Front Page Titles (by Subject) CHAPTER 39: VALUE THEORY AND SOCIAL WELFARE - Economics, vol. 1: Economic Principles
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CHAPTER 39: VALUE THEORY AND SOCIAL WELFARE - Frank A. Fetter, Economics, vol. 1: Economic Principles 
Economics, vol. 1: Economic Principles, (New York: The Century Co., 1915).
Part of: Economics, 2 vols.
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VALUE THEORY AND SOCIAL WELFARE
§ 1. Epoch of the dismal science. § 2. Communism and value theory. § 3. The single-tax doctrine. § 4. Optimistic theories of wages. § 5. An organic theory of value. § 6. Labor and its environment. § 7. Aspects of wealth. § 8. Welfare. § 9. The paradox of value in practice. § 10. Conflict of individual and general interests. § 11. Business economy and social economy.
§ 1. Epoch of the dismal science. A preliminary word. The foregoing survey of the dynamic forces and changes in economic society (Part VI), incomplete as it is, may yet serve in some measure to broaden and to extend our understanding of the study that preceded (Parts I to V). This chapter concluding the outline of economic principles will give: first (sections 1-4), a suggestion of some of the far-reaching conclusions which economic students have in the past drawn from their theories of value in respect to the trend of popular welfare; secondly (sections 5-6), a general summary of the positive theory of value that has been developed in its details throughout this volume; and thirdly (sections 7-11), a brief outline of the relations between wealth and welfare, value and utility, individual advantage and the general good.
The value-theory one holds is sure to affect one’s view of economic progress and one’s attitude toward projects of social reform. The theories from the middle of the eighteenth to the middle of the nineteenth century, however varied they were in other respects, nearly all gave a gloomy view of the condition of the masses. Such were the theories of the physiocratic school in France, consisting of a small group of highly educated and aristocratic men of liberal sympathies in the generation preceding the French Revolution of 1789; of the so-called “orthodox” or “classical” economists in England composed of the writers from about 1800 to 1850 that were in sympathy either with the landholding or with the commercial classes; and of the socialistic or laboring-class theorists, from 1789 to the present. It was the prevalence of such a view which caused Carlyle to characterize political economy by the term still sometimes heard, “the dismal science.”
However greatly these various groups of thinkers differed in other respects, they united in the belief that the labor incomes of the masses must remain near the starvation point. Indeed, this was little more than a generalization of the observed conditions of the time. The population of Europe was increasing, the pressure for food was strong, and the cultivated area was not increasing proportionately. While all the forms of industry most common in cities were increasing, while the wealth of the cities and the rents of rural landlords were increasing, poverty was growing among the peasantry. Owing to exceptional conditions this was especially true in England during the Napoleonic wars, 1793-1815. (See Chapter 34, section 8.)
In this situation the thinkers of that period confused the truth of the limited powers of agricultural land with the false inference and prophecy of a necessarily decreasing relative food supply and decreasing wages. The economic theory of the “classical” economics centered around this fact and the false inference from it. The condition of the masses was believed to change rhythmically, rising from time to time, only to return, through the pressure of population, to its former level. Their pessimism was all due to their view of the food problem. They doubtless underrated the forces operating for volitional control. In another regard they were too optimistic, for they had no thought that timber, mineral, and other natural stores might be exhausted, with the result of decreasing prosperity. The things made from these materials were thought to be the “product of labor,” and capable of unlimited increase. It is just these materials whose increasing scarcity is one of the greatest economic problems that society has now to face. (See Chapter 35.)
§ 2. Communism and value theory. The “orthodox” economists gave currency to two erroneous doctrines: (a) that labor is the sole source of value; and (b) that the laboring classes must forever be reduced to a bare subsistence. They were quite heedless of the use that would be made of these doctrines in political discussion to attack the existing order of society. They did, it is true, modify and qualify both these doctrines, sacrificing thus the consistency of their reasoning, while gaining in common sense and in harmony with the facts. The communists, however, accepted these doctrines in their most unqualified form, and drew from false premises the false conclusion most natural for the human mind, that the existing order was fundamentally unjust and hopeless for the masses. For if wages were always to be forced to a bare minimum of subsistence, it followed that the other shares (incomes of landlords and of other owners) must absorb all the benefits of improved machinery, better methods, and general industrial progress.
