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.