Chapter 1
Value and value creation within political economy and economics
“[F]rom no source do so many errors, and so much difference of opinion (…) proceed, as from the vague ideas which are attached to the word value.”
David Ricardo ([1817] 2010: 4)
The tricky concept of value
Within the discipline of economics the concept of value has a fundamental, yet also highly ambivalent, position. On the one hand, it is clearly one of the central and defining concepts which holds economics together, and has done so since its inception and formation as a gradually emerging discipline in the eighteenth century. From the classical economists and onwards, one might even characterize the discipline of economics as being that which revolves around and seeks to give an account of the complexities of and mutual relations between the production, circulation, and consumption of value (Mirowski 1989). Owing to this, it is not surprising that the central figures of political economy, Adam Smith ([1776] 1999), David Ricardo ([1817] 2010), and Karl Marx ([1867] 1990), all accorded passages on value a central place in the very opening of their works. On the other hand, this stands in sharp contrast to the situation within which economics finds itself today.
Here the concept of value has totally fallen out of use (Mirowski 1989: 2, 141), or at least been marginalized to the extent of being an unimportant, and even metaphysical (Robinson 1962), problem. In the textbooks with which first-year students today are introduced to the discipline of economics, it is therefore not uncommon to totally neglect elaborations and considerations hereof (Frank 1997;
Krugman and Wells 2009). Here, economics is not defined as a science preoccupied with the creation, distribution, and consumption of value, but as the study of “how people choose under conditions of scarcity” (Frank 1997: 3). This
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lack of attention to what used to be the economic concept par excellence is not merely visible from the relative lack of mention in the opening paragraphs of most contemporary works on economics, but also becomes painfully apparent when one turns to the index of the textbook just cited. Here one finds entries on ‘anabolic steroids,’ ‘Allen, Woody,’ ‘safe harbor in a storm,’ and ‘elite universities,’ but not a single separate entry on ‘value.’
Interestingly enough, this historical decline and current disregard of considerations pertaining to value within mainstream economics has been accompanied by an intensification of the way in which references are made to the concept of value within several of the neighboring and more practically oriented approaches – not least within the broad and highly diversified field of management thought. Thus, when one looks for instance across the area of strategic management (see for example Bowman and Ambrosini 2000; Porter 2004; Lepak et al. 2007; Foss and Stieglitz 2010), or to the theoretical frameworks of financial decision-making (see for example Koller et al. 2005; Wooley 2009), one detects a prevalent and recurring preoccupation with value that manifests itself in fine-masked and highly specialized approaches that take into account what value is, how it is measured and created and how it should be organized and calculated, as well as how one ought to protect it in relation to actual or potential competitors. This is all the more interesting since several of these approaches – implicitly or explicitly – see themselves as being in continuation of and building upon the insights of economic theory (Pitelis 2009: xxxi). This of course creates some expositional difficulties, since a reference to economic-managerial conceptualizations of value and value creation as such becomes highly speculative and unpersuasive given the abovementioned differing tendencies with which the discipline of mainstream economics and the more practically oriented disciplines within management thought relate to (or, in the case of the former, abstains from) a direct confrontation with the problem of value and value creation.
This chapter will map some important conceptual shifts within the history of political economy and economics. Attending to this history is intended to achieve two things. First and foremost, it provides a short overview of the historical emergence of the concept of value creation that figures prominently in the next couple of chapters. By way of situating the concept of value creation within the
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wider historical trajectories through which value as such has been discussed, the chapter excavates conceptual layers that still resurface within contemporary discussions on value creation that is taken up in chapters two and three. While several contemporary conceptualizations present themselves as if they have left former approaches behind, their value creation concepts nevertheless reactivate and remain indebted to former conceptualizations. Hence, only by attending to the wider history of value and its creation, does it become possible to take stock of the complex continuity-discontinuity problem between former and contemporary conceptualizations of value creation. Second, besides providing an indispensable background for chapters two and three, furthermore this chapter provides an important and wide stretching thread that is weaved together with the genealogy of co-creation undertaken in Part Two of the dissertation. As becomes evident in chapters five and six, the history of value and its creation ties in with the history of managementality, which is also addressed in these later chapters.
