Smith and his Non-Labour Theory of Value in his Age of Commerce

Here is a typical piece of contentious theory advanced in good faith by a conservative economist, which distorts Adam Smith’s legacy. Its author, G. Stolyarov II, who posts in a conservative Blog, Free Republic.com (at: http://www.freerepublic.com/focus/f-news/1760469/posts, entitles his post: 'Arguments Against the Labor Theory of Value' (21 December 2006.

He writes:

“I shall refute here the proposition that “the economic value of all goods and services is derived from the cost of their production and ultimately from the labor expended on their creation—be it measured in terms of the time, effort, or disutility required to produce the goods or services in question—and the labor expended on the creation of goods necessarily endows them with economic value.” This proposition is the essence of the labor theory of value, a false view nonetheless embraced by such notable thinkers as Thomas Aquinas and Adam Smith and used by Karl Marx to justify socialism. I shall then argue that the utility theory, which views economic value as identical to the benefits gained by individuals from goods and services, is a superior explanation of economic value.”

Comment
That the labour theory of value as it has come to be known is ‘false’, I concur; that it was the basis of Karl Marx’s ‘justification of socialism’, I concur (when he turned it into a theory of the exploitation of ‘surplus value’); that a theory of economic value based on some version of utility and market pricing ‘is a superior explanation, I also concur; but that Adam Smith ‘embraced’ a labour theory of value in Wealth of Nations, I have, as we say in Scotland’ my doubts.

The problem of the misattribution of a labour theory of value to Smith arose from the context and times in which he wrote. In the 18th century and much of the 19th century, economists advanced the current consensus that labour was the measure of economic value. It didn’t become a loaded political question until it became entangled in crude (even naïve) ideas of socialism and part of the agitation of some intellectuals against the early vestiges of what was rapidly becoming ‘capitalism’, a word invented for what was happening, though mainly in the forms of finance and rentier capital (William Makepeace Thackery’s novel, The Newcomes, about one such in 1854). His contemporary, Karl Marx picked up the word, or popularised it from German, in his book, The Capital, and ensured it a worldwide usage thereon.
Smith’s presentation of a theory of value is short of his much vaunted pride in perspicuity (Marx’s presentation of his version is absolutely muddled in contrast, and not a little ‘mystical’ too).

Smith social-evolutionary model applied to all his writings and he began his theory of value as usual with an historical consideration of how individuals moved from the ‘rude’, ‘savage’ state towards the Ages of Man: Hunting, Shepherding, Agriculture and (‘at last’) Commerce (Lectures in Jurisprudence, 1763-4).

In the ‘rude’ state (which the 18th century equated with the lives of North American ‘Indians’, the continent’s first invaders), hunters dominated the mode of production (until the 20th century the role of the far more important Gatherers, in terms of quantity of food, was unrecognised, as was the even earlier and much longer unknown stage of foragers, scavengers and gatherers that dominated Homo sapiens pre-history). John Locke was of the opinion (correctly as it is now known) that ‘in the beginning all the world was America’.

In the early state each hunter was self-sufficient – he made his own tools, his own clothes, his own shelter. He owned the product of his labour. That was Smith’s starting point. There was no exchange, as economists know it, though the potential for it existed within the extended families that composed the groups. Smith located the origins of the propensity to ‘truck, barter, and trade’ in the ‘necessary consequence of the faculties of reason and speech’, which led to the division of labour, but decidedly not from the ‘divine’ or ‘secular’ plan of anybody, mortal or otherwise. The process was ‘the necessary, though very slow and gradual consequence’ that had ‘in view no such extensive utility’ of where the human propensity would take it.

Spread over hundreds of thousands of years (the toolmakers preceded the emergence of Homo sapiens from the Hominids), the simple fact of each hunter owning the product of his or her labour, is the dominant fact of human life. The crude labour theory of value in terms of the individual ownership of the products of labour, pre-the emergence of property is Smith’s valid point and the sole extent to which he endorsed anything like a labour theory of value. In the beginning artefacts and objects had utility value only, because exchange was not invented until the division of labour reached a more sophisticated level (crudely, sexual relations for contributing to the extended family’s diet and comforts).

Smith’s exposition appears unclear in Wealth of Nations because he does not preface his remarks with details of the process of evolution but states explicitly that ‘it does not belong to our present subject to enquire’ (WN I.i.1: p 25). Analysing closely this chapter I think he was merging at least two pages of lecture notes and kept dipping in an out of two themes. But the bottom line is that he did not carry the rude state’s labour theory on and into his analysis of the situation after property was introduced and established.

In handling in Chapter V, Book I, the transition from labour as a measure of value (easier to think of it as the ‘price’ to acquire something) to its money price (after the end of barter), Smith’s exposition suffers from trying to account for a process that nobody recorded and which lasted for many millennia.

Once property appeared (shepherds forming herds and flock and defending them against theft; farmers building fences and barriers to wandering animals and human beings), the division of the ‘revenues’ from exchanging the products, no longer belonged to the sole owners of the products of labour, but to the owners of the factors required to produce it, who shared in the revenues, not ‘fairly’, of course – property made a great difference to the raw egalitarian brutality of human relationships.