic a t i o n o f M a lth u sr I n q u iry i n to R e n t, he to o k r e n t in t o j h i s c o n s id e r a ti o n . T h ere, he a rg u e d , when r e n t in c re a se s,, p r o f i t s would f a l l . The second s ta g e o f h i s argum ent a s s o c ia te d th e v a lu e o f a commodity w ith th e d i f f i c u l t y : ! ! o r f a c i l i t y o f i t s p r o d u c tio n . i | The exchangeable v alu e o f a l l com m odities, r i s e s j a s th e d i f f i c u l t i e s o f t h e i r p ro d u c tio n i n c r e a s e . 1 I f th e n new d i f f i c u l t i e s o cc u r i n th e p ro d u c tio n o f , c o rn , from more la b o u r b ein g n e c e s s a ry , w h ils t no ! more la b o u r i s r e q u ir e d t o produce g o ld , s i l v e r , j c l o t h , l i n e n , &c. th e exchangeable v a lu e o f co rn I ^ I b i d . , Volume V I, p . 162. See a ls o i b i d . , Volume I , p . 2<§9» T T I f th e n e c e s s i t i e s of th e workman could be in c re a s e d c o n s ta n tly w ith th e same f a c i l i t y th e r e co u ld be no perm anent a l t e r a t i o n i n th e r a t e o f p r o f i t s o r w a g e s.” See a ls o i b i d . , Volume I I I , p . 1$ and fo o tn o te 2 o f th e same p a g e . 112 w i l l n e c e s s a r i l y r i s e , as compared w ith th o s e t h i n g s . On th e c o n tr a r y , f a c i l i t i e s i n th e p ro d u c tio n o f I c o rn , o r o f any o th e r commodity o f w h atev er k in d , : which s h a l l a f f o r d th e same produce w ith l e s s l a b o u r , . w i l l lo w er i t s exch an g eab le v a lu e . Thus we see t h a t , im provem ents i n a g r i c u l t u r e , or i n th e im plem ents o f h u sb a n d ry , lo w er th e exchangeable v a lu e o f co rn ; ; im provem ents i n th e m achinery connected w ith th e m an u factu re o f c o tto n , low er th e exchangeable v a lu e o f c o tto n goods; and im provem ents i n m in in g , o r th e d is c o v e ry o f new and more abundant m ines o f th e j p re c io u s m e ta ls , low er th e v a lu e o f g old and s i l v e r , o r which i s th e same t h i n g , r a i s e s th e p r i c e o f a l l o th e r com m odities* W herever c o m p e titio n can have i t s ifu ll e f f e c t , and th e p r o d u c tio n o f th e commodity be not li m i t e d by n a t u r e , as i n th e case w ith some w in e s, th e d i f f i c u l t y o r f a c i l i t y o f t h e i r pro d u c t i o n w i l l u l t i m a t e l y r e g u la te t h e i r exchangeable v a l u e .61 T h is p a s s a g e , o r a s a whole E ssay s on P r o f i t , m ight be c o n s id e re d as a t r a n s i t i o n a l l i n k betw een R i c a r d o ^ o ld j p r o p o s itio n t h a t " i t i s th e p r o f i t s o f th e farm er which ! r e g u la te th e p r o f i t s o f a l l o th e r t r a d e s , ” and th e one j p re s e n te d i n th e f i r s t e d i t i o n o f th e P r in c i p l e s where | I j he m a in ta in e d t h a t p r o f i t s depend upon th e " p ro p o rtio n o f th e an n u al la b o u r o f th e c o u n try (which) i s d evoted to th e su p p o rt o f th e l a b o u r e r s ."62 T his was th e embryo o f th e th e o r y o f p r o f i t i n te rm s o f th e la b o r th e o ry o f ; v a l u e . 63 T his h e lp e d him t o p ro c la im u n d e rs ta n d in g o f 6 l l b i d . , Volume IV, p p . 1 9 -2 0 . — 62l b i d . t Volume I , p . 49; a ls o Volume I I , p p . 6 1 -6 2 . 63i b i d . , Volume I , p* x x x i i . See S r a f f a 's comment. ’’th e most d i f f i c u l t , and p erh ap s th e most im p o rta n t t o p i c o f P o l i t i c a l Economy, namely th e p ro g re s s o f a c o u n try i n w e a lth and th e law s by which th e in c r e a s in g produce i s d i s t r i b u t e d . ”64 The Theory o f Value i n th e P r i n c i p l e s , F i r s t E d iti o n and T h ird E d itio n R ic a rd o 1s c r i t i q u e o f Adam Smith s t a r t e d i n th e f i r s t p a ra g ra p h o f th e f i r s t c h a p te r o f th e f i r s t e d i t i o n o f th e P r i n c i p l e s when he s a id : The v a lu e o f a commodity, o r th e q u a n tity o f any o th e r commodity f o r which i t w i l l exchange, depends on th e r e l a t i v e q u a n t ity o f la b o u r which i s n e c e s s a ry f o r i t s p r o d u c tio n , and not on th e g r e a t e r o r l e s s com pensation which i s p a id f o r t h a t l a b o u r . 65 Adam Sm ith, who so a c c u r a te ly d e fin e d th e o r i g i n a l so u rce o f exchangeable v a lu e , and who was bound i n c o n s is te n c y t o m a in ta in , t h a t a l l th in g s became more o r l e s s v a r ia b le i n p r o p o rtio n as more o r l e s s la b o u r was bestow ed on t h e i r p ro d u c tio n , h a s h im s e lf e r e c te d a n o th e r s ta n d a rd m easure o f v a lu e , and speaks o f th in g s b e in g more o r l e s s v a lu a b le , i n p ro p o r tio n a s th e y w i l l exchange f o r more o r l e s s o f t h i s s ta n d a rd m e a su re . Sometimes he speaks of c o rn , a t o th e r tim e s o f la b o u r , a s a s ta n d a rd m easure; not th e q u a n tity o f la b o u r bestow ed on th e p ro d u c tio n o f any o b je c t, b u t th e q u a n t ity which i t can command i n th e m ark et; a s i f th e s e were two e q u iv a le n t e x p r e s s io n s , and as i f b ecause a man’ s la b o u r had become doubly e f f i c i e n t , and he could th e r e f o r e produce tw ic e th e 64 i b i d . t Volume V II, p . 24 i b i d . , Volume I , p . 11. 114 q u a n t ity o f a commodity, he would n e c e s s a r i l y r e c e iv e " tw ic e th e form er q u a n t ity i n exchange , f o r i t .66 A c c o rd in g ly , th e r e was an in c o n s is te n c y i n Adam S m ith Ts argum ent o f th e th e o ry of v a l u e . I f la b o r n ev e r v a r i e s i n v a l u e , ^ th e n commandable la b o r can n o t be re g a rd e d a s a m easure o f v a lu e a s Smith m ain ta in ed * I f th e v a lu e o f a commodity depends on th e commandable l a b o r , th e r e - fo re v a lu e should change w ith th e f l u c t u a t i o n s o f th e com pensations p a id t o th e l a b o r e r . But i f th e v a lu e of la b o r i t s e l f i s i n v a r i a b l e , as Adam Sm ith s a i d , th e n j th e v a lu e o f th e commodity w i l l v a ry w ith changes i n 1 I i wages p a id to th e l a b o r e r s . J N ext, B icard o c r i t i c i z e d Smith in t h i s p a ssa g e : I I t w i l l be seen by th e e x t r a c t w hich I have made from W ealth o f N a tio n s , t h a t though Adam Smith f u l l y re c o g n iz e d tKe p r i n c i p l e , t h a t th e p r o p o r tio n betw een) th e q u a n t i t i e s o f la b o u r n e c e s s a ry f o r a c q u ir in g d i f - ; f e r e n t o b j e c t s , i s th e o nly c irc u m sta n c e which can i a f f o r d any r u l e f o r our exchanging them f o r one ; a n o th e r, y e t he l i m i t s i t s a p p l i c a t i o n t o " th a t e a r l y ■ and rude s t a t e o f s o c i e t y , ” which p re c e d e s both th e ac cu m u latio n o f s to c k and th e a p p r o p r ia ti o n o f la n d ; I 66i b i d . , Volume I , p p . 13-14* 6 7 g mi t h , W ealth o f N a tio n s , p . 3 5 . j 6^Sm ith s a id , "Labour a lo n e , t h e r e f o r e , n ev er j v a ry in g i n i t s own v a lu e , i s alone th e u ltim a te and r e a l j s ta n d a rd by which th e v a lu e o f a l l com m odities can a t a l l tim e s and p la c e s be e s tim a te d and com pared. I t i s | t h e i r r e a l p r i c e ; money i s t h e i r nom inal p r i c e , ” i n I W ealth o f N a tio n s , p . 33* ! 115 as i f , when p r o f i t s and r e n t were t o be p a id , th e y would have some in f lu e n c e on th e r e l a t i v e v a lu e of com m odities, in d e p en d en t o f th e mere q u a n t i t y o f la b o u r t h a t was n e c e s s a ry t o t h e i r p r o d u c tio n . Adam Sm ith h as nowhere an a ly ze d th e e f f e c t s o f th e a c c u m u la tio n o f c a p i t a l and th e a p p r o p r ia tio n o f la n d , on r e l a t i v e v a lu e . I t i s o f im p o rta n c e , t h e r e f o r e , to d eterm in e how f a r th e e f f e c t s which a re avowedly produced on th e exchangeable v a lu e o f com m odities, by th e co m p arativ e q u a n tity o f la b o u r bestow ed on t h e i r p ro d u c tio n , a re m o d ifie d o r ; a l t e r e d by th e ac cu m u latio n o f c a p i t a l and th e j payment o f r e n t .69 Sm ith arg u e d , as was s a id a b o v e ,7® t h a t i n modern tim e s i i th e v a lu e o f a commodity depends on th e nn a t u r a l p r i c e . ” j i R ic a rd o , on th e o th e r h an d , contended t h a t th e manner i n which th e p ro cee d s o f a s a le o f a commodity were d i s t r i b u t e d t o th e s o c i a l c l a s s e s h as no re le v a n c e t o i th e v a lu e o f th e commodity. R icard o argued t h a t th e v a lu e o f a commodity was d eterm in ed by th e la b o r tim e J n e c e s s a ry to produce i t . ^ R icard o s a id : i 69R iGardo, W orks, Volume I , p p . 22-23 f o o tn o te . : 7^See above pages 101-103, on Sm ith*s e v a l u a t i o n . ! James M ill commented on th e f i r s t d r a f t o f th e i P r i n c i p l e s , w r i tin g t o R ic a rd o , "Your e x p la n a tio n o f th e g e n e ra l p r i n c i p l e t h a t q u a n tity o f la b o u r i s th e cause and m easure o f exchangeable v a lu e . . . i s b o th s a t i s f a c t o r y and c l e a r . Your e x p o s itio n and a rg u m e n ta tio n to ! show, i n o p p o s itio n t o A. Sm ith, t h a t p r o f i t s o f sto c k ! do n o t d is t u r b t h a t law , a re lu m in o u s. So a re th e expo s i t i o n and arg u m e n ta tio n t o show t h a t r e n t a ls o o p e ra te s no such d i s t u r b a n c e ,” i n R ic a rd o , Works, Volume VII* p . 93. 116 I A ll th e im plem ents n e c e ss a ry to k i l l th e b e a v e r and d e e r m ight b elong t o one e l a s s o f men, and th e la b o u r employed i n t h e i r d e s t r u c t i o n m ight be f u r - | n ish e d by a n o th e r c l a s s ; s t i l l , t h e i r com parative • p r i c e s would be i n p r o p o rtio n to th e a c tu a l la b o u r ; b esto w ed , b o th on th e fo rm a tio n o f th e c a p i t a l , and on th e d e s t r u c t i o n o f th e a n im a ls . Under d i f f e r e n t i c irc u m sta n c e s o f p le n ty o r s c a r c i t y o f c a p i t a l , as compared w ith la b o u r, u nder d i f f e r e n t c irc u m sta n c e s o f p le n ty o r s c a r c i t y o f th e food and n e c e s s a r ie s e s s e n t i a l t o th e su p p o rt of men, th o s e who fu rn is h e d ■ an eq u al v a lu e o f c a p i t a l f o r e i t h e r one employment o r f o r th e o th e r , m ight have a h a l f , a f o u r t h , o r an e ig h th o f th e produce o b ta in e d , th e rem ain d er b e in g p a id a s wages t o th o s e who f u rn is h e d th e la b o u r; y e t t h i s d i v i s i o n could n o t a f f e c t th e r e l a t i v e v a lu e of th e s e com m odities, s in c e w h eth er th e p r o f i t s o f c a p i t a l were g r e a t e r o r l e s s , w h eth e r th e y were 5 0 , 20, o r 10 p e r c e n t, o r w h eth er th e wages of j la b o u r were h ig h or low , th e y would o p e ra te e q u a lly ; on b o th em ploym ents.72 i The im p lic a tio n s o f t h i s o fte n -q u o te d p a ssa g e a r e : f i r s t , ! i i t h a t a change i n th e p ro p o rtio n s i n which th e produce ' I ! j was d iv id e d up betw een p r o f i t s and wages would n o t a f f e c t j I ! th e r e l a t i v e v a lu e o f com m odities. Second, th e r i s e i n th e p r ic e o f co rn does n o t b r in g a b o u t a g e n e ra l r i s e of I p r i c e s . Or, a r i s e i n wages does not mean a r i s e i n th e j p r ic e o f a l l com m odities. T h ird , Adam S m ith Ts c o n te n tio n ' I t h a t th e la b o r th e o ry o f v a lu e was a p p lic a b le o n ly to I p r im itiv e com m unities, and n o t to modern tim e s , was u t t e r l y r e j e c t e d . 