Adam Smith Did Not Have a Labour Theory of Value for Other than 'Rude' Society

The association of Adam Smith with a labour theory of value has long been an embarrassment to some economists who candidly assert that on this aspect of his economics he was just plain wrong, while for socialist economists it appears as an encouragement to their adherence to Marx’s version of a labour theory of value. Neither group of economists is right about Smith and his alleged labour theory of value.

Robert Vienneau, an economist who writes the ‘Thoughts of Economics’ Blog, at
http://robertvienneau.blogspot.com/2006/11/smith-explains-source-of-profits-in.html

prompts me to go over, briefly, what Smith was about when it came to writing his analysis on value in Wealth of Nations (1776) and lecturing on it in his classes at Glasgow (Lectures on Jurisprudence, 1763-4). As per usual Smith's presentation of his fairly straightforward ideas is muddled together and obscures the clarity of his thinking if read too quickly. I shall unravel them here.

Smith, in common with the traditional 18th-century Scottish syllabus, presented to his moral philosophy class a series of lectures on political economy, and in a similar order, though not necessarily content, as followed by his mentor, Professor Francis Hutcheson up to 1746, and as heard by Smith from 1737-40 (see Francis Hutcheson, 1755 (posthumous), A System of Moral Philosophy).

Smith took an historical, social evolutionary approach to his subjects. His successors felt comfortable with it but gradually eliminated all ‘extraneous’ historical matter from political economy, creating the sanitised subject we know today as neoclassical economics. In this context, the source for the confusion about Smith’s alleged labour theory of value is evident. Simply contrasting isolated paragraphs from Wealth of Nations with passages from Karl Marx to conclude that both had a labour theory of value is disingenuous, and relies solely on their failing to read Wealth of Nations carefully.

Under Smith’s schema, mankind passes through ‘four distinct states’: the ‘Four Ages’ of Hunters, Shepherds, Agriculture and Commerce [LJ(A) i.27: p 14]. He finds in the evolution of property rights, and the associated instruments of justice, a basis for the progression of humankind from ‘savagery’ to ‘civilisation’. Marx grafted onto this progression (though ‘morphed into’, might be more appropriate) his theory of ‘class struggle’, and also changed the basis of the transition. But for Smith, property was the inescapable cause/ consequence of progress, and its driving force was the ‘propensity to truck, barter, and exchange’, allied, inescapably, to the division of labour (WN I.i, ii, iii).

Robert Vienneau, for example, selects quotations from the same Book in Wealth of Nations (WN I. vi) but drops their context. Capital (or ‘stock’, as it was known) has a long, largely unwritten history. Smith writes of a distinct state of mankind:

‘In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land …’ (p 65; all references are to the Oxford/Liberty Fund edition).

At this time, he ventures, there was no ‘property’ in a societal sense; there was ‘society’ certainly, because humans, like their primate cousins, have always lived socially, and the bounties of nature and the fruits of labour belonged to those who collected, predated, or expended effort to acquire them. Labour, necessarily, was the sole source of ‘value’ and ‘labourers’ ‘owned’ the full fruits of their efforts (in so far as these terms meant anything in such times).

The transformation from ‘the early and rude state of society’ to shepherding, and then to agriculture, introduced elements of property. Those who ‘owned’ the sheep, or whatever, kept what they caught and tamed, and watched over them by driving off predators and other humans. The basis by which the flocks or herds were shared among their ‘owners’ is not known exactly, but we may surmise it was related to the norms by which the human bands or tribes were organised. We may note that shepherd tribes eventually overthrew the Roman Empire and re-divided out the land and what was on it.

With the spread of farming in the agricultural state, property in land (and the accompanying laws of land ownership, transfer and tenancy) added complexity to social structures. Agricultural societies formed settled civilisations, some of which were marked by towns and cities, and wars over ownership were a common feature. One element is inescapable; the product was no longer owned by the labourer. What had happened?

Smith suggests the division of labour combined with the propensity to exchange (bargaining) altered titles to the ownership of the bounties of nature and the fruits of labour. Labour can only be divided if individuals specialise. He gives the case of two hunters (WN I.vi.1., p 65) considering the exchange of beaver meat for venison. He also gives the case of a savage who makes arrows in exchange for venison, because he gets more venison this way than relying on his own hunting, and following exchanges with a hunter, who not having to make arrows, gets more venison from his hunting than he would with making his own arrows (LJ(A) vi.55: p 351). This advance is the beginning of the separation of the labourer from his product and from the products of his product. It is also the origin of capital (stock).

While labourers make their own implements, and rely of their own surplus food and clothing (the original ‘grub stake’ stock) they ‘own’ their product unambiguously. There are no deductions from it. What he shares with his ‘family’ and ‘dependents’ is entirely up to him. What he shares on occasion with unsuccessful or less successful other hunters and dependents depends on societal norms of (selective) reciprocation when the fortunes of the hunt are reversed (some of which reciprocation, evidenced by ‘modern’ norms in surviving hunting societies, includes sexual favours from the women of less successful hunters).

