Saturday, July 21, 2007

Smith Did Not Advance a Labour Theory of Exchangeable Value for Commercial Society

Liberty For All Blog (19 July ) carries an article, ‘Value is Subjective’, by Denis D. Hayes, who is described as: ‘a healthy, independent thinker, author, and medical professional. Never one to pass up the opportunity to play at being a wordsmith, especially when it comes to politics and music, he has been actively writing for more than two decades. He has been with Liberty for All since its inaugural issue and devotes the bulk of his time to his family, his work, and the pursuit of happiness’.

This, I suppose, makes Denis interesting; however, he writes with evidence that he has the haziness notion of when Adam Smith lived (1723) and when Karl Marx lived (1818 – 1883):

It is at this juncture that I feel we should briefly examine the error that gave rise to such things as unions in the first place. It happened around 1776, and is traceable to the great work of Adam Smith, “Wealth of Nations.” At about the same time a guy named Karl Marx is looking this work over, looking for anything he can exploit in his bid to discredit capitalism. Marx found it in Smith’s so called Labor Theory of Value.

Now it is well known that Smith was very sympathetic to the working class, but unfortunately it was probably this soft spot that contributed to his major mistake. Essentially Smith said, “All things owe their value to the labor that goes into their production.” This has been shown to be false innumerable times by many people and examples, but in the most enlightening way by A. J. Galambos, who was a physicist and author, and was the developer of the Theory of Volition. Galambos correctly points out that Karl Marx lifted the statement from Smith and then reworked it to support his own exploitation of the masses concept. Marx’s version states, “All the value is created by the laborer.”

Denis writes this in the midst of a fairly strong critique of the role and existence of trade unions, of which I shall say nothing. Should you be interested, follow the link above to the ‘Liberty for All’ web site.

The error of dates is only part of the problem, in that 1776 is a long way before 1818, when Marx was born and the 1850s, when Marx was writing on his labour theory of value, and was not remotely ‘about the same time’.

Denis is not clear on what Smith wrote about labour being the source of exchangeable value. He referred here to labour in the ‘rude’ society of hunters when labour was the sole factor production. There were no landlords charging rent for using their land and no undertakers paying wages to workers, or tax inspectors taking a share of their income. Smith argue that two hunters would exchange items (beavers for deer) in the ratio by which it would cost each labourer in labour time to hunt the other animal they wanted to exchange for what they had caught earlier. If it took twice as long to catch a beaver than it did to catch a deer, he suggested that the beaver would exchange for two deer.

As society advanced from sole hunters to shepherds, then farmers, and finally commerce, the number of factors required for production would increase from one to many, and each owner of the constituent factors would require a share in the revenue received from selling the joint product. From this time on, labour was no longer the sole source of production and the labour time theory of exchange value would no longer be relevant. This much is clear from reading Wealth Of Nations closely, as I explain in my forthcoming book on Adam Smith for Palgrave’s Great Thinkers in Economics series (2008).

Marx drew on the exchange value of labour time in ‘rude’ society, denied the existence of property, without which society would have remain at the hunting mode of subsistence age, not developed knowledge of shepherding, farming or commerce, and not experienced a growth in population at all. However, that may be disputed by Marxists but they cannot challenge the historical fact that hunting survived, which survived to the 18th century, had small populations in vast territories, nor can they challenge that hunting societies surviving to day (Kalahari, Papua New Guinea, Amazon, Australia, etc.,) are all low population, low technology and now, smaller land territories. At one time, not long ago, the whole world was limited to hunting as its mode of subsistence (as John Locke put it: ‘all the world was America’, alluding to the hunting tribes of North America, then being reported in detail by travellers and explorers).

Marx was wrong about ‘surplus value’ and he created a whole new vocabulary of abstractions trying to make it credible. Smith’s expressed a truism that factors had to be paid their costs, plus in the undertakers had to receive a profit, to induce them to continue supply their services. This did not mean that buyers had to pay sellers their costs. Market prices were determined by supply and effectual demand. Where a gap existed – as Smith thought there would be – markets would need to adjust the amount they supply or the amount that is demanded.


Blogger Russell said...

And what adjusts supply and demand? Usually labor. If a meteorite lands in your backyard and you decide to sell it, your labor hasn't determined its price.

But there is a market in meteorites, and its prices are determined by the efforts of those who scour their favorite windblown desert sites in dune buggies (with half their finds going to universities if they are searching on Federal Lands.)Markets not determined by labor at one moment usually become so.

Of course, Smith uttered an overgeneralization. But over time where labor is applied is the factor that can be most easily changed, so it ends up determining prices rather closely, even with commodities - but of course it is the marginal labor, of getting the most labor-intensive last part of the supply to market that determines price, often leaving much "economic profit."

It's not impossible that Marx was groping for this last concept, ineptly, with his lamentable theory of "surplus value" (which Bertrand Russell excuses as an emotional outburst due to reading to much about child labor)although this interpretation of mine may be much too kind. In transitional (or subtly corrupt) economies such profits can be very wide spread amongst the rich.

11:18 pm  
Blogger Gavin Kennedy said...

Thank you for your comment.

Apologies for not replying sooner but I didn’t notice it until today.

You make some interesting points. The meteorite finder’s labour in a desert search costs the rent of or purchase of the buggie and its fuel. The federal transaction costs administration of receipt of the meteorite, storage and distribution to approved institutions, and monitoring of any cash rewards to universities and the finder.

Value is ‘exchangeable value’, which is determined in markets by the coincidence of the buyer’s and the seller’s aspirations under the condition that buyers are not interested in the seller’s costs, and sellers are not interested in the buyer’s needs. We call the process by which buyers and sellers mediate their difference as to price, bargaining (higgling, haggling).

If the state fixes the price its decisions have market effects. Too ‘high’ and it is inundated with supply (week-end meteorite hunters increase in numbers and the hours they put in); too ‘low’ and its costs of overheads are not recovered and there is widespread evasion of its rules.

I liked the reference to Bertrand Russell – do you have a source for it?

10:59 am  

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