Economics the Political Science

Part 2 of 3

Vic H. Blundell

CHAPTER 5 Henry George on Value

Henry George, like Professor Perry (1866) whom he quotes, (see Chapter 2) could see that no headway could be made in establishing a sound basis for the study of Political Economy until the words Wealth and Value had precise meanings marking them off clearly from other concepts. Henry George was of course equally concerned with the other basic terms in political economy, but the main confusions could be found in the words wealth and value.

Since the times of Adam Smith and his accredited successors, the lack of definiteness and consistency as to the nature of these terms had, said George, resulted in such confusion that the only proposition that economists appeared to agree upon was that wealth had value. But as to whether all that had value was wealth, there was a wide divergence of opinion. George, along with his predecessors (but more clearly) marks off the distinction between value in exchange and value in use. He avoids, in his exposition, the error of suggesting even the remotest relationship between the two.

Adam Smith, while making the distinction clear, blurred it in the examples he gave, and John Stuart Mill, in attempting to correct Smith, was guilty of the same error himself (see Chapter 3).

While it is true, says George, that the great majority of things have both value in use and valuein exchange, the two qualities have absolutely no connection with each other. The two qualities of use value and exchange value are as essentially different and unrelated as are weight and colour. Value in the economic sense of value in exchange, says George, can never really be intrinsic. It refers not to any property of the thing itself, but to the toil and trouble that men will undergo to acquire possession of it, or the amount of other things costing toil and trouble that they will give for it.

Henry George then takes up the concept of "the value of labour", labour being included by some economists in a category of considered values:

"What the reputed economists since Smith have called 'the value of labour' is in reality the value of the products of labour paid to labourers in wages."

Thus the ability to labour is not an exchangeable thing and cannot come into any category of values; it resides in the individual body and cannot be taken out of that body and transferred to another.

If you want another man's labour, what you really want is what that labour will produce. You cannot take a man's labour away, wrap it up and store it until you need it. Even if you "own" a slave you cannot really own his labour power -- it is not transferable to you -- you can only own the results of his exertion.

Since value does not exist in labour power, says George, but does appear where that power take tangible form through exertion, the fundamental relation of value must be a relation to exertion and this relation is a negative one not a positive one.

Henry George explains:

"I exchange gold for silver, let us say. In this I give something positively and receive something positively. I get rid of gold and acquire silver. The other party of the exchange gets rid of silver and acquires gold. But when I exchange gold for exertion or toil, do I get rid of gold and acquire toil, and does he get rid of toil and acquire gold? Clearly not. No one wants exertion or toil; all of us want to get rid of it. It is not exertion in a positive sense which is the object of the exchange, but exertion in a negative sense; not exertion given or imposed but exertion avoided or saved; or, to use the algebraic form, the relation of the quality of value is not to plus-exertion, but to minus-exertion. Value, in short, is equivalent to the amount of toil which the possession of that thing will save the possessor, or enable him, to use Adam Smith's phrase, 'to impose upon other people' through exchange. Thus, it is not exchangeability that gives value; but value that gives exchangeability."

In short, says Henry George, contrary to the current theory that it is when and because a thing becomes exchangeable that it becomes valuable, it is when and because a thing becomes valuable that it becomes exchangeable. It is not the toil and trouble which a thing has cost that gives it value. It is the toil and trouble, or its equivalent, that others are now willing, directly or indirectly, to relieve its owner of in order to possess that thing.

Whether a diamond is merely picked up or obtained after years of hard toil has nothing whatever to do with its value. That depends upon what others are willing to give for it. That which may be had with out toil and trouble, continues George, has no value. There is no measure of value among men save competition or the higgling of the market.

Thus George resolves his theory basically into a curent or future cost-of-production theory: "We speak properly 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 what the thing itself has cost, but what such a thing would cost now."

Following on Smith, Ricardo and Marx and various other economists of note, George ruled out use value as having any place in political economy. Further, he clarified the relation of labour to exchange value, rebuilding the labour theory of value as it applied to man's products.

But man's products are not the only things that have exchange value. To what then, are these other things related? Or to put it another way, what is their source of value?

It is here that Henry George divides value in exchange into value arising from production and value arising from obligation, a division of the greatest significance and one ignored by all other economists.

