Abstract
Commons criticized three limitations of the classical theory of value, namely, the elimination of scarcity, ownership, and money, and attempted to construct new concepts and theories to overcome these limitations. The purpose of this chapter is to reveal Commons’s theoretical progress by analyzing a recently discovered manuscript written in 1927 titled “Reasonable Value: A Theory of Volitional Economics”. Specifically, I compare this manuscript with several other published works by Commons: The Distribution of Wealth (1893), Legal Foundations of Capitalism (1924), Reasonable Value (1925), and Institutional Economics (1934).
This chapter is structured as follows. Section 1 presents the conclusions Commons reached as a result of his criticisms of the classical theory of value. Section 2 applies comparative analysis to identify three aspects of Commons’s theoretical progress in the 1927 manuscript: first, the conceptualization of proprietary scarcity; second, the construction of his theory of value with multiple causations; third, the formulation of three types of transactions. Section 3 identifies two theoretical limitations of the 1927 manuscript and considers how to overcome them. The first limitation is that the “judicial transactions” described in the 1927 manuscript included only the correction of transaction failures at the microlevel. The second limitation is that Commons’s theory of value did not include the coexistence of suppliers with different efficiency levels, with the result that Commons did not sufficiently explain the coordination of managerial and bargaining transactions. Section 4 shows that managerial transactions controlling efficiency and bargaining transactions controlling scarcity are complimentary, both at the firm and macroeconomic levels.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
For example, the 1927 manuscript listed “productivity” among the five principles that formed the basis for the theory of value (Commons 1927, Chapter 1, p.14). However, in Institutional Economics Commons substituted “efficiency” for “productivity” to avoid confusion over physical versus value-added labor productivity. In the former case, output is measured by physical quantity of product; in the latter case, output is measured by added value (ibid., p. 378). Price is used in calculating added value, but Commons sees price as determined by bargaining transactions related to scarcity. However, efficiency is determined through managerial transactions. Although these two variables are linked, Commons treated them as distinct concepts. Furthermore, Commons (1934, p. 284) noted the potential plant productivity to be confused with plant capacity in ordinary discussion.
- 2.
Commons (1927, Chapter 5, s.47f) noted “Cf. Llewellyn, Carl, American Econ. Rev., March 1924,” and Commons (1934, p.194f) added, “Llewellyn, like Hume, makes proprietary scarcity the basis of his correlation of law and economics. Knies and Ely had previously set forth a similar idea.” As a cause of price, Ely (1889) mentioned suppliers’ withholding of supply as follows: “[l]abor organizations and other organizations of productive forces try to regulate supply and demand in a manner beneficial to themselves, and this is often, though not always, in a manner beneficial to the general public. To withhold supply for a time from those demanding it tends to raise prices, while to press it upon them leads to ‘slaughter-prices’” (Ely 1889, p.180).
- 3.
Similar sentences exist in Commons (1934, p. 169).
- 4.
According to Commons, Menger should be excluded because his concept of scarcity was social and objective and differed from the individual and subjective concept of Jevons (Commons 1927, Chapter 8, s.16). Commons explained this as follows, “Menger went further than the individual. His quantity wanted is wanted by society. His quantity available is made available by society. The relation between the two quantities is his ‘social relation’ of scarcity. Put in mathematical terms this is the scarcity-ratio between the quantity wanted by society and the quantity made available by society. This ratio is Price” (Commons 1934, p. 380).
- 5.
Regarding this point, beginning with his 1893 book, Commons consistently emphasized suppliers’ control of the quantity of supply as a determinant of prices and wages.
- 6.
Similar sentences exist in Commons (1934, p.195).
- 7.
Commons (1893) also examined the case of increasing costs (pp.147–148). However, according to Harter (1962), “Commons lost his way when he tried to use increasing costs and practically admitted as much.” Consequently, “Not only did the interesting part of the analysis in the Distribution of Wealth fail to survive its bad reception from economists, but it failed to sustain Commons’s interest. Never again did he attempt to approximate the type of analysis which interested his fellow economists” (Harter 1962, pp.214–215). However, as I will explain later, in the 1927 manuscript, Commons tried to articulate the theories of value of Menger and Ricardo using a framework similar to that in his earlier work of 1893.