The communistic theory of value is akin to the “classical” theory in holding that capitalists absorb all the benefits of progress. But the communists refused to recognize that any useful and necessary service in social production is performed by the owners of wealth, or by the savers and lenders of capital, or by the employers of labor. They did not even attempt to distinguish the part in the production of value due to manual labor from the part due to brains, to science, to art, to supervision, or that part in turn from the part due to the saving, conserving, and provision of the agents of production. The whole elaborate industrial environment and its skilful management that made possible modern industry they took for granted as at the laborer’s command and credited to him the whole value of the product. All profits made by employers were called robbery, and capital was looked upon merely as the weapon by which the act was committed. They accepted the conclusion of “orthodox” economic theory and magnified it, declaring that under a competitive condition of society the laboring man, tho he produces everything, must be forever ground down in hopeless misery. This they called “the iron law of wages.” They held, therefore, that the only hope of the laboring masses was to do away with competitive society and to substitute for it the governmental control of all industry.1
§ 3. The single-tax doctrine. The single-tax doctrine of Henry George was likewise built upon a value theory. Tho George eloquently denied the law of diminishing returns (including the principle of proportionality applied to land uses), he accepted the conclusions that the classical economists drew from it, that ground rent must be an ever-increasing share of the national income. He believed that the landholders get all the gains that come to society as a result of science, invention, and machinery. Hence his belief expressed in the title of his work, “Progress and Poverty,” that, with private property in land, the outlook for the laboring classes is hopeless. In George’s opinion neither wage-earners nor such capitalists as are not landholders have any share in the benefits of industrial progress. He saw no problem of monopoly anywhere except in connection with land ownership. The evil, as George saw it, called for a radical measure of reform, namely, the taking of all the rent of land (a single tax), for public purposes as a common instead of an individual income. This, he believed, would be enough to replace all other forms of taxation.
§ 4. Optimistic theories of wages. Some recent theories of value have assigned to labor a more hopeful position. Most optimistic was “the residual claimant theory,” of wages presented by the American economist, Francis A. Walker. His view was that the various shares of production, such as landrent, the income from machinery, etc., and the enterpriser’s profits, were fixed by forces independent of wages, and any increase in the output must therefore fall to the laborer as the residual claimant. This appears to explain somehow the rise in wages in the past century, but the fallacy of its method is evident. It involves the circular reasoning that land-rent (a surplus over cost of production) is fixed regardless of wages, whereas the cost of production itself is made up chiefly of wages.
Another American economist, John B. Clark, was led by his theory of profits to a most hopeful view as to the future of wages. Profits he considers to be essentially the reward for introducing new methods into the productive processes, which gradually accrue to the general benefit. As profits thus disappear, the average wage-earner is correspondingly uplifted. In reaching this conclusion Clark omits from consideration the growing scarcity of natural resources and narrows his conception of profits to the point where industry is self-organizing and self-directing. Some facts lend support to every one of these theories of social progress, radical and conservative, gloomy and hopeful, but other facts refuse to be harmonized.
§ 5. An organic theory of value. Let us turn from negative criticism to a summary of the positive ideas as to value that are contained in the foregoing chapters. We have not been content with an easy but superficial explanation of value. We have come to see that the value of the simplest commodities (a dozen eggs, a pound of butter, a bushel of wheat), is a part of a great complex problem. We have not explained it fully, we have only begun to understand it, when we take the desires of a group of traders in a market as a starting point, and have even drawn a diagram showing the meeting point of price. For these desires in turn have been conditioned by manifold influences, stretching on to other men, other goods, other lands, and other times. Nor can we rightly conceive of a theory of value as being a thing apart from a theory of usance, of labor-incomes, of time-preference, etc. These are all but special aspects of a general theory of value, and each must be thought of as a part, or aspect, of what might be called an organic whole, or perhaps better, a general economic situation. From the first and repeatedly this thought was brought to the reader’s attention, in treating the static theories;2 and the thought has pervaded our whole discussion of the dynamic aspects of economics. In respect to value, as in other ways, it may be said: “We are all members, one of another.” With this thought now clearly in mind we may take a final view of the subject.