This opens up a new area of the analysis of value and it is appropriate at this point to see how political influences have been instrumental in the virtual abandonment of all labour theories of value and their replacement by the marginal utility theory.

Some interesting observations on political influences in economics are given by Edwin R. Seligman[13] in an article in the Economic Journal. Among the subjects covered by these "Neglected British Economists" are: the opposition to the labour theory of exchange; the broadening of the rent concept; and the theory of marginal utility as a basis of value.

Seligman says:

"But, it will be asked, how does it happen that all these authors have been so largely overlooked and neglected? For very much the same reason that Cournot was passed over in France, and Gossen in Germany. Their views were not in accord with those of the dominant school. The practical issues of the time were so momentous that the economic science which taught a doctrine in harmony with these practical demands was accepted as infallible ... but when the demands of the dominant social and political classes were reinforced by the teachings of the scientists, economics leapt with a bound into the position, not only of a popular, but almost a sacrosanct science... The reputation of the great names was such that any deviation from accepted doctrine was banned as unorthodox."

It must be remembered of course that orthodoxy is not always wrong! Whether we would agree with criticisms of so-called orthodox economic thinking or not, many disputes are based on political rather than economic thinking. We must not only beware of being misled by political economics, we must also guard against being guilty of its ourselves. All theories must stand the test of reasoning and accuracy of facts.

Seligman in his article examines the economics of Samuel Read (1829) and says:

"Read's opposition to Ricardo is shown in many ways. He criticises unreservedly the statement that labour is the sole cause of wealth. He considers this 'a most mischievous and fundamental error', mischievous largely because of the conclusions that have to be drawn from the principle by the 'labour writers'."

But Seligman himself is not above pinning a socialist tag on Ricardo for he continues:

"Read is the first thinker clearly to perceive that through this theory of value the Ricardian economics leads logically to Ricardian socialism."

There can be no doubt that the rejection of the labour theory of value was politically convenient, and those who rejected it were not slow themselves in accusing its supporters of adherence to it for political reasons. In A Textbook of Economics J.L. Hanson, to whom we have already referred, says:

"It is not surprising that the labour theory of value was eagerly seized upon by writers seeking support for pre-conceived political views. Karl Marx and his followers reiterated the view that the value of a commodity depended on the amount of labour required for its production in order to be able to assert that the worker was entitled to the entire fruit of his labour."

Not content to dismiss the association of labour with value, Hanson goes on to say:

"The cost-of-production theory of value is merely a refinement of the labour theory of value."

Note the pejorative use of the word 'merely'.

Despite certain weaknesses in the labour theory of value as expounded by early economists, there was no reason for damning it completely and substituting the highly dubious marginal utility theory of value. Henry George's development of the labour theory of value and his original contribution to the value theory is ignored. Henry George was not a socialist but perhaps he was regarded as something more dangerous.

CHAPTER 6 The Marginal Utility Theory of Value

Although often spoken of as the product of the Austrian economists, the marginal utility theory of value is apparently English in origin, the Rev. W.F. Lloyd having advanced the basis of the theory in a little known lecture delivered at the University of Oxford in 1833 and published in 1834. William Stanley Jevons (1835-1852) is considered to have arrived at the theory independently of either Lloyd or the so-called Austrian school. While a number of other economists have contributed to the theory, adding their own refinements and ideas, its essence is this:

Use value or utility is the key to value -- not labour or costs of production. Value has its origin in the mind of a person seeking to assess the worth of a useful article. This value finds its level at the margin, the margin being represented by the utility to be found in the last portion of successive portions having diminishing utility because satisfaction decreases with every available additional portion. Expressed another way, the margin is the point at which the least important use is to be derived from an article subject to the amount available.

Finally, this value is reflected back from the consumer goods to the agents which have produced them, so that value determines costs, not the other way round. A common illustration of the process by which the marginal utility of an article is finally arrived at is as follows:

A hungry man will value highly a loaf of bread. He will value a second loaf, but less than the first. A third loaf will give even less satisfaction to him, and so on until he reaches a point where the cost of acquiring a further loaf gives him more 'pain' than 'pleasure' in eating the loaf. The last loaf he buys is the marginal loaf and this fixes the limit of his demand.

