Smith Did Not Have a Labour Theory of Value for Commercial Society

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Gavin Kennedy

I admit that reading this particular Blog (Cannonfire), I am no wiser as to its role or what it is about. Buried in an article about Abraham Lincoln and his alleged statements about corporations, I found a repetition of the usual claim that Adam Smith ‘believed’ in the labour theory of value, which has the singular virtue that it is widely believed, but no other. It is not true, especially when it is linked, as in this case, to Karl Marx.

Joseph Cannon at: ‘Cannonfire’

“Adam Smith himself voiced some wariness of "joint stock corporations," and was not (contrary to what you've been taught) always opposed to government regulation. Smith also believed in the Labor Theory of Value, usually attributed to Marx. (Yes, I've actually read The Wealth of Nations -- unlike a lot of the people who treat it as a holy book.) (Gad, I hope someone doesn't demand that I cite chapter and verse -- my complete copy is missing, and my abridged edition is buried in a huge pile of other books.)”
[Read the Cannonfire post (note, it is a fairly rabid anti-Republican rant) at:
http://cannonfire.blogspot.com/2007/02/lincoln-again.html]

Comment
I have extracted from my new book ms on Adam Smith an edited version of a sub-chapter on Smith’s alleged labour theory of value, which I found not to be the case on a close reading of Wealth of Nations. It’s rather long but you may find in thought provoking.

Smith’s flirtations with traditional labour theories of value
© Gavin Kennedy 2007

Smith put forward what is claimed to be a version of the labour theory of exchangeable value, along with, it should also be noted, strong evidence of his awareness that whatever merits such a theory may have had in the distant past, consistent with conventional knowledge and his historical perspective, it was insufficient to explain the observed behaviours of prices in markets, as the history of theories of value shows . And this created one of those conundrums: to what extent was Adam Smith committed to a labour theory of value? The answer is: very weakly, if at all.

There is no doubt that Smith’s presentation of labour as ‘the real measure of the exchangeable value of all commodities’ is less than clear, partly because he muddled his presentation and straddled two quite different circumstances. In time, successor authorities resolved the problem with the new theories of marginal utility, and Marxists holding labour as a measure of value by then had marched it into a cul de sac.

Smith shows that the early history of primitive hunting societies, ‘which preceded both the accumulation of stock and the appropriation of land’, were the arena where labour was ‘the source of value’ in primitive ‘exchange’. However, with the division of labour and, crucially, the co-operation of separate property owners in commercial society, Smith clearly acknowledged that labour no longer had a unique role in determining value or price. Therefore, the errors of a labour theory of value in commercial society put forward by others does not apply to Smith’s contributions.

Smith opens with:

‘In that early and rude state of society which preceded both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another’ (emphasis added).

He clearly delimits the situation he addresses, by asserting that labour is the ‘real measure of the exchangeable value of all commodities’ in a ‘rude society’ before the ‘accumulation of stock and the appropriation of land’. After the ‘accumulation’ and ‘appropriation’ occurred, labour ceased this role.

The Age of the Hunter was unrepresentative of the Ages that followed because in all of them labour was no longer the only factor of production; farming and commerce, for instance, had multi-factor production functions, and were significantly different from the ‘rude’ state of society. In consequence, Smith (and others) explored the impact of markets on the basis of pricing variations, and he used ‘natural’ and ‘market’ price formulations explain the distribution of earnings among several factors.

In his ‘parable’ of the beaver and the deer hunters he postulated that if in a ‘nation of hunters … it usually costs twice as much labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.’

The parable applies to a ‘rude’ society only, where hunters unambiguously owned the product of their labour, leaving aside the dubious implication that in exchange they traded ‘equivalent values’, a proposition derived from medieval notions of the ‘Just’ or ‘fair’ Price’, still heard occasionally today.

Separately, Smith drew attention to the problems of determining the quantities of labour exerted by beaver and deer hunters. Despite labour being ‘the real measure of the exchangeable value of all commodities’, Smith asserts that it would be ‘difficult to ascertain’ the determinants of the quantity of labour that constituted labour’s real value because, in addition to time, other qualities enter the quantity equation, such as the degrees of hardship and the ingenuity of labour, degrees by which one hour of arduous work exceeds one hour of easy work, and one hour of a trade that cost years to become proficient in compared with a month’s unskilled industry.