7^Ibid., Volume I, p. 24* 117 At one tim e i t was b e lie v e d t h a t R icard o had abandoned th e la b o r th e o ry o f v a l u e , as e x p la in e d i n th e t h i r d e d i t i o n o f th e P r i n c i p l e s * I t was argued t h a t R ic a rd o , upon th e p u b lic a t io n o f th e t h i r d e d i t i o n , had r e a l i z e d t h a t la b o r th e o ry o f v a lu e was in a d e q u a te and u n r e l i a b l e t o e x p la in th e s t r u c t u r e o f th e th e o ry o f d i s t r i b u t i o n * The o r i g i n f o r t h i s c o n te n tio n had been R ic a rd o ’ s l e t t e r t o M cculloch d a te d June 13, 1820.73 I t i s i n t e r e s t i n g t o n o te t h a t H* H o lla n d e r was th e f i r s t who d iss e m in a te d th e v ie w * ^ R ic a rd o ’ s r e t r e a t was e s t a b l i s h e d when Cannan claim ed t h a t , on th e tre a tm e n t o f th e e f f e c t o f c a p i t a l on v a lu e , R icard o "was weak from th e b e g in n in g , and he weakened more and more as tim e went 73I b id , Volume V II, p p . 191-197* See e s p e c i a l l y p . 194* Schum peter a s s e r t s t h a t , ’’P ro f e s s o r K night su p p o rts i t ( t h a t th e problem o f d i s t r i b u t i o n was not approached a s a problem o f v a l u a t i o n by c l a s s i c a l econ o m is ts ) , by a h ig h ly s i g n i f i c a n t p assag e from a l e t t e r o f R icard o t o M cCulloch, where th e form er a v e rs i n so many words t h a t th e r e l a t i v e d i s t r i b u t i v e s h a re s a re not e s s e n t i a l l y co n n ected w ith th e d o c tr in e o f v a lu e , . . . th e f a c t t h a t c a p i t a l i s t d i s t r i b u t i o n i s a v a lu e phe nomena were not c l e a r l y seen even by R ic a rd o . They were seen by M arx,” i n Joseph Schum peter, H is to r y o f Economic A n a ly sis (New York: Oxford U n iv e r s ity P r e s s ,“ T9$"4), p . 543 and f o o tn o te . M. H. Dobb h as shown t h a t ’’M arx’ s ex a m in a tio n o f th e problem ” was ”an a m e n d a tio n ,” and e x te n s io n o f R ic a rd ia n d o c t r i n e , ” i n P o l i t i c a l Economy and C a p ita lis m , p* 94* 74h . H o lla n d e r, ’’The Development o f R ic a rd o ’ s Theory o f V a lu e ,” Q u a rte rly J o u r n a l o f Econom ics, XVIII (A ugust, 1 9 0 4 ), 455-4911 l i d , on and c r i t i c i s m m u l t i p l i e d . ” Mr. S r a f f a has s t a t e d : . . . an e x a m in a tio n o f th e changes i n th e t e x t i n th e l i g h t o f th e new ev id en ce le n d s no su p p o rt t o t h i s view [ R ic a r d o 's r e t r e a t ] : th e th eo ry , o f e d i t i o n th r e e a p p e a rs t o be th e same, i n ‘ e sse n c e and i n em phasis, as t h a t o f e d i t i o n o n e . 76 I t i s t o be conceded t h a t th e m ain a l t e r a t i o n in th e t h i r d e d i t i o n o f th e P r i n c i p l e s was in terw o v en w ith R ic a rd o Ts engagement w ith th e problem o f d e f in in g th e " i n v a r i a b l e ” v a lu e . Soon a f t e r re a d in g M althus* P r i n c i p l e s , which ap p eared i n A p ril o f 1620, R icardo r e a l i z e d t h a t h i s e x p la n a tio n o f t h i s problem i n th e f i r s t and second e d i tio n s o f h i s own P r i n c i p l e s was j d e f i c i e n t , b ecause he had not ta k e n in t o c o n s id e r a tio n j th e " v a r i e t y o f c irc u m s ta n c e s ” w hich r e p r e s e n t a mean ; betw een th e two extrem es o f h ig h and low " p ro p o rtio n s " and " d u r a b i l i t i e s " o f c a p i t a l . 77 Most o f th e a l t e r a t i o n s j 7^Edwin Cannan, A Review o f Economic Theory (London: P. S. King and Son, L im ite d , 1 ^2 9 ), p . 185 • 7& Ricardo, W orks, Volume I , p p . x x x i i - x x x v i i i • 77R icardo s a id , " I t a p p e a rs , to o , t h a t in p ro p o r tio n to th e d u r a b i l i t y o f c a p i t a l employed i n any ; k in d o f p ro d u c tio n , th e r e l a t i v e p r ic e s o f th o s e com- ; m o d itie s on which such d u ra b le c a p i t a l i s em ployed, w i l l j v a ry in v e r s e ly a s wages . . . on th e c o n tr a r y , th o se w hich a re produced c h i e f l y by la b o u r w ith l e s s f ix e d c a p i t a l , or w ith f ix e d c a p i t a l , o f a l e s s d u ra b le c h a r a c t e r th a n th e medium i n which p r ic e i s e s tim a te d , w i l l r i s e a s wages r i s e , and f a l l a s wages f a l l , " in i b i d . , Volume I , p . 43* 119 i n th e t h i r d e d i t i o n o f th e P r i n c i p l e s a re th e r e s u l t o f R ic a rd o Ts developm ent o f t h i s i d e a . j R ic a rd o ’ s con cep t o f a b s o lu te v a lu e . There a re i | s ig n s i n th e t h i r d e d i t i o n o f R ic a rd o ’s P r i n c i p l e s i . ! which i n d i c a t e h i s i n t e r e s t t o d e f in e th e a b s o lu te J v a l u e .7^ I t was R ic a rd o ’ s in c r e a s in g te n d e n c y t o i d e n t i f y th e a b s o lu te v a lu e of a commodity w ith th e ; I q u a n tity o f la b o r embodied i n i t . The d is c o v e ry and i p u b lic a t io n o f R ic a rd o ’ s A bsolute Value and E xchangeable j V alue, upon w hich R icard o was w orking d u rin g th e l a s t ! i weeks o f h i s l i f e , i s an in v a lu a b le c o n t r ib u t io n o f S r a f f a and Dobb t o academ ic c i r c l e s . ! In a l e t t e r to M a lth u s, R icard o s a id : N othing i s t o me so l i t t l e im p o rta n t as th e f a l l j and r i s e o f com m odities o f money, th e g r e a t e n q u ir ie s i on which t o f i x o u r a t t e n t i o n a re th e r i s e o r f a l l j | o f c o rn , la b o u r , and com m odities i n r e a l v a l u e . That I j i s t o say th e in c re a s e o r d im in u tio n o f th e q u a n tity ! I o f la b o u r n e c e s s a ry to r a i s e c o rn , and to m an u factu re | com m odities. I t may be c u rio u s to develop th e e f f e c t j o f an a l t e r a t i o n o f r e a l v a lu e on money p r i c e , b u t mankind a re only r e a l l y i n t e r e s t e d i n making la b o u r I p r o d u c tiv e , i n th e enjoym ent o f abundance, and i n a 1 ; good d i s t r i b u t i o n o f th e p ro d u c e , o b ta in e d by c a p i t a l . i I ? % b i d . t Volume I , p p . 44, 45, 46, 53, 63, and ; ! e s p e c i a l l y 2&4-2$5; Volume IX, p p . 2, 3 $ , $3, 100. Here ' J he s a id , "to o much im p o rtan ce i s a tta c h e d t o money- i 1 f a c i l i t y o f p ro d u c tio n i s th e g r e a t and i n t e r e s t i n g p o i n t ." ; 120 and i n d u s t r y . I can not h e lp th in k in g t h a t i n your s p e c u la tio n s you suppose th e s e much to o c l o s e ly co nnected w ith money p r i c e . 79 T h i s g r o w i n g i n t e r e s t o f R i c a r d o o f t h e p r o b le m o f v a l u a t i o n w a s c o n n e c t e d w i t h h i s s h a r p o p p o s i t i o n t o d i f f e r e n t t h e o r i e s o f v a l u e . I n t h e f o l l o w i n g p a s s a g e R i c a r d o s t a t e d t h e c r u x o f t h e p r o b le m s p e c i f i c a l l y : I m ay b e a s k e d w h a t I m ean b y t h e w o rd v a l u e , a n d b y w h a t c r i t e r i o n I w o u ld j u d g e w h e t h e r a c o m m o d ity h a d o r h a d n o t c h a n g e d i t s v a l u e . I a n s w e r , I k n ow n o o t h e r c r i t e r i o n o f a t h i n g b e i n g d e a r o r c h e a p b u t b y t h e s a c r i f i c e s o f l a b o u r m ade t o o b t a i n i t . E v e r y t h i n g i s o r i g i n a l l y p u r c h a s e d b y l a b o u r — n o t h i n g t h a t h a s v a l u e c a n b e p r o d u c e d w i t h o u t i t , a n d t h e r e f o r e i f a c o m m o d it y s u c h a s c l o t h r e q u i r e d t h e l a b o u r o f t e n m en f o r a y e a r t o p r o d u c e i t a t o n e t i m e , a n d o n l y r e q u i r e s t h e l a b o u r o f f i v e f o r j t h e sam e t i m e t o p r o d u c e i t a t a n o t h e r i t w i l l b e t w i c e a s c h e a p . Or i f t h e l a b o u r o f t e n m en s h o u l d s t i l l b e r e q u i r e d t o p r o d u c e t h e sam e q u a n t i t y o f j c l o t h b u t f o r 6 m o n t h s i n s t e a d o f t w e l v e c l o t h w o u ld i f a l l i n v a l u e . T h a t t h e g r e a t e r o r l e s s q u a n t i t y o f l a b o u r w o r k e d u p i n c o m m o d i t i e s c a n b e t h e o n l y c a u s e o f t h e i r a l t e r a t i o n i n v a l u e i s c o m p l e t e l y m ade o u t a s s o o n a s we a r e a g r e e d t h a t a l l c o m m o d i t i e s a r e t h e p r o d u c e o f l a b o u r a n d w o u l d h a v e no. v a l u e b u t f o r t h e l a b o u r ! e x p e n d e d u p o n them.SO ' , The e v a lu a tio n o f R i c a r d o ^ th e o ry o f v a l u e . R icard o should be e v a lu a te d i n te rm s o f th e advance t h a t ! i 7 9 i b i d ., Volume IX, p . &3• The n o te s on A bsolute Value and Exchangeable V alue were p u b lis h e d f o r th e f i r s t tim e i n W orks, Volume IV,' p p . 35&-412. 3 °I b id . , Volume IV, p. 397* 121 he made beyond S m ith ’ s fo rm u la tio n o f th e th e o ry o f v a lu e . The advance which R icardo made beyond Sm ith was th e r e c o g n itio n o f th e f a c t t h a t " in t h a t e a r l y and rude s t a t e o f s o c i e t y , ” a s w e ll a s modern tim e s , embodied la b o r r a t i o s sh o u ld r e g u la te th e exchange r a t i o . The f a c t t h a t embodied la b o r r a t i o s were n o t in norm al c a se s s t r i c t l y p r o p o r tio n a te t o exchange r a t i o s ap p eared to R icard o as a ”c o n t r a d i c t i o n ”— a problem which hampered R ic a rd o ’ s f u r t h e r p r o g r e s s . But t h i s problem does not i n d i c a t e th e inadequacy o f th e th e o r y o f v a lu e ; r a t h e r i t i s an i n d i c a t i o n o f ’’th e inadequacy o f [him ] R icardo who h as a tte m p te d t o e x p la in i t . ”^ -* - The fundam ental e r r o r i n R ic a r d o ’ s re a s o n in g was: At a p o in t .when he was o n ly a s y e t concerned in e x p la in in g 1 v a lu e , and was t h e r e f o r e as y e t only d e a lin g w ith th e commodity, he su d d en ly b u r s ts i n w ith th e g e n e ra l r a t e o 'f p r o f i t and a l l th e con d i t i o n s which a r i s e from th e h ig h e r developm ent o f c a p i t a l i s t p ro d u c tiv e r e l a t i o n s . I n s te a d o f assum ing t h i s g e n e ra l r a t e o f p r o f i t i n ad y an ce, R icard o should r a t h e r have in v e s tig a te d how f a r i t s e x is te n c e i s i n any way c o n s is te n t w ith th e d e te r m in a tio n o f v a lu e by la b o u r tim e ; and he would th e n have found t h a t in s te a d o f b e in g con s i s t e n t w ith i t , prim a f a c i e i t c o n t r a d ic ts i t , and ^ I b i d , Volume V II, p . 142. ^ M a rx , The T h e o rie s o f S u rp lu s V alue, p . 