Capital and Interest: A Critical History of Economical Theory

Eugen v. Böhm-Bawerk, from the Warren J. Samuels Portrait Collection
Böhm-Bawerk, Eugen v.
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William A. Smart, trans.
First Pub. Date
London: Macmillan and Co.
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Book VI, Chapter III



Marx*50 starts from the proposition that the exchange value*51 of all goods is regulated entirely by the amount of labour which their production costs. He lays much more emphasis on this proposition than does Rodbertus. While Rodbertus only mentions it incidentally, in the course of his argument as it were, and puts it very often in the shape of a hypothetical assumption without wasting any words in its proof, Marx makes it his fundamental principle, and goes thoroughly into statement and explication. To be just to the peculiar dialectical style of the author I must give the essential parts of the theory in his own words.


"The utility of a thing gives it a value in use. But this utility is not something in the air. It is limited by the properties of the commodity, and has no existence apart from that commodity. The commodity itself, the iron, corn, or diamond, is therefore a use value or good.... Use values constitute the matter of wealth, whatever be their social form. In the social form we are about to consider they constitute at the same time the material substratum of exchange value. Exchange value in the first instance presents itself as the quantitative relation, the proportion in which use values of one kind are exchanged for those of another kind, a relation constantly changing with time and place. Hence exchange value seems to be something accidental and purely relative, and an intrinsic value in exchange seems a contradiction in terms. Let us look at the matter more closely.


"A single commodity, e.g. a quarter of wheat, exchanges with other articles in the most varying proportions. Still its exchange value remains unaltered, whether expressed in X boot-blacking, Y silk, or Z money. It must therefore have a content distinct from those various forms of expression. Now let us take two commodities, wheat and iron. Whatever be the proportion in which they are exchangeable, it can always be represented by an equation, in which a given quantity of wheat appears as equal to a certain quantity of iron. For instance, 1 quarter wheat = 1 cwt. of iron. What does this equation tell us? It tells us that there is a common element of equal amount in two different things—in a quarter of wheat and in a cwt. of iron. The two things are therefore equal to a third, which in itself is neither the one nor the other. Each of the two, so far as it is an exchange value, must therefore be reducible to that third.... This common element cannot be a geometrical, physical, chemical, or other natural property of the commodities. Their physical properties only come into consideration so far as they make the commodities useful; that is, make them use values. But, on the other hand, the exchange relation of goods evidently involves our disregarding their use value. Within this relation one use value counts for just as much as any other, provided only it be present in due proportion. Or, as old Barbon says, "one sort of wares is as good as another if the value be equal." There is no difference or distinction in things of equal value. One hundred pounds' worth of lead or iron is of as great a value as one hundred pounds' worth of silver and gold." As use values, commodities are, first and foremost, of different qualities; as exchange values they can only be of different quantities, and contain therefore not an atom of use value.


"If then we disregard the use value of commodities, they have only one common property left, that of being products of labour. But even as the product of labour they have changed in our hand. For if we disregard the use value of a commodity, we disregard also the special material constituents and shapes which give it a use value. It is no longer a table, a house, yarn, or any other useful thing. All its sensible qualities have disappeared. Nor is it any longer the product of the labour of the joiner, the mason, the spinner, or of any other distinct kind of productive labour. With the useful character of the products of labour disappears the useful character of the labours embodied in them, and also the different concrete forms of these labours; they are no longer distinguished from each other, but are all reduced to equal human labour, abstract human labour.


"Consider now what is left. It is nothing but the same immaterial objectivity, a mere congelation of homogeneous human labour, i.e. of labour power expended without regard to the form of its expenditure. All that these things now tell us is that human labour was expended in their production, that human labour is stored up in them; as crystals of this common social substance they are—Values.... A use value or good, therefore, only has a value because abstract human labour is objectified or materialised in it."


As labour is the source of all value, so, Marx continues, the amount of the value of all goods is measured by the quantity of labour contained in them, or in labour time. But not by that particular labour time which the individual who made the good might find necessary, but by the "socially necessary labour time." This Marx explains as the "labour time required to produce a use value under the conditions of production that are socially normal at the time, and with the socially necessary degree of skill and intensity of labour." It is only the quantity of socially necessary labour, or the labour time socially necessary for the making of a use value, that determines the amount of the value. "The single commodity here is to be counted as the average sample of its class. Commodities, therefore, in which equally great amounts of labour are contained, or which could be made in the same labour time, have the same amount of value. The value of one commodity is to the value of every other commodity as the labour time necessary to the production of the one is to the labour time necessary to the production of the other.... As values all commodities are only definite amounts of congealed labour time."*52


Later on I shall try to estimate the value of these fundamental principles which Marx puts forward on the subject of value. In the meantime I go on to his theory of interest.


Marx finds the problem of interest in the following phenomenon. The usual circulation of commodities carried on by the medium of exchange, money, proceeds in this way: one man sells the commodity which he possesses for money, in order to buy with the money another commodity which he requires for his own purposes. This course of circulation may be expressed by the formula, Commodity—Money—Commodity. The starting point and the finishing point of the circulation is a commodity, though the two commodities be of different kinds.


