Introduction 1—The present-day position of theoretical political economy

At the end of the last century and at the beginning, or during the first third, of the present century the theory of political economy underwent a rapid development—especially in England, at the hands of Adam Smith, Malthus and Ricardo. This seemed to promise that one day this branch of knowledge would be raised to the same level as the exact sciences. Since then, however, this development has not continued on anything like the same scale. As far as interesting works of a special kind on certain branches of political economy—on money and its functions, on banking, on international exchange, etc.—and valuable historical monographs are concerned, modern English literature is not wanting. However, apart from the work of Stanley Jevons, about which we shall have more to say later, no general law worthy to be put beside Malthus’s Law of Population or Ricardo’s Theory of Rent has been laid down by any of their followers; for the meritorious work by Cairnes, Some Leading Principles of Political Economy newly expounded, contains rather a first step towards, and a stimulus to, renewed and deepened investigation of fundamental economic doctrine than any completed results. J. S. Mill’s famous work Principles of Political Economy, although already nearly fifty years old, can still—or at least could until quite recently—be regarded as embracing the whole of classical economic knowledge in England.¹

The same is true of France, whose economic literature, at least during the present century, doubtless includes many eminent writers, but few original thinkers. As far as theoretical political economy is concerned the same applies to German thought, which turned relatively late to the economic sphere, and for a long time was only an echo of the English and French achievements. With the peculiar trend taken by German political economic study in recent times, we shall deal shortly.

In the scientific field not less than in other spheres, however, stagnation is mostly accompanied by deterioration. When theoretical political economy was no longer able to add new results to those already achieved, the natural consequence was that even the truth of these results was more and more doubted. It was asserted, and not always without reason, that the older economists, in laying down the rules which they regarded as general, only kept in mind the conditions of their own country and their own time. Still more, the question began to be asked whether it was at all possible to work out generally valid laws for a subject which seemed to be influenced in such a high degree by changing circumstances in time, by the peculiar characteristics of different nations, and even by the caprices of human nature itself. This critical, or rather purely negative point of view, which in recent times has also had its advocates in England (Cliff Leslie, J. Ingram and others), has, as is known, become more and more the main line of thought in modern German political economy, where the so-called ‘historical school’ reigned supreme until quite recently. In the opinion of this school, political economy can only claim to be regarded as a historical subject. Historical inquiries into matters of detail, special investigation of certain limited periods in the development of our continent, as far as transmitted deeds and documents allow—these are the only things which, according to this view, can procure for us a real understanding of economic facts, though necessarily a very fragmentary one. In coming to general conclusions one ought to be extremely cautious; for, a priori, it would be quite unrealistic to try to formulate laws, valid for all times and peoples, on the basis of the knowledge which we believe we possess of the general characteristics of human nature and the physical conditions of our life.

In this mode of reasoning there lies, in my opinion, beside a certain amount of truth, a considerable exaggeration. However valuable (indeed even indispensable) historical investigation may be for every social science (and consequently for political economy), it has value only in so far as it succeeds in revealing and throwing light on the general laws which govern and direct human action.¹ Without the existence of such laws, history itself would be inconceivable and what it teaches us of no avail to our generation and wholly inapplicable to the conditions of our own time. This is perhaps especially true if we are speaking of those economic relationships which, in their present forms, are to a great extent the product of recent or very recent times, with few or no points of direct comparison with the economic life of the past. Let us look at our modern credit and banking system, our system of government finance, industrial associations, international commercial affairs and means of communication. Where would one find, even if one only went back a few centuries, a real counterpart to these at a time when credit banks were unknown, when the guilds enjoyed absolute power, and when trade was so small that, for instance, the whole of the customs business of proud Albion could be leased to private persons for a tribute of a few thousand pounds sterling a year?

