Labour Theory of Value and other Mumbo Jumbo

In what appears to be a book review, Terry Bell, expostulates on Adam Smith, somewhat obscurely. The book is “State of the Nation”, edited by Sallela Buhlungu, John Daniel, Roger Southall and Jessica Lutchman, The Human Sciences Research Council, price Rand 194. The 'review' appears in the Sunday Independent, Johanesberg (read it at: http://www.sundayindependent.co.za/index.php?fArticleId=3011637&fSectionId=1083&fSetId=).

“There is also the uncritical acceptance of a comment attributed the Anglo American's Bobby Godsell that the labour theory of value was a creation of Karl Marx and needed to be buried. This is not only ahistorical, it raises one of the fundamental questions of economic theory that needs to be interrogated to make real sense of the current state of national and global economics.For the record, and in vindication of [Margaret] Legum's comment: the labour theory of value was developed by Adam Smith, father of liberal, laissez-faire economics, who died 28 years before Marx was born. It is a fundamental theory underpinning an ideological rump based on some metaphysical mumbo-jumbo about an "invisible hand".

Comment:
From the context of the review, the above appears out of nowhere (heavy sub-editing to make space?). My comments are directed at what it says, not what the reviewer was trying to say about the book he was reviewing.

In correcting Bobby Godsell’s error in crediting Karl Marx with the labour theory of value, Terry Bell mistakenly hands that accolade to Adam Smith, who was not ‘the father of laissez faire economics’ - that accolade belongs to the French Physiocrats or ‘economistes’. (Given that Smith never used the words ‘laissez-faire’, he was a remarkable ‘father’ of a theory, indeed.)

It was John Locke who advocated a labour theory of price and Smith took the same ideas but did not develop them. I deal with this issue in my forthcoming book on Adam Smith for Palgrave’s Great Thinkers in Economics series, due in 2007. Smith’s theory of prices was part of his theory of commercial markets, which are rooted clearly in supply and demand analysis and a theory of distribution incorporating three factors, not just labour (rent and profits).

Whether “it raises one of the fundamental questions of economic theory that needs to be interrogated to make real sense of the current state of national and global economics” is beyond comment, as it is not clear what Bobby Godsell, Margaret Legum or Terry Bell are saying, or why.

That the labour theory of value was a dead-end, though in the strict sense used by Locke and Smith – that labour was the sole source of value in a primitive society, such as in a gatherer-scavenger and small game hunter society - before the advent of sophisticated tools, property and big-game hunting, a statement to Locke's or Smith's effect was and remains unexceptional. Once property appeared and the division of labour, a single factor, for example labour, could no longer remain the sole source of value. Ricaredo and Marx tried to develop the dead-end into a highway for understanding, but failed.

Karl Marx’s metaphysical formulation of his labour theory of value was pure verbiage (‘crystallised’ labour and the vacuous idea of ‘labour power’, etc.,) without content that ended up with exactly the same elements in price as ignorant merchants, artificers and capitalists based their costs on: the sum of wages, raw materials, and wear and tear of machinery, buildings and rent.

Prices were determined by what people paid for the products; if they paid sufficient, the ‘projector’, ‘entrepreneur’ or ‘capitalist’ made a profit; if they didn’t they made a loss. Marx mystified the process by calling it ‘surplus value’, but ends up with the same price (and profits) as standard accounting.

The other example of mystical verbiage being imposed on economics is that of the ‘abolition’ of interest in banking. Exactly the same process is undertaken to hide the reality to avoid calling it ‘interest’ – the amount paid back is the loan plus ‘administrative charges’, which in real banking, as practised by ‘anti-interest’ theologies, track normal interest rates with remarkable exactitude.

Terry Bell manages to link the labour theory of value to another of the misleading attributions to Smith:

“It is a fundamental theory underpinning an ideological rump based on some metaphysical mumbo-jumbo about an "invisible hand".

The invisible hand was an isolated metaphor about the consequences of human motivation. It was never part of an ‘ideological rump’ in Smith’s “Wealth of Nations”; it was never a ‘theorem’, a ‘concept’ or a ‘theory’ of markets. It was a simple but crude metaphor.

That some 19th and – many - 20th century economists made it more than it was, and journalists with dim memories of Economics 101 tutored by non-readers of Adam Smith (and their dimmer memories of their distant classes in economics), have given the metaphor an aura it does not deserve is one of the major problems in trying to restore Adam Smith’s legacy to its proper place in the history of economic thought.