Although bread is not actually bought in this fashion, the price getting lower each time he buys another loaf, it is the marginal loaf that determines the price of all loaves.

This calculation on the part of the buyer is applied to all the goods he buys. But since most, if not all, people cannot buy everything they want, the consumer apportions his spending in accordance with the relative marginal utility to himself of each article.

The theory covers capital goods as well as consumer goods - the buyer or exchanger weighing the satisfaction he gets from what he buys with whatever he parts with. It is the sum of all these influences which finally determines price in the market.

Both Jevons and Leon Walras were mathematicians and expressed their theories of marginal utility in complex (to laymen at least) mathematical form.

Summarised below are just some of the aspects of marginal utility (other than those already outlined) expounded by the Austrian writers, although these ideas are not necessarily exclusive to them.


Auguste Walras (1801-1866)

If utility explains value, then where there is utility there also is value. But water and air have utility but no value. This difficulty is overcome by bringing in scarcity -- only scarce things can be considered as wealth, or those things in limited supply. Whatever value such things have is due to this limitation.


Hermann H. Gossen (1810-1858)

The satisfaction or utility that any commodity gives is modified by its cost of production. So there is a point where satisfaction and cost of production equate; utility and disutility are balanced. When there exists a choice between several enjoyments, but not time to enjoy them all, each should be enjoyed to the point where an alternative enjoyment gives most satisfaction. At the breaking-off point the two separate enjoyments equate in satisfaction. Gossen's expositions were accompanied by mathematical symbols or numbers and his book is described by Alexander Gray (Development of Economic Doctrine) as "repellently mathematical and chaotic". It was "one of those books that are made not to be read" (and it rarely was).


Karl Menger (1840-1921)

Value is the utility possessed by goods, exchange is merely external evidence of what is in the mind of the evaluator. Value is entirely subjective. Menger ignored entirely objective considerations of value. Goods are classified as being of the first order, second order, third order, etc., according, it would appear, to the order in which they come in the chain of production. Bread would be of the first order as it can immediately satisfy a desire; flour is of the second order; the flour mill of the third order and so on, presumably a series of orders right back to the plough in the field. If goods went out of fashion or were not required, then the goods of the higher orders previously used in making them would not be considered any further as goods -- unless they could be used in any other capacity. Reversely, pens would cease to be goods if ink were unobtainable, etc. There are more elaborations and refinements to Menger's theory which weary the mind.


Friedrich von Wiesen (1851-1926)

Value is the basis of all economic theory. The function of the state is the maximising of values. Cost of production is the payment necessary to justify use of particular productive resources as being more desirable than some alternative use and it is marginal utility that decides that. In the process of working out his theory, Wiesen appears to be attempting a reconciliation of it with the cost-of-production theory of value.


Eugen von Bohn-Bawerk (1851-1914)

This contributor to the marginal utility school followed more or less the same lines as the others. He did however develop the theory of what he calls "marginal pairs". The determination of price by the so-called "marginal pairs" is novel only in its exposition and setting. Otherwise, it might be described as a "blinding glimpse of the obvious". No man will pay more and no man will accept less than he thinks an object is worth. The price will thus fall between these limits if an exchange takes place. Further, in an auction, the buyer will be the person who offers most and he must outbid the limit set by the bidder who, next to him, hangs on longest. Bohn-Bawerk then illustrates his "marginal pairs". There are ten people who want to buy a horse in the market and eight people who want to sell one. All horses are alike. Each person has his own idea of what a horse is worth. Then there follows in the illustration a chart showing a variety of valuations ranging from £10 to £30.

Although in isolation the price will fall between £10 and £30, the conflicting estimates of value between buyers and sellers, buyers and buyers, and sellers and sellers, result in the final price being arrived at by reference to the particular pair of marginal buyers and sellers whose private estimates come closest to each other.

It would appear that the participants in this highly improbable situation are not consciously aware of Bohn-Bawerk's theory. However, they put an exchange value on their own subjective estimate -- and leave the rest to the market!

(What of other markets elsewhere, the coincidence of horses having the same value and the wide range of subjective estimates of value?)