251* 122 i t s e x is te n c e h as t h e r e f o r e to be e x p la in e d th rough a number of in te rm e d ia ry s ta g e s — an e x p la n a tio n w hich i s som ething v e ry d i f f e r e n t from m erely in e lu d in g i t u n d er th e law o f v a l u e . $3 I f th e ex p a n sio n o f p ro d u c tio n and th e ex p a n sio n j o f th e m a rk e t, a t th e c r i s i s s ta g e o f a b u s in e s s c y c le , i s v i s u a l i z e d , i t i s a p p a re n t t h a t th e m arket expands more slo w ly th a n p ro d u c tio n , and a moment comes when th e m ark et i s to o narrow f o r p ro d u ctio n * O v erp ro d u c tio n , th e n , i s th e m a n if e s ta tio n o f an unexpanded m a rk e t. Had th e e x p a n sio n o f th e m arket k e p t pace w ith th e e x te n s io n o f p ro d u c tio n , th e r e would be no o v e rp ro d u c tio n o r c r i s e s I t i s a l s o t r u e t h a t p ro d u c tio n and th e m arket a re two I in d e p e n d e n t f a c t o r s ; th e ex p an sio n o f one may not c o r- I respond w ith th e ex p a n sio n o f th e o th e r . R ic a rd o , r e ly in g on h i s th e o ry o f v a lu e , d e n i e d , ^ i n c o n t r a s t to S m i t h , ^5 th e n e c e s s ity f o r an ex p an sio n o f th e m arket to c o rre sp o n d w ith th e ex p a n sio n o f p ro - i d u c tio n and growth o f c a p i t a l . R icard o supposed t h a t ! ^3i b i d . , p . 212. Mr. Meek h a s commented t h a t , | "The im p o rta n t q u a l i t y which was la c k in g i n R ic a rd o , ■ b u t ab u n d a n tly p r e s e n t in Marx, was a p ro p e r a p p r e c ia tio n I o f th e f a c t t h a t problem s o f economic th e o ry . . • were ! n o t o n ly problem s o f lo g ic b u t a ls o problem s o f h i s t o r y , " i n ££* c i t . , p . 120. i . j ^ R i c a r d o , W orks, Volume I , pp. 293-296* ^5gm ith, W ealth o f N a tio n s , p p . &$-90, 165, 352-353, 4 2 2 . a l l c a p i t a l a v a i l a b l e i n a c o u n try could be a d v a n ta g e o u sly employed i n th e same c o u n try . The re a s o n t h a t R icard o supposed sp o n tan eo u s ex p a n sio n o f th e m arket as th e r e s u l t o f th e ex p a n sio n o f th e p ro d u c tio n can be e x p lo re d a s fo llo w s : F i r s t , he i d e n t i f i e d v a lu e w ith th e " c o s t" o f p ro d u c tio n , and " a d d e d -v a lu e ” w ith p r o f i t . T h e re fo re , th e s e m is ta k e n view s made him p ro c la im t h a t i n th e exchange o f com m odities o f eq u a l v alu e p r o f i t i s r e a l i z e d . Second, was h i s e rro n e o u s th e o ry o f money. R icard o alw ays r e tu r n e d to th e id e a t h a t th e r a t e of p r o f i t i s not a f f e c t e d by changes i n th e p r i c e s o f com m odities a f f e c t e d by changes i n th e v a lu e o f money R icard o m is ta k e n ly b e lie v e d t h a t a f a l l i n th e p r ic e of th e commodity, due to a r i s e i n th e v a lu e o f money, " w ill n o t be a tte n d e d w ith any d im in u tio n in th e money income o f th e p r o d u c e r s A s was shown by M a lth u s,^ ^ t h i s f a l l i n th e "money income" o f th e p ro d u c e r r e s u l t s i n a ^ R i c a r d o , W orks, Volume I , p p . 50-51* ^ I b i d . , Volume I , p . 427. ^ T . R. M a lth u s, P r in c ip le s o f P o l i t i c a l Economy (second e d i t i o n ; London: 1 tf. P ic k e rin g , 1&36), p . '364. 124 l o s s which b r in g s ab o u t a c r i s i s . T h ird , he assumed a g e n e ra l r a t e o f p r o f i t which p re su p p o se s, t o p u t i t in M arx’ s te rm in o lo g y , a c o n s ta n t " o rg a n ic co m p o sitio n o f c a p i t a l , " ( c / v ) , and a c o n s ta n t " r a t e o f s u rp lu s v a l u e ," ( s / v ) . Marx has shown t h a t I "w ith th e same r a t e o f s u r p lu s v a lu e th e r a t e o f p r o f i t would n e c e s s a r i l y be v ery d i f f e r e n t in th e v a rio u s b ra n c h e s o f production."^ In a w orld i n which th e l i m i t to p ro d u c tio n i s p r o d u c e r ’s p r o f i t , p ro d u c e rs t r y to s e l l t h e i r com m odities a t th e same p r ic e o f p ro d u c tio n which y i e l d s th e same r a t e o f p r o f i t . R ic a rd o , by assum in g a " g e n e r a l r a t e o f p r o f i t , " t o t a l l y ig n o re d t h a t f a c t . F o u rth , i t was s a id b e fo re t h a t th e ex p an sio n sh o u ld n e c e s s a r i l y co rresp o n d w ith th e ex p an sio n o f m a rk e t. R icard o s a id t h a t f o r th e ex p a n sio n o f m a rk e t, "n o th in g i s r e q u ir e d b u t th e m eans, and n o th in g can a f f o r d th e means b u t an in c re a s e o f p r o d u c tio n ."9® i t a p p e a rs t h a t t h i s sta te m e n t and i t s u n d e rly in g assump- I j t i o n s encouraged him t o o v erlo o k th e g e n e s is o f a c r i s i s | w hich, on th e w orld m a rk e t, a r i s e s o u t o f th e p ro c e s s o f j ^ M a rx , The T h e o rie s o f S u rp lu s V alu e, p p . 212, ; 252, 332-335, 3W ~ e t Se q . 90Ricardo, Works, Volume I, p. 292. p ro d u c tio n i t s e l f . The u n d e rly in g assu m p tio n s o f R ic a rd o ’ s argum ents w ere: (1) tfno man p ro d u ces b u t w ith a view to consume o r s e l l , and he n ev er s e l l s b u t w ith an i n t e n t i o n t o p u rch ase some o th e r c o m m o d itie s " ;^ (2) " p ro d u c tio n s a re alw ays bought by p r o d u c tio n s , o r by s e r v i c e s ”^ ; and (3) "money i s o n ly th e medium by which th e exchange i s e f f e c t e d . ”*^ Thus th e whole p ro c e s s o f s a le and p u rc h a se i s u n if ie d by R ic a rd o , a u n i f i c a t i o n which m a n ife s ts c o n t r a d i c t i o n . T rue, i n a b a r t e r economy th e r e i s no problem o f s a le and p u rc h a s e --e v e ry o n e i s s e l l e r and i n th e meantime p u r c h a s e r . Nor h as anyone h e a rd t h a t th e a n c ie n t s , w ith t h e i r s la v e p ro d u c tio n , had seen any c r i s e s , b ecau se p ro d u c e rs had no o th e r ch o ice b u t t o s e l l . But th e case h a s been d i f f e r e n t in R ic a rd o ’ s a s w e ll a s to d a y ’s tim e . Today, a c r i s i s may ap p e ar b ecau se th e p ro d u cer can n o t s e l l , o r can s e l l , b u t o n ly below th e p r ic e o f p ro d u c tio n o r a t a l o s s . Anyone who i d e n t i f i e s " a d d e d -v a lu e ” w ith p r o f i t , and assum es t h a t com m odities a re exchanged a c c o rd in g to t h e i r v a lu e , h a s t o n e g le c t t h a t com m odities m ight be s o ld a t a l o s s . 93-I b i d . , Volume I , p . 290. 92I b i d . , Volume I , pp. 291-292. 93ibid., Volume I, p. 292. 126 Thus, a g a in , th e h i s t o r i c a l ta s k o f R icard o was to pave th e way f o r Marx, who amended and ex ten d ed th e c l a s s i c a l th e o ry o f v a lu e . V. MARX’S THEORY OF VALUE In th e p re v io u s s e c t i o n , m ention was made t h a t f i n a l l y R icardo was c o n fro n te d w ith a " c o n t r a d i c t i o n ” which he h im s e lf was u n a b le t o s o lv e . In th e p e rio d betw een R ic a rd o ’ s d e a th and M arx’ s re e x a m in a tio n o f th e th e o r y o f v a lu e , th e h i s t o r y o f economic d o c tr in e s saw a number o f s i g n i f i c a n t d ev e lo p m ents i n th e f i e l d o f th e th e o r y o f v a lu e . The im m ediate im p lic a tio n o f th e R ic a r d ia n th e o ry o f v a lu e was th e a n a ly s is o f th e movements o f c l a s s re v e n u e s . T his aro u se d th e an g e r o f h i s o p p o n en ts, so t h a t Carey s a id : Mr. R ic a rd o ’ s system i s one o f d is c o rd s . . . i t s whole te n d s t o th e p ro d u c tio n o f h o s t i l i t y among c l a s s e s and n a t i o n s . • • • H is book i s th e tr u e m anual o f th e demagogue, who se ek s power by means o f a g r a r ia n is m , w ar, and p lu n d e r .94 T h is elem ent and th e v u l g a r i z a t i o n o f R ic a rd o ’ s th e o ry by h is f o llo w e rs a ffo rd e d an easy t a r g e t f o r th e c r i t i c s . The r e a c tio n a g a in s t R icard o to o k a number o f d i f f e r e n t 94Henr}r C h a rle s C arey, The P a s t , th e P r e s e n t , and th e F u tu re ( P h ila d e lp h ia : Carey arid' H a r t , 1848), pp. ?4-7$ • Quoted by Marx, The T h e o rie s o f S u rp lu s V alu e, p . 204* 127 ’ fo rm s. F i r s t , f o llo w e r s o f M aithus and L au d erd ale argued t h a t ,T demand and su p p ly ” alo n e were adequate to e x p la in th e th e o r y o f v a l u e S e c o n d , B a ily and T o rre n s c r i t i c i z e d R ic a rd o ! s concept o f a b s o lu te and r e a l v alu e* T h ird , R ic a rd o ’ s th e o ry o f v a lu e was " r e j e c t e d " by th o se who l a i d in c r e a s in g em phasis upon u t i l i t y i n th e e x p la n a tio n o f v a lu e . R icard o and th e R ic a r d ia n sc h o o l were r e s p o n s ib le f o r th e r e t r e a t o f th e la b o r th e o ry o f v a l u e . R ic a rd o ’ s b a s ic w eakness was h i s f a i l u r e to e x p la in how th e a p p a re n tly u n eq u al exchange betw een c a p i t a l and la b o r could be r e c o n c ile d w ith th e la b o r th e o r y . Also h is am b ig u ity on th e concept o f r e l a t i v e and a b s o lu te v a lu e , and on cause and m easure o f v a lu e , should be added t o th e above w eak n ess. T his s i t u a t i o n was a g g ra v a te d by th e works o f some r a d i c a l w r i t e r s who argued t h a t a c c o rd in g to th e l a b o r th e o ry o f v a lu e th e 95schum peter m is ta k e n ly s a id , "F or R ic a rd o , th e main p o in t a t is s u e was from th e f i r s t la b o u r q u a n tity v e rs u s su p p ly and demand. . . . I t im p lie s th a t^ R ic a rd o was c o m p le te ly b lin d t o th e n a tu r e , and th e l o g i c a l p la c e i n economic th e o r y , o f th e supply-and-dem and a p p a ra tu s and t h a t he to o k i t to r e p r e s e n t a th e o ry of v a lu e d i s t i n c t from and opposed t o h i s own. T his r e f l e c t s - - l i t t l e c r e d i t on him as a t h e o r i s t , " i n op. c i t . , pp. 6 0 0 -6 0 1 . A ll t h a t R icard o argued was t h a t supply and demand was n o t enough by which to e x p la in v a l u e . I t i s a m ista k e t o say t h a t R icard o "was b lin d " to th e n a tu re o f demand and s u p p ly . See e s p e c i a l l y R ic a rd o , W orks, Volume I I , p p . 3$-53> Volume V II, p p . 250-251; Volume V I I I , p p . 27 6 -2 7 7 , 279. 128 i la b o r e r produced a l l th e w e a lth , and th u s t o him should be a p p r o p r ia te d a l l th e produced w e a lth . M arx*s c r i t i c i s m o f th e above arg u m en t. Marx su g g e ste d t h a t " i t i s wrong to speak o f la b o u r i n so f a r as i t i s a p p lie d to th e p ro d u c tio n ©f u s e -v a lu e s a s o f th e o n ly sou rce o f w e a lth , nam ely, th e m a te r ia l w ea lth produced by i t . "96 The la b o r th e o ry o f v a lu e , to Marx, was a t o o l f o r th e a n a ly s is o f c a p i t a l i s t r e a l i t y . The la b o r th e o ry o f v a lu e s u g g e s ts t h a t th e p ro c e s s should be an a ly ze d i n term s o f th e s o c i a l r e l a t i o n s betw een men and men i n th e p ro d u c tio n o f com m odities. Thus, th e m a t e r i a l i s t c o n c e p tio n o f h i s t o r y was th e s t a r t i n g p o in t o f M arxTs su b se q u en t economic r e s e a r c h e s and d i c t a t e d , t o a la r g e e x t e n t , th e econom ic method which he a d o p te d . The German Id eo lo g y c o n ta in s th e f i r s t d e t a i l e d acco u n t o f th e M arxian m a t e r i a l i s t c o n c e p tio n o f h i s t o r y . I E n g els and Marx em phasized t h a t t h e i r s o u r c e -m a te r ia l was th e f a c t s o f s o c i a l l i f e and develo p m en t. They s a id : ^ M a r x , A C o n trib u tio n to th e C r itiq u e o f P o l i t i c a l Economy, p . 33• See a ls o K a rl Marx and F re d e ric k E n g e ls , The German Id eo lo g y (New York: I n t e r n a t i o n a l P u b lis h e r s , 1 9 4 7 ), p . 