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TWoN Chapter 6

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Here Smith is analyzing the parts of a commodity.  He begins with “that early and rude state of society” where labor was the only part of a commodity.  Page 67: “It is natural that what is usually the produce of two days or two hours labor should be worth double of what is usually the produce of one day’s or one hour’s labor.”  It is worth remembering that in those days what we call a “commodity” did not exist; but I’m not sure if that indicates a fundamental flaw in his reasoning, or merely a change in definitions.  I suspect the latter.

He then goes on to observe that an hour of difficult labor may exchange for two hours of easy labor, or, again, if one form of labor requires “an uncommon degree of dexterity and ingenuity.”  On page 67-68 he says that such allowances are “commonly made in the wages of labor, and something of the same kind must probably have taken place in its earliest and rudest period.”  In fact, my anthropological readings over the last two years do not bear this out.

Further down the page he, for the first time, addresses profit.  After observing that it is natural that those who accumulate stock will use this stock to set others to work, supplying them with “materials and subsistence in order to make a profit by the sale of their work, or by what their labor adds to the value of the materials.  In exchanging the complete manufacture either for money, for labor, or for other goods, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertaker of the work who hazards his stock in this adeventure.”

I waited, during the rest of the chapter, for him to explain where this profit comes from, and, at least so far, he does not.  It is, indeed, true that in a market economy, without profit no one would invest stock for manufacture, there is a sharp contrast between the precision of his earlier explanations about how labor creates value, and his cavalier dismissel of profit as something that “must be given.”  It is true that it must be given, but this does not say where it comes from.

Immediately following: “The value which the workmen add to the materials, therefore, resolves itself in this case into two parts,  of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced.”  So we have, in this case, two parts to the value of a commodity: one being the labor and material, the other the profit.  He is very clear about where the former comes from, but says nothing whatever about the latter except that it must be there.  This is like saying that if you throw a rock into a pool the water must splash because you’ve thrown a rock into it; it is true, but doesn’t tell us anything.

At the bottom of the page, he is very clear that profit is not the same as the wages of inspection and direction, pointing out (quite correctly) that these functions need not be carried out by the person investing the stock.  Again, we know where profit does NOT come from, but not where it does.

On page 69 he creates an example that leaves me puzzled.  It begins, “Let us suppose, for example, that in some particular place, where the common annual profits of manufacturing stock are ten percent….” and goes on and leaves me in the dust.  I’ve read that passage several times, and maybe I’m just being stupid, but I’m having trouble with the concept of percentage of profit (here he means return on investment, I think) can reasonably considered fixed within a geographic region.  On the other hand, the point of this example is to add weight to his argument that profit is not the wages of management, and he already convinced me of that, so I guess I can go on without understanding that piece.  I hope.

On page 70 he says, “In this state of things, the whole produce of labor does not always belong to the laboror.  He must in most cases share it with the owner of the stock which employs him.”  Now we begin to get a hint of his confusion.  Yes, it is certainly the case that the produce of labor in a manufacture is shared between the laborer and the investor; but if labor is the source of this value, and if the labor is a commodity sold at its value so that $50 worth of labor creates $50 worth of value, then profit comes from–nowhere!  Clearly, it must be the case that either labor is not a commodity, or value can come from somewhere other than labor.  (In fact, it was this connundrum that Marx would solve three-quarters of a century later, but let’s not get ahead of ourselves.)

Later he says, “An additional quantity, it is evident, must be due for the profits of the stock which advances the wages and furnished the materials of that labor.”  Again, to say it “must be due” is correct, but does not answer the question, “where does it come from?”  This is important precisely because, earlier, Smith was so adament on answering that very question regarding (what he now calls) the labor portion of the value of the commodity.

Further down, he introduces the portion of value of the commodity that involves rent of the land.  Page 71: “The real value of all the different parts of price, it must be observed, is measured by the quantity of labor which they can, each of them, purchase or command.”   And, “In every society the price of every commoodity 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 the price of the far greater part of commodities.”

He then uses the price of corn (ie, any grain) as an example, where part of the price is the cost of the laborers, another the rent of the land, and another the profit.

On page 73: “…as whatever part of it remains after paying the rent of the land, and the price of the whole labor employed in raising, manufacuturing, and bringing it to market, must necessarily be profit to somebody.”  True enough; but he ought to explain WHY some part of it must remain.  To say that, “If no part of it remained, no one would do it,” serves to prove that it exists, but not where it comes from.

On page 74 he mentions the interest on money for the first time.  “The interest of money is always a derivative revenue, ;which if is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue.”  He seems to be saying that money cannot create value, but, in order to earn interest, must be (eventually) invested in something that DOES create value.  If I’m understanding him correctly, than recent events in the world economy seem to have proven his point pretty emphatically.

Then we get into the subject of the private farmer (the American colonies being used as an example) in which the profit from the ground rent and the wages to the laborer go to the same person–ie, the farmer.

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Author: corwin

Site administrative account, so probably Corwin, Felix or DD-B.

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  1. He then goes on to observe that an hour of difficult labor may exchange for two hours of easy labor, or, again, if one form of labor requires “an uncommon degree of dexterity and ingenuity.”

    This seems to strike at the heart of the modern controversy of “intellectual property” vs more tangible property. How much value should be given to the innovator, the idea-maker, vs the person whose raw labor actually produces a tangible commodity?

    Is the idea leading to the tangible result of the innovation something that should be held in perpetuity by the inventor, and his descendants, or at some point be passed over into the public domain for common benefit of all? If so, how long a period should this be? Should an idea or innovation be protected in trust for the progeny of the innovator at all?