"But by the side of this form of exchange we find another and specifically different form, namely, Money—Commodity—Money; the transformation of money into a commodity and the transformation back again of the commodity into money—buying in order to sell. Money that in its movement describes this circulation becomes capital, and is already capital when it is dedicated to be used in this way.... In the simple circulation of commodities the two extremes have the same economic form. They are both commodities. They are also of the same value. But they are qualitatively different use values, as, for instance, wheat and clothes. The essence of the movement consists in the exchange of those products in which the labour of society is embodied. It is different with the circulation M—C—M. At the first glance it looks as if it were meaningless, because tautological. Both extremes have the same economic form. They are both money, and therefore not qualitatively different use values, for money is but the converted form of commodities in which their different use values are lost. First to exchange £100 for wool, and then to exchange the same wool again for £100—that is, in a roundabout way to exchange money for money, like for like—seems a transaction as purposeless as it is absurd. One sum of money can only be distinguished from another sum of money by its amount. The process M—C—M does not owe its character therefore to any qualitative difference between its extremes, since they are both money, but only to this quantitative difference. At the end of the process more money is withdrawn from the circulation than was thrown in at the beginning. The wool bought for £100 is sold again, that is to say, for £100 + £10, or £110. The complete form of this process therefore is M—C—M', where M' = M + D M; that is, the sum originally advanced plus an increment. This increment, or surplus over original value, I call Surplus Value (Mehrwerth). The value originally advanced, therefore, not only remains during the circulation, but changes in amount; adds to itself a surplus value, or makes itself value. And this movement changes it into capital" (p. 132).


"To buy in order to sell, or, to put it more fully, to buy in order to sell at a higher price, M—C—M', seems indeed the peculiar form characteristic of one kind of capital only, merchant capital. But industrial capital also is money that changes itself into commodities, and by the sale of these commodities changes back into more money. Acts which take place outside the sphere of circulation, between the buying and the selling, do not make any alteration in the form of the movement. Finally, in interest bearing capital the circulation M—C—M' presents itself in an abridged form, shows its result without any mediation, en style lapidaire so to speak, as M—M'; i.e. money which is equal to more money, value which is greater than itself" (p. 138).


Whence then comes the surplus value?


Marx works out the problem dialectically. First he declares that the surplus value can neither originate in the fact that the capitalist, as buyer, buys commodities regularly under their value, nor in the fact that the capitalist, as seller, sells them regularly over their value. It cannot therefore originate in the circulation. But neither can it originate outside the circulation. For "outside the circulation the owner of the commodity only stands related to his own commodity. As regards its value the relation is limited to this, that the commodity contains a quantity of the owner's own labour measured by definite social laws. This quantity of labour is expressed in the amount of the value of the commodity produced, and, since the amount of the value is expressed in money, the quantity of labour is expressed in a price, say £10. But the owner's labour does not represent itself in the value of the commodity and in a surplus over its own value—in a price of £10, which is at the same time a price of £11—in a value which is greater than itself! The owner of a commodity can by his labour produce value, but not value that evolves itself. He can raise the value of a commodity by adding new value to that which is there already, through new labour; as, e.g. in making boots out of leather. The same material has now more value, because it contains a greater amount of labour. The boot then has more value than the leather, but the value of the leather remains as it was. It has not evolved itself; it has not added a surplus value to itself during the making of the boot" (p. 150).


And now the problem stands as follows: "Our money owner, who is yet only a capitalist in the grub stage, must buy the commodities at their value, must sell them at their value, and yet at the end of the process must draw out more money than he put in. The bursting of the grub into the butterfly must take place in the sphere of circulation, and not in the sphere of circulation. These are the conditions of the problem. Hic Rhodus, hic salta!" (p. 150).


The solution Marx finds in this, that there is one commodity whose use value possesses the peculiar quality of being the source of exchange value. This commodity is the capacity of labour, or Labour Power. It is offered for sale on the market under the double condition that the labourer is personally free, for otherwise it would not be his labour power that would be on sale, but his entire person as a slave; and that the labourer is deprived of "all things necessary for the realising of his labour power," for otherwise he would prefer to produce on his own account, and to offer his products instead of his labour power for sale. It is by trading in this commodity that the capitalist receives the surplus value. In the following way.


The value of the commodity, labour power, like that of all other commodities, is regulated by the labour time necessary for its reproduction; that is, in this case, by the labour time that is necessary to produce as much means of subsistence as are required for the maintenance of the labourer. Say, for instance, that, to produce the necessary means of subsistence for one day, a social labour time of six hours is necessary, and assume that this same labour time is embodied in three shillings of money, then the labour power of one day is to be bought for three shillings. If the capitalist has completed this purchase, the use value of the labour power belongs to him, and he realises it by getting the labourer to work for him. If he were to get him to work only so many hours per day as are incorporated in the labour power itself, and as must have been paid in the buying of the same, no surplus value would emerge. For, according to the assumption, six hours of labour cannot put into the product in which they are incorporated any greater value than three shillings, and so much the capitalist has paid as wage. But this is not the way in which capitalists act. Even if they have bought the labour power for a price that only corresponds to six hours' labour time, they get the worker to labour the whole day for them. And now, in the product made during this day, there are more hours of labour incorporated than the capitalist was obliged to pay for; he has consequently a greater value than the wage he has paid, and the difference is the "surplus value" that falls to the capitalist.


To take an example. Suppose that a worker can in six hours spin 10 lbs. of wool into yarn. Suppose that this wool for its own production has required twenty hours of labour, and possesses, accordingly, a value of 10s. Suppose, further, that during the six hours of spinning the spinner uses up so much of his tools as corresponds to the labour of four hours, and represents consequently a value of 2s. The total value of the means of production consumed in the spinning will amount to 12s., corresponding to twenty-four hours' labour. In the spinning process the wool "absorbs" other six hours of labour; the yarn spun is therefore, on the whole, the product of thirty hours of labour, and will have in conformity a value of 15s. Under the assumption that the capitalist gets the hired labourer to work only six hours in the day, the making of the yarn has cost the capitalist quite 15s.—10s. for wool; 2s. for wear and tear of tools; 3s. for wage of labour. There is no surplus value here.