188 p a s sim ; and K arl Marx, C r itiq u e o f th e Gotha Programme CNew York: I n t e r n a t i o n a l P u b lis h e r s , 193$)» p p . 13-14* 129 W e do not s e t out from what men sa y , im ag in e, c o n c e iv e , nor from men as n a r r a te d , th o u g h t o f , im ag in ed , c o n c e iv e d , i n o rd e r t o a r r i v e a t men i n f l e s h . W e s e t out from r e a l , a c tiv e men, and on th e b a s i s o f t h e i r r e a l l i f e - p r o c e s s we demon s t r a t e th e developm ent o f th e id e o l o g i c a l r e f le x e s and echoes a t t h i s l i f e - p r o c e s s • • • men, d ev e lo p in g t h e i r m a te r ia l p ro d u c tio n and t h e i r m a te r ia l i n t e r c o u r s e , a l t e r , along w ith t h i s t h e i r r e a l e x i s te n c e , t h e i r th in k in g and th e p ro d u c ts of t h e i r th in k i n g . L ife i s n o t d eterm in ed by c o n s c io u s n e s s , b u t c o n sc io u sn e ss by l i f e . . . . As soon a s t h i s a c tiv e l i f e - p r o c e s s i s d e s c r ib e d , h i s t o r y c e a se s t o be a c o l l e c t i o n o f dead f a c t s as i t i s w ith th e e m p i r i c i s t s , o r an im agined a c t i v i t y o f im agined s u b j e c t s , a s w ith th e i d e a l i s t s . 97 The m ain t a s k which Marx s e t h im s e lf i n C a p ita l was to e x p la in th e o r i g i n and developm ent o f th e c a p i t a l i s t economic fo rm a tio n i n term s o f th e d e v e lo p in g r e l a t i o n s h ip s betw een men a s p ro d u c e rs* M ention sh o u ld be made t h a t i n b o th sim ple commodity p ro d u c tio n , and i n c a p i t a l i s t commodity p r o d u c t i o n , ^ Marx arg u ed : i 97$/farx and E n g e ls , The German Id e o lo g y , p p . 14-15* i 1 In C o n trib u tio n t o th e C r itiq u e of P o l i t i c a l Economy j j Marx s a id th e H l e g a l r e l a t i o n s as w e ll a s form s o f s t a t e | I . . . a re ro o te d i n th e m a te r ia l c o n d itio n s o f l i f e — | i c i v i l s o c ie ty — th e anatomy o f t h a t c i v i c - s o c i e t y i s t o j j be sought i n p o l i t i c a l econom y,0 p . 1 1 . j I 9% ,ormui a © C-M-C ( commodity-money-commodity) , and < ! M-C-M (money-commodity-money) , c h a r a c te r i z e th e sim ple ! I and c a p i t a l i s t p ro d u c tio n s r e s p e c t i v e l y . The sim ple i j p ro d u c tio n i s used by th o s e who T ,s e l l i n o rd e r t o b u y .” ; | H ere, money i s o n ly "medium o f e x c h a n g e .” But th e cap- j i t a l i s t commodity p ro d u c tio n i s used by th o s e who want j ”to a t t r a c t more exchange v a l u e .” H ere, money i s no j lo n g e r th e medium o f exchange. ”The c i r c u i t o f M-C-M, ■ ! . . . commences w ith money and ends w ith m oney.” K arl Marx, C a p ita l, A C r i t i c a l A n a ly sis o f C a p i t a l i s t P ro d u c tio n , p p ."1 2 7 -1 2 8 . T his f a c t was ig n o re d by th o s e who have ad h ered t o th e Law o f M a rk e ts. 1 130 . . . p ro d u c tio n , d i s t r i b u t i o n , exchange, and consum ption a re (n o t) i d e n t i c a l , b u t th e y a r e , a l l members o f o n e - e n t i t y , d i f f e r e n t s id e s o f one u n i t . . . . A d e f i n i t e form o f p ro d u c tio n th u s d e te rm in e s th e (form s of) consum ption, d i s t r i b u t i o n , exchange, and a ls o th e m utual r e l a t i o n s betw een th e s e v a rio u s e le m e n ts'.99 E v id e n tly th e la b o r th e o ry o f v alu e p la y ed a key r o le i n t h i s dem onstration.-® -^ Marx w rote t o Kugelmann: . . . Even i f th e r e were no c h a p te r on " v a lu e ” i n my book, th e a n a ly s is o f th e r e a l r e l a t i o n s h i p s w hich I g iv e would c o n ta in th e p ro o f and dem onstra t i o n o f th e r e a l v alu e r e l a t i o n . . . . E very c h ild knows, t h a t th e means o f p ro d u c ts co rre sp o n d in g to th e d i f f e r e n t needs r e q u ir e d i f f e r e n t and q u a n t i t a t i v e l y d eterm in ed m asses o f th e t o t a l la b o u r o f s o c i e t y . T hat t h i s n e c e s s ity o f d i s t r i b u t i n g s o c ia l la b o u r ( i s ) i n d e f i n i t e p r o p o r ti o n s . . . . And th e form i n which t h i s p r o p o r ti o n a l d i v i s i o n o f la b o u r o p e r a te s , i n a s t a t e o f s o c ie ty where th e i n t e r c o n n e c tio n o f s o c i a l la b o u r i s m a n ife s te d i n the f r i v a t e exchange o f th e in d iv i d u a l p ro d u c ts o f a b o u r, i s p r e c i s e l y th e exchange v a lu e o f th e s e p r o d u c ts .101 Marx, t h e r e f o r e , argued t h a t t o d em o n strate how th e r e l a t i o n s o f p ro d u c tio n d e te rm in e s th e form s o f exchange, d i s t r i b u t i o n , and consum ption i s i d e n t i c a l w ith showing how th e law o f v a lu e o p e ra te s* 99j/[arx, A C o n trib u tio n t o th e C r itiq u e of P o l i t i c a l Economy, p . 29l« h . Dobb, "Marxism and Economic T h e o ry ,” Modern Q u a r te r ly , I I I (S p rin g , 194$), 65-79* 103-Karl Marx and F re d e r ic k E n g e ls , S e le c te d C orrespondenee o f K arl Marx and F re d e ric k E n g e ls.. (New York: I n t e r n a t i o n a l P u b lis h e r s , 1 9 4 2 ), p . 246* 131 M arxTs th e o ry o f v a lu e * Marx commenced h i s a n a ly s is w ith a p a r t i c u l a r c o n c e p t, th e co n cep t t h a t v a lu e was conceived a s embodied o r c r y s t a l l i z e d l a b o r — which was a s s o c ia te d w ith h i s m a t e r i a l i s t c o n c e p tio n o f h i s t o r y . Marx arg u ed : A g iv e n commodity, e . g . , a q u a r te r o f w heat i s exchanged f o r x b la c k in g , y s i l k , o r z g o ld , & c.— i n s h o r t , f o r o th e r com m odities i n th e m ost d i f f e r e n t p r o p o r ti o n s . I n s te a d o f one exchange v a lu e , th e w heat h a s , t h e r e f o r e , a g r e a t many. But s in c e x b la c k in g , y s i l k , o r z g o ld , &c*, each r e p r e s e n t th e exchange v a lu e o f one q u a r te r of w heat, x b la c k in g , y s i l k , z g o ld , &c», m ust a s exchange v a lu e s be r e p la c e a b le by each o t h e r . T h e re fo re , f i r s t : th e v a l id exchange v a lu e s o f a g iv e n commodity e x p re s s som ething e q u a l; se co n d ly exchange v a lu e , g e n e r a lly , i s o n ly th e mode o f e x p r e s s io n , th e phenom enal form , o f som ething c o n ta in e d i n i t , y e t d is t in g u is h a b le from i t . L et u s ta k e two com m odities, e . g . , co rn and i r o n . The p r o p o rtio n s i n w hich th e y a re e x c h an g e ab le , w h ate v er th o se p r o p o rtio n s may b e , can alw ays be r e p r e s e n te d by an e q u a tio n i n which a g iv e n q u a n tity o f corn i s eq u a ted to some q u a n t ity o f ir o n : e . g . , 1 q u a r t e r corn = x cw t. i r o n . What does t h i s equa t i o n t e l l us? I t t e l l s us t h a t i n two d i f f e r e n t t h i n g s — in 1 q u a r t e r o f corn and x cw t. o f i r o n , t h e r e e x i s t s i n e q u a l q u a n t i t i e s som ething common t o b o th . The two th i n g s must th e r e f o r e be eq u a l t o a t h i r d , which i n i t s e l f i s n e i t h e r th e one n o r th e o t h e r . Each of them , so f a r a s i t i s exchange v a lu e , m ust t h e r e f o r e be r e d u c ib le t o t h i s t h i r d . A sim ple g e o m e tric a l i l l u s t r a t i o n w i l l make t h i s c l e a r . In o r d e r t o c a l c u l a t e and compare th e a re a s o f .r e c t i l i n e a r f i g u r e s , we decompose them in t o t r i a n g l e s . But th e a re a o f th e t r i a n g l e i t s e l f i s e x p re sse d by som ething t o t a l l y d i f f e r e n t from i t s v i s i b l e f i g u r e , nam ely, by h a l f th e p ro d u c t o f th e b ase in t o th e a l t i t u d e . In th e same way th e exchange v a lu e s o f com m odities must be c a p a b le o f b ein g 132 e x p re sse d i n te rm s o f som ething eommon t o them a l l , o f which th in g th e y r e p r e s e n t a g r e a t e r o r l e s s q u a n t i t y . T his common "so m eth in g ” cannot be e i t h e r a g e o m e tr ic a l, a c h e m ic a l, or any o th e r n a t u r a l p r o p e r ty o f com m odities. Such p r o p e r t i e s claim our a t t e n t i o n o n ly i n so f a r as th e y a f f e c t th e u t i l i t y o f th o se com m odities, make them u s e -v a lu e s * But th e exchange o f com m odities i s e v id e n tly an a c t c h a r a c te r i s e d by a t o t a l a b s t r a c t i o n from u s e - v a lu e s . Then one u s e -v a lu e i s j u s t as good as a n o th e r , p ro v id e d o n ly i t be p r e s e n t i n s u f f i c i e n t q u a n t i t y . Or, as o ld Barbon s a y s , "one s o r t o f w ares a re as good a s a n o th e r, i f th e v a lu e s be e q u a l. There i s no d if f e r e n c e o r d i s t i n c t i o n i n th i n g s o f eq u a l value. . . . An hundred p o u n d s1 w orth of le a d or i r o n , i s o f as g r e a t v a lu e as one hundred pounds1 w orth o f s i l v e r o r g o ld ." As u s e - v a lu e s , com m o d itie s a r e , above a l l , o f d i f f e r e n t q u a l i t i e s , b u t a s exchange v a lu e s th e y a re m e re ly d if f e r e n t, q u a n t i t i e s , and c o n se q u e n tly do n o t c o n ta in an atom o f u s e - v a lu e . I f th e n we le a v e out of c o n s id e r a tio n th e u se - v a lu e of com m odities, th e y have o nly one common p r o p e r ty l e f t , t h a t o f b e in g p ro d u c ts o f l a b o u r . 1 0 2 A c c o rd in g ly , Marx b e lie v e d t h a t th e th e o ry o f v alu e sh o u ld be based on th e m a t e r i a l i s t co n c e p tio n o f h i s t o r y , and t h i s p a r t i c u l a r co n cep t alo n e could be cap ab le o f f u l f i l l i n g th e fo rm al re q u ire m e n ts o f a th e o ry o f v a lu e . | And th e r e a l p ro o f o f th e la b o r th e o r y o f v a lu e was ] I c o n ta in e d i n th e s e c tio n s o f C a p ita l where th e la b o r I th e o ry o f v a lu e was a p p lie d to th e economic r e a l i t y , ■^^Marx, C a p i t a l , A C r i t i c a l A n a ly sis o f C a p i t a l i s t P ro d u c tio n , p p . 3-4* a n d p a r t i c u l a r l y t o t h e p r o b l e m o f d istr ib u tio n ." * " ® -^ W hen i t i s s a i d t h a t l a b o r c o n t a i n e d i n a com m o d i t y f o r m s t h e s u b s t a n c e o f t h e v a l u e o f t h a t c o m m o d ity i t i s t a n t a m o u n t t o a s s u m i n g t h a t " t h e m o re i d l e a n d u n s k i l l f u l t h e l a b o u r e r , t h e m o re v a l u a b l e w o u ld h i s c o m m o d it y b e , b e c a u s e m o re t i m e w o u l d b e r e q u i r e d i n i t s p rod u ction." -*-® ^ " S u c h a n i n t e r p r e t a t i o n s e e m s t o a p p e a r t a u t o l o g y . M arx a r g u e d t h a t t h e r e i s a n " a v e r a g i n g " p r o c e s s w h i c h t a k e s p l a c e i n h i s t o r y b e f o r e a p p e a r i n g i n t h e m in d s o f e c o n o m i s t s . M a r x , i n a n o f t e n - q u o t e d p a s s a g e , s a i d : I t i s t h e e x p e n d i t u r e o f s i m p l e l a b o u r - p o w e r , i . e . , o f t h e l a b o u r - p o w e r w h i c h , o n a n a v e r a g e , a p a r t fr o m a n y s p e c i a l d e v e l o p m e n t , e x i s t s i n t h e o r g a n i s m o f e v e r y o r d i n a r y i n d i v i d u a l . S i m p l e a v e r a g e l a b o u r , i t i s t r u e , v a r i e s i n c h a r a c t e r i n d i f f e r e n t c o u n t r i e s a n d a t d i f f e r e n t t i m e s , b u t i n a p a r t i c u l a r s o c i e t y i t i s g i v e n . S k i l l e d 103i t h as been a fa s h io n t o o v erlo o k th e im p o rta n t d i s t i n c t i o n t h a t Marx made betw een " u s e fu l la b o u r" and " a b s t r a c t la b o u r ," a d i s t i n c t i o n which Marx c a lle d a " p iv o t on which a c l e a r com prehension o f p o l i t i c a l econ omy t u r n s . " He d e fin e d u s e f u l la b o r a s " th e la b o u r , j whose u t i l i t y i s th u s r e p r e s e n te d by th e v a lu e i n use o f I i t s p ro d u c t, o r which m a n ife s ts i t s e l f by making i t s ! p ro d u c t a u s e - v a l u e ,” i b i d . f p . He s a id a b s t r a c t : la b o r i s "v alu e o f a commodity (which) r e p r e s e n ts human la b o u r i n th e a b s t r a c t , th e e x p e n d itu re o f human la b o u r j | i n g e n e r a l," i b i d . , p . 