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C. The Marginalists versus Ricardo
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C. The Marginalists versus Ricardo

Although subsequent marginalist criticisms of Ricardo were more thorough, Jevons fired the opening salvo quite dramatically. He explicitly formulated his utility-based theory of value in opposition to the labor theory. In his Introduction to The Theory of Political Economy, he wrote:

Repeated reflection and inquiry have led me to the somewhat novel opinion, that value depends entirely upon utility. Prevailing opinions make labour rather than utility the origin of value; and there are even those who distinctly assert that labour is the cause of value. I show, on the contrary, that we have only to trace out carefully the natural laws of the variation of utility, as depending upon the quantity of commodity in our possession, in order to arrive at a satisfactory theory of exchange, of which the ordinary laws of supply and demand are a necessary consequence. This theory is in harmony with facts; and, whenever there is any apparent reason for the belief that labour is the cause of value, we obtain an explanation of the reason. Labour is found often to determine value, but only in an indirect manner, by varying the degree of utility of the commodity through an increase or limitation of the supply.15

On the face of it, the bald assertion that utility determines value seems utter nonsense. The only way the supplier of a good can charge according to its utility to the buyer, is if he is in a monopoly situation which enables him to charge whatever the market will bear, without regard to the cost of production. But by qualifying this statement to treat marginal utility as a dependent variable determined by the quantity in our possession, he makes it clear that the influence of value on price assumes a snapshot of the balance of supply and demand in a market at any given time. This is also a shortcoming of the Austrian utility theory, as it was developed by Böhm-Bawerk and his Austrian followers, up to the present. Not only did the later Austrians inadequately treat the time dimension, but they were forced to a position of radical skepticism regarding the notions of "equilibrium price," in order to avoid a Marshallian understanding of the dynamic effect of production cost on price, through the effect of market price on supply. To the extent that Jevons admitted the dimension of time, and made supply itself a function of the supplier's response to market price, he was also forced to admit the effect of labor on value "in an indirect manner," in much the same way that Marshall was later to do with his famous scissors.

Böhm-Bawerk was at his best in systematically analyzing the exceptions to the labor-theory and the cost-principle. In so doing, however, he was forced to admit a rough statistical correlation between cost and price in cases of reproducible goods; and in so admitting, he was forced to reduce his argument to quibbling over the required level of generality of a theory of value. So, Böhm-Bawerk having set the terms of discussion, let us proceed to examine his list of exceptions to Ricardo's cost-theory of price. He begins with a general statement of his criticism:

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.16

As we shall see later, though, it is of questionable value to measure quantitatively the exceptions to the law of value; it makes more sense to treat the effect of cost as a first-order generalization, and then to treat scarcity exceptions as second-order deviations from this generalization. This was the approach of both Ricardo, in treating cost and scarcity as twin principles of value, and Marshall, with his scissors. The longer the time frame, the more cost is shown to be the main influence on the price of goods whose supply can be increased in response to demand, and scarcity rents are shown to be short-term deviations through which the cost-principle works itself out.

The first exception to the labor theory of value Böhm-Bawerk listed was that for scarce goods with an inelastic supply.

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, copyrights, and trade secrets come into play, it will be found that the extent of these "exceptions" is by no means inconsiderable.17

Goods that are permanently inelastic in supply are, indeed, the most fundamental exception to Ricardo's labor theory of value. Such completely inelastic goods are, however, a relatively minor portion of all commodities. The production of most goods can, eventually, be expanded to a level sufficient to meet demand. For such elastic goods, the only question is the duration required for such adjustment. Böhm-Bawerk addressed that "exception" (not really an exception at all, as we shall see, since it does not in any way violate the correspondence between labor-value and equilibrium price) in his fourth point, quoted below. As for the example of rare works of art, etc., Böhm-Bawark himself admitted that Ricardo had acknowledged them.

