The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Lecture I.
• Lecture II.
• Lecture III.
• Lecture IV.
• Lecture V.
• Lecture VI.
• Lecture VII.
• Lecture VIII.
• Lecture IX.
• Lecture X.
• Lecture XI.
• Appendix.
• Note On Page 32.
• Page 37.
• Page 39.
• Page 57.
• Page 65.
• Page 133.
• Page 145.
• Page 149.
• Page 164.
• Page 175.
• Page 183.
• Page 203.
• Page 223.

LECTURE II.

Gentlemen,—

As Political-Economy is the science which teaches the laws that regulate the production, accumulation, consumption, and distribution of wealth, it is plainly necessary, in order that we may confine its investigations accurately within their proper limits, that we should define what we understand by the term “wealth.” By wealth, then, writers generally understand any of those things which satisfy the wants or gratify the wishes of mankind, and which possess an exchangeable value. This last condition is inserted to exclude such objects as the common light of heaven, the atmospheric air, and other gifts of nature, which, however useful or necessary they may be, yet possess no exchangeable value, and therefore are not usually comprised under the term wealth. However, whether they are included within the definition, as they are by some writers, or are directly excluded by such a qualifying phrase as I have added, is a matter of no importance. For since all men possess as much as they desire of those natural elements, without care or toil, Political-Economy has no concern with them, as human conduct can exercise no influence over their production, accumulation, consumption, or distribution. They are produced by nature, and cannot be accumulated by any art; every man consumes as much as he desires, and each man’s share is what he is disposed to consume. What wealth is, no one is completely ignorant of; and therefore perhaps to give any definition of it may be thought unnecessary and useless; and it would be so if there were no propositions to be discussed, which may or may not be true, according to the sense in which the word is understood. In this science in particular, as most of the terms employed in it are of daily use, it will frequently be in the highest degree necessary to give accurate definitions in order to fix the meaning of the most abstract words. It seldom happens that any word of daily occurrence in common conversation is content with a single meaning; it generally either obtains some metaphorical extension of its signification, or suffers a diminution by being considered applicable only to those particular subjects to which it happens to be most frequently applied. Hence the necessity of definitions, to fix precisely the meaning of the propositions we discuss. In the mathematical sciences they serve a double purpose: they both fix the meaning of the word, and serve as a basis on which our reasonings may be founded. In mathematics therefore it is necessary to commence with the definitions, as all our reasonings are to be built on them. But in the moral sciences definitions will serve only the former purpose, and none but trifling propositions can be deduced from them. If we meet with any novel or striking proposition, deduced from the mere definitions by fair and conclusive reasoning, we may feel confident that some of the words employed in the statement of the proposition have been defined in some unusual sense, and that the proposition itself will not be true when its terms are understood in their ordinary signification. Hence in Political-Economy we cannot reason from definitions; and it will be sufficient to define the words when we have occasion to use them in a stricter sense. And there may be some advantage in pursuing this course, in preference to grouping the definitions all together at the commencement. The study of definitions is a dry uninteresting task in every science, and in none more so than in Political-Economy. Its terms are those employed in common life, and he who learns them appears at first to have acquired no reward for his labour. He does not carry away any of those new and sonorous words which in other sciences serve to display the lately acquired information. I shall not willingly therefore occupy much of your time with definitions and explanations of words; and if I am sometimes guilty of a deviation from this rule, I trust that you will feel assured that I do so from an opinion of its necessity.