1 1 . ; I ! lQ^ i b i d , t p . 5 , Marx argued t h a t " th e la b o u r j t h a t form s th e su b sta n c e o f v a lu e , i s homogeneous human i la b o u ry e x p e n d itu re o f one u niform la b o u r-p o w e r," i b i d . , pp. 5 -6 . 134 la b o u r co u n ts o nly a s sim ple la b o u r i n t e n s i f i e d , o r r a t h e r , as m u lt ip lie d sim ple la b o u r, a g iv e n q u a n tity o f s k i l l e d b ein g c o n s id e re d e q u a l to a g r e a t e r q u a n t ity o f sim ple la b o u r . E x p erien c e shows t h a t t h i s re d u c tio n i s c o n s ta n tly b e in g m ade. A commodity may be th e p ro d u c t o f th e most s k i l l e d la b o u r , b u t i t s v a lu e , by e q u a tin g i t to th e p ro d u c t o f sim ple u n s k i l l e d la b o u r , r e p r e s e n ts a d e f i n i t e q u a n tity o f th e l a t t e r la b o u r a l o n e . The d i f f e r e n t p r o p o rtio n s i n w hich d i f f e r e n t s o r t s o f la b o u r a re reduced to u n s k il le d la b o u r a s t h e i r s ta n d a r d , a re e s t a b li s h e d by a s o c i a l p ro c e s s t h a t goes on behind th e backs o f th e p ro d u c e rs , and, c o n s e q u e n tly , a p p e ar t o be f ix e d by c u s t o m .1 ° 5 Here Marx, a s E n g els s a id , i s concerned w ith th e demon s t r a t i o n o f th e f a c t t h a t th e " r e d u c tio n ” o f " s k i l l e d ” o r "com plex” la b o r to " u n s k i lle d ” o r " s im p le ” la b o r i s a s o c i a l p ro c e s s which ta k e s p la c e i n th e r e a l w o rld . Marx e x p la in s h i s p ro ced u re i n th e fo rm u la tio n o f th e th e o ry o f v a lu e i n th e fo llo w in g p a ssa g e : In f a c t we s t a r t e d from exchange v a l u e , o r th e exchange r e l a t i o n o f com m odities, i n o rd e r to g e t a t th e v a lu e t h a t l i e s h id d e n b eh in d i t . We must now r e t u r n to t h i s form under w hich v a lu e f i r s t app eared to u s . E very one knows, i f he knows n o th in g e l s e , t h a t com m odities have a v alu e form common t o them a l l , 1Q5i b i d . , p p . 1 1 -1 2 . Quoted i n F re d e ric k E n g e ls , A n ti- D uhring (C hicago: C h a rle s H. K e rr, 1935)» P» 203* ^ ^ I b i d . However, Marx, i n C a p i t a l , A C r i t i c a l A n a ly sis o f C a p i t a l i s t P ro d u c tio n , p p . l$ 0 -ll> l, 179-180, 342-343, and C a p i t a l , A C r itiq u e o f P o l i t i c a l Economy (Volume I I I ; C hicago: ‘ Charl'i's H'. H e rr, 1 9 0 2 ), p . 16$, made i t c l e a r t h a t f i r s t " e d u c a tio n o r t r a i n i n g ” c o s ts a re c o n s t i t u e n t elem e n ts in th e v a lu e o f la b o r pow er. 135 and p r e s e n tin g a marked c o n t r a s t w ith th e v a r ie d b o d ily form s o f t h e i r u s e - v a lu e s . I mean t h e i r money form . H ere, how ever, a ta s k i s s e t u s , th e perform ance o f which h as n ev e r y e t even been a tte m p te d by b o u rg e o is economy, th e ta s k o f t r a c i n g th e g e n e s is o f t h i s money form , o f d e v e lo p in g th e e x p re s s io n o f v alu e im p lie d i n th e v alu e r e l a t i o n o f com m odities, from i t s s im p le s t, alm o st im per c e p tib l e o u t l i n e , to th e d a z z lin g money fo rm . By doing t h i s we s h a l l , a t th e same tim e , s o lv e th e r i d d l e p re s e n te d by m oney.107 What Marx a tte m p te d to do h e re i s to d is c lo s e th e J > " c o n tr a d ic tio n " which r e s u l t s from th e r e c i p r o c a l i n t e r - j i a c tio n o f th e two s id e s o f th e v a lu e e q u a tio n s . I n t h i s ! re g a rd E n g els s a id : j 1 A fte r use v a lu e and exchange v a lu e have b een j d ev e lo p ed , com m odities a re p re s e n te d a s th e I im m ediate u n ity o f b o th , i n th e form i n w hich th e y j e n t e r th e p ro c e s s o f exchange. What c o n t r a d ic ti o n s ; r e s u l t h e re can a lte r w a r d s be re a d on p p . 20, 21.* ; W e o nly n o tic e t h a t th e s e c o n t r a d ic ti o n s a re n o t m e rely o f a b s t r a c t t h e o r e t i c a l i n t e r e s t , b u t a t th e same tim e r e f l e c t th e d i f f i c u l t i e s which emerge from th e n a tu re o f th e im m ediate exchange r e l a t i o n s , o f sim ple b a r t e r , r e f l e c t th e i m p o s s i b i l i t i e s in | which t h i s f i r s t crude form of exchange n e c e s s a r i l y ; t e r m i n a te s . The s o l u t i o n o f th e s e i m p o s s i b i l i t i e s ; i s t o be found i n th e f a c t t h a t th e p r o p e r ty o f i r e p r e s e n tin g th e exchange v a lu e o f a l l o th e r com- I m o d itie s i s t r a n s f e r r e d to a s p e c ia l commodity— money.10° ^®7]v[arx, C a p i t a l , A C r i t i c a l A n a ly sis o f C a p i t a l i s t P ro d u c tio n , p . llH ! l ^ F r e d e r i c k E ngebs, Ludwig F euerbach (New York: j I n t e r n a t i o n a l P u b lis h e r s , 1 9 4 1 ), PP« 8 0 -S I. *Bngels i h e re r e f e r s t o th e pages o f M arxTs A C o n trib u tio n t o th e j C r itiq u e o f P o l i t i c a l Economy. I j 136 ; C o r r e la tio n o f th e th e o ry o f v alu e w ith r e a l i t y . i | Marx s a id : ’’That which d e te rm in e s th e m agnitude o f th e | v a lu e o f any a r t i c l e i s th e amount o f la b o u r s o c i a l l y | | n e c e s s a r y , . . . f o r i t s p r o d u c tio n ." - ^ 9 ]y fa rx j b e lie v e d t h a t u n d er c o m p e titiv e c o n d itio n s th e lo n g -ru n i p r ic e o f com m odities te n d s t o be e q u a l to th e v a lu e o f t h a t " s o c i a l l y n e c e s s a ry l a b o u r ." In t h i s case p r ie e i s e q u a l to th e v a lu e o f th e g iv e n com modity. But i t i s to be borne i n m ind, Marx arg u e d , t h a t p r i c e s m ight d iv e rg e from v a lu e s i n c a s e s where demand and supply d id n o t " b a la n c e ." Marx argued t h a t " p r ic e i s th e t | money-name o f th e la b o u r r e a l i z e d i n a commodity ' B ecause, " th e name o f a th in g i s som ething d i s t i n c t from th e q u a l i t i e s o f t h a t t h i n g . I know n o th in g o f a man, by knowing t h a t h i s name i s Ja co b . Marx b e g in s w ith th e assu m p tio n t h a t under c o m p e titiv e c a p ita lis m com m odities a re s o ld a t " t h e i r j v a l u e s ." In o rd e r t h a t com m odities a re to be so ld a t t h e i r " v a lu e ," t h e i r p r ic e sh o u ld cover raw m a te r ia l s and d e p r e c ia tio n (c), wages (v), and s u rp lu s v a lu e (s). I l^ M a r x , C a p i t a l , A — C r i t i c a l A n a ly s is o f I C a p i t a l i s t P ro d u c tio n , p .“*6 • j l 110Ib id . . p . I k • l i : LI b i d . , p . 73* 137 But u n d er modern c a p ita lis m , once an av erag e r a t e o f p r o f i t ( ) i s e s t a b l i s h e d t o which a l l in d iv id u a l r a t e s te n d t o conform , p r i c e s w i l l n o t be e q u a l to " v a lu e ” o f com m odities, u n le s s t h e i r o rg a n ic co m p o sitio n c o f c a p i t a l s (y) a re e q u a l. So, i n r e a l i t y , th e re a s o n t h a t u n d e r modern c a p ita lis m com m odities a re not so ld ”a t t h e i r v a lu e ” i s due to th e i n e q u a l i t y o f th e o rg a n ic co m p o sitio n o f c a p i t a l and e q u a l i t y o f th e av erag e r a t e o f p r o f i t . 112 M ention was made b e fo re t h a t Marx, i n h i s economic a n a l y s i s , d is tin g u is h e d two p ro c e s s e s a s f a r as commodity p ro d u c tio n was co n c ern ed . One was sim ple commodity p ro d u c tio n ('C-M-C), i n w hich p ro d u cer s e l l s i n o r d e r t o buy. In t h i s s ta g e , norm al exchange i s one o f " v a lu e ” f o r " v a lu e ” ; a ls o com m odities a re so ld " a t t h e i r v a l u e ." This s ta g e i s th e h i s t o r i c a l and l o g i c a l s t a r t i n g - p o i n t i n M arxr s a n a l y s i s . The second sta g e was c a p i t a l i s t commodity p ro d u c tio n (M-C-M) . ^ 3 i n t h i s s ta g e each p ro d u cer "buys i n o rd e r t o s e l l . " He buys th e raw m a t e r i a l s , and, th ro u g h a p r o c e s s , tra n s f o rm s them in to H ^M eek, o p . c i t . , p p . 179-1&0. H 3 c h a p te r IV o f P a r t I I o f th e f i r s t column o f C a p ita l, u n d er th e t i t l e o f "The G eneral Formula f o r C a p i t a l , ” i s devoted t o th e e x p la n a tio n o f th e s e two p r o c e s s e s . ! 13d J a " d e a r e r" commodity. This le a d s t o th e e x te n s io n and I | i n t e n s i f i c a t i o n o f c o m p e titio n among c a p i t a l i s t s , which i | su b se q u e n tly le a d s to th e fo rm a tio n o f an av erag e r a t e ! o f p r o f i t . In t h i s sta g e com m odities a re so ld i n p ro - j p o r tio n to t h e i r " p r ic e s o f p r o d u c t i o n . I n t h i s , s ta g e com m odities a r e no lo n g e r so ld " a t t h e i r v a l u e ." j I t i s c l e a r t h a t f i r s t ap p ro x im a tio n i s th e groundwork, i | th e " l o g i c a l and h i s t o r i c a l s t a r t i n g - p o i n t " f o r th e second a p p ro x im a tio n , r a t h e r th a n i t s c o n t r a d i c t i o n . M arx, i n c o n t r a s t t o R ic a rd o , m a in ta in e d t h a t i n th e > s ta g e where th e second ap p ro x im a tio n h e ld t r u e , s t i l l j 1-^-^Marx s a id : "The p r ic e o f p ro d u c tio n o f a ! c e r t a i n commodity i s i t s c o s t - p r i c e f o r th e b u y e r, and t h i s p r ic e may p a s s i n t o o th e r com m odities and become an elem ent o f t h e i r p r i c e s . S ince th e p r ic e o f p ro d u c tio n may v ary from th e v a lu e o f a commodity, i t fo llo w s t h a t th e e o s t - p r i c e o f a commodity c o n ta in in g t h i s p r ic e o f p ro d u c tio n may a l s o sta n d above o r below t h a t p o r tio n o f i t s t o t a l v a lu e which i s formed by th e v a lu e of th e means o f p ro d u c tio n consumed by i t . I t i s n e c e s s a ry t o remember t h i s m o d ified s ig n i f ic a n c e o f th e c o s t - p r i c e , and to b e a r i n mind t h a t th e r e i s alw ays th e p o s s i b i l i t y o f an e r r o r , i f we assume t h a t th e c o s t - p r i c e o f th e com m odities o f any p a r t i c u l a r sp h ere i s e q u a l to th e v a lu e o f th e means o f p ro d u c tio n consumed b y . i t , " C a p i t a l , A C r itiq u e o f P o l i t i c a l j Economy, Volume I I I , p p . 1^4-195• I •^•^Dobb, P o l i t i c a l Economy and C a p ita lis m , pp. 72-73* 5 i i ... 