The Online Library of Liberty

A project of Liberty Fund, Inc.

• A History of Banking In Great Britain;
• Chapter I.: Banking In England.
• Section I.: A Record of Beginnings.
• Section II.: Foundation of the Bank of England.
• Section III.: An Era of National Development.
• Section IV.: State of the Irish Currency.
• Section V.: Failure of Currency Reform—inflation and Reaction.
• Section VI.: The Committee On Banking of 1840.
• Section VII.: On the Bank Acts of 1844 and 1845.
• Section VIII.: Commercial Crises.
• Section IX.: Monetary Panics.
• Section X.: General Conclusion.
• Chapter II.: Banking In Scotland.
• Chapter III.: The Theory and Mechanism of Banking.
• Chapter IV.: Definitions of Economic Terms.
• Chapter V.: The Theory of Value.
• Section I.
• Section II.
• Section III.
• Chapter VI.: The Theory of Credit.
• Section I.
• Section II.
• Banking In Russia.
• Chapter I.: The Early Stages of Money and Credit.
• Section I.: Prefatory.
• Section II.: Introduction of Paper Money.
• Section III.: Financial Reconstruction Under Alexander II. And the Founding of the State Bank.
• Chapter II.: Methods and Operations of the State Bank.
• Chapter III.: Banking Vicissitudes From 1862 to 1875.
• Chapter IV.: The Eastern War Period.
• Chapter V.: Private Banks.
• Chapter VI.: The Bourse.
• Chapter VII.: The Precious Metals.
• Chapter VIII.: Foreign Exchanges.
• Chapter IX.: The Debt and Finances of Russia.
• History of Savings-banks In the United States.
• I.
• II.
• III.
• IV.
• V.

CHAPTER V.

THE THEORY OF VALUE.

SECTION I.

I.—

VALUE DEFINED.

VALUE, in its original sense, is a desire or affection of the mind toward some object: it means esteem or estimation. To bring value into economics, a person must not only have an estimate of some object or property of his own, but he must have a desire or value for something which is in someone else’s possession, and be willing to give some of his own property in exchange for it. One person, however, cannot acquire an object which another person possesses without giving him in exchange for it some object which that other person desires, demands, and values; hence, economic value necessarily requires the concurrence of two minds.

If a person brought a cargo of tobacco to a nation of non-smokers, it would have no value among them, because no one among them would desire or demand it. If a person brought a cargo of wine to a nation of teetotallers, it would have no value, because no one among them would desire or demand it, and therefore no one would buy it. However much a person may wish to sell his product, he cannot do so unless someone else will buy it, and in that case it would have no economic value. Hence, for an exchange to take place, there must be the reciprocal desire or demand of two persons, each for the product of the other. When, however, two persons each desire or demand to obtain the product of the other, and when they have agreed as to the quantity of their own product which they will give in exchange to acquire the product of the other, each product may be said to be the measure of the desire of its owner to acquire the product of the other. The two products, therefore, measure the desire, demand, or value of their respective owners to obtain the product of the other; and when two persons have agreed upon the quantities of their products to be exchanged, the two products are said to be equal value; each product is the value or the demand for the other. And this is the only kind of value with which economics is concerned.

The Greek word for value is ὰξία, which is derived from ἄγω, one of whose meanings is to weigh, or be of the weight of. Thus Demosthenes, speaking of some golden goblets, says:* “ἄγουϭα ἐκάϭτη μνᾶν.”—“Each one weighing a mina.” And he says of the sword of Mardonius:† “ὂς ἠγε τριακοϭίους δαρεικούς.”—“Which weighed three hundred darics.” So Homer says:‡ “κὰδ δὲ λέβητ’ ἄπυρον, βοὸς ἄξιον, ἀνθεμόεντα θῆκ’ ἐς ἀγῶνα φέρων.”—“And he offered, too, as a prize, a new caldron, ornamented with flowers, worth an ox.” Hence ἀξία meant equality, weight for weight, as when two quantities placed in a balance are of equal weight.

So in Latin æstimatio means exactly the same as ἀξία; it means the quantity of money (æs) given for anything. Thus Cicero§ speaks of: “æstimatio frumenti.”—“The value of the corn to be furnished.” So Cæsar∥ speaks of: “æstimatio rerum et possessionum.”—“The value of their goods and chattels.” So Catullus says, 12, 11: “Quod me non movet æstimatione.”—“Which does not affect me on account of its value.” So Le Trosne says¶ that value is a new quality which products acquire when men live in society. “Products acquire, then, in the social state, which arises from the community of men among each other, a new quality. This new quality is value, which makes products become wealth. Value consists in the ratio of exchange, which takes place between such and such a product, between such a quantity of one product and such a quantity of another product. Price is the expression of value; it is not separate in exchange; each thing is reciprocally the price of the merchandise; in a sale the price is the money.”

Hence it is clear that value is a ratio or an equation; like distance and an equation, it necessarily requires two objects. The value of anything is always something external to itself. Hence a single object cannot have economic value. A single object cannot be equal or distant. If an object is said to be equal or distant, we must ask—Equal to what? or, Distant from what? So if any quantity is said to have value, we must ask—Value in what? And as it is absurd to speak of absolute or intrinsic distance, or absolute or intrinsic equality, so it is equally absurd to speak of absolute or intrinsic value. It is impossible to predicate that any quantity has value, without at the same time implying that it can be exchanged for something else; and of course everything it can be exchanged for is its value in that commodity. Hence any economic quantity has as many values as quantities it can be exchanged for; and if there is nothing for which it can be exchanged, it has no value.