  2. If: “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.”
    Then: the value of the commodity is not simply the value of the labor required to produce it, but includes the added value of acquisition. The convenience (or greater difficulty) of acquiring it raises the commodity’s value in the perception of the purchaser, and that would be where profit is derived?

  3. “fixed within a geographic region”

    Profits will tend toward a common rate across all endeavors that are close enough together that they compete with one another.

    In fact, economists use the term “excess profit” to refer to any profit that any business makes that’s above that of other nearby businesses–and suggest that excess profit will generally be competed out of existence.

    Whatever the more-profitable business is doing–using better technology, better industrial processes, better marketing, whatever–will be copied and the profit gap will close (partial exception cases for things like patents and trade secrets where copying is hard or illegal.)

    For this to happen, though, the businesses have to be competitors, which may be the reason Smith restricts his analysis to geographical regions. Within a local area, though, profits of even completely different kinds of business will tend to converge–because who’s going to run a mill if a tannery is twice as profitable? (Even if none of the mill owners is bold enough to change businesses, the next guy who starts a new business will surely target the most profitable field.)

  4. Vampirecat, the value of something is what it is worth *to me* *right now*. That’s higher than the *price* or I don’t buy it.

    (E.g. I’ve just been outside running, it’s hot, and I’m very thirsty. The value of a bottle of water is $10, so when I pass a vendor selling them for $2 I buy one. There’s another runner who is just as thirsty, but he earns less, so he puts the value at $.80 and doesn’t buy.)

    Value is essentially independent of production cost. The fact that I place a higher value on something than it costs to produce is the reason it can be sold to me at a profit.

  5. The purpose of intellectual property rights is to encourage the production of said stuff. The benefits to the creator and to society have to be balanced.

    If there were no such thing as intellectual property rights, fewer people would write books (and those who still did would spend less time writing, because they’d also have to earn a living doing something else).

    On the other hand, there’s no reason for copyright to last umpteen centuries; something like minimum(40 years, life+10) would work fine. No author is going to think “I’m old, so I’ll only get royalties for 40 years instead of 75, so it’s not worth writing another book.”

    It’s especially corrupt to increase copyright terms for stuff previously created; you can’t incent someone to have done something 40 years ago, he either did it or not.

  6. If there were no such thing as intellectual property rights, fewer people would write books (and those who still did would spend less time writing, because they’d also have to earn a living doing something else).

    This must explain why so few great works of art and literature were produced before the advent of copyright laws.

    Just think what Michelangelo, DaVinci, Bach, Chaucer, et al might have accomplished if only they’d had some kind of incentive to be creative! Maybe they’d have made something that was actually GOOD.

    My point here is that while it seems logical to assume that protecting “intellectual property” in the same way as a tangible commodity would encourage production of said works, artists (and art) would still exist without it; and good artists would still be able to make a living just fine without it. There might be fewer artists; but considering the dubious quality of some of the “art” that is out there in these days of Youtube and Twitter, that might actually be a good thing.

    Now, I’m not in favor of abolishing copyright completely, but it seems to me that shortening copyright terms to, say, 10 years, regardless of the creator’s lifespan, would be sufficient to ensure they get fairly compensated for their “product”. This would blunt the current phenomenon of large media corporations sucking up every film, song, poem and book that comes along and charging the bejeesus out of it for a century or more.

    This could actually do more to encourage new work, also. Why would a record label, for instance, want to fund new artists when they can just keep reselling Led Zeppelin’s Greatest Hits over and over again?

    And maybe it would do the artists some good to know that they can’t just rest on their laurels for a great album/book/movie they made 20 years ago? Wouldn’t that create more incentive for them to go out and produce something new?

  7. It seems to me the best defense of copyright laws (which makes it possible for people to make a career out of writing) would be if an increase in a writer’s writing experience lead to a commensurate increase in the quality of their writing output. After, say, a certain amount of experience necessary for them to find their “voice”. If that were true, then the very final works of the most prolific writers should have the greatest artistic merit. I’m not even sure that that could be measured, but my gut reaction is that that wouldn’t turn out to be true. Of course, not every work (such as Wealth of Nations) is written with artistry in mind. Even if the law did say you could copyright an idea or a fact, though, I doubt it would do you any good.

  8. I tend to agree with Majikjon that copyright terms are far longer than they need to be.

    True story: I have been trying to find a copy of the game System Shock 2. The original publisher no longer produces it, no retail shops have copies of it, no online stores have copies of it. It was published on August 11, 1999 (according to Wikipedia), less than 10 years ago. The developers and publisher have already made ALL the money they are going to make out of this intellectual property. But it won’t be legal for anyone who has it to make a copy and give it to me for decades.

    If copyright represents society at large giving up the legal ability to do whatever the hell they want with intellectual property they acquire access to, for the greater good of providing incentives that cause more intellectual property to be created, then there’s no possible justification for it to last this long. I know software IP often has a very short commercial lifespan, but still for almost everything I can think of the vast bulk of the profits from sale of a work comes in a relatively small number of years after the first publication of a work.

  9. Majikjon, the people you refer to lived when intellectual property rights were mostly irrelevant: it’s not like it was cheap to copy stuff, and the copies were indistinguishable from the master.

    How many writers could make a living today without royalties? You might claim that the “good ones” would still write; I know that I enjoy reading stuff written by people who wouldn’t write if it didn’t earn them a living, so I’d be worse off without copyright.

    And I did say that current terms were too long. 40 years gets 99% of the revenue (100% for a large majority of items); I suggested life + 10 so as to avoid the insult to a living author of someone else doing bad things to his writing (and the +10 so that a publisher will buy the rights to an old book by an old author).

    But a clause that says “If something stays out of print for a year anybody can reproduce it for a statutory payment” is also reasonable.

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