The Theory of Value: A Reply to Professor Macvane

Friedrich Wieser

Annals of the American Academy of Political and Social Science II

(1891-1892), pp. 600-28.

This paper has been prepared with the view of replying to the

objections raised by Professor Macvane(1*) to the theory of value

advanced by the Austrian school of economists. I regret that his

criticisms, although published nearly a year ago, have but

recently come to my notice. They are directed chiefly against

Bohm-Bawerk, and I shall therefore leave him to answer all such

cross swords with so chivalrous an opponent as Professor Macvane,

whose attack is so earnest that it must be parried, and whose

bearing is so courteous as to raise great hopes of a calm and

fruitful discussion.

Before beginning, however, I owe my readers the explanation

that the simple reply, first intended by me, has finally

developed into an extensive and independent essay. The roots of

the theory of value reach out into the field of economic theory,

and I believe that the discussion can be brought to a conclusion

only by extending it to these ramifications. Professor Macvane

economic conditions can best be presented by describing the

economy of a hunter, or fisher, or some similar entirely

primitive kind of production. Human labor and nothing more is

expended to obtain "Commodities," i.e., means for support and

comfort. Economically, labor is measured by the effort involved,

the commodities by their value and utility. Value, is in the long

run, determined by the amount of labor expended, provisionally,

by the fluctuations of supply and demand affecting the utility.

The products and their value determine the reward of labor (the

income) which, like value, has a theory of its own.

however, limited to commodities, while, on the other hand, the

theory of distribution is extended so as to include the relations

of land and capital. At the same time, in discussing interest and

rent (as in discussing the functions of capital, etc.), the

simplicity of these economic principles is destroyed by a large

number of resulting internal contradictions. Out of the conflict

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between the necessity of working and the dislike of work on

account of the exertion required, arises the economic tendency to

reduce as much as possible the necessary effort. This also

explains the meaning of the economic balance-sheet. All its

figures, however complicated they be, represent, as a rule,

quantities of labor, or, more exactly, quantities of effort

expended. In the long run the value of commodities is determined

by the exertion which is saved owing to their existence. This

the "too little," the demand for "more" and "much" rears the

economic structure. For what other reason should poverty be

feared and wealth desired? Wealth is utility or satisfaction

secured, poverty the want of it. It is characteristic that

Ricardo admits the idea of scarcity in the case of a few

commodities only, rarities of all kinds. Of the large number of

commodities remaining he says expressly: "They may be

multiplied... almost without any assignable limit, if we are

disposed to bestow the labor necessary to obtain them." We, on

the other hand, start with the supposition that only in a few

of consumption which otherwise could not have been supplied. For

their value is measured by the increase of utility obtained in

this way. This is true of land, capital, and also of labor. Labor

has value owing to what it produces and the greater value the

more it produces.

The definition of value as proposed by our school, is,

therefore, comprehensive, since it includes not only commodities

but the means of production as well. It is also monistic since it

bases itself on utility alone and does not in a dualistic way

refer now to utility and now to labor. In our opinion, the same

It is beyond my present purpose to show that we intend to

give greater extension and uniformity to the theory of value in

another direction, by trying to combine the ideas of value in

exchange and value in use.

The opinion which Professor Macvane expresses in regard to

our theory is, notwithstanding his complimentary tone, highly

unfavorable. He denies that it presents "a fundamental law of

value," and thinks it, at best, a new and "less convenient" form

of the familiar principle of demand and supply. In his view we

only make some contributions to the explanation of the

irreconcilable causes, which only proves that the true cause has

not yet been recognized. We also wished to bridge over the chasm

which yawns between the theory of value and that of distribution,

and especially of interest. We hoped that a broad, clear current

of theory might reflect the whole economic structure.

If, instead of fulfilling this purpose, we had only rectified

a detail in Ricardo's system, and in this way supplemented the

latter, we should have, in my opinion, only increased the evil

us. Although I wish my answer to be brief, I must, nevertheless,

commence with the discussion of some propositions of economic

theory and since the most successful way of defence is offensive,

I shall begin by attacking my opponent. First I shall endeavor to

refute the proposition that all costs may be reduced to labor.