- 8.
Expressions such as “proprietary and scarcity concept” (p.32) and “the scarcity factor and the proprietary factor” (p.33) appeared in Commons (1925).
- 9.
Although Lederer (1922) attempted a similar explanation, Commons not only tried to articulate the two theories but also added his own concept of price determinants to overcome their limitations.
- 10.
J. Robinson’s The Economics of Imperfect Competition and E. H. Chamberlin’s The Theory of Monopolistic Competition, published in 1933, triggered a full-fledged examination of price theory in an oligopolistic market. Based on these new developments in imperfect competition theory, Commons might have considered it necessary to revise the price theory in the 1927 manuscript. This may explain why Institutional Economics excluded this material from the 1927 manuscript.
- 11.
Commons noted that Ricardo did not assume diminishing returns in manufacturing as he did in agriculture and assumed an average amount of embodied labor per unit in the case of the former (Commons 1927, Chapter 8, s.125).
- 12.
While Commons does not explicitly mention here the financial processes associated with external financing of the purchase of capital goods, this is substantially the same as Minsky’s explanation of the “demand price” of investment goods (Minsky 1975). Commons did not explicitly describe—this is self-evident—how curve C′H in Figure 2 changed position when futurity was considered. Commons developed his analysis of financial processes in Chapter 9 of Institutional Economics, titled “Futurity.”
- 13.
Chapter 1 of the 1927 manuscript consists of two sections: Section 1 “Metaphysics” (12 sheets) and Section 2 “Formula of transactions” (21 sheets). After major revisions, these contents were used in Sections 2 and 6 of Chapter 2 of Institutional Economics, titled “Transactions and Concerns” and “Conflict of Interests.” With regard to bargaining and managerial transactions, the section names and contents were almost the same in the 1927 manuscript and Institutional Economics. However, the name of the third type of transaction was changed from “judicial transactions” in the 1927 manuscript to “rationing transactions” in Institutional Economics, and the content of this type of transaction was expanded greatly. The reason for and meaning of this change are explained in Sect. 3.1.
- 14.
According to Commons, “[i]nducements are the stimuli applied to individuals by other individuals, but sanctions are the stimuli applied to individuals by a collection of individuals acting in concert” (ibid., Chapter 1, s.24).
- 15.
Commons (1924) classified transactions into “authorized transactions” and “authoritative transactions.” According to Commons (1924), in an authoritative transaction, “[t]here is no bargaining between citizen and official, no power to withhold service or property, the psychological aspect of the transaction being that of command and obedience” (p.107). Therefore, an authoritative transaction was defined in the 1927 manuscript as corresponding to a “judicial transaction” as defined in the 1927 manuscript. However, the psychological aspect of an authorized transaction is “partly command and obedience, partly persuasion or coercion” (p.107). Although an authorized transaction seems to include both managerial transactions and bargaining transactions, Commons (1924) did not formulate these two terms. Moreover, although Commons (1924) identified managerial ability as follows, he did not conceptualize managerial transactions. “[I]f managerial ability is distinguished from these, it is the ability to induce other persons to move things, usually by that emotional influence of promises, warnings or threats which may be summarized in social psychology as persuasion or coercion, command and obedience”(p.155).
- 16.
Commons (1925) did not use the antonyms “going plant” and “going business” but rather the similar pair of terms “engineering economy” and “business economy” (p.38). Regarding psychology, Commons (1925) mentioned that “external psychology by which individuals adapt themselves to this custom of private property and personal liberty [...] [is] summarized in the psychological concepts of persuasion and coercion between equals, command and obedience between superiors and subordinates” (p.66). Moreover, similar to Commons (1924), Commons (1925) identified managerial ability (p.11).
