Chapter V. Labour Theories

CHAPTER V

LABOUR THEORIES

IN my “Capital and Interest” (Part I) I have described three different types of the labour theory. The first of these, which in former times was represented by James Mill and McCulloch, so far as I know has found no representative in recent times, and may, therefore, be considered as dead and buried.¹

The second type, the French form of the labour theory, which regards interest as the compensation for the moral effort of saving, so far as I can perceive, has received no new reëforcements, though it holds its own within the narrow circle of its former adherents.

As for the third form of this theory, that which declares interest to be a kind of official income paid to the class of capitalists as a salary for the social function of accumulating and employing capital, it may be observed as a remarkable literary fact of the most recent times, that Adolf Wagner, whom I have conditionally ranged in this group, has now emphatically declared that he does not accept the labour theory as a sufficient theoretical explanation of the phenomenon of interest, and that those expressions of his which resemble the process of thought peculiar to this theory relate only to the socio-political view of interest, that is, to the question of its justification. Regarding the peculiarly theoretical problem of interest Wagner declares himself in agreement with the essential points of my explanation.¹ Stolzmann,² on the other hand, has accepted and elaborately defended this type of the labour theory. Since his work exhibits many original features, and certainly represents the most carefully and closely thought-out form of this theory, a somewhat more thorough exposition and consideration of it is in place here.

Stolzmann makes the theory of value his starting-point. He represents a peculiar modification of the labour-cost theory. According to him the exchange value of goods is determined by their labour-cost, but not, as Ricardo and the Socialists teach, by the quantity of labour employed in the production of goods, nor, as other theorists have been teaching, by the amount of displeasure and trouble connected with that labour; but he holds that labour is the decisive cause of value, because and to the extent that it requires remuneration, and that, therefore, it is not so much labour itself, as its wages, that determine value (p. 335). But wages themselves, and this is the second fundamental premise of Stolzmann’s system, are determined by the relative power of social groups (Sociale Machtverhältnisse). The labourer must live. In every period of his existence he needs a certain quantity of provisions (this term being used in its widest sense), and this quantity Stolzmann calls the “unit of provisions” (Nahrungsmitteleinheit). To this notion he attributes extraordinary importance. It appears to him to be an indispensable, intermediary link in the formation and determination of the value of goods. Starting from the widely spread notion that individual wants are incommensurable,¹ he thinks that the value of goods cannot be derived from or measured by them; that, on the contrary, in this, as in every other scientific question, man with all his needs must be considered as a single whole, as the unit which influences value at first hand (p. 264). The process by which value is determined, therefore, is about as follows: First of all, the magnitude of “the unit of provisions” which the working-man is able to acquire for himself is determined by social forces. This unit is not a fixed quantity established by physiology or by any law of nature, but the result of a social struggle, in which not purely economic causes, but the relative power of the contending forces decides what quantity of provisions the labourer obtains, what standard of life he can maintain. From the magnitude of the unit of provisions the value of goods is derived by the simple rule that a product is always worth as many units of provisions as there were units of time (for example, days of labour) or aliquot parts of units of time required for its production.

Stolzmann develops this “law of labour-cost,” first of all, for a hypothetical, primitive type of society. He assumes a social group of ten persons who procure their ten units of provisions upon a common plan by division of labour. They are supposed to be equal in diligence and ability, and each of them applies himself to the production of one of the ten species of goods of which every unit is composed, and, during one and the same period, manufactures ten pieces from the beginning to the end. Under these circumstances, Stolzmann continues, no other division of the produce could take place than that based on the principle that each should receive, for the unit of labour which he had contributed to production, just one unit of provisions, composed of one piece of each of the ten kinds; and the several pieces of every kind, if they should be exchanged at all, would be exchanged on an equal basis, since each of them is produced by the same number of labour units and represents the same number of units of provisions. Why? Because, according to our assumption, all the ten partners are equipotent; no one of them is subjected to any sort of compulsion or coercion, but each one, by threatening to “run away,” is in a condition effectually to oppose any attempt on the part of his colleagues to restrict him to a smaller unit of provisions or to reward him according to a worse standard for the goods produced.¹