The productive process is a unity and the values of the different agents and incomes in our actual economic organization bear a mutual relation to each other. Yet the unit itself (the total to be divided in an industry) rises or falls as a result of many forces coöperating or conflicting; any share, therefore (as that of the laborer), depends both on the size of the total product and on the proportion he gets out of it. The factors and agents of production mutually employ each other and thus prices are fixed by reciprocal demand. (See Chapter 34.) The value of any one in terms of the other rises as its relative quantity and efficiency fall and falls as its quantity and efficiency rise. But the absolute amount of goods obtained, the income obtained by any one, may and does rise with its quantity and efficiency and vice versa. Labor and natural materials are complementary agents, and the more abundant and accessible the natural stores of materials, the larger the whole product of industry and the larger also the share of the price that is attributed to the labor. Real wages must vary (other things equal) with available supplies of elementary materials, rising when they become relatively more abundant, and falling with their exhaustion or relative diminution. This is illustrated broadly by the high real incomes of the common laborer in new countries, despite some other adverse conditions, and by the lower incomes in countries poor in natural resources. As those natural resources that are exhaustible, as lumber, coal, and metal ores, grow less, their money price rises. That makes the purchasing power of a day’s labor less in exchange not only for those raw materials, but for everything which those materials are indirectly helping to create. It is possible to counteract this effect in part or wholly, temporarily or permanently, by substitutions and by other improvements, and by the discovery of new resources beneath the surface of the earth.
Even when population is stationary or decreasing, an absolute decrease of the supplies of many of the principal natural materials is certain to take place and, in so far, real wages may be reduced. A decreasing food supply, on the contrary, can hardly occur with a stationary or slowly increasing population such as results from effective volitional control.
Change in the artificial agents for shaping and moving things is the second great objective cause of changes in wages. It has been shown (Chapters 12 and 36) how the utilization of wealth is affected by scarcity and abundance of agents, and how saving increases the bounty of agents, improves the methods of production, and benefits the community as a whole, including those who have had no part in the saving (Chapters 24 and 38). Thus from several sides it has been seen how the necessary influence of a decaying equipment of tools must force laborers to lower, less effective, margins in the existing stocks of tools, and on the other hand how the relative increases of those agents, and the growth of science and invention, tend toward the raising of production and of the proportion going as wages. Other things being equal, real wages vary with the agencies for shaping and moving things, rising when they become relatively more abundant and effective, and falling if they decline. Except as affected by the increasing scarcity of some elemental materials, the reasonable prospect is that tools and machinery will steadily be multiplied in number and improved in efficiency. This is a basis for optimistic prophecy.3
§ 6. Labor and its environment. Decreasing and increasing returns are cases of changing proportionality, involving social, rather than individual adjustment; not the adjustment of enterpriser’s money cost to prices, but of the whole labor supply in relation to the employment afforded by its environment. The individual employer thinks of the supply of labor as consisting of men seeking employment in his special industry. In this view it is the demand of the employers that apportions the workers among the various occupations, and seems to determine wages. The social view of the opportunity for labor, however, looks at the whole field. The opportunity for labor is then seen to be represented ultimately not by human employers, but by resources and agents which labor can use. The rich acre, the tool, the machine, all material wealth needing the human touch to utilize it, represent opportunity for labor in this sense. The employers’ demand for labor, therefore, is but a reflection of the opportunities embodied in resources. A million men are a great or a small population according as they occupy a little island or a large continent, according as they are equipped with a small or a large supply of agents.
§ 7. Aspects of wealth. Wealth is the general term for those things which are felt or seen to be related to the gratification of desires. This definition is wider or narrower according to the senses in which the various words are taken. What is included in “things”? How deeply are they felt and how far-sightedly are they seen to be related? How immediate is the gratification? Individual wealth is usually taken to mean the valuable things the individual owns. Some would include “internal goods,” such abstract qualities as honesty and cheerfulness; others would include not abstract qualities but men themselves with all their capacities of body and mind; the free man owning himself and his powers to serve his own desires, the slave being owned. More frequently, and properly, the term individual wealth is limited to valuable agents objective to men, not including free men. There is much popular usage in favor of including evidences of claims of ownership such as notes, mortgages, stocks, and other credit instruments, by so doing making private wealth (tho not always consistently) synonymous with capital in our definition. There is good reason to keep the term wealth for the concrete things while using capital as the value expression of business power embodied in those things. Thus, the factory is wealth, the economic basis for the capital represented by stocks and bonds; the farm is wealth, the economic basis of the mortgage and of the owner’s residual claim to the unmortgaged capital value.