That the one-sided, negative course of historical study was especially calculated to raise the influence and prestige of political economy, can scarcely be affirmed. A subject which has not a single established result and no generally acknowledged doctrine to show, must consequently renounce all claim to play a leading part in the decisions and resolutions of governments and parliaments. It was not to be wondered at, then, that in consequence of the purely historical orientation of political economy the opinion should at last have spread to the leading circles that in economic affairs almost everything was possible, and nearly everything permitted, to men who themselves make or wish to make history.¹

Was it really true that classical political economy, as developed by the above-mentioned great representatives of the subject, was only pretence and delusion? Nobody can affirm this after having studied carefully the principal works of Ricardo and Malthus. If the doctrines of political economy have not so far been able to reform the economy of nations even partially, the most important reason is simply that these teachings have never been carried through seriously and to their full implications. In this case, the great economists had the same experience as the doctor whose patient sometimes obeyed his orders and sometimes disobeyed them, but never ceased to complain of his illness.

That their analysis of economic phenomena was an incomplete one, must be admitted; but this defect need not be ascribed to the analytic-synthetical method which they applied. It is to be hoped that this method—continually refined and developed with the aid of the daily increasing harvest of facts which are nowadays supplied by statistics and historical research, as well as by the more profound knowledge which we now possess of the forces of nature and the economic resources which they offer—will be able, in theory and in practice, to bring the doctrines concerning the economic life of nations, their internal economy and mutual intercourse to an even higher degree of clarity and harmony.

A promise in this direction is given by the new theory of exchange value, with conclusions about capital and interest derived from it, which will be the subject of this study. Already 40 years ago the essential features of this theory were described in a work—unfortunately totally unnoticed—by the German H. Gossen.¹ At the beginning of the seventies, it was developed afresh in an essentially identical form by an Austrian, a French-Swiss and an English scholar,² without one of them being aware of the work which was being done simultaneously by the others or of that of their undeservedly forgotten predecessor.

2—The classical theory of value

That the theory of value must be of fundamental significance for political economy, is evident if one bears in mind that this subject deals with values only, that is to say with that aspect of external objects (and, in a wider sense, of human abilities and qualities also) which makes it worth while for us to obtain possession of them. In the true natural sciences also, and still more in technology, this point of view is of course of great importance; in political economy, however, it is the only determining one. It is well known that almost every new school of thought in political economy has laid down its own theory of value and from this, as it were, derived its entire character. Here we shall glance briefly at the best known of these theories.

The difficulty in explaining the nature of exchange value as well as in trying to find a suitable measure for it, is a twofold one.

Obviously, objects have a value for us only in virtue of their utility, that is to say, because of the enjoyment and satisfaction which they give us, or—and this is fundamentally the same—because of the pain and discomfort from which they free us; but apart from the fact that all these attributes seem, at first glance, on account of their subjective nature, quite unsuited to serve as a real measure of value, we have in addition the peculiar and remarkable fact that ‘utility,’ however much we may stretch this concept, usually bears no relation to what one calls ‘exchange value,’ that is to say, the quantitative proportions in which the objects are actually exchanged for one another. Adam Smith has indicated this fact in a well-known sentence the paradoxical nature of which does not, however, seem to have been realized either by himself or by his closest adherents: ‘The things which have the greatest value in use,’ says Adam Smith, ‘have frequently little or no value in exchange’ ; and vice versa—e.g. diamonds, water.

It was noticed by de Quincey and J. S. Mill that, properly speaking, only the first half of Smith’s sentence is true. In their opinion the ‘value in use’ of objects can indeed be greater than their ‘value in exchange,’ but not vice versa. The value in use would always constitute the upper limit of value in exchange and so forth. In fact, this is only true of the commodity obtained in exchange. The commodity disposed of must, of course, always have (for the owner) a greater value in exchange than in use. The thought indicated here was not, by the way, pursued; rather, it was resolved to leave aside the whole conception of value in use.

Altogether, these subjective grounds of value in exchange seemed of a nature too indeterminate for the establishment thereon of a science of value. The French school, which, with J. B. Say at the head, tried to adhere to ‘utility’ as the factor which determines value, became involved thereby in contradictions and difficulties which for a long time were regarded as insurmountable. Only recent investigations, with which we shall deal in the following pages, succeeded in shedding full light on this important but obscure point.