II.—

EXAMPLES OF VALUE.

Any economic quantity may have value in terms of any other. Suppose that A as above is ten guineas; then B may be any one of the other three species of economic quantities. It may be a watch, or so much corn, or wine, or clothes, or any other material chattel. Or it may be so much labor, instruction, or amusement, or service. Or it may be a right of action, or a debt, or the funds, or a copyright, or any other abstract right. Each of these species of property is of the value of ten guineas, and it follows that each of them is equal in value to the other; because, things which are equal to the same thing are equal to each other. The value of the money in the pockets of the public is the products, services and rights it can purchase. The value of the goods in the warehouses of merchants and traders is the money in the pockets of the public.

The value of an incorporeal right is the thing promised which may be demanded. The value of a £5 note is five sovereigns; the value of a postage stamp is the carriage of a letter; the value of a railway ticket is the journey; the value of an order to see the play is seeing the play; the value of a promise to cut a man’s hair is the cutting of the hair; the value of an order for milk, bread, wine, soup, coals, etc., is the milk, bread, wine, etc. If I want a loaf of bread which costs a shilling, what difference does it make to me whether I have a shilling or the promise of the baker to give me a loaf? It is clear that in this case the shilling and the promise are of exactly the same value to me. Suppose that the price of cutting a man’s hair is a shilling; what difference does it make to me whether I have a shilling or the promise of the hairdresser to cut my hair? In this case it is clear that the shilling and the promise are exactly equal value to me. In short, in the case of every product and service, the money to purchase it with, and a promise to render the product, or service, are of exactly equal value in each separate case.

Now, what is money by the unanimous consent of economists? It is nothing but a general right, or title, to demand a product or service from any person who is in the habit of rendering them at any time; and as there is always some person who can render them, if another cannot, money has general and permanent value; while each of these promises has only particular and precarious value. Each of these separate rights, then, is of exactly the same nature as money; but it is of an inferior degree. But they are, each of them, economic quantities, or wealth, for the very same reason that money is. Is it not clear that if a person had his pockets full of promises by solvent persons to render him all the products and services he might require, he would be exactly as wealthy as if he had so much money? And he can always sell, or exchange, any of these orders for orders for a different thing. Hence we see the perfect justice of the doctrine of all jurists that rights are wealth.

III.—

ON NEGATIVE VALUES.

Value, then, being the desire, or affection of the mind, toward some object, may be of two forms; either the desire to acquire some object, or the desire to get rid of it. As these desires are inverse and opposite, they may be denoted by opposite signs; if the desire to obtain something be termed positive value, the desire to get rid of something may be termed negative value. Thus if we consider a piece of land just in the fit state to be cultivated, to be in the state o, it may be covered with primeval forest, with marshes and fens, with jungle, and huge bowlders, or any other obstructions to cultivation. It may require a considerable sum of money to clear away all these obstructions and bring it into a fit state for cultivation, which we have denoted by o; the sum necessary to clear away all these obstructions, and bring it into the state o, may be termed its negative value. So if the state of a person in health be denoted by o, he may fall into illness and require the services of a physician; or he may meet with an accident and require the services of a surgeon to bring him into a state of health. As the fees paid to the physician or surgeon are paid for removing obstructions to health, they may be termed negative values.

If we consider persons in the enjoyment of perfect security as to their persons and property as o, and if people were perfectly honest and never attacked their neighbors’ persons and property, there would be no use for the police; hence all sums spent on the police, which are spent merely for the purpose of warding off attacks on person and property, may be termed a negative value.

Now, it is evident that all the sums spent on negative values, or on removing obstructions, are just so much subtracted from positive values, or the acquirement of wealth, or enjoyments. We thus see what a gigantic obstruction to progress and wealth these European armaments are; and what an immense advantage in progress of wealth it is to America to be free from them; and to devote all the money and people employed in Europe on negative values to the increase of positive values. It was the observation that there are two kinds of value, positive value and negative value, to which we first drew attention, which led Stanley Jevons, as he acknowledged, to designate economics by the somewhat fantastic title, as the calculus of pleasure and pain.

IV.—

THERE MAY BE A GENERAL RISE OR FALL OF PRICES; BUT NOT OF VALUES.

Price is the value of any economic quantity in money or credit. Now, if money or credit be very greatly increased or decreased in quantity, the prices of all other economic quantities may rise or fall, but they will still preserve their relations among each other. If a loaf of bread and a pound of meat each cost a shilling; and if in consequence of a great increase in the quantity of money or credit they each rise to two shillings; or if in consequence of a great decrease in the quantity of money or credit they each fall to sixpence, the loaf of bread is still of the value of a pound of meat. Hence there may be a general rise or a general fall of prices. But there can be no such thing as a general rise or a general fall in values. Everything can no more rise or fall in value with respect to everything else, than, as Mill says, a dozen runners can each outrun the rest, or a hundred trees can each overtop each other. To suppose that all things could rise relatively to each other would be to realize Pat’s idea of society where everyone is as good as his neighbor, and a great deal better, too. The opposite case of everything falling in value with respect to everything else would be analogous to everyone thinking himself inferior to everyone else; which, according to human nature and St. Paul, would be an impossible case.

