In contrast to the Smith-Ricardo mainstream of Smithians who set forth the labour theory (or at very best, the cost-of-production theory) of value, J.B. Say firmly re-established the scholastic-continental-French utility analysis. It is utility and utility alone that gives rise to exchange value, and Say settled the value paradox to his own satisfaction by disposing of ‘use-value’ altogether as not being relevant to the world of exchange. Not only that: Say adopted a subjective value theory, since he believed that value rests on acts of valuation by the consumers. In addition to being subjective, these degrees of valuation are relative, since the value of one good or service is always being compared against another. These values, or utilities, depend on all manner of wants, desires and knowledge on the part of individuals: ‘upon the moral and physical nature of man, the climate he lives in, and on the manner and legislation of his country. He has wants of the body, wants of the mind, and of the soul; wants for himself, others for his family, others still as a member of society’. Political economy, Say sagely pointed out, must take these values and preferences of people as givens, ‘as one of the data of its reasonings; leaving to the moralist and the practical man, the several duties of enlightening and of guiding their fellow-creatures, as well in this, as in other particulars of human conduct’.
At some points, Say went up to the edge of discovering the marginal utility concept, without ever quite doing so. Thus he saw that relative valuations of goods depends on ‘degrees of estimation in the mind of the valuer’. But since he did not discover the marginal concept, he could not fully solve the value paradox. In fact, he did far less well at solving it than his continental predecessors. And so Say simply dismissed use-value and the value paradox altogether, and decided to concentrate on exchange-value. As a result, however, he could no more than Smith and his British successors, devote much energy to analysing consumption or consumer behaviour.
But whereas Say simply discarded use-value, Ricardo made the value paradox and the unfortunate split between use- and exchange-value the key to his value theory. For Ricardo, iron was worth less than gold because the labour cost of digging and producing gold was greater than the labour cost of producing iron. Ricardo admitted that utility ‘is certainly the foundation of value’, but this was apparently of only remote interest, since the ‘degree of utility’ can never be the measure by which to estimate its value. All too true, but Ricardo failed to see the absurdity of looking for such a measure in the first place. His second absurdity, as we shall see further below, was in thinking that labour cost provided such a ‘true’ and invariable measure of value. As Say wrote in his annotations on the French translation of Ricardo's Principles, ‘an invariable measure of value is a pure chimera’.
Smith, and still more Ricardo, were pushed into their labour cost theory by concentrating on the long-run ‘natural’ price of products. Say's analysis was aided greatly by his realistic concentration on the explanation of real market price.
Costs, of course, are intimately related to the pricing of factors of production. One question that cost-value theorists have difficulty answering is if, indeed, costs are determining, where do they come from? Are they mandated by divine revelation?
One of the anomalies of Say's discussion is that, even though a subjective value and utility theorist, he uncomprehendingly rejected the insight of Genovesi and of his own ideologue forbear Condillac, that people exchange one thing for another because they value the thing they acquire more than what they give up – so that exchange always benefits both parties. And in denying this mutual gain, Say is inconsistent with much of his own position on utility.
In spurning Condillac, Say is being not only ungenerous but almost wilfully obtuse. First he notes that Condillac ‘maintains that commodities, which are worth less to the seller than to the buyer, increase in value from the mere act of transfer from one hand to another’. But Condillac insists, for example, that ‘equal value is really given for equal value’, so that when Spanish wine is bought in Paris, ‘the money paid by the buyer and the wine he receives are worth one another’ – to which we might ask, to whom’? He then admits that the selfsame wine is worth more in Paris than it had been when grown in Spain, but he insists that the increase in the value of the wine took place not ‘at the moment of handing over the wine to the consumer, but comes from the transport’.
But St Clair trenchantly takes Say to task: ‘In reality, the transfer to the consumer is the essence of the transaction; the long transport is subsidiary to this purpose; the change of locality is merely a means to this end, and would not have been necessary if consumers willing to buy the same quantity and pay the same price could have been found on the spot’.