The English school, on the other hand, tried from the start to find another and a more satisfying and objective reason for value in exchange. It believed it had found such a reason in labour. Labour, effort, that price which we must pay for the satisfaction of our needs, where nature herself provides no remedy—labour, this indispensable factor in almost all production, not only seemed to be the most natural explanation of exchange value, but, as a measure of this, also had the important advantage that the length of working hours can be reckoned with the same accuracy as all other physical quantities. In the writings of Adam Smith, who, on the whole, was not a man of exact definitions, this explanation was still rather vague. In Smith’s works, labour as a measure of exchange value sometimes means the labour which is necessary for the production of the commodity concerned; at other times—or, rather, in one and the same sentence—he means by it the labour which, once one is in possession of the commodity, one can spare oneself and pass on to others—that is to say, the quantity of labour which the possessor of the commodity concerned is able to ‘command’ or buy. It is, of course, quite inadmissible, however, to treat these different quantities of labour alike, without going back to primitive conditions of society where interest and rent were unknown. This was most probably what Adam Smith meant but never expressed in clear words. In any case one misses in his works any clear discussion of the significance of interest and rent for the exchange value of commodities.

Ricardo was far from this ambiguity. For him ‘labour’ is always the quantity of labour required for the production of goods. Nevertheless, he believed he was able to adhere to the dogma that labour is the measure of exchange value. And this dogma he developed with a force and consistency not often found in works on economic questions. The socialists, especially those of the Marxist school, believed, as is well known, that they could use Ricardo’s theory of value as a weapon of direct attack against the whole capitalist structure of society. This is certainly wrong.¹ Ricardo’s dictum is quite formal. His sole aim was to lay down a general measure and regulator of exchange value; he never speaks of labour as the exclusive source of value, even in our present-day society. On the other hand, the way in which Ricardo develops his argument—totally free from the fantastic ideas and dialectic leaps of many of the later schools—is a model of strictly logical reasoning about a subject which seems, at first glance, to admit of so little precision.

In primitive society where private ownership of land is unknown and where almost no capital exists—for instance, in a society of hunters—labour would, as had already been noticed by Adam Smith, constitute the only source and therefore also the natural measure of exchange Value. If, on the average, it takes three days to kill a beaver but only two days to shoot a stag, two beavers will necessarily be equal to three stags in value. Here already one notices that cause and effect have in reality been confused. For if a beaver’s carcass is not valued more highly than a stag’s for other reasons, it will certainly never acquire a higher value by the greater difficulty in procuring it. The only consequence would then be that nobody would care to give up his time to work so troublesome and so little remunerative as killing a beaver. Formally speaking, however, this rule is certainly perfectly correct under the given assumptions.

But in our present-day society, where almost all land is private property and almost all production requires capital, can labour be regarded as the only measure of exchange value ? Ricardo answers this question in the affirmative, and does so after taking the following points into consideration.

If in the first place no account is taken of rent, or if one looks at those branches of industry which have to pay little rent, the price of their products is divided into two parts, namely wages and capital profits; and though neither of these coincides with the labour employed in their production, according to Ricardo they are, nevertheless, each in itself proportional to that quantity of labour, so that finally the reciprocal prices or exchange values of commodities come to stand in the same proportion to each other as the quantities of labour which are necessary for their production.

As regards labour, this is a consequence of the reciprocal competition of workers, whereby wages are always reduced to one and the same level. Here, of course, one must meet the objection that in fact different kinds of labour are generally rewarded very unequally. Ricardo, indeed, has not given sufficient thought to this fact. He simply pointed—as Adam Smith did before him—to the effect of competition, which has apparently been the laying down of a fixed scale of reward for qualified labour which, during longer or shorter periods, remains unchanged. This is not correct, as Cairnes¹ especially has shown in detail : between different grades of workers or of society in general no effective competition exists.

Respecting wages for ordinary labour, Ricardo is known to have laid down the rule that these are not only equal for all workers, but that they can, as far as real wages are concerned, even be regarded as a constant magnitude which, incidentally, is equal to the sum of what the worker himself needs for subsistence and for bringing up the usual number of children. This is the notorious theory of ‘natural’ wages. Though this theory is not quite true, one can at least say of it that at present it is unfortunately only too true. But we will not proceed further with criticism of this theory here. Later on J. S. Mill (amongst others) substituted for it the so-called wage fund theory, which from the scholarly point of view is even less satisfactory. We shall come back to this later.