V.—

NOTHING CAN HAVE FIXED VALUE UNLESS EVERYTHING HAS FIXED VALUE.

As value is the ratio in which any two quantities will exchange, it is clear that the value of A with respect to B varies directly as B; that is, that it increases or decreases according to the greater or less quantity of B that A can purchase. And the value of B in terms of A varies directly as A; that is, it increases or decreases according as B can purchase more or less of A. It is also clear that if from any cause whatever the value, or ratio, between A and B has changed, the value of both of them has changed. It is manifestly as absurd to say that the value of A has changed with respect to B, but the value of B has remained the same, as it would be to say that a railway station has remained at the same distance from a train, while the train has increased its distance from the station. Moreover, it is as absurd to say that a quantity has changed its own value, or kept its own value fixed, without stating the quantities with respect to which its value has changed or remained fixed, as it would be to say that an object has changed or preserved its distance, or its ratio, fixed, without saying its distance from what or its ratio to what. Hence it is clear that nothing can have fixed or invariable value unless everything else has fixed and invariable value as well. Because, though a quantity may retain its value unchanged with respect to a certain number of quantities, yet if its value has changed with respect to other quantities, its value has changed. From this it will be seen that it is utterly futile to seek for a currency, or circulating medium, of fixed or invariable value.

SECTION II.

VI.—

ON THE ORIGIN, SOURCE, OR CAUSE OF VALUE.

WE now come to the second branch of our inquiry—What is the origin, source, or cause of value? Or, in the language of Bacon—What is the form of value? And whence does it originate?

Now, when we are to search for the cause of value, it is necessary to understand what we are searching for. There are three distinct orders of quantities, each containing many varieties, which all have value. We have to discover some single cause which is common to them all; and ascertain what that single cause is by genuine induction. Bacon says:* “But the induction which is to be available for the discovery and demonstration of sciences and arts, must analyze nature by proper rejections and exclusions, and then, after a sufficient number of negatives, come to a conclusion on the affirmative instances.” Also:† “What the sciences stand in need of is a form of induction which shall analyze experience and take it to pieces, and by a due process of exclusion and rejection lead to an inevitable conclusion.” The first step in this process of induction is to make a complete collection of all the different kinds of quantities, of whatever nature they may be, which have value‡ —“For whoever is acquainted with forms [i. e., causes] embraces the unity of nature in substances the most unlike. From the discovery of forms [causes] results truth in theory and freedom in practice.”

Bacon earnestly inculcates as the foundation of all true science a careful collection of all kinds of instances in which the given nature is found:§ “The investigation of forms [causes] proceeds thus: a nature [such as value] being given, we must first of all have a presentation before the understanding of all known instances which agree in the same nature though in substances the most unlike; and such collections must be made in the manner of history, without premature theory.” Bacon then exemplifies his method by an investigation into the form, or cause, of heat. He gives tables of the divers instances agreeing in the nature of heat; also where it appears in different degrees:* “The work and effect of these tables I call the presentation of instances to the understanding; which presentation having been made, induction itself must be set to work; for the problem is upon a review of instances, all and each, to find such a nature as is always present or absent with the given nature, and always increases and decreases with it; and which is, as I have said, a particular case of a more general nature. We must, therefore, make a complete solution and separation of nature; not, indeed, by fire, but by the mind, which is a kind of divine fire. The first work, therefore, of true induction (so far as the discovery of causes) is the rejection or exclusion of the several natures which are not found in some instances where the given nature is present, and are found in some instances where the given nature is absent; or are found to increase in some instances where the given nature decreases, or to decrease where the given nature increases. Then, indeed, after the rejection and exclusion has been duly made, there will remain at the bottom, all light opinions vanishing in smoke, a cause affirmative, solid and true and well defined.”

As an indispensable part of induction is the rejection of erroneous causes,† “I must now give an example of the exclusion and rejection of natures, which, by the table of presentations, are found not to belong to the form or cause [of value], observing in the meantime not only each table suffices for the rejection of any nature, but even any one of the particular instances contained in any one of the tables. For it is manifest from what has been said, that any one contradictory instance overthrows a conjecture as to the cause.”

VII.—

INVESTIGATION OF THE FORM OR CAUSE OF VALUE.

Bacon has exemplified his process of induction by investigating the form, or cause, of heat; our present task is to investigate the form, or cause, of value. Following the example of the mighty master, we must begin by making a complete collection of all the instances of value. That is, we must enumerate all the different kinds of quantities, with all their varieties, which have value. These are:

I. Corporeal or material quantities. Under this species are comprehended the following varieties: lands, houses, trees, cattle, flocks and herds of all sorts, corn and all other fruits of the earth, furniture, clothes, money, minerals of all sorts, jewelry, pearls, manufactured articles of all sorts, fish, game.

II. Immaterial quantities; comprehending labor of all sorts—agricultural, artisan, professional, scientific, literary, trade secrets, news.

III. Incorporeal quantities; comprehending rights of action, credits or debts, the funds, shares in commercial companies, copyrights, patents, the goodwill of a business, a professional practice, tolls, ferries, tithes, advowsons, rents, shootings, fishings, market rights, and all other valuable rights.

We must now investigate the cause of value in all these different kinds of quantities, and in all their varieties, and in each one separately. We must first, by a due course of rejections and exclusions, eliminate all accidental and intrusive ideas which may in some cases be associated with value, and in other cases not; and after completing this course of rejections and exclusions, we must end by an affirmative; and discover that single general cause, which is common to all these different classes of quantities, which, being present, value is present; which, when it increases, value increases; which, when it decreases, value decreases; and which, being absent, value is absent.