In a sure recipe for argument, two hunters, tired, dirty and bloodied from their labours, understated the problems of comparability: ‘it is not easy’, he says, ‘to find any accurate measure of either hardship or ingenuity.’ While ‘some allowance is commonly made for both’, the exchange ratio would be found ‘by the higgling and bargaining of the market’, which he suggests ‘is sufficient for carrying on the business of common life’. But once ‘higgling and bargaining’ are allowed, there is no compelling reason to believe that the ‘higgling’ confined itself solely to the alleged labour (or any other) costs that the parties claimed for their products.

By generalising these conclusions to both ‘rude’ and ‘advanced’ societies, it causes confusions. Smith drew attention to the problem of ‘price’ determination by asserting how it worked:

‘In the advanced state of society, allowances of this kind, for superior hardship and superior skill, are commonly made in the wages of labour; and something of the same kind must probably have taken place in its earliest and rudest period.’

If we remember that exchangeable value, first for a ‘rude’ society, assuming an acceptable measure of quantity exists, with labour as the only factor owned by whoever exerted it, is different from exchange value when societies moved on to the ‘advanced’ state, when labour was no longer the only factor, and that others owned the other factors, everything is clear. But he switched between different modes of production, causing careless readers to miss the significance of the differences. They also missed that Smith took for granted, they knew he was talking about two separate phenomena of ‘value’ in ‘rude’ and ‘value’ in subsequent states of society, after property was invented.

Separate the muddle
He opens Chapter V with:
‘Everyman is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life.’

He speaks here of the commercial age and not the ‘rude’ hunting age, because this definition applies after the division of labour ‘has thoroughly taken place’, and he makes the logical assertion that in this state each person supplies from his own labour only a small part of his needs and, necessarily, he must obtain what else he needs from others. In these circumstances their richness or poorness depends on the labour of others each can command by what they can ‘purchase’ from what their own labour can purchase from the products they own and which they can supply to others in exchange for the products owned by them. It is the command of other people’s products through the exchange of products that people already own (irrespective of what they cost in labour), or what they can get for what they can trade, irrespective of the supposed labour ‘embodied’, so to speak, within them, that constitutes Smith’s theory of exchangeable value. It is no longer a labour theory of value.

When labour is no longer the only factor, it ceases to be the case that what everything ‘really costs to the man who wants to acquire’ something is purely ‘the toil and trouble of acquiring it’. In commercial society, through the division of labour, he acquires what he needs by trading his surplus contribution with the owners for their surplus products. By acquiring money from contributing to the production of exchangeable surpluses he saves himself the toil and trouble of making other products he wants; he imposes the ‘toil and trouble’ of making them upon those who made them. This, after all, is the benefit of an exchange economy, with its ever-finer division of labour – we have an unimaginable increase of product variability available for exchange.

Smith’s text moves between both ‘rude’ (with an extremely limited division of labour) and commercial societies (in which the division of labour ‘has thoroughly taken place’). In the ‘rude’, single-factor society, the identity of labour with value may be sound; in commercial multi-factor, multi-owner societies, the labour of an individual lost its ‘monopoly’ of creating the ‘value’ that a person consumed, because individuals now consumed products created by multiple others in addition to the one or few they created themselves.

Smith writes of exchange relations in commercial societies, after the division of labour ‘has thoroughly taken place’, and shakes off unique measures of an individual’s labour as the sole source of value; he introduced the notion of the greater toil of making everything oneself with the lesser toil and trouble of somebody else making it for an exchange with others.

‘What is bought with money or goods is purchased by labour as much as what we acquire by the toil of our own body.’

This assertion elides one relevant point: the division of labour through exchange creates a larger range of products than individuals could make for themselves in a ‘rude’ society, before the division of labour ‘has thoroughly taken place.’ The individual in commercial societies purchases from among a vastly superior range of products. ‘Toil’ is more productive with a division of labour than without it.