- 17.
Although Commons cited Marx simply as “Poverty, 41, 42,” a more precise citation of the source text would be as follows: Marx, K. 1847. Poverty of Philosophy. Translator H. Quelch. 1913. Chicago: C.H. Kerr & Company. pp.40–41.
- 18.
However, Commons continued that “sometimes his meaning is ambiguous […] In some cases Marx seems to mean that use-value is only physical quality.” To demonstrate Commons cited several passages from The Capital, as follows: “[the exchange-value of commodities] manifests itself as something totally independent of their use-value;” “[u]se-value is independent of the amount of labor required to appropriate its useful qualities;” “[u]se-values furnish the material for a special study, that of the commercial knowledge of commodities;” and “[u]se-value as such lies outside the sphere of investigation of political economy” (ibid., Chapter 8, s.146).
- 19.
The term “confusion” may be incorrect, because Marx distinguished efficiency (relation of output and input) and scarcity (relation of income and outgo). Commons criticized Marx not for his distinguishing these two relations but for his idea that these two processes were controlled in the production process by capitalists. In fact, Commons (1934) correctly noted that “Social Man-Power [...] is intended to distinguish [the] engineering economy from [the] proprietary economy, which Marx was the first clearly to distinguish” (Commons 1934, p. 267).
- 20.
Although in Commons (1927) the explanation of Marx’s confusion continued over nine sheets (Chapter 8, ss.161–169), in Commons (1934) it was summarized in a few short sentences. Readers may not easily understand the brief explanation in Commons (1934), which ran as follows: “This production in limited quantities, we take it, is what Marx meant by socially ‘necessary’ labor-power. The word ‘necessary’ means necessary to supply the demands of consumers. Herein Marx read into his concept of labor-power, whose principle is efficiency, the antithetic meaning of bargaining power, whose principle is scarcity.” (Commons 1934, p. 374)
- 21.
In Commons (1934), after the criticism on Marx quoted in the above footnote, Commons explained his own method of analysis, writing: “[o]ur method is different. We separate each by a ‘virtual’ elimination of the other, and then combine them on the principle of limiting and complementary factors. Hence, for us, the engineer as such increases production indefinitely, regardless of its price, but the business man restricts or regulates production in order to maintain its price. The two are limiting and complementary factors” (Commons 1934, p. 374). This explanation indicates that the reason Commons formulated two types of transactions can be found in his criticism on Marx.
- 22.
In this sense, the concept of the judicial transaction in the 1927 manuscript is the same as the authoritative transaction in Commons (1924). Commons explained the authoritative transaction as follows: “[w]e have seen that unauthorized transactions are likely to fail in the two respects of lack of correlation and insecurity of expectations. For this reason a government or judiciary, with its rules regarding transactions, is needed to intervene with the double purpose of correlating rights, exposures, liberties, duties, and of maintaining the correlation even if the parties prove false or change their minds.” (Commons 1924, p.100)
- 23.
Because Commons included varied activities in a single category of rationing transaction, his characterization of rationing transactions exhibited some weaknesses. For example, according to Commons (1934) the psychology of rationing transactions is “arguments and pleadings,” but the psychology of judicial decisions is “commands and obedience,” as general social rules are applied to individual cases. In fact though, in Commons (1950), the psychology of a rationing transaction is explained as “commands and obedience” (p.57).
- 24.
In explaining “extra surplus value,” Marx obviously assumed a productivity gap between producers. Marx’s theory of value therefore did not consider only the social average of productivity. Kühne (1979, Chapter 18) recognized this characteristic of Marx’s theory of value and called Marx’s theory of value based on the social average of productivity “the static theory” and that based on the productivity gap among producers “the dynamic theory.”
- 25.