Following these clarifications, it is now possible to turn to some of the central conceptual shifts within the history of value and value creation, as these have been articulated within political economy and, later, economics.1 More precisely, firstly we follow the concept of value and see how it gradually crystallizes in a relatively stable substance conception of value. This conception largely remains unchallenged from François Quesnay to Adam Smith and David Ricardo and on to Karl Marx’s critique of political economy. In spite of disagreeing about what actually constitutes the substance and source of value, all of these authors conceptualize value in accordance with a framework according to which value is created in production,
1Since the historical transformations of the concept of value and value creation have already been covered within the history of economic thought, it is worth noting that this chapter draws on already existing accounts. In addition to Karl Pribram’s (1983) classic, posthumously published book as well as the work of Jürg Niehans (1990), Henry W. Spiegel (1991), and Margaret Schabas (2005), this chapter in particular draws on Philip Mirowski’s (1989) More Heat than Light. While an indispensable part of Mirowski’s story is tied up with the development of the energy concept within physics and the way this set the stage for theoretical groundwork within economics, this chapter predominantly employs Mirowski’s work because it covers the changing historical conceptions of value and value creation in a highly comprehensive manner, and with reference to a vast amount of literature.
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preserved in exchange, and diminished or destroyed in consumption (Mirowski 1989: 143). After attending to the continuities and discontinuities within eighteenth and nineteenth century political economy, we see how this shared understanding of value and value creation enters into a crisis with the emergence of the marginalist revolution in the 1870’s. From here on, value, to the extent that it remains in use, is viewed as being created in exchange, and production is henceforth stripped of all its former prerogatives. This transformation crucially hinges upon the way in which the discipline of economics begins to model itself by appropriating the terminology of mid-nineteenth century physics.
Value and value creation within political economy
Though economists usually refer to the year of 1776 as the year in which economics was born as a separate and autonomous discipline, it is important to note that Adam Smith did not himself regard The Wealth of Nations as such a founding text. Rather, the political economy to which Smith made his contribution was considered “as a branch of the science of the statesman or legislator” which consisted of “two distinct objects: first to provide a plentiful revenue or subsistence for the people (…); and secondly, to supply the state or commonwealth with a revenue sufficient for the public services” (Smith 1999, book IV: 5; Pribram 1983: 126). Owing to this, Smith’s contribution can be seen as a continuation of several works preceding his own (Quesnay [1758] 1973), just as much as it can be seen as pointing out new directions which were eventually to lead to the formation of economics as an increasingly autonomous field of study. However, in order to assess Smith’s contribution and especially the way in which he contributed to the conceptualization of value, it might be useful firstly to sketch some of the notions of value preceding his work.
Up until the middle of the eighteenth century, several works had already been published which had treated the problem of the nature and sources of value.
Aristotle had touched upon the issue already by way of the separation he drew between the self-sufficiency of the oikos on the one hand, and trade on the other.
While the former had its distinct mode of ordering and hierarchy, the latter led to the problem of equalizing the unequal in the process of exchange (Dooley 2005: 7),
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just as it raised the issue of which kinds of exchange were justifiable and in accordance with the natural needs of the household (Aristotle [fourth century BC]
1981: 84-87). While the question of the justifiability of market transactions, especially those undertaken with the aim of acquiring money, became a huge problematic throughout Antiquity and the Middle Ages, the problem of finding some measure which would permit an equalization of qualitatively heterogeneous objects, was one of the early forerunners of later discussions regarding how value should be conceptualized and measured. According to Aristotle, money not merely performs the role of measuring the unequal, but also acts as a store of value (Dooley 2005: 6). Though being central in this regard, money, however, is viewed as a purely conventional, and hence unnatural, medium according to which trade can be facilitated (Aristotle 1981: 82-83) and since it is of a conventional nature, the value represented by money cannot exhibit a law-like nature. For Aristotle, just as for later heirs of his thought, value is thus not a strict quantitative - but rather a qualitative - concept, reflecting the fact that it is inseparable from the wider and more primary concerns of the appropriateness of social and political relations within and in accordance with which its proper function is determined. Thus, as
“long as the market was a subsidiary support for the organization of livelihood, it was the more qualitative connotation of value that predominated in Western thought” (Mirowski 1989: 146).
The concept of value underwent important changes in the transition from Aristotle and the medieval philosophers to the mercantilist writers. This latter group first and foremost became recognizable as a coherent collective of authors due to the way in which they were presented and criticized by Adam Smith (for an overview of the various usages of the term ‘mercantilist,’ see Pribram 1983: 36).