Say continues obstinately to assault Condillac's insight: “The seller is not a professional cheat, nor the buyer a dupe, and Condillac is not justified in saying that if the values exchanged were always equal neither party would gain anything by exchange’. But in reality, of course, Condillac was perfectly right; why should anyone bother exchanging X for Y of equal value?
St Clair reacts brilliantly in exasperation:
Lord, how these economists do misunderstand one another! Condillac does not suggest that the wine merchant is a rogue and the customer a fool; he does not suggest that the merchant robs either the consumer or the producer; his doctrine is that products increase in utility and value by being transferred from the producer to the consumer, and that both parties benefit by the intervention of the merchant who brings about the exchange. To the producer the merchant is a consumer-finder; to the consumer he is a commodity-finder; with the merchant as medium of exchange, the producer gets a better price for his produce and the buyer better value for his money.12
One of Say's great contributions was to apply utility theory to the theory of distribution, in brief by discovering the productivity theory of the pricing, and hence the income, accruing to factors of production. In the first place, Say pointed out that, in contrast to Smith, all labour, not just labour embodied in material objects, is ‘productive’. Indeed, Say brilliantly pointed out that all the services of factors of production, whether they be land, labour, or capital, are immaterial, even though they might result in a material product. Factors, in short, provide immaterial services in the process of production. That process, as Say pointed out clearly for the first time, was not the ‘creation’ of material products. Man cannot create matter; he can only transform it into different shapes and moulds, in order to satisfy his wants more fully. Production is this very transformation process. In the sense of such transformation, all labour is productive ‘because it concurs in the creation of a product’, or, metaphorically, in the creation of ‘utilities’. If, as can happen, labour has been expended to no ultimate benefit, then the result is error: ‘folly or waste in the person bestowing’ the labour. One example of unproductive labour is crime, not only a non- but an anti-market activity: there ‘trouble [effort] is directed to the stripping another person of the goods in his possession by means of fraud or violence...[it] degenerates to absolute criminality and there results no production, but only a forcible transfer of wealth from one individual to another’.
J.B. Say also put clearly for the first time the insight that wants are unlimited. Wrote Say: ‘there is no object of pleasure or utility, whereof the mere desire may not be unlimited, since every body is always ready to receive whatever can contribute to his benefit or gratification’. Say denounced the proto-Galbraithian position of the British mercantilist Sir James Steuart, in extolling an ascetic reduction of wants as a solution to desires outpacing production. Say heaps proper scorn on this doctrine: ‘Upon this principle, it would be the very acme of perfection to produce nothing and to have no wants, that is to say, to annihilate human existence.’
Unfortunately, Say proceeds to fall prey to this very Galbraithian trap by attacking luxury and ostentation, and by maintaining that ‘real wants’ are more important to the community than ‘artificial wants’. Say hastens to add, however, that government intervention is not the proper road to achieving proper affluence.
On the valuing or pricing of the services of the factors (or as Say would put it, ‘agents’) of production, Say adopted the proto-Austrian in direct contrast to the Smith-Ricardo tradition. For since subjective human desire for any object creates its value, and reflects its utility, productive factors receive value because of their ‘ability to create the utility wherein originates that desire’. Ricardo, writes Say, believes ‘that the value of products is founded upon that of productive agency’, i.e. that the value of products is determined by the value of their productive factors, or their cost of production. In contrast, Say declares, ‘the current value of productive exertion is founded upon the value of an infinity of products compared one with another... which value is proportionate to the importance of its cooperation in the business of production...’. In contrast to consumer goods, Say points out, the demand for productive factors does not originate in immediate enjoyment, but rather in the ‘value of the product they are capable of raising, which itself originates in the utility of that product, or the satisfaction it may be capable of affording’. In short, the value of factors is determined by the value of their products, which in turn is conferred by consumer valuations and demands. The causal chain, for Say as for the later Austrians, is from consumer valuations to consumer goods prices to the pricing of productive factors (i.e. to costs of production). In contrast, the Smithian, and especially the Ricardian, causal chain is from cost of production, and especially labour cost, to consumer goods prices. By speaking of the ‘proportionate’ value of each factor, Say once again comes to the edge of a marginal productivity theory of imputation of consumer to factor valuations, and to the edge of a variable proportions analysis. But he does not reach it.