‘Labour’, writes Smith, referring to ‘rude’ societies, ‘was the first price, the original purchase price that was paid for all things.’ Indeed, it was by labour that ‘all the wealth of the world was originally purchased’ and, ‘its value to those who possess it and who want to exchange it for some new productions’ is ‘precisely equal to the quantity of labour which it can enable them to purchase or command.’ Smith’s shows he had moved on from labour values:

‘But though labour be the real [i.e., historical] measure of the exchangeable value of all commodities, it is no longer how value is commonly estimated.’

Because of the difficulties involved in ascertaining the commensurability of two quantities of labour, we are back at ‘higgling and bargaining’ and, outside ‘rude’ societies, the quantity of labour is an ‘abstract notion’. In commercial societies, where the division of labour is in full effect and ‘barter ceases’ in favour of monetary exchange, people rely on the ‘palpable objects’ of the quantities of commodities.

Hence, ‘it comes to pass,’ writes Smith ‘that the exchangeable value of every commodity is more frequently estimated by the quantity of money, than by the quantity of labour or any other commodity which can be had in exchange for it.’ In short, there was no useable labour theory of exchangeable value outside the early stages of ‘rude’ society, once the division of labour became general.

Smith considered that what he enunciated was clear enough if readers properly understood the central role of ‘truck, barter, and exchange’ in a commercial economy. The problem is that despite his repeated emphasis, too few readers in practice realise his intentions.

‘Had this state continued’
I shall follow his speculative diversion where he returns to a rude society.
‘In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.’

Smith uses the same phrase, ‘the whole produce of labour belongs to the labourer’, no less than three times but always in connection with the original, first Age of Hunting, i.e., before the Ages of Shepherding, Farming or Commerce. It is the simple fact that the product of his labour constituted the hunter’s property. An individual had a natural or perfect right in one’s own body and when ‘trafficking with those who are willing to deal with him’ (‘liberi commercii’) all persons had a natural right of ownership in their ‘industry, labour or amusements’, when not ‘hurtful to other persons or goods’.

His parable of an exchange of arrows for a share of a hunter’s kill affected his statements that the ‘whole produce of labour belongs to the labourer’. In the exchange transaction, the arrow maker no longer ‘owns’ the ones he gives in trade, and the hunter, using the arrows he did not make, no longer is the sole source of the labour involved in whatever he kills using the arrows. The link between labour and ownership necessarily breaks the link between an individual’s labour and the supposed exchange value of a product.

If the labourer was no longer the sole owner, who owned the product using arrows made by somebody else to make a kill? The hunter was not the sole owner of the ‘whole product’ of his labour. The traded arrows and the kill belonged to the hunter, net of the share of his kill that he had ‘higgled and bargained’ for with the arrow maker; the arrows belonged to the arrow maker, minus those given in exchange for a share of the kill received for the arrows that he had higgled and bargained for: the traded arrows and the share of the kill given in exchange, no longer belong to their original producers.

Exchanging created a clear break in the ownership of the factors that produced the kill. In rude societies, ownership was inextricably linked because hunters made their own arrows and arrow makers did their own hunting, but with trade the ‘title’ of ownership changed from the bargain made between the new owners. When owners of other factors joined in producing output this was significantly different from the former situation when there was only one factor, the hunter’s labour, unambiguously owned outright by the hunter.

Truck, barter and exchange introduced multiple claims to ownership of the product. Smith’s statements that ‘the whole produce of labour belongs to the labourer’ apply only to the first age of the hunters up to the exchange of arrows (or whatever) for the product.

With the evolution of property in land the share of an individual labourer in the final product is reduced, and the contribution from materials and technology, also owned by others, further reduced the share further, because he had to pay a third or half of the product as some kind of rent. Differences between rude and commercial societies in the ownership of the ‘product of labour’ became the basis of Marx’s theory of ‘exploitation’ through the ‘surplus value’ (the amount paid to the owners of capital and materials – Smith) which Marx claimed was created by ‘workers’ and ‘belonged’ to ‘them’, collectively.