139 j th e law o f v a lu e o p e r a te d . \ The v e ry im m ediate im p lic a tio n o f t h i s dichotom y, ! a s f a r as th e th e o ry o f " d i s t r i b u t i o n o f income" betw een . la b o r and c a p i t a l i s co n c ern ed , i s t h a t on th e assump- ! t i o n s o f th e f i r s t volum e, th e t o t a l p ro d u c t i s d i s - t * ! t r i b u t e d betw een w a g e -la b o r and c a p i t a l i n p r o p o rtio n to th e a g g re g a te q u a n tity o f la b o r employed and th e q u a n t ity employed t o produce w age-goods. .The d i s t r i b u t i o n o f th e t o t a l p r o d u c t, a c c o rd in g t o th e assu m p tio n s o f th e t h i r d volum e, betw een w orkers and c a p i t a l i s t s , depends on th e r e l a t i o n o f th e v a lu e o f f in is h e d com m odities to th e v a lu e o f la b o r-p o w e r. T his c r u c i a l r e l a t i o n s t i l l co u ld be t r e a t e d a s d eterm in ed a c c o rd in g t o th e a n a ly s is of Volume At th e b e g in n in g o f Volume I I I o f C a p ita l Marx s a id : ll£ > M a r x w rote to E n g e ls i n 1$62, a few y e a rs b e fo re th e p u b lic a t io n o f th e f i r s t volume o f C a p i t a l , t h a t he m a in ta in e d th e p o s s i b i l i t y o f exchange ox com- m o d itie s a c c o rd in g to t h e i r p r ic e o f p ro d u c tio n i n th e s ta g e o f c a p i t a l i s t i c commodity p ro d u c tio n . He s a id : "R icard o d e n ie s t h i s p o s s i b i l i t y , I m a in ta in i t . I a ls o m a in ta in t h a t h i s d e n ia l i s based upon a t h e o r e t i c a l f a l s e dogma ta k e n over from Adam Sm ith— th e p re -su p p o se d i d e n t i t y betw een th e c o s t p r ic e and th e v a lu e o f com m o d it ie s ," i n S e le c te d C o rresp o n d en ce, p . 137* -^-^Dobb, P o l i t i c a l Economy and C a p ita lis m , p p . 72-73- 140 P r ic e s o f p ro d u c tio n a re c o n d itio n e d on th e e x is te n c e o f an averag e r a t e of p r o f i t , and t h i s , a g a in , r e s t s on th e prem ise t h a t th e r a t e s o f p r o f i t i n e v e ry sp h ere o f p ro d u c tio n , c o n sid e re d by i t s e l f , have p r e v io u s ly been reduced to so many av erag e r a t e s o f p r o f i t . These s p e c ia l r a t e s of p r o f i t a re e q u a l to i n e v e ry sphere o f p r o d u c tio n , and th e y must be deduced out o f th e v a lu e s o f th e com m odities, a s shown i n volume I . W ithout such a d e d u c tio n an av erag e r a t e o f p r o f i t (and c o n s e q u e n tly a p r ic e o f p ro d u c tio n o f co m m o d ities), rem ain s a vague and s e n s e le s s con c e p tio n .U S A cc o rd in g ly , i n th e f i r s t volum e, Marx was con cern ed w ith th e fo rm a tio n o f s u rp lu s v a lu e ; w h ile i n th e t h i r d volum e, he was concerned w ith th e d e r i v a t i o n o f p r o f i t from th e s u rp lu s v a lu e .H 9 S u rp lu s v a lu e , acco rd in g to th e Volume I a n a l y s i s , i s r e l a t e d t o t h a t p a r t o f c a p i t a l which i s sp e n t on wages; w h ile p r o f i t i s r e l a t e d to th e whole o f c a p i t a l . Goinversion o f s u rp lu s valu e i n t o p r o f i t . T his c o n v e rs io n im p lie s th e tr a n s f o r m a tio n o f v a lu e s in to what Marx c a lle d " p r ic e s o f p r o d u c tio n ." M ention was made t h a t i n th e c a p i t a l i s t i c commodity p ro d u c tio n (M-C-M), com m odities a re no lo n g e r s o ld " a t t h e i r v a l u e s ," b u t a t t h e i r p r i c e s o f p r o d u c tio n . P r ic e s of -*--^Marx, C ap ital, A C ritique o f P o lit ic a l Economy, Volume I I I , pp. 185-186'; see a lso Theories of "Surplus Value, pi 231. •^■•^M arx, C ap ital, A C ritique o f P o lit ic a l Economy, Volume I I I , pp. 37-38. 141 p r o d u c t i o n o f M a r x , i n c l u d i n g a v e r a g e r a t e o f p r o f i t , i s : . . . t h e sam e t h i n g w h i c h Adam S m it h c a l l e d n a t u r a l p r i c e , R i c a r d o p r i c e o f p r o d u c t i o n o r c o s t o f p r o d u c t i o n . . . b e c a u s e i t i s m t h e lo n g r u n a p r e r e q u i s i t e o f s u p p l y , o f t h e r e p r o d u c t i o n o f c o m m o d i t i e s i n e v e r y i n d i v i d u a l s p h e r e . 1 2 0 H o w e v e r , i t i s c l e a r t h a t t h e t r a n s f o r m a t i o n p r o c e s s a n a l y z e d i n V o lu m e I I I r e q u i r e s a m o d i f i c a t i o n o f t h e a s s u m p t i o n s o f V o lu m e I , t h a t " t h e c o s t - p r i c e o f a c o m m o d ity i s e q u a l t o t h e v a l u e o f t h e c o m m o d i t i e s c o n s u m e d i n i t s p r o d u c t i o n M arx s a i d : T he p r i c e o f p r o d u c t i o n o f a c e r t a i n c o m m o d it y i s i t s c o s t - p r i c e f o r t h e b u y e r , an d t h i s p r i c e m ay p a s s i n t o o t h e r c o m m o d i t i e s a n d b e c o m e a n e l e m e n t o f t h e i r p r i c e s . S i n c e t h e p r i c e o f p r o d u c t i o n m ay v a r y fr o m t h e v a l u e o f a c o m m o d it y , i t f o l l o w s t h a t t h e c o s t - p r i c e o f a c o m m o d ity c o n t a i n i n g t h i s p r i c e o f p r o d u c t i o n m ay a l s o s t a n d a b o v e o r b e l o w t h a t p o r t i o n o f i t s t o t a l v a l u e w h i c h i s f o r m e d b y t h e v a l u e o f t h e m e a n s o f p r o d u c t i o n c o n s u m e d b y 120I b i d . , p . 2 3 3 . 1 2 lE q u al "c o m p o sitio n s o f c a p i t a l " i s th e b a s i s o f M arxfs v a lu e p r i n c i p l e i n C a p i t a l , A C r i t i c a l A n a ly sis o f C a p i t a l i s t P r o d u c tio n . In C a p i t a l , A C r itiq u e o f I F o li tic a l Economy, Volume I I I , he dropped t h i s assump t i o n . Eugen Fohm von Bawerk caused a clam or on t h i s " c o n tr a d ic tio n " betw een Volume I and Volume I I I , in K arl Marx and th e C lose o f His System ; and C r itic is m , :B raH sT atT oirT y"T T icenfr MacHonaTd (Tonidon:" "T'V"S".----- Unwin, 1$9&), p p . 6&-75- The f a c t i s t h a t Marx was f u l l y aware o f t h i s problem s e v e r a l y e a rs b e fo re th e p u b lic a t i o n o f Volume I . L e t t e r s o f Marx t o E n g e ls , A p ril 2, 1S5S and August 2, 1&62. See S e le c te d C orrespondence, p p . 105-109, 129-133- 142 i t . I t i s n e c e s s a ry to remember t h i s m o d ifie d s ig n i f ic a n c e o f th e c o s t - p r i c e , and t o b e a r in mind t h a t th e r e i s alw ays th e p o s s i b i l i t y o f an e r r o r , i f we assume t h a t th e c o s t - p r i c e o f th e com m odities o f any p a r t i c u l a r sp h ere i s e q u a l to th e v a lu e o f th e means o f p ro d u c tio n consumed by i t . Our p r e s e n t a n a ly s is does n o t n e c e s s i t a t e a c l o s e r ex a m in a tio n o f t h i s p o i n t . 122 | I t i s c l e a r from th e c o n te x t, as Marx s u g g e s ts i n a v a lu e s in to p r i c e s o f p ro d u c tio n i s a r e f l e c t i o n o f a h i s t o r i c a l tr a n s f o r m a tio n of exchange r a t i o s , which were e q u a l t o embodied la b o r r a t i o , in t o exchange r a t i o s which were e q u a l to p r ic e o f p ro d u c tio n r a t i o s . I f i t i s assumed t h a t a th e o ry a r i s e s from th e a tte m p t to so lv e some problem , o r s e t o f pro b lem s, th e n to u n d e rsta n d a th e o ry in v o lv e s u n d e rs ta n d in g what q u e s tio n s i t a n sw e rs. The la b o r th e o ry o f v a lu e e x p re s s e s th e view t h a t men can produce and accum ulate o n ly by c o o p e ra tin g and m u tu a lly exchanging t h e i r a c t i v i t i e s . I t h as been shown t h a t th e q u e s tio n s which i passage in Volume I I I , ^ 2^ t h a t th e tr a n s f o r m a tio n o f V I. GENERAL EVALUATION ! Volume III, pp. 122j5arx,+ ■ A C r itiq u e o f P o l i t i c a l Economy, I I I , p p . -^^Ibid. 9 pp. 207-206; also pp. 206-209, 212. / 143 : were r a i s e d by Sm ith, R ic a rd o , and Marx, i n th e l i g h t I o f la b o r th e o ry o f v a lu e , were d i f f e r e n t . i | Adam Smith b e lie v e d t h a t ”th e g r e a t o b je c t o f | | th e p o l i t i c a l economy o f e v e ry c o u n try , i s t o in c r e a s e i 1 p J L f th e r ic h e s and power of t h a t c o u n tr y .” And he asked ] h im s e lf to what e x t e n t, i f a t a l l , th e q u a n tity o f la b o r i used i n p ro d u c tio n was in s tru m e n ta l i n ex p a n sio n and a c c u m u la tio n . Then he came t o th e c o n c lu s io n t h a t " th e I an n u al la b o r o f ev ery n a tio n i s th e fund which o r i g i n a l l y s u p p lie s i t w ith a l l th e n e c e s s a r ie s and co n v en ien ces o f l i f e which i t a c t u a l l y c o n s u m e s T h e n he c r i t i c i z e d c e r t a i n s o c i a l o b s ta c le s and s o c i a l a t t i t u d e s which I 1 O fs | d isc o u ra g e d p ro d u c tio n and a c c u m u la tio n . ° In f a c t , i what he saw i n th e accu m u latio n o f c a p i t a l was an i u n q u a lif ie d in c r e a s e i n th e t o t a l w e a lth and w e ll- b e in g 1 o f th e n a tio n ; b u t he d id n o t re c o g n iz e th e phenomenon ; o f o v e rp ro d u c tio n and c r i s e s r e s u l t i n g from t h a t . But ! i. » i ! he co n ceiv ed th e developm ent o f th e i n t e r n a l m arket i n t o j I th e f o r e ig n and c o l o n ia l m a rk e t.^ 27 ' | i i __________________ 1 ^ ^ S m ith , W ealth of N a tio n s , p . 352. ! 125 l b i d . , p . l v i i . 126 i b i d . , p p . llg -1 4 3 * j 127Ibid ., pp. 164, 352-353, 413-419- lif-Z f. The c r u c i a l q u e s tio n which was r a i s e d by R icardo was "an in q u ir y i n t o th e law s whi'ch d eterm in e th e I d i v i s i o n o f th e produce o f th e in d u s tr y amongst th e j 1 oci ! c l a s s e s who concur i n i t s fo rm a tio n ." ^ Thus, th e m ain | a t t e n t i o n o f R icardo was focused upon th e law s o f d i s - | t r i b u t i o n which d e te rm in e th e r a t i o s i n which th e an n u al n a t io n a l income was d i s t r i b u t e d among th e f a c t o r s o f p r o d u c tio n . T his approach was i n re sp o n se to th e con tem p o rary problem s w ith im p o rta n t p o l i t i c a l im p l ic a tio n s . As was s a id b e f o r e , th e - c o n tro v e rs y o ver such v i t a l i s s u e s a s th e Corn Laws and p a rlia m e n ta ry reform was growing i n i n t e n s i t y . To so lv e th e s e problem s, R icard o began w ith th e assu m p tio n t h a t th e d e te r m in a tio n o f v a lu e by la b o r- tim e i s th e n e c e s s a ry s t a r t tow ards u n d e rs ta n d in g th e anatomy o f th e s o c i e t y . Then he proceeded to i n v e s t i g a t e "w hether th e o th e r economic r e l a t i o n s o r c a te g o r ie s c o n f l i c t w ith t h i s d e f i n i t i o n o f v a lu e , o r how f a r th e y m odify i t . " ^ 9 R icard o * s approach was an advance over t h a t of S m ith, b u t s t i l l th e answ ers t h a t he o f f e r e d p o l i t i c a l economy f o r some ■^■^Ricardo, Works, Volume V I I I , p . 27&; Volume V II, p . 2 4 ; Volume I , p r e f a c e . 129Marx, The Theories of Surplus Value, p. 201. 