An Introduction to the Theory of Value

on the Lines of Menger, Wieser, and Böhm-Bawerk

First Edition – 1891

by William Smart (1853-1915)

Chapter I

ITV-E1-1.1 There is an understanding among economists, dating at least as far back as Adam Smith, that, in economic science and discussion, the ordinary terms of the industrial world are to be used in the sense generally attached to them in the industrial world. This has proved a misfortune for the science which is thus bound for ever to a loose nomenclature. It is, in particular, a misfortune for English political economy which has not the possibility, so enviable in German science, of combining a new predicate with an old stem in such a way that the combined word is exact yet familiar. Hence very many terms in economics have a long and chequered history attached to them, as economists, in writing their systems,1 tried to follow the usage of the market and the street, or to free themselves from its restraints.
ITV-E1-1.2 No word has suffered more from this than the word Value. It is deeply rooted in popular conception and popular speech. Of all words used in economics it has most need of exact definition, because in that science the theory of value is the basis of everything. Yet the history of political economy is strewn with the wrecks of theories of value.
ITV-E1-1.3 Every one knows Thornton’s story of Sydney Smith [Online editor’s note: English economist William Thomas Thornton (1813-1880); English writer Sydney Smith (1771-1845). – RTL] retiring from the Political Economy Club, because his chief motive for joining had been to discover what Value was, while all he had discovered was that the rest of the Club knew as little about the matter as he did. Every one, too, has smiled at Mill’s statement, in 1848, that there was nothing in the laws of value which remained for him or any future writer to clear up. And many drew a long breath of relief when Jevons threw the term overboard altogether, declaring that neither writers nor readers could avoid the confusion so long as they used the word.
ITV-E1-1.4 But although it might be possible, by a very strict attention to proof sheets, to keep the word out of a book, it would not be possible to keep it out of the economist’s mouth, any more than it would be to banish it from ordinary speech. And – happily, as it seems to me – the recent writings of the Austrian school have shown that we may retain the old familiar word, and yet attain the exactitude of scientific nomenclature.
ITV-E1-1.5 There is a time-honoured classification to which is due much of the present confusion. In our great classic, the Wealth of Nations (Book i. chap. iv.), occurs the following well-known passage:
ITV-E1-1.6 “The word Value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘Value in use,’ the other, ‘Value in exchange.’ The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of goods may frequently be had in exchange for it.”2
ITV-E1-1.7 This passage, like many other passages in Adam Smith, does not say all that has been read into it by subsequent economists. It does not say that Use Value and Exchange Value are two great branches of one universal conception of Value. Nor does it say that they are entirely different conceptions. It merely says that the word has two different meanings. What concerns us, however, is the use that economists have generally made of this passage. They have quoted it with approval; shown that the two kinds of value do not by any means coincide; and have then gone on to discuss the latter as “economic value,” or “what we mean by value in political economy.” The best thing we can do, meantime, is to try to forget this old classification, and begin anew.
ITV-E1-1.8 It does not require proving that Value, in whichever of its various senses the word is used, does not express any inherent property of things. Very often, indeed, we can scarcely help thinking of it as a quality of a material object, – particularly when it is an object of universal desire such as gold coin. But Mr. Walker’s [Online editor’s note: American economist Francis Amasa Walker (1840–1897), son of Amasa Walker. – RTL] monetary creed, “Money is that money does,” may remind us that even the value of gold coin is given it by the service it renders in a highly organised community, and that, if any substitute be given the confidence that gold commands, the same value will attach to it – “attach” but not “inhere.” Sometimes, again, value is so strongly a personal experience that we are tempted to think of it as purely a subjective matter, and this is particularly the case among people who understand Ruskin’s [Online editor’s note: English writer John Ruskin, 1819-1900. – RTL] famous words, “there is no wealth but Life.” The different value set upon any work of art by different individuals, classes, or nations, is sufficient proof of this.
ITV-E1-1.9 But although it is almost impossible to use the term without suggesting an inherent property,3 value always implies a relation. It seems, in fact, to arise in the relation of Means to End. Value, then, will take various forms according to the “end” to which it is related. The end may be, directly, the Wellbeing of man, whether that wellbeing be conceived of as the ideal good of humanity, or the social ideal current at the time, or the realisation of an individual character, or merely the gratification of individual desire. Or the end may be some mechanical or technical result, which has no direct reference to personal wellbeing, or at least admits of being considered, for the moment, as a merely objective or intermediate result. Answering to these two classes of “ends” we may divide the phenomena of value into Subjective or Personal Value and Objective Value. These expressions are not by any means perfect,4 but they are the terms generally used by the Austrian school, and they are perhaps the best we can get.
ITV-E1-1.10 Value in the subjective sense we may call, generally, the importance which a good is considered to possess with reference to the wellbeing of a person. In this sense a good is valuable to me when I consider that my wellbeing is associated with the possession of it – that it “avails” for my wellbeing.
ITV-E1-1.11 Value in the objective sense is a relation of power or capacity between one good and another good. In this sense a good has value when it has the power of producing – or “avails” towards – some objective effect. There are, consequently, as many objective values as there are objective effects. Thus while the subjective value of coal to me is the amount of good I get from the fire, its objective value is the temperature which it maintains in the room, or the amount of steam it can raise in the boiler, or the money it brings me if I sell it. This kind of value is very much synonymous with the word “power” or “capacity”; it is as common to speak of “heating power” as of “heating value.”
ITV-E1-1.12 There is no doubt that “Value” is generally used, in ordinary language and thought, in either of these senses. But there is also no doubt that powers or values of the latter sort in general do not enter into economic study at all. We have nothing to do with the heating value of coal, or the resisting power of iron, or the fattening value of oil-cake; these are purely physical or technical matters. But, inside this class of Objective Values, there is one species which has an economic interest, and that is, the “power of exchange” or “purchasing power.” By this is meant the capacity or power of a good to obtain other goods in exchange. Of course the word “power” is also misleading. No good has this power in itself. It is, at best, a power conferred on goods by the complex machinery of an organised economic community, and it does not exist outside of a system of exchange. It is a power that lies in the connection or relation of two things, and not in either of the things. Jevons very well called it a Ratio of Exchange. But it is purely an “objective” relation as we have defined it; just as objective, for instance, as heating power. When the quarter of wheat in the market exchanges for 40/, we say, indifferently, that the “exchange value of the wheat is 40/,” or that “the purchasing power is 40/,” or that “the ratio of exchange between the wheat and the shillings is as 40 to 1.” [Online editor’s note: the solidus mark “/” is the symbol for shillings. – RTL]
ITV-E1-1.13 It has been the dream of economists to explain all kinds of value from a single universal conception, but so far the result has only been to group heterogeneous elements under a common name. It may be possible, I think, to connect them all under the general conception of “that which avails,” or under the relation of Means to End; but whether much is gained by this for economic science I should not like to say.5
ITV-E1-1.14 Here, at any rate, we shall follow the line which has led to good results among the Austrian economists, and consider Subjective and Objective Value in general as two independent conceptions accidentally associated in common usage.
ITV-E1-1.15 But while this holds as regards Subjective and Objective value in general, we shall find that there is a close and necessary connection between subjective value and that one branch of objective value just referred to, Objective Exchange Value. In the latter part of this book it will be shown that this latter Value, while, in itself, an objective, and, as it were, a mechanical power, is a superstructure on the subjective or personal estimates of value put upon goods by buyers and sellers within a market. In short, we shall have to vindicate Jevons’ assertion, now put forward as a text of the Austrian School, that “Value depends entirely on Utility.”
ITV-E1-1.16 From what has been said the reader will be prepared for our claim, that, in economics, when the word Value is used without qualification, it should mean Subjective or Personal value, and not Purchasing Power. The first and the main work of the theory of value, then, is to inquire into the nature, causes, and standard of Subjective Value.

