The Two Sources of 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the schools, this work of genius which swayed all Europe in its day, is laid upon the shelf as an antiquated affair, superseded by the smaller and duller men who have pulled his system to pieces and are offering us the fragments as a science most of whose first principles are still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 XIV
The Two Sources of Value

Showing That There Is a Value From Production and Also a Value From Obligation

Value does not involve increase of wealth -- Value of obligation -- Of enslavement -- Economic definition of wealth impossible without recognition of this difference in value -- Smith's confusion and results -- Necessity of the distinction -- Value from production and value from obligation -- Either gives the essential quality of commanding exertion -- The obligation of debt -- Other obligations -- Land values most important of all forms of value from obligation -- Property in land equivalent to property in men -- Common meaning of value in exchange -- Real relation with exertion -- Ultimate exchangeability is for labor -- Adam Smith right -- Light thrown by this theory of value 01

We now come to a point of much importance. For it is to the failure to note what I wish in this chapter to point out that the confusions that have so perplexed the terms value and wealth in the study of political economy have arisen.


It is usually, if not indeed invariably assumed in all standard economic works that the conversion of labor power through exertion into services or wealth is the only way in which value originates.


Yet what we have already seen is enough to show us that this cannot be so.


It is not the exertion that a thing has cost, in past time, that gives it value, but the exertion that its possession will in future time dispense with, for even the immediate is in strictness future. Thus value may be created by mere agreement to render exertion, or by the imposition of such obstacles to the satisfaction of desire as will necessitate a greater exertion for the attainment of the satisfaction. In the same way, the value of some things may be increased, or sometime perhaps produced, without the production of real wealth; or even by the destruction of real wealth.


For instance: I with another may agree to exchange, but consummate in the present but one side of the full exchange, substituting for the other side an agreement or obligation to complete it in the future. That is to say, I may give or receive things having present value in return for an obligation to render labor or the results or representatives of labor at some definite or indefinite future time. Or, both of us may exchange similar obligations. The obligations thus created may, and frequently do, at once assume value and become exchangeable for exertion or the results of exertion. Or, a government or joint -- stock company may issue obligations of the same kind, in the form of bonds or stock, which may at once assume a value dependent as in the case of an individual upon the strength of the belief that the obligations will be faithfully redeemed, irrespective of any counter payment or obligation.


There is in all this no increase of wealth; but there is a creation of value -- a value arising out of obligation and dependent entirely upon expectation, but still a value -- an exchangeable quantity, the possession of which could command through exchange other valuable things.


Or, again: Suppose the discoverers of the Isle of Eden, we have imagined, to have been of the same kidney as the Spanish discoverers of America, and instead of tempting the islanders to work for them by exciting their desire for new satisfactions, had compelled them to work by whipping, or killing them if they refused. The discoverers might thus have carried off, as the Spanish conquistadors carried off, what readily, exchanging for exertion in other parts of the world, would there have great value -- not merely precious metals or stones, woods or spices -- but even the natives themselves. For carried to any country where the power to compel them to work was by municipal law transferable, these human beings would have value, just as the ability to compel their service in their native island would have value.


Now in Individual Economy, which takes cognizance only of the relations of the individual to other individuals, there is no difference between these two kinds of value. Whether an individual has the power of commanding exertion from others because he has added to the general stock, or simply because he holds the power of demanding exertion from others makes no difference to him or to them. In either case he gets and they give.


But in political economy, which is the economy of the Society or the aggregate, there is a great difference. Value of the one kind -- the value which constitutes an addition to the common stock -- involves an addition to the wealth of the community or aggregate, and thus is wealth in the politico-economic sense. Value of the other kind -- the value which consists merely of the power of one individual to demand exertion from another individual -- adds nothing to the common stock, all it effects is a new distribution of what already exists in the common stock, and in the politico-economic sense, is not wealth at all.


In the development of political economy from Adam Smith these two and totally different kinds of values have been confused in one word. Smith started in by recognizing as value that which added to wealth, but he afterwards, and with seeming carelessness included as value that which adds to the wealth of the individual, but adds nothing whatever to the wealth of the community. This consorted with the common idea that the wealth of a community is the sum of the wealth of individuals, and enabled all that has value to the individual to be included as politico -- economic wealth. It consorted as wealth with the disposition of the wealthy class to give a moral sanction to whatever was to them superiority, and has thus been perpetuated by economist after economist.


