The classics versus the labor theory of value - Part V - J. B. Say
The classics versus the labor theory of value - Part V - J. B. Say
A cost-price theory is not the same than a labor theory of value
J. B. Say’s price theory includes a critical difference from the cost → price framework discussed in the previous posts (Adam Smith, David Ricardo, J. S. Mill, and Karl Marx). Let’s start with the following passage from A Treatise of Political Economy (TPE, p. 285, bolds added):
Valuation is vague and arbitrary, when there is no assurance that it will be generally acquiesced in by others. The owner of the house may reckon it worth 4500 dollars, while an indifferent person would value it at no more than 3500 dollars, and probably neither would be right. But if another, or a dozen other persons be willing to give for it a specific amount of other commodities, say 4000 dollars, or 4000 bushels of wheat, we may conclude the estimate to be a correct one. A house that will fetch 4000 dollars in the market is worth that sum. But if one bidder only will give that price, and he is unable to re-sell it without loss, he will give more than it is worth. The only fair criterion of the value of an object is, the quantity of other commodities at large, that can be readily obtained for it in exchange, whenever the owner wishes to part with it; and this, in all commercial dealings, and in all money valuations, is called the current price.
This combines a subjective approach to utility with an objective market price. It is reasonable that Say (or any classic, for that matter) would not separate utility from price as clearly as it later became the norm with the marginal revolution. Yet, this passage would not support the interpretation that, as a classic, Say had a cost (or labor) theory of value (utility).
Say immediately continues as follows (TPE, p. 285, bolds added):
What is it, then, that determines this current price of commodities?
The want or desire of any particular object depends upon the physical and moral constitution of man, the climate he may live in, the laws, customs, and manners of the particular society, in which he may happen to be enrolled. He has wants, both corporeal and intellectual, social and individual; wants for himself and for his family. His bear-skin and reindeer are articles of the first necessity to the Laplander; whilst their very name is unknown to the lazzarone of Naples, who cares for nothing in the world if he get but his meal of macaroni. In Europe, courts of justice are considered indispensable to the maintenance of social union; whereas the Indian of America, the Tartar, and the Arab, feel no want of such establishments. It is not our business here to inquire, wherein these wants originate; we must take them as existing data, and reason upon them accordingly.
Say is going against Ricardo by arguing that it is utility, not cost to production, that ultimately determines final prices. The following passage does not only show Say’s though, but it also shows that sometimes the classics use the word value with double meaning (price and utility) (TPE, p. 287, bolds added):
Thus it is obvious, that the current value of productive exertion is founded upon the value of an infinity of products compared one with another; that the value of products is not founded upon that of productive agency, as some authors have erroneously affirmed;[fn. to David Ricardo] and that since the desire of an object, and consequently its value, originates in its utility, it is the ability to create the utility wherein originates that desire, that gives value to productive agency; which value is proportionate to the importance of its co-operation in the business of production, and forms, in respect to each product individually, what is called, the cost of its production.
A significant contribution by Say is to distinguish between the owner (capitalist) and the manager (entrepreneur) of a business activity. With this distinction, Say side-steps the vicious cycle in the classic’s price theory. In Say’s theory, the speculator is willing to pay for factors of production as much as he speculates individuals value the goods he plans to sell to the market. Say is moving in that direction without developing a marginal theory of value. In a letter to Malthus, Say (pp. 13-14, bolds added) argues the following way:
To obtain a better view of the operations of industry, capital, and land, in the work of production, I personify them: and I discover that all these personages sell their services, which I call productive services, to a speculator, who may be either a trader, a manufacturer, or a farmer. This speculator having purchased the services of a landed estate, by paying a rent to the proprietor; the services of a capital, by paying interest to the capitalist; and the industrious services of workmen, factors, agents of whatever description, by the payment of salaries;—consumes all these productive services, annihilates them; and out of this consumption comes a production which has a value.
The value of this production, provided it be equal to the costs of production, that is to say, to the sum necessarily advanced for all the productive services, suffices to pay the profits of all those who have concurred directly or indirectly in this production. The profit of the speculator on whose account this operation has been effected, deducting the interest of the capital which he may have employed, represents the remuneration for his time and talents; that is to say, his own productive services employed in his own behalf. If his abilities be great, and his calculations well made, his profit will be considerable. If instead of talent he evinces inexperience in his affairs, he may gain nothing; he may very probably be a loser. All the risks attach to the speculator; but on the other hand he takes the advantage of all the favourable chances.
Consider now the following dialogue from his Catechism (bolds added):
- We have seen how utility is given to things: we have seen that utility gives them value; how is that value fixed, the amount of which constitutes riches?
- The utility which the things have acquired, causes them to be sought after, to be wanted; a price is offered for them; and when this price is sufficient to defray the expenses which their production would cost, they will be produced.
- Of what are the expenses of production composed?
- Of whatever must be paid to obtain the co-operation of the agents of production.
- What are the agents of production?
- They are the means indispensably necessary for the creation of a product: viz. human industry; the capital or value which serves for that purpose; the land and other natural agents which contribute to it.
- To whom do you give the name of producers?
- To all those who possess any of the agents of production. A man who exercises an industry, and the possessor of capital or of land are producers.
- Why do you call the possessors of capital or of land, producers, even when they do not labour themselves?
- Because the capital and the land, concurring in the formation of products, those who furnish these means of production contribute to it effectually themselves.
- What do you say of him who employs his own capital or cultivates his own land?
- That he contributes doubly: first, by his industry; afterwards as a capitalist or landholder: but although these functions are often filled by one person, it is convenient to separate them when they are to be studied, in order to distinguish properly what belongs to each species of productive service.
- What is meant by the term productive service?
- It is the service rendered by each of the agents of production: the service rendered by industry; the service rendered by capital, and the service rendered by natural agents.
- I see what is the cause of the demand and of the payment for productive services: what is it that limits this demand?
- The property of the consumers, or of those who desire to use the product. There would be no bounds to the demand for any useful thing if it was not to be paid for. There is no other effective demand than that which is accompanied by the offer of a price: and it is this price which in paying for the product pays at the same time for the services which were necessary to its production.
- What happens when the price of the product is not sufficient to pay the charges of production?
- Then the producers will not exchange their productive services for the price of the product; and the production does not take place.
- What happens when the price of the product is more than enough to pay the charges of production?
The producers of this kind of product become more numerous, and their competition will cause the price of the product to fall.
- Can one let out or lend productive services?
- Yes, when a man lets out his industry, the price which is paid for it is called wages. When he lets out his capital it is called interest. When he lets out his land, the tenant is called a farmer, and the price is called rent.
- What do you understand by letting out industry?
- It is to give for hire time, talent, and labour; to co-operate in the creation of a product of industry.
- Who is it that hires the labour of the one, the capital or the land of the others?
- It is an undertaker of industry who unites all these means of production, and who finds in the value of the products which result from them, the re-establishment of the entire capital he employs, and the value of the wages, the interest and the rent which he pays, as well as the profits belonging to himself.
- What happens when the value of the products he has created is not sufficient to pay for all that?
- He loses, if he has any thing to lose: or if he has nothing, those lose who have given him their confidence.
Conclusions
Say’s price theory has some similarities with the classics. In both cases, prices converge to the cost of production, and in both cases, there is no developed utility theory.
Yet, Say uses the distinction between capitalist and entrepreneur to explain (imprecisely and maybe inconsistent) how utility defines prices and prices are used by entrepreneurs to decide how they are willing to pay for the factors of production. Prices converge to the cost of production through market competition, which moves final prices down to eliminate extraordinary profits.
Next: Conclusion: The Marginal revolution and a step back