Some interesting questions arise from the whole theory of marginal utility as it is applied to market value and therefore price.

We have already given George Soule's assessment in his Ideas of the Great Economists (1952) in Chapter 3 in which he asks "How relevant is it to the real world? What can you do with a theory like this?" And he finishes his comment by shrewdly observing that the theory is little more than an impressive elaboration of Adam Smith's "invisible hand", all forces, interests, incentives, preferences, costs, etc., coming together unconsciously in the market place. In short, no man will pay more for an article than he is obliged to - despite his subjective estimates of worth. And of course the same principle applies to the seller, the other way round.

Peter F. Drucker, to whom reference has already been made, says in his article Towards the Next Economics (1980) "... But as an economic world view, or as an economic system, the earlier theories - such as the disciplined orthodoxy of the Austrian school of economics, which was popular in the early 1900's -- will not do."

Drucker later takes the usual attitude of Marx's critics towards Marx's labour theory of value. "Karl Marx and the Marxists refused to abandon the Labour Theory of Value. This then forced them to spurn economic analysis" (presumably of the Austrian variety).

This seems a little unfair on Marx for, however faulty his initial economic reasoning in his labour theory, this does not dispose of the labour theory per se.

Drucker himself obliquely supports a labour theory of value. He says:

"The next economics should again have a theory of value. It may base itself on the postulate that productivity -- that is knowledge applied to resources through human work - is the source of all economic value.

"Productivity as the source of value is both a priori and operational, and this satisfies the specifications for a first principle."

Does this mean that we are to have a labour theory of value in new clothes, disguised, as it were, to make it acceptable to non-Marxists?

Keynes was purported to have been asked why his General Theory contained no theory of value. To which he replied, "Because the only available theory of value is the labour theory and it is totally discredited."

Drucker comments:

"None of the great non-Marxist economists of the last hundred years, Alfred Marshall, Joseph Schumpeter, or John Maynard Keynes, was in turn comfortable with an economics that lacked a theory of value altogether. But, as the Keynes anecdote illustrates, they saw no alternative."

It is interesting to observe that, if Ricardo's elimination of rent as a factor of price and his classification of capital as stored-up labour is accepted, then one has a cost-of-production theory of value (all other overheads being classified as forms of labour). Does this differ from Drucker's final words?

"Productivity as the source of all economic value would serve ... Productivity is both man and things, both structural and analytical. A productivity-based economics might thus become what all the great ecomomists have striven for …"

Henry George (from The Science of Political Economy)

The more ingenious and elaborate the attempts that have been made to give something like solid support and logical coherency to the prevailing theory that value is really nothing more than exchangeability only the more clearly show its utter inadequacy. Thus the latest and most elaborate of these attempts, that of the Austrian or psychological school, which derives value from what it calls "marginal utilities", is an attempt to emulate in economic reasoning the stories told of East Indian jugglers who, throwing a ball of thread into the air, pull up by it a stouter thread, then a rope, and finally a ladder, on which they ascend until out of sight, and then -- come down again!

For whoever will work his way through the perplexities of their reasoning will find the adherents of this school derive the value of pig-iron, for instance, or even of iron ore in the vein, from the willingness of consumers to pay for higher and more elaborate products into the production of which iron enters, deriving that willingness from a mental estimate on the part of consumers of the utility of these products to them. Thus, as coolly as such stories of Indian jugglers ignore the law of gravitation, do they ignore that law which to political economy is what gravitation is to physics, the law that men seek to satisfy their desires with the least exertion - a law from which proceeds the universal fact that as a matter of exchange no one will pay more for anything than he is obliged to.

These elaborate attempts to link value on utility, and the utility on individual will or perception, in order to find a support for the idea of value, only show that there is no resting-place in the supposition that value proceeds from exchangeability, and can only be relative to other values.

Thus, that value depends on value, and springs from value and can only be measured by value -- that is, by the selection of some particular article having value, from which relatively and empirically the value of other articles may be measured -- seems to us perfectly clear, and we accept the doctrine that there can be no general increase or decrease in values, as if it were but another statement of the axiom that a whole is equal to the sum of its parts, and consequently that all those parts can never be increased or diminished at the same time.

The habitual use of money as a common measure of value is apt to prevent any realisation of the fact that we are reasoning in a circle.