145 s o c i a l pro b lem s, e x p a n sio n , and c r i s i s were n o t, as i t was shown, a d e q u a te . He th o u g h t t h a t th e ex p an sio n o f th e m arket fo llo w e d th e ex p a n sio n o f th e p ro d u c tio n , t h e r e f o r e , he r u le d o u t th e e x is te n c e o f c r i s i s * Joan Robinson h a s r e c e n t l y rem arked: For R icard o th e Theory o f Value was a means o f s tu d y in g th e d i s t r i b u t i o n o f t o t a l o u tp u t betw een w ages, r e n t , and p r o f i t , each c o n s id e re d a s a w hole. T his i s a b ig q u e s tio n . M a rsh a ll tu rn e d th e mean in g o f V alue in to a l i t t l e q u e s tio n ; why does an egg c o s t more th a n a cup o f te a ? . . . Keynes changed th e q u e s tio n back a g a in . He s t a r t e d th in k in g i n R icard o * s te rm s : o u tp u t a s a whole and why w orry about a cup o f te a ? When you a r e th in k in g about o u tp u t a s a w hole, r e l a t i v e p r ic e s come out i n th e wash— in c lu d in g th e r e l a t i v e p r ic e o f money and l a b o r . The p r ic e l e y e l comes in t o th e argum ent, b u t i t comes i n a s a c o m p lic a tio n , n o t as th e main p o i n t . I f you have had some p r a c t i c e on R ic a rd o ’ s b ic y c le you do n o t need t o s to p and a s k - y o u r s e lf what t o do i n a case l i k e t h a t , you J u s t do i t . You assume away th e c o m p lic a tio n t i l l you have got th e main problem worked o u t. So Keynes began by g e t tin g money p r i c e s out of th e way. . . . But i f you can n o t use money, what u n i t o f v a lu e do you ta k e ? A man h o u r o f la b o r tim e . I t i s th e most handy and s e n s ib le m easure o f v a l u e , so n a t u r a l l y you ta k e i t . You do n o t have t o prove a n y th in g , you j u s t do i t . W ell th e r e you a r e —we a re back on R ic a rd o ’ s la r g e q u e s tio n s , and we a re u s in g M arx’ s u n i t o f v a l u e .1 3 0 As f a r as M a rx ist co n cep t o f v a lu e i s co ncerned, Robinson h as m issed th e p o i n t , t h a t M arx’ s tre a tm e n t of 130Joan R obinson, On Re-R eading Marx (Cam bridge: E n g lis h S tu d e n ts ’ Bookshops, 1953J , PP« 22-23• 146 I v a lu e was n o t t o p ro v id e a handy u n i t o f ac co u n t b u t t o j I show "how th e law o f v a lu e o p e r a t e s , ” i . e . to show how j j " th e mode o f exchanging p ro d u c ts i s r e g u la te d by th e : mode o f p ro d u cin g them . "-*-31 Borrowing th e concept from j R ic a rd o , Marx contended t h a t " th e s t a r t i n g p o in t f o r th e j p h y sio lo g y o f th e b o u rg e o is system — f o r th e u n d e rs ta n d in g o f i t s i n t e r n a l o rg a n ic coheren ce and l i f e p r o c e s s — i s th e d e te rm in a tio n o f v a lu e by la b o r t i m e 2 Then, as i t was shown, Marx put forw ard th e idea, t h a t p r i c e s and p r o f i t s can r e s p e c t i v e l y be e x p la in e d i n te rm s o f " v a lu e ” and ” s u r p lu s - v a l u e . ” To show th e r e l a t i o n betw een th e v a lu e and p r ic e on th e one hand, and th e s u r p lu s - v a lu e and p r o f i t on th e o th e r hand, h e , fo llo w in g R ic a rd o , t r i e d t o p e n e tr a te to th e e sse n c e which la y below th e ap p earan ce o f th e m a rk e t; a p p e a ra n c e s , he c laim ed , were o f te n d e c e p tiv e , t h a t " in ap pearance th in g s look d i f f e r ent."-*-^ Then he argued t h a t u n d er monopoly c a p ita lis m , com m odities were exchanged a c c o rd in g to t h e i r p r ic e o f p r o d u c tio n , th e p r ic e w hich y i e l d s th e same r a t e o f 1^^K arl Marx, P o v erty o f P h ilo so p h y (New York: I n t e r n a t i o n a l P u b lis h e r s , 193FT, p • 66• l ^ M a r x , The T h e o rie s o f S u rp lu s V alue, p . 2 0 3 . 133Marx and E n g e ls , S e le c te d C o rresp o n d en ce, p. 247• 147 p r o f i t . Then he claim ed t h a t i n an unexpanded m a rk e t, where th e r e a re b a r r i e r s to th e exchange o f com m odities, f u r t h e r p ro d u c tio n r e s u l t s i n " o v e rp ro d u c tio n , d e p r e c ia t i o n , ex c e ss o f la b o u r fo llo w ed by u n e m p l o y m e n t . " * * " ^ Thus he contended t h a t f u r t h e r p ro d u c tio n r e q u ir e s ex p a n sio n o f th e m a rk e t, h o ld in g th e Law o f M arkets u n te n a b le . These were th e ty p e o f problem s which Marx t r i e d t o answ er. Robinson h a s su g g e ste d , r e c e n t l y , t h a t " i f th e r e i s any hope o f p ro g re s s i n econom ics a t a l l , i t must be i n u s in g academ ic m ethods t o so lv e th e prob lem s posed by M a r x . "^-3 5 Now t h a t a t t e n t i o n s o f th e overw helm ing m a jo r ity o f eco n o m ists have been fo cu sed on th e problem s o f c r i s i s and economic developm ent i t m ight be s a i d , w ith f e a r o f much d is p u t e , t h a t th e hope o f p ro g re s s l i e s in u s in g M arx’ s method to answ er th e problem s r a i s e d by academ ic e c o n o m ists. But th e p r e s e n t w r i t e r m a in ta in s t h a t M arx’ s th e o ry o f v a lu e i s not i n a l l r e s p e c ts com plete and p e r f e c t . The r e a p p l i c a t i o n o f th e M a rx ist m ethodology r e q u i r e s re e x a m in a tio n o f M arx’ s o r i g i n a l th e o r y . -* -3 4 ]y ];arx> P o v e rty o f P h ilo so p h y , p . 64• -*-35joan R obinson. An E ssay on M arxian Economics (London: M acm illan, 1 9 4 7 ), p . 95• I B IB LI OG RAP HY BIBLIOGRAPHY A . BOOKS l a r a n , P aul A . The P o l i t i c a l Economy o f Growth. 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C a d e ll and W. D av is, 1$05• C. PUBLICATIONS OF THE GOVERNMENT, LEARNED SOCIETIES, A N D OTHER ORGANIZATIONS Board o f G overnors o f th e F e d e ra l R eserve System . Banking and M onetary S t a t i s t i c s . W ashington: Board o f G o v e r n o r s o f th e F e d e ra l R eserve System , 1943- F rie n d , Irw in , and Joan B ro n fe n b re n n e r. "B u sin e ss In v estm en t and T h e ir R e a l i z a t i o n ," The Survey o f C u rren t B u s in e s s . W ashington: Government P r i n t i n g O ffic e , December, 1950. "P ostw ar Economic P e r s p e c tiv e s ," S o c ia l S e c u r ity B u l l e t i n . Wa-shington: Government P r in t in g O ff ic e , F e b ru a ry , 1946• Temporary N a tio n a l Economic Com m ittee. V erbatim Record o f th e P ro c e e d in g s , Volume I I . W ashington: Government P r in t in g O ff ic e , March 25 t o May 29, 1939* U. S . Bureau o f F o re ig n and Dom estic Commerce. The Survey o f C u rren t B u s in e s s . 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D« "The S ig n if ic a n c e o f th e Rate of I n t e r e s t , " Oxford Economic P a p e rs , I (O cto b er, 1 9 3 $ ), 1-13“ Dobb, M. H. "Marxism and Economic T h eo ry ," Modern Q u a r te r ly , I I I (S p rin g , 1 9 4 2 ), 65-79* Durbin* E . F . M. "A R e p ly ," Econom ica, X III (November, 1933), 417-425* E z e k ie l, M o rd acai. " S t a t i s t i c a l I n v e s ti g a ti o n s o f S av in g , Consum ption, and In v e s tm e n t," American Economic Review , XXXII (Ju n e , 1 9 4 2 ), 22-49, 272-307* G ilb o y , E liz a b e t h . "The P ro p e n s ity t o Consume," Q u a rte rly J o u rn a l o f Econom ics, L II I (November, 197 27; tzo '= T tfr.-------------- - - - - - H am ilton, E a r l J . " P r o f i t I n f l a t i o n and th e I n d u s t r i a l R e v o lu tio n ," Q u a r te rly J o u rn a l o f Econom ics, LVI (F e b ru a ry , 1 9 4 2 ), 256-273 * Hobson, J* A. "U nderconsum ption," Sconom ica, X III (November, 1 9 3 3 ), 402-417* . "A R e jo in d e r," Econom ica, X III (November, T 9J3), 425-427* H o lla n d e r, H. "The Development o f R ip a rd o f s Theory o f V a lu e ," Q u a rte r ly J o u rn a l o f Econom ics, XVIII ( A ugust, 1 9 0 4 ), 455-491* Lange, O scar. "The R ate o f I n t e r e s t and th e Optimum P ro p e n s ity to Consume," Eeonom ica, V (F e b ru a ry , 1 9 3 2 ), 1 2 -3 2 . 157 L e rn e r, A. P . "The R e la tio n of Wage P o l i c i e s and P ric e P o l i c i e s . " American Economic Review, Supplem ent, XXIX (March, 1 9 5 9 ), 158-169« L u tz , F . A. "The I n t e r e s t R ate and In v estm en t i n a Dynamic Economy," American Economic Review, XXX? (December, 1 9 4 5 ), 811-830• Meade, <J. E . , and P . W. Andrews. "Summary o f R e p lie s t o Q u e stio n s on th e E f f e c t s o f I n t e r e s t R a te ," Oxford Economic P a p e r s , I (O c to b er, 1938), 1 4 -3 1 . N e is s e r , H. "Commentary on K eynes," S o c ia l R esearch a n d I n t e r n a t i o n a l Q u a r t e r l y o f P o l i t i c a l a n d S o c i a l S c i e n c e s , I I I ( N o v e m b e r , 1 9 3 ^ 7 , 4 5 9 - 4 7 8 . . "G eneral O v erp ro d u ctio n : A Study o f S ay’ s Law o f M a rk e ts," J o u rn a l o f P o l i t i c a l Economy, XLII ( A ugust, 1 9 3 4 ), 433-47)5 • R o sen stein -R o d an , P . N» "A C o -o rd in a tio n o f th e G eneral T h e o rie s o f Money and P r i c e s ," Econom iea, XVI (A ugust, 1936), 257-: S p e n g le r, Jo se p h . "The P h y s io c r a te s and S a y ’s Law o f M a rk e ts," Jo u rn a l o f P o li t i c a l Economy, L I I I (December, 1 9 4 5 ), T41-342* S ta e h le , H ans. " S h o rt-P e rio d V a r ia tio n s i n th e D i s t r i b u t i o n o f Incom e," Review o f Economic S t a t i s t i c s , XIX (A ugust, 1937)» TJ3-143’. T in b erg en , J . "Annual Survey: S u g g e stio n s on Q u a n tita tiv e B u sin ess Cycle T h eo ry ," E co n o m etrica, I I I ( J u ly , 1 9 3 5 ), 241-308. W oytinsky, S . W. " R e la tio n s h ip Between Consumers* E x p e n d itu re s , S a v in g s, and D isp o sab le Incom e," Review o f Economic S t a t i s t i c s , XXVIII (F e b ru a ry , 1 3 4 5 7 7 T ^ i n ------------------------------ 1 5 3 1 E . ESSAYS AND ARTICLES IN COLLECTIONS ! B u rn s, A. F* "Economic R esearch and th e K eynesian T hinking o f Our Time," The F r o n t i e r s o f Economic Knowledge , Number 57* New York: N a tio n a l Bureau o f Economic R esearch , 195A* H a b e rle r, G o t t f r i e d . "The G eneral T heory," The New Econom ics: K eynes’ In flu e n c e on Theory and P u b lic P o lic y ,H Ie y m o u rE . H a r r i s , e d i t o r . New Yorlcl A lfre d A . Knopf, 1 9 5 0 . H a r r i s , S e y m o u r E . ( e d i t o r ) • The New E c o n o m i c s : K e y n e s ’ I n f l u e n c e o n T h e o r y a n d P u b l i c P o l i c y . New Y o rk : A l f r e d AY ITnopi'V 1 9 5 ^ : -------------------------------- C i ta t io n s from th e above p u b lic a t io n in c lu d e : L in tn e r , John. "The Theory o f Money and P r i c e s ." M e tz le r, L loyd. "Keynes and th e Theory o f B u sin ess C y c le ." Sam uelson, P a u l. "The G eneral T h eo ry ." Sweezy, P a u l. "Keynes, th e E co n o m ist." Keynes, J . M. " P re fa c e t o th e French E d itio n o f The G eneral Theory o f Employment, I n t e r e s t , and Money, " I n t e r n a t i o n a l Economic P aper's, Number 4, t r a n s l a t i o n by P eacock. London: The M acm illan Company, 1954* L am bert, P a u l. "The Law o f M arkets P r io r t o J . B. Say and th e Say-M althus D e b a te ," I n t e r n a t i o n a l Economic P a p e rs , Number 6 . London: The M acm illan Company, 1956. Lange, O scar. "S ay ’ s Law: A R estatem en t and C r iti c is m ," S tu d ie s i n M athem atical Econom ics. C hicago: U n iv e r s ity o f Chicago P re s s , 1942. F . ENCYCLOPEDIA ARTICLES D o b b , M. H . " C a m b r id g e S c h o o l , " The E n c y c l o p a e d i a o f t h e S o c i a l S c i e n c e s , V , 363-371• New Y o r k : TEe M a c m i l l a n C om pan y, 1933• 159 ! H o lla n d e r, H. " R ic a rd o ,” The E n cy clo p aed ia o f th e S o c ia l S c ie n c e s , X I I I , 379~ Hew York: TKe M acm illan Company, 1933• * "S ay, Jean B .," E n c y c lo p a e d ia B r ita n n ic a (11th e d i t i o n ) , XXIII-XXIV, TUT-— ----------------------------- "Say, Je a n B .," E n c y c lo p ae d ia B r ita n n ic a ( U n iv e