This heterogeneous group was a scattered collection of merchants, hired propagandists, pamphleteers, and administrators writing from the middle of the sixteenth century to, approximately, the middle of the eighteenth century. In their writings, they pursued a range of different and only partly overlapping agendas. In spite of the debatable legitimacy of grouping them together under the term mercantilism, important changes regarding the conceptualization of value nevertheless occurred in this “proto-economic literature,” as Mirowski (1989: 147) calls it. For one thing, the qualitative understanding of value became ever more
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quantitative and substantial in nature due to those writers favoring a balance-of-trade perspective on how the state was to enrich itself in competition with foreign states. In conjunction with this a new agenda emerged which centered on accumulating as many precious metals as possible, since these were viewed as the only way in which states could enrich themselves, i.e. as the only possible way in which value could be augmented for the nation. Due to this, foreign trade “was regarded as a kind of hidden warfare waged over the possession of monetary metals, and the connection between the acquisition of these metals and political considerations was reflected in various, often repeated phrases to the effect that money was the ‘nerves of the state,’ the ‘sinews of war,’ and the like” (Pribram 1983: 46). By way of this transformation money went from being a purely conventionally established store and measure of value, to being an objective yardstick according to which the strength and political maneuverability of the respective countries could be determined in relation to one another. The more precious metals the country could accumulate, the richer and stronger it was. This way of viewing value entailed a rigorous competition between the European states, since it implied a zero-sum game, where the gain of some by necessity entailed the loss of others. According to Spiegel (1991: 171), the underlying principle guiding mercantilist policies was therefore most prominently expressed by one of Montaigne’s essays entitled: “the advantage of one is the damage of the other.”
By way of promoting the balance-of-trade agenda and the associated understanding of value as a substance incarnated in precious metals, the mercantilist writers paved the way for later developments in the conceptualization of value, as these were to develop throughout the latter course of the eighteenth century. However, while this tendency to favor a balance-of-trade perspective remained strong among the mercantilist writers, it was developing in parallel to the works of Nicholas Barbon, John Houghton, and William Petty who held largely opposing views, especially regarding the restrictions which should regulate trade.
This “free-trade school”, as Mirowski (1989: 150) calls it, was highly critical of views in favor of tying value to money and the balance-of-trade agenda. While on the one hand aspiring to natural philosophy and stressing rigorous quantification, the grounding of the free-trade school was on the other hand undermining its scientific aspirations, since the principle they refuted was not replaced by a
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functionally equivalent principle according to which this school would be able to measure or prove that free trade would lead to improvements in national wealth. In other words, “when the free-trade mercantilists denied that money was a central value substance, they went so far as to deny the need for any value principle at all”
(Mirowski 1989: 151).
The Physiocrats
Though various attempts were made at combining the different doctrines of the mercantilist writers, it was not until the middle of the eighteenth century that a free-trade perspective was successfully merged with the principle of a stable value substance. This happened within the thought of the Physiocrats, and especially in the writings of their most central figure, François Quesnay.
Quesnay denounced the mercantilist writers who had equated value with money. Money, according to Quesnay, was “the idol of nations unacquainted with the genuine principles of political economy” (Quesnay 1973: 61). Accordingly, he wanted to “strip money of all the properties attributed to it by prejudice; for they are altogether imaginary” (Quesnay 1973: 145-6). This, however, was not because money was not useful in several different ways. Rather, it was merely to stress that money be given a less prominent and more derivative place than had hitherto been the case. Thus, from having been conceived central, money was now viewed as something that under specific circumstances played a supportive role in enhancing the wealth of the nation. But at the same time it merely reflected and stood in a subordinate relation to another value substance which made it possible for Quesnay to combine free trade with a substance conception of value. This latter, and far more important thing, was according to Quesnay “blé, best translated as
‘corn’ or ‘wheat’” (Mirowski 1989: 154).
This blé was essentially the product of the earth. As a result of this, the prominence previously accorded to the merchant, now shifted towards “the husbandman” who, as part of the productive class, constituted the true source of wealth (Quesnay 1973: 5). All the riches of the nation could therefore essentially be located back to this source and the way in which this wealth was circulated and augmented was dependent upon the production undertaken in the agricultural sector, and the way in which the outcome of this subsequently circulated between
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the three classes making up society, i.e. the productive class consisting of farmers, the proprietary class consisting of landlords, and the sterile class consisting of merchants and manufactures. In what Niehans (1990: 39) describes as “the most celebrated single page in the history of economics” Quesnay set forth his Tableau Économique which graphically and quantitatively depicts the annual circulation and consumption of the value substance and the way its unhindered flow is a precondition for establishing the wealth of the nation.