Before we can enter fully into the questions connected with wealth and value, it will be necessary to premise a few observations, to show what is understood by value, and how it is measured. Adam Smith divided value into two kinds; “value in use, and value in exchange;” and there was no impropriety in the division, as the two things were really different, and were frequently called by the same name. More modern writers however have termed the former kind “utility,” and have appropriated the term value to the latter kind alone, or to value in exchange. By the utility of an article is meant the power which it has of satisfying one or more of the various wants or desires of mankind. It is to be observed that by this definition of the word utility it acquires a somewhat more extended signification than is generally given to it in common use, since we do not ordinarily attribute utility to any article merely because it has the capacity of satisfying some want or wish, unless that want or wish be one of those of which the gratification is most imperiously demanded by nature. The value is its power of being exchanged for other articles. It is plain that without some utility a thing can have no value, since nobody would give any thing or bestow any labour for that which would not satisfy any want or wish. But once possessed of any utility, its value will not depend so much upon the extent of that utility as upon other circumstances, the investigation of which constitutes a very important branch of the science of Political-Economy. By the extent of utility I of course mean the number of persons whose wants and wishes can be satisfied by the object, and the imperiousness of those desires in demanding their proper gratification. All the materials of wealth must be both useful and valuable; but it is with their value, not their utility, that the elements of Political-Economy are principally conversant, in so much that it has been called the science of values, or the science of exchanges. This may at first cause some to think the study of it still more trifling than if wealth in all its bearings were its subject, since it is more with the utility than with the exchangeable value of commodities that the happiness of mankind is concerned; and it may appear strange therefore that in our early investigations we should occupy ourselves so much about value, and seem to pay so little attention to utility. But some advantages are obtained by discussing the different questions respecting the value of objects before we involve ourselves in controversies about their utility. Several theories about value may be proved by arguments as strong as can exist in morals and metaphysics, and which may therefore be called moral or metaphysical demonstration. Besides the certainty which these questions admit of, they have the advantage of not relating to subjects of immediate practical importance; and in them therefore we are free from the danger of being misled by the sophistry of passion or prejudice. The science may be divided into the two branches of theoretical and practical Political-Economy. The former is conversant about value, the latter about utility. The former ought to be first considered; it is more elementary, it admits of greater certainty, and is subservient to the latter, but not in any respect dependent upon it. Antithetical contrasts between value and utility are in general fallacious; and as we advance we shall see that perhaps for all practical purposes the best measure of utility is value, and that there is a sophism employed in the arguments used to prove that things of equal utility may have different values, and that things of equal value may have different degrees of utility. The proposition, to be considered of any importance, must be understood in a sense different from that in which it is proved. In fact the utility of any particular article to the possessors must vary according to their circumstances and situation, and exchanges serve the purpose of providing that the goods possessed by each individual shall in proportion to their value be of the greatest utility to him; that is, that they shall contribute more to his happiness, and to the satisfaction of his wants and the gratification of his desires, than any other possessions of equal value. The same cause that prevents a person from giving any thing for that which has not some power of satisfying his wants or gratifying his wishes—that is, which has not some utility—will also prevent him from making any exchange, unless what he receives will conduce at least as much to his happiness as what he gives. When an exchange is made therefore it may be fairly presumed that each party to it has gained something, by receiving for the article he disposed of something which is, relative to him, of more utility, accordingto the extended signification which I have given to the word. How value shall be measured is a thing that at first does not appear very important. It is indeed said that labour is the real measure of the value of all commodities. But it is I think sufficiently plain that value can only be measured by value, that its quantity depends altogether upon proportion, and that one measure cannot be called a more real measure than another. If one article can be purchased with two yards of cloth, or two pounds of tea, or two day’s labour, and another with one yard of cloth, or one pound of tea, or one day’s labour, the value of the former will be exactly twice the value of the latter; and the proportion of their values will remain the same, whatever commodities they are compared with.

The most unsatisfactory reasons have been given to shew not only that labour is (as it undoubtedly is) the best, but also that it is the only real measure of value, which undoubtedly it is not. Adam Smith says that the real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. Hence he infers that this toil or trouble is the best measure of its value. He attempts to prove the same thing, in a more formal manner, in the following passage, where he first introduces that doctrine: “Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him; the far greater part of them he must derive from the labour of other people; and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity therefore to the person who possesses it, and who means not to use it or to consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it will enable him to purchase or command. Labour therefore is the real measure of the exchangeable value of all commodities.”

Now in the passage just cited, although evidently intended to be a formal proof of the concluding passage, that “labour therefore is the real measure of the exchangeable value of all commodities,” I am unable to discern wherein the validity of the argument consists; and if it were important, I might observe that those arguments, if valid, would establish, and in the quotations I have made are actually employed to establish, the right of two perfectly distinct things to be called each the only real measure of value, viz. the quantity of labour required to produce any article, and the quantity of labour which it can purchase or command. The value of any article to the person who possesses it, and means not to consume it himself, is equal to the quantity of any commodity which it will enable him to purchase; but such an assertion, though certainly true, does not prove one thing to be a more fit or real measure than another. The same sophism is to be found in all the arguments used to prove that labour is the real measure of value; namely, the implied supposition that because labour is a fit measure it is therefore the only real measure of value; and we shall afterwards find that the doctrine is frequently supported and defended against certain objections, by arguments inconsistent with those by which in the first instance, it is supposed to be proved. Perhaps it may be thought a matter of small importance by what arguments a true proposition is maintained, provided it is in fact a true one; but this is not the case at least in the moral sciences; for here the sense in which a proposition is understood, and the manner in which it is applied, and the deductions that are drawn from it, will be found to depend mainly on the manner in which it has been proved. I do not know of any mental exercise more useful in such studies than the practice of recalling all the arguments by which, and the hypothesis on which, any proposition is proved, whenever any occasion comes of drawing any inference from it. It seems probable that the erroneous opinions held by Smith on the subject of rent and a few analogous subjects arose principally, if not entirely, from his misunderstanding the cause why labour is so peculiarly fitted to be a measure of value.

