THE MOST significant characteristic of classical Political Economy after Ricardo has usually been treated as a marked improvement. Certainly it followed as an attempt to avoid the impasse which Ricardo had reached in his attempt to identify market values with real cost. Viewed in correct perspective, 1believe, this is to be regarded as a symptom of decline, since it constituted, in effect, an abandonment of the most fundamental part of the problem which underlay the Physiocratic enquiry and a passing over into empiricism and eclecticism. The attempted solution was really no solution, but a retreat from the issue. It consisted in virtually abandoning the conception of objective real cost. “Real cost” was retained in name, but was given an altered content which was ‘sufficient to change and to destroy its essential significance. Adam Smith was first responsible for importing the phrase “toil and trouble” into the problem of real cost. But when he referred to labour as the basis of value, he seemed more frequently to use it in the original objective sense of concrete material expenditure of human energy than in any subjective psychological sense. With Ricardo’s successors and interpreters, the conception of real cost became explicitly and completely shifted on to a subjective basis. McCulloch had defined “real value” as regulated by the “quantity of labour required “; but at the same time he seems to have defined Smith’s “toil and trouble” as measured by “the sacrifice to those by whom it (the labour) is performed."[1] And after him “real cost” became explicitly something psychological – a disinclination, or malaise, in the mind. Given this shift of content, the logical next step was Senior’s “abstinence,” or refraining from present consumption in order to save and invest, as a second category of real cost, this “abstinence” affording the “explanation” of profit and removing it from the category of a surplus. Real cost = labour + abstinence. Money cost and price = wages + profit. Therefore, market values coincide with real cost. The Ricardian dilemma seemed to be solved. But the solution was no solution. Once the unitary conception of real cost had been abandoned, the possibility of using it as a concept of equivalence between commodities necessarily broke down: to enquire whether or not things exchanged in the market on the basis of these equivalents became otiose. One now had two dissimilar so-called quantities – “labour” and “abstinence” – qualitatively different. How to equate them to form a single quantity, real cost? Was an hour of labour to be equated to an abstinence from the enjoyment of £1 for an hour, or for a day, a week or a year? “Real cost” remained merely as a catalogue-device to embrace two disparate categories which could only be equated in terms of money – i.e. in terms of their market values, which were themselves dependent, of course, on the market values of the latter. If the former reflected the latter, how could they be based on the latter? What meaning had enquiries about the identity of the two? Perhaps a Hedonist psychology (which explained human behaviour as motivated by calculations of pleasure and pain) could afford a solution by reducing both “abstinence” and “work” to terms of a single quantity – “Pain.” But this solution, though it was suggested, was never very explicitly defined. If it had been, the concept of sacrifice would probably have had to be shorn of much of the meaning generally imparted to it. At any rate, it is highly questionable whether any such solution would find acceptance to-day. As it was, Senior had considerable difficulty, I believe an insuperable difficulty, in delimiting his concept of abstinence. Was there a “sacrifice'” or “real cost'” involved in lending property that was inherited, as well as in lending property that had been accumulated out of one’s income? If so, where was the difference between lending a factory or a railway and lending land? If not (as Senior decided), why so arbitrary a boundary to the virtues of sacrifice? So long as real cost meant “sacrifice,” there seemed no solution: one cannot sacrifice unless one has something to sacrifice; and sacrifice becomes simply a “function” of available opportunities, variable with those opportunities and constituting nothing fundamental at all. The search for a theory of value became merely an empirical one – a collection of the various proximate causes of changes in market price – which could afford no judgment as to the “natural” fitness, appropriateness, desirableness or otherwise of the system of exchange equivalents which the market established. Moreover, once an adequate system of real cost was gone, there was no basis for any fundamental distinction between gross and net produce: the concept of surplus no longer had a consistent meaning.


1. J. R. McCulloch: Principles of Political Economy (1825), pp. 215-217.