Theories of Value from Adam Smith to Piero Sraffa

Ajit Sinha

• Publisher: Routledge India
• Year: 2018
• Print ISBN: 9780367147617
• eBook ISBN: 9780429807718
• Edition: 2
• Topic: Betriebswirtschaft
• Subtopic: Wirtschaftssethik

This book presents a comprehensive account of more than 200 years of controversy on the classical theories of value and distribution. The author focuses on four, perhaps most critical classics — Adam Smith's Wealth of Nations, David Ricardo's Principles of Political Economy, Karl Marx's Capital and Piero Sraffa's Production of Commodities by Means of Commodities. The book highlights several significant differences in the widely celebrated theories of the four authors as it searches for the 'classical standpoint' that separates them from the 'moderns'. It also challenges canonical interpretations to analyse their flaws and weaknesses, in addition to the already obvious strengths, and critically engages with the major alternative interpretations and criticisms of the theories.

With a new Afterword that follows up on the debates and developments since the first edition, this book will appeal to scholars and academics of economic theory and philosophy, as well as to the general reader.

1
The Theory of Value in Adam Smith's Wealth of Nations

Part I
Why Value?

In the ‘Introduction and Plan of the Book’ of the Wealth of Nations, Adam Smith does not mention anything pertaining to the question of value. The first four brief paragraphs explain the nature or the purpose of the book, which is to establish that the true nature of the wealth of a nation lies in its per capita real income and that it depends largely upon two things: (i) the productivity of its labour, and (ii) its division of total labour into productive employment and unproductive employment. Of the two, the first is much more important than the second. The rest of the five paragraphs are devoted to explaining the division of the work into five ‘books’. The first book deals with the causes of improvement in labour productivity and the distribution of the total product among different classes. The second deals with the nature of capital and its investment in employing productive and unproductive labour. The third deals with the natural course of development of a nation and the various government policies that in one way or another favour one sector over others and thus interfere with the natural course of development. The fourth is a critique of two great economic doctrines: Mercantilism and Physiocracy. And the fifth and last book deals with the issues of public finance in great detail.

The problem of value or prices of commodities is nevertheless broached at the end of Chapter IV in Book I. The reader is entreated for ‘patience and attention’, for the ‘subject’ is ‘in its own nature extremely abstracted’ (p. 46, all the references to WN are from 1981 Library Fund edition). The topic occupies three full chapters from V to VII. His deliberation on the question of value is sandwiched between his deliberations on the causes that lead to increase in labour productivity and the distribution of total product among the three classes. It would appear from the design of the scheme that the problem of value had to be resolved before an understanding of the distribution of income could be developed. However, the questions that Adam Smith poses to himself at the end of Chapter IV suggest something entirely different. The problems for Chapters VI and VII are stated as:

... what are the different parts of which this real price is composed or made up, …

And lastly, what are the different circumstances which sometimes raise some or all of these different parts of price above, and sometimes sink them below their natural or ordinary rate; or, what are the causes which sometimes hinder the market price, that is, the actual price of commodities, from coinciding exactly with what may be called their natural price (p. 46).

Here, the first statement seems to treat prices as a dependent variable made up of various parts. It would therefore appear that the discovery of those parts would be essential for the investigation of the principle that regulates the exchangeable values of commodities. The second statement apparently confirms the methodology indicated above; here the causes for market prices deviating from their natural prices are identified with the circumstances that raise or sink the levels of its parts from their natural levels. Thus, apparently, while the natural price is determined by the natural levels of its parts, the subject matter of the determination of the natural levels of those parts belongs to the investigation of the distribution of the total product. On the other hand, however, we frequently come across such statements as:

In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts; and in every improved society, all the three enter more or less, as component parts, into price of the far greater part of commodities (p. 68).