From what has been said it may sufficiently appear that any commodity will serve as a measure of value, provided its value admits of being compared directly with that of the article whose value is to be measured; and further investigation will show us that the peculiar fitness of labour for that purpose arises from this, that in many articles such as manufactures, the entire value above that of the raw materials of which it is composed is derived from and can be measured by the labour employed about them, and even of the raw material there is always some portion which is of equal value with any other equal quantity of the same commodity whose value is either derived from or can be measured by the quantity of labour necessary to produce it. That portion which is produced entirely by labour can have its value measured by the quantity of labour which produced it, and will itself in return serve as a measure of the value of the remainder. If this be, as on further investigation we shall find it to be, the case, labour is the best measure of value, because it admits of being directly applied to or compared with every other important commodity whose value we desire to learn. And it may be asserted as a general truth, subject to few exceptions, that no permanent change can take place in the relative values of any two commodities without its being occasioned by some alterations in the quantity, or nature, or value, of the labour required to produce one or both of those commodities; and hence the utility of frequently referring to labour as a measure of value. It is often even more important to investigate the causes of the variations in price of an article than to ascertain the comparative values of two different commodities. It is from labour that almost every thing useful or agreeable to man derives its existence. Mr. Locke I believe first observed that it was labour that put the difference of value on every thing, and he drew attention to the difference in the value of the produce of a well cultivated farm, and the produce of the same when allowed to run waste. All this value, he said, must be charged on the account of labour and received as its effect; nature and the earth having furnished only materials almost worthless in themselves. It may indeed be said that such a waste farm, although worthless in itself, and useless if left alone and not wrought upon, may yet be valuable, as furnishing a material upon which labour may be advantageously employed, just as a fleece of wool is valuable, although it might be very little use until further labour was exercised upon it. This is undoubtedly true, and may be thought a sufficient objection to Mr. Locke’s system, that labour is the foundation of property, since all value is derived from it. His argument is replied to by shewing that a waste farm may possess a value even before any labour has been expended upon its cultivation. This value must become the property of individuals upon some claim or right, different from that of their having produced it by their own labour. The same objection might apparently be urged to the doctrine that labour may be used as a fit measure of value. It may be said that if a field possesses any value antecedent to its cultivation, the value of its produce ought to exceed that of the labour employed in raising it by at least the value or rent of the field during the time. This is certainly true: but in order that labour should be a proper, that is, a useful measure of the value of any commodity, it is not necessary that the whole supply of that commodity should have its value entirely derived from the labour expended in its production. It is sufficient if some part, of equal value with the rest can thus be as it were resolved into the labour which created it. The value of that part will serve as a measure for the rest, and be measured itself by the value of the labour from which it derives its existence; and even if there were some goods which could not be compared with labour, it would not prevent labour from being a fit measure of the value of those articles with which it can be directly compared. I shall not now occupy your time with the discussions necessary to prove that even of raw materials, the rude unmanufactured produce of the earth, there exists always some portion whose value admits of thus being directly compared with and measured by labour. It is enough to state the proposition now, and it is not necessary that it should be proved until we are about to enter upon the consequences that may be drawn from it. That portion of every commodity whose value admits of being thus measured is that part which is produced under what I shall call the most disadvantageous circumstances; that is, under those circumstances which require the greatest expenditure of labour in order to produce any certain quantity of the commodity. The production price or natural value of almost every commodity admits of being measured in this manner. The exceptions are very few indeed, and are of very little importance in the science of Political-Economy. These exceptions consist principally of such articles as derive their entire value from their scarcity, and not from the labour attending their production, or, more properly speaking, of those articles which are limited in supply, from some other cause than the necessity of expending a certain quantity of labour in producing them. In those cases the supply in general depends upon something beyond human power to controul, and will not be increased or diminished by any increase or diminution in the demand. Instances of such articles are antique gems or remains, irregular or very scarce productions of nature, &c. The value of these, according to their rarity and the competition among the purchasers, may rise or sink to any price, and Political-Economy does not much concern itself with them. We have not many data to ascertain the price that would be given, if any one should find or possess a horse with eight legs, a monkey with seven heads, or a Queen Anne’s farthing, or any of those rarities which serve to amuse the antiquary or puzzle the philosopher. In what manner such things shall be distributed is evidently a matter of trivial importance. Their price depends very much upon caprice and ceteris paribus, they will be dearest in those countries where the greatest inequality of wealth exists, or where the greatest amount of riches is in the hands of a few individuals. I shall henceforth in general therefore confine myself to those articles whose value admits of being measured by the quantity and kind of labour necessary to produce them, and it will be necessary to investigate more minutely the circumstances which regulate or affect their value. On this point a distinction is generally and properly made between what is called the natural value or the production price, and the exchangeable value or the market price of any commodity. To the latter the name of value more properly belongs, and the former is only entitled to the name on account of the influence which the cost of producing any article exercises upon its value in exchange. The natural value is measured by what is called the cost of production, or the quantity of labour necessary to produce any article for the market. It is called the natural value, because it is the price at which, with the usual profit of trade, the article could be permanently and constantly sold for. It is the price at which nature furnishes the article to mankind. It is the price which the manufacturer has in view when producing the commodity, and to it the exchangeable value or market price has a constant tendency to conform. By the exchangeable value or market price of any thing is meant that sum which any person is willing to give or able to procure for it in exchange. This price is said to depend upon the proportion between the supply and demand. This proposition however without much explanation, would not enable any person to make a guess at what the price of an article is likely to be. The subject however is by no means a difficult one, and an analysis of the manner in which variations in the supply and demand affect the exchangeable value of commodities will lead us to the conclusion that the exchangeable value is that price which will produce an equality between the supply and the effective demand—meaning by effective demand the demand of those who are able and willing to give the price in question for the article. It is also true that the market price of any commodity depends upon its natural value, but is liable to temporary deviations from it in consequence of variations in the supply and demand. Occasional vicissitudes may for a time depress the market price below, or elevate it above the cost of production; but the former has always a strong tendency to conform to the latter, and in some articles can never very far recede from it.