I think I have correctly described the line of reasoning which makes the derivation of value from exchangeability so plausible. I do not of course mean to say that labour is never taken into account. It is often expressly mentioned and always implied to be one of the valuable things. But the weight of the examination is, I think, always thrown upon such things as I have named - things resulting from the exertion of labour; while labour itself is passed over lightly as one of the "other valuable things", and attention never rests upon it.

Imagine a ship containing such merchandise as would tempt the fancy of a primitive people to come in sight of an island and cast anchor. Would exchange between the ship's people and the islanders be impossible because of the lack on the part of the islanders of anything having value? By no means. If nothing else would suffice, the offer of bright cloths and looking-glasses would surely tempt the Eves, if it did not the Adams; and though never exerted before, the islanders would exert their power of labour to fill the ship with fruit or nuts or shells, or whatever else of the natural products of the island their exertion could procure, or to pull her on the beach so that she might be calked, or to fill and roll her water-casks. There was nothing of value in the island before the ship came. Yet the exchanges that would thus take place would be the giving of value in return for value; for on the part of the islanders value that did not exist before would be brought into existence by the conversion of their labour power through exertion into wealth or services. There would thus be what so many of our economists say is impossible, a general increase in values. Even if we suppose the islanders to relapse into their former easy way of living when their visitors sailed off, there would still remain on the island, where there was no value before, some things having value, and this value would attach to these things until they were destroyed or so long as such desire as would prompt any of the islanders to render labour in exchange for what remained.

Nothing, indeed, can be clearer than this. Even in the richest of civilised countries, the ultimate purchasers of the greatest mass of valuable things, are not those who have in store valuable things that they can give in exchange. The great body of the people in any civilised society consists of what we call the working-class, who live almost literally from hand to mouth, and who having in their possession at any one time little, or practically nothing, of value. Yet they are the purchasers of the great body of articles of value. Where does the value which they thus exchange for value which is already in concrete form come from? Does it not come from the conversion of their labour power, through exertion, into value? Is not the exchange which is constantly going on, the exchange of the potentiality of labour, or raw labour power for labour power that by that transfer has already been converted into value? In common phrase, they exchange their labour for commodities.

How does this fact consort with the theory that value is a relation of exchangeability between valuable things, and that there can be no general increase or decrease of values? Does it not utterly invalidate the theory? Must there not be a constant increase of value to make up for the constant destruction of value, and in spite of it, to permit such a growth of aggregate values as we are going on in progressive countries?

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 anyone 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 proposed to abolish competition.

CHAPTER 7 Value: A Summary and the Two Sources of Value

We are now able to review the value controversy and decide whether we can support a particular theory or reach an eclectic conclusion or evolve our own.

Before endeavouring to establish what determines market value, let us first establish what does not.

We have seen that Smith, Ricardo, Mill, Marx and George rejected the subjective sense of value expressed in such terms as "use value", "utility", "usefulness", etc., as having no relevance in political economy.

Exchange, the lifeblood of any community, springs from the division of labour without which no community could for long enjoy more than a primitive existence. As the division of labour and thus specialisation involves exchange, it is exchange value with which political economy is concerned. We have now two questions to answer:

(1) What makes an article valuable?

(2) What determines what that value is?

Confining ourselves to man's products for the moment, as indeed did the classical economists and those who followed, we establish that, although a labour theory provides the answer to (1) it fails to answer (2) since, by the time products have reached the market (which is not necessarily immediately they have been made), many of which had the same amount of labour expended on them, have different values in exchange. The only possible answer to (2) -- what is it that determines value? -- is the market place itself. If we still wish to relate market value to labour, then the only way this can be done is to follow Henry George and observe that it is not the exertion, toil or trouble that goes into an article that determines its value but the toil and trouble that a person will undergo in order to possess it, or conversely the toil and trouble that it saves a man by possessing it. The answer is still in the market place. The subjective estimates of buyers may still be present in bargaining but this will determine not value but only whether a person is willing to buy or sell. Buyers or sellers cannot force the market to adopt their own estimates of value.