Social wealth is a broader term and includes all the wealbringing environment of the nation. It is more than the sum of concrete individual wealth (factories, farms, etc., of course all conflicting claims being canceled); it includes the valuable exchangeable things in governmental possession, parks, forests, public buildings, libraries, bridges, highways, and publicowned wealth, etc., and also all the natural advantages of climate, rivers, harbors, lakes, and oceans. The better and more beautiful these advantages, the less may be the need of individual wealth; one nation with natural waterways may be truly wealthier than another with canals costing millions of dollars and owned by corporations; and a nation with abundant cheap lands of low price is more happily situated than one with high-priced lands that yield great private incomes to the owners.
§ 8. Welfare. Welfare, in an immediate or narrow sense, is the same as gratification of the moment; in a broader and truer sense it is the abiding condition of well-being. We have here a distinction very much like that often made between pleasure and happiness. If only the present moment is thought of, welfare is the absence of pain, and the presence of pleasurable feeling; but if a longer period in a man’s life or his entire lifetime is considered, it is seen that many things that afford a momentary gratification do not minister to his ultimate, or abiding, welfare. The difference is illustrated by the thoughtlessness and impulsiveness of a child or savage as contrasted with the more rational life of those with foresight and patience.
Now it is evident that a large part of the value of individual wealth rests on the basis of foolish and shortsighted choice. But whether tobacco or alcohol or morphine minister to the abiding welfare of the consumers is not the question in explaining the value of these things.4 Here again it is seen how poor an index the value of individual wealth is to the permanent welfare of men and society.
In studying the question of social prosperity we must rise to the standpoint of the social philosopher and consider the more abiding effects of wealth. Desires may be developed and made rational, and the permanent prosperity of a community depends on this result. Any species of animals that continued regularly to enjoy that which weakens the health and strength would become extinct. Any society or individual that continues to seek its pleasures in ways that do not, on the average, minister to permanent welfare, sinks in the struggle of life and gives way to those men and nations that have a sounder and healthier adjustment of choice and welfare. We touch here, therefore, on the edge of the great problems of morals, and while we must recognize the contrast that often exists in the life of any particular man between his “pleasures” and his health and happiness, we see that there is a reason why, on the whole, and in the long run, these two can not remain far apart. The old proverbs, “Be virtuous and you will be happy,” “Honesty is the best policy,” and “Virtue is its own reward,” have a sound basis in the age-long experience of the world. Cynics or jesters may easily disprove these truths in a multitude of particular cases.
§ 9. The paradox of value in practice. A necessary condition of value is scarcity. The business incomes of individuals depend on the price of the agents and uses they control. It appears in the paradox of value (Chapter 4, section 11) that up to a certain point the total value increases with the number of units offered in a market, and beyond that point it decreases. In the period of increasing total price (tho declining unit price) any one who owned the whole supply would gain by abundance and his interest would be in harmony with the interests of the buyers of his goods; beyond that point he would gain by greater scarcity. Thus individual gain sometimes may lie in social want rather than in social wealth. Broadly speaking, so long as value is on the ascending curve and income grows with abundance of goods, the individual interest is bound up with the social interest. So soon as value is on the descending curve and private income grows with social need, the individual interest is at conflict with the social interest, and a problem of social control is presented. Fortunately, in most cases the individual is concerned only with the ascending scale of total value and can increase his private income only by striving for abundance, increasing the number of units he has to offer. A social problem is presented wherever individuals or corporations control such a large proportion of the whole supply at a particular time and place that they are tempted to increase their private incomes by artificially enhancing scarcity.
In other cases scarcity grows inevitably, as in the exhaustion of natural deposits or the relative decrease of favored building sites for commerce and of tillable land for food when population grows rapidly. Each individual controls such a small portion of the supply that he gains only by striving for abundance (planting new forests, discovering and developing new mines, clearing, draining, irrigating, and fertilizing more fields); but with growing scarcity of the whole supply, price per unit rises. Where supply is absolutely falling off (exhaustion of natural stores of timber, coal, and metals) this rising price per unit partly, wholly, or more than, compensates the owners for the decreasing quantity; where supply is only relatively declining (same supply at a higher price) each owner gains and the whole group of owners gain by the scarcity, without themselves helping to bring about the change. Thus again it is seen that value is not identical, indeed may be in contrast with utility. Individual incomes depend primarily upon value, and therefore individual gain may be associated in many cases with scarcity and not with abundance.