With certain modifications Stolzmann then transfers this law of labour-cost, made plausible for a primitive community, to developed society. Here distribution is by far more complicated, partly because the units of provisions are not nowadays constituted by simply bringing together their component parts, but by complicated processes of exchange, and partly because labourers are not the only participants in the distribution of the produce, but must compete also with capitalists and landowners. But the essence of the process of distribution remains the same. Stolzmann repeatedly rejects, with the greatest possible emphasis, the idea that each of the agents of production is remunerated according to its contribution to the whole produce, and that economic causes or the technique of production are decisive in the determination of the shares in distribution. Indeed, his entire work, as its very title, “The Social Category,” shows, is an attempt to prove that the actual distribution of goods at the present time is determined, not by purely economic, but by “social forces.” To quote some characteristic sayings: “Power alone, the laws governing distribution, determine the magnitude of the shares in distribution” (p. 41). “The technical contribution of the factor, nature, differs very materially from its social contribution and share of income” (p. 341 sq.). “Not what any agent of production contributes towards the technique of ‘ production, but the dividend which can and must be given to its proprietor for its surrender, is decisive for the amount of his share in the distribution” (p. 338). The value of the whole is distributed among the proprietors of the three factors of production, not in proportion to the share which each has had in the production, but “according to principles essentially different, i.e. according to the relative amounts of social power each exerts” (p. 61), and in the following manner: The working-man desires and needs his “worker’s unit of provisions,” How large this is does not depend, as other theorists believe, on the productive effect of labour, but essentially on “the existing social class relations.” “The traditional standard of life of the working classes, their power, their covetousness, and the esteem they enjoy as fellow-men, according to the opinions regarding human dignity and the precepts of ethics and religion held at the time,” determine the rate of wages they can obtain (p. 334). But the capitalist also desires to live. He desires and needs his “capitalist’s unit of provisions,” the amount of which, like that of the worker’s unit, is determined by social forces, such as the level of culture, the extent of their fashionable wants, their previous education, the extent to which they coöperate through unions, trusts, and syndicates, the intervention of the State, and the like (p. 371 sq). Particularly decisive for the rate of profit is the standard of life of the “last,” that is, the least important capitalist, as determined by such social conditions; in other words, to capital must be given such a per cent of profit as will yield the capitalist’s unit of provisions even to the least important capitalist who can just stand the competition but is still indispensable to the production of the supplies needed by society.

Thus are determined the elements of exchange value in modern society. The exchange value of goods fixes itself at that level which is required to remunerate the labour employed in their production at the rate of wages enforced by the labourers, and the coöperating capital at the rate of profit necessary for supplying the capitalist’s unit of provisions. The landowner, on the contrary, appears merely as a “residual claimant”; he receives as the rent of land “the portion which remains after deducting the two first fixed quotas from the total receipts.”

But how can this theory of value claim to be a “labour-cost theory,” when it recognizes as an independent element in the formation of value, besides labour and the wages of labour, also the service of the capital which must be remunerated? This difficulty is surmounted by declaring the work of capitalists remunerated by interest to be a kind of labour. At the very close of his systematic presentation, Stolzmann makes this declaration when he explains profits as the “socially necessary remuneration for the socially indispensable function of forming and employing capital.” This, he says, is no new idea, but one that agrees in its essence with that conception which we have designated as the German type of the labour-cost theory of interest. Stolzmann quotes with approval an utterance of Adolf Wagner, according to which the “labour” constituting the cost of production comprises also the necessary services of private capitalists and employers, and emphatically declares that upon this idea he wishes to base, not merely, as in Wagner’s case, the social and political justification of interest, but also its theoretical explanation (p. 421 sq.). Stolzmann did not keep in sight during the whole course of his work the necessary consequences of this theory. There are passages in which he seems to hold that the labour-cost which determines value, consists of the “worker’s unit of provisions” in a narrow sense.¹ But Stolzmann’s real view does not seem to me to be represented by such casual utterances as are inconsistent with his principles, but rather by such statements as promote the capitalist’s function to the dignity of a species of labour in need of remuneration.