The means of subsistence of workers are advanced by capitalists. Capital, if in the meantime one takes no account of the fixed part of it, forms consequently a magnitude which is proportional to the quantity of labour; and, as capital can change its occupation as easily as labour or even more easily, capital profit will be approximately the same, though in different countries or at different times it may change. Ricardo was blamed by several economists for not having examined thoroughly the way in which capital profit came into existence, but simply taking it for granted. I cannot agree with this opinion. The capitalist is for Ricardo the entrepreneur of the firm. Therefore, once he has paid, or rather advanced, wages and rent, he is entitled to the result of the production. Since, according to Ricardo, wages represent a magnitude fixed from the beginning, and since—as he later shows—the level of rent is also determined by independent causes, the cause of capital profit is already settled. It is neither possible nor necessary to explain capital profit in other ways, if the other assumptions are sound.

On the other hand—as Ricardo himself especially emphasizes—his general rule about the proportionality of prices and quantities of labour is considerably modified by the fact that the division of capital into a fixed and working part is not the same in all firms. Only the working part of capital employs and pays wages to workers, whereas the profit is dependent on and proportional to the whole capital. Or, what is in fact the same, each part of the capital employs labour (namely, the labour which is necessary for the construction of machines, etc.) only once during the whole process of production, and until it is replaced by the proceeds of the finished products. But every year each part of the capital bears the usual interest or yields the usual profit, until the piece of capital in question is worn out.

The theoretical difficulty presented by this was not solved by Ricardo; and of course it never can be solved in such a way that this proportionality between prices and quantities of labour would still hold good. It should be remembered, however, that here, too, Ricardo has correctly understood the sequence of cause and effect; if money wages rise (which in his view could only happen over longer periods as a result of the greater difficulty in producing the means of maintenance of workers, although in general such a rise can be understood as the consequence of every increase of capital), then the introduction of machines which before proved unproductive will now become more profitable, as he has shown in an ingenious example.¹ The price of machinery, that is to say, includes profit as well as wages. As this profit, like all the others, must fall when wages rise, the price of machines can consequently never rise in the same proportion as wages. According to the more modern terminology, this means that every increase of wages encourages a lengthening of the period of production, which occupies more time but is more productive, whereby the wage increase is partly compensated. Indeed, in this example of Ricardo’s, the fine theories with which Böhm-Bawerk has recently enriched the subject lie enclosed as in the bud. In these theories the relationships between the rate of interest and wages appear in a strong light, in which, however, they are seen to be less simple than was assumed in Ricardo’s ‘iron’ law of wages or in the wage fund theory.

But apart from labour and means of labour, production also needs natural resources; and in so far as these are not free, but must be bought from the owner of landed property, a new element in the cost of production enters here: rent. If in all production every unit of labour always used exactly the same amount of natural resources (for instance, the same area of land of the same quality), then the reciprocal exchange value of goods would remain proportional to the employed quantity of labour. This, however, is not the case. The different branches of production not only need labour and natural resources in quite unequal proportions, but, even when producing the same kind of goods—as, for example, in agriculture—the same expenditure of labour will yield different quantities of products according to the condition of the land and to the climate.

It is known that the last-mentioned point in particular gave rise to the ingenious theory of rent which bears Ricardo’s name, though it really originates from Malthus and Sir Richard West.¹ With growth of population and increasing capital, the demand and prices for agricultural products rise, ceteris paribus; this leads to the cultivation of poorer land as well as a more intensive cultivation of land already under the plough. The owners of better land, or the landowners generally, are consequently able to appropriate to themselves as rent from this monopoly a greater and greater share, absolute and relative, of the yield of land. Only the poorest land gives no rent; the last labourer engaged in cultivation only raises products equal in value to his own means of maintenance (including the usual interest, in cases where these were advanced to him by the capitalist). At this extreme point the products of agriculture, in respect of their exchange value, come under the same rules as were valid in actual industry. It is the labour engaged on the poorest land, or, more generally speaking, that agricultural labour which provides no rent, but, nevertheless, does yield profit, that determines, in Ricardo’s view, the value of agricultural products. The rule of labour as a measure of value was therefore also applied in this connexion, though, as one finds, in an entirely formal manner. Proportionality of commodity prices with the quantity of labour employed in the production of these goods, is here no longer mentioned.

