Early nineteenth-century theorists who shared Adam Smith’s focus on macroeconomic problems also followed his example by using a cost of production framework of analysis to address questions of what determined the relative exchange values of goods on the one hand and the distribution of those values among factors of production on the other. Accordingly they defined the value of each commodity (and of national output as a whole) as the sum of the rewards accruing to the labourers, landlords and capitalists involved in producing it.
Since labour generally accounted for the bulk of these costs, classical economic analysis tended to use a simplified version of the cost of production approach that approximated to a labour theory of value. Ricardo, for example, justified leaving rent out of his account of value by adopting a theory of differential rents in agriculture, which enabled him to conclude that rent was price determined rather than price determining. He then dealt with capital by arguing that, in the long run, the relative exchange values of goods could be expected to vary in proportion not only to their direct labour costs but also to the cost of labour embodied in the fixed capital used up in producing them. That gave him a rough but reasonable measure of the relative exchange values of commodities in terms of the person-hours of labour used up in their production.
This convenient simplification provided the spring-board for the Marxian theory of capitalist economic development based on exploitation of labour by owners of the means of production. Marx postulated that the labour embodied in commodities represented not merely a rough measure but the whole essence of value in a capitalist economic system. He then developed a theory of surplus value in which the share of profits in the value of output was explained by the historically specific characteristics of mature capitalism, wherein powerful entrepreneurs could divert the community’s social surplus into their own pockets. In so doing he elevated a spectre which classical political economists had typically refused to acknowledge—that of an inevitable conflict between the interests of capital and labour.
A cost of production theory of value and distribution effectively underpinned both orthodox and unorthodox economic doctrine until the 1870s when some theorists began to analyse the theory of value in a market-oriented rather than a production-oriented framework. It was Marshall who first systematically explored the new perspectives opened up by marginal analysis and laid the foundations of neo-classical economics which rapidly assumed the mantle of orthodoxy in mainstream economic thought. The crucial distinguishing characteristic of the new economics was a shift away from the broad macroeconomic concerns of classical political economy in order to focus, with increasing mathematical rigour and social detachment, on a systematic analysis of market prices in long-term competitive equilibrium. It involved interpreting the behaviour of both consumers and producers in terms of their marginal utility and cost functions. Thus the individual parties to an exchange transaction were assumed to adjust the quantities offered or demanded to the point where their marginal preferences and costs coincided with given market prices and these in turn were assumed to reflect combined preferences and costs over the whole economy. The prices of factors of production (and hence their distributive shares) were explained in terms of a similar mechanism. Profit-maximizing entrepreneurs were seen as engaged in a continuous process of substitution between factors of production—weighing up costs and returns of alternative combinations of, say, machinery and labour or skilled and unskilled labour—so as to achieve the most profitable technique (defined as that which equated costs and return at the margin). In short, the neo-classical theorists derived their answer to the question of what determined the relative shares of factors of production as a purely logical byproduct of their assumptions about market prices in competitive equilibrium.
Twentieth-century economists have therefore inherited two different traditions of analysis of value and distribution. The neo-classical system of ideas matured elegantly in the middle decades of the century into the Arrow-Debreu model of general equilibrium yielding mathematically consistent, highly abstract results without normative or descriptive implications for applied economics. Debreu (1959), for example, subtitled his monograph on value An Analysis of Economic Equilibrium. Meanwhile economists whose research programmes are driven by contemporary macroeconomic policy problems have sought to be realistically selective in their choice of assumptions and in consequence have tended to be more eclectic and less rigorous in their analyses than the high theorists. Keynes, for example, who had been brought up on currently orthodox Marshallian economics had been persuaded by the 1930s that, in a world characterized by chronic unemployment and fluctuating money values, its postulates concerning the operations of the labour market were profoundly unrealistic and its theory of value and distribution was uncoordinated with its theory of money and prices. It was to rectify these flaws in the neo-classical economic theory that Keynes (1936) formulated his own General Theory of Employment Interest and Money and generated the so-called Keynesian revolution in economic doctrine.
Pure theories of value and distribution—new and old—continue to inspire serious (if often inconclusive) debates at academic conferences in the second half of the twentieth century and to suggest potentially fruitful doctoral research topics. For applied economists the present rapidly changing political, institutional and technological problem situations in which contemporary economic agents take their decisions makes it inappropriate to seek overarching, general purpose theories in the area of value and distribution. However, inspired perhaps by the example of Keynes, there is increasing evidence of imaginative cross-fertilization of ideas between schools of thought which were once inhibited from effective communication by the presumed ideological undertones of radically different perspectives.
Phyllis Deane
University of Cambridge
References
Debreu, G. (1959) Theory of Value, New York.
Keynes, J.M. (1936) General Theory of Employment Interest and Money, London.
Further reading
Baranzini, M. and Scazzieri, R. (eds) (1986) Foundations of Economics, London.
Black, R.C., Coats, A.W. and Goodwin, C.D.W. (eds) (1973) The Marginal Revolution in Economics, Durham, NC.
Dobb, M. (1973) Theories of Value and Distribution since Adam Smith, Cambridge, UK.