Quite otherwise is it if the capitalist gets the labourer to work twelve hours a day for him. In twelve hours the labourer works up 20 lbs. of wool, in which previously forty hours of labour have been incorporated, and which, consequently, are worth 20s.; further he uses up in tools the product of eight hours' labour, of the value of 4s.; but during a day he adds to the raw material twelve hours' labour,—that is, a new value of 6s. And now the balance-sheet stands as follows: The yarn produced during a day has cost in all sixty hours' labour; it has therefore a value of 30s. The outlays of the capitalist amounted to 20s. for wool, 4s. for wear and tear of tools, and 3s. for wage; in all, therefore, only 27s. There remains now a "surplus value" of 3s.


Surplus value therefore, according to Marx, is a consequence of the capitalist getting the labourer to work a part of the day for him without paying for it. In the labourer's work day two portions may be distinguished. In the first part, the "necessary labour time," the worker produces the means of his own maintenance, or the value of that maintenance; for this part of his labour he receives an equivalent in wage. During the second portion, the "surplus labour time," he is "exploited"; he produces "surplus value" without receiving any equivalent whatever for it.*53 "Capital is therefore not merely a command over labour, as Adam Smith calls it. It is essentially a command over unpaid labour. All surplus value, in whatever particular form it may afterwards crystallise itself, be it profit, interest, rent, or any other, is in substance only the material shape of unpaid labour. The secret of the power of capital to evolve value is found in its disposal over a definite quantity of the unpaid labour of others" (p. 554).


In this statement the careful reader will have recognised—if partly in a somewhat altered dress—all the essential propositions combined by Rodbertus in his theory of interest: the doctrine that the value of goods is measured by quantity of labour; that labour alone creates all value; that in the loan contract the worker receives less value than he creates, and that necessity compels him to acquiesce in this; that the capitalist appropriates the surplus to himself; and that consequently the profit so obtained has the character of plunder from the produce of the labour of others.


On account of the substantial agreement of both theories, or, to speak more correctly, of both ways of formulating the same theory, almost everything that I have adduced against Rodbertus's doctrine has equal force against Marx. I may therefore limit myself now to some supplementary remarks that I consider necessary; partly for the purpose of adapting my criticism in particular places to Marx's peculiar statement of the theory, partly also for dealing with some new matter introduced by Marx.


Of this by far the most important is the attempt to prove the proposition that all value rests on labour; instead of merely asserting it. In criticising Rodbertus I laid as little emphasis on that proposition as he had done. I was content to point out some undoubted exceptions to it, but I did not go to the root of the matter. In the case of Marx I neither can nor will intermit this. It is true that in doing so I venture on a field already traversed many a time, and by distinguished writers. I can scarcely hope then to bring forward much that is new. But in a book which has for its subject the critical statement of theories of interest, it would ill become me to avoid the thorough criticism of a proposition which has been placed at the head of one of the most important of these theories, as its most important fundamental principle. And, unfortunately, the present position of our science is not such that it can be considered superfluous once more to undertake this task. Although this proposition is, in truth, nothing more than a fallacy once perpetrated by a great man, and repeated ever since by a credulous crowd, in our day it is like to be accepted in widening circles as a kind of gospel.


For the doctrine that the value of all goods depends upon labour, the proud names of Adam Smith and Ricardo have usually been claimed both as authors and authorities. This is correct; but it is not altogether correct. The doctrine is to be found in the writings of both; but Adam Smith now and then contradicts it,*54 and Ricardo so narrows the sphere within which it is valid, and surrounds it with such important exceptions, that it is scarcely justifiable to assert that he has represented labour as the universal and the exclusive principle of value. He begins his Principles with the express assertion that the exchange value of goods has its origin in two sources—in their scarcity and in the quantity of labour that their production has cost. Certain goods, such as rare statues and paintings, get their value exclusively from the former source, and it is only the value of those goods that can be multiplied, without any assignable limit, by labour, which is determined by the amount of labour they cost. These latter, indeed, in Ricardo's opinion, constitute "by far the greatest part of those goods which are the objects of desire"; but even in regard to them Ricardo finds himself compelled to a further limitation. He has to admit that, even in their case, the exchange value is not determined exclusively by labour; that time also—the time elapsing between the advancing of the labour and the realising of the finished product—has a considerable influence on it.*55


It appears then that neither Adam Smith nor Ricardo have stated the principle that stands in their name in such an unqualified way as they generally get credit for. Still, to a certain extent, they have stated it, and we have to inquire on what grounds they did so.


On seeking to answer this question we shall make a remarkable discovery. It is that neither Adam Smith nor Ricardo have given any reason for this principle, but simply asserted its validity as something self-explanatory. The celebrated passage in Adam Smith, which Ricardo afterwards verbally adopted in his own doctrine, runs thus: "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."*56


Let us pause here a moment. The tone in which Adam Smith speaks signifies that the truth of these words must be immediately obvious. But is it really obvious? Are value and trouble really so closely related that the very conception of them at once carries conviction that trouble is the ground of value? I do not think any unprejudiced person will maintain this. That I have given myself trouble about a thing is one fact; that the thing is worth the trouble is another and a different fact; and that the two facts do not always go hand in hand is too well confirmed by experience for any doubt about it to be possible. It is confirmed by every one of the innumerable cases in which, from want of technical skill, or from unsuccessful speculation, or simply from ill-luck, labour is every day being followed by a valueless result. But not less is it confirmed by every one of the numerous cases where little trouble is rewarded with high gains; such as the occupation of a piece of land, the finding of a precious stone, the discovery of a gold mine.


