4.5 Samuel Bailey and the subjective utility theory of value

In 1825, Samuel Bailey (1791–1870), a rising young merchant from Sheffield, published a thorough demolition of Ricardian value theory, in his A Critical Dissertation on the Nature, Measures, and Causes of Value. Bailey at last brought into English economics the subjective utility theory of the French tradition; unfortunately, he was not gracious enough to acknowledge that fact. While his essay was clearly in the Say tradition, for example, his brief and brusque references to Say's Treatise gave no hints of acknowledging his indebtedness. But in any case, Bailey's demolition of Ricardo was devastating. Beginning with Ricardo's definition of value as the relative price, or purchasing power, of particular goods, Bailey went on to show the absurdity and inner contradiction of Ricardo's claim that each good acquires an absolute and invarying value from the quantity of labour hours embodied in its production. For one thing, if the quantity of labour needed to produce good A remains the same, its value, contra Ricardo, can scarcely be invariable, if the quantity of labour embodied in other goods, B, C, D, etc. has changed. In short, value is strictly relational, a ranking among goods, and therefore cannot be absolute or invariant. Furthermore, Bailey demonstrates that value is not inherent in goods at all, but is rather always a process of subjective evaluation in the minds of individuals. Value, as Bailey pointed out, ‘in its ultimate sense, appears to mean the esteem in which any object is held. It denotes strictly speaking, an effect produced on the mind...’. Value is purely a ‘mental affection’. Furthermore, he profoundly states that value is not only a subjective estimation, but also that valuation is necessarily relative among various goods or objects; value is a matter of relative preference. Thus Bailey:

When we consider objects in themselves, without reference to each other; the emotion or pleasure or satisfaction, with which we regard their utility or beauty, can scarcely take the appellation of value. It is only when objects are considered as subjects of preference or exchange, that the specific feeling of value can arise. When they are so considered, our esteem for one object, or our wish to possess it, may be equal to, or greater or less than our esteem for another...

But if value is subjective and relative (or relational) valuation, it follows that it is absurd for Ricardo to hanker after an invariable measure of value.

In a scintillating and telling passage, Bailey displays the inner contradictions and absurdities of any objective, absolute theory of value, and specifically of the Ricardian quantity of labour variant. The Ricardians had lost sight of

the relative nature of value, and... consider it as something positive and absolute; so that if there were only two commodities in the world, and they should both from some circumstance or other come to be produced by double the quantity of labour, they would both rise in real value, although their relation to each other would be undisturbed. According to this doctrine, everything might at once become more valuable, by requiring at once more labour for its production, a position utterly at variance with the truth, that value denotes the relation in which commodities stand to each other as articles of exchange. Real value, in a word, is on this theory considered as being the independent result of labour; and consequently, if under any circumstances the quantity of labour is increased, the real value is increased. Hence, the paradox, [quoting from the devoted Ricardian Thomas De Quincey] ‘that it is possible for A continually to increase in value – in real value observe – and yet command a continually decreasing quantity of B’; and this though they were the only commodities in existence.

In sum, as Bailey pungently noted, ‘the very term absolute value, implies the same sort of absurdity as absolute distance...’.

Bailey then enters into a penetrating discussion of the theory of measurement, showing the tremendous gulf between genuine measurement of real or physical objects and any concept of ‘measuring’ something as subjective and relative as human valuation. In the case of physical objects, such concepts as length or weight are measured by fixing an invariant physical measure, such as a foot rule, and then comparing the length of other objects in question with such a rule. In human valuation, ‘measurement’ is quite different; it is simply the expression of prices or relative purchasing powers of different goods in terms of one money, or medium of exchange. Here there is no physical operation such as measurement of physical objects. In the case of money there is a ‘common expression or denominator of value’ in money rather than an invariable physical object of comparison. In fact, these prices or quantities are relative and variable, and there is no invariability involved. Indeed, Bailey would have done still better to abandon the term ‘measure’ altogether, and to confine it strictly to the invariant standards used to compare physical objects, simply confining the idea of comparing relative prices in terms of money to the term ‘common expression’ or common denominator’. A great deal of confusion in economic theory might have been avoided.

