A Week-End Debate on Adam Smith

Juan Fernando Carpio writes (8 September) on Mises.org Blog:

"In chapter three [WN II.iii.1: page 330] one can find another quote that supports my interpretation of Smith's: "Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit.". There is ignorance or disregard for the pure capitalist (investor) role, speculators and so on."

My reply:

"Juan Fernando Carpio,
The full quotation from Wealth Of Nations that opens Chapter iii in Book II, page 330, ‘On the Accumulation of Capital, or of productive and unproductive labour’ reads:

“There is one sort of labour which adds to the value of the subject upon which it is bestowed. There is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive, labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit. The labour of the menial servant, on the contrary, adds to the value of nothing. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expence, the value of his wages being generally, restored, together with a profit, in the improved sale of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers: He grows poor, by maintaining a multitude of menial servants.’ [WN II.iii.1: page 330]

Productive labour produces products that are sold by masters for a price and out of the revenue received by the ‘master’.

The ‘entrepreneur’: from the 18th-century French usage of the word: ‘between takers, buyers or purchasers, has shifted meaning in the 21st century. The common French usage of ‘entrepreneur’ is as a ‘haulage contractor’, etc., in the French village where is live. In English (and American) it has been expanded to mean any risk taking in business.

The master recovers the wages he paid to the labourer (or ‘manufacturer’; in the 18th century, these were persons who used their ‘hands’ to make things, i.e., handmade products, but not a 21st-century large-scale modern ‘manufacturer’) when the master sold his goods in markets. Wages were at the subsistence level as determine socially.

Out of the balance of revenue from sales that was left after paying wages of labourers, the master, recovered the cost of the materials used by the labourer, and retained the rest (if any) as his profit. This profit share came from his ownership of the circulating capital that maintained labour in their employment, paid for the raw materials or semi-manufactured produce (today: ‘work in progress’). The master’s capital was at risk because he may not have recovered his capital his outlays (the maintenance of the labourers, and his purchases of raw materials), or made sufficient profit to justify taking such risks. In which case, he would leave the business and seek other profit opportunities (lend his capital at interest or hire other labour to produce something else).

If you continue reading Book II of Wealth Of Nations, you will be introduced to Smith’s ‘model’ of the ‘great wheel of circulation’ (Fixed and circulating capital) and see how he believed that this created net growth in a commercial economy.

It is absolutely clear, beyond argument in fact, though that never stops academics from arguing, that profit was the share of the revenue to owners of capital from employing labour in productive output and from selling the products in markets. It was never a ‘wage’ for the master’s work. He took his profits and either consumed them (tendencies to prodigality) or invested them in productive work (frugality).

You may also note that Adam Smith never discussed ‘capitalism’ and did not recognise the phenomenon, nor the word. The first use of ‘capitalist’ in English was in 1793 (Smith died in 1790); Turgot used the French word ‘capitaliste’ in 1766. The first use of ‘capitalism’ in English was in 1854 in William Makepeace Thackeray’s novel: ‘The Newcomes’, and thereafter, of course, by Karl Marx.

Adam Smith’s description of the ‘age of commerce’ was a much simpler affair than modern ideas of finance capital. He spoke of owners of ‘stock’, owners of ‘capital’, and ‘undertakers’.

Should you have further quotations for clarification, I would be delighted to offer my views, or, rather, Adam Smith’s views on his behalf.

To which ‘Anthony’ interjects a comment:

Smith's views on profits were closely related with the LTV [Labour Theory of Value] it seems. It's not too difficult to see how Marx would go along a different route with regard to the formation of profits (based on the LTV.)

I reply to ‘Anthony’ (9 September):

Anthony
Discussing Smith and the Labour Theory of Value would take us a long way from this thread. Briefly, he argued that labour ‘originally’ was the source of all wealth in, and the distinction is important, ‘rude’ society of hunting and gathering. There was no ‘capital’ present in this first ‘age’ of mankind. Labour owned the product its labour; land was owned by nobody; there was no ‘capital’ present in this first ‘age’ of mankind, and nobody made ‘profits’.

But Smith moved the argument away from labour in savage society to labour in the ages of shepherding and agriculture, and the appearance of property, civil government and laws. His presentation of these distinct changes is muddled because it is mixed together, as he switches from describing ‘rude’ and ‘savage’ society to societies where other contributors to wealth production, denominated as the annual output of the ‘necessaries, conveniences, and amusements of life’. It is necessary to read these chapters carefully to disentangle the loose strands of his arguments [Wealth Of Nations, I.v-viii: pp 47-104] to understand his so-called labour theory of labour.

Labour contributed essential components of man made products, and was no longer the sole source of value because owners of land and of primitive capital (direct savings out of earned ‘rents’ and ‘profits’) were contributors to output. In the age of commerce, labourers earned their wages, landlords rented their lands and masters earned their profits from their ownership and risk taking only. In short, for Smith the ‘labour theory of value’ no longer applied. Prices were determined by the quantity supplied and the ‘effectual’ (quantity) demanded.

Adam Smith, like Richard Cantillon (1734) and Turgot (1766) distinguished between ‘natural’ prices (where the factors of production received their ‘natural’ shares of the revenue) and ‘market’ prices, where the entrepreneur got what he got (by price determine solely quantity supplied and quantity demanded). If price rose above 'natural prices' he was able to pay his labourers and the landlord, his profits rose above the natural profits; if not, he made losses and (under perfect liberty) he changed his business activities, to recoup losses in the next period(s).

This is quite different from the Marxian labour theory of value”