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 XII
Cost of Production

ITV-E2-12.1 We have now to compare the law of Value at which we have arrived with that generally adopted by English economists. It is a matter of common experience that, in the case of articles manufactured on a large scale – “freely produced,” or “reproducible at will” – the price always tends towards equality with the cost of their production. On this experience is founded the familiar statement that the value of a good is determined by its cost. Speaking generally, Costs of Production are all the productive goods consumed in the making of a product, – raw and auxiliary materials, machinery, power, and labour. To speak more accurately, we should substitute the term Expenses of Production, thus indicating that the naturally incommensurable “efforts and abstinences” are measured by the money paid for them. On this theory, the value of a good comes from its past.
ITV-E2-12.2 Now, on the theory above explained, we have to show that the causal connection runs the other way, from Product to Cost. Human want, as was shown, is the very first consideration in the Theory of Value. The relation of each man’s resources to his varied wants determines what is the last want satisfied in each class of want, and so the Marginal Utility and subjective value of goods. The figures which buyers and sellers respectively put on their goods determine the competitors, determine the marginal pair or the last buyer, and so determine price. Through price, the subjective valuations are carried back to means of production. As the typical labourer, the peasant, measures the value of his labour by the produce he raises, or the value of his implements by the additional crop they procure, so is all value reflected back from goods to that which makes them. Thus value comes, not from the past of goods but from their future; that is to say, from the side of consumption in satisfying want. Goods stand midway between production and consumption. In the old reading it was the former term that gave value: in the new, it is the latter.
ITV-E2-12.3 Before going further, it is necessary more exactly to define the connection between production and consumption goods.
ITV-E2-12.4 All goods find their goal in satisfying the want of man. As Roscher finely says, Ausgangspunkt, wie Zielpunkt unserer Wissenschaft ist der Mensch. [Online editor’s note: “The starting-point, and likewise the goal-point, of our science is man.” German economist Wilhelm Roscher (1817-1894) was one of the leaders of the German Historical School during its “Older,” pre-Schmollerite phase. – RTL] The consumption-good then – the good which is to find its destiny, and its life-work, in ministering to human life and want – is that for which and towards which we set in motion the whole machinery of industry. From the soil or the mine downward, every productive instrument is, economically, a consumption-good in the making. This Menger has put in terms which are now classical. He calls consumption-goods, goods of the first or lowest rank. The goods which co-operate in immediately producing these – the group of productive instruments used in the last stage of production – he calls goods of second rank. The factors of this second group, again, are goods of third rank, and so on. Thus, if a loaf is the consumption-good or the good of first rank, the flour, the oven, and the baker’s labour form the group of second rank; the wheat, the mill, the labour, and the material that makes the oven, the group of third rank; the land, the agricultural implements, the materials of the mill, etc., the group of fourth rank, and so on. Now, as we have seen, consumption-goods receive their value from the dependence of some want upon them – from their being the condition of some satisfaction. Take, then, the good, a loaf of bread. The value of the loaf in the baker’s shop is determined subjectively by its marginal utility to the consumers, and the valuations (based on this marginal utility) of buyers and sellers decide the market price at which the bread is put on the market. Looking back now at the continuity of production and consumption goods, we see that the last group of productive goods which issues in the bread is really the loaf in the making. If the baker had not that group he would not have the bread, and we should lose our marginal utility – the satisfaction of the want. What, then, depends on the having or losing the group of second rank? Simply the marginal utility of the finished good. Tracing back the loaf to more and more remote groups, we find, similarly, that what depends upon them all is, at different points of time, the marginal utility of the finished consumption-good: that is to say, they are all, economically, the loaf in the making. In short, value depends on a relation to human wellbeing as indicated by the satisfaction of want; and productive goods only come into contact with human wellbeing through the final member of the chain, the consumption-good. No one values the iron ore, or the ragged “pig,” for what it is in itself. Ingenious and delicate as may be the machine, no one puts together these cunning arrangements of wheels and pulleys and rollers for the sake of showing the machinist’s skill, or the working of mechanical powers. Even the smooth and gossamer yarn is not a thing which can satisfy any human want. All these goods are only “good” because they are cloth, or some other consumption-good, in the making. We “value” them, not because we see the iron fabrics passing, by wear and tear of the machine, into the warp, or the threads of human life being woven into the weft, but because, with prophetic eyes, we see the web covering the otherwise bare backs of men and women, and giving up its life in ministering to theirs.