Say did not rest content with a general, even if pioneering, analysis of the pricing of productive factors. He goes on to virtually create the famous ‘triad’ of classical economics: land (or ‘natural agents’), labour (or ‘industry’ for Say), and capital. Labour works on, or employs ‘natural agents’ to create capital, which is then used to multiply productivity in collaboration with land and labour. Although capital is the previous creation of labour, once in existence it is used by labour to increase production. If there are classes of factors of production, what easier trap to fall into than to maintain that each class receives the kind of income attributed to it in common parlance: i.e. labour receives wages; land receives rent; and capital receives interest? Surely a common-sense approach! And so Say adopted it. While useful as a first attempt (excepting the forgotten Turgot) to clarify production theory out of Adam Smith's muddle, this superficial clarity comes at the expense of deep fallacy, that would not be uncovered until the Austrians. In the first place, these three rigidly separated categories already begin to break down in Say's interesting insight that labourers ‘lend’ their services to owners of capital and land and earn wages thereby; that landowners ‘lend’ their land to capital and labour and earn rent; and that capitalists ‘lend’ their capital to earn interest. For how exactly do these payments differ? How does rent as a ‘loan’ price compare with interest as a loan? And how do wages differ from interest or rent? In fact, the muddle is even worse, for workers and landowners don't ‘lend’ their services; they are not creditors. On the contrary, in a deep sense, capitalists lend them money by giving them money in advance of selling the product to the consumers; and so workers and landowners are ‘debtors’ to the capitalists, and pay them a natural rate of interest. And finally, this classical triad rests on a basic equivocation, as Böhm-Bawerk would eventually point out, between ‘capital’ and ‘capital goods’. Capital as a fund of savings or lending may earn interest; but capital goods – which are the real physical factors of production rather than money funds – do not earn interest. Like all other factors, capital goods earn a price, a price per unit of time for their services. If you will, capital goods, land, and labourers all earn such prices, in the sense of ‘rents’, defining a rental price as a price of any good per unit of time. This price is determined by the productivity of each factor. But then where does interest on capital funds come from?
Thus, in grappling with the problem of interest, Say criticizes Smith and the Smithians for focusing on labour as the sole factor of production, and neglecting the cooperating role of capital. Tackling the Smith-Ricardian (and what would later be the Marxian) riposte: that capital is simply accumulated labour, Say replies yes, but the services of capital, once built, are there and continue anew and must be paid for. While satisfactory enough on one level, the answer does not solve the problem of where the net return on capital funds comes from, a return which Turgot and then the Austrians explained as the price of time-preference, of the fact, in short, that capital is not only accumulated labour but also ‘accumulated time’.
Despite the lack of resolution of the problem of interest, Say set forth an excellent analysis of capital, in the sense of capital goods, and its crucial role in production and in increasing economic wealth. Man, he pointed out, transforms natural agents into capital, to work further with nature to arrive at consumer goods. The more he has built capital goods – the more tools and machinery – the more can man harness nature to make labour increasingly productive. More machinery means an increase in productivity of labour and a fall in the cost of production. Such increase in capital is particularly beneficial to the mass of consumers, for competition lowers the price of product as well as the cost of production. Furthermore, increased machinery permits a superior quality of product, and allows the creation of new products which would not have been available under handicraft production. The enormous increase in production and rise in the standard of living releases human energies from the scramble for subsistence to permit cultivation of the arts, even of frivolity, and most importantly for ‘the cultivation of the intellectual faculties’.