VIII.—

MATERIALITY IS NOT NECESSARY TO VALUE.

Now, in examining these three classes of cases which all have value, we observe that the whole class of immaterial quantities, and the whole class of incorporeal quantities, have value, but have no materiality. Hence it is evident that materiality is not necessary to value; it is only in some cases the accident of value.

IX.—

PERMANENCE, OR DURABILITY, IS NOT NECESSARY TO VALUE.

We also observe that some things which have value last forever, like the land, the funds, precious stones, statues, coins. Other things may last a very long time, such as houses, watches, pictures. Other things have a very much less degree of durability, such as clothes, animals. Others have a very short degree of durability, such as food, flowers. But labor, which in many cases has very high value, perishes in the very instant of its production, and therefore has no durability, or permanence, at all. Thus, quantities which have value have all degrees of permanence, or durability. Now, among Bacon’s prerogative instances he mentions ultimity, or limit, and says:* “Nor should extremes in the lowest degree be less noticed than instances in the highest degree.” This is the doctrine of the law of continuity, which says: “That which is true up to the limit, is true at the limit.” From these principles it follows that things which have the lowest degree of permanence, or durability, which is o, are to be included in economics as well as those which have the degree, i. e., which last forever. Hence it is seen that permanence, or durability, is not necessary to value; it is only the accident of value.

X.—

DEMAND THE SOLE CAUSE OF VALUE.

It has now been shown that materiality and durability are in no way necessary to value, but are only in some cases the accidents of value. In what, then, consists the essence of value? The only thing which ancient writers, Aristotle, the author of the “Eryxias,” the Roman jurists, and in modern times the physiocrates, the Italian economists, Smith, Condillac, Whately, and hosts of others have observed—exchangeability. Each of the quantities in the table of instances may be bought and sold, or their value may be measured in money; each of them possesses the attribute of exchangeability, and that is the sole attribute which is common to all the classes of quantities, and to each separate quantity in each class. Hence, as the ancients unanimously held for 850 years, exchangeability is the sole essence and principle of wealth. Thus, by strictly and reverently following the precepts of the mighty master, by rejecting and excluding all accidental and intrusive ideas, we have at last obtained an affirmative issue.

Now, what is necessary in order that any quantity may be exchangeable? Evidently that someone else should demand it. If I offer something for sale, what is necessary that it should be sold? Simply that someone else should desire or demand it. It is, therefore, clear that demand is the sole cause of value, or exchangeability. Aristotle said long ago that it is χρεία, or demand, which binds society together. The author of the “Eryxias” over and over again points out that demand is the sole cause which constitutes anything wealth; and that anything is wealth, whatever its nature may be, so long as it is wanted and demanded, and no longer. He pointed out that the local money of different states is only wealth where it has power of purchase; where it has no power of purchase it is not wealth. It has been shown that the Greek word χρῆμα, which is one of the most usual words for wealth, is derived from χράομαι, to want, or demand; and that χρῆμα simply means anything which is “wanted and demanded”; and that things are only χρήματα where they are χρήϭιμα, or wanted and demanded; and that where they are not χρήϭιμα, they are not χρήματα.

Here it is quite evident that we have got to the origin, form, or cause, of value; it is demand, pure and simple. Value is not a quality of an object, nor is it the labor bestowed on obtaining it; it is an affection of the mind. The sole origin, form, or cause, of value is human desire. When there is a demand for things, they have value; when the demand increases (the supply remaining the same), the value increases; when the demand decreases, the value decreases; and when demand altogether ceases, value is altogether gone.

XI.—

CREDITS, OR DEBTS, HAVE VALUE BECAUSE THEY WILL BE PAID IN MONEY.

The importance and the bearing of this investigation on our present subject is obvious. For it is the fatal doctrine that labor is the cause of all value, and that all wealth is composed of the materials of the globe and the product of land, labor, and capital that is at the root of all the difficulty to apprehend the subject of credit. If it be laid down that labor is necessary to all value, how could the notes of the Bank of England or any other bank have value? Or how could the bills of a solvent merchant have value? Everyone knows that a credit in a bank or a bank note has value because the bank will pay it in gold; a bill on a solvent merchant has value because he will pay it in gold when it becomes due. And the gold with which the banker or merchant pays his notes or bills is their value. So Mill, who is a devotee of Ricardo, says:* “An order or a note of hand, or bill payable at sight, for an ounce of gold, while the credit of the giver is unimpaired, is worth neither more nor less than the gold itself.” So Smith, Say, and Mill all class bank notes as under the head of circulating capital. Smith himself acknowledges that if money were not exchangeable it would have no value, as the author of the “Eryxias” showed.

We have already frequently shown that all jurists class rights of action, whether written or unwritten, as goods, chattels, commodities, merchandise, which can be bought and sold like any materials, chattels, or like money itself. And this species of goods, chattels, commodities, merchandise has value for exactly the same reason that any other merchandise or money has value, because it is exchangeable. Money has value only because it is exchangeable for products and services, and credits, or debts, have value because they are exchangeable for money. Thus we see that so long as ideas of value are mixed up and founded on labor, the subject is plunged into inextricable difficulties and contradictions. But as soon as we adopt exchangeability as test of value and the sole essence and principle of wealth, as the ancients unanimously did for 850 years, and modern economists are at last coming to do, all difficulties and obscurities are cleared up and dispersed like a fog before the morning sun.