In my opinion Stolzmann’s theory in all its parts is open to numerous objections. What I have said in the proper place against labour theories in general, naturally applies to Stolzmann’s theory as well as the others, and I will not repeat it here. I will content myself with pointing out the most striking weaknesses of the special form which he has given to the theory.

First of all, the very foundation of the whole system, the labour-cost theory of value, is without any solid basis. He endeavours to make plausible his contention that labour-cost is the only possible foundation of value by an example taken from primitive society. In this he commits a mistake, peculiarly interesting on account of its relation to a previous discussion of his. He had justly blamed Ricardo for deducing his well-known law of value from an arbitrarily constructed primitive type of society, without noticing, the fact that the correspondence of value with the quantity of labour employed was only the result of the accidental circumstances of his arbitrarily constructed type of primitive society. But in the same breath Stolzmann commits precisely the same error by the threefold supposition that all the members of a primitive society are equally industrious and skilful, and apply their labour during productive periods of the same length.¹ He, too, has eliminated from his example any circumstance that might cause the value of the product to deviate from parallelism, not only with Ricardo’s labour-quantities, but also with his own labour-costs, or force it to conform to a standard other than this. And for the very same reason Stolzmann’s key to distribution is only “a chance peculiarity of this special hypothesis,” and no universally valid, theoretical fact. Had Stolzmann introduced into his hypothesis unequally skilful or unequally industrious partners, he would certainly have quickly convinced himself that, even in the absence of relations tending to coerce the labourer, full and equal units of provisions are not always to be realized, and that a very important part¹ of what he is inclined to treat under the head of “force” is derived from no other source than the economic efficiency of the respective factors of production. It is very easy to see why the threat of an idle or unskilful worker to “run away” will exercise a much less efficient power in securing for him a large unit of provisions than the same threat of a skilful and industrious worker !

The situation is precisely the same regarding the different lengths of the periods of time which intervene between the beginning of labour and the acquisition of its fruits, and during which every one must wait. In Stolzmann’s primitive society no regard for these intervals of time can interfere with the labour-costs key which he has discovered, since they are assumed to be the same for all labourers and for all sorts of production, thus mutually offsetting each other. But Stolzmann cannot and evidently does not claim that this equality of intervals of time is actually to be met with in real life; certainly he will not claim that it is so universally met with that it may be regarded as a typical, normal case, from which a universally valid law may be derived. Just as little can he assume without proof that the diversity of these intervals is without influence on the formation of value. But he actually does make this assumption.

He touches upon this question in that portion of his book (p. 303) in which he states that the work done in advance is substantially equal to that done afterward, and that the difference between these kinds of labour is “nothing but” a difference in time, which in his primitive community exerts “no appreciable influence upon value and distribution.” As the same quantity of labour is at stake in both cases, that performed in advance and that performed afterward must be regarded as equal for purposes of distribution. According to his notion, time can play a part in the formation of value and in distribution in the form of labour-time only, and hence “the value to be allotted to the several labourers as multiples or aliquot parts of units of provisions must be proportioned to the length of time which is put in by the several labourers,” without any reference to the question whether the labour was performed in advance or afterward. I think all this is simply a presumption contrary to facts, which reminds us of Marx’s¹ unproved denial of the influence of the time spent in waiting, and which indicates a petitio principii invoked by both authors in favour of the principle of value which each holds.²

The unnatural character of Stolzmann’s conception, resulting from the fact that he stamps a manifest proprietor’s revenue as a species of wages of labour, I need not demonstrate again after all that I have said on this point in my treatment of labour theories in general.