ITV-E1-1.n1.1 1 The present position of economic science, as distinguished from many other sciences, is, perhaps, explained when we remember that, up till the last few years, almost every economist thought proper to write an entire “system.”
ITV-E1-1.n2.1 2 The division is as old as Aristotle. “Of everything which we possess there are two uses both belonging to the thing as such, but not in the same manner; for one is the proper and the other the improper or secondary use of it. For example, a shoe is used for wear, and is used for exchange; both are uses of the shoe.” – Politics (Jowett), § 9.
ITV-E1-1.n3.1 3 The following passage, from a writer to whom we owe much in the present economic reaction, is worth quoting: –
ITV-E1-1.n3.2 “Value is the life-giving power of anything; cost, the quantity of labour required to produce it; price, the quantity of labour which its possessor will take in exchange for it. ‘Value’ signifies the strength, or ‘availing’ of anything towards the sustaining of life, and is always twofold; that is to say, primarily, intrinsic, and secondarily, effectual. Intrinsic value is the absolute power of anything to support life. A sheaf of wheat of given quality and weight has in it a measurable power of sustaining the substance of the body; a cubic foot of pure air, a fixed power of sustaining its warmth; and a cluster of flowers of given beauty, a fixed power of enlivening or animating the senses and heart. It does not in the least affect the intrinsic value of the wheat, the air, or the flowers, that men refuse or despise them. Used or not, their own power is in them, and that particular power is in nothing else. But in order that this value of theirs may become effectual, a certain state is necessary in the recipient of it. The digesting, breathing, and perceiving functions must be perfect in the human creature before the food, air, or flowers can become of their full value to it. The production of effectual value, therefore, always involves two needs: first, the production of a thing essentially useful; then the production of the capacity to use it.” – (Ruskin, Munera Pulveris, i. § 12.)
ITV-E1-1.n3.3 I quote this passage, not as agreeing with it, but partly on account of its suggestiveness, partly to show how the idea of a relation is, even by such a careful writer as Ruskin, spoken of as something inherent in one or other of the related members.
ITV-E1-1.n4.1 4 For instance – to say nothing of the fact that all economic ends must be subjective – of the four ways in which Wellbeing may be conceived, the three first may be considered objective as compared with the subjective fourth, while the wellbeing of man generally – particularly the ideal good – may very well be called the only objective end in contrast to the accident of a technical result. But, as it is impossible to keep the economic vocabulary clear of the philosophic, we may be satisfied if these names are definite enough to keep before our minds the broad lines of the division indicated above.
ITV-E1-1.n5.1 5 Böhm-Bawerk, like Neumann [Online editor’s note: probably one of several economic writers named Max Neumann. – RTL], while acknowledging that the two conceptions have many internal and external relations, and that both spring undoubtedly from one common root, thinks that any more universal conception, which should embrace them both, would be ganz leer und schattenhaft. [Online editor’s note: “utterly empty and shadowy.” – RTL]

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