XII.—

ON THE ERROR OF THE EXPRESSION “INTRINSIC VALUE.”

We have now to say something about an expression which has been the cause of enormous confusion in economics, which has been one of the chief stumbling-blocks in the apprehension of the subject of credit, and which must be cleared away. All ancient writers, as well as modern economists until Adam Smith’s deplorable confusion on the subject, clearly understood that the value of anything is some other thing external to itself, and there is not to be found in any of them the slightest trace of any such confusion of ideas as the expression “intrinsic” value. It is not easy to determine when the unfortunate expression intrinsic value came into use, but it seems to have arisen in this way: When unreflecting persons thought about value they thought of the quality of the thing which made it desirable, and they called that its value. They therefore gradually began to speak of intrinsic value. So long ago as 1696, an able writer (Barbon) pointed out the confusion which had arisen from mistaking the absolute qualities of an object for the quantity of things it would exchange for. He says:† “There is nothing which troubles this controversy more than for want of distinguishing between virtue and value. Value is only the price of things, and that can never be certain; because it must be there at all times and in all places of the same value; therefore nothing can have an intrinsic value. But things have an intrinsic virtue in themselves, which in all things have the same virtue—the loadstone to attract iron, and the several qualities that belong to herbs and drugs, some purgative, some diuretical, etc. But these, though they have great virtue, may be of small value, or no price, according to the place where they are plenty or scarce; as the red nettle, though it be of excellent virtue to stop bleeding, yet it is a weed of no value from its plenty. And so are spices and drugs in their native soil of no value but as common shrubs and weeds, but with us of great value, and yet in both places of the same excellent intrinsic virtue. * * * For these have no value in themselves; it is opinion and fashion brings them into use and gives them a value.” Barbon thus entirely refutes by anticipation the doctrine that utility is the cause of value, which has become rather common in the present day, and puts his finger on the phrase which has caused so much confusion in current economics—intrinsic value—which is to confound an intrinsic quality with an external relation. The following passage from Senior shows how easily even able men are beguiled into the error. He says:* “We have already stated that we use the word value in its popular (?) acceptation, as signifying that quality in anything which fits it to be given and received in exchange, or, in other words, to be lent or sold, hired or purchased. So, defined value denotes a relation reciprocally existing between two objects.” Now, the quality of a melon which fits it to be sold is its agreeable flavor; its flavor, therefore, according to Senior, is its value (!); and so defined, he says it means that it costs 5s.! That is, he defines the quality of the melon to be its price! This is exactly the confusion which the economists so carefully provided against. The quality which makes a thing desirable is its value in use, or its utility; and the economists repeatedly explained that economics has nothing to do with value in use or utility, but only with value in exchange, or market price.

This unhappy phrase, intrinsic value, meets us at every turn in modern economics; and yet the slightest reflection will show that to define value to be something external to a quantity, and then to be constantly speaking of intrinsic value, are inconsistent and self-contradictory ideas. Thus, over and over again it is said that money has intrinsic value, but that a bank note or a bill of exchange is only a representative of value. Money, no doubt, is the produce of labor; but Smith himself says that if money would exchange for nothing it would have no value; so he admits that exchangeability is the real essence of value. How, then, can the value of money be intrinsic? How can anything have intrinsic value unless it has the thing it will exchange for inside itself? Money will exchange for anything—lands, houses, corn, books, wine, jewelry, etc.; and each of these is a value of money; but which of these is its intrinsic value? Money remains exactly the same in itself wherever it may be placed. A hogshead full of sovereigns has immense value in the middle of London, but if a person had it by itself in a deserted ship in the middle of the Atlantic, or in a barren island, where would its value be? Yet if it has intrinsic value in one place it must have it equally in any other place. A bank note payable on demand is of the value of money; and why is it so? Simply because it is exchangeable for money. Hence, a bank note has value for exactly the same reason that money has—namely, because it is exchangeable for something else. Credit is the right to demand money, and money is the right to demand products and services.

Socrates, in the “Eryxias,” shows that it is only when and where that money can be exchanged that it has value; when and where it cannot be exchanged it has no value. So, when a bank note or a bill of exchange can be exchanged it has value; when it cannot be exchanged it has no value. Hence, the value of money and credits of all sorts is essentially of the same nature, though there may be different degrees of it. A credit, by the unanimous consent of all jurists, economists, and merchants, is an article of merchandise, and an exchangeable commodity, just like money, or any other material chattel; and this whether it exists only in the abstract form of a mere right or whether it be recorded on paper.

Who ever heard of intrinsic distance, or of an intrinsic ratio? The absurdity of these expressions is apparent at once; but they are not a whit more absurd than intrinsic value. If we speak of the intrinsic value of money, we may just as well speak of the intrinsic distance of St. Paul’s, or the intrinsic ratio of five. To say that money has intrinsic value because it is material and the produce of labor, and that a bank note, or a bill of exchange, is only the representative of value, is just as absurd as to say that a wooden yard-measure is intrinsic distance, and that the distance between two points one yard apart is only the representative of distance.

XIII.—

A STANDARD OF VALUE IS IMPOSSIBLE.