Say follows Smith in his discussion of the division of labour, and in pointing out that the degree of that division is limited by the extent of the market. But Say's discussion is far sounder. He shows, first, that expanding the division of labour needs a great deal of capital, so that investment of capital becomes the crucial point rather than its division per se. He also points out that, in contrast to Smith, the crucial specialization of labour is not simply within a factory (as in Smith's famous pin factory) but ranges over the entire economy, and forms the basis for all exchange between producers.
Say also saw that the essence of investing capital is advancing money payments to factors of production, an advance that is repaid later by the consumer. Thus ‘the capital employed on a productive operation is always a mere advance made for payment of a productive service, and reimbursed by the value of their resulting product’. Here he captured the essence of the Austrian insight into capital as a process over time and one that involves payment in advance for production. Say also anticipated the Austrian concept of ‘stages of production’. He pointed out that, instead of waiting a long time for reimbursement by the consumer, the capitalist at each stage of production purchases the product of the previous stage and thereby reimburses the previous set of capitalists. As Say lucidly puts it:
The miner extracts the ore from the bowels of the earth; the iron-founder pays him for it. Here ends the miner's production, which is paid for by an advance out of the capital of the iron-founder. This latter next smelts the ore, refines and makes it into steel, which he sells to the cutler; thus is the production of the founder paid, and his advance reimbursed by a second advance on the part of the cutler, made in the price of the steel. This again the cutler works up into razor-blades, the price for which replaces his advance of capital, and at the same time pays for his productive agency.
Each successive producer makes the advance to his precursor of the then value of the product, including the labour already expended upon it. His successor in the order of production, reimburses him in turn, with the addition of such value as the product may have received in passing through his hands. Finally, the last producer, who is generally the retail dealer, is compensated by the consumer for the aggregate of all these advances, plus the concluding operation performed by himself upon the product.
In the end, the money paid by the consumers for the final product, say razor blades, repays capitalists for their previous advances for the various services of the factors of production.
Turning to wages and the labour market, Say pointed out that wages will be highest relative to the price of capital and land, where labour is scarcest relative to the other two factors. This will be either whenever land is virtually unlimited in supply; and/or when an abundance of capital creates a great demand for labour. Furthermore, wage rates will be proportionate to the danger, trouble, or obnoxiousness of the work, to the irregularity of the employment, to the length of training, and to the degree of skill or talent. As Say puts it: ‘Every one of these causes tends to diminish the quantity of labour in circulation in each department, and consequently to vary its’ wage rate. In recognizing the differences of natural talent, Say advanced far beyond the egalitarianism of Adam Smith and of neoclassical economics since Smith's day.
In the long run, capital will earn the same return in all firms and industries; but this is only true in the long run, since for one thing there are inevitable immobilities of land, labour and capital. To Say, the ‘profits’ or interest, on capital stems from its productive services – again, a fundamental confusion between capital as a fund, which earns interest, and capital goods, which are productive factors and earn prices and incomes for their productivity. But despite this basic error, Say had many shrewd things to say about interest. He was possibly the first economist, for example, to show that risk premiums are added to the basic interest rate, so that riskier debtors will pay higher interest. Risk, he pointed out, depends on expected safety of the investment, the personal credit and character of the borrower, the past record of the borrower, and the ability or willingness of the government of the debtor's country to enforce the payment of debt. Furthermore, Say introduced an innovation theory of profit by stating that since new methods of employing capital are more uncertain they are especially risky, and hence they will tend to be more profitable. Thus, innovation profits are subsumed under risk.
Say was also insistent that interest on the loan market is determined by the demand for capital (to which it is directly proportional) and the supply of capital (inversely proportional). A champion of freedom of the loan market -'usury’ is no worse morally than rent or wages – he also demonstrated that it was a fallacy that the quantity of money either lowers or raises the rate of interest. Say perceptively pointed out that it is ‘an abuse of words to talk of the interest of money’; it is really interest on savings, not money, and loans can and do occur in kind as well as in money. Wrote Say: the ‘abundance or scarcity of money or of its substitutes... no more affects the rate of interest, than the abundance or scarcity of cinnamon, or wheat, or of silk’.