From this Ricardo drew the familiar conclusion upon which he, and Mill after him, laid great stress, namely that rent constitutes ‘no element’ of prices of agricultural products; in other words, prices for the latter would not fall, even if the rent were completely remitted by the landowners. This assertion, at first sight paradoxical, certainly contains a profound and remarkable truth; but the truth in it is valid not only for landed property but also for capital in its real sense. According to Ricardo and Mill, if landowners remitted their rent, this would only result in tenants themselves now being able to live ‘like gentlemen.’ They would then, in fact, become landowners themselves, and would simply put the rent into their own pockets. One could, of course, certainly think of a more generally useful application of rent, e.g. through the nationalization of landed property; or, what is nearly the same, rent could, on the analogy of the net profit of a co-operative society, be distributed pro rata parte amongst the consumers of bread. That this would be very advantageous to the latter, is quite evident; for now they could cover part of their consumption of bread by means of these new incomes. But this does not mean that the price of bread would fall; on the contrary it would rise; for the consumption and the demand for bread would doubtless increase in these circumstances, while the possibilities of production remained just the same as before.

This rule is also important as opposed to the socialist point of view, according to which all rent is an exploitation of labour which would only receive its full reward in the socialist society. However, even in the socialist state, the reward of labour would be substantially the same as now, for it would also depend on the proportion between supply and demand, and could, for instance, never rise above the yield which the last labour employed on the poorest land or in the least fruitful branches of production is able to raise. It is obvious that, if private property were replaced by common property, all who were before without property would get greater incomes; but they would not get these incomes as higher wages for labour, but as a share in the rent of the then nationalized capital (including landed property). In other words, rent and interest are not, as the socialists declare, merely ‘historical categories,’ but, on the contrary, as Böhm-Bawerk in particular has clearly shown, indestructible economic factors; and this state of affairs, amongst other things, shows the universal significance of the population problem, consideration of which in the socialist state could not be postponed for a single day, let alone for centuries.

Ricardo’s theory of value is, one finds, developed with a high degree of consistency and strictness. On the other hand, it is, as we said before, of a purely formal nature; of the inner causes of exchange value this theory gives us practically no explanation. It has, in addition, the fault of choosing two quite different explanations for the prices of commodities in the market and the so-called natural prices. The former are explained as dependent on ‘supply and demand’; the latter, however, are explained in the way mentioned above; while nothing seems clearer than that a reason which is sufficient to determine at any given moment the level of prices must be regarded as their only and true cause.

Nevertheless, Ricardo’s theory certainly contains a considerable amount of truth. The theory of rent, especially, shows a marked analogy with the modern concept of marginal utility.

A more searching analysis of economic phenomena would certainly have made possible a scientific extension of Ricardo’s theory of value. Such an extension, however, was not undertaken; on the contrary, this theory underwent a completely unscientific and paradoxical exaggeration at the hands of two completely opposed schools, the harmony economists (Bastiat among others) on the one hand, and the socialists on the other. The dispassionate and purely scientific investigation of the English scholars had unmercifully exposed the weaknesses of our modern economic life.¹ It now became the task of the defender of the existing order of society to conceal or explain away these weaknesses as far as possible. It was the aggressors’ task, on the contrary, to show them in a particularly strong light. Both trends met strangely in the attempt to establish labour not only as a formal measure of exchange value, but—and from this attempt Ricardo wisely abstained—also as the real cause and substantial ground of value.