In the course of demolishing the idea of an invariable measure of value, Bailey took deadly aim at the notion that the value of money is invariant over time, and therefore can be used to compare general prices over time. While the money commodity is not more fixed in value than any other, one of its attributes, and one of the reasons it is chosen as money on the market, is its ‘comparative steadiness of value’, as Bailey sensibly termed it in a later work on money and its value {Money and its Vicissitudes in Value, 1837). But its value is not constant, and therefore there is no way of measuring value over time. But commodities only have value relations to each other at the same time; a commodity has no value relation to itself at different times. As Bailey puts it:

We cannot ascertain the relation of cloth at one time to cloth at another, as we ascertain the relation to cloth in the present day. AH that we can do is to compare the relation in which cloth stood at each period to some other commodity... We cannot say, that a pair of stockings in James the First's reign would exchange for six pair in our own day; and we therefore cannot say, that a pair in James the First's reign was equal in value to six pair now, without reference to some other article. Value is a relation between contemporary commodities, because such only admit of being exchanged for each other; and if we compare the value of a commodity at one time with its value at another, it is only a comparison of the relation in which it stood at these different times to some other commodity.

Until recently, historians have believed that Bailey's work made no impact on the Ricardian world of British economics, and fell into obscurity, only to be resurrected at the end of the nineteenth century by economists looking for forerunners of the marginal utility theory. Actually, we now know that, despite a vicious personal assault (probably by James Mill) on Bailey in the Westminster Review, Bailey's Critical Dissertation was widely read among economists and virtually swept the field. In his January 1831 funeral rites for the Ricardian system before the Political Economy Club, Colonel Robert Torrens declared that ‘as to value’, Bailey's Dissertation ‘has settled that question’. Indeed, the year after Bailey's work was published, Torrens praised it highly in the third edition of his Essay on the External Corn Trade, calling it in his preface ‘a masterly specimen of perspicuous and accurate logic’, spearing ‘that vague and ambiguous language in which some of our most eminent economists have indulged’. And remarkably, the changeable Torrens stuck to that estimate throughout his life. In the lengthy introduction to his The Budget (1844), in which he revised and retracted many of his earlier views, Colonel Torrens went out of his way to affirm that ‘the gifted author of “A Dissertation on the Nature, Causes, and Measures of Value”, has set finally at rest the long agitated question, whether value should be regarded as an absolute or positive quality inhering in commodities, or as a relation existing between them’.

Samuel Bailey wrote an effective reply to the Westminster critic (A Letter to a Political Economist, 1826), but apart from this and his Money tract, most of his numerous writings dealt with philosophy and with political reform. For this prosperous Sheffield merchant, born into a mercantile family, founder and four-time president of the Sheffield Literary and Philosophical Society, was in intellectual matters an ardent Benthamite. He devoted the bulk of his intellectual resources to Benthamite writings on philosophy and on radical reform, and twice ran unsuccessfully on a reform ticket for Parliament. Bailey made a considerable philosophical impact with his first book, his Essay on the Formation and Publication of Public Opinion (1821). The Essay's emphasis on the utilitarian value of free discussion greatly influenced James Mill, John Stuart Mill's On Liberty, and Francis Place. In economic matters, Bailey's Essay grounded economic activity in subjective, mental phenomena, and explicitly rejected the emphasis on British classical economics on physical material objects. The methodology of economics, Bailey maintained, was introspective of one's empirical surroundings. Bailey saw economics as a ‘science of mind’ rather than as technology. Clearly, his methodology and philosophy of economics were far more ‘Austrian’ than has been realized.¹⁴

Bailey's later works were non-economic, including Essays on the Pursuit of Truth (1844), The Theory of Reasoning (1851, 1852), and three series of Letters on the Philosophy of the Human Mind (1855–62). His final publication was a two-volume book using etymology to rearrange and reinterpret some of Shakespeare's plays {On the Received Text of Shakespeare's Dramatic Writings and its Improvement (1862–66)).