But not to mention cases that may be considered as exceptions from the regular course of things, it is a fact, as indubitable as it is perfectly normal, that the same amount of labour exerted by different persons has a quite different value. The result of one month's labour on the part of a famous artist is, quite regularly, a hundred times more valuable than the same period of labour on the part of a common carpenter. How could that be possible if trouble were really the principle of value? How could it be possible if, in virtue of some immediate psychological connection, we were forced to base our estimate of value on the consideration of toil and trouble, and only on that consideration?*57 Or perhaps it is that nature is so aristocratic that its psychological laws force our spirit to reckon the trouble of a skilled artist a hundred times more valuable than the more modest trouble of a carpenter! I think that any one who reflects for a little, instead of blindly taking it on trust, will be convinced that there is no immediately obvious and essential connection between trouble and value, such as the passage in Adam Smith seems to assume.


But does the passage actually refer to exchange value, as has been tacitly assumed? I do not think that any one who reads it with unprejudiced eye can maintain that either. The passage applies neither to exchange value, nor to use value, nor to any other kind of value in the strict scientific sense. The fact is—as shown by the employment of the expression "worth" instead of value—that in this case Adam Smith has used the word in that very wide and vague sense which it has in everyday speech. And this is very significant. Feeling involuntarily that, at the bar of strictly scientific reflection, his proposition could not be admitted, he turns to the loose impressions of everyday life, and makes use of the ill-defined expressions of everyday life,—with a result, as experience has shown, very much to be deplored in the interests of the science.


Finally, how little the whole passage can lay claim to scientific exactitude is shown by the fact that, even in the few words that compose it, there is a contradiction. In one breath he claims for two things the distinctive property of being the principle of "real" value: first, for the trouble that a man can save himself through the possession of a good; second, for the trouble that a man can impose upon other people. But these are two quantities which, as every one knows, are not absolutely identical. Under the regime of the division of labour, the trouble which I personally would be obliged to undergo to obtain possession of a thing I desired is usually much greater than the trouble with which a labourer technically trained produces it. Which of these two troubles, the "saved " or the "imposed," are we to understand as determining the real value?


In short, the celebrated passage where our old master Adam Smith introduces the Labour Principle into the theory of value is as far as possible from being the great and well grounded scientific principle it has usually been considered. It does not of itself carry conviction. It is not supported by a particle of evidence. It has the slovenly dress and the slovenly character of a popular expression. Finally, it contradicts itself. That, notwithstanding this, it found general acceptance is due, in my opinion, to the coincidence of two circumstances; first, that an Adam Smith said it, and, second, that he said it without adducing any evidence for it. If Adam Smith had but addressed a single word in its proof to the intelligence of his readers, instead of simply appealing to their immediate impressions, they would have insisted upon putting the evidence before the bar of their intelligence, and then the absence of all real argument would infallibly have shown itself. It is only by taking people by surprise that such propositions can win acceptance.


Let us see what Adam Smith, and after him, Ricardo, says further. "Labour was the first price—the original purchase money that was paid for all things." This proposition is comparatively inoffensive, but it has no bearing on the principle of value.


"In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. If, among a nation of hunters, for example, it usually cost twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days' or two hours' labour should be worth double of what is usually the produce of one day's or one hour's labour."


In these words also we shall look in vain for any trace of a rational basis for the doctrine. Adam Smith simply says, "seems to be the only circumstance," "should naturally," "it is natural," and so on, but throughout he leaves it to the reader to convince himself of the "naturalness" of such judgments—a task, be it remarked in passing, that the critical reader will not find easy. For if it is "natural" that the exchange of products should be regulated exclusively by the proportion of labour time that their attainment costs, it must also be natural that, for instance, any uncommon species of butterfly, or any rare edible frog, should be worth, "among a nation of hunters" ten times more than a deer, inasmuch as a man might spend ten days in looking for the former, while he could capture the latter usually by one day's labour. But the "naturalness" of this proportion would scarcely be obvious to everybody!


The result of these considerations may, I think, be summed up as follows. Adam Smith and Ricardo have asserted that labour is the principle of the value of goods simply as an axiom, and without giving any evidence for it. Consequently any one who would maintain this principle must not look to Adam Smith and Ricardo as guaranteeing its truth, but must seek for some other and independent basis of proof.


Now it is a very remarkable fact that of later writers scarcely any one has done so. The men who in other respects sifted the old-fashioned doctrine inside and out with their destructive criticism, with whom no proposition, however venerable with age, was secure from being put once more in question and tested, these very men have not uttered a word in criticism of the weightiest principle that they borrowed from the old doctrine. From Ricardo to Rodbertus, from Sismondi to Lassalle, the name of Adam Smith is the only guarantee thought necessary for this doctrine. No writer adds anything of his own but repeated asseverations that the proposition is true, incontrovertible, indubitable; there is no real attempt to prove its truth, to meet objections, to remove doubts. The despisers of proof from authority content themselves with appealing to authority; the sworn foes of unproved assumptions and assertions content themselves with assuming and asserting. Only a very few representatives of the Labour Value theory form any exception to this rule; one of these few, however, is Marx.


