Adam Smith's Limited Labour Theory of Value
David W. Viel, a physics PhD at John Hopkins Applied Physics Lab, posts
“Labor is wealth - Adam Smith
"Labour, it must always be remembered, and not any particular commodity, or set of commodities, is the real measure of the value both of silver and of all other commodities." and "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." Adam Smith, Wealth of Nations 
“I've been reading Adam Smith lately because so much of the school of economics which is popular these days is based in large part on his work. I also suspect that many who preach the gospel of Adam Smith have actually never read his work. So, I'm going to produce a series of posts based on this work, with this being the first.
Smith says a great many things. Some of which are a bit disturbing to modern sensibilities, such as his appraisal of the laboring class (of which he is clearly not a member) as a flexible commodity which expands and contracts as circumstances allow. His comments may be on the mark, but the deafness to the human condition is quite marked in his writings.”
David W. Viel is a welcome addition to the ‘Smithian’ community, certainly more so than I would be welcome to the applied physics community (I don’t pretend that reading occasional articles in Scientific American qualifies me as more than an uniformed outsider).
He is of course right to “suspect that many who preach the gospel of Adam Smith have actually never read his work”. I have commented similarly on many times on Lost Legacy with many specific instances of such errors of even willful ignorance exhibited among modern economists, including, sadly, several Nobel Prize winners, most of which could have been avoided and remedied by them consulting Smith’s works, rather than relying on others interpreting him for them, sometime supported by misleading excerpts from famous quotations.
Not the least of modern errors associated with Smith’s writings on labour as the source of value. This was a philosophical concept from long before Smith wrote about it (Locke for instance). Smith had a doctorate in jurisprudence (1764 from Glasgow) and held the Chair in Moral Philosophy (1752-64) before economics was a separate subject. Moreover, the essence of what he was saying became conflated with how David Ricardo, and Karl Marx in the 19th century developed the philosophical idea of labour as the source of exchange value, which became irretrievably lifeless from the history of 20th century communism.
This was consequential, but not necessarily decisive, in the history of economic thought. David W. Viel, as a relative newcomer to that history, has to start from the basis of economics as it is constantly developed, which is fine, as long as he takes what Smith’s writes within his ideas in their time and place.
I have long suspected that chapter 5 to 8 of Wealth of Nations (1776) was subject to Smith’s untidy re-editing, and was poorly written, suggesting his changes of mind or focus. I opined along such lines once at a seminar of specialists in the history of economic thought but was dismissed (without discussion) by my friend, professor Terry Peach, who is an international authority on David Ricardo (see Ricardo’s entry in Oxford’s Dictionary of National Biography).
That labour is the source of value in human society seems to me to be self-evident. The quantity and quality of labour expended by humans in the first ages of men and women determined the limits to the living standards of human communities. Tribes along the upper Amazon (Orinoco) today have access to fewer commodities than those along today’s Hudson’s River (New York) in a ratio, crudely expressed as a few thousand items to many billions.
Along the Orinoco these sturdy people co-operate from tribal necessity and have done so successfully for hundreds of millennia – they produce with their labour all of their needs limited by what is available locally and could continue to do so indefinitely as long as they refrain from contact with ‘civilisation’.
Along the Hudson, the situation is incomparable. New Yorkers co-operate globally with billions of anonymous others in modern, long, and complex supply chains of products, all still produced by human labour and ingenuity, known as markets and could continue to do so indefinitely if, ultimately, perhaps precariously – should those complex markets falter and collapse into anarchy. From which events, the millions along the Hudson would rapidly face a world of which they know nothing.
No small community along the Hudson could marshal “the toil and trouble of acquiring” all of what they are used to buying in the small corner shop in their neighbourhood, let alone in the nearest supermarket or from the Internet.
Meanwhile, in the tribal lands along the Amazon the locals, oblivious of the existence of New York, would continue as they have always done by applying their labour strictly within their tribal areas, without exchanging anything other than their co-operation with each other. Each tribal member produces by their labour their total needs. They do not exchange things for things with other distant tribes; local tribal habits decide everything. But along the Hudson, the market enables people to exchange the product of their labour, be it their actual labour or their entitlements, for something else, which saves them the “toil and trouble” of making it for themselves. No individual’s life is long enough for them to produce much for themselves, only a very small proportion of what they consume currently. Whereas the adult Orinoco tribesman living in the upper reaches of the Amazon River knows how to acquire everything he or she needs and has no need to know how to acquire anything beyond that. They can survive as they have always done.
The New Yorker is totally vulnerable to such a calamity; they would be helpless in days, even hours, and certainly in a month. Sadly, this is a common happening in major natural calamities; fortunately some semblance of emergency relief is available from elsewhere in the international community.
But this is the limit of the pure Smithian labour theory of value. Attempts to address the relevance of how market economies, and earlier pre-market economies, must change the essence of the pure labour theory of exchange value, and are glaringly well short of being satisfactory. Smith partly tried to do so but failed. Ricardo’s and Marx’s attempted labour theories of value proved redundant, though still interesting to scholars. Terry Peach on Ricardo is excellent, but others who still labour to make Marx’s labour theory of value, coherent such as Yaris Varoufakis, Joseph Halevi, and Nicholas Theocarakis in their “Modern Political Economics” (Routledge, 2011), ultimately fail to remain realistic (they end up conceiving of an entity called “capital” that is conscious and intends to realise its ends!).