But it was impossible to treat as one and the same quality a value that added to the wealth of the community and a value that did not, and yet to make a politico-economic definition of wealth. This therefore has been the point on which the political economy founded by Adam Smith has been constantly at sea. It could not be a political economy until it had defined wealth, and it could not define wealth until it had recognized a distinction between two kinds of value.


This difficulty might have been avoided in the beginning by giving to the two kinds of value separate names, but the word value has so long been used for both, that the best a science of political economy can do now, is to distinguish between value of the one kind and value of the other kind.


This however it is necessary to attempt. The best thing I can do is to distinguish value, not as one, but as of two kinds.


By a clear distinction, the various ways in which value may originate, embrace (1) the value which comes from the exertion of labor in such a way as to save future exertion in obtaining the satisfaction of desire; and, (2) the value which comes from the acquisition of power on the part of some men to command or compel exertion on the part of others, or, which is the same thing, from the imposition of obstacles to the satisfaction of desire that render more exertion necessary to the production of the same satisfaction.


Value arising in the first mode may be distinguished as "value from production," and value arising in the second mode may be distinguished as "value from obligation" -- for the word obligation is the best word I can think of to express everything which may require the rendering of exertion without the return of exertion.


Value in the sense of exchange value, the only sense in which it can be properly used in political economy, since this has now been fixed by usage, is one and the same quality, just as the water that flows through the outlet of the Nile or Mississippi is one and the same stream. But as we distinguish the sources of these waters as the White Nile and the Blue Nile, or as the Upper Mississippi, the Missouri, the Ohio, etc., so we may distinguish as to origin, between value from production and value from obligation. The mere recognition that there is such a difference in the origins of value would of itself do much to extricate political economy from the utter maze into which a century of cultivation has brought it in the closing years of the nineteenth century.


But while making this distinction it must be remembered that the essential character of value is always that of equivalence to exertion in the satisfaction of desire. The value of a thing, in short, is the amount of toil and trouble which it will save to the possessor (as in the case of a Crusoe), or (as is the usual case) others may be willing to undertake in exchange for it. This is not necessarily the toil and trouble which the purchaser will agree in his own person to undergo, but the toil and trouble which he had power to command or to induce others to undergo, and of which he can thus dispense the seller in the attainment of his desire. No matter how this quality attaches to them, whether by value from production, or by value from obligation, things have value when, so long, and so far, as they will purchase exemption from toil and trouble in the attainment of desire.


That "debt is slavery" is not merely a metaphorical expression. It is literally true in this, that debt involves, though it may be in limited degree, the same obligation of rendering exertion without return as does slavery. When under the form of exchange I receive services or commodities from another, asking him to forego the receipt on his part of what I should by the terms, expressed or implied, of our exchange, receive in return from him, I assume an obligation, though probably to a limited extent and with limited sanctions, to render to him labor, or the results of labor, without, so far as it goes, any return on his part. Such a debt may be a mere debt of conscience, which he may have no means of proving, or have no legal means of collecting, even if he could prove it; or it may be a mere debt of honor, which is the name we give to debt held morally binding, but which the municipal law may refuse to help us to collect; or it may be witnessed by other persons or writings, or by the assignment of releases of specific things as in mortgages; or by the agreements of others to pay if I do not, as is the case of negotiable notes. But while all this may affect the ease with which I may dispose of my obligation to another and the value I can get in return for it, the essential principle of these different forms of obligation is the same. It is the same in so far as it goes as the obligation to render exertion, as that which gave their exchangeable value to slaves, and which is in fact the type of all debts of obligation.


The term "value from obligation" will at once be recognized as including an immense body of the values dealt with by banks, stock exchanges, trust companies, or held by private individuals, and which are commonly known as obligations or securities. But it may require a little reflection to see how much else there is having value which is really value from obligation. All debts and claims of whatever kind, whether they be what the lawyers call choses in action or mere debts of honor or good faith unrecognized by law, all special privileges and franchises, patents, and the beneficial interests known as good-will, in so far as they have value, have it as value from obligation. The value of slaves wherever slavery exists -- and only a few years ago the market value of slaves in the United States was estimated in round numbers at three thousand million dollars -- is clearly a value of obligation, springing not from production, but from the obligation imposed on the slave to work for the master. So too with the value of public pensions and the incumbency of profitable offices and places, when they are made matters of bargain and sale, which is in some cases yet done in England and which is I fear to a still larger extent yet done in the United States, though surreptitiously, as it is habitually done in China where "civil service reform" has for centuries prevailed.


