VALUE AND DISTRIBUTION- AN HISTORICAL, CRITICAL, AND CONSTRUCTIVE STUDY IN ECONOMIC THEORY ADAPTED FOR ADVANCED AND POST-GRADUATE WORK BY CHARLES WILLIAM MACFARLANE, PH.D. SECOND EDITION PHILADELPHIA J. B. LIPP1NCOTT COMPANY 1911 COPYRIGHT, 1898, BY J. B. LIPPINCOTT COMPANY. MAIN LIBRARY ELECTROTYPED AND PRINTED BY J. B. LIPPINCOTT COMPANY, PHILADELPHIA, U.S. A. THIS BOOK IS GRATEFULLY DEDICATED TO MY FRIEND AND FORMER PRECEPTOR DR. EUGEN VON PHILIPPOV1CH PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF VIENNA WHO, WHILE IN NO WAY RESPONSIBLE FOR THE OPINIONS HEREIN EXPRESSED, MAY YET FIND IN THEM SOME REFLEC- TION OF HIS OWN CATHOLIC VIEW OF ECONOMIC PHENOMENA last quarter Q the nineteenth century has 1 witnessed more than one noteworthy advance in economic theory. Some of this work has been embodied in permanent form, as in the publications of the Austrian school of economists ; much of it, however, is scattered through various magazines and journals, and its importance is unrecognized because no effort has as yet been made to bring it together as a coherent whole. One of the purposes of the present volume is to give more permanent form to this scattered work and to bring it, as well as that of the Austrian economists, into some sort of co- relation with the work of the so-called orthodox school of economists. Again, it will be found that in the endeavor to give coherence to the work of previous writers certain concepts or theories are de- veloped that have not been clearly stated elsewhere, concepts which more or less seriously modify the hitherto accepted views of value and distribution. The fact from which all studies of distribution must start is the price of commodities, and what we have to determine is how this price is divided among the several parties to the transaction. From this it follows that any adequate study of distribution must be prefaced by an examination of the phe- nomena of value and price. In keeping with this I have devoted the first part of the present volume to an attempt to answer the vexed question, What do we mean by value and price ? In the discussion of the problem of distribution, the question of the equity of the distribution has been consciously arid purposely avoided. The im- portance of this phase of the subject cannot well be exaggerated ; but the laws according to which the social product is distributed should first be clearly defined before we attempt to determine whether or not this distribution is equitable. Nothing is gained either by confounding the two problems or by in- verting the order of the inquiry. In the present volume I shall strictly confine myself to the first of these problems, or to a purely theoretic study of the laws under which the several shares in distri- bution are determined. In the earlier days of the present investigation I regarded it strictly as a monograph, and addressed myself to those who are familiar with the whole range of economic theory. As the work progressed, however, it seemed that by some modifications and additions it might be made available for the ordinary advanced student or for those who had only been over the ground covered by the usual text-book. With this larger audience in mind, I was persuaded to adopt the topical form for the presentation of the subject. The shifting from one audience to another during the progress of the work has re- sulted in an unevenness which could only be elimi- nated by a careful rewriting of the entire book. The pressure of other interests renders this practi- cally impossible. In the desire to secure a clear and coherent view of a rather wide range of economic phenomena, I have been compelled to ignore many details whose discussion, though interesting and important, might confound the reader, or at least obscure his view of the main lines of the argument. Again, it may be that a greater wealth of illustrations would have helped rather than hindered the argument. If so, it is an omission which the intelligent teacher can readily supply.

THE COST THEORY OP VALUE. 

I. THE EARLIER COST THEORY. 

1. Paradoxes of value explained by the Cost Theory 20 

2. Free goods eliminated from economic 

consideration 20 

3. Scarcity goods eliminated because of their rare occurrence ... 21 

4. The Law of Cost only applicable to freely reproducible goods . 21 

II. THE MARGINAL COST THEORY. 

5. The graphical representation of Marginal Cost Theory .... 22 

6. Ricardo's statement of the Marginal Cost Theory . . . 

CHAPTER II. 

CONDITIONS UNDER WHICH THE COST THEORY 

FAILS. 

 CASES IN WHICH THE CONTENTION OF THE AUSTRIANS 

FAILS. 