3—The theories of value of the harmony economists and the socialists

In Ricardo’s system, as we have seen, not only labour, but also capital profit and ground-rent, claimed to get their share of the fruits of production. But are not the latter themselves products of labour? asked Bastiat and his school. Is not capital itself produced by labour, and does not the fertility of the cultivated land depend on the labour of former generations? They answered both these questions in the affirmative, and believed they had achieved by this a considerable improvement on Ricardo’s theory. All value became now an indirect or direct product of labour; not only the true capitalist but also the owner of landed property obtained as his profit only the reward of his own and his ancestors’ labour, or the reward of his renunciation in not having consumed the fruits of this labour. It needs few words to show how absurd this view is, especially as regards landed property. Let us look merely at the extreme cases. What human hand ever gave value to our forests, coal-fields, ore-seams, natural meadows and pastures, fish-ponds, etc.; what human hand ‘created’ the source of returns which they give to their owners? The matter does not wear a much better aspect if one tries to explain these un-produced values as the fruits of the industrial labour of the whole society, as Leroy-Beaulieu did in his work Repartition des Richesses. This is a point which, as is well known, Lasalle also tried to make, but in the socialist interest. A vacant building site in the middle of a well populated town has, as everybody knows, a very high value. Is this value also a product of the local industries? This is certainly a confusion of ideas. The real cause of this phenomenon is not the productivity of industry or labour, but the fact that this labour is not sufficiently productive. In spite of all hard work, all improvements of the means of communication, etc., a numerous town population cannot overcome the inconveniences which are caused by increasing distances. This is the cause of the high value of central building sites or open spaces. What is given for them may indeed be the creation of industry, but not their value itself, which, on the contrary, is determined by the sum of the needs which they satisfy. There can, of course, be cases where human thought or hand can sometimes give a high value to things which were hitherto worthless, without any direct influence. It is said, for instance, that, through the introduction of the Bessemer method in the iron-industry, certain ores¹ which in former times were thought valueless have proved to be the best material for the new process, so that the owners of the ore-seams in question suddenly found themselves in possession of considerable wealth. Up to a certain point one can, of course, regard this value as a product of Bessemer’s inventive genius, but it would be quite absurd to try to find any proportion between the labour which in this case Bessemer employed for his invention (even if the labour of all his predecessors were included) and the values, perhaps quite unknown to him, which they later produced or, rather, revealed. Even Leroy-Beaulieu does not go so far.

If the attempt of the harmony economists to explain all value as a product of labour failed in this way, even as a scientific theory, this was even more the case when they tried to make the question of the exchange value of commodities into a question of the justification of the distribution of wealth in society. In this theory, indeed, they believed they had indicated a new and better legal argument for the existing distribution of property. Questions of social justice turn out in the end to be questions of what is socially useful and possible; and no one, however learned or sagacious he may be, can claim for the majority of the present possessors of capital and rent a right higher than that which lies in the instinct of self-preservation—I mean the right of self-defence, which, by the way, is not wholly objectionable.

The rule: He who tries to prove too much, proves nothing, has seldom been better exemplified than in this case. The writings of the harmony economists became indeed the arsenal from which their opponents, the socialists, took their sharpest weapons of attack against the existing order of society. It is known to what merciless satire Bastiat and his German follower Schulze-Delitzsch—on the whole an excellent economist—were exposed by Lasalle. The socialists agreed only too willingly with the doctrine of their opponents, that labour is the only source of value. But as soon as it became necessary to answer the question, who was at present actually performing, or in bygone days had actually performed, that labour, the socialists thought—and not without reason—that the credit must necessarily be awarded to those classes which one usually calls the working classes.