The final group of exceptions--land, patents, etc.--deserves close consideration. Böhm-Bawerk lumped together all goods with an inelastic supply, regardless of whether their inelasticity results from "actual or legal hindrances." But the mutualist version of the labor theory of value states that, excepting goods naturally inelastic in supply, profit results from unequal exchange--itself a result of state intervention in the market. To the extent that scarcity of land is natural, and absentee landlord claims are not enforced by the state, economic rent on land is a form of scarcity rent that will prevail under any system. But to the extent that the scarcity is artificial, resulting from government or absentee landlord restrictions on access to vacant land, or landlord rent on those actually occupying and using land, the mutualist contention is that such rent is a deviation from normal exchange-value caused by unequal exchange. Patents, likewise, are such a deviation, being nothing but a monopoly imposed by the state. Such examples, therefore, have no bearing whatsoever on the validity of the labor theory of value.

As his second item in the list of exceptions, Böhm-Bawerk mentioned the product of skilled labor. In the process of his discussion, he ridiculed Marx's attempt to salvage a uniform labor-time standard by reducing skilled labor to a multiple of common labor.18 In this, Böhm-Bawerk was entirely correct. The validity of this criticism was one factor in our attempt to rework the labor theory of value on the basis of Smith's and Hodgskin's subjective "toil and trouble," in place of Ricardo's and Marx's embodied labor time. This will be discussed in detail in a later chapter.

The third kind of exception, similarly, included "those goods---not, it is true, a very important class--that are produced by abnormally badly paid labour."19 But the labor theory of value, as Ricardo formulated it at least, stated that the exchange values of goods were regulated by the quantity of labor embodied in them--not by the wages of labor. And according to the mutualist version of the theory, low wages in relation to the total product of labor are a result of unequal exchange between capital and labor within the production process.

The most important exception, after the first, was the fourth: the fluctuations of commodity prices above and below the axis of their labor-value, in response to changes in supply and demand.

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 toward 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.20

In fact, this fourth exception is absolutely devoid of substance, unless one adopts the later Austrian pose of radical epistemological skepticism toward the notion of "equilibrium price." And if, as Böhm-Bawerk said, Ricardo himself admitted the existence of that exception, it can only be deduced that Ricardo did not view it as a fatal flaw in the labor theory. It would seem to follow that Böhm-Bawerk and Ricardo differed in their opinions of the significance of the phenomenon--in which case, Böhm-Bawerk's real task would be to show why Ricardo was mistaken in his views of what constituted an adequate theory.

The labor theory of Ricardo did not just implicitly assume such fluctuation, but depended on it. It was only the process of competition over time, and the response of suppliers and consumers to the fluctuating market price, that continually caused equilibrium price to gravitate around labor value. And Marx said as much explicitly, as we shall see below.

Ricardo for the most part treated "value" and "price" as synonymous, and claimed only that value approximated embodied labor over a period of time. Marx, on the other hand, used "value" in a sense much closer to equilibrium price. Both, then, asserted no more than that the equilibrium price of a good in elastic supply approximates its labor-value. And for both, price fluctuations under the influence of supply and demand were the very mechanism by which the law of value operated.

Finally, Böhm-Bawerk pointed, as a fifth exception, to those cases in which prices "constantly" diverged from labor-value, "and that not inconsiderably," to the extent that their production "require[d] the greater advance of 'previous' labour...."21 If he was referring here to amortization cost of past capital outlays, that presents no problem at all for the labor theory, given its view of capital as accumulated past labor. If he was referring to the problems presented the labor theory of value by capitals of different organic composition and the general rate of profit, an at-length study of that issue is beyond our scope here. Suffice it to say that Ricardo as well as Marx recognized differing capital compositions as a distorting factor; and Marx saw the general rate of profit only as redistributing surplus-value, and thus rendering the operation of the law of value indirect. And from the mutualist point of view, profit and interest are monopoly returns on capital resulting from state intervention in the marketplace; so for mutualism, the rate of profit (excepting the relatively minor part of net profit resulting from time-preference, with which we will deal in Chapter 3) is simply another example of the distortions by which unequal exchange causes a deviation from "normal values."

Böhm-Bawerk summed up all the deviations from the labor principle, and concluded that the labor theory of value "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."22

Böhm-Bawerk's straw-man caricature of what the labor theory was intended to demonstrate, certainly, did not hold up at all well under his onslaught. But then, straw-men are deliberately constructed to be knocked down. He would have made as much sense in saying that the law of gravity was invalidated by all the exceptions presented by air resistance, wind, obstacles, human effort, and so forth. The force operates at all times, but its operation is always qualified by the action of secondary forces. But it is clear, in the case of gravity, which is the first-order phenomenon, and which are second-order deviations from it.