That unfortunate confusion of ideas between value being the quantity of any other commodity which any quantity will purchase, and the quantity of labor embodied, as it were, in the thing itself—which is chiefly due to Smith and Ricardo—has not only led to that mischievous expression, intrinsic value, the source of endless confusion in economics, but also to the search for something which the very slightest reflection would have shown to be impossible in the very nature of things—namely, an invariable standard of value.

It is as well to explain what those economists mean who are searching for an invariable standard of value. If we had a British yard and any foreign measures of length before us we could at once perceive the difference between them; and if we were told the measurement of any foreign buildings, however remote in age or country in foreign measures, we could, by a very simple calculation, reduce them to the standard of British measurement, and compare them with the size of our own buildings. Those economists who want an invariable standard of value want to discover and fix upon some single commodity by which they can compare the value of other things in all ages and countries. But the least reflection will show that such a standard is impossible in the very nature of things. Money, indeed, is termed the measure of value; and so it is in exchanges which are effected at the same time and place. If we are told that a quarter of corn is worth 40s., and that a sheep is worth 40s. at a certain time and place, we should say that they were then and there of equal value. But such matters are not the result of simple perception by the senses, as are the different measures of length and capacity. If a quantity of gold were placed beside a number of other things, no human sense could discern what their value would be. And the most violent changes in their several values might take place in the market without there being any visible sign of such a thing. Value is a mental affection; and values are not perceptible by ocular inspection, but they must be declared by the communication of minds.

Moreover, it is not possible to ascertain the different values of different quantities of gold obtained in different ages and countries. If a quantity of gold coin minted in the age of Augustus, an equal quantity minted in the reign of Elizabeth, and an equal quantity minted in China were placed side by side, what human sense could discern the difference in value between them? And yet that is what those economists require who want an invariable standard of value. They want something by which they can at once decide whether gold is of more value in ad 30, in ad 1588, or in ad 1893, in Italy, in England, or in China, without reference to anything else, just as we can discern the difference between British and foreign measures by laying them side by side. But the only test of value is an exchange; and unless we can effect an exchange there can be no value. How can we exchange an ounce of gold in the year ad 193 with one in the year ad 1593, or with one in the year ad 1893?

A measure of length or capacity is a single quantity, and can measure other single quantities, such as different lengths, or bodies of capacity. But value is a ratio, or a relation; and it is utterly impossible in the very nature of things that a single quantity can measure a ratio, or a relation. It is impossible to say that a : b :: x. It is manifestly absurd to say that 4 is to 5 as 8, without saying as 8 is to what; just as it is absurd to say that a horse gallops at the rate of twenty miles, without saying in what time.

XIV.—

BUT THERE MAY BE A MEASURE OF VALUE.

But though a standard of value is impossible by the very nature of things, there may be a measure of value.

Value being an affection of the mind, or the desire or demand of a person to acquire some object; the quantity of money he is willing to give to acquire it is the measure of his desire to obtain it, and, therefore, the measure of his value for it. But credit is also equally a measure of value as well as money. Neither a merchant nor anyone else will give more in credit, which he is bound to redeem in money, to acquire any commodity, than he would give in money itself. But if he wants anything, he will give just as much in credit as he would in money. Hence, credit is equally a measure of value, or desire, with money. Hence, money and credit are the measure of value; and, as it is universally admitted by all economists that purchases with credit affect prices in all respects equally with money, it follows that the aggregate of money and credit is the medium in which prices are measured, and that the aggregate of money and credit constitutes the circulating medium, or currency.

XV.—

VALUE EXISTS ONLY IN THE HUMAN MIND.

Value, then, like color, sound, and odor, exists only in the human mind. There is neither color, nor sound, nor odor in external nature; they exist only in the human mind.

According to the unanimous doctrine of ancient writers and all foreign economists, demand is the sole origin, form, or cause of value. It is demand, or consumption, and not labor, which gives value to a product. It is not the labor which gives value to the product, but the demand for the product which gives value to the labor. Hence, it is not labor which is the cause of value, but value which is the inducement to labor. It is not the labor of the producer which constitutes a thing wealth, but the demand of the consumer. We conclude, then, that it is not labor, but consumption, exchange, or demand which constitutes a thing wealth; and we trace the progress of a nation in wealth according as their wants and desires increase and multiply. First, the demand for the sustenance required by the body gives value to the material products of the earth, food, clothing, shelter, fuel. Then, as their tastes become cultivated and refined arises the demand for works of literature, art, and science; for painting, for sculpture, for architecture, for the drama, for music. And those who minister to these wants of the mind become wealthy, just as those who minister to the wants of the body do. It is the demand of the public alone which makes these things wealth. Hence, in order to be wealthy, a people must be inspired with strong and various desires and be willing to work to gratify those desires. And this shows the great importance, in an economical point of view, of national education. Heavy taxes can alone be borne by an industrious and wealthy people; and the multiplication of wants and desires multiplies industry, multiplies capital, multiplies incomes, multiplies the numbers of persons able to bear the burden of taxation; and renders the nation capable of great achievements, and of taking a leading position in the councils of the world.

SECTION III.

XVI.—

ON THE GENERAL LAW OF VALUE; OR, THE GENERAL EQUATION OF ECONOMICS.

THE last branch of our inquiry is to discover the general law of value, or the general equation of economics. That is, to discover a single general law which governs the exchangeable relations of all quantities whatever their nature may be, at all times, and in all places.

