Torren’s theory of value was that prices in the long run’ were regulated by the cost of capital advanced (equivalent to indirect (accululated) labour) for equal turrnover periods of capital, and not by cost of indirect + direct labour.
As he put it
“From the perpetually operating law of competition, the employment of equal capitals for equal times yields results of equal exchangeable value” (EICT 1820, 361)
The ‘results’ here being the price of the products produced plus the price of the capital reproduced (Torrens joint production method adopted by Sraffa) allowing for depreciation.
This theory caused some concern amongst classical economist, whilst accepting part of its validity the general view adopted by McCulloch and James Mill was that it was functionally equivalent to rather than a challenge to Ricardo’s theory(see O’Brien The Classical Economists reinterpreted Page 109), a position often repeated in current history books on classical economics. This is an error, as is the view set out below:
Kurtz and Salvatori Interpreting Classical Economics – Studies in Long Period Analysis Page 142.
Torrens adopted the special assumption…that in the same lines of production the same capital input proportions apply…hence the capitals advanced in different industries can easily be compared….It is clear that under the conditions specified Torren’s capital theory value and Ricardo’s labour theory value amount to the same thing.
This is an error as it it based on the original theory Torrens advanced in the 1819 first edition of his Corn trade where the capital input proportions of the sectors exchanging were the same. But following the critiques of Ricardo, Mill and McCullough Torrens made major changes to the 1821 and 1826 editions.
In the later edition Torrens adopted no less than 24 different models. (see Torrens and Malthus’ Challenge Rogério Arthmar Researcher of the Brazili Paper to be presented at the History of Economic Thought Society of Australia 2012 Conference, Melbourne) In some of these capital input proportions were identical in others they were proportionate. So for example in a two industry model if a capital intensive industry exchanged with a labour intensive industry the capital intensity of one sector was necessarily the inverse of another. The issue is whether in an n industry model this holds – i.e whether the capital industry of each industry when added necessarily adds to unity. Was Torrens distorting his models to make a special case seem general or was he rather advocating a deeper underlying principle that has been missed/forgotten, much like his Corn Model (which we shant forget Ricardo took from Torrens) as an underpinning structural and universal principle underlying the surplus approach.
It is I think highly unlikley Torrens willfully distorted his models to present a special case as more general, rather he was setting out a more general principle, a theory set out at length in his 1821 Essay on the Production of Wealth. This theory of ‘effectual demand’ is that at long run prices not dictated by monopoly prices the effectual demand of each and every commodity in the economy will be set by the requirements for use by each and every other sector. At that prices effectual demand = effectual supply. This was a modified form of Says Law/The Law of Markets – but Torrens was critical of the form of the law put forward by Say and Mill.
M. Say and Mr. Mill belong the merit of having been the first to bring forward the very important doctrine, that as commodities are purchased with commodities, one half will furnish a market for the other half, and increased production will be the occasion of increased demand, (page ix)
Which to my mind is a clearer explanation then either Say or Mill.
But this doctrine, though it embraces the very key-stone of economical science, is not correct in the general and unqualified sense in which these distinguished writers have stated it. Though one half of our commodities should be of the same value as the other half, and though the two halves should freely exchange against each other, it is yet possible that there may be an effectual demand for neither.
Effectual demand being the term from Adam Smith used here in the revised formulation of Ricardo to express the demand that results when commodities are sold at their ‘natural price’ around which (plus the ‘customery rate of profit’ the classical gravitation process oscillates).(see page 53 of the pamphlet)
It is quite obvious that there can exist no reciprocal effectual demand, unless the interchange of two different sets of commodities replaces, with a surplus, the expenditure incurred in the production of both. Now, what is that specific relation or proportion between commodities, which occasions the exchange of one half of them against the other half, to replace, with a surplus, the cost of producing both ?
It is clear in the final chapter of the essay that Torren’s solution is to set out such a n-sectors system where the proportions are reciprocal and add to unity. Torrens may have been the first to describe this as ‘Equilibrium’, but Torrens was clear that most of the time the economy was not in equilibrium and it was the classical gravitation process that created the pressures for equilibriation.
Accepting the principle of compatible capital proportions it is clear that Torren’s system does not only apply to a special case but is the general case in equilibrium, with incompatible capital proportions creating shortages in effectual demand driving away from equilibrium and the reallocation of capital top the most profitable sectors driving prices back towards it. Under these gneral conditions Torren’s theory of value is not the same as Ricardos. In Torren’s system prices (including wages and the price of money) and profits were determined simultaneously, a point misunderstood by both Ricardo and Marx (both suffering from the Ricardian Vice) that there must be some apriori cuase of capital values. In Torrens there is no apriori exogenous elements other than the techincal productivity of production.
Is then Torren’s system free from error and does it represent a modified and corrected labour theory of value. I shall leave the second question open however one issue Torrens was unclear about was the need to discount the costs of inputs, both direct and indirect. On this point George Scope writing in 1833 set out a corrected theory (in many ways he has the highpoint of the english school of political economy) where it is the time discounted costs of production that determine value,