r s ity o f Chicago e d i t T o H T n W T T T ^ r T ^ ^ r ™ T e il h a c , E r n e s t. "Say, Je a n B .," The E n cy c lo p ae d ia o f th e S o c ia l S c ie n c e s , X I I I , 559-5601 New York: TEe M acm illan Company, 1935* APPENDIX APPENDIX A* MATHEMATICAL RESTATEMENT OF THE LAW OF MARKETS I t m i g h t b e s a i d , w i t h f e a r o f m uch d i s p u t e , t h a t t h e f o l l o w i n g p a s s a g e fr o m R i c a r d o f u l l y e x p r e s s e s t h e Law o f M a r k e t s : Demand i s o n l y l i m i t e d b y p r o d u c t i o n . No m an p r o d u c e s , b u t w i t h a v i e w t o c o n su m e o r s e l l , and h e n e v e r s e l l s , b u t w i t h a n i n t e n t i o n t o p u r c h a s e som e o t h e r c o m m o d it y , w h i c h m ay b e u s e f u l t o h im , o r w h i c h m ay c o n t r i b u t e t o f u t u r e p r o d u c t i o n . B y p r o d u c i n g , t h e n , h e n e c e s s a r i l y b e c o m e s e i t h e r t h e c o n s u m e r o f h i s own g o o d s , o r t h e p u r c h a s e r an d c o n s u m e r o f t h e g o o d s o f som e o t h e r p e r s o n . • • . P r o d u c t i o n s a r e a l w a y s b o u g h t b y p r o d u c t i o n s , o r b y s e r v i c e s ; m o n e y i s o n l y t h e m ed iu m b y w h i c h t h e e x c h a n g e i s e f f e c t e d . - * - The i m p l i c a t i o n s o f t h i s p r i n c i p l e m ay b e s u m m a r iz e d a s : ( 1 ) ! t o t a l s u p p l y i s i d e n t i c a l l y e q u a l t o t h e t o t a l d e m a n d , ( 2 ) t o t a l r e c e i p t s a r e a l w a y s e q u a l t o t o t a l c o s t p l u s n o r m a l p r o f i t , a n d ( 3 ) t o t a l dem and f o r m o n ey i s i d e n t i c a l l y e q u a l t o t h e t o t a l q u a n t i t y o f m o n e y . *M uch o f t h i s p a r t i s b a s e d o n O s c a r L a n g e , " S a y ts Law: A R estatem en t and C r i t i c i s m , T t S tu d ie s i n M ath em atical Economy and Economics ( Chicago: U n iv e r s ity o f Chicago' P re s s , 1 9 4 2 ), p p . 4 9 -6 $ . ^David R ic a rd o , On th e P r i n c i p l e s o f P o l i t i c a l Economy and T a x a tio n (?olume I o f The Work's and C orrespondence o f David R ic a rd o , e d ite d by P. S r a f f a and M. H. Dobb. 10 Volumes: Cambridge: Cambridge U n iv e r s ity P r e s s , 1951-1955), PP* 290-291* * 162 L et u s c o n s id e r a system i n which th e r e a re (m) com m odities* The mth commodity fu n c tio n s a s th e medium o f ex change. S in c e , o b v io u s ly , the demand, and su p p ly a re b o th fu n c tio n s o f income and p r i c e , we can w r i te : L e t t e r y s ta n d s f o r income and p f o r p r ic e Dx (piyi»P2y2» p y ) « s, * m-1 rn-1 x ( Piyi»P2y2»*” Pm-iym-l) or m-1 m-1 S I T p x y x D x S i_ P X y x S x (l«a) x=l x=l and m-1 2 Z pxyx^x - ^m x= l m-1 1E I 7 p x y x ^ x — f i n a l l y m m-1 2— pxyxox = IT pxyxD x+ 5 S j h + D m x= l x= l m m-1 ST p xyxsx » ZT p xyxsx+ % » D m + sm X=1 X— 1 S ince Sm ■ + D m s D m + Sm T h e re fo re m m 21 pxyxox s 2Z pxyxsx (i*b) x= l x= l E q u a t i o n ( l . a ) i s t h e e q u i l i b r i u m p r i c e a n d in c o m e a n d e q u a t i o n ( l * b ) i s t h e e q u i l i b r i u m f o r t h e w h o l e s y s t e m i n c l u s i v e o f t h e d em and a n d s u p p l y o f m o n e y . The e q u a t i o n ( l . a ) i s i n d e t e r m i n a t e . I n o t h e r w o r d s , t h e t o t a l s u p p l y o f c o m m o d i t i e s i s i d e n t i c a l l y e q u a l t o t h e t o t a l d em and f o r c o m m o d i t i e s o n l y u n d e r t h e c o n d i t i o n o f m o n e t a r y e q u i l i b r i u m : I t m e a n s t h a t t h e r e i s n o ’d e s i r e t o i n c r e a s e o r d e c r e a s e h o a r d s o f m o n e y . g e n e r a l " g l u t ” i s i m p o s s i b l e a l t h o u g h p a r t i a l " g l u t ” may o c c u r . A ny p a r t i a l o v e r p r o d u c t i o n i n o n e p l a c e i s t o b e a c c o m p a n ie d w i t h u n d e r p r o d u c t i o n s o m e w h e r e e l s e ; o r a d e f i c i e n c y o f r e c e i p t s i n o n e p l a c e i s t o b e L e t A d e n o t e t h e t o t a l r e c e i p t s o f a l l e n t r e p r e n e u r s , C t h e a g g r e g a t e c o s t o f p r o d u c t i o n o f a l l e n t r e p r e n e u r s , a n d E t h e a g g r e g a t e p r o f i t s o f a l l e n t r e p r e n e u r s . L e t The m e a n in g o f t h e ,s e c o n d p o s t u l a t e i s t h a t t h e 2 a c c o m p a n ie d w i t h s u r p l u s r e c e i p t s so m e w h e r e e l s e . A c c o r d i n g t o t h e Law o f M a r k e t s : m -1 m -1 m -1 ^Ibid., pp. 289-300. 164 j i us assume t h a t t o t a l com m odities a re composed o f fo u r | k in d s : (1) th o se t h a t e n tr e p r e n e u r s p u rch ase from o th e rs * L et them be c a lle d ’’p r o d u c ts ,” and be d e s ig n a te d by «p.w They a r e n o t th e so u rce of p r o f i t , u n le s s th e y a re tra n sfo rm e d i n to ’’com m odities” f o r th e sake o f ! i s e l l i n g . (2) Those t h a t e n tre p re n e u r s s e l l to o t h e r s . L et them be c a lle d "Commodity,” and be d e s ig n a te d by ”U .” They a re th e so u rce o f p r o f i t . They a r e th e " P ro d u c ts ” which a re gone th ro u g h th e p ro c e s s o f p ro d u c tio n . (3) Money. L et i t be d en o ted by ”M," and (4) la b o u r-p o w e r. I t i s shown by ”L .” W e can w r ite : S. Dp - Z Sp 2 1 Du = 2 T Su * D m = = * zb 1 = r Sj and m HI PxYx^x = Dp + Du + D m + Di x = l m 21. Px^x^x s Sp + Su + Sm + S i x= l S ince m m 51 PxMx^x S XT PxTxDx x = l x = l 165 T h e r e f o r e Dp + Du + % + D i s S p + S u + % + S i A c c o r d i n g t o t h e Law o f M a r k e t s ^m 3 A M 3 0 T h e r e f o r e Dp + Du + Dx 5 S p + Su + S± ( l . c ) A c c o r d i n g t o o u r d e f i n i t i o n Su - Dp 5 E T h i s i s t h e p l a n n e d p r o f i t s o f e n t r e p r e n e u r s fr o m ( l » e ) E 5 S u + Dp s (Du - Sp ) + ( D i - S i ) f o r Su - Dp s Bu - S p h o l d s t r u e , i t i s n e c e s s a r y - t h e n : o r D]_ - 8 ]_ s A L. a 0 D i 5 S X T h u s f o r m -1 m -1 m -1 2 T ax g 527 cx + 2 T Ex X = 1 X = 1 X = 1 a n d Dp + Du + % + Dx s 3 p + Su + ^ + S x h o l d t r u e , i t i s n e c e s s a r y t o h a v e : Dm - Sm . a M a 0 a n d - Sq & A L 3 0 T h u s , t h e c e n t r a l i m p l i c a t i o n o f t h e Law o f M a r k e t s i s t h a t t h e r e i s a l w a y s a s t a b l e e q u i l i b r i u m b e t w e e n t h e c l a s s o f c o m m o d i t i e s a n d l a b o r ; a n d t h e e x c e s s s u p p l y o f c o m m o d i t i e s m e a n s e x c e s s dem and f o r l a b o r . 166 j M althus argued t h a t : , t I t i s by no means t r u e , a s a m a tte r o f f a c t, t h a t com m odities a re alw ays exchanged f o r com m o d itie s . The g r e a t mass o f com m odities i s exchanged d i r e c t l y f o r la b o u r , e i t h e r p ro d u c tiv e o r u n p ro d u c tiv e ; and i t i s q u ite obvious t h a t t h i s mass o f com m odities, compared w ith th e la b o u r w ith which i t i s t o be exchanged, may f a l l i n v a lu e from a g lu t j u s t as any one commodity ; f a l l s i n v a lu e from an e x c e ss o f su p p ly , compared e i t h e r w ith la b o u r or m oney.3 T his passage sim ply means t h a t th e r e may be a g e n e ra l abundance o f su p p ly o f com m odities whose p r i c e s w i l l d e c re a se as compared w ith th e p r ic e o f la b o r , th e r e f o r e p r o f i t s w i l l cT e'clin e and t h i s w i l l check f u r t h e r p ro d u c tio n . R icard o alw ays m a in ta in e d t h a t th e abundance o f com m odities means p r o p o r tio n a te in c r e a s e s o f demand f o r la b o r; t h i s w i l l cause th e p r ic e o f la b o r to r i s e . ^ M althus den ied th e c o n te n tio n o f R icard o on th e ground t h a t ex c ess supply o f com m odities may be a s s o c ia te d w ith th e e x c e ss supply o f la b o r which i s th e s t a t e o f unemploy m ent. T his o cc u rs when m onetary e q u ilib riu m no lo n g e r i s m a in ta in e d , which le a d s to a g e n e ra l c r i s i s . The t o p i c o f th e te n d en cy o f th e r a t e o f p r o f i t to f a l l , -which was a id e d by d is c u s s io n o f th e r e q u i r e - 3t . R. M a lth u s, P r i n c i p l e s o f P o -l-itical Economy (second e d i t i o n ; London: P ic k e r in g , 1 8 3 6 ), p . 316* ^-Ricardo, crp* cit., Volume II, p. 308. 167 ! m e n t s f o r a t h e o r y o f v a l u e , w a s t h e c o r e o f t h e ; R i c a r d o - M a l t h u s d i s a g r e e m e n t . M a i t h u s a r g u e d t h a t a f a l l i n t h e p r i c e o f c o m m o d i t i e s , d u e t o a d e f i c i e n t d e m a n d , m ay c a u s e p r o f i t s t o d e c l i n e . T h i s w a s l i k e l y t o h a p p e n i f a c c u m u l a t i o n o f c a p i t a l w a s t o o r a p i d . j I t i s p o s s i b l e , M a l t h u s a r g u e d , f o r p r o d u c t i o n t o e x c e e d c o n s u m p t i o n , i n t e r m s o f a d e f i c i e n c y o f dem an d w h i c h c a u s e s a f a l l i n p r i c e a n d i n p r o f i t , a n d a c o n s e q u e n t " g l u t 0 i n t h e b u s i n e s s . ^ M a l t h u s h e l d t h e v i e w t h a t , w i t h e x p a n d i n g a c c u m u l a t i o n , i t i s a n a t u r a l t e n d e n c y f o r a l l c o m m o d i t i e s t o f a l l in . v a l u e r e l a t i v e l y t o l a b o r ^M althus, op* c i t ., p p . 326-327* 6I b i d . , p . 315 • M althus made h im s e lf e x p l i c i t when he sai'd t h a t th e d o c tr in e which was su p p o rted by "Mr. Say, Mr. M il l, and Mr. R ic a rd o ," seemed t o have appeared " u t t e r l y unfounded, and co m p le te ly to c o n tr a d ic t th e g r e a t p r i n c i p l e s which r e g u la te su p p ly and demand." APPENDIX APPENDIX B THE LAW OF MARKETS AND THE THEORY OF PRICE P xY x^ x a P x y x S x A c c o r d i n g t o t h e Law o f M a r k e t s : m -1 m -1 S T X = 1 i f Dm " S m s A M S 0 t h e n m m S T P x Y x ^ x 2 SI P x Y x ^ x x = l x = l W hen t h e Law h o l d s t r u e , t h e e q u i l i b r i u m o f p r i c e i s i n d e t e r m i n a t e . The Law o f M a r k e t s i m p l i e s t h e n e u t r a l i t y o f m o n e y . T h i s c o m e s i n t o c o n t r a d i c t i o n w i t h t h e t r a d i t i o n a l t h e o r y o f m o n e y , ? w h i c h v i e w e d m o n e y a s o n l y a m ed iu m o f e x c h a n g e . ? K n u t W ic k s .e -ll r e m a r k e d , f,Any t h e o r y o f m o n e y . . . m u s t b e a b l e t o s h o w h ow a n d w hy t h e m o n e t a r y o r p e c u n i a r y dem and f o r g o o d s e x c e e d s o r f a l l s s h o r t o f t h e s u p p l y o f g o o d s i n g i v e n c o n d i t i o n s , ” i n L e c t u r e r s o n P o l i t i c a l E co n o m y (L o n d o n : R o u t l e d g e a n d K e g a n P a u T T L i m i t e d , W , p p • 1 5 9 - 1 6 0 . H a fcersitv ©f Southern C alifornia

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Creator Kooros, Ahmed (author)

Core Title An inquiry into the formulations and implications of Say's law of markets

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Walker, Franklin V. (committee chair), Elliott, John E. (committee member), Pollard, Spencer D. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-446194

Unique identifier UC11264167

Identifier EP44755.pdf (filename),usctheses-c20-446194 (legacy record id)

Legacy Identifier EP44755.pdf

Dmrecord 446194

Document Type Thesis

Rights Kooros, Ahmed

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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