The metaphysical setting
The labour theory of value grew out of the ideas of the natural law philosophers of the seventeenth and eighteenth centuries: Grotius, Pufendorf, Hobbes, Locke, Quesnay, Hutcheson and Adam Smith, among others. They shared a common research agenda, which can be traced back to antiquity. They began their analysis of humanity and society by looking back to that original state of things which came before civil society. They painted various pictures of this hypothetical society, sometimes called a state of nature. Different philosophers described it somewhat differently. Adam Smith (1976 :65) called it “that early and rude state of society which precedes both the accumulation of stock and the appropriation of land.” In such a society, labour sacrifice is the only cost of production; and labour is the sole active agent of production. Labour produces commodities out of the things found in nature. Land is not only a gift of nature that costs nothing to produce, but it is also so abundant that it is free to anyone who appropriates it. Since land is free, it bears no rent; and since capital does not exist, neither does profit. “In this state of things,” Adam Smith (1976 :65) declared, “the whole produce of labour belongs to the labourer.”
In a world where isolated individuals dwell in a state of nature without the companionship, cooperation and protection of friends or family, life would be, as Thomas Hobbes (1968 :186) so famously put it, “solitary, poore, nasty, brutish, and short.” The first communities, whether based on the family or the village, enriched the social and economic welfare of mankind. They provided care in infancy, in sickness and in old age. They defended society against robber bands and wild beasts. They developed social customs and enjoyed the pleasures of communal life. Through the specialization and cooperation of labour, they also produced a greater abundance of commodities than was possible when each labourer worked alone.
The division of labour gave rise to the institutions of the market, money, property, justice and the state. The isolated individual living in a state of nature is both miserably poor and necessarily self-sufficient. Isolation makes trade impossible, money useless, ownership indisputable, justice irrelevant and the state superfluous. Property and justice become social issues as soon as the specialization of labour produces an abundance of commodities. Francis Hutcheson (1989 :71) explained how labourers will gladly toil to obtain “the conveniences and elegancies of life” rather than subsist on the products of uncultivated nature. They trade their leisure time for the material pleasures of life, but they could have no incentive to work unless they had the right of property in the fruits of their labour. Hutcheson endorsed the theory of property rights introduced by John Locke (1988 :288), who maintained that a labourer is entitled to whatever “he hath mixed his Labour with.” The existence of property requires a system of justice that defines the laws of ownership. As society progresses, the state arises to enforce the rule of law.
The labour theory of value is a production theory of value. In primitive society, labourers convert the free gifts of nature into commodities, so that the whole value of commodities is due to labour alone. Labour is the origin of value. When labourers first specialized in production, they produced surpluses of their particular commodities that accumulated beyond their immediate needs. These surpluses are capital goods to their producers, by definition, because they are produced and not consumed. Since, according to the classical view, they were produced by labour, they may be said to embody labour. If these first capital goods are then used in the production of new commodities, metaphorically speaking, the new commodities embody part of the labour contained in the first capital goods. Capital goods transfer the labour embodied in them to new commodities as they are used up in production. Thus, Sir William Petty (1963 : 110) wrote that commodities were the “effect of former or past labour.” David Hume (1964 :III, 302) called commodities “a kind of store-house of labour.” Adam Smith (1976 :330) said they were “a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion.” This line of reasoning lies at the heart of the labour theory of value presented by Karl Marx (1961–62 [1867–94]:1, 38), who claimed that a useful article “has value only because human labour in the abstract has been embodied and materialized in it.” This theory leads to the proposition that, in civil society, the whole value of all commodities is produced by labour alone, because land is a free gift of nature that is not produced and because capital goods are simply accumulated labour.
Since everyone desires a great variety of different commodities, labourers barter one surplus product for another. This requires a market where one commodity can be traded for another. In Adam Smith’s (1976 : 65) well-known example of the beaver and the deer, one beaver exchanges for two deer, because “it usually costs twice the labour to kill a beaver which it does to kill a deer.” Labour regulates the relative value of the beaver and deer. Trading one commodity for another by barter is, however, often inconvenient. This inconvenience leads to the invention of money. By convention, people come to accept one commodity in exchange for all other commodities. Starting with this idea, authorities from Aristotle to Adam Smith defined money as some thing people agree to accept in exchange. Money is not only a medium of exchange and a store of value, but also a measure of value.