An economist looking for a real confirmation of the principle in question might proceed in one of two directions; he might either attempt to develop the proof from grounds involved in its very statement, or he might deduce it from experience. Marx has taken the former course, with a result on which the reader may presently form his own opinion.


I have already quoted in Marx's own words the passages relative to the subject. The line of argument divides itself clearly into three steps.


First step. Since in exchange two goods are made equal to one another, there must be a common element of similar quantity in the two, and in this common element must reside the principle of Exchange value.


Second step. This common element cannot be the Use value, for in the exchange of goods the use value is disregarded.


Third step. If the use value of commodities be disregarded there remains in them only one common property—that of being products of labour. Consequently, so runs the conclusion, Labour is the principle of value; or, as Marx says, the use value, or "good," only has a value because human labour is made objective in it, is materialised in it.


I have seldom read anything to equal this for bad reasoning and carelessness in drawing conclusions.


The first step may pass, but the second step can only be maintained by a logical fallacy of the grossest kind. The use value cannot be the common element because it is "obviously disregarded in the exchange relations of commodities, for"—I quote literally—"within the exchange relations one use value counts for just as much as any other, if only it is to be had in the proper proportion." What would Marx have said to the following argument?


In an opera company there are three celebrated singers—a tenor, a bass, and a baritone—and these have each a salary of £1000. The question is asked, What is the common circumstance on account of which their salaries are made equal? And I answer, In the question of salary one good voice counts for just as much as any other—a good tenor for as much as a good bass or a good baritone—provided only it is to be had in proper proportion; consequently in the question of salary the good voice is evidently disregarded, and the good voice cannot be the cause of the good salary.


The fallaciousness of this argument is clear. But it is just as clear that Marx's conclusion, from which this is exactly copied, is not a whit more correct. Both commit the same fallacy. They confuse the disregarding of a genus with the disregarding of the specific forms in which this genus manifests itself. In our illustration the circumstance which is of no account as regards the question of salary is evidently only the special form which the good voice assumes, whether tenor, bass, or baritone. It is by no means the good voice in general. And just so is it with the exchange relations of commodities. The special forms under which use value may appear, whether the use be for food, clothing, shelter, or any other thing, is of course disregarded; but the use value of the commodity in general is never disregarded. Marx might have seen that we do not absolutely disregard use value from the fact that there can be no exchange value where there is not a use value—a fact which Marx himself is repeatedly forced to admit.*58


But still worse fallacies are involved in the third step of the demonstration. If the use value of commodities is disregarded, says Marx, there remains in them only one common property—that of being products of labour. Is this true? Is there only one property? In goods that have exchange value, for instance, is there not also the property of being scarce in proportion to the demand? Or that they are objects of demand and supply? Or that they are appropriated? Or that they are natural products? For that they are products of nature just as they are products of labour no one declares more plainly than Marx himself, when in one place he says, "Commodities are combinations of two elements, natural material and labour;" or when he incidentally quotes Petty's expression about material wealth, "Labour is its father and the earth its mother."*59


Now why, I ask, may not the principle of value reside in any one of these common properties, as well as in the property of being the product of labour? For in support of this latter proposition Marx has not adduced the smallest positive argument. His sole argument is the negative one, that the use value, thus happily disregarded and out of the way, is not the principle of exchange value. But does not this negative argument apply with equal force to all the other common properties overlooked by Marx? Wantonness in assertion and carelessness in reasoning cannot go much farther.


But this is not all. Is it even true that in all goods possessing exchange value there is this common property of being the product of labour? Is virgin soil a product of labour? Or a gold mine? Or a natural seam of coal? And yet, as every one knows, these often have a very high exchange value. But how can an element that does not enter at all into one class of goods possessing exchange value be put forward as the common universal principle of exchange value? How Marx would have lashed any of his opponents who had been guilty of such logic!*60


Without doing Marx any wrong then we shall here take the liberty of saying that his attempt to prove the truth of his principle deductively has completely fallen through.


If the proposition that the value of all goods rests on labour is neither an axiom nor capable of proof by deduction, there still remains at least one possibility in its favour; it may be capable of demonstration by experience. To give Marx every chance we shall look at this possibility also. What is the testimony of experience?


Experience shows that the exchange value of goods stands in proportion to that amount of labour which their production costs only in the case of one class of goods, and even then only approximately. Well known as this should be, considering that the facts on which it rests are so familiar, it is very seldom estimated at its proper value. Of course everybody, including the socialist writers, agrees that experience does not entirely confirm the Labour Principle. It is commonly imagined, however, that the cases in which actual facts confirm the labour principle form the rule, and that the cases which contradict the principle form a relatively insignificant exception. This view is very erroneous, and to correct it once and for all I shall put together in groups the exceptions by which experience proves the labour principle to be limited in economic life. We shall see that the exceptions so much preponderate that they scarcely leave any room for the rule.