(2)

The critic can only judge what he understands; nay, he must

even understand it better than he whom he criticizes. I must

frankly confess, however, that in the case under discussion I

in opposition to that philosophical view which regards all

physical objects which surround us as only apparent, the

fictitious creations of our imaginations. He cannot rid himself

of the idea that he can grasp and hold the things. Whatever the

philosopher may say in favor of his view, may inspire him with

awe and wonder, and, perhaps, with some kind of admiration, but

never with clear insight. I am in entirely the same condition

when it is asserted that raw material, coal, and machinery could

all be completely expressed in terms of labor. Their shapes are

too real to me, too concrete to permit me to put an abstraction

result of human work in a general sense, which it is sought to

reduce to labor. I certainly do not object to the assertion that

capital is the result of human labor in a general way, but if it

is taken literally and means that capital is labor, it must be

frankly confessed, I can no longer follow the argument in my

thought. I say this with perfect sincerity, and with no shadow of

irony. I wish to call the attention of my opponent to the fact

that I am here obliged to ignore that which proves a decisive

argument to him and to so many other distinguished thinkers. I

must say that nothing has made me so doubtful during my study of

eagerly endeavor to eliminate capital from the cost-account

because they are not able to explain the part which it plays. The

reasoning by means of which the value of the products of labor is

derived from the exertion involved in their production only

includes those efforts which are felt, and not the inanimate

capital. The theorist can come to no practical conclusion

regarding capital as a part of the cost of production

(Kapitalkosten), and, therefore, it must disappear. Of course

disturbing fact. Such an agreement, it seems to me, exists in the

English-American literature with regard to the part which capital

plays in the cost-account.

The attempt has often been made to eliminate the inconvenient

item of capital from the cost-account and to substitute labor for

it. In my opinion this has been done most ingeniously by some

Socialistic writers, whose explanation I cannot discuss in this

place. Besides the above, two lines of argument have usually been

taken. It is either asserted that capital is historically gained

though labor, and, if the co-operation of natural forces is left

capital from the beginning of economic history, in the latter the

outlay which is necessary to reproduce the capital consumed.

I will not discuss here how far it is at all possible to

estimate the value of a quantity of goods by its cost. I will

only point out that with regard to the extent to which cost

should he considered in determining value, a certain limitation

must he made in theory and practice, namely, that only the

necessary or reasonable expenditure shall be taken into account,

but not an excess of cost due to an accident. Careless, wasteful,

or unskilled labor, which has been employed in excess of what is

and accumulating capital, which has been carried on for thousands

of years, cannot enter as a factor in determining value. By far

the greater part of the exertion by means of which mankind has,

in the course of time, acquired this capital, might have been

saved, if, from the beginning, the best processes had been known,

the greatest industry had been applied, if nothing had been

squandered, and especially nothing had been destroyed though

violence and war. Only that part of the cost should be reckoned

in, which, according to the present condition of things, would be

absolutely necessary for reproducing the productive capital

means of machines? Who can do any work to-day without raw

material or tools? Nowhere in our modern economy is capital

produced by labor alone. Everywhere the new capital is the

descendant of previously existing capital. By no form of

computation can the factor "capital" be eliminated from the cost

of capital.

To the assertion that the quantity of labor invested in the

gradual accumulation of capital in the past determines the value

can no longer be reproduced by new labor without the co-operation

of already existing capital.

In his "Working Principles," Professor Macvane presents an

exact analysis of the costs of producing paper in a large

factory. In passing, I will note that one-fifth of the entire

cost in cash is paid for wages -- for absolute labor, the rest,

four-fifths of the whole, is expended for machines, raw material,

etc. Professor Macvane then continues: "But a little study of the

matter enables us to see that the sums paid for machinery,

materials, etc., are, in fact, mainly payments of wages in

materials, etc. Each actual cost-account contains items of

capital. What right has a theory to ignore them?

I know it is customary to state the matter as if capital, as

an item of cost, only appeared in the cost-account as a result of

the division of production among several or many producers. The

paper manufacturer who buys his machines from the machine

manufacturer, necessarily believes that he acquires capital,

while in reality he only buys the fruit of labor, i.e., labor. If

all concerns were united under one management, it would be

evident at first glance that there was no original expenditure in

long ago elapsed. If poor fishermen during the winter produce a

net out of materials which nature furnishes them gratuitously,

they create something which is paid for in summer by the fish

which they catch by means of it. Their labor is first transformed

into the net and then into the fish. Formerly the scanty tools

were, perhaps, nothing more than rapidly-passing, transitional

forms of human labor which embodied itself, only finally to

resolve itself into the finished product, the creation of which

was facilitated by this means. The distinction between such a

primitive mode of production and the modern one lies in the fact

means of labor alone, but it would even be impossible to attain

the national income, or even a noteworthy faction of it in this

way. We owe the goods which we consume not only to our industry,

but also to the capital which we have inherited from our

ancestors, together with Labor and Nature. This inherited

capital-by the help of which we begin every process of

production, without exception-must be considered as an

independent and indispensable factor in our production, which can

Principles" (chap. vii.), and he calls (chap. viii., p. 69.) "the

capital of to-day a legacy." He informs his readers that "to

those who already have capital, increase is comparatively easy.