The meat that hunters gave in exchange for arrows was the ‘price’ they paid to own, or to ‘borrow’, tools that had belonged to somebody else. Land before the evolution of property was ‘free’. Because they could not both consume the entire product and ‘pay’ the producer of the other factor (they couldn’t ‘eat their cake and have it’), they consumed less of the product of their labour in order to ‘pay’ for the arrows they formerly used with their own labour to produce their entire output of kills. The items they traded from the division of labour increased the hunter’s output because more and better arrows ensured more kills (partially wounded prey escaped). With the aid of the tools they purchased, they released time formerly used to make their own arrows, which increased the discretionary time available for hunting, leisure, or whatever. In exchange for the arrows, they gave up any claim to that share of the kills that went to the arrow maker, because the arrow maker’s share of a kill unambiguously belonged to him for his arrows. Inevitable disputes over shares and ‘non-payment’ required the development of adjudication and ‘rules’ or ‘laws’ and their enforcement. Thus the history of jurisprudence commenced through numerous experimental variants.
Because primitive exchanges made those participating in them ‘better off’ (a major incentive of the division of labour and the main unintentional consequence of the propensity to ‘truck, barter and exchange’), they had a self-reinforcing effect of encouraging pair-wise exchange behaviour throughout a society. Therefore, Smith’s unique assessment of the role of ‘truck, barter and exchange’ was that it opened the social-evolutionary road that eventually leaves behind assertions that the product solely belonged to the labourer.

Smith did not spell out these consequences clearly enough and he is lumbered with a reputation for a theory that he knew no longer applied, once the division of labour from exchange was underway in the later millennia of the first Age of Hunting and thereafter, with increasing effect in the Ages of Shepherding, Agriculture, and the Age of Commerce, and since in the 19th-21st centuries. Exchanging property in the age of commerce means exchanging claims on output with the participants in production.

Components of Exchangeable Value in Advanced societies
Smith makes clear that there is a crucial difference between rude and commercial society, i.e., societies more advanced than rude societies, But he is unclear that he has leapt from barter to a monetised economy:

‘As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials.’

The product of ‘complete manufacture’ is exchanged for money at a price ‘over and above the price of materials, and the wages of the workmen’ and contributes something for the ‘undertaker’, who ‘hazards’ his stock in the ‘adventure’. Workmen add value to the materials provided by the undertaker and their added value pays their wages and the cost of the materials, and the profit on both wages and materials advanced by the undertaker.

The undertaker only ‘hazards’ his stock in the ‘adventure’ if he expects to make a profit. It is the profit motive that promotes the employment of labourers; without it there is no employment. If a venture did not yield a profit, the undertaker withdraws from it at the earliest opportunity and this imperative induces the undertakers’ interest in the costs of production the world over. If the venture did not pay labourers at least their minimum subsistence they do not work for it for long; they look elsewhere for work opportunities. Buyers are not interested in the seller’s costs.

Bringing the elements together, Smith finds in the prices of all commodities that all three contributing ‘owners’ share the revenue among themselves as ‘wages of their labour, the profits of their stock or the rent of their land’, making wages, profits and rent the ‘three original sources of all revenue as well as of all exchangeable value.’ Labour is no longer the sole source of value in a commercial exchange economy. Without trumpeting it, Smith dropped ‘his’ labour theory of value because this is where his analysis led him.

Money lent to someone who employs it derives revenue, its ‘rent’ being the interest paid by the borrower. The profit from the borrower’s use of it is divided between the profit for his risks in the venture and his conduct of the enterprise, and the profit of the lender who affords the borrower the opportunity to make a profit.

Smith abandoned the pristine labour theory of value that dominated his historical account of rude society and he unambiguously asserts that ‘as in a civilised country there are but few commodities of which the exchangeable value arises from labour only, rent and profit contributing to that of the far greater part of them, so the annual produce of its labour will always be sufficient to purchase or command a much greater quantity of labour than what was employed in raising, preparing, and bringing that produce to market.’

Labourers’ families live off their (subsistence) wage incomes, leaving little or nothing for savings; the undertakers’ families live of their profits and the landlord’s families live off their rents, having a greater capacity than labourers to save. Among the latter two orders there were ‘idle’ persons of all ages, who consume from their family’s their income streams from rents or profits. The proportion between the consumption and savings of productive and unproductive, including idle, labour determines whether net annual output increases or diminishes or remains the same.

© Gavin Kennedy 2007