As society progresses, the increasing abundance of commodities leads to the growth of population, as T.R.Malthus explained in his Essay on Population. David Hume and Adam Smith, among others, had previously made the same point. As population grows, land is appropriated. Whoever first occupies the land, according to Hugo Grotius and Samuel von Pufendorf, claims title to it, but some people are left without any. This unequal division of land creates different social classes based on property, as John Locke and Richard Cantillon later explained, so that rent arises as a distinct category of income. Farmers who accumulate capital or who borrow capital from others can rent land from its owners. People without land and without access to capital must work as labourers. This hypothetical history of mankind accounts for the origin of the three social classes in classical economics: landlords, capitalists and labourers. They receive three distinct
The origin of property, markets, justice and the state
The state of nature provided a theatre for philosophers to present their ideas on ethics, politics, justice, economics, psychology, sociology and the condition of mankind in general. In earlier times, moral philosophy encompassed all of these subjects. They had not yet become separate areas of specialization, but were all interrelated. Cicero (1967:100) put it well when he called philosophy “the knowledge of all things human and divine and the causes which lie behind them.” The modern world inherited this approach from classical antiquity, which, along with the Bible, gave scholars of the sixteenth, seventeenth and eighteenth centuries their most fun-damental literature. Universities required Greek and Latin for matriculation. Adam Smith and his predecessors were thoroughly grounded in the classics. While Cicero may have been their favourite classical author, Plato and, to a greater extent, Aristotle influenced the economic thought of the modern world.1
Plato (c. 427–347 BC) was more interested in politics than economics, perhaps because he had witnessed the growth of wealth and commerce in the Hellenic world and with it the defeat of Athens and the disintegration of Athenian society. He lived through the tyranny which followed the conquest of Athens by Sparta and he saw the democracy which replaced it condemn his teacher, Socrates, to death. He sought an ideal society where justice would prevail. categories of income: the rent of land, the profit or interest of capital, and the wages of labour.
The labour theory of value could convincingly account for the value of commodities in that original state of things which preceded the appropriation of land and the accumulation of stock. Labour was the only scarce factor of production and labour sacrifice was the only cost of production. The labour spent producing a commodity from the free gifts of nature also gave a credible justification for property in that commodity. Taking the fruit of someone else’s labour would be robbery. In this situation, the labour theory of property rights is in harmony with the labour theory of value.
In civil society, however, the price of most commodities is divided between the labourer, the capitalist and the landlord; and it is paid out as wages, profit and rent. “In this state of things,” Adam Smith (1976 : 67) wrote, “the whole produce of labour does not always belong to the labourer.” The labour theory of property rights is no longer in harmony with economic reality. When he came to explain the regulation of value in civil society, Adam Smith abandoned the labour theory of value. He taught, instead, that prices naturally tend to equal the cost of production, which divides into wages, profit and rent. David Ricardo tried valiantly to maintain the labour theory of market prices, but his logic led him to a cost of production theory that included wages and profit, though he managed to get rid of rent. Karl Marx remained convinced that labour produces the whole value of all commodities, but that labour does not receive that whole value. Capitalists exploit propertyless labourers by paying subsistence wages and by expropriating surplus value as profits. Marx also undertook to show how labour values are transformed into market prices, a demonstration which is still the subject of controversy.
The inquiry into the origin of justice and injustice in his Republic began with an economic analysis of the origin of a community or village. “Society originates,” wrote Plato (1955:102), “because the individual is not selfsufficient, but has many needs which he can’t supply himself.” Food is the first need of mankind, shelter second and clothing third. The farmer and the builder require tools made by craftsmen of various kinds. Shepherds produce wool for the weaver. Cowherds furnish leather to the shoemaker. A self-sufficient village would, therefore, contain many different types of labourers.