With the old tools new ones can be made." But if, in the same

text-hooks and systems, we turn from the chapter on production to

that on value-capital has disappeared. With regard to value,

Professor Macvane classifies all cost into "labor" and "waiting,"

as others classify cost into labor and abstinence. In this

classification capital, as such, has vanished. Only the following

alternative is possible: Either capital has no existence whatever

with labor.

Every practical employer is constantly intent on arriving at

a clear statement of his cost-account, including capital. Without

it his book-keeping would he regarded as very incomplete. Imagine

the manager of a large business who is engaged in drawing up a

statement of his earnings and running expenses becoming puzzled

in his calculations respecting his investments, discounts, a

possible fall in value, etc. Let him try to inform himself about

the meaning and significance of his calculations by reading

theoretical works on value. What a surprise it would be to him

valuations, as they are generally made, were repeated. It is

necessary that theory should rise above practice, especially

above the individual case. But on the other hand, it would be

entirely out of place to give a theory of value which should

entirely ignore practical views of value and their origin. The

physician who studies the diseases of the human body regards the

testimony of the patient only as hints and suggestions, which he

knows often enough mislead, his real object is the silent body

itself. To the political economist, who studies the problem of

value, the practical valuations are more than symptoms, they are

(3)

Professor Macvane is right in supposing that the Austrian

economists would reject the explanation of value based

exclusively on exertion, even if it were true that the cost of

capital could be reduced in every case to the cost of labor. We

have a number of further objections, and we do not stand alone in

this respect. They have been raised over and over again. It will

from the labor theory. And now let every reader ask himself

whether experience affirms the supposition that the most painful

and dangerous labor really receives the highest wages. I believe

even he who professes the labor theory will be compelled to grant

that experience contradicts his theory, and that he would gladly

be relieved of the necessity of proving that this contradiction

is only apparent, and that experience really supports his view.

I, at least, do not envy the theorist, who is forced of necessity

to attempt such an explanation. It is certain that from a mere

observation of wages nobody could have conceived the idea that

themselves as to what is painful or dangerous -- be his opinion

justifiable or not -- must he decisive in estimating the effort

and danger of labor. "What they think hard or dangerous, or

disagreeable, is, for our present purposes, hard or dangerous, or

disagreeable; what they think easy and pleasant, is easy and

pleasant." This thought would lead to the conclusion that every

one who is satisfied with certain wages for a certain effort,

while others receive higher wages for less effort, would thereby

silently admit that he regarded his effort as the less painful. I

do not know whether Professor Macvane intends to go so far. It

would say, according to the skill of the workmen and the services

which they render him in his business. He will confess, that in

certain cases, when he requires increased efforts, he will he

obliged to increase wages in proportion, but he will not indicate

exertion as the absolute standard by which he grades labor. He

will he compelled to increase the wages of the laborer who has a

secured income, in order to induce him to undertake harder work,

while, on the other hand, he only needs to offer starvation wages

to the laborer who only has the choice between earning nothing

and submitting to the heaviest work for the meagerest wages. It

(4)

Ricardo, and those who deduce value from labor, advance what

at bottom amounts to the following argument: If a certain

expenditure of labor, though relatively very small, must be made

for the sake of obtaining useful things, each of these things has

value or importance, simply because by the possession of the

article labor is saved; the measure of value is not to be found

in the utility of the article created, but in the often

effort. In other words, we should expect that every one would be

justified in consuming as much as would be the equivalent of the

sacrifice of labor which he was willing to make. No satisfaction

should be denied to him who is willing to work for it.

Unfortunately, human labor cannot thus produce commodities

indefinitely. In the first place, in order to make labor

fruitful, we need capital in addition; and secondly, there is not

always a sufficient quantity of labor available to carry on every

kind of production which might be desired. The Ricardian theory

of value is faulty, because the theory of economics which it

opposition to facts. The conception of value at which this theory

arrives, although clear and attractive, cannot be applied to our

economic conditions. Not less so the law of value, which, it may

be remarked in passing, has a very close inner affinity with the

law of marginal utility; and in general, however strange it may

sound, Ricardo's conception of value is very nearly related to

that of value in use. No other anterior theory has shed so much

light on the inner working of the economic world.