ITV-E2-12.5 The conduction of value, then, would seem to be, from product1 to means of production; and this would, probably, be generally recognised if every product were connected immediately with only one group of means of production. In the case of a wine grower it is easy enough to see that the value of the grapes is derived from the wine, and the value of the vineyard from the grapes; that the price, for instance, at which he would let his land to a third party, or the number of labourers he could, economically, hire to assist him, is determined by average productiveness. Or suppose we value a good subjectively, say, at £100, there seems a very good reason why we should be willing to pay, say, £50 for the labour of raising raw material, £40 for manufacturing it, and £10 for delivering it. But in modern divided industry it is, of course, impossible for most of the intermediate producers to know anything about the marginal utility, or the price which the goods will obtain when finished. The labourer paid 20/ a week for lumbering will scarcely connect his wage with the price of the delicately carved cabinet which, among other final products, is the ultimate goal of his labour. Even the timber merchant, as a rule, will not make his calculations of the price he can pay for wood with any better knowledge of its final destiny. But each branch of production has an immediate product as well as an ultimate one, and in the marginal utility and price of this intermediate product it finds its value and price. Thus though the conduction of value from anticipated final product back to intermediate product, and from that back to the very first product of all, may remain hidden from each producer, the organisation of industry practically carries the information from stage to stage. The weaver finds a market value already attached to yarn, and, measuring by that, he puts a value upon his labour and the raw material for which he offers. But the cloth he weaves is the means of production for the next intermediate product, and gets its value from it again. And so the line of communication goes on down the ranks, till it comes to the final consumption-good.
ITV-E2-12.6 The proof of this conduction is not far to seek: it is found in the common phenomenon of Dead Stock. However great the cost expended on an article, if the public will not have it, all the costs in Christendom will not give it a value; and if the good continues “dead,” all the machinery and buildings by which it would have been made lose their value, except in as far as they can be turned to other uses, and get another value from another product. Even labour suffers. Whatever the expense of his special training, the labourer can give no value to his work, and loses his wage to the extent that he cannot adapt his skill to other employments. Suppose that an article of which there is a stock, goes out of fashion, the value and the price of it fall at once. The first thing the immediate manufacturer does is to ask himself if he can reduce his costs to suit the new price: if he cannot he abandons the manufacture, and it passes probably to some man who is able to produce more cheaply, it may be by reducing wages and salaries, by new processes and more complicated machinery, or, perhaps, by employing women instead of men. In any case the cost must conform to the value.
ITV-E2-12.7 A striking proof of this is given in the case of silver. Most people have a dim idea that silver, as one of the precious metals, has a value almost innate. Yet after 1873 mine after mine was abandoned although the ores were as rich and the reefs as plentiful as ever. What was the cause? – Simply that silver was discarded as currency in certain countries: that is to say, silver fell in the estimation of great communities, and the loss of value was carried back till the price realised by the virgin silver was not enough to pay for the mining of it.
ITV-E2-12.8 Of course the identity of value between final product and groups of higher and higher rank is not absolute. It would be strange if it were; for where all the groups get their value from the last product, and this gets its value from a thing so inconstant as human want and so elastic as human provision, it is to be expected that the calculation which conducts value back and back, will, often enough, be mistaken. Builders tempted, by high freights at a time of sudden demand, to lay down a ship, must reckon with the possibility that, ere it be finished, the tide of prosperity may have ebbed, and that the price realised for the ship may scarce repay the wages and prices paid in anticipation. And, besides these fluctuations which cannot be reduced to law, and are often the chances on which the employer (as distinguished from the capitalist) makes his great profits – and losses – there is one constant difference between the value of the productive groups and that of the final product; that is, Interest. With this, however, we have no concern here.

ITV-E2-12.n1.1 1 It need scarcely be said that it is anticipated product: in modern circumstances it is of course impossible for the fore producers to wait on final sales, even if makers and merchants did not regularly anticipate demand; but this does not affect the logical connection.

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