Economic Value

Epigraphs to Book II

Definitions are the basis of systematic reasoning.

-- Aristotle

The mixture of those things by speech which are by nature divided is the mother of all error.

-- Hooker

Bacon made us sensible of the emptiness of the Aristotelian philosophy; Smith, in like manner, caused us to perceive the fallaciousness of all the previous systems of political economy; but the latter no more raised the superstructure of this science, than the former created logic.... We are, however, not yet in possession of an established text-book on the science of political economy, in which the fruits of an enlarged and accurate observation are referred to general principles that can be admitted by every reflecting mind; a work in which these results are so complete and well arranged as to afford to each other mutual support, and that many everywhere and at all times be studied with advantage.

-- J.B. Say, 1803

We may cite as examples of such inchoate but yet incomplete discoveries the great Wealth of Nations by Adam Smith -- a work which still stands out, and will ever stand out, as that of a pioneer, and the only book on political economy which displays its genius to every kind of intelligent reader. But among the specialists and the schools, this work of genius which swayed all Europe in its day, is laid upon the shelf as an antiquated affair, superseded by the smaller and duller men who have pulled his system to pieces and are offering us the fragments as a science most of whose first principles are still under dispute.

-- Professor (Greek) J.P. Mahaffy, "The Present Position of Egyptology," "Nineteenth Century," August, 1894.

Henry George
The Science of Political Economy

Book II, The Nature of Wealth

Chapter XI
Economic Value -- Its Real Meaning and Final Measure

Showing How Value In Exchange Has Been Deemed a Relation of Proportion; and the Ambiguity Which Has Led to This

The conception of value as a relation of proportion -- It is really a relation to exertion -- Adam Smith's perception of this -- His reasons for accepting the term value in exchange -- His confusion and that of his successors 01

Value, as an economic term, means, as we have seen, what in defining it from the other sense of the word value, is known as value in exchange, or exchangeability. And to this meaning alone I shall, when using the word value without adjunct, hereafter confine it.


But from what does this quality of value in exchange, or exchangeability, proceed? And by what may we measure it?


As to this the current teachings of political economy are, that value, the quality or power of exchangeability, is a relation between each exchangeable thing and all other exchangeable things. Thus, it is said, there can be no general increase or decrease of values, since what one valuable thing may gain in exchange power, some other valuable thing or things must lose; and what one loses some other or others must gain. In other words, the relation of value being a relation of ratio or proportion, any change in one ratio must involve reverse changes in other ratios, since the sum total of ratios can neither be increased nor diminished. There may be increase or decrease of value in any one or more things, as compared with any other one or more things; but no increase or decrease in all values at once. All prices, for instance, may increase or diminish, because price is a relation of exchangeability between all other exchangeable things and one particular exchangeable thing, money; and increase or decrease of price (greater or less exchangeability of other things for money) involves correlatively decrease or increase of the exchangeability of money for other things. But increase or decrease in value generally (i.e., all values) is a contradiction in terms.


This view has a certain plausibility. Yet to examine it is to see that it makes value dependent on value without possibility of measurement except arbitrarily and relatively, by comparing one value with another; that it leaves the idea of value swimming, as it were, in vacancy, without connection or fixed starting-point, such as we attach to all other qualities of relation, and without which any definite idea of relation is impossible.


Thus, such qualities as size, distance, direction, color, consanguinity and the like are only comprehensible and intelligible to us by reference to some fixed starting-point, to which and not to all other things having the same quality the relation is made. Size and distance, for instance, are comprehended and intelligibly expressed as relations to certain measures of extension, such as the barleycorn, the foot, the meter, diameters of the earth, or diameters of the earth's orbit; direction, as a relation to the radii of a sphere, which, proceeding from a central point, would include all possible directions; color, as a relation to the order in which certain impressions are received through the human eye; consanguinity, as a relation in blood to the primary blood-relationship, that between parent and child; and so on.


Now, has not also the idea of value some fixed starting point, by which it becomes comprehensible and intelligible, as have all other ideas of relation?


Clearly it has. What the idea of value really springs from, is not the relation of each thing having value to all things having value, but the relation of each thing having value to something which is the source and natural measure of all value -- namely, human exertion, with its attendant irksomeness or weariness.