The acknowledged principles of natural philosophy show that there can be only one general law of value, or a single general equation of economics. We have shown that there are three distinct orders of economic quantities, and we have generalized all the fundamental concepts of economics so as to grasp all these quantities. These three orders of quantities can be exchanged in six different ways. Our present inquiry is to investigate a single general equation which shall govern all these six species of exchanges indifferently. Suppose that we make £ the general symbol of an economic quantity—i. e., of anything whatever which can be bought and sold, or exchanged, or whose value can be measured in money, or which has purchasing power and representing these various quantities under the general symbol £—we may say that there are in every country quantities of this sort:

£459,621,340

£278,234,500

£826,342,784

etc., etc., etc.

Now, we affirm, by virtue of the great principle of the community of science, and of the great algebraical doctrine of the permanence of equivalent forms, that whatever can be proved to be true economically of any one of this series of quantities must be true of them all.

Now, looking at the series of quantities placed above, who could tell of what species they are? Some may be land, some houses, some corn, some timber, some cattle, some jewelry, some money, some labor of different sorts, some credit, or debts, some the funds, or other public obligations, some copyrights, some patents, some shares in commercial companies, etc. Now, as we have shown that materiality, permanence, and labor are only accidentally associated in some cases with economic quantities, and not with all, and that exchangeability is the only quality which is common to all economic quantities, it follows that materiality, permanence, and labor must be excluded from any general concept of an economic quantity, and exchangeability retained as its sole general quality. Having thus obtained these independent economic quantities, the whole purpose and object of the science is to discover the single general law which governs the variations of their exchangeable relations. It is clear that by the principle of the continuity of science and the analogy of all physical sciences, however varied and complicated the different phenomena of value may be, there can, by no possibility, be more than one general law of value, or a single general equation of economics, whatever it may be.

XVII.—

FUNDAMENTAL CONDITIONS OF THE GENERAL EQUATION OF ECONOMICS.

Now, let A and B be any two quantities whatever supposed perfectly general, it is quite clear that their exchangeable relations are contained within the following limits:

∞ A = 0 B

etc. = etc.

2 A = B

A = B

A = 2 B

etc. = etc.

0 A = ∞ B

The meaning of which is simply this: Let the exchangeable relation between A and B gradually and continuously change from where the greatest possible quantity of A will exchange for the least possible quantity of B, to where the least possible quantity of A will exchange for the greatest possible quantity of B. Now, the law of continuity says that a quantity cannot pass from one amount to another by any change of conditions without passing through all intermediate degrees of magnitude according to the intermediate conditions. Hence, we affirm by virtue of the law of continuity:

1. That if it can be indubitably proved that any particular law is true at any one point in the range of prices, that same law must be necessarily true at all points throughout the whole range of prices.

2. That as the symbols A and B are perfectly general, if any law whatever can be proved to be true in the variations of the exchangeable relation of any two quantities whatever, that law must necessarily be true in the exchangeable relations of all quantities whatever.

Thus, by the law of continuity we are enabled to affirm that if any law whatever can be proved to be true at any one point in the range of prices, between any two quantities whatever, that same law must necessarily be true at all points in the range of prices, and between all quantities whatever. And, as a necessary corollary from the preceding, we may affirm that if any law can be proved not to be true with regard to the relation of any two quantities whatever, that law cannot be a general law of economics.

Furthermore, as it is a universally acknowledged principle of natural philosophy that that law only is the true one which explains all the phenomena, it may be laid down as an unquestionable truth in economics that if two or more forms of expression will explain or account for any phenomena regarding price, or the change of price, that form of expression only is to be adopted as the true one which explains all the phenomena in the science, and not that particular case, or class of cases only.

Economics is a physical science because it is a pure science of causes and effects. There being three orders of exchangeable quantities, and, therefore, six different kinds of exchange, the object of the science is to determine the laws of the phenomena of these exchanges—that is, to determine the laws which govern the changes in their numerical relations of exchange. Hence we have a new order of variable quantities; and the laws which govern this new order of variable quantities must be in strict harmony with the laws which govern the relations of variable quantities in general. The same general principles of reasoning which govern the relations of the stars in their courses must govern the varying relations of economic quantities. The fact is that astronomy is the physical science which is the type of economics. The fundamental problem of economics is identically the same as the fundamental problem of astronomy. The astronomer sees a number of quantities—the heavenly bodies—moving in all sorts of directions—sometimes advancing, sometimes apparently stationary, sometimes retrograding—and his object is to discover a single general law which accounts for and governs all these varying relations. So the economist sees a vast multitude of quantities constantly changing their numerical relation to each other, and his object is to discover a single general law which governs all these varying relations. Economics, like astronomy, is a pure science of ratios.

XVIII.—

LORD LAUDERDALE’S LAW OF VALUE.

Now, how is the great general law of astronomy determined? In this way: Let the heavenly bodies at any given instant be in any position. They then change their positions; the problem is to discover the law which governs these changes of relation. We must proceed in exactly the same way in economics. Let any number of economic quantities at any given time have any given relation to each other. They then change their relations to each other; then the problem is to discover the single general law which accounts for and governs these changes of relation. Lord Lauderdale states the case in this way: Take any two quantities, A and B, which may vary with respect to each other. First let A remain constant while B varies. Then the ratio of B to A will change from four causes. It would increase in value—1. From a diminution of quantity; 2. From an increase of demand. It would diminish in value—1. From an increase of quantity; 2. From a diminution of demand. Now, as the variation of A with respect to B will be governed by exactly the same four causes, it is quite clear that the variation of both quantities will be governed by eight independent causes; and if these be connected in the form of an equation, that will manifestly be the true general law of value, or the true general equation of economics. And as it is in the form of a fraction containing no less than eight independent variables, it at once shows the supremely complicated nature of the science.

