Adam Smith on Exchangeable Value

Art Carden, assistant professor at Rhodes College, who teaches, inter alia, 'Classical and Marxian economics', and posts today on “David Harvey on Karl Marx”, on the authoritative and excellent economics blog, Division of Labour, HERE:

Less interested in Karl Marx, I noted this interesting paragraph:

“In fairness to Marx, he derived his erroneous value theory from Adam Smith and David Ricardo, but in fairness to the classical economists, they did not try to build an entire theory of history and social change on so sandy a foundation as the proposition that labor alone is the source of value. As I read Adam Smith, his endorsement of the "obvious and simple system of natural liberty" does not derive from his value theory".

Comment
In this statement we see the drift in meaning that led to both the Ricardo-Marx error, which was picked up by the modern economists on its own terms and continued the drift, until we are no longer talking about the same things.

Smith’s ‘exchangeable value’ became ‘value’, as if the two are synonymous and value is something ‘intrinsic’ (a misreading that even Oscar Wilde didn’t realise).

Admittedly, Smith wrote a muddled presentation of his basic ideas and it takes some effort to disentangle them. I have a draft paper on my disentanglement which I must finish sometime soon.

The idea of ‘exchange value’ is central to Adam Smith’s analysis of commercial society and how it evolved from the time when humans were predominantly, even exclusively, gatherer-hunter/scavengers. There was no idea of property except in the ability of humans to ‘pick fruit’ (which Smith erroneously dismissed as ‘hardly imployment’ in his Lectures on Jurisprudence, 1762-3) and to track and kill animals, in the forest and open land owned by nobody. There were no landlords or stock holders, or tax collectors, with whom they shared the fruits of their gathering or hunting.

Smith looked for a basis by which the products of the labour of people could be exchanged freely among them (summarized in his ‘beaver and deer’ parable in Lectures on Jurisprudence 1762-3, and reproduced in Wealth Of Nations, 1776).

He deduced exchange value as being the labour time taken to acquire products for exchange. It was in exchange that products acquired their exchangeable value; outside exchange, products did not have value in any intrinsic sense. The word ‘exchangeable’ is important because it defines value related to the act of exchange, and not to some notion of common views of their ‘intrinsic’ value. That was the extent of his pure theory of exchange value in the first age of mankind.

But beyond the forest, when humans settled in permanent locations and when ‘herding’ wild animals and gathering plant food in relative abundance from accidentally or deliberately farming the land, property was extended from the labour of people to the ‘ownership’ of land and all that was on it. With property human life changed for ever.

It did not matter whether property was held in common by the band or larger tribe, or ‘nation’ of tribes, or by the head of a family, or by private individuals. Property was held by the ‘what we have, we hold against all comers’ basis, which became the first ‘law’ of human society, enforced by those strong enough to enforce it.

In those parts of the world where property emerged in land and resources, separate from the labour of producing them, about 11,000 years ago initially, and then spread, the new property relations set the necessary conditions for permanent settlements with their growing populations able to reap (unequally) the benefits of growing productivity through exchange relationships fostered by specialisation and divisions of labour.

The singular characteristic of these early property-based societies was that the products of labour were shared among those who laboured and those who owned property. Smith acknowledges this important difference between the beaver-and-deer hunters’ parable, with which he opened his analysis of exchangeable value. The beaver hunters, etc., now had to share the exchange value of their prey with the owner of the land on which the beaver were found, and the owner of the wherewithal by which he sustained himself and his family by the necessary subsistence and tools, themselves extracted from somebody’s, or some tribe’s, claim to the ownership of land and natural resources.

Unfortunately, in jumping from one mode of subsistence (primitive hunting in the ‘open’ land) to another (property in labour, land and resources), a process that took millennia, not decades) to get underway, and more millennia to spread across Europe ad the Near East, and those other parts of the world, though not necessarily contiguous in either time or territory, Smith, without the basic knowledge common today in an Anthropology 101 class or text, in compressing the process, he constantly gets into a muddled exposition, switching back and forwards between what we now know were different periods with their much varied local circumstances.

Hence, Wealth Of Nations on exchangeable value is a challenge to disentangle, much like primitive, ancient maps of the world, where imagination often informed their authors, but which are barely recognizable to a modern eye, familiar with maps of the entire planet in different forms of projection, and which are embedded in instantly recognizable shapes and proportions when shown North to South.

Smith’s exchangeable value for commercial society specifically includes the requirement that the (much higher) product of labour is shared between the three owners with their claims to their shares: the labourer, the owner of land, and the owner of stock (formed from resources for subsistence and tools). From this point on, for these people, but not for those who stayed as hunter-gatherer-scavengers, labour alone ceased to have the sole claim of the (lower) product of labour.

Smith’s clear acknowledgement of the significance of these changes, and, what was in effect, if not stated too clearly, his repudiation of the labour theory of early exchange value, became and remains one of the most enduring misreading of Wealth Of Nations since it was published in 1776 (and of much older vintage than the modern myth of the ‘invisible hand’, which only dates from the 1950s).

This problem today was prompted too by the misreading of Smith’s statement about ‘toil and trouble’ being the 'real cost' (or value to the indvidual)of anything, which can be read as a return to labour as the source of exchange value (clearly is demarked elsewhere in Wealth Of Nations as determined by Market prices, which may coincide or be close to Natural prices), when in fact it relates to one of the benefits of the division of labour, namely that by acquiring products through exchange, the receivers save themselves the ‘toil and trouble’ of making those products themselves. In short, it is a psychological advantage of a commercial economy from the plethora of products to which people have access, should they choose to pay (or have) the market (money) price for them. It was not a labour theory of value!