Adam Smith saw this, though he may not have consistently held to it, as was the case with some other things he clearly saw for a moment, as through a rift in clouds which afterwards closed up again. In the first paragraphs of Chapter V, Book I, Wealth of Nations, he says:


    Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences and amusements of human life. But after the division of labor has once thoroughly taken place, it is but a very small part of these with which a man's own labor can supply him. The far greater part of them he must derive from the labor of other people, and he must be rich or poor according to the quantity of that labor which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labor which it enables him to purchase or command. Labor, therefore, is the real measure of the exchangeable value of all commodities.

    The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labor, as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labor, which we exchange for what is supposed at the time to contain the value of an equal quantity. Labor was the first price, the original purchase money that was paid for all things. It was not by gold or by silver, but by labor, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command.

    Wealth, as Mr. Hobbes says, is power. But the person who either acquires or succeeds to a great fortune, does not necessarily acquire or succeed to any political power, either civil or military. His fortune may perhaps afford him the means of acquiring both, but the mere possession of that fortune does not necessarily convey to him either. The power which that possession immediately and directly conveys to him is the power of purchasing; a certain command over all the labor, or over all the produce of labor which is then in the market. His fortune is greater or less precisely in proportion to the extent of this power; or to the quantity of other men's labor, or, what is the same thing, of the produce of other men's labor which it enables him to purchase or command. The exchangeable value of everything must always be precisely equal to the extent of this power which it will convey to its owner.

This is perfectly clear, if we attend only to the meaning Adam Smith puts upon the words he uses somewhat loosely. The sense in which he uses the word labor is that of exertion, with its inseparable attendants, toil and trouble. What he means by price, is cost in toil and trouble, as he indeed incidentally explains,* and by wealth he evidently means the products or tangible results of human exertion. What he says is that value is the equivalent of the toil and trouble of exertion, and that its measure is the amount of toil and trouble that it will save to the owner or enable him by exchange to induce others to take for him.


And he again repeats this statement a little further on in the same book:


    Equal quantities of labor, at all times and places, may be said to be of equal value to the laborer. In his ordinary state of health, strength and spirits; in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness. The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these indeed it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labor which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labor to acquire; and that cheap which is to be had easily, or with very little labor. Labor alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.... Labor, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places.

How then is it that Adam Smith, when he needed a term which should express the second sense of the word value, did not adopt a phrase that would bring out the fundamental meaning of value in this sense, such, for instance, as "value in toil," or "value in exertion," or "value in labor;" but instead of any of them chose a phrase, "value in exchange," which refers directly to only a secondary and derivative meaning?


The reasons he himself gives, in what immediately follows the first two paragraphs I have quoted:


    But though labor be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated. It is often difficult to ascertain the proportion between two different quantities of labor. The time spent in two different sorts of work will not always alone determine this proportion. The different degrees of hardship endured, and of ingenuity exercised, must likewise be taken into account. There may be more labor in an hour's hard work than in two hours' easy business; or in an hour's application to a trade which it cost ten years' labor to learn, than in a month's industry at an ordinary and obvious employment. But it is not easy to find any accurate measure either of hardship or ingenuity. In exchanging, indeed, the different productions of different sorts of labor for one another, some allowance is commonly made for both. It is adjusted, however, not by any accurate measure, but by the higgling and the bargaining of the market, according to that sort of rough equality which, though not exact, is yet sufficient for carrying on the business of common life.

    Every commodity, besides, is more frequently exchanged for, and thereby compared with, other commodities than with labor. It is more natural therefore to estimate its exchangeable value by the quantity of some other commodity, than by that of the labor which it can purchase. The greater part of people, too, understand better what is meant by a quantity of a particular commodity than by a quantity of labor. The one is a plain and palpable object; the other an abstract notion, which, though it can be made sufficiently intelligible, is not altogether so natural and obvious.

There are here two reasons assigned for the choice of the term "value in exchange," to denote what Smith saw with perfect, though only momentary clearness, really to mean "value in exertion," or in the phraseology he uses, "value in labor."


The first, and it is a weighty one, is that the term "value in exchange" was already familiar, and would be best understood in bringing out the distinction he wished to dwell upon -- the difference between value in the economic sense and "value in use."