Lord Lauderdale has thus the credit of having established the true general equation of economics. This comprehends the whole science of pure, or analytical, economics; exactly as the great law of Newton’s governs the relations of the heavenly bodies. This complicated equation is the full expression of what is popularly known as the law of supply and demand. All economists admit that it is true when the prices of things are very low; they also admit that it is true when the prices of things are very high; they therefore admit that it is true at the extremes of prices; and, therefore, as it is true at the extremes of prices, the law of continuity affirms that it is necessarily true at all points in the range of prices between the extremes; that is, that it is universally true; and therefore that it is the true general law of value, or the true general equation of economics.

XIX.—

REMARKS ON THE GENERAL EQUATION OF ECONOMICS.

The general equation of economics is, therefore, a compound ratio of a very complicated nature; and to apply it to particular cases requires a profound knowledge of the circumstances of the case; but yet it is demonstrably true; and the whole science must be constructed, taking that equation as the basis. In obtaining this general equation, we have followed the method invariably used in all physical science. We have obtained the independent variables, and connected them by a general law, or formula. This insures certainty to the science; but it is on the last point that the real difficulty arises; namely, in giving precision, or numerical amounts, to the co-efficients. It is absolutely impossible to say what numerical variations in supply and demand produce definite variations in value. This has been attempted in some cases, as in that of corn; but it is manifestly impossible to obtain exact numerical data; and in fact, though the same general law is true in all cases, it is perfectly well known that it varies in every particular case; and that the same absolute variation in supply and demand in various quantities will produce great differences in the variations of their numerical values.

It is this impossibility of giving exact numerical values to the co-efficients which makes many persons suppose that it is impossible to make economics an exact science. It is sometimes supposed that for a science to be an exact one, it is necessary that its laws should be capable of exact quantitative statement. This, however, is an error which has been specially pointed out by Comte, who well shows the difference between certainty and precision in science. To constitute an exact science, it is not necessary that its laws can be ascertained with numerical precision; but only that the reasoning be exact, or certain. He says that a dangerous prejudice has sprung up; that because the precision of different sciences is very unequal, their certainty is so too. This tends to discourage the study of the most difficult; precision and certainty are perfectly distinct. An absurd proposition may be very precise; as that the angles of a triangle are equal to three right angles. On the other hand, a certain proposition may not be precise; as that a man will die. Hence, though the different sciences may vary in precision, that will not affect their certainty. This observation applies most forcibly to economics. Some persons are apt to despise it because it does not bring out its results with the same precision as mathematics. This, however, is a grievous mistake. In economics the causes of phenomena can be ascertained with absolute certainty. This is all that is necessary to constitute economics an exact science; because, the method of producing a required result being pointed out with absolute certainty, it has only to be put into force until the result is produced.

In considering the general equation of economics we see the application of Bacon’s aphorism:* “That which in theory is the cause, in practice is the rule.” No other quantities but demand and supply appear on the face of the equation; it is therefore certain that no other causes influence value, or changes of value, except intensity of demand and limitation of supply. It is certain that neither labor nor cost of production have any direct influence on value; it can only be by affecting the demand or the supply; and that no change of labor, nor of cost of production, can have any influence on value, unless they produce a change in the relation of supply and demand. By this means, we are enabled to create a rigorously exact theory of economics; and by reverently following the precepts of the mighty prophet of inductive philosophy, and the immortal creators of the various inductive sciences, it is seen that economics, as a moral science, is fitted to take rank with mechanics and optics as a great positive inductive physico-moral science; and it is the only moral science capable of being raised to the rank of an exact science.

In interpreting, however, the general equation of economics it is necessary to make an observation. It is sometimes supposed that value is only affected by the actually existing quantity of produce which is brought into the market. This, however, is not so. The expected quantity which may be brought into the market has a most important influence on the value of the existing quantity. If there were a general failure of the coming crops, that would exert a most potent influence on the present value of the existing stock. Or if prices had been very high in consequence of great scarcity of supplies and the coming crops promised to be very abundant, that would exercise a most potent influence in diminishing the value of the present stock. Hence, the word quantity in the general equation must denote the quantity, actual or expected. Similarly the word demand must denote the demand, actual or expected.

[* ] Against Androtion, 617, 21.

[† ] Against Timocrates, 741, 7.

[‡ ] Iliad, XXIII., 885.

[§ ] Ver. 2, 53.

[∥ ]Bell. Civil., 3, 1.

[¶ ]De l’Intèrêt Sociale, ch. i., sec. 4.

[* ] Nov. Org., Bk. I., Aph. 105.

[† ]Distributio Operis.

[‡ ] Nov. Org., Bk. II., Aph. 3.

[§ ] Nov. Org., Bk. II., Aph. 11.

[* ] Nov. Org., Bk. II., Aph. 16.

[† ] Nov. Org., Bk. II., Aph. 18.

[* ] Nov. Org., Bk. II., Aph. 34.

[* ] Principles of Political Economy, Bk. III., ch. xii.

[† ] A Discourse Concerning Coining the New Money Lighter, p. 6.

[* ] Political Economy, p. 13.

[* ] Nov. Org., Bk. I., Aph. 3.