§ 10. Conflict of individual and general interests. The social welfare has no reality apart from the abiding happiness of individuals and progress toward a higher, nobler form of social life. The individual members of society are guided mainly in their business activity by value, as that determines their incomes, and the value of the services rendered is a very inaccurate index either of the welfare of the individual consumer or of the social group. Both labor-claims and capital-claims on income reflect values; they do not always reflect the true welfare of individuals or of society. Labor and wealth sometimes are applied to nerve-destroying and life-destroying pleasures, because the panderer to vices can get a larger income in that way than in any other. Gamblers provide means for the indulgence of a common weakness that gives a pleasurable excitement but that undermines the foundations of social prosperity. Able lawyers render highly paid services to enable individual criminals to escape the penalty of the law or wealthy corporations to destroy competitors, establish illegal monopoly, and secure anti-social gains. Employers have profited through defeating, with superior legal talent and powers of endurance, the claims of workmen. Manual laborers often shirk work when not under the master’s eye and draw their wages for dishonest service. The primary purpose of most men in industry is to acquire income, and they leave the purchaser to look after his own welfare. Fortunately, however, in many cases acquisition of income is conditioned on production of welfare, and some worthy standards of business honor are found in every class of society.
In this regard what is true of income from labor-services is true of capital. Capital is the saleable value-expression of expected incomes, no matter what the source of the incomes may be, whether rentals of vice, gains of monopoly, mendacious advertising, or the growing scarcity of natural agents. To identify growth of capital with national prosperity is fallacious. Capital is a private business concept, and tho in many cases it is the present worth of real productive agents, in others it reflects the claim of one individual against another rather than a claim upon objective goods, relative scarcity rather than abundance, a summation of value rather than of welfare.
§ 11. Business economy and social economy. Not without reason it has been made a reproach to economic writers that they often have confounded business incomes (and especially those of a limited, influential, class in society) with general social welfare, and have identified individual acquisition with social production. Business economy has been mistaken for true political economy, commercial profits for social welfare.
The right understanding of the nature of value and of capital makes possible a clearer distinction than before between business economy and social economy. Men can not to-day, in view of the truths set forth above, cherish the error that “whatever is, is right” in the distribution of incomes. We must recognize the fact that in all times and countries and still to-day there is in public and private business more or less favoritism, bribery, monopoly, and dishonesty, which give to some men more than the economic law of value would explain or warrant. We must recognize further that the law of value itself is not necessarily the law of justice, that the incomes resulting from values in the world as it is do not always meet an ethical test. The problem of the social control of industry is largely that of determining when incomes that accrue to individuals are in harmony with, and when they are adverse, to the general weal. A number of these questions will be considered and an attempt will be made to answer them in accord with fundamental economic principles, in a later volume on “Economic Problems in America.”
[1 ]The communist theory of that period was originated or elaborated by such men as Karl Marx, Friederich Engels, and Ferdinand Lassalle, labor leaders and political agitators, who found a ready weapon in the bungling economic analysis of the time. The claim of a scientific basis for communism (now usually called social-democracy or socialism) has continued to be made by their followers, most of whom still boast that it is nothing but the (now admittedly defective) orthodox theory of value carried to its logical conclusion.
[2 ]Among many examples note: ch. 7, secs. 9, 10; ch. 13, sec. 4; ch. 15, sec. 11; ch. 18, sec. 10; ch. 27, sec. 13; ch. 28, sec. 10; ch. 30, sec. 3.
[3 ]The wage-fund doctrine of wages once held a central place in economic discussion. It was that wages were determined by the relation of the number of laborers to the capital. “Capital” was taken in the narrow sense of a special fund set aside (it was never quite clear how) by the employers for the payment of wages. The element of truth in the doctrine was the recognition, somewhat dim, that wages are favorably affected by the efficiency of the whole economic environment in which labor works.
[4 ]See also ch. 19, note on value versus utility of labor.