The second, which indicates a confusion in the philosopher's own mind -- the swiftness with which the clouds drifted over the star he had just seen -- is that he could think of nothing by which to measure the toil and trouble of exertion except time of application, which he truly saw could only measure quantity and not quality -- that is to say, duration, not intensity. He failed to recognize the obvious fact that if the toil and trouble of exertion dispensed with be the measure of value, then, correlatively, value must be the real measure of the toil and trouble of that exertion, and that the something he was seemingly looking for -- some material thing or attribute which, as a yardstick measures length and a standard weight measures mass, should, independently of "the higgling of the market," measure the toil and trouble of exertion -- is not to be found, because it cannot exist, the only possibility of such a measurement lying in "the higgling of the market." For since toil and trouble, which constitute the resistance to exertion, are subjective feelings which cannot be objectively recognized until brought, through their influence upon action, into the objective field, there is no way of measuring them except by the inducement that will tempt men to undergo them in exertion, which can be determined only by competition or "the higgling of the market."


So, for a good reason and a bad reason, Adam Smith, for the purpose of expressing the economic sense of the word value, chose the term "value in exchange." It would be too much to say that he made a bad choice, especially considering his time and the main purpose he had in mind, which was to show the absurdity of what was then called the mercantile system, and has since been re-christened the protective system. But the ambiguity involved in the term "value in exchange" has been a stumbling-block in political economy from his day to this, and, indeed, to the ambiguity concealed in his own chosen term Adam Smith himself fell a victim. Or perhaps, rather, it should be said, that the ambiguity of the term allowed him to retain confusions that were already in his mind, save when in the paragraphs just quoted he momentarily brushed them away, only to have them recur again. It will be noticed that, in these paragraphs, Smith clearly distinguishes between labor and commodities, evidently meaning by commodities things produced by labor; and that he seems clearly to understand by wealth the products of labor. But in other places he drops into the confusion of treating labor itself as a commodity, and of classing personal qualities, such as industry, skill, knowledge, etc., as articles of wealth; just as, in Chapter VIII, he clearly sees and correctly states the true origin and nature of wages where he says: "The produce of labor constitutes the natural recompense or wages of labor," only almost immediately to abandon it and proceed to treat wages as supplied from the capital of the employer.


Adam Smith was never called upon to revise or in any way to reconsider the statement of his great book as to the nature of value, the discussion on the subject having arisen since his death. His successors in political economy have been with few exceptions, not men of original thought, but the mere imitators, compilers and strawsplitters who usually follow a great work of genius. They have, without looking further, accepted the term used by him, "value in exchange," not merely in the same way that he accepted it, as a convenient, because a readily understood, name for a quality, but as expressing the nature of that quality. Thus Adam Smith's explanation of the essential relation of value to the exertion of labor has been virtually, if not utterly, ignored. And from looking further than exchangeability for an explanation of the nature of value, these succeeding economists have been dissuaded and debarred not only by certain facts not understood, such as the fact that many things having value do not originate in labor, and by erroneous conceptions, such as that which treats labor itself as a commodity; but by a greatly effective, though doubtless in most cases a very vague recognition of the fact that danger to existing social institutions would follow any too searching an inquiry into the fundamental principle of value. A world of ingenuity has been expended and monstrous books have been written that it will tire a man to read and almost make him doubt his own sanity to try to understand, to solve the problem of the fundamental nature of value in exchange. Yet they have resulted in what are but ponderous elaborations of confusion, for the good and sufficient reason that the essence or foundation of what we call value in exchange does not lie in exchangeability at all, but in something from which exchangeability springs -- the toil and trouble attendant upon exertion.


Let me endeavor, even at some length, to prove this in a succeeding chapter, for most vital and far-reaching economic issues are involved in this settlement of the meaning of a term.

* "Price," as an economic term, has come to mean value in terms of money, or at least in terms of one particular commodity; but Adam Smith did not make this distinction. He uses the word "price" sometimes where he means "cost," and sometimes where he means "value." This use of price for value he once in a while indicates, as where, in Chapter VI, he speaks of "price or exchangeable value," but in general he leaves it to inference. Where it is necessary for him to make the distinction between what we now call value and what we now call price, he usually speaks of the one as "real price" and of the other as "nominal price," meaning by "real price" value in labor, and by "nominal price" value in money.