This is not the place to go into a more detailed analysis of the socialist doctrines, which in fact include many things which do not stand or fall by this or that economic theory. But in their criticism of the present system of production as well as in the estimate of economic resources which they themselves recommend, the socialist authors are to a great extent under the influence of the peculiar theory of value which, since the first writings of Marx, has become more and more the pillar of the socialist system. The so-called proof which Marx gives of his rule that labour is the substance of exchange value, whilst unpaid labour equals the profit of capitalists, on which his extensive work Das Kapital is only a continuous commentary, has, in fact, as is now most probably more and more admitted, scarcely the virtue of being able to be discussed seriously. It consists of a kind of free application of the principium exclusi tertii. If two commodities are exchanged against each other in the market, they must, says Marx, be equal in some one respect. But the equality cannot consist in the fact that they have the same value in use; on the contrary, this must necessarily be different, otherwise the exchange would be senseless. The values in use of different commodities are indeed incommensurable¹ quantities (says Marx), and nothing is consequently left but that both commodities are the product of an equally long working time. Or, as the same thought is expressed by Marx elsewhere: If one divests commodities of the specific attributes which determine their values in use (which cannot be compared with one another), there is only one attribute left, namely that of being ‘labour jelly’ (Arbeitsgallerte), definite masses of ‘congealed labour time.’ The gaping holes in this argument hardly require special mention. Even if the values in use of two different commodities, or the utility which they have at any time, were quite incomparable magnitudes and could consequently not be taken into consideration, there could generally exist a great number of circumstances besides labour which together could, without being the same for both commodities, constitute the same exchange value. For instance, both have used a certain area of land for the production of raw material as well as for the production of the finished commodity; for both of them a certain quantity of power (coal) was needed to bring them to market, etc. But as regards working time, not only its length, but also the intervals between different stages of production, in other words the time during which the means of maintenance and of production for the workers must be advanced, have influence on the productivity of labour.¹

In reality, however, the different values in use or the ‘utilities’ are by no means incommensurable quantities. Every day we compare different utilities with one another and weigh their reciprocal magnitudes against each other. If, following the Marxist terminology, we divest two commodities of their specific attributes, one attribute will always remain: both commodities provide us with a certain quantity of utility. But this utility does not need to be equal for both commodities, for them to possess the same exchange value. The fixed proportions in which different goods are exchanged against each other in the open market, are indeed the consequence of special laws which are valid for the market but not for the individual exchange—in the first place, the la wof free competition, or the law of indifference as Jevons called it, according to which at every moment and for every commodity there can be approximately only one price on the market.

In what follows we shall have an opportunity to go deeper into most of the above-mentioned points of view, which together form the framework of the modern theory of exchange value. The considerations which have led to the formulation of this theory are, however, not of a kind that can be easily understood, and one cannot reproach Marx with not having thought of them. Less excusable, it seems to me, is the fact that modern socialist writers—for example, B. K. Kautsky in his well-known account of Marx’s fundamental doctrines—show themselves totally uninfluenced by recent investigations, although these investigations have attracted increasingly lively interest in the learned world.

This brief survey of the history of the development of different theories of value will have sufficed to show two things: firstly, that the question of the origin of exchange value, far from being a more or less unfruitful splitting of hairs, is on the contrary of the most far-reaching practical interest; secondly, that the heart of the matter lay so deep down that, to find it, a new and more profound investigation was indeed necessary. Such an investigation was in fact carried out in recent times—in England, by the highly gifted Stanley Jevons, who died too early; in Switzerland, by Leon Walras, professor at the Academy of Lausanne; and also in Austria, where Carl Menger and his disciples—amongst whom Böhm-Bawerk must be mentioned first—have devoted themselves with as much zeal as good fortune to these investigations.

¹ Marshall’s Principles of Economics, which is based throughout on recent investigations, was, when this book was written, not yet published.

¹ This was also, if I am not mistaken, the principal aim of the distinguished men who, like Hildebrand, Roscher, Knies and others, inaugurated the historical school in Germany. The one-sidedness which we have mentioned is more the fault of their followers, who, becoming ever more deeply engaged in historical research in special fields, wanted in the end to condemn almost all theory.

¹ In my opinion, one of the main reasons for this not very satisfactory development of German political economy can without doubt be found in the restriction of the freedom of instruction in this field, especially while the Socialist Law (Sozialistengesetz) was in force. Research, when it is forbidden to deal with certain spheres or to draw certain conclusions, does not usually provide us with great results, as experience has shown. The German scholars, naturally enough, preferred to occupy themselves with historical investigations which were relatively innocuous, in order to avoid ‘the controversies of the day.’ Meanwhile socialism, which it was desired to combat, continued to exist and made more and more disciples, even among scholars. Since its doctrines could no longer be preached openly, they were never subjected to serious criticism. Nowadays, in the writings of German professors, one very often encounters socialist arguments—even those which are least capable of being maintained—in one disguise or another.

