The Denominator of Value
Epigraphs to Book II
Definitions are the basis of systematic reasoning.
The mixture of those things by speech which are by nature divided is the mother of all error.
Bacon made us sensible of the emptiness of the Aristotelian philosophy; Smith, in like manner, caused us to perceive the fallaciousness of all the previous systems of political economy; but the latter no more raised the superstructure of this science, than the former created logic.... We are, however, not yet in possession of an established text-book on the science of political economy, in which the fruits of an enlarged and accurate observation are referred to general principles that can be admitted by every reflecting mind; a work in which these results are so complete and well arranged as to afford to each other mutual support, and that many everywhere and at all times be studied with advantage.
-- J.B. Say, 1803
We may cite as examples of such inchoate but yet incomplete discoveries the great Wealth of Nations by Adam Smith -- a work which still stands out, and will ever stand out, as that of a pioneer, and the only book on political economy which displays its genius to every kind of intelligent reader. But among the specialists and the schools, this work of genius which swayed all Europe in its day, is laid upon the shelf as an antiquated affair, superseded by the smaller and duller men who have pulled his system to pieces and are offering us the fragments as a science most of whose first principles are still under dispute.
-- Professor (Greek) J.P. Mahaffy, "The Present Position of Egyptology," "Nineteenth Century," August, 1894.
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The Science of Political Economy
Book II, The Nature of Wealth
The Denominator of Value
Showing What Value Is, and Its Relations
What value is -- The test of real value -- Value related only to human desire -- This perception at the bottom of the Austrian school -- But its measure must be objective -- How cost of production acts as a measure of value -- Desire for similar things and for essential things -- Application of this principle -- Its relation to land values
Value in the economic sense or value in exchange is, as we have seen, worth in exchange. It is a quality attaching to the ownership of things, of dispensing with the exertion necessary to secure the satisfaction of desire, by inducing others to take it in return for them. Things are valuable in proportion to the amount of exertion that they will thus command, and will exchange with each other in that proportion.
The value of a thing in any time and place is thus the largest amount of exertion that any one will render in exchange for it. And since men always seek to gratify their desires with the least exertion this is, or always tends to be, the lowest amount for which such a thing can otherwise be obtained.
This of course is not to say that whatever anything may exchange for is its value. In individual and especially in unaccustomed transactions the point at which any particular exchange takes place may considerably vary. But that our idea of value assumes a normal point, and what this point really is, may be seen in common speech. Thus we frequently say of the exchange of a certain thing that it brought less than its value, or that it brought more than its value. Now in this, which we refer to as a real or true value, differing from the assumption of value in the particular exchange, we mean something more definite than customary or habitual value, for this, as in our times we know, is subject in regard to particular things to considerable and not infrequent changes. What we really mean by this real value, and what is its true test, we show in the way we attempt to prove that a thing was exchanged at more or less than its value. We say that a thing was exchanged at less than its value because some one else would have given more for it. Or that a thing was exchanged at more than its value because some one else would have given the same thing for a less return. And so what we deem the point of real value, or actual equivalence, we speak of as market value, from the old idea of the market or meeting place of those who wish to make exchanges, where competition or the higgling of the market brings out the highest bidding or the lowest offering in transactions of exchange. And when we wish to ascertain the exact value of a thing we offer it at auction or in some other way subject it to competitive offers.
Thus I am justified in saying that the value of a thing in any time and place is the largest amount of exertion that any one will render in exchange for it; or to make the estimate from the other side, that it is the smallest amount of exertion for which any one will part with it in exchange.
Value is thus an expression which, when used in its proper economic sense of value in exchange, has no direct relation to any intrinsic quality of external things, but only to man's desires. Its essential element is subjective, not objective; that is to say, lying in the mind or will of man, and not lying in the nature of things external to the human will or mind. There is no material test for value. Whether a thing is valuable or not valuable, or what may be the degree of its value, we cannot really tell by its size or shape or color or smell, or any other material quality, except so far as such investigations may enable us to infer how other men may regard them. For the point of equivalence or equation that we express or assume when we speak of the value of a thing is a point where the desire to obtain in one mind so counterbalances in its effect on action the desire to retain in another mind that the thing itself may pass in exchange from the possession of one man to the possession of another with mutual willingness.
Now this fact that the perception of value springs from a feeling of man, and has not at bottom any relation to the external world -- a fact that has been much ignored in the teachings and expositions of accepted economists -- is what lies at the bottom of the grotesque confusions which, under the name of the Austrian school of political economy, have within recent years so easily captured the teachings of pretty much all the universities and colleges in the English-speaking world.
Vaguely feeling that there was something wrong in the accepted theory of value, they have taken the truth that value is not a quality of things but an affection of the human mind towards things, and attempted at the risk of fatal consequences to the ancient landmarks of English speech to account for, classify and measure value through what is and ever must remain the subjective -- that is to say, pertaining to the individual Ego.
The fault of all this is that it begins at the wrong end. What is subjective is in itself incommunicable. A feeling so long as it remains merely a feeling can be known only to and can be measured only by him who feels it. It must come out in some way into the objective through action before any one else can appreciate or in any way measure it. Even if we ourselves may measure the strength of a desire while it is as yet merely felt, we can make no one else adequately understand it until it shows itself in action.
