Nassau Senior Value and Costs

Nassau Senior Value and Costs

Senior's modifications of the Ricardian theory of value were more important, in an analytical sense, than those introduced by Malthus. His major departures from Ricardo include (1) an acceptance of the utility theory of value and (2) a critique of Ricardo's cost-of-production theory and the (classical) assumption of free competition.

Several continental writers in the first half of the nineteenth century (e.g., Say and Condillac) perceived the fact that utility is more than a mere condition of value, as Ricardo had stated, but a cause of value. However, they were un­able to do anything analytically with this notion before Dupuit (see Chapter 12), and so utility theory accomplished nothing. Senior did better than others in this respect, and Leon Walras (see Chapter 16) correctly credited him with the notion of marginal utility.

The chief adversary of the labor theory of value in the nineteenth century was always the supply-and-demand theory. Malthus, for example, went right to it and concentrated on it exclusively. Senior also adopted it, but in general he handled the demand-supply discussion better than Malthus. The higher flight of Senior's discussion was due to his recognition not only of the impor­tance of relative utility but also of the interdependence between relative utility and relative scarcity.

Having earlier defined economics as the science of wealth, Senior pro­ceeded in his Political Economy to define wealth, value, and utility. Wealth, he affirmed, includes all goods and services that (1) possess utility, (2) are rel­atively scarce, and (3) are capable of being transferred. This definition is at once broader than Adam Smith's—because it includes services as well as physical output—and very modern: it recognizes the pivotal importance of both demand factors (utility) and supply factors (scarcity).

Senior's definition of value and utility are no less modern. Value is "that qual­ity in anything which fits it to be given and received in exchange; or in other words, to be lent or sold, hired or purchased." And utility "denotes no intrinsic quality in the things we call useful; it merely expresses their relations to the pains and pleasures of mankind" (Political Economy, p. 7). Finally, the notion of di­minishing marginal utility and its relation to relative scarcity were clearly set forth in Senior's discussion of human love of variety in consumption:

Not only are there limits to the pleasure which commodities of any given class can afford, but the pleasure diminishes in a rapidly increasing ratio long before those limits are reached. Two articles of the same kind will seldom afford twice the plea­sure of one, and still less will ten give five times the pleasure of two. In proportion, therefore, as any article is abundant, the number of those who are provided with it, and do not wish, or wish but little, to increase their provision, is likely to be great; and so far as they are concerned, the additional supply loses all, or nearly all, its utility (Political Economy, pp. 11-12).

What stands out in the above passage is Senior's clear recognition that both utility and scarcity together determine value. Surely Senior had in his grasp the key to unlock the classical paradox of value! Further progress in the first half of the nineteenth century was hampered, however, by the failure or un­willingness of British economists to apply the differential calculus to economic analysis. But in France, Cournot and Dupuit were soon to scale the heights of marginal analysis.