Before I attempt to give a more complete proof and explanation of those propositions, it may not be inconvenient to state something more precisely concerning value and its measures, and the manner in which the cost of production is measured by labour. Value is a word that always refers to an exchange either made or contemplated. The value of any commodity is its power of exchanging for other commodities, and is to be measured by the extent of that power, that is, by the amount of other commodities which can be procured in exchange for it; and any thing for which it can be procured or given in exchange will serve as a measure of its value. But there is no such quality in an article as abstract value without reference to exchange. It is a relation, not a mode, to use the language with which I presume most of you are familiar, from your acquaintance with “Locke’s Essay on the Understanding.” The value of any commodity is to be measured by the quantity of other articles which can be procured in exchange for it, and all measures are therefore equally real. But one measure may be more useful or convenient than another, by serving more readily as a medium for comparing the values of any two commodities which are not usually given or procured for each other in exchange. Thus in common life, money, as it is the most usual medium of exchange, is also the most useful and convenient measure of value. And in the same manner, in many of the reasonings of Political Economy, labour, from its concern in the cost of production, has an indirect influence over the exchangeable value that often makes it a convenient measure, especially as it is by reference to the labour employed in production that the source of any permanent variation in the relative exchangeable value of commodities can be found. The analysis by which the production cost of raw materials is separated from rent and reduced to labour is a little abstruse; and it would therefore be out of order to introduce it now at the entrance into the science. But it is almost evident that the only difference between the manufactured article and the raw material is caused by the labour which wrought the change; and the difference of value therefore will be equal to the pay of the labourers and the profits of those who employed and paid them in the first instance. Here, it may be said, is a new element—namely, profit introduced into the cost of production, which therefore may be said to consist of labour and profit. But hereafter, when we proceed to consider and compare the different kinds of labour and profit, we shall find that the two propositions, “that the cost of production consists of labour,” or that it consists of labour and profits, are equivalent, or must be understood in the same sense; and perhaps it is sometimes more convenient to consider it as reduced to labour alone, and to consider profit as an equivalent for the increased wages which the labourer would require, were his payment deferred until the sale of the article he contributed to produce. It is evident that as labour is used not as a more real measure, but as a convenient one, that when in analysing the cost of production of any article, we come to expenses of known amount, we need not go farther, and reduce them to their value in labour; and also that the result may be expressed in any other measure as well as labour, in the same manner as although a perch or a yard may be used to measure a distance, the result may be given conveniently in miles or furlongs. Thus if five shillings worth of flax is turned into linen, at the expense of 10s., employed in paying for labour at the usual rate, we should speak of its cost of production as being 15s. I shall next proceed to shew how the cost of production, and the variations in the demand and supply, influence the price of commodities, or their value estimated in money; and then, for the purpose of more accurately measuring the cost of production, I shall point out the circumstances which in different employments produce different rates of wages and profits. These discussions, which will occupy me for two lectures more, will complete the subject of value. We shall then have come to the conclusion of the most dry and uninteresting parts of the science of Political-Economy; which however, on the other hand, are more certain, and less liable than more agreeable topics to be made the subject of controversy. In the course of them, I hope to be able to show some useful deductions that may be drawn from those principles, and some of them will be found perfectly conformable to experience, and yet of such a nature that experience alone would never have been able to detect them.