9. Marginal Cost Theory holds for Products of 
Better Land, etc. So far as the products of better 
land, greater skill, or more efficient machines are 
concerned, the case against the cost theory fails the 
moment that it is recognized that it is marginal cost 
that determines value. Ricardo in admitting that 
the products of the better land are exceptions to the 
law of cost lost sight of the fact that it is marginal 
cost that determines price. 

10. Marginal Cost Theory holds for Products of 
Fixed Capital. While the employment of machinery 
or other fixed capital tells very seriously against a 
labor theory of value, it does not necessarily tell 
against a cost theory of value if it is admitted that 
abstinence is a disutility or cost. Ricardo's state- 
ment of the case is certainly open to this interpreta- 
tion. He writes : " Mr. Mai thus seems to think that

it is part of my doctrine that the cost and the value 
of a thing should be the same ; it is, if he means by 
cost, cost of production including profits/'* 

III. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS 
MAY BE SUSTAINED. 

11. Patents, Tariffs, etc. In a more recent publi- 
cation f Bohm-Bawerk seems to have realized the 
weakness of his argument upon the two points just 
mentioned (goods produced by means of fixed capital 
or on the more fertile lands, etc.). In his restate- 
ment of the case against the cost theory he confines 
himself to those instances where the freedom of com- 
petition is interfered with by patents, tariff laws, etc. 
He writes : " There are at the present time very few 
products in which some patented machine or process 
or some import duty on raw or auxiliary material 
does not play a part." 

In other words, he contends, and rightly, that 
scarcity goods are the rule ; that competition at the 
margin is frequently interfered with by patent, im- 
port duty, etc. ; that non-competing groups among 
producers do exist ; that the marginal producer fre- 
quently secures a surplus above his cost, and, hence, 
that even marginal disutility must fail 

as the ultimate standard of value. 

Bohm-Bawerk does not 
state the case in just this way, but the most cursory 
examination of his article on " The Ultimate Stand- 
ard of Value" will show that in this later contribu- 
tion he ignores all portions of the product that are 
produced under specially advantageous circumstances, 
and confines himself to showing the frequent occur- 
rence of those monopoly or scarcity goods in the pro- 
duction of which the marginal producer secures a 
surplus over and above all cost, either in labor or 
abstinence. It is important that this point in the 
argument should be clearly apprehended, for in 
another chapter I shall endeavor to show that the 
marginal utility theory fails for much the same 
reason, to wit, that in many instances the marginal 
consumer secures a surplus. 

 Additional Exceptions. To this admitted list 
of exceptions Bohm-Bawerk 

adds all goods produced under the protection 

of a patent, coypright, or 
tariff, and then, as though this list of exceptions was 
not sufficient, Bohm-Bawerk calls attention to the 
fact that even those goods which are ordinarily re- 
garded as freely reproducible are only so for the 
brief interval during which their price is at the 
normal point. At all other times or during their 
fluctuations on either side of this normal point their 
price is determined under monopoly conditions.* 

* Much confusion has arisen in the use of the phrase free 
competition. Thus, it is held by many that free competition 
prevails wherever there is no legal or other external restric- 
tions on trade. It is manifest, however, that quite inde- 
pendent of such external restrictions there may be an inter- 
ference with the freedom of competition. It will hardly be 
claimed that a handicapped man is competing freely, or that 
the lame and the halt compete freely with those who are fleet 
of foot, or, again, that the ignorant and the weak compete 
freely with the cunning and the powerful. What, then, do 
we mean by free competition ? If we take the case of any 
pronounced monopoly good, we find that its price varies more 
or less widely from the normal price. From this we are led 
to conclude that any good whose price varies from the normal 
is a monopoly or scarcity good, whether the variation is 
large or small, or is maintained for a long or short interval. 
It follows from this that so-called freely reproducible goods 
are in reality scarcity goods, except during the interval that 
their price is at the normal point. Here, then, is the ultimate 
test of free competition, the existence of normal price, or 
the existence of those conditions in which marginal utility 
and marginal disutility are equal. Any departure from the 
normal or any failure in the equating of utility and disutility 
implies the existence of a marginal surplus; and the exist- 
ence of such a surplus indicates that there is some interference 
with the freedom of competition. .

The cause of the failure of the earlier advocates 
of the utility theory is now manifest. They did not 
even see the real difficulty that confronted them ; 
did not recognize the fact that in the consumption 
of a given commodity a number of different utilities 
are developed. It therefore never occurred to them 
to ask the interesting question, Which of these 
utilities is it that determines the value of the commodity ? .