Ricardo's distinction between reproducible and non-reproducible goods, true enough, was misleading. Although goods whose supply is absolutely limited relative to demand are a relatively minor portion of all commodities, it is nevertheless true that even reproducible goods take a greater or lesser period of time for supply to accommodate demand. At any given time, the price of most commodities is probably greater or less than labor-value, as a result of imbalance between supply and demand. It is only over time that price approximates labor-value. So rather than stressing the quantitative insignificance of scarcity deviations from cost, Ricardo would have been more accurate to emphasize the character of such deviations as a secondary phenomenon in the overall process by which equilibrium price approximates labor-value.

But the Austrians were guilty of their own ambiguity. Although Menger and Böhm-Bawerk regarded the influence of production cost as virtually irrelevant in all cases of scarcity, they were unclear exactly what they meant by scarcity.

Menger distinguished economic goods, which were characterized by scarcity, from non-economic goods: "the difference between economic and non-economic goods is ultimately founded on a difference... in the relationship between requirements for and available quantities of these goods...."23 Of non-economic goods, he wrote:

The relationship responsible for the non-economic character of goods consists in requirements for goods being smaller than their available quantities. Thus there are always portions of the whole supply of non-economic goods that are related to no human need.... Hence no satisfaction depends on our control of any one of the units of a good having non-economic character....24

The problem, though, is that goods are almost never "non-economic" in this sense of having no exchange-value whatever. Unless an unlimited supply of a good is located at its point of consumption, and requires no effort to appropriate, it will acquire some value from the effort necessary to transport it to the final user in usable form. Even when a village is surrounded by forest, with no limit on the amount that may be cut by an individual household, firewood has an exchange-value. Even in Cockaigne or Big Rock Candy Mountain, one must make the effort of picking the roast chickens off the bush or dipping the whiskey from the stream.

Menger's disciple, Böhm-Bawerk, likewise made scarcity relative to demand the basis of value. Economic value required "scarcity as well as usefulness--"

not absolute scarcity, but scarcity relative to the demand for the particular class of goods. To put it more exactly: goods acquire value when the whole available stock of them is not sufficient to cover the wants depending on them for satisfaction, or when the stock would not be sufficient without these particular goods.25

And this scarcity, as Böhm-Bawerk put it, was a scarcity of "present goods":

Now it can be shown--and with this we come to the goal of our long inquiry--that the supply of present goods must be numerically less than the demand. The supply, even in the richest nation, is limited by the amount of the people's wealth at the moment. The demand, on the other hand, is practically infinite....26

This concept of "scarcity," as used by Menger and Böhm-Bawerk, has three problems. First, as we have already suggested above, making scarcity and utility depend on the balance of demand and "present goods" at the present moment, it ignores the dynamic factor. In taking the balance of supply and demand in a particular market at a particular time as a "snapshot," and deriving value from "utility" in this context, it ignores the effect of short-term price on the future behavior of market actors: the very mechanism through which price is made to approximate cost over time.

Second, it confuses two kinds of scarcity: 1) the kind of scarcity that makes economic goods (i.e., a difficulty of production or appropriation sufficient to require some effort or disutility to acquire them in a usable form); and 2) the kind of scarcity in which a good is in more or less inelastic supply, so that it cannot be produced in quantities proportional to effort. In a sense, the former kind is set up in opposition to a straw man: as we said above, there are virtually no non-economic goods.

And third, the claim that demand is virtually infinite relative to supply is misleading. "Demand" is not an independent variable, but depends on the price at which goods are available. To be "reproducible" in the Ricardian sense, a good need not be reproducible without limit, in any quantities an individual might conceivably be willing to consume of it, if it cost nothing. It has only to be reproducible in the quantities for which there is effective demand at the cost of production. And as we pointed out above, regardless of the degree of elasticity, so long as supply can eventually be adapted to demand, the equilibrium price will approximate the cost of production.