1. From the scope of the Labour Principle are excepted all "scarce" goods that, from actual or legal hindrances, cannot be reproduced at all, or can be reproduced only in limited amount. Ricardo names, by way of example, rare statues and pictures, scarce books and coins, wines of a peculiar quality, and adds the remark that such goods form only a very small proportion of the goods daily exchanged in the market. If, however, we consider that to this category belongs the whole of the land, and, further, those numerous goods in the production of which patents, copyright, and trade secrets come into play, it will be found that the extent of these "exceptions " is by no means inconsiderable.*61


2. All goods that are produced not by common, but by skilled labour, form an exception. Although in the day's product of a sculptor, a skilled joiner, a violin-maker, an engineer, and so on, no more labour be incorporated than in the day's product of a common labourer or a factory operative, the former has a greater exchange value, and often a many times greater exchange value. The adherents of the labour value theory have of course not been able to overlook this exception. Sometimes they mention it, but in such a way as to suggest that it does not form a real exception, but only a little variation that yet comes under the rule. Marx, for instance, adopts the expedient of reckoning skilled labour as a multiplex of common labour. "Complicated labour," he says (p. 19), "counts only as strengthened, or rather multiplied, simple labour, so that a smaller quantity of complicated labour is equal to a greater quantity of simple labour. Experience shows that this reduction is constantly made. A commodity may be the product of the most complicated labour; its value makes it equal to the product of simple labour, and represents therefore only a definite quantity of simple labour."


The naïvety of this theoretical juggle is almost stupefying. That a day's labour of a sculptor may be considered equal to five days' labour of a miner in many respects—for instance, in money valuation—there can be no doubt. But that twelve hours' labour of a sculptor actually are sixty hours' common labour no one will maintain. Now in questions of theory—for instance, in the question of the principle of value—it is not a matter of what fictions men may set up, but of what actually is. For theory the day's production of the sculptor is, and remains, the product of one day's labour, and if a good which is the product of one day's labour is worth as much as another which is the product of five days' labour, men may invent what fictions they please; there is here an exception from the rule asserted, that the exchange value of goods is regulated by the amount of human labour incorporated in them. Suppose that a railway generally graduates its tariff according to the distances travelled by persons and goods, but, as regards one part of the line in which the working expenses are peculiarly heavy, arranges that each mile shall count as two, can it be maintained that the length of the distances is really the exclusive principle in fixing the railway tariff? Certainly not; by a fiction it is assumed to be so, but in truth the application of that principle is limited by another consideration, the character of the distances. Similarly we cannot preserve the theoretical unity of the labour principle by any such fiction.


Not to carry the matter further, I may say that this second exception embraces a considerable proportion of all bought and sold goods. In one respect, strictly speaking, we might say that almost all goods belong to it. For into the production of almost every good there enters some skilled labour—labour of an inventor, of a manager, of a pioneer, or some such labour—and this raises the value of the good a little above the level which would have been determined if the quantity of labour had been the only consideration.


3. The number of exceptions is increased by those goods—not, it is true, a very important class—that are produced by abnormally badly paid labour. For reasons that need not be discussed here, wages remain constantly under the minimum of subsistence in certain branches of production; for instance, in certain women's industries, such as sewing, embroidering, and knitting. The products of these employments have thus an abnormally low value. There is, for instance, nothing unusual in the product of three days' labour on the part of a white seam worker only fetching as much as the product of two days' labour on the part of a factory worker.


All the exceptions mentioned hitherto take the form of exempting certain groups of goods altogether from the law of labour value, and therefore tend to narrow the sphere of that law's validity. The only goods then left to the action of the law are those goods which can be produced at will, without any limitations, and which at the same time require nothing but unskilled labour for their production. But even in this contracted sphere the law of labour value does not rule absolutely. There are some further exceptions that go a great way to break down its strictness.


4. A fourth exception to the Labour Principle may be found in the familiar and universally admitted phenomenon that even those goods, in which exchange value entirely corresponds with the labour costs, do not show this correspondence at every moment. By the fluctuations of supply and demand their exchange value is put sometimes above, sometimes below the level corresponding to the amount of labour incorporated in them. The amount of labour only indicates the point towards which exchange value gravitates,—not any fixed point of value. This exception, too, the socialist adherents of the labour principle seem to me to make too light of. They mention it indeed, but they treat it as a little transitory irregularity, the existence of which does not interfere with the great "law" of exchange value. But it is undeniable that these irregularities are just so many cases where exchange value is regulated by other determinants than the amount of labour costs. They might at all events have suggested the inquiry whether there is not perhaps a more universal principle of exchange value, to which might be traceable, not only the regular formations of value, but also those formations which, from the standpoint of the labour theory, appear to be "irregular." But we should look in vain for any such inquiry among the theorists of this school.


5. Apart from these momentary fluctuations, it is clear that in the following case the exchange value of goods constantly diverges, and that not inconsiderably, from the level indicated by the quantity of labour incorporated in them. Of two goods which cost exactly the same amount of social average labour to produce, that one maintains a higher exchange value the production of which requires the greater advance of "previous" labour. Ricardo, as we saw, in two sections of the first chapter of his Principles, has spoken in detail of this exception from the labour principle. Rodbertus and Marx ignore, without expressly denying it; indeed they could not very well do so; for that an oak-tree of a hundred years possesses a higher value than corresponds to the half minute's labour required in planting the seed is too well known to be successfully disputed.


To sum up. The asserted "law" that the value of goods is regulated by the amount of the labour incorporated in them, does not hold at all in the case of a very considerable proportion of goods; in the case of the others, does not hold always, and never holds exactly. These are the facts of experience with which the value theorists have to reckon.


What conclusions can an unprejudiced theorist draw from such facts? Certainly not the conclusion that the origin and measure of all value is to be ascribed exclusively to labour. Such a conclusion would be very like deducing the law. All electricity is caused by friction, from the experience that electricity is produced in many ways, and is very often produced by friction.