Stolzmann seems to me to be wholly in error in his attempt to attribute to the capitalist’s unit of provisions the importance of a determining cause in the processes of distribution and the formation of capital. If there is anything that is not the cause of the existence or of the height of interest, but its effect, that is surely the standard of life of capitalists. There is no minimum of property with regard to which one could say that any technical need of production or any other socio-economic necessity requires that it must support its owner with a fixed rate of income. A nation needs capital, and so long as the formation of capital is predominantly effected by private economy it also needs capitalists; but it is by no means in need of these to such an extent that it must maintain any person or any class of persons by means of a fixed rate of income on capital. Whoever possesses too little capital of his own to enable him to live on the revenue derived from it in the manner which he considers required by his rank is not on this account obliged to withdraw from his “class” (if by ”class“ be not meant the group of perfectly idle capitalists, a group certainly not absolutely necessary to the economy of any nation) or to be deprived of his economic existence, but he can very well earn what is lacking by employing or augmenting his personal activity. In fact this is done by the proprietor of a small capital who seeks for employment as an official or a physician or a menial servant, and the same thing is done by the employer who does not confine himself to the general direction of his enterprises, but works in it with his own hands, and by performing the functions of a director or foreman or a simple workman earns in his own enterprise, as it were, also a salary or a wage.

Stolzmann himself had observed a number of difficulties connected with his doctrine regarding the influence of the unit of provisions of the last capitalist, namely, that capitalists, and especially the least important of them, such as labourers, artisans, or officials, are also people who need not live on the revenue of their capital; that the capitalist is not identical with the employer; that the idle capitalist is not a social necessity; that if the entrepreneur rather than the money-lender be regarded as the decisive personality, he is not accustomed to work with his own capital alone, so that in this case the capital of the last employer would not coincide with the amount of capital employed in the last enterprise, and so on. Stolzmann accompanies the review of these difficulties with a very frank recognition of their magnitude. He is forced to admit that when one faces the complete reality, “difficulties quite insuperable” stand in the way of his conception, and that especially the relation, lying at the basis of his conception, between the material and the personal factor, that is, between capital as the factor of production, and the personal proprietor of the same, the capitalist, “seems either not to exist or to be very accidental and loose” (p. 380). In discussing details he finds one of these difficulties “very serious,” at first sight even “almost overwhelming”; another is characterized as “still much worse”; again another causes him “almost to doubt” the exactness of his theory; while still another makes it appear “absurd,” and so on. Nevertheless he thinks himself able to steer his course among all the cliffs which start up in his way by means of a system of artificial explanations and bold deductions, with which, I at least believe, only one who possesses as great a predilection for the standpoint defended by Stolzmann as the author himself will be. inclined to be satisfied. I, therefore, think a detailed criticism unnecessary, and content myself with the two following remarks:—

First, Stolzmann has not kept in view a certain difficulty which would probably have demonstrated the untenableness of his standpoint more strikingly than anything else could have done. This difficulty lies in the circumstance that the magnitude of the entrepreneur’s capital varies greatly, not only between enterprises of various sizes within the same branch of business, but also for technical reasons between one branch of production and another, e.g. between a gun foundery and the trade of a craftsman or a pedler, and that the magnitude of the capital of the smallest entrepreneur¹ capable of competition, which according to Stolzmann is decisive for the capitalist’s unit of provisions, is extraordinarily small. A tailor in some little place may carry on quite a prosperous enterprise on the basis of a capital of 100 florins, either of his own or partly or altogether borrowed, but will any one seriously claim that the level of profits in a nation or the rate of interest, let us say the question of its being fixed at 4 or 4½ per cent, will be determined by the fact that this man and such as he need for a living such as is usual in their class 4½ instead of 4 florins per annum! In order to forestall any objection, let me add one other remark. A doubt might arise as to whether, according to Stolzmann’s theory, the capitalist employer’s unit of provisions must be exclusively supplied from profits on capital, or whether in the calculation the whole income of the employer is taken into account Practically this difference, especially important in the case of the smaller and least important employers, would show itself in the taking or not taking into account of those parts of revenue which are earned by personal labour such as could be performed by paid employers or helpers.