Quesnay’s (1973: vi) Tableau Économique Though later ridiculed by Adam Smith and other economists for stressing agriculture as the only productive sector of the economy, Quesnay’s Tableau is
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important, because it can be seen as “the purest instance of the classical substance theory of value” (Mirowski 1989: 155), that is, the theory of value which makes up the underlying and recurring epistemological structure of all classical political economy. While the underlying substance did change, as we will come to see below, the analytical framework, based on the creation of a value substance in production, its conservation in the process of circulation, and its destruction or diminishment in consumption, remained intact for a little more than a century (Mirowski 1989:
143).
Since the Tableau can be seen as one of the foremost and most clearly spelled out instances of the substance theory of value, it is worth noting that an important source of inspiration for its construction came from principles Quesnay had previously set forth within his medical theories (Mirowski 1989: 155). Though a latecomer to political economy – Quesnay was over sixty when he first began writing on the subject – he was already an experienced surgeon who had previously written on medical subjects like bleeding and fevers (Niehans 1990: 39). Pertaining to the subject of bleeding, he had acquired considerable fame due to his involvement in and victorious exit from a controversy in 1730, where he had proved Jean Baptista Silva’s theory wrong. The latter had set forward the claim that
“blood would rush away from a wound faster than it would flow toward it when a vein was opened”. The implication being “that the surgeon should locate the incisions conditional upon the specific malady being treated”. By way of setting up experiments with tubes and pumps, however, Quesnay proved this theory wrong and instead suggested that “incisions could be administered anywhere that was convenient for the surgeon and the patient” (Mirowski 1989: 155). Drawing on the research of Vernard Foley (1976), Mirowski (1989: 155-6) states that Quesnay’s view of the body as a machine and the “coronary system” as reducible to a “pump and some tubes” not only shows the Cartesian influence at work in relation to Quesnay’s experimental setup. More importantly, we see here the formation of the model which Quesnay would put to use in depicting the circulation of the value substance within the Tableau.
Overall, Quesnay’s contribution was significant. Informed by his earlier writings on medical subjects, he substituted for “that trivial science, which has no other object but the cash and finances of a kingdom” (Quesnay 1973: 94) what he
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himself regarded as a true economical science consisting in “the science of economical government of a kingdom” (Ibid: 5, 94). By way of identifying blé as the value that circulated and gave nourishment to the body of the state, Quesnay had not merely combined the notion of a clearly defined value substance with the principle of free trade, but also paved the way for viewing the economy as a sphere exhibiting the regularities of nature. Indeed, through this re-conceptualization of value “all the major themes of the classical theory of value fell into place. The natural law of society was reduced to physical law in form and content” (Mirowski 1989: 158). Seen within a larger picture, Quesnay’s thought regarding this can be viewed as being in line with the prevailing assumption of the later part of the eighteenth century where it became commonplace to view political economy as pertaining to the same reality as that dealt with within natural philosophy (Schabas 2005: 2). In conjunction with this, political economy was portrayed as intimately connected with nature. This is also the reason why Quesnay (1973: 5) spoke about political economy as “that great physical science of this earthly globe”, just as it is the reason why he criticized former attempts at laying out the principles of political economy as not taking cognizance of “the great advantages we might expect from a more regular conduct which nature never refuses to those, who allow things to follow her direction” (Quesnay 1973: 2). We return to Quesnay and the problem of government in accordance with nature in chapter five. For now, however, it is enough to take stock of Quesnay’s problematizations of value and its creation.
Adam Smith
Quesnay’s understanding of value and the wider conceptual network within which this was formulated was extended and elaborated by Adam Smith, who, however, also denounced important aspects of Quesnay’s work. On the one hand, Smith gave credit to Quesnay for having written “perhaps the nearest approximation to the truth that has yet been written upon the subject of political economy” (Smith 1999, Book IV: 264), and Smith had furthermore planned to dedicate The Wealth of Nations to Quesnay (Heilbroner 2000: 49). On the other hand, he also criticized Quesnay’s system for serious shortcomings – not least the “capital error” by way of which it represented “the class of artificers, manufacturers, and merchants as altogether barren and unproductive” (Smith 1999, Book IV: 260).