In my opinion, the part which this theory has played in the

historical development of the doctrine of value, can best be

large expenditure of explanatory effort. Even if we overlook the

fact that entirely different economic conditions must be

presupposed -- a limited, instead of a plentiful supply of

commodities -- it is, nevertheless, necessary to examine the

value of the means of production in connection with the value of

the products. Even if it were true, that all means of production

could be reduced to labor, it would be necessary to examine the

value of labor. Professor Macvane says "that the relation of

product to exertion is that of reward, and reward only." He

evidently thinks that with regard to labor, only the returns --

kinds of productions; the valuation according to "utility," on

the other hand, indicates a disturbance, owing to which one

branch of production is isolated from the other branches and

consequently the equilibrium is destroyed.

It is primarily the individual capitalist who makes his

calculation according to cost in his own interest. Free

competition, however, compels him to apply the same calculation

in selling to his customers and in this way to give to

The Austrian School explains exchange by the value in use;

each party to the exchange endeavors to gain in value in use. If

the commodities parted with have a value in use of ten, the

article received in exchange must necessarily have a higher value

than ten in order that the exchange may take place. In the case

of the other party to the exchange the valuation will be

reversed; here a higher value is attached to that which received

a lower estimate in the first instance.

Professor Macvane is right in showing that under the

supremacy of the division of labor the products very frequently,

the price which he receives has an indirect value in use to him,

since it enables him to buy goods of direct value in use. On this

account he is influenced by those motives which, in our opinion,

lead to the exchange. We presuppose a difference between the

value in use of the article received and that of the article

given in exchange. This difference does not disappear when the

article given in exchange has a value in use equal to zero, but

rather reaches its maximum in this case.

It is proper to emphasize in this place that the Ricardian

theory offers no explanation of exchange. According to Ricardo,

order to explain exchange, it is necessary to determine the real

economic measure of utility: that measure the Austrians believe

they have found in the idea of marginal utility. In this way the

idea of marginal utility may enter the breach which the Ricardian

theory of exchange leaves open. If it succeed in this, the former

theory will, I am convinced, suffer a signal and complete defeat.

the greatest possible result by the least possible effort; and

thus he makes the best application of his powers. Division of

labor and free competition make it possible that the endeavor of

each individual should redound to the advantage of society; so

that finally the maximum of general advantage is attained by the

minimum expenditure of general effort.

Professor Macvane thinks that on account of its erroneous

conception of the motives of exchange our theory does not serve

value and exchange.

I even maintain that the explanation of this process from the

standpoint of the Ricardian theory is not by far as clear as that

reached from our standpoint. Ricardo's theory does not in any way

contain an explanation of exchange. In general, a theory can only

explain the meaning of the economy of the world at large in so

far as it succeeds in explaining the economy of the individual.

The Ricardian theory only takes into account the quantities of

labor expended, and only in so far as these are concerned does it

trace the effects of the division of labor and of free

the economic world. Since Ricardo has no measure for the results,

that is, for the economic gain, he is not able to explain the

nature of exchange.

Jevons and his school have in this respect progressed far

beyond the standpoint of Ricardo. Jevons estimated utility by the

standard of the marginal utility. He is able to correlate

expenditure and gain in production as well as sacrifice and its

reward in exchange. The economic balance-sheet is according to

his theory "a calculus of pain and pleasure," and the word

"calculus" has its definite sense in this connection because

pain may suffice well enough when men gain sensual pleasures by

means of physical exertions. If the utilitarians are right the

highest rule of moral conduct may even be deduced from this

principle. But it cannot without modification be applied in

political economy and especially in relation to production,

because the latter requires not only personal sacrifices, but

also the sacrifice of material objects. These, however, represent

the possessions of the producer, the sacrifice of which does not

necessarily imply any feeling of pain. Certainly, no new

principle is in this way introduced into political economy, since

them at the same time as a condition of pleasure, and it is

according to this pleasure that we estimate their value. The

musician whose painless performances delight his hearers, would

reckon but poorly if he should estimate his performances by his

pain and not by the delight of the public. The calculations of

political economy will only be satisfactorily explained when the

general and, for this reason, insignificant formula of "the

calculus of pleasure and pain" is applied to these complicated

bookkeeping than may be dreamt of in the philosophy of the

hunter, and a formula explaining the latter would be but ill

adapted for the interpretation of the former.

What I have said above in regard to the conception of cost

and the meaning of the cost-account shows how we attempt to carry

out the "calculus of pleasure" with regard to productive

property. However, I cannot enter into further details here, nor

can I develop the influence which, in our opinion, is to be

attributed to the effort expended by labor. Although we deny that

this enters as such into the value of the commodities, we do not,

1. "Bohm-Bawerk on Value and Wages" Quarterly Journal of

Economics, Oct. 1890.

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