Category: The Wealth of Nations

Page 91: “The produce of labour constitutes the natural recompence or wages of labor.”  In other words, the “natural” or baseline value of labor is the amount that labor adds to the commodity.  This is why Smith was forced to create profit as an independant part of the value of a commodity, and why he was unable to explain where it  came from.

This becomes even more clear in the following paragraphs, where he observes that, originally, “whole produce of labor belonged to the laboror” and goes on to suggest that, had this continued, all things would have become cheaper as the productivity of labor increased.  “They would have been produced by a smaller quantity of labor; and as the commodities produced by equal quantites of labor would naturally in this state of things be exchanged for one another, they would have been purchased likewise with the produce of a smaller quantity.”

It seems to me that Smith was a sharp observer, and he certainly had a luminous mind.  Where he fails is in failure observe the effect of form (which is rather pleasing, since today it is so popular to concentrate exclusively on form and utterly ignore content).  What I mean is, he makes sharp observation about the functions of a market economy, but fails when he tries to show that they applied to other forms of economy.  The laws of commodity exchange no more apply to a fuedal-agrarian economy than the laws of astronomy apply to biological function; both are forms of matter in motion, but the laws of each must be learned independently.

Page 92: “As soon as land becomes private property, the landlord demands a share of almost all the produce which the laboror can raise or collect from it.  His rent makes the first deduction from the produce of the labor which is employed upon land.”    On the other hand, there are times he recognizes how the change in form affects content, so maybe I’m full of shit.

“In all arts and manufactures the greater part of the workmen stand in need of a master to advance the materials of their work, and their wages and maintenance till it be compleated.  He shares in the produce of their labor or in the value which it adds.” (emphasis added)  He then goes on to observe that it is possible for the workman and the master to be the same person, in which case enjoys the whoe produce of his labor, but points out that this is very rare.

He observes on page 94 that the interest of the master and laborer are by no means the same.  In other words, they are each have an interest in getting as much as possible of the value the laborer adds.  This underlines his skill as an observer, as he made this observation before the discovery of surplus value.

“We have no acts of parliament against combining to lower the price of work; but many against combining to raise it…in the long-run the workman may be as necessary to the master as the master is to him, but the necessity is not so immediate…We rarely hear, it has been said, of the combinations of masters, though frequenetly of those of workmen.  But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.  Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate.”

Page 95 on “combinations of laborers”: “They are desperate, and act with the folly and extravagance of desperate men, who must either starve or frighten their masters into an immediate compliance with their demands.  The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against combinations of servants, laborers, and journeymen.”

On page 97 we get to something more daring and interesting: “When in any country the demand for (workers) is continually increasing…the workmen have no occasion to combine in order to raise their wages.”  And, further, “The demand for those who lives by wages, it is evident, cannot increase but in proportion to the increase of the funds which are destined for the payment of wages.”

Yes and no.  It seems that, yes, when the economy is rapidly expanding, it works to the advantage of the workman, in that he can command a higher price.  But that is not the only way in which he can do so.  History, after Smith’s time, showed that broad and determination combinations of workers can have drastic influence on the standard of living of the entire class, and can even force repeal of the most draconian of the anti-labor laws he refers to.

Nevertheless, he makes a strong, even a profound point.  Page 98: “It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in wages.  It is not, accordingly, in the richest countries, but in the most thriving, or in those growing rich the fastest, that the wages of labor are highest.”  Later economists would find other reasons why a given capitalist economy must be continually expanding; but Smith got there first.

Page 99: “The most decisive mark of the prosperity of any country is the increase of the number of its inhabitants.”  Interest.  Is this true?  I can see his arguments, but I’m not convinced.  Still, he is more nearly correct than Malthus.

Page 104: “The liberal reward of labor, therefore, as it is the necessary effect, so it is the necessary symptom of increasing national wealth.”

On page 105 he observes that the wages of labor do not necessarily fluctuate with the price of provisions.  In other words, he asserts–quite correctly–the independence of the cost of labor and the value of labor.  This hints at the discovery of labor-power.

Page 107: (comparing different levels of subsistence in England and Scotland) “This difference, however, in the mode of their subsistence is not the cause, but the effect, of the diference in their wages; though, by a strange misapprehension, I have frequently heard it represented as the cause.  It is not because one man keeps a coach while his neighbor walks a-foot that the one is rich and the other poor, but because the one is rich he keeps a coach, and because the other is poor he walks a-foot.”  Brilliant.