Property changed these norms gradually as the notion of ‘capital’ stock formed. In exchange for the implements (knowledge) of hunting and farming, including stock (the wherewithal to continue hunting, or commence shepherding or to live upon while crops grew to harvest), others exercised their claims on the product of labour (bounties of nature and fruits of labour). The labourer was no longer the sole owner of the entire product of ‘his’ labour:

‘He must in most cases share it with the owners of the stock which employs him’ (WN I.vi.7: p 67).

And as productivity from specialisation due to the division of labour and the propensity to exchange (one came with the other, Smith insists), the possibility of some labourers ‘saving’ a portion of their product and accumulating even a small amount of it, initiates a long process of what becomes the first ‘stock’ once it is made available to others. Where and how it went from there is not known in particular cases, but that it was one of several possibilities is sufficient for this arguemnt.

Among other possibilities, the technological evolution of farming amidst hunting states is noted. Smith points, off-handed almost, to reports of elements of agriculture among North American tribes in which women scatter small amounts of corn stalks to grow seasoning for meats (LJ(A) i.29-30; P 15), but reports nothing in North America on the scale of the agricultural innovation in east-central Europe (or indeed the habits of agriculture in Central and South America).

Shepherding took firm root in Eastern Europe and Western Asia and co-existed with farming for millennia, with long periods of hostility among both states in contingent societies. Cain and Abel’s violent dispute between the farmer and the shepherd in Genesis is indicative of this tension, as is the dénouement of the final destruction of Rome (agriculture) by the Germanic tribes (shepherds).

Shepherding and agriculture moved the notion of property into centre stage in human societies. Keeping the source of food (and power) intact requires the marking out of boundaries – animals destroy crops; and other people take what others have sowed or have tended.

In the long run of history, with its many manifestations of many possible forms of development, societies developed through the discovery of property. In some cases, property was individual, in others tribal, and others societal. In fact, every variation has probably been tried over the tens of millennia since ‘early and rude society’, when, as John Locke expressed it, ‘all the world was America’. Much is written about the ‘oriental despotism’ of the State ‘hydraulic’ societies of the Near East and Asia, the tyrannies of Incas and Aztec’s, and feudalism of Europe, all based on agricultural societies.

In the mid-18th century, many variations of the four states of societies co-existed both in fact and currently, and in the historical record. It was from that perspective that Smith scoped out in summary form the evolution of the theory of value.

His chapters in Book I keep going back and forth across a panorama of history as he develops his analysis and, unless he is read carefully, this may be missed, especially when he sometimes jumps from describing labour as a source of value in ‘rude society’ and then seems to be discussing commercial society without always making clear he has moved from one state to another, and that earlier statements on ‘the whole produce of labour’ belonging to the labourer no longer apply, once elements of exchange from the evolution of products for immediate consumption to the evolution of capital to produce more product are introduced, both of which depend absolutely on the distinction between reciprocal transfers between the owners of private property.

The act of exchange itself is the recognition of property for a bargained price, an essential component of which is the mutual cancellation of property rights in whatever is foregone in order to receive whatever is traded.

A society based on the labourer owning the whole product of his or her labour is possible – it was the norm for scores of millennia – and inevitably had a low material standard of living (and was associated with near absolute ignorance, belief in invisible ‘gods’ and credulity). The division of labour and the propensity to exchange opens the prospect of increasing access to a wider variety of goods than any one individual can or could make for themselves.

In capital assisted labour, the product is the labourers only as long as the capital is owned by the labourer and self-supplied. Labour using other factors (land and capital) owned by others must share its product with all who have claims on the product.

Smith recognised this explicitly (WN I.vi: page 67) and in doing so moved to a theory of the distribution of the returns from production that was no longer a labour theory of value (it retained elements of ‘cost of production’ theory). In principle, it is no different from the consequence of exchange by bargaining: each party foregoes its ownership of what it offers and acquires ownership of what it receives. Everything Smith understood about the social evolution through the states of society follows from ‘rude’ to ‘commerce’ is based on recognising this principle.


Robert Vienneau concludes:

“I find it of interest that Adam Smith offers this account while rejecting the (embodied) labor theory of value. I'm not sure this account makes sense, as a quantitative approach, without the labor theory of value, or, at least, without Marx's invariants. I do not think the tremendous continuity, as well as differences, between the ideas of Adam Smith and of Karl Marx is any secret among scholars.”

I do not think his conclusions are warranted about Smith; I have no comments on his statements about Karl Marx and his theories of surplus value, alleged exploitation, or his labour theories of value.

Smith, however, did not have a labour theory of value for any state in society other than ‘rude’ society in pre-history.