Since no two people are born alike, they are best fit for different trades. “Quantity and quality,” according to Plato (1955:103), “are more easily produced when a man specializes appropriately on a single job for which he is naturally fitted.” The division of labour increases production, first, because people specialize in those occupations for which they possess natural aptitudes. Differences in innate abilities cannot very well explain the economic prosperity of civil society, however, because those differences exist in all societies. Second, Plato, like Adam Smith,2 emphasized that the skill of labourers improves when they devote their lives to particular trades. This cannot go far in a small village. A high degree of specialization requires a large market, a market which extends to foreign trade. Third, labourers must be available to perform their tasks at the right time. Thus, the division of labour explains not only the origin of society, but also the growth in the output of each labourer and of the whole community.
Specialization makes coordination necessary. Each labourer produces an abundance of one commodity, but wants a variety of different commodities. This leads to buying and selling, the establishment of markets and the introduction of tokens to serve as money, the medium of exchange. Retailers arise in local markets as a distinct social class. A different class of merchants engages in importing and exporting. They, in turn, hire specialists in foreign trade and shipping. A simple village contains a variety of workers, but they produce only plain and simple food, clothing, shelter and the other necessities of life. It is, therefore, called a city of pigs.
Civilized societies are more populous, have many more types of specialized labourers, enjoy greater luxuries and have a higher standard of living. As a society progresses and population grows, it will eventually confront neighbouring societies, which eventually leads to war. Just as shoemakers must practice their craft to become proficient, so too soldiers must devote their lives to the tools of their trade. A well-trained army is the first requisite of a city state. It could not survive without one. These soldiers come from the guardian class in Plato’s Republic. The guardian class forms the political elite of his ideal state, which would be ruled by a philosopher king.
In his ideal state, life would be closely regulated. The men and women of the guardian class would be equal, but they could not marry. They would not live in families; instead, they would be subject to a programme of selective breeding. Population would be held constant as a matter of state policy. In his Laws, Plato (1970:209) recommended the rule of primogeniture to check the growth of population. An optimal population would be 5,040 people, which Plato (1970:205) recommended on the numerological grounds that it “has the largest number of consecutive divisors,” that is, 1 through 10. The guardians would be housed, fed and educated at the expense of the community, but, wrote Plato (1955:162), they “shall have no property beyond the barest essentials.” His notion of communism is perhaps closer to a Spartan mess hall than a workers’ soviet. If the aristocratic guardians owned property, they would be tempted to prey upon the community. He saw the great inequality of property as evidence of great injustice. His ideal state would also limit inequalities of wealth among the lower classes of farmers, tradesmen and merchants. Excessive wealth, Plato (1970:192) thought, produces “enmity and feuds in private and public life, while a deficiency almost invariably leads to slavery.”
Economic theory and economic policy were of secondary importance to Plato’s analysis of the ideal state. His primary purpose was ethical: to demonstrate that the ideal state should be built on the four cardinal virtues of wisdom, courage, discipline and justice. While few people today may have much sympathy for the authoritarian political structure of Plato’s ideal state, his hypothetical sketch of the origin of society became part of the common heritage of western economic thought. National defence and the administration of justice became the traditional duties of the state. His economic analysis included such issues as the diversity of wants, the division of labour, the necessity of exchange, the invention of money and the inequality of wealth which leading economists have discussed for over two thousand years.
Aristotle (c. 384–322 BC) was a student of Plato; and, like Plato, he began his study of society with the origin of the state. In his Politics, he argued that the first community was the family, because it is necessary for the propagation of the species. It arose naturally from the passion between the sexes. Families grew into villages and villages combined to form cities. The subsistence of the family required the proper management of the household economy. In order to survive, the household needed property in the instruments of production, whether these objects were inanimate like a ship or animate like a slave. Slavery was a matter of fact in the ancient world. Aristotle thought slavery was just when it arose from the natural inferiority of the slave, as in the case of a person fit only for manual labour. In Athenian...