Here, price ‘resolving’ itself into three parts would imply that price is the independent variable while distribution is the dependent one. But reference to three parts as components of price implies that it is the other way round. Modern readers of Adam Smith are constantly faced with such ‘contradictory’ juxtapositions and it would be helpful for them to keep in mind that the epistemological foundation of Smith’s theory is not necessarily the same as theirs. We will take up this issue at the end of our reading. At the end of Chapter IV, paragraph 12, Adam Smith writes: ‘What are the rules which men naturally observe in exchanging them [commodities] either for money or for one another, I shall now proceed to examine. These rules determine what may be called the relative or exchangeable value of goods’ (p. 44). By the phrase ‘the rules which men naturally observe’, Adam Smith could mean some kind of social convention that men naturally observe, such as the convention to drive on either the right or left side of the road. However, in paragraph 14, he goes on to say: ‘In order to investigate the principles which regulate the exchangeable value of commodities, I shall en-deavour to shew ...’ (p. 46). Here, the word ‘principle’ apparently points in the direction of some sort of a theory, i.e., the ‘investigation of the principles’ may amount to a discovery of the variables and their relations that regulate the exchangeable value of commodities.

Measure of Value

Be that as it may, the problematique of Chapter V is introduced as ‘what is the real measure of this exchangeable value; or, wherein consists the real price of all commodities’, and is entitled, ‘Of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money’. As is obvious from the title, from the very outset Smith declares that the real price of a commodity is in terms of labour, whereas its nominal price is in terms of money. The question is: What does Smith mean by ‘real price’ and ‘labour’? Before we investigate this question, it is important to note that for Smith the problem of distinguishing the ‘real price’ from ‘nominal price’ arises only in the context of comparison of value over a period of time or across spaces. As he writes:

At the same time and place the real and the nominal price of all commodities are exactly in proportion to one another. The more or less money you get for any commodity, in the London market, for example, the more or less labour it will at that time and place enable you to purchase or command. At the same time and place, therefore, money is the exact measure of the real exchangeable value of all commodities. It is so, however, at the same time and place only (p. 55).

Thus the problematique of the chapter is apparently not concerned with the determination of exchangeable value of commodities in a market at any given point in time; rather, it is concerned with the measure of changes in the value of a commodity over a period of time in a given market. Smith notes that though the exchangeable value of every commodity is frequently estimated by the quantity of money, like any other commodity the money commodity is itself exposed to variation in its price. Thus when it comes to an estimation of the changes in the value of a commodity over a period of time, the money commodity turns out to be an unsatisfactory measure:

[A]s a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity which is itself continually varying in its own value, can never be an accurate measure of the value of other commodities (p. 50).

It is in this context that he proposes labour as the ‘real measure’ of value or the price of a commodity estimated in terms of labour as its ‘real price’.

Now let us see why Adam Smith considers the price of a commodity estimated in terms of labour as its ‘real’ price. He argues:

The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. That money or those goods indeed save us the toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it and who want to exchange it for some new production, is precisely equal to the quantity of labour which it can enable them to purchase or command (pp. 47–48).

Clearly the reason for labour to be the real price lies in the fact that stripped of all social relations, production remains a relation between the labourer and nature. In this relationship the labourer is the subject. He pays a price through toil or sacrifice of his comfort to acquire a commodity. This is the original price and thus the real price of the commodity to the labourer. It should be, however, also noted that in this context Adam Smith maintains that:

What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. That money or those goods indeed save us the toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity (ibid.).

This is a statement of a pure labour theory of value — a statement that will recur in the next chapter as well.

Now when one places the commodity within a social relation and asks what the real price of the commodity is, then it is not clear who is the subject of this question. Is it still the labourer who needs to acquire this commodity or the owner of the commodity who needs to exchange it for some other commodity or direct labour services? Usually the question is understood from the point of view of the owner of the commodity as the subject. If that is the case, then the switch in the position of the subject creates an apparent disconnect between Smith’s reason for labour to be the real price and his insistence that the real price must be measured in terms of quantity of labour. Smith is thus guilty of switching his subject around on this question and thereby causing a great deal of confusion among his readers. For example, in the passage just quoted, his reference to ‘those who possess it and who want to exchange it for some new production’ switches the subject of the passage from labourer to the owner of the commodity. However, if the subject is the owner of a commodity who can exchange the commodity with any other commodity or money or services of labour, then it is not clear in what sense its exchange relation with labour can be privileged among all other exchange relations. Furthermore, for the commodity owner the value of labour is susceptible to as many variations as any other commodity. But Smith’s real measure of value is supposed to remain constant over time and space. Confronted with this problem, Smith reverts back to his original position of positing the labourer as the subject:

Equal quantities of labour, at all times and places, may be said to be of equal value to the labourer. In his ordinary state of health, strength, and spirits; in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness.¹ The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these indeed, it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labour which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only (pp. 50–51).

