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doctrines, he endorsed them in substance, and proceeded to elaborate and refine the earlier views. Ricardo said, "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labor which is necessary for its production. The quantity of labor bestowed on the production of commodities regulates their value.” He refers to “labor as the foundation of the value of commodities,” and makes the comparative quantity of labor which is necessary to their production, the rule which determines the respective quantities of goods which will be given in exchange for each other." 4

Seizing upon an ambiguity in the theories of Smith and Ricardo, a German socialist, Karl Marx, established socialism upon a basic proposition that labor is the sole producer of value. According to the Marxian interpretation, the value of a commodity is the amount of human labor embodied in it. The amount of labor is to be conceived as the labor time socially necessary for the production of the good. “The labor time socially necessary is that required to produce an article under the normal condition of production, and with the average degree of skill and intensity prevalent at the time. Such phrases as “simple, abstract, human labor," "socially necessary labor," and "crystallized labor" are used to explain the Marxian view.

Since all value was exclusively and solely attributable to labor, such payments as interest and profit were a theft from labor. What the laborer received for his toil was bare subsistence. The product of his toil was sold by the capitalist at a market value far in excess of the subsistence needs of the worker. The difference between what the worker actually received and the value which he produced was surplus value. Profit was, therefore, nothing other than unpaid labor.

Two lines of protest against the Marxian exaggeration of the labor element in value presented themselves. One of these attempted to attribute value wholly to the side of demand or utility. The other attempted to prove that although cost of production determined prices, nevertheless labor was not the sole cost of production, but was accompanied by other legitimate costs, including interest, rent, and profit.

The most direct attack upon the Marxian excesses came from the theorists who attributed value to demand. Thus, W. S. Jevons wrote, “Repeated reflection and inquiry have led me to the somewhat novel opinion that value depends entirely upon utility.Jevons, an English economist, was closely sympathetic in point of view with a French economist, Walras, and an Austrian economist, Menger. Chiefly through Menger, and allied Austrian economists, the marginal utility theory of value was built up in great detail. The marginal theory has become

. associated with the “Austrian School" of economists. They shifted emphasis from the supply and cost side of the matter to the demand and utility side.

The final solution of the separate value theories was contained in the 4 Volume I, pp. 1, 33, 74.

proposition that both supply and demand, or cost and utility, are of importance in determining value. Even Adam Smith and Ricardo gave recognition to demand as well as to supply factors, but in their emphasis upon labor as the cause of value, they left an opportunity for the Marxian doctrine of exclusive labor value and of surplus value. Toward the close of the nineteenth century and during the first two decades of the twentieth century, both supply and demand have been assigned places of importance in value theory. A merger of conflicting tendencies has taken place, and the theory of value has come to be a balanced doctrine of supply and demand.

Instrumental in this merging process were Alfred Marshall in Eng. land, and J. B. Clark, R. T. Ely, S. N. Patten, F. A. Fetter, and F. W. Taussig, to mention only a few of the men prominent in the development. They applied the marginal concept rigidly to supply and cost as well as to demand and utility. Over against marginal utility they balanced marginal disutility. Marshall illustrated the joint importance of supply and demand, cost and utility, by the analogy of a pair of shears. One blade he termed supply, the other demand. The cutting of the shears corresponded to price. No one would say that price of value was due to one blade alone, without the coöperation of the other. The cutting, or valuation, process depends upon the mutual coöperation of both blades, supply and demand.

Logically, the connecting link between supply and demand is scarcity. Cost of production or quantity of labor affect value only by first affecting the scarcity of the goods on the market. Cost as such and labor as such have no direct influence upon value. Only indirectly as they influence scarcity can they influence value. On the other hand, the price paid by demanders of goods will depend upon the .scarcity of the goods. Scarcity is a term which is relative both to supply and demand. Gustav Cassel, in his Theory of Social Economy, written in 1924, takes the position that economic theory can dispense altogether with the categories of marginal utility and disutility, and can formulate a complete theory of value purely on the basis of price, scarcity, and demand. His preface states, “From the first beginnings of my studies of this science I have felt that it ought to be possible to do away with the whole of the old theory of value and build up the science from the beginning on the theory of prices."

It is not necessary to go to the extreme suggested by Cassel, and to reject the whole marginal analysis. We may use it for limited purposes, and within certain boundaries. But Cassel's criticism does indicate that traditional value theory does not furnish a completely adequate theory of value. A large number of the younger generation of economists have found the traditional theory insufficient to solve their new problems. Even though such theory be conceded to be all right as far as it goes, most emphatically it does not go far enough. What shall be used to supplement and extend the traditional theory? In answer, economists are not agreed, but the trend is strongly in the direction of price analysis of the money economy. Instead of making a subjective value theory, the trend is toward an objective analysis in terms of prices. Statistical methods make possible quantitative studies of the major price problems. The following chapter presents the body of thought and method contained in such price study of the money economy. It represents an extension of value theory calculated to meet the needs of modern economic problems.


ANDERSON, B. M., JR., Social Value.
BÖHM-BAWERK, E. V., Positive Theory of Capital, Books III, IV.
CLARK, J. M., in The Trend of Economics, edited by R. G. Tugwell.
COOLEY, C. H., Pecuniary Value, Journal of Political Economy, Volume XXVI,

p. 366 ff.