A last point where Art Carden is right: Adam Smith’s ‘endorsement of the "obvious and simple system of natural liberty" does not derive from his value theory’. Theories of Natural Liberty come from the philosophical theory of ‘Natural Law’, from such philosophers as Grotius, Pufendorf, Carmichael, and Hutcheson, which Smith learned while a student at Glasgow University, where Natural Law jurisprudence was taught to him and which his writings are sprinkled with throughout. In turn, these ideas are often confused with laissez-faire, but that's another story...

Labour in the 18th century

Keith Thomas, writes in the Independent (UK) (HERE)

'The Saturday Essay: “If only the devil did make work for idle hands...”

“On the other hand, work was widely admired as a divine activity, practised by God during the creation of the world and by Adam and Eve in Eden. It was a sacred duty and the source of all human comforts, creating wealth and making civilisation possible. It was a cure for boredom and melancholy and a remedy for vice. It was the only sure route to human happiness, bringing health, contentment and personal fulfilment. It structured the day, gave opportunities for sociability and companionship, fostered pride in individual creativity and created a sense of personal identity. Idleness could never make people happy; and the ideal society was one in which there was satisfying work available for everybody.

The classical economists took the first of these two views. Adam Smith agreed with Dr Johnson that every man was naturally an idler. It was axiomatic that human beings preferred leisure to work. Labour meant "toil and trouble". It was undertaken only for the sake of remuneration, what in North America is still revealingly referred to as "compensation". The object of working was to acquire wealth, and the object of wealth was to avoid having to work.”

However, Locke also believed that psychologically, "men cannot be perfectly idle; they must be doing something".

It was his 18th-century successor, David Hume, who did most to develop this insight. "Every enjoyment," he wrote, "soon becomes insipid and distasteful, when not acquired by fatigue and industry. There was no craving of the human mind more constant and insatiable than the desire for exercise and employment."

When Adam Smith declared that labour involved the worker only in "toil and trouble", he was thinking primarily of manual work. Indeed he explicitly said that it was only what he called "the inferior employments" that were performed solely for the sake of the money, thus conceding the possibility that other occupations could be rewarding in themselves. Nevertheless, Karl Marx had a point when he declared that Smith's view of labour as a curse was psychologically misconceived.”

Comment
I think Keith Thomas is slightly off centre in some of his remarks.

For instance, it was only with the expulsion of Adam And Eve that they had to work, it being fairly clear from the start that the Eden Garden was a paradise of sorts, where all their needs were provided for in the forest, where, as Smith put it, ‘The pulling of wild fruit can hardly be called an imployment’ (Lectures in Jurisprudence [1762-3] 1978, p 14, Liberty Press).

Before they left the paradise of the Eden Garden (a somewhat misleading appreciation of the realities of the lives of hunter-gatherers), Adam and Eve were told in no uncertain terms, ‘In the sweat of thy face shalt thou eat bread’[Genesis 3.v.19) (taking many millennia from the life of the forest to the labour of farming).

‘Labour meant "toil and trouble” ’is another slightly misleading take on Smith’s use of the phrase. In his discussion on the ‘real and nominal Price of Commodities’ he states that the ‘Real price of everything, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.’ He goes on to say that what something is really worth ‘is the toil and trouble which he can save to himself, and which he can impose upon other people’. And what ever is bought with money is ‘purchased by labour as much as what we acquire by the toil of our body. The money or those goods indeed save us this toil.’ [WN I.v.2.p 47; Edwin Canaan, 1937 edition, p 30-1]

The ‘other people’ are the sellers of what he wants. He labours to acquire money to save him the 'toil and trouble' of making the things he wants for himself. It is not the toil and trouble of wage labour that is decisive; it is the ‘toil and trouble’ of making what he wants himself, or, realistically, having to do without what he wants because he couldn’t make these things for himself – they are beyond both his reach and grasp.

This relates to Adam Smith’s basic observation that the hunters of North America were living in comparative poverty compared to the ordinary day labourer of Scotland in terms of their mutual possessions. The life of a hunter was hard enough to collect the few basic things needed in the hours he spent each day, without contemplating what else he might desire if they were in reach.

The notion of ‘toil and trouble’ is a psychological impulse – much like the desire to ‘better themselves’ – which impels labourers in a commercial society to seek work to acquire the goods that constitute their real incomes. Idleness was a problem for the very rich (anxious boredom with goods and each other was their main problem, as the novels of the 18th-19th centuries show), whereas for the very poor it was their anxieties from poverty, exacerbated by the intermittent absence of work, and suffering from the strange view among some legislators and those who influenced them that relieving poverty was an ‘inconveniency to the society’. (WN I.viii.36: p 96: Edwin Canaan, 1937 edition, p 78-9 )

The higher real incomes are, the greater the motivations to work well to acquire what their incomes can buy, to save them and their families the ‘toil and trouble’ of daily lives.

‘Tis a pity, as David Hume might have put it, that it took long enough for society to see the connection between what Adam Smith was talking about, when he lamented the short-sightedness of treating labouring men as little better than labouring cattle. It’s not that they were idle in the abstract, any more than slavery was basically inefficient (as well as inhumane). The slave who had ‘no other interest but to eat as much, and to labour as little as possible’ (WN III.ii.9: p 387; Edwin Canaan, 1937 edition, p 365;, is but a step or two away from the low-waged labourer, whose interest is to act as ‘idle’ as he can get away with).

Commentators in the 21st century might show some humility when discussing life in the 18th century (and, perhaps life today in an impoverished, failed states).