An Introduction to the Theory of Value

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

Second Edition – 1910

by William Smart (1853-1915)

Chapter I

ITV-E2-1.1 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. In many respects this has been unfortunate: the science is bound for ever to a loose nomenclature. It is particularly unfortunate 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 and yet not unfamiliar. Hence very many terms in economics have a long and chequered history attached to them, according as economists, in writing their systems, have tried either to follow the usage of the market and the street, or to free themselves from the vexatious restraint.
ITV-E2-1.2 No term affords a better illustration of this than the word Value. It is deeply rooted in popular conception and popular speech. Of all words used in economic theory, it has most need of exact definition, because there the theory of value occupies the chief place. Yet the history of economic science is strewn with the wrecks of theories of value.
ITV-E2-1.3 Every one knows Thornton’s story of how Sydney Smith [Online editor’s note: English economist William Thomas Thornton (1813-1880); English writer Sydney Smith (1771-1845). – RTL] retired 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, made in 1848, that there was nothing in the laws of value which remained for him or for any future writer to clear up. And many felt sympathy with Jevons when he threw the term overboard altogether, declaring that neither writers nor readers could avoid the confusion so long as they used the word.
ITV-E2-1.4 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-E2-1.5 There is a time-honoured classification to which is due much of the present confusion. In the Wealth of Nations (Book i. chap. iv.), occurs the following well-known passage:
ITV-E2-1.6 “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.”1
ITV-E2-1.7 This passage, like much else in Adam Smith, does not bear 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-E2-1.8 It scarcely requires 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 Value as a quality of a material object, – particularly when it is an object of universal desire, such as gold coin. But Walker’s [Online editor’s note: American economist Francis Amasa Walker (1840–1897), son of Amasa Walker. – RTL] monetary formula, “Money is that money does,” may remind us that the value even of gold coin is given to it by the service it renders in a highly organised community, and that, if to any substitute can 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-E2-1.9 But although it is almost impossible to use the term without suggesting an inherent property,2 Value in all its forms implies a relation. The word seems to arise fundamentally in the relation of Means to End, and will accordingly take various forms according to the “end” conceived of. The end may be, directly, the Wellbeing of man, whether conceived of as the ideal good of humanity, or the social ideal current at the time, or the realisation of individual character, or merely the gratification of individual desire. Or it 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. Corresponding 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,3 but they are the terms generally used by the Austrian school, and they are perhaps the best we can get.
ITV-E2-1.10 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 or dependent on the possession of it – that it “avails” for my wellbeing.
ITV-E2-1.11 Value, in the objective sense, is a relation of power or capacity between a good and an objective result. 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-E2-1.12 There is no doubt that “Value” is generally used, in ordinary language and thought, in both 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 properties of oil-cake; these are purely physical or technical matters. But, inside this class of Objective Values, there is one species which has a peculiarly 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” here 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 25s., we say, indifferently, that the “exchange value of the wheat is 25s.,” or that “the purchasing power is 25s.,” or that “the ratio of exchange between the wheat and the shillings is as 25 to 1.”
ITV-E2-1.13 It has been the ambition 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 might 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 is doubtful.4
ITV-E2-1.14 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-E2-1.15 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 what follows 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, or at least defend, Jevons’ assertion, now become a text of the Austrian School, that “Value depends entirely on Utility.”

ITV-E2-1.16 From what has been said the reader will be prepared for the claim of this school, in opposition to Adam Smith and many of his successors, that, 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-E2-1.n1.1 1 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.” – Polities [Online editor’s note: sic; Polities should be Politics. – RTL] (Jowett), § 9.
ITV-E2-1.n2.1 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-E2-1.n2.2 I quote this passage, partly on account of its suggestiveness, partly to show how impossible it would be to reconcile any such definition of value either with ordinary language or with economic science.
ITV-E2-1.n3.1 3 For instance – to say nothing of the fact that all economic ends must be subjective – of the four ways indicated above 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 philosophical, we may be satisfied if these names are definite enough to keep before our minds the broad lines of the division indicated above.
ITV-E2-1.n4.1 4 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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