In English newspapers one may yet occasionally read advertisements for the sale of advowsons for the cure of souls. The exchange value that they have is of course from obligation. Up to a few years ago there were similar advertisements for the sale of commissions in the army and navy. These are but survivals of an earlier and perhaps clearer type of nomenclature. The value they have is clearly a value from obligation. And the same thing is true under more modern forms, of rights given by protective duties, by civil-service regulations, and franchises, and patents, and forms of good-will. All these things have value only as "value from obligation."


Among the valuable assessments of the large landholders of feudal times was the right of holding markets, of keeping dove-cotes, of succeeding in certain instances to the property of tenants; or of grinding grain, of coining money, of collecting floatwood, etc. The values of these were clearly "values from obligation." But that they have passed insensibly into the single right of exacting a rent for the use of land is proof that the value of this right -- the right, as it is called, of private ownership of land -- is in reality a "value from obligation."


These ways of giving an additional value to things already in existence or of bringing out value in things which may have no more tangible existence than an act of mind, a verbal promise, a paper note, an act of legislature, a decision of court or a common habit or custom, are clearly of totally different origin and nature from the ways in which value originates by the expenditure of labor in the production of wealth or services, and readily to distinguish them we need a classifying name. It is because the word obligation best consorts with existing customs, and best expresses the common character of the element distinct from production that gives value, that I speak of value from obligation as distinct from value from production. For the common character of all that I am here speaking of is that their possession enables the possessor to command or compel others to render exertion without any return of exertion on his part to them. This power to command labor without the return of labor constitutes on the other side an obligation, and it is this that gives value.


Thus a verbal promise, a bank-account, a promissory note, or any other instrument of indebtedness, an annuity, an insurance policy, things which frequently have value, derive that value from the fact that they express an obligation fixed, unfixed or merely contingent to render exertion to the holder or assignee without return. Thus value may be increased sometimes even by the destruction of valuable things, as the Dutch East India Company kept up the value of spices in Europe by destroying great quantities of spices in the islands where they grew; and as our "protective" tariff makes certain things more valuable in the United States than they would otherwise be, by imposing fines and penalties on bringing them into the country; or as strikes, as we have recently seen in Australia, in England and in America, may increase the value of coal or other products; or as a drought, which causes great loss of the corn crop over wide areas, may increase the value of corn, or as a war which lessens the supply of cotton in England may increase the value of cotton there.


All such additions to value are of "value from obligation," which can no more affect the general stock than can what Jack wins from Tom in a game of cards.


But the most important of these additions to value which do not increase wealth are unquestionably to be found in land value, the form of value from obligation which in the progress of mankind to civilization tends most rapidly to increase, and which has already in the modern world assumed perhaps more than the relative importance that slavery once held in the ancient world. In an England or a United States, or any other highly civilized country, this importance is already so great that the selling value of the land is the selling value of all improvements and personal property, in short of all "value from production;" while it is the one thing which the natural progress of society, in short all improvements of whatever kind, tend constantly to augment. Yet this value is not a part of wealth in the economic sense. It can have, so far as the individual is concerned, none of the moral sanctions of property. It rightfully belongs to no individual or individuals but to the community itself. Considered by the vulgar as the highest form and very type of wealth, land in reality is to the political economist not wealth at all.


And this is the reason that neither by Adam Smith nor by those who succeeded him, however much they may have differed as to tweedledum and tweedledee, has the true character and dual nature of value been realized. For to recognize that is to come to the conclusion of the Physiocrats that, in the economic sense, land is not wealth. And this involves a revolution, albeit to society a beneficent revolution, greater than the world has yet seen.