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While controversy reigns regarding the extent of Quesnay’s and the Physiocrats’ influence on Smith’s writings (cf. Dobb 1973: 41-2, 56; Heilbroner 2000: 51; Schumpeter 1986: 183-4; Winch 1996: 35), what is important for the purpose of this chapter is not so much the originality of Smith’s ideas and the way these measure up with, add to, or totally overcome the problems encountered by earlier writers, but rather the conceptual continuity and development the concept of value underwent. In relation to this there are two problems that are focused upon. First, the discussions on value in the opening chapters of Book I of The Wealth of Nations that have roamed largely in the secondary literature and on behalf of which a clear discontinuity can be detected in relation to earlier writers. Second, the less noted continuity by way of which Smith’s notion of ‘stock’ performs an equivalent function to that of ‘blé’ in Quesnay’s Tableau (Mirowski 1989: 166-9).
Regarding the first, that is, the explicit discussions on value, Smith (1999, Book I: 131-2) formulated the water-diamond paradox at the end of chapter four of Book I: according to this, objects that are highly useful often have little or no monetary value, just as objects that are really expensive often have no use value.
Water is an example of the former, while diamonds are an example of the latter. In order to excavate this problem further, Smith pointed to the fact that the notion of value “has two different meanings”: one is called “value in use”, and relates to the usefulness of the item for the one who uses it, while the other is called “value in exchange” and refers to “the power of purchasing other goods which the possession of that object conveys.” On behalf of this double meaning of value, Smith hereafter set out (in chapters five, six and seven) to investigate the measure of value in exchange, and the parts that enter into the composition of this.
According to Smith (1999, Book I: 133), labor is “the real measure of all exchangeable value”. As such, labor is not merely a historically determined yardstick through which the ratio of exchange between different commodities can be established, it is also a measure of the value of commodities across centuries (ibid: 139-40). In stating this, Smith not only distanced himself from the mercantilist writers, who held precious metals as the source of value, but also from the physiocratic conception of corn as being the only source of value. “[I]n describing the industrial sector as performing only a sterile manipulation,”
Quesnay’s system “failed to see that labor could produce wealth wherever it
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performed, not just on land. To see that labor, not nature, was the source of
‘value,’ was one of smith’s greatest insights” (Heilbroner 2000: 49).
As long as human beings lived in a primitive state, labor was the only factor which could be a source of value. With the advent of civilization, however, stock is accumulated just as private property is introduced. This gives rise to a new situation in which exchange value is no longer determined by the amount of labor that has gone into the production of a given commodity, but by the rent and profit which a landlord, on the one hand, and an undertaker, on the other, can now claim. Smith (1999, Book I: 155) was therefore able to claim that “wages, profit, and rent, are the three original sources of (…) all exchangeable value.”
While these outlines and specifications of value left a huge imprint, attracted criticism and gave rise to many discussions later on (cf. Dobb 1973: 49), a shift occurring later in Smith’s work marks a continuation on another level, than that signaled in the early chapters of The Wealth of Nations. On the one hand, then, we are given an explicit account and refutation of the mercantilist and physiocratic conception of value. But if we stop the investigation of value here, then we would on the other hand fail to notice an underlying and important tendency at work in Smith’s book which on a deeper level exhibits a continuity of the principles that inform the doctrines of the writers whom he criticizes. In delving into this issue, Mirowski (1989: 166-7) states that the opening chapters of The Wealth of Nations are characterized by the fact that Smith “stared the problem [of value] briefly in the face and then waited a few hundred pages for the reader to get distracted, only to press onward without further ado.” Upon this rather cruel yet also humorous remark, Mirowski writes that while Smith did begin to elaborate “a number of potential value principles early on in Book 1”, the issue as to what constitutes the essence of value is not settled until Book 2 where it is stated that “value is stock (…) suitable for either consumption or investment.”
Stock, however, as already stated, was not accumulated in that “rude state of society”, where all of the products of human labor were consumed within a relatively short time-span from the moment they were produced (Smith 1999, Book II: 371). Only with the expansion of the market and with the associated refinement of the division of labor do we see a rise in the accumulation of stock.
This stock, according to Smith (1999, Book II: 373-4), falls within two categories: it