Page 111: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

On page 114 he speaks of the benefits of to the capitalist of happy, rested, strong, and well-fed (in effect, well-paid) workmen.  This reminds me very much of the arguments advance by antebellum apologists for slavery that it is in the masters interest to keep the slaves happy, rested, strong, and well-fed; and yet history shows that, generally speaking, it didn’t work out that way.  Why not?  In my opinion, because of competition, which, while it has many beneficial effects, also has profoundly destructive effects.  Today, in the midst of the financial crisis, the impressionists are trying to convince us that the bankers who led us into this path were foolish, because they were not acting in their own long-term interests.  They ignore the demands of competition.  In the day to day life of the capitalist, profit does not come up all that often; instead the constant battles are: cash-flow, and market share.  An investment banker in the last few years who acted “in his own long-term interests” was in danger of losing his market share, and thus his economic life, against competitors who were concentrating on short-term interests.  That Smith didn’t see this is, in my opinion, through no fault of his own, but simply because, in the middle of the 18th Century, there the data wasn’t there to draw this conclusion.  It wasn’t until the industrial revolution that these tendencies became plain.

Page 119: “The money price of labor is determined by what is requisite for purchasing (the necessaries and conveniences of life which must be given to the laborer).”  True in part, but it ignores the social aspect of the question–the effect of those combinations of laborers that are successful.  Smith can hardly be blamed for not seeing this, because he lived before such combinations became powerful; this, too, was a result of the industrial revolution.

Page 120: “The increase in the wages of labor necessarily increases the price of many commodities, by increaseing the part of it that resolves itself into wages…”  This contradicts what he said earlier about the independence of the cost of labor and the value of labor.  It is also contradicts observed data (though these data were scarce in Smith’s era).  But I believe in the most backward bourgious economist no longer clings to the “wage-price spiral” that enjoyed a brief vogue in the 1970’s.

Much of this chapter is devoted to supply and demand, and establishing its proper place in setting the price of commodities.  To do this, he creates the concept of “natural price.”  Page 79: “There is in every society or neighborhood an ordinary or average rate both of wages and profit in every different employment of labor and stock..the ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail.”

Page 79: “The actual price at which any commodity is commonly sold  is called its market price.  It may either be above, below, or  exactly the same with its natural price.”

Supply and demand determines the way in which the market price fluctuates around the natural price.  From his remarks earlier concerning labor as the measurement of value, we can determine that, for Smith, the amount of labor embodied in a commodity determines it’s natural price, around which its market price fluctuates.

He then goes on to describe effectual demand as distinct from absolute demand.  P 80: “A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, so the commodity can never be brought to market in order to satisfy it.”

Page 82: “The natural price, therefore, is, as it were, the central price to which the prices of all commodities are continually gravitating.

He speaks later of the desire for secrecy on the part of those who benefit from a given commodity rising above it’s natural price, in order to prevent others from entering the market, which will naturally tend to lower the price by increasing the supply.

Later he touches briefly on monopoly.  Page 87: “The price of monopoly is upon every occasion the highest which can be got.  The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together.”

I run into a problem on page 89: “Though pecuniary wages and profit are very different in the different employments of labor and stock, yet a certain proportion seems commonly to take place between both the pecuniary wages in all the different employments of labor, and the pecuniary profits in all different employments of stock.”  I’m not quite sure what he’s saying here, unless he is asserting that wages in a given industry that are 10% higher than the regional average ten to be associated with manufacture with a return on investment that is 10% higher than the regional average.

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.

Page 43: “Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life.  But after division of labor has once thoroughly taken place, it is but a very small part of these with which a man’s own labor can supply him.  The far greater part of them he must derive from the labor of other people, and he must be rich or poor according to the quantity of that labor which can command, or which he can afford to purchase.  The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labor which it enables him to purchase or command.  Labor, therefore, is the real measure of the exchangable value of all commodities.”

And, immediately thereafter: “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.”

Labor is the real measure of exchange value, and, in the last analysis, the price of all things is labor.  The argument is strong.  The first implication that comes to my mind, then, is that if labor is the measure of all things, in what is labor measured?  This was before the important distinction between labor and labor-power was discovered, and so there is some danger of confusion here.  But there’s no point in getting ahead of myself.  I’m going to just go with Smith and see where that leads.