Yet it is perfectly clear. Let us go back in thought to our imaginary Isle of Eden, and suppose that its discoverers, instead of making merchandise of the inhabitants themselves, had done at once what the American missionaries have done gradually in the Hawaiian Islands -- made themselves owners of the land of the island, and with power to enforce their claim by punishment, had forbidden any islander to pluck of a tree or drink of a spring without their permission. Land before valueless would at once become valuable, for the islanders having nothing else to give would be compelled to render exertion, or the products of exertion, for the privilege of continuing in life.


And that this quality attaching to things, of purchasing by exchange exemption from the toil and trouble in the attainment of desire, is what is commonly meant by value in exchange a little analysis will show. "The value of a thing is just what you can get for it," is a saying, current among men who have never bothered their heads with political economy, which concisely expresses the conception of value. A thing has no value for which nothing can be got in exchange, and it has value when, so long as, and to the degree that, it may be exchanged for some other thing or things.


But all things having value cannot be exchanged for all other things having value. I could not, for instance, exchange a million dollars' worth of cheese-cakes for a building worth a million dollars. What then is the one thing for which all things having value must directly or indirectly exchange? We are apt to ignore that question, because we habitually think of value in terms of money, which serves us as a flux for the exchange of all values, and because we are apt to think of labor as a valuable thing, without distinguishing the different senses in which we use the word. But if we press the question, we see that everything having value must be ultimately exchangeable into human exertion, and that it is in this that its value consists. There are some valuable things that cannot readily, and some that it is practically impossible to exchange for exertion -- such, for instance, as an equatorial telescope, a locomotive, a steamship, a promissory note or bond of large amount, or a bank-note or greenback of high denomination. But they derive their value from the fact that they can be exchanged for things that can in turn be exchanged for exertion.


Money itself derives its power of serving as a medium or flux of exchanges from the fact that it is of all things that which is most readily exchangeable for exertion, and it utterly loses value when it ceases to be exchangeable for exertion. This we have seen in the United States in the case of the Continental currency, in the case of the notes of broken State banks and in the case of the Confederate currency. Thus value ends as it begins, with the power of commanding exertion, and is always measured by that power.


Again, as before, we find that Adam Smith was right in the clear though evanescent gleam that he got of the nature of value. Value in the economic sense is not a mere relation of exchangeability between valuable things, which, save relatively, as between one particular thing and another particular thing, can neither increase nor diminish. The real relation of value is with human exertion, or rather with the toil and trouble that are the inseparable adjuncts of exertion; and the true and absolute value of anything, that which makes it comparable with that of any or all other things in all times and places, is the difficulty or ease of acquiring it. That is of high value which is hard to get; that is of low value which is easy to get; while that which may be had without exertion and that which no one will undergo exertion to get are of no value at all. Cheapness or low value is the result of abundance; dearness or high value the result of scarcity. The one means that the satisfactions of desire may be obtained with little effort, the other that they can be obtained only with much effort. Thus there may be general increase or decrease of value as clearly and as truly as there may be general scarcity or general abundance.


The recognition of this simple theory of value will enable us as we proceed to clear up with ease and certainty many points which have perplexed the economists who have ignored it, and are to their students stumbling-blocks, which make them doubt whether any real science of political economy is possible. In its light all the complex phenomena of value and exchange become clear, and are seen to be but illustrations of that fundamental law of the human mind which impels men to seek the gratification of their desires with the least exertion.


Whatever increases the obstacles, natural or artificial, to the gratification of desire on the part of the ultimate users or consumers of things, thus compelling them to expend more exertion or undergo more toil and trouble to obtain those things, increases their value; whatever lessens the exertion that must be expended or the toil and trouble that must be undergone, decreases value. Thus, wars, tariffs, pirates, public insecurity, monopolies, taxes and restrictions of all kinds, which render more difficult the satisfaction of the desire for certain things, increase their value, and discoveries, inventions and improvements which lessen the exertion required for bringing things to the satisfaction of desire, lessen their value.


Here we may see at once the clear solution of a question which has perplexed and still perplexes many minds -- the question whether the artificial increase of values by governmental restriction is or is not in the interest of the community. When we regard value as a simple relation of exchangeability between exchangeable things, there may seem room for debate. But when we see that its relation is to the toil and trouble which must be undergone by ultimate users in the satisfaction of desire, there is no room for debate. Scarcity may be at times to the relative interest of the few; but abundance is always to the general interest.