On the other hand, the conclusion might very well be drawn that expenditure of labour is one circumstance which exerts a powerful influence on the value of many goods; always remembering that labour is not an ultimate cause—for an ultimate cause must be common to all the phenomena of value—but a particular and intermediate cause. It would not be difficult to find a deductive proof of such an influence, though no deductive proof could be given of the more thoroughgoing principle. And, further, it may be very interesting and very important accurately to trace the influence of labour on the value of goods, and to express the results in the form of laws. Only in doing so we must keep before us the fact that these will be only particular laws of value not affecting the universal nature of value. To use a comparison. The law that formulates the influence of labour on the exchange value of goods will stand to the universal law of value in the same relation as the law, The west wind brings rain, stands to a universal theory of rain. West wind is a very general intermediate cause of rain, just as expenditure of labour is a very general intermediate cause of value; but the ultimate cause of rain is as little the west wind as that of value is the expended labour.


Ricardo himself only went a very little way over the proper limits. As I have shown, he knew right well that his law of value was only a particular law; he knew, for instance, that the value of scarce goods rests on quite another principle. He only erred in so far as he very much over-estimated the extent to which his law is valid, and practically ascribed to it a validity almost universal. The consequence is that, later on, he forgot almost entirely the little exceptions he had rightly made but too little considered at the beginning of his work, and often spoke of his law as if it were really a universal law of value.


It was his shortsighted followers who first fell into the scarcely conceivable blunder of deliberately and absolutely representing labour as the universal principle of value. I say, the scarcely conceivable blunder, for really it is not easy to understand how men trained in theoretical research could, after mature consideration, maintain a principle for which they could find such slight support. They could find no argument for it in the nature of things, for that shows no necessary connection whatever between value and labour; nor in experience, for experience shows, on the contrary, that value for the most part does not correspond with labour expended; nor, finally, even in authority, for the authorities appealed to had never maintained the principle with that pretentious universality now given it.


And this principle, entirely unfounded as it is, the socialist adherents of the Exploitation theory do not maintain as something unessential, as some innocent bit of system building; they put it in the forefront of practical claims of the most aggressive description. They maintain the law that the value of all commodities rests on the labour time incorporated in them, in order that the next moment they may attack, as "opposed to law," "unnatural," and "unjust," all formations of value that do not harmonise with this "law"—such as the difference in value that falls as surplus to the capitalist—and demand their abolition. Thus they first ignore the exceptions in order to proclaim their law of value as universal. And, after thus assuming its universality, they again draw attention to the exceptions in order to brand them as offences against the law. This kind of arguing is very much as if one were to assume that there are many foolish people in the world, and to ignore that there are also many wise ones; and thus coming to the "universally valid law" that "all men are foolish," should demand the extirpation of the wise on the ground that their existence is obviously "contrary to law"!


I have criticised the law of Labour Value with all the severity that a doctrine so utterly false seemed to me to deserve. It may be that my criticism also is open to many objections. But one thing at any rate seems to me certain: earnest writers concerned to find out the truth will not in future venture to content themselves with asserting the law of labour value as has been hitherto done.


In future any one who thinks that he can maintain this law will first of all be obliged to supply what his predecessors have omitted—a proof that can be taken seriously. Not quotations from authorities; not protesting and dogmatising phrases; but a proof that earnestly and conscientiously goes into the essence of the matter. On such a basis no one will be more ready and willing to continue the discussion than myself.


To return to Marx. Sharing in Rodbertus's mistaken idea that the value of all goods rests on labour, he falls later on into almost all the mistakes of which I have accused Rodbertus. Shut up in his labour theory Marx, too, fails to grasp the idea that Time also has an influence on value. On one occasion he says expressly that, as regards the value of a commodity, it is all the same whether a part of the labour of making it be expended at a much earlier point of time or not.*62 Consequently he does not observe that there is all the difference in the world whether the labourer receives the final value of the product at the end of the whole process of production, or receives it a couple of months or years earlier; and he repeats Rodbertus's mistake of claiming now, in the name of justice, the value of the finished product as it will be then.


Another point to be noted is that, in business capital, Marx distinguishes two portions; of which one, in his peculiar terminology called Variable capital, is advanced for the wages of labour; the other, which he calls Constant capital, is advanced for the means of production. And Marx maintains that only the amount of the variable capital has any influence on the quantity of surplus value obtainable,*63 the amount of the constant capital being in this respect of no account.*64 But in this Marx, like Rodbertus before him, falls into contradiction with facts; for facts show, on the contrary, that, under the working of the law of assimilation of profits, the amount of surplus value obtained stands, over the whole field, in direct proportion to the amount of the total capital—variable and constant together—that has been expended. It is singular that Marx himself became aware of the fact that there was a contradiction here,*65 and found it necessary for the sake of his solution to promise to deal with it later on.*66 But the promise was never kept, and indeed could not be kept.


Finally, Marx's theory, taken as a whole, was as powerless as Rodbertus's to give an answer even approximately satisfactory to one important part of the interest phenomena. At what hour of the labour day does the labourer begin to create the surplus value that the wine obtains, say between the fifth and the tenth year of its lying in the cellar? Or is it, seriously speaking, nothing but robbery—nothing but the exploitation of unpaid labour—when the worker who sticks the acorn in the ground is not paid the full £20 that the oak will be worth some day when, without further labour of man, it has grown into a tree?


Perhaps I need not go farther. If what I have said is true, the socialist Exploitation theory, as represented by its two most distinguished adherents, is not only incorrect, but, in theoretical value, even takes one of the lowest places among interest theories. However serious the fallacies we may meet among the representatives of some of the other theories, I scarcely think that anywhere else are to be found together so great a number of the worst fallacies—wanton, unproved assumption, self-contradiction, and blindness to facts. The socialists are able critics, but exceedingly weak theorists. The world would long ago have come to this conclusion if the opposite party had chanced to have had in its service a pen as keen and cutting as that of Lassalle and as slashing as that of Marx.