Social Process. DIBLEE, G. B., The Laws of Supply and Demand. FRIDAY, DAVID, An Extension of Value Theory, Quarterly Journal of Economics,

Volume XXXVI, pp. 197-220. HAMILTON, WALTON H., The Price System and Social Policy, Journal of Politi

cal Economy, Volume XXXVI, p. 31. HARTMAN, H. H., Fair Value. HENDERSON, H. D., Supply and Demand. MARSHALL, ALFRED, Principles of Economics, Books III, IV, V. SIMPSON, KEMPER, Price Theories, Quarterly Journal of Economics, Volume

XXXV, p. 287 ff. RICARDO, DAVID, Principles of Political Economy, Volume I, Chapter V. TaussiG, F. W., Principles of Economics, Volume 1, Chapters VIII-XVI. TAYLOR, F. M., Principles of Economics, Chapters XIV-XX. TURNER, J. R., Introduction to Economics, Chapters VIII, IX. WICKSTEED, P. H., The Common Sense of Political Economy, Book I, Chap

ter II. W1

VIESER, F., Natural Value.
WRIGHT, P. G., Value Theories Applied to Sugar, Quarterly Journal of

Economics, Volume XXX, p. 101 ff.



The Meaning of the Money Economy.-In 1924, the total volume of exchanges in the United States amounted to an estimated total of $700,000,000,000. In the same year, the people spent in retail markets in the neighborhood of $35,000,000,000. For every dollar spent in retail stores by consumers, about twenty dollars had been interchanged by dealers and middlemen in the long line of tradesmen from first producers to final consumers. The money spent at retail is only one-twentieth of the total money changing hands in the course of a year. The other nineteen-twentieths of the total volume of money payments consisted of a vast complex of contracts, purchases and sales, between countless dealers, speculators, shippers, traffic companies, manufacturers, and traders. This vast maze of money transactions is the money economy.

In the money economy, a contrast appears between the technology of producing physical goods and the technology of producing money gains. The former technology comprises the process of industry. Here belong the efforts of farmers, miners, manufacturers, and all those whose energy is devoted to the fabrication and preparation of goods for human use. The devices of engineering, of machinery, of human skill, of efficiency, of scientific management, are applied to the tasks of industry. But the technology of money gains belongs in the category of modern business. Industry is making goods, whereas business is making money. Business comprises the efforts of financiers, promoters, dealers, speculators, accountants, and tradesmen. Their task is, from a modicum of goods, to buy at one price and sell at another, thereby making a margin of profit. The goods are incidental, the real desideratum is the money profit.

This contrast between industrial and business pursuits penetrates the whole fabric of modern economic life. Let us take the position of a factory worker. On the surface, he is engaged in the production of goods. But this is not his direct motive. He is producing the goods for others, not for himself or his family. He has no direct interest in the goods. He will never wear the shoes or the clothes which he is making. He will never see the product again after it passes his hand. He is producing goods for others, not for self. But one vital interest inheres in this task, namely, the money he can get out of it. His pay envelope is the thing. His direct motive is to make as large a money wage as possible. He must, it is true, go through a certain number of perfunctory motions as a laborer in order to secure this money reward. But the test of his prosperity as a worker is the amount of money he makes. He may have to make more or less goods in order to gain the money, but the bright ulterior hope is the pay envelope. Acquisition of money for himself will make him prosperous, and this is absolutely the only thing which, so far as he is concerned, can make him prosperous. Production for others and acquisition for self dominate the process, because the laborer is fundamentally engaged in making money and only incidentally engaged in making goods.

Even the modern farmer comes under the money economy. Most of his product is sold for the consumption of others, and most of his own consumption comes from retail markets. Farming has become a cash and credit business. The prosperity of the farmer is often greatest in years when his crop production is lowest, because the short crop, when sold for a high price, yields a larger net profit. His prosperity depends upon the amount of money he can obtain from his crops, whether the crops be more or less. His prosperity is a money prosperity through and through.

The business man is the cardinal type of the money economy. He it is who directs the physical task of making goods, who owns the goods, who owns the capital equipment with which they are produced, who finances the entire undertaking. In so far as he deals with goods, he is directing production for others, but the outcome will be acquisition for himself. The acquisition will be in money. His ability is concentrated on the problems of buying and selling,—buying low in order to sell high, selling high in order to buy further. This activity may or may not result in greater production of goods. If indirectly and incidentally some commodities are produced, well and good. Likewise, if no commodities are produced, but by clever strategies of salesmanship money is made, well and good. Business which enriches the owner and enterpriser in terms of money may or may not enrich the community in terms of goods.

The business man works by pecuniary standards. By these standards, business is prosperous whether it makes more or less goods provided only it makes more money. The pecuniary employments have to do with vendibility and salability rather than serviceability. They concentrate upon ownership, exchanges, bargainings, for the purpose of pecuniary gain. Profit is their goal, product is an incident. To simplify these observations, we may reduce them to a definition of business from the pecuniary standpoint of the money economy. We may define business as an organized undertaking to gain money profits by a series of price bargains for the purchase and sale of contracts, rights, services, and goods.

Differential Gains and Social Gains.-Under this money economy, the point of primary concern is what every citizen gets for himself. The attack is individualistic. Not that the citizen is avaricious or greedy, but that his point of approach is naturally what he can get for himself. What he can get for himself depends less on his efficiency in producing

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