In Commons (1924), Commons (1927), and Commons (1934), Commons explained bargaining transactions using a formula that consisted of two sellers (S offered a lower price than S1) and two buyers (B offered a higher price than B1). Although Commons did not show this explicitly, the difference in offer price between two sellers is mainly based on an efficiency gap between them. Commons (1934) used this formula to explain the “limits of coercion” and “bargaining power.” For example, the gap between the offer prices of S and S1 affects the bargaining power of S relative to buyers, and the offer price of S1 becomes the “limits of coercion by S to buyers.” Commons explained as follows: “In our formula it is evident that seller S cannot force buyer B to pay more than $120, since above that margin his competitor S1 would take his place as the seller” (Commons 1934, p.331). This explanation seems to mention the effect of supplier efficiency gap on price determination. However, in this formula, if S can sell, S1 cannot. That is, Commons did not assume the coexistence of transactions involving both S and S1. The efficiency gap assumed in this formula was that between a supplier that monopolizing the market and a supplier that was expelled from the market.
- 26.
Rutherford (1994) has contributed excellent comparative studies on old and new institutionalist theories, which illustrate differences from various viewpoints and propose ways in which they are complementary.
References
Coase, R.H. 1937. The Nature of the Firm. Economica 4(16): 386–405. Reprinted in Coase, R.H. 1988. The Firm, the Market, and the Law. Chicago: University of Chicago Press.
Commons, J.R. 1893. The Distribution of Wealth. New York: Macmillan.
———. 1924. The Legal Foundations of Capitalism. New York: Macmillan.
———. 1925. Reasonable Value. Madison: Edwards Brothers.
———. 1927. Reasonable Value: A Theory of Volitional Economics. Manuscript. Collection of the Kyoto Prefectural Library. Call mark: /331.04/C85/, Material code: 1102508007.
———. 1934. Institutional Economics: Its Place in Political Economy. New York: Macmillan.
Ely, R.T. 1889. An Introduction to Political Economy. New York: Hunt & Eaton.
Harter, L.G. Jr. 1962. John R. Commons: His Assault on Laissez-faire. Corvallis: Oregon State University Press.
Kühne, K. 1979. Economics and Marxism. Vol. 1. New York: St. Martin’s Press.
Lederer, E. 1922. Grundzüge der ökonomischen Theorie: eine Einführung. Tübingen: J. C. B. Mohr.
Minsky, H.P. 1975. John Maynard Keynes. New York: Columbia University Press.
Rutherford, M. 1994. Institutions in Economics: the Old and the New Institutionalism. Cambridge/New York: Cambridge University Press.
Sylos-Labini P. 1956. Oligopolio e Progresso Tecnico. Torino: G. Einaudi (Henderson, E. (tr.) 1962. Oligopoly and Technical Progress. Cambridge: Harvard University Press).
Uni, H., and Nakahara, T. 2017. Economics of Collective Action and Custom: A Comparison of John R. Commons with the Theories of Regulation and Convention. In Contemporary Meanings of John R. Commons’s Institutional Economics: An Analysis Using a Newly Discovered Manuscript, ed. H. Uni. Singapore: Springer.
Wieser, F. 1889. Der Natürliche Werth. Wien: Hölder (Smart, W. (ed.) and Malloch, C.A. (tr.) 1893. Natural Value. New York: Macmillan).
Williamson, O.E. 1975. Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization. New York: Free Press.
Acknowledgments
This work was supported by the Japan Society for the Promotion of Science (JSPS) and the KAKENHI Grant-in-Aid for Scientific Research (B) (grant number 26285048).
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2017 Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Uni, H. (2017). Scope of John R. Commons’s Criticism of the Classical Theory of Value: Progress and Limitations in the 1927 Manuscript. In: Uni, H. (eds) Contemporary Meanings of John R. Commons’s Institutional Economics. Evolutionary Economics and Social Complexity Science, vol 5. Springer, Singapore. https://doi.org/10.1007/978-981-10-3202-8_1
Download citation
DOI: https://doi.org/10.1007/978-981-10-3202-8_1
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-10-3201-1
Online ISBN: 978-981-10-3202-8
eBook Packages: Economics and FinanceEconomics and Finance (R0)