That in spite of its inherent weakness the Exploitation theory found, and still finds, so much credence, is due, in my opinion, to the coincidence of two circumstances. The first is that it has shifted the struggle to a sphere where appeal is usually made to the heart as well as to the head. What we wish to believe we readily believe. The condition of the labouring classes is indeed most pitiful; every philanthropist must wish that it were bettered. Many profits do in fact flow from an impure spring; every philanthropist must wish that such springs were dried up. In considering a theory whose conclusions incline to raise the claims of the poor, and to depress the claims of the rich,—a theory which agrees partly, or it may be entirely, with the wishes of his heart,—many a one will be prejudiced in its favour from the first, and will relax a great deal of the critical severity that, in other circumstances, he would have shown in examining its scientific basis. And it need scarcely be said that theories such as these have a strong attraction for the masses. Their concern is not with criticism; they simply follow the line of their own wishes. They believe in the Exploitation theory because it is agreeable to them, and although it is false; and they would believe in it even if its theoretical argument were much worse than it is.


A second circumstance that helped to spread the theory was the weakness of its opponents. So long as the scientific opposition to it was led chiefly by men who adhered to the Abstinence theory, the Productivity theory, or the Labour theory of a Bastiat or M'Culloch, a Roscher or Strasburger, the battle could not go badly for the socialists. From positions so faultily chosen these men could not strike at the real weaknesses of Socialism; it was not too difficult to repel their lame attacks, and to follow the fighters triumphantly into their own camp. This the socialists were strong enough to do, with as much success as skill. If many socialistic writers have won an abiding place in the history of economic science, it is due to the strength and cleverness with which they managed to destroy so many flourishing and deeply-rooted erroneous doctrines. This is the service, and almost the only service, which Socialism has rendered to our science. To put truth in the place of error was beyond the power of the Exploitation theorists—even more than it was beyond the power of their much abused opponents.

Notes for this chapter

Zur Kritik der politischen-Oekonomie, Berlin, 1859. Das Kapital, Kritik der politischen-Oekonomie, vol. i, first edition, Hamburg, 1867; second edition, 1872. English translation by Moore and Aveling, Sonnenschein, 1887. I quote from Das Kapital as the book in which Marx stated his views last and most in detail. On Marx also Knies has made some very valuable criticisms, of which I make frequent use in the sequel. Most of the other attempts to criticise and refute Marx's work are so far below that of Knies in value that I have not found it useful to refer to them.
With Marx simply called Value.
Das Kapital, second edition, p. 10, etc.
Das Kapital, p. 205, etc.
E.g. when in the fifth chapter of the second book he says of the farmer: "Not only his labouring servants, but his labouring cattle are productive labourers." and further, "In agriculture too Nature labours along with man, and though her labour costs no expense, its produce has its value as well as that of the most expensive workmen." See also Knies, Der Kredit, part ii p. 62.
See above, p. 354 [Book VI, Chapter II, par. VI.II.72.—Econlib Ed.], and Knies as before, p. 60, etc.
Wealth of Nations,book i. chap. v. (p. 13 of M'Culloch's edition); Ricardo, Principles, chap. i.
Adam Smith gets rid of the difficulty mentioned in the text as follows: "If the one species of labour requires an uncommon degree of dexterity and ingenuity, the esteem which men have for such talents will naturally give a value to their produce superior to what would be due to the time employed about it. Such talents can seldom be acquired, but in consequence of long application and the superior value of their produce may frequently be more than a reasonable compensation for the time and labour which must be spent in acquiring them" (book i. chap. vi.)

The insufficiency of this explanation is obvious. In the first place, it is clear that the higher value of the products of exceptionally skilled men rests on a quite different foundation from the "esteem which men have for such talents." How many poets and scholars does the public leave to starve in spite of the very high esteem which it pays to their talents, and how many unscrupulous speculators has it rewarded for their adroitness by hundreds of thousands, although it has no esteem whatever for their "talents"! But suppose esteem were the foundation of value, in that case the law that value depends on trouble would evidently not be confirmed but violated. If, again, in the second of the above sentences, Adam Smith attempts to trace that higher value to the trouble expended in acquiring the dexterity, by his insertion of the word "frequently" he confesses that it will not hold in all cases. The contradiction therefore remains.

For instance, in p. 15 at the end: "Finally, nothing can be valuable without being an object of use. If it is useless the labour contained in it is also useless; it does not count as labour (sic), and therefore confers no value." Knies has already drawn attention to the logical blunder here criticised (Das Geld, Berlin, 1873, p. 123, etc.)
Das Kapital, p. 17 etc.
See also on the subject Knies, Das Geld, p. 121.
See also Knies, Kredit, part ii, p. 61.
P. 175.
"The rate of surplus value and the value of labour power being given, the amounts of surplus value produced are in direct ratio with the amounts of variable capital advanced.... The value and the degree of exploitation of labour power being equal, the amounts of value and surplus value produced by various capitals stand in direct ratio with the amounts of the variable constituent of these capitals; that is, of those constituents which are converted into living labour power" (p. 311, etc.)
"The value of these contributory means of production may rise, fall, remain unchanged, be little or much, it remains without any influence whatever in producing surplus value" (p. 312).
Pp. 204, 312.
Pp. 312, 542 at end.

End of Notes

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