From this position it is easy for Adam Smith to reject the argument that the value of labour is susceptible to as many variations as any other commodity:

But though equal quantities of labour are always of equal value to the labourer, yet to the person who employs him they appear sometimes to be of greater and sometimes of smaller value. He purchases them sometimes with a greater and sometimes with a smaller quantity of goods, and to him the price of labour seems to vary like that of all other things. It appears to him dear in the one case, and cheap in the other. In reality, however, it is the goods which are cheap in one case, and dear in the other (p. 51).

Given that the labourers constitute a vast majority of the population and the Wealth of Nations was particularly concerned with the welfare of this particular group of people,² it made eminent sense for Adam Smith to measure the rise and fall in the values of commodities on the basis of whether the labourer had to sacrifice more or less ‘toil and trouble’ to buy that commodity. The reader should note that Smith’s proposed measure of value is entirely objective — how many hours a labourer must work to purchase a commodity at any given point of time is an objective measure, and is not affected by the differences in the subjectivities of labourers regarding how they feel about the work. It is also quite clear, however, that even when real wages are taken to be given from outside, the real value of commodities at any given point in time is not immediately determined, as wage is a basket of goods and thus how much labour-time a labourer must sacrifice to acquire any commodity (either belonging to or outside of that basket) can only be determined when the relative values or prices of all commodities against a numéraire are known at that point in time. For a modern reader, Smith’s reversal of the subject position on this question amounts to using the wage basket as the numéraire for the price determination of commodities at any point in time.

Such reversals of the subject position are possible on this question due to the fact that quantitatively the answer remains the same whether it is looked at from the point of view of the labourer wanting to acquire a commodity through the sacrifice of his labour or whether it is looked at from the point of view of the owner of a commodity who directly or indirectly exchanges direct labour services for the commodity. For example, let us posit the labourer as the subject and ask the question: how much of labour must a labourer sacrifice to obtain a commodity? In a ‘rude’ society the value of a commodity must be equal to the time it takes to produce the commodity. If the labourer can produce 2 kg of corn in six hours, then the value of 1 kg of corn would be three hours of labour to him. But in a capitalist society, the labourer does not have direct access to production. He sells his labour for wage; say eight hours of labour a day for 2 kg of corn. Thus the value of 1 kg of corn is equal to four hours of labour to him. In this scenario, suppose that at period 1, one unit of a commodity x exchanges for 4 kg of corn. Thus the value of commodity x will be equal to 16 hours of labour to the labourer in period 1. Now suppose that in period 2 the worker still sells eight hours of labour for 2 kg of corn, but one unit of commodity x exchanges for 2 instead of 4 kg of corn. The exchange ratio between corn and x could change for reasons intrinsic to corn or x or both. However, from the labourer’s perspective the value of corn has remained the same but the value of x has fallen to half, from 16 hours to eight hours. Thus as long as the relationship between corn and labour remains constant, corn could be used as an invariable scale of measure to measure changes in the value of all other goods. Further, suppose that in period 2 the worker has to work 16 hours for 2 kg of corn. In this case, the value of x remains constant but the value of 1 kg of corn rises to eight hours. We can repeat the exercise by inverting the subject and ask how much of labour-time a unit of the commodity x can command and verify that the quantitative answers remain the same. The only problem in the second case is that there seems to be no particular reason why it would be important to the owner of a commodity to reckon the value of his commodity in terms of the quantity of labour services it can exchange for and not money or some other commodity. Though it makes perfect sense for the labourer to measure the value of a commodity in terms of the quantity of labour he will have to sacrifice to acquire it, the raison d’être for labour to be the measure of value apparently ceases to exist with the inversion of the subject from the labourer to the owner of the commodity. ³

Though it may be helpful for a mod...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Preface to the Second Edition
• Preface to the First Edition
• 1 The Theory of Value in Adam Smith's Wealth of Nations
• 2 The Theory of Value in Ricardo's Principles
• 3 The Theory ot Value in Marx's Capital
• 4 The Theory of Value in Sraffa's Production of Commodities
• 5 Conclusion: On the 'Classical Standpoint'
• Afterword: A Response to My Critics
• References
• Index