Why is did Smith get into a muddle? Because everything about value changed with the discovery of personal property! Smith actually noted this in Wealth Of Nations, but it is hardly noted by those (few) who read him.
“In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him” (WN I.viii.2: 82). Smith’s begins the next paragraph with wishful words: “had this state continued”. But it did not continue in the way Smith imagined with “all those improvements in [labour’s] productive powers”.
The observed experience of surviving societies from the 15th century suggest there were few “improvements” in labour productivity in the absence of first, tribal, and eventually whole cultures, of individual private property. After 40,000 years of pre-historic stagnation the archeological record appears to show that labour productivity was bounded by the pure theory of the labour theory of value: “the whole produce of labour belongs to the labourer” within the restraints of the collective customs of the tribe. These customs appear to bear a remarkable consistency across the habits of our species.
Crucially for our purpose here, Smith recognized his limited knowledge at this juncture: “But this original state of things, in which the labourer enjoyed the whole produce of his own labour, could not last beyond the first introduction of the appropriation of land and the accumulation of stock. It was at an end, therefore, long before the most considerable improvements were made in the productive powers of labour, and it would be to no purpose to trace farther what might have been its effects upon the recompence or wages of labour” (WNI.viii.5: 82-3).
The archeological record shows direct evidence of trade by exchange across huge distances in pre-history (examples: Baugh & Ericson, 1994. Pre-Historic Exchange Systems in North America, Plenum; Bradley and Edmunds, 1993. Interpreting the Axe Trade in Neolithic Britain, Cambridge). With regular contact across huge distances came inter-tribal violence (Le Blanc. 1999. Pre-historic Warfare in the American South West, University of Utah). Human exchange and primitive trade boosted the division of labour, which promoted the division of labour, which itself contributed to the evolution of private property within co-operative tribal cultures.
One consequence where such habits developed from contact was that tribal ideas of property led to shepherding and farming. Open hunting lands belonged to those who occupied them and with the division of labour individual property owners appeared in small geographical areas. Humankind in this corner of the world was changing locally for ever. Private property changed the distribution of the fruits of human labour. Smith wrote in his partial explanation (without actual data and therefore inaccurately):
“As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.
It seldom happens that the person who tills the ground has wherewithal to maintain himself till he reaps the harvest. His maintenance is generally advanced to him from the stock of a master, the farmer who employs him, and who would have no interest to employ him, unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit. This profit makes a second deduction from the produce of the labour which is employed upon land” (WN I.viii.6&7: 83).”
Labour was no longer governed by the pure labour theory of value. The contortions that followed, based on the solid and noble idea of the product of labour belonged to the labourer, was no longer viable; it was manifestly redundant. Marx’s fanciful “congealed labour” and such like, became fantasies of his creative genius, but remained empty nevertheless.
David W. Viel’s exposition of Smith’s observation “the real price of every thing,..., is the toil and trouble of acquiring it” is interesting and instructive and remains true as a philosophical idea but is not an accounting concept. It is not meant as an objective tool for measurement. Individual’s decide their acceptable prices differently depending on circumstances. For some people (I’m thinking from observations of my children’s occasional behaviours) the “toil and trouble of acquiring” the wherewithall for their dinner (absent their mother’s presence) can lead them to avoid the “toil and trouble” of preparing a wholesome meal from what’s in the fridge, by, instead, scoffing a bar of chocolate and a diet coke!
It’s not a profound observation of Smith’s to suggest that “price” is a variable measure of value. Even his parable of the two hunters’ haggle to decide the “price” of beavers in deer terms left unsaid the plain fact that the same two hunters on any other day, or another two on the same day, might very well have haggled different “prices”.
Conclusion? The real price of anything is subjective. Evidence? Daily experience. The labour theory of value was about the natural rights of ownership in the first ages of humans. Smith regarded it within the philosophical theory of Natural Liberty (Puffendorf) .
The individual labourer had clear inviolable title to the fruits of own his labour before the invention of private property. Even before property, tribal customs could require all hunters and gatherers to hand over their gathered food or hunted kills for collective distribution among the tribal band, from which their self-interests were mediated with the shared self-interests of band. Be clear, this was never a wholly perfect selfless distribution – nothing managed by humans ever was or is – but it appears to have been a sort of “norm” across those human societies studied in depth by anthropologists.
Those few societies that did turn to property norms that accelerated the division of labour and successfully survived were associated with great swathes of ever increasing division of labour that for one of two locations in North-western Europe developed into market economies that from Smith’s time, in three centuries, created the world as we know it today, for longtime good or ill.
There’s no going back to our roots in the Orinoco River. Since they were noticed by their very distant relatives beyond the Orinoco, their life-style clock is ticking. Sad. Very sad.