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...