Samuel Bailey was the most important and influential subjective value theorist; but he was not the first to bring subjective utility theory to nineteenth century Britain. That honour belongs to the virtually unknown Scotsman, John Craig (c. 1780-c. 1850). All that we know about Craig is that he was a citizen of Glasgow, and was a member of the fellowship of the Royal Society of Edinburgh, and yet nothing else is known about his occupation or background. After writing a three-volume work on the Elements of Political Science (1814), Craig made his striking if unnoticed contribution to economics, in his Remarks on Some Fundamental Doctrines of Political Economy (1821).

Craig not only brought utility into a British economics dominated by discussions of cost and ‘natural price’; for the first time in Great Britain, he brought value theory to the verge of the concept of marginal utility. Starting with the axiom that utility is the basis of all value, Craig proceeds to the influence of supply: ‘relative values of commodities may change, and those persons who happen to be possessed of articles which are produced in larger quantities than formerly, or which from other circumstances becomes less in demand, may find themselves poorer...’. In short, greater quantity leads to a lesser value. More abundance leading to lower value had once been a commonplace of economic thought; but precisely why is this true? Craig first notes that an increased quantity of, say, broadcloth will lower its price. He then goes on to explain, in a truly notable passage, that

All of the broadcloth, that, in the estimation of purchasers, was worth the former price, had been formerly brought to market, and if more is now to be disposed of, it must be to those who did not reckon its utility equivalent to its former cost. New purchasers indeed will appear in proportion to the reduction of price; because at every step of the decline it is brought down to the estimate, which an additional number of persons had formed of its power of producing gratification, or in other words, to their estimate of its value in use.

Thus, John Craig not only explicitly refuted the dominant Smithian view of the separation of value in use from value in exchange, showing that the latter depended strictly on the former. Even more important, Craig had captured the essence of the marginal utility doctrine without the label: showing that as the quantity of a good increases, its price or value must fall in order to tap a new group of purchases whose utility estimate of the good had been too low to allow them to purchase the good at the original higher price for the smaller product. In short, purchasers previously sub-marginal now become marginal for the additional product as the price falls. As Professor Thor Bruce declares,

Craig appears on the very verge of expressing the idea of marginal utility. He broke away from the theory held by his contemporaries, which was based on the cost idea, and became the first exponent of the idea of the connection between utility and value. In thus emphasizing the utility theory he was the forerunner of the Austrian School of the latter half of the nineteenth century.¹⁵

Craig doesn't stop there. If more broadcloth, for example, has been produced and its price has therefore fallen, the previous purchasers now have surplus revenue, which they will use to increase the demand and therefore the price of other products. Hence the fall in value of broadcloth will increase the demand and the price of other goods. Therefore, an increased supply of some goods does not necessarily lead to a fall in general values, but rather to a restructuring of prices and to additional real income to consumers.

Craig concludes from his value analysis that exchange-value not only depends on use-value, but is also an accurate measure of that value. Craig points out in his introduction to the Remarks that only after the body of his tract was written did he come across J.B. Say's Treatise and see the similarity in approach. He adds, however, that Say's proper concentration on exchange-value should have been amended to point out that it is also the embodiment or expression of value in use.

Attacking the Ricardian labour or cost theory of value, Craig points out that the value of any good is determined not by its cost of production, but by its demand and supply, the demand varying continually in accordance with consumer desires, and the supply changing according to the scarcity or abundance of its factors of production, as well as the fertility of agriculture. Or, as Craig put it:

even if the cost were ascertained, it would not enable us to judge of the exchangeable value. Exchange value depends entirely on the proportion in the market which the demand for an article may bear to the supply, a proportion ever varying, on the one hand, according to the plenty or scarcity of capital or labour, and the fertility of the season.

If Samuel Bailey was preceded by John Craig, he was succeeded, six years after his Dissertation, by Charles Foster Cotterill, in his an Examination of the Doctrine of Value... (1831). Cotterill not only generally endorsed Bailey's subjective utility theory; he also pronounced, the same year as Torrens, the demise of the Ricardian movement, noting bemusedly that ‘there are some Ricardians still remaining’.