Value has of course its origin in the feeling of desire. But the only measure of desire it can afford is akin to the rough and ready way of measuring sorrow which was proposed at a funeral by the man who said: "I am sorry for the widow to the amount of five dollars. How much are the rest of you sorry?" Now, what value determines is not how much a thing is desired, but how much any one is willing to give for it; not desire in itself, but what the elder economists have called effective demand -- that is to say, the desire to possess, accompanied by the ability and willingness to give in return.
Thus it is that there is no measure of value among men save competition or the higgling of the market, a matter that might be worth the consideration of those amiable reformers who so lightly propose to abolish competition.
It is never the amount of labor that has been exerted in bringing a thing into being that determines its value, but always the amount of labor that will be rendered in exchange for it. Nevertheless, we properly speak of the value of certain things as being determined by the cost of production. But the cost of production that we thus refer to is not the expenditure of labor that has taken place in producing the identical thing, but the expenditure of labor that would now be required to produce a similar thing -- not what the thing itself has cost, but what such a thing would now cost.
The desire to obtain, which renders men willing to undergo exertion, is, save in rare cases, not the desire for an identical thing, but the desire for a similar thing. Thus, a desire for wheat is not a desire for certain particular grains of wheat; but a desire for wheat generally, or for wheat of a certain kind. So a desire for coats, or knives, or drinking -- glasses or so on, is, save in very rare cases, not a desire for particular, identical things, but a desire for similar things. Now, the value of a thing in any given time and place is the largest amount of labor that any one will render (or cause others to render) in exchange for it. But as men always seek to gratify their desires with the least exertion, this highest amount of labor which any one will give for a similar thing in any time and place, tends always to be the lowest amount for which such a thing can in any other way be obtained.
Thus the point of equation between desire and satisfaction, or as we usually say, between demand and supply, tends in a case of things that can be produced by labor to the cost of production -- that is to say, not what the production of the thing has cost, but the present cost of producing a similar thing. Desire remaining, whatever increases the amount of labor that must be expended to obtain similar things by making them will thus tend to increase the value of existing things; and whatever tends to decrease the cost of obtaining similar things by making them will tend to decrease the value of existing things.
But there are some cases in which the desire for a product of labor is not a desire for a similar thing, but for a particular and identical thing. Thus, when that great genius and great toady, Sir Walter Scott, carried off a wine-glass from which George IV had drunk, it was to satisfy a desire not for a similar glass, but for that particular glass, which had been honored by the lips of royalty. Where such a desire is felt by only one person or one economic unit, as where I or my family may value a chair or table or book which once belonged to some one we loved, our valuation is analogous to value in use, and does not affect its economic or exchange value, except perhaps as it might make us loath to part with it at its true exchange value. But where more than one person or unit has this desire, which is the case where the possession of a particular article comes to gratify ostentation, it acquires an exchange value which is not limited by the cost of producing a similar thing. Thus, an original picture of a dead master, or an original copy of an old edition of a book, which identically cannot now be produced by any amount of exertion, may have a value not limited by the cost of production, and this may rise to any height to which sentiment or ostentation may carry desire.
The cases I have here taken to illustrate the principle have but small practical application, though they are continually called to attention, and any theory of value must include them. But the principle itself has the widest and most important applications, which steadily increase in importance with the growth of civilization. The value that attaches to land with the growth of civilization is an example of the same principle which governs in the case of a picture by a Raphael or Rubens, or an Elgin marble. Land, which in the economic sense includes all the natural opportunities of life, has no cost of production. It was here before man came, and will be here, so far as we can see, after he has gone. It is not produced. It was created.
And it was created and still exists in such abundance as even now far to exceed the disposition and power of mankind to use it. Land as land, or land generally -- the natural element necessary to human life and production -- has no more value than air as air. But land in special, that is, land of a particular kind or in a particular locality, may have a value such as that which may attach to a particular wine-glass or a particular picture or statue; a value which unchecked by the possibility of production has no limit except the strength of the desire to possess it.
This attaching of value to land in special -- that is to say, land in particular localities with respect to population -- is not merely a most striking feature in the progress of modern civilization, but it is, as I shall hereafter show, a consequence of civilization, lying entirely within the natural order, and furnishing perhaps the most conclusive proof that the intent of that order is the equality of men. If left by just municipal laws to its natural development, the strength of the desire to use particular land can never become the desire to use land generally, and can never rise to the point of lowering wages by compelling workers to give for the use of land any part of what is the natural and just earnings of their labor. But where land is monopolized and the resort of population to unmonopolized land is shut out either by legal restriction or social conditions, then the desire to use particular land may be based upon the desire to use land generally, or land the natural element; and its strength, measured in the only way in which we can measure the strength of a desire, the willingness to undergo toil and trouble for its gratification, may become when pushed to full expression, nothing less than the strength of the desire for life itself, for land is the indispensable prerequisite to life, and "all that a man hath will he give for his life."
But in every case the value of land, consisting in the amount of exertion that can be commanded from those who desire to use it by those who have the power of giving or refusing consent to its use, is in the nature of an obligation to render service rather than in that of an exchange of service.
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