Now let us go back a little to the point made by the classical economists that capital is but stored-up labour. The point is well made that a finished article contains the labour of the men who made the capital as well as that of those who used the capital as tools. But this is a philosophical observation not an economic one. The study of political economy is the study of the production of wealth and its distribution among the separate factors engaged in production, of which capital is one. A physicist would agree that ice, water and steam are really only different forms of H20, but would insist that by the very nature of his studies, he must recognise their differences and treat them as different substances. Thus in the science of political economy, capital stands as an independent factor of production and an independent contributor to the finished product.

The question of whether land is a contributor to the value of an article was another controversial point in the discussions of the classical economists. That land is a factor in production, and thus a contributor to the value of the final product, appears to be self-evident if we are thinking of the physical properties of land and, philosophically, of the use value of land. However, in economics we cannot regard land as contributing to the exchange value of a commodity. Land above the margin that is used in production produces a surplus which is accounted for by rent and does not enter into unit values.

Imagine an abundance of land of equal fertility which could be had without the payment of rent. What will determine the exchange value of products made from that land? Is it not the case that the land, being basic to all the activities of labour, would be ignored in calculating costs of production? Men meeting to exchange their products would barter on the basis of labour for labour and however this was modified by the free market, they would do so without reference to the land used, for this would be a factor that would give equal advantage to all producers.

Thus we may conclude that, although the value of the final product is modified by competition, temporary monopoly or scarcity, land, in strictly economic terms, would not be a factor that entered into the value of the final product. Our example equates with what takes place on marginal land, and to those paying rent, whether much or little; they are effectively working on marginal land. It is this approach that leads us to agree with Ricardo that rent does not enter into the value of commodities sold on the market. This leaves only labour and capital (and all other "overheads" involved which are essentially labour and capital) to contribute to exchange value which finds it ultimate level in the market and these two factors are normally expressed as costs of production.

While the vagaries of the market must always prevail, it is nonetheless interesting to observe that when there is a constant stream of goods flowing from manufacturer to consumer, costs of production as defined are reflected pretty accurately in the shelf values of goods offered for sale. Slow selling goods are not necessarily marked down in price but rather the quantity offered for sale reduced. But it requires little to upset the basic relationship between cost price and selling price as any businessman will testify -- the market reigns supreme.

In this brief survey of the ideas behind the labour theory of value, we arrive at Henry George's theory that value is related negatively to labour. This theory has a double significance. First it overcomes the problem faced by the classical economists of reconciling original labour costs with ultimate market values, and secondly it rectifies the omission from the labour theory of those values that arise from obligation (they could not be accommodated without being represented as a form of labour).

Values arising from obligation, of which land is the dominant one, do not have labour embodied in them. But George's theory requires not that labour be embodied in products but that labour can be commanded by products. The possession of land can command the labour of others directly or indirectly. Land has value for this reason.

Thus George's theory of value is the only logical one. But why has it not been recognised even to this day? It is because a labour theory of value has become politically unacceptable and its replacement by the subjective theory of marginal utility has effectively barred the way to further investigation that would have lead, first, to a logical explanation of value, and then to water-tight definition of wealth confined to values that arise from production only.

But this would have invited a separate ethical judgment as to the rights of property in the products of man and right of property in land. Is there any other explanation for the failure to define wealth right up to this day?

THE TWO SOURCES OF VALUE (Abridged from Henry George's The Science of Political Economy)

It is usually, if not invariably, assumed in all standard economic works that the conversion of labour-power through exertion into services or wealth is the only way in which value originates. Yet what we have already seen is enough to show us that this cannot be so.

It is not the exertion that a thing has cost, in past time, that gives it value, but the exertion that its possession will in future time dispense with, for even the immediate is in strictness future. Thus value may be created by mere agreement to render exertion, or by the imposition of such obstacles to the satisfaction of desire as will necessitate a greater exertion for the attainment of the satisfaction. In the same way, the value of some things may be increased, or sometime perhaps reduced, without the production of real wealth; or even by the destruction of real wealth.

A government or joint stock company may issue obligations in the form of bonds or stock, which may at once assume a value dependent as in the case of an individual upon the strength of the belief that the obligation will be faithfully redeemed.

There is in all this no increase of wealth; but there is a creation of value -- a value arising out of obligation and dependent entirely upon expectation but still a value -- an exchangeable quantity, the possession of which could command through exchange other valuable things.