Stolzmann does not expressly decide this question in his final and formal definition of the “last capitalist.” He defines this person age (p. 396) as the “proprietor of a stock of capital by means of which and the credit based on it he is able to establish and prosperously to carry on the last still competing enterprise in such a way that by means of the value of its produce he may be able to defray the expense not only of the wear and tear of capital and of the wages of labour, but also of the minimum standard of life usual with employers of the time, and of the interest on the capital borrowed.” With this definition one must still ask whether Stolzmann means by the “wages of labour” only those paid to other men or also those earned by the employer himself. In my opinion, the whole tendency of Stolzmann’s theory here demands the narrower interpretation of the term "wages of labour," so that wages earned by the employer himself are to be considered not as a part of the expense to bededucted beforehand, but as a part of the capitalist's unit of provisions remaining after the deduction of expenses. But Stolzmann's theory comes to grief whichever signification he adopts. If he does not choose to reckon, in the socially necessaiy unit of provisions, the personal earnings of the entrepreneur, it means that in our neither fanciful nor impossible example of the tailor with ioo florins of capital and 4 or even 10 or 20 florins of profits, he maintains that the standard of life usual to the class of poor, independent craftsmen can be nowadays maintained with 4, 10, or 20 florins yearly; or, in manifest opposition to facts, that enterprises of such insignificance as not to afford a bare competence without the master's manual labour cannot exist; in other words, that the economy of nature requires that even the class of the smallest entrepreneurs shall be made up of capitalist employers who do not themselves labour. But if Stolzmann chooses to count these earnings as a part of the unit of provisions, not as wages of labour but as profits of capital, he arrives necessarily at the absurd conclusion that our little tailor, who certainly earns by his business every year more than some hundred florins, receives from his capital of 100 florins a profit of some hundreds per cent, and that this monstrous rate of profit is to be regarded as the general one of that time and nation as determined by the last capitalist’s earnings. Or, finally, he may choose to count the personal earnings of the last capitalist as a part of his unit of provisions, and at the same time recognize them as wages. I may observe, by the way, that this is most likely Stolzmann's meaning, although on one occasion and in a passage which purports to be a definition, he expresses himself in a manner incompatible with this interpretation.¹ But if this be Stolzmann’s opinion, he has evidently completely failed in his explanation and demonstration. He wished to show that the rate of profits is determined by the capitalist’s unit of provisions. But if, besides the profit of capital, some other thing, such as the earnings of labour, is or can be included in the unit of provisions, even if this unit were itself real, and were able to determine anything whatever, at best it could only determine how much the smallest capitalist-employer must receive from two different sources together; but as these two sources can be combined in all possible proportions, the part which profits have in that, mixture,—the real object of the whole inquiry,—emains completely undetermined. Moreover, Stolzmann has not even tried to demonstrate, —what indeed cannot be demonstrated at all, —that between these two sources there must be some socially necessary proportion, and that the share of the capitalist must accordingly be a quantity determined by a social necessity and itself ruling the whole capital market. Such an attempt at demonstration, not to speak of other difficulties, would be refuted by the simple case of the little tailor which shows that the part which capital occupies in the total income of the smallest entrepreneur is relatively trifling, a veritable quantité négligeable; and one could not avoid the absurdity that to gradations within this evidently insignificant quantité négligeable must be ascribed he all-decisive rolô in the world of capital.

In conclusion I must not omit to mention that Stolzmann’s treatment in individual cases often attracts me by its freshness and originality, as well as by the evident energy of his spirit of investigation; but as for its positive results, I regard them as so unsatisfactory that I do not expect them to play an influential part in the future history of theories of interest.

¹ Though Giddings’s theory, which we have briefly considered in another place (see above, p. 11), bears a certain resemblance to this type, yet his standpoint is theoretically so different and so much more advanced that I preferred to range his theory in another and more modern group.

¹ “Grundlegung,” 3d ed., Pt. II, p. 289 sq.

² “Die sociale Kategorie in der Volkswirtschaftslehre,” Berlin, 1896.

¹ I have criticised this opinion in another place (Conrad’s Jahrbüher, N.F., Vol. XIII, p. 46 sq.). Here I wish to avoid criticism, and will therefore not examine the point further at this time.

