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CHAPTER FOUR

Theory of Value1


J. R. McCULLQCH, the most distinguished contemporary English economist,2 has rightly given the name "theory of value" to a
1. [List's note to this chapter, written when the treatise was finished, is printed in an appendix; see below, pp. 193-5.]

2. J..R. McCulloch (1789-1864) was a contributor to the Edinburgh Review, Professor of Political Economy at University College, London and Comptroller of

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doctrine based upon the teachings of Adam Smith and J. B. Say. The latter clearly included the theory of value in his definition of "political economy" which, in his view, was that branch of know­ledge which examines the production, division, and consumption of wealth. But this definition shows that Say does not propose to discuss how productive power is established, how they develop, or how they can be destroyed.

We do not deny that Adam Smith and J.B. Say recognise the significance of productive power for the creation of material wealth. But we hope to show that they have failed to recognise the difference not only between the two doctrines which we have mentioned but also between the theories of cosmopolitan and national economics. These writers confuse the two theories, and when they seek to support the policy of free trade they are quite capable of using propositions derived from one doctrine as argu­ments against the other doctrine.

Moreover Adam Smith, more logical than J.B. Say, classes as unproductive those who - like professors, teachers, judges, artists and actors - do not produce any material wealth. This is fully justified if one considers the theory of value in isolation. But if one appreciates how the work of these members of society contributes to the growth of a nation's productive power one can see that they are really more productive than those who make material goods. The judge upholds the safety of the individual and the sanctity of property, the teacher prepares the way for the future extension of learning, including technical knowledge, while the artist establishes and elevates the culture of society.

Say does appreciate, though only in a vague sort of way, the existence of this important lacuna in his doctrine and he regards these creators of productive forces as mere producers of cultural (or immaterial) values. Since his doctrine is entirely materialistic in conception - he is concerned only with the "exchange value" of material goods - he tries to justify his view by defining the activities of these producers in purely materialistic terms. Say argues that these producers create only "immaterial values" which are con­sumed as soon as they are made. If this were really the case the producers in question would be engaged in a truly empty sort of


H.M. Stationery Office. His books include Principles of Political Economy (1820), The Rate of Wages (1826), Dictionary ofCommerce (1832) and Statistical Account of the British Empire (1837).

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production which would hardly be worth discussing at all. Say also argues that the producers of "cultural values" receive "exchange values" for their services. This argument, too, falls to the ground since it implies that the producers of "cultural values" make no contribution to the wealth of the nation.

The foundation of Say's doctrine is the conception of material wealth. His whole system is based upon it. Consequently he concen­trates his attention upon the theory of value and he is interested in productive forces only insofar as they can be brought into direct association with his doctrine.

On the other hand Say's assessment of foreign commerce and import duties would unquestionably have been quite different if he had distinguished clearly between cosmopolitan and national economics, if he had given the theory of productive power priority over the theory of value, and if he had considered the theory of value only insofar as material wealth creates things that contribute to future economic expansion.

When Say denounces import duties and suggests that they fail to stimulate industrial progress, he uses arguments which are valid only as criticisms of the mercantile system and which are all depen­dent upon his theory of value. He thinks that every nation should buy the goods that it requires in the cheapest market. He believes that it is as absurd for a nation as for an individual to manufacture goods at a higher cost than they can be purchased from foreigners. This is obviously an argument which applies only to a merchant who makes a living by exchanging goods or "exchange values". A merchant is not concerned with the theory of productive power and may indeed be ignorant of its very existence. And Say's argument is not even sound when applied to private individuals for they should always aim at the preservation and growth of their own personal productive power.

Above all we must point out that Say mentions only the imme­diate sacrifices that the consumer has to make when import duties are imposed. He fails to consider the long term advantages of a policy of protection. If it were always foolish to make short term sacrifices for long term gains it would be a mistake to plant pear trees and sensible to buy pears since the cost of planting trees is so high that every pear picked at the end of the first year would be more expensive than a basket of pears bought in the market. To this sort of doctrinaire argument a practical farmer would reply that he

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does not plant a tree to reap the crop that it will bear at the end of the first year. He plants a tree to gather the pears that it will bear for a hundred years. The cost of planting a tree should be compared with the fruit that it will bear throughout its life. And a nation establishes industries not for a hundred years but for the whole period of its existence. Moreover the indirect advantages that agriculture derives from the establishment of industries are an additional bonus to the direct advantages gained by society from the growth of the manufacturing sector of the economy. Finally, a nation should not regard the progress of industries from a purely economic point of view. Manufactures become a very important part of the nation's political and cultural heritage.

A further weakness of Say's argument is that he assumes that a country which has - for one or more years - had enough money to pay for the goods which it buys more cheaply abroad than they can be manufactured at home, will always be in a financial position to make such purchases.