Whether an individual has the power of commanding exertion from others because he has added to the general stock, or simply because he holds the power of demanding exertion from others makes no difference to him or to them. In either case he gets and they give.

But in political economy, which is the economy of society, there is a great difference. Value of one kind - the value which constitutes an addition to the common stock -- involves an addition to the wealth of the community, and thus is wealth in the politico-economic sense. Value of the other kind -- the value which consists merely of the power of one individual to demand exertion from another individual -- adds nothing to the common stock; all it effects is a new distribution of what already exists in the common stock, and in the politico-economic sense, is not wealth at all.

In the development of political economy from Adam Smith, these two totally different kinds of values have been confused in one word. Smith started by recognising as value that which added to wealth, but he afterwards, and with seeming carelessness included as value that which adds to the wealth of the individual, but adds nothing whatever to the wealth of the community. This consorted with the common idea that the wealth of a community is the sum of the wealth of individuals, and enabled all that has value to the individual to be included as politico-economic wealth.

But it was impossible to treat as one and the same quality a value that added to the wealth of the community and a value that did not, and yet to make an economic definition of wealth. This therefore has been the point on which the political economy founded by Adam Smith has been constantly at sea. It could not be political economy until it had defined wealth, and it could not define wealth until it had recognised this distinction between two kinds of value.

This difficulty might have been avoided in the beginning by giving to the two kinds of value separate names, but the word value has so long been used for both, that the best a science of political economy can do now is to distinguish between value of the one kind and value of the other kind.

This however it is necessary to attempt. The best thing I can do is to distinguish value, not as one, but of two kinds.

By a clear distinction, the various ways in which value may originate, embrace (1) the value which comes from the exertion of labour in such a way as to save future exertion in obtaining the satisfaction of desire; and, (2) the value which comes from the acquisition of power on the part of some men to command or compel exertion on the part of others.

Value arising in the first mode may be distinguished as "value from production", and value arising in the second mode may be distinguished as "value from obligation" -- for the word obligation is the best word I can think of to express everything which may require the rendering of exertion without the return of exertion.

But while making this distinction it must be remembered that the essential character of value is always that of equivalence to exertion in the satisfaction of desire. This is not necessarily the toil and trouble which the purchaser will agree in his own person to undergo, but the toil and trouble which he had the power to command or to induce others to undergo.

Among the valuable assets of the large land-holders of feudal times was the right of holding markets, succeeding in certain instances to the property of tenants; or of grinding grain, of coining money, of collecting floatwood, etc. The values of these were clearly "values from obligation". But that they have passed insensibly into the single right of exacting a rent for the use of land is proof that the value of this right -- the right, as it is called, of private ownership of land -- is in reality a "value from obligation".

The most important of additions to value which do not increase wealth are unquestionably to be found in land value, the form of value from obligation which in the progress of mankind to civilisation tends most rapidly to increase. Land value is not part of wealth in the economic sense. It can have, so far as the individual is concerned, none of the moral sanctions of property. It rightfully belongs to no individual or individuals but to the community itself.

And this is the reason that neither by Adam Smith nor by those who succeeded him has the true character and dual nature of value been realised. For to recognise that is to come to the conclusion of the Physiocrats that, in the economic sense, land is not wealth. And this involves a revolution, albeit to society a beneficent revolution.

Whatever increases the obstacles, natural or artificial, to the gratification of desire on the part of the ultimate users or consumers of things, thus compelling them to expend more exertion or undergo more toil and trouble to obtain those things, increases their value; whatever lessens the exertion that must be expended or the toil and trouble that must be undergone, decreases value. Thus, wars, tariffs, pirates, public insecurity, monopolies, taxes and restrictions of all kinds, which render more difficult the satisfaction of the desire for certain things, increase their value, and discoveries, inventions and improvements which lessen the exertion required for bringing things to the satisfaction of desire, lessen their value.

Here we may see at once the clear solution of a question which has perplexed and still perplexes many minds -- the question whether the artificial increase of values by governmental restriction is or is not in the interest of the community. Scarcity may be at times to the relative interests of the few, but abundance is always to the general interest.

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