¹Grundsätze des menschlichen Verkehrs und die daraus fliessenden Regeln für menschliches Handeln, Brunswick 1853, new edition Berlin 1889.

² Carl Menger, Leon Walras, Stanley Jevons.

¹ That the Ricardian theory, while exposing the blind and purely mechanical operation of economic forces, must indirectly help the criticism of the order of society, no one, of course, will deny.

¹Some Leading Principles of Political Economy newly expounded.

¹Principles, Ch. I, Section V.

¹ It is said to have been in fact put forward by a certain Dr. Anderson before Adam Smith, but at that time remained unconsidered.

¹ There was, in my opinion, a good reason why Ricardo, in showing up these weaknesses, did not treat capital property in the same way as landed property. The former had, at least, the advantage over landed property that its object, capital, had first to be created; and the existence of large amounts of capital can only have beneficial consequences for society itself, which could hardly be affirmed of the monopoly of landed property. Adolf Held’s reproaches, Zwei Bücher zur sozialen Geschichte Englands, are therefore unfounded in my opinion. As to Ricardo’s alleged ‘harshness’ towards the working classes, it should be mentioned that he never represented the low level of wages as the only possible situation for workers, still less as something which is pleasant in itself. How in his opinion workers could achieve a better position at that time, Ricardo has partly shown directly, and partly indicated indirectly, by accepting Malthus’s doctrine. As I see it, men like Malthus and Ricardo, who tried to search out the true reason of social conditions and particularly of the low standard of living of workers, have done more for their welfare than those economists who sometimes make a great show of friendly feelings towards the workers, but do not want to learn the means which could really have remedied their situation. A German economist, very well known in recent times and very praiseworthy in different ways, has actually delivered an academic speech on the causes of social want without uttering a single word on the population question. In the Revue d’Economie politique of November 1891, the same author made the astonishing statement that Karl Marx has ‘refute la these, en consequence de laquelle le salaire devait dépendre de l’augmentation ou de la diminution de la population totale, au lieu de dépendre de l’excès existant dans chaque industrie, et cela de telle manière qu’elle ne devrait plus ètre soutenue dans les cercles scientifiques.’ Probably as a proof of this alleged victory of Marx over Ricardo and Malthus, it is later mentioned that the attempts of the coal-miners of Durham and Northumberland to improve their situation during the prosperous period that followed the Franco-Prussian war, failed because new workers from other branches of industry came from all parts of the United Kingdom. ‘Ce fut surtout des matelots qui s’y rendirent.’

For ordinary readers, this example will speak against Marx’s view and in favour of Ricardo’s. How the author could have overlooked this, is beyond my understanding.

¹ If I am not wrong, the so-called specular iron-ore.

¹ This expression occurs only here and there in Marx’s work—e.g. on page 96, n. 80, of the third edition of Das Kapital—but it expresses exactly his true meaning.

¹ If working time alone determined exchange value, it would make no difference to the value or to the quantity of the product whether, for example, 10 workers took 10 years to produce it or 100 workers a single year. This, in fact, cannot be true, because otherwise it would never be profitable to invest capital in the longer period of production.

How it was that Marx could simply deny all these indisputable and well-known facts, and what he meant when, for example, he assures us that virgin soil, natural meadows, wild-growing wood, etc., are ‘values in use, but not values’ (Das Kapital, vol. I, third edition, page 7), etc. etc., is indeed not easy to understand. In the first volume of Das Kapital these contradictions are as far as possible covered by the general assertion, never elucidated, that prices (even average prices) must not be treated simply as if they were identical with values. On page 202, n. 31, the promise is given that this secret will be disclosed in the third, not yet published volume. The necessary explanation will in any case come rather late !

Meanwhile one can confidently assert that the solution of this puzzle lies simply in the fact that Marx, like Rodbertus before him, does not mean by value the real exchange value, but rather certain ideal exchange values which would come into being as soon as capital and landed property ceased to be private property.

Even if we assume this, the rule that labour is the only substance of exchange value is, as we have already seen, by no means correct; but then it would represent at least a possible and comprehensible point of view, which can scarcely be affirmed of the present Marxist theory of value, if one takes it literally.