Page 44: “…with money or with goods is purchased by labor as much as what we acquire by the toil of our own body.  That money or those goods indeed save us this toil.  The contain the value of a certain quantity of labor which we exchange…It was not by gold or by silver, but by labor, that all the wealther of the world originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command.”  Based on earlier chapters, the measure of labor is time.  Yet Smith says that all labor-time isn’t equal.  This would imply to me that there is some multiplier, or, putting it another way, that there is or ought to be the concept of simple labor-time, in which exchange value is expressed.  Other forms of labor (ie, with a machine that multiplies the efficiency of labor, or with highly skilled labor) could then be expressed in terms of simple labor-time.

Page 45: “The time spent in two different sorts of work will not always alone determine this proportion.  The different degrees of hardship endured, and of ingenuity exercised, must likewise be taken into account.”

The value of labor is adjusted “not by any accurate measure, but by the higgling and bargaining of the market.”  It remains to point out (which Smith implies but doesn’t say) that this is a social question.  The executive who leaves or threatens to leave his job for a higher-paying one, or the combination of workers striking or threatening to strike, or the employer moving or threatening to move his factory to a place where labor is cheaper, are all engaged in this “higgling and bargaining of the market.”

Here is an important point: “The greater part of people too understand better what is meant by a quantity of of a particular commodity, than by a quantity of labor.  The one is a plain, palpable object; the other an abstract notion, which, though it can be made sufficiently intelligible, is not altogether so natural and obvious.”  Or, in other words, while what is being exchanged in the market is the product of labor, and thus, in fact, labort; in a market economy this process is concealed.  This is an important distinction between capitalism and earlier economic forms.  The relationship between master and slave, or between fuedal lord and serf, is clear and obvious; the market, while permitting far more efficient use of labor, also makes it harder to see.

Page 47: “Equal quantities of labor, at all times and places, may be said to be of equal value to the laborer.  In his ordinary state of health, strength and spirits; in the ordinary dgree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness.  The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it….labor alone, therefore, never varying its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared.  It is their real price; money is their nominal price only.”

Page 48: “…therefore labor, like commodities, may be said to have a real and a nominal price.”  This is very striking in that he says labor is LIKE a commodity, which clearly implies that, to Smith, it is NOT a commodity.  This hints at a dilemma that was to trouble political economists for the next half century or more.

Later he begins to go into the whole subject of ground rents.  Page 51: “But a rent reserved in any other commodity is liable, not only to the variations in the quantity of labor which any particular quantity of corn can purchase, but to the variations in the quantity of corn which be purchased by any particular quantity of that commodity.”  He then speaks of the fluctuation periods of corn (ie, any grain) and silver, warning away from accepting rent in coin because of the tendency of coin to debase.  This is interesting, but I look forward to seeing how he will analyze ground rent in terms of labor and the market; I imagine that will be later in the book.

Page 52: “Labor, therefore, it appears evidentally, is the only universal, as well as the only accurate measurement of value, or the only standard by which we can compare the values of different commodities at all times and at all places.”

Page 33: “Every man thus lives by exchanging, or becomes in some measure a merchant.”  This is worth some time to look at.

1. Leave it to a theoretician of capitalism to see everyone as a merchant.  A theoretician of a feudal monarchical society might just as well have said, “By having control over his home, every man becomes in some measure a lord.”

2. What distinguishes a merchant from other trades, is that he makes his livelihood from the profit of exchanging of goods none of which he has produced or contributed toward producing; yet according to Smith, exchanges are made of equal value for equal value, hence according to his own laws, not only is every man not a merchant, but merchants cannot exist.

3. Nethertheless, there is a powerful truth here, and I think the truth outweighs the quibbles I listed above: In a market economy, exchange is the foundation of existence for everyone.  The capitalist must exchange or he has no incentive to produce; the worker must exchange his ability to labor for the goods owned by the capitalist or he will not be able to feed himself to return tomorrow.

He follows this with a brief history of the development of money from 1. something that everything else can be exchanged with 2. metals being useful for this. 3. Coins as an easy form of metal, originally marked to indicate a set weight and purity  4. The inevitable debasement of coins

Page 41: “The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the uility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys.  The one may be called ‘value in use;’ the other, ‘value in exchange.'”  If this discovery–that double meaning of “value”–was originally discovered by Smith, it ranks as one of his most profound and important achievements.