Say makes another erroneous statement which we shall discuss in more detail later. He asserts that import duties upon manufactured goods confer upon industrialists a monopoly at the expense of farmers and consumers in general. In fact the monopoly is not one granted to a particular set of individuals at the expense of another group of individuals. It is a monopoly granted to the country as a whole at the expense of foreigners. The long term results of the protection of industry by import duties are as follows. Assuming that people are free to choose their occupation and to move from one job to another; assuming the existence of universal education; assuming the availability of adequate capital in the country that has conferred a monopoly upon itself by a protective tariff- then in the long run native manufacturers will be able to produce goods which can be sold at lower prices than those charged for foreign products. For these reasons - and because of the advantages gained by farmers from a growing demand for their foodstuffs and raw materials - the initial high prices that consumers pay for native manufactured goods protected by a tariff are of minor consequence compared with the ultimate advantage of having a strong home industry.

We believe that we have drawn attention to the mistakes con­cerning import duties which Adam Smith and Say have made through confusing the theory of value with the theory of productive

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forces. We shall give further proofs later.

On the very first page of his book Say makes it clear how little he knows about the theory of productive power. He asserts that all nations are capable of becoming prosperous under any form of government. In fact a study of the history of all peoples at all times shows that the prosperity of a country depends to a great extent upon the nature of its political constitution.1

Say makes a still more extraordinary assertion when he argues that politics should have nothing to do with economics. This contra­dicts the very name of his doctrine. Since he calls his doctrine "political economy" it should be concerned as much with politics as wth economics. The way in which Adam Smith and J. B. Say both completely exclude politics from their doctrines is the clearest proof that they are concerned solely with the theories of cosmo­politan economics and value and not with the doctrine of national economics.

Adam Smith and J.B. Say have, of course, performed a very useful service as founders of the theory of cosmopolitan economics


1. [List's note] In his Traité d'economie politique (1824), discours preliminaire, Say writes: "Political science, which ought properly to be regarded as the study of the organisation of society, has long been confused with economics, which examines how the wealth which satisfies our needs is created, distributed, and consumed. The wealth of a country is really independent of its political organisation. A state will become rich if it is well administered, whatever its constitution may be. Nations ruled by absolute monarchs have prospered, while those governed by popular assemblies have seen their economies ruined. It is only indirectly that political liberty may be more favourable (than a dictatorship) to economic prosperity - or for that matter to the progress of cultural activities". All history refutes this notion. The truth is the very opposite. No nation has ever achieved success as an industrial power without also enjoying a high degree of political freedom. No country ruled by a despot has ever been able to establish manufactures on a large scale or to achieve economic prosperity. Free peoples have declined and have become poor and weak, but this has occurred only after they have lost their liberty. A despot has sometimes secured a certain degree of prosperity for his subjects but this has happened only if he had the good fortune to employ a number of exceptionally able ministers and officials. But, as the Emperor Alexander once remarked, that is only a fortunate chance. As soon as the services of able officials are no longer available the economy of the country declines. Liberty and industry are synonymous and cannot be separated. Only a strong democratic element in society can bring opulence to a monarchical or an aristocratic state. The nobles of Venice committed suicide as soon as they effectively weakened the democratic element in the city state. Industry demands a democratic government which pursues the same economic policy for many hundreds of years.

The validity of this proposition is supported not only by historical evidence but also by no less an authority than Montesquieu who writes in his Esprit des lois (Part II, p. 192): "In a servile state people work to preserve what they have got rather than to increase their wealth. In a free society people work to acquire riches rather than to preserve wealth".

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and the theory of value. Their fame is not lessened by their failure to remedy certain gaps in their doctrines, or by the fact that their mistake in confusing two different theories should have been repeated by their disciples, or by the continued contradiction between their theories and what happens in the real world of business.

Our thanks are due to Adam Smith and to Say because they have clearly laid down the principles of individual economics and cosmo­politan economics. These doctrines may be regarded as aims which nations should strive to achieve. But experience teaches us that Adam Smith and Say have not shown countries the right road to follow to achieve the noble ideal of world free trade. Their services are not diminished by the fact that- although they have developed the theory of value to its greatest extent - they have failed to appreciate the significance of the doctrine of productive power. And Adam Smith and Say have also attacked the policy of pro­tection by mistaken arguments based upon erroneous principles.

We define the theory of value as those unalterable principles which can be shown to have existed unchanged among all peoples and at all times with regard to the level of prices, rents, profits, wages, supply and demand, capital, and interest. As a discussion of the theory of value does not fall within the scope of the question posed by the Academy we shall examine the doctrine only insofar as it touches upon our own doctrines of national economics and productive power.

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