¹ pp. 31–36; see also p. 304.

¹ E.g. p. 330, where he says, Capital is identical in value with the labour-cost employed in it, and labour-cost is identical with the workers’ units of provisions paid as wages to the labourers. Similarly, pp. 372 and 378, where he works it out numerically. I observe also that these utterances are not based upon the assumption of a primitive, non-capitalistic state of society, but that the existence of capital in a developed community is assumed. In my review of Stolzmann’s book, in the Zeitschrift für Volkswirtschaft, Socialpolitik und Verwaltung, Vol. VII, p. 424, it was passages like these which caused me to reproach Stolzmann with ignoring the influence of unequal expenditures of time on the formation of value. Upon renewed reflection, however, I think that these utterances were mere oversights, and that Stolzmann’s real opinion is the one expounded in the text.

¹ This third supposition is not made expressly, but it is clearly implied in the assumption, on the one hand, that every partner produces one commodity “from beginning to end,” and thus measures off the entire production period, and, on the other hand, that “for every period of consumption ” the same number of pieces of each kind is “available for consumption,” so that evidently the periods of production and the periods of consumption must be equal to each other. A passage confirming this view may be found on page 32.

¹ A very important part, but not the whole. Upon the problems which exist along this line, and which still persist in spite of the solution attempted by Stolzmann in his one-sided exaggeration, I have expressed myself in my above-mentioned review of his book, Zeitschrift für Volkswirthschafty Sociaipolitik und Verwaltung, Vol. VII, p. 425 sq.

¹ See my “Geschichte und Kritik der Capitalzins-Theorien,” 2d ed., p. 554 sq.

² In a strange way Stolzmann tries to turn my argument against me, and reproaches me with a petitio principii, notwithstanding my rather explicit demonstration that not only the time of labour but also the time of waiting is a circumstance by no means irrelevant in the explanation of remuneration and valuation. I do not intend here to make a rejoinder, for which, perhaps, a more suitable place may be found in the second volume of this work. I will only remark that all the attempts of Stolzmann to explain away the necessity of “waiting” by a skilful interlapping of stages of production and needs (“Sociale Kategorie,” p. 304 sq., especially 307, 308, 313), even under the hypothesis of longer periods of production, seem to me utterly fallacious and futile. Even the most skilful manipulation cannot make a cover longer than it is, and if Stolzmann honestly believes that it is legitimate to assume that even then “a sufficient quantity of present goods will always be ready for immediate consumption” (p. 313), so that society will be relieved of the burden of waiting, this “sufficient quantity of present goods” in his process of thought plays the ròle of a deus ex machina. Their “always being ready” would certainly solve all difficulties, but neither their “readiness” nor their certain “sufficiency” is explained.

¹ The notion of the “last employer” is somewhat ambiguous in itself and also in Stolzmann’s book. It may refer to the capitalist who by severe economy is just able to endure competition or to the smallest capitalist, i.e. the one working prosperously with the smallest capital. The whole trend of Stolzmann’s teaching, as well as numerous expressions pointing in this direction (e.g. pp. 381, 383, 390 sq., 396 sq.), leave no doubt in my mind that the second interpretation is the one Stolzmann had in mind. To be sure, in one instance, in a parenthetical phrase he expressly explains “the smallest” as the “least favoured” undertaking (p. 396).

¹ On page 396 may be found the following passage emphasized by italics: “The rate of profit which the last entrepreneur receives is the percentage which expresses the numerical proportion of his own capital to the socially necessary entrepreneur’s unit of provisions.” Here the rate of profit is deduced from the proportion of the whole entrepreneur’s unit to his own capital, and thereby this entire unit is regarded as profits. On the contrary, his remark that interest sometimes constitutes a determinate fraction of profits (397), and that “great and small capitalists receive the same percentage of profit” (380), leads to the conclusion that he was not willing to regard the whole income of an employer as profits on capital, but as a heterogeneous aggregate including some earnings of labour. However, on this, as well as many other decisive points, Stolzmann’s theory is obscure.