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ADAM SMITHS CONCEPT OF LABOUR: VALUE OR MEASURE?

Adam Smiths Concept of Labour: Value or Measure?

Adolfo Rodrguez Herrera

June 18, 2014

Abstract

The terms employed by Smith to refer to value and measure of value are used in histime with imprecision, which has led to different interpretations about his positionon these issues. It is no coincidence that Smith is considered the father of the theoryof labour value developed by David Ricardo and Karl Marx and simultaneously ofthe cost-of-production theory developed by John Stuart Mill and Alfred Marshall.

This note reviews the criticisms made by Ricardo and Marx on Smiths positionabout value and measure of value. According to these authors, Smith is not consis-tent in proposing that value of a commodity is defined or measured as the amountof labour necessary to produce it and simultaneously as the amount of labour thatcan be purchased by this commodity. After demonstrating that the interpretationmade by Ricardo and Marx on Smiths arguments is wrong and that the criticizedinconsistency does not really exist, I will argue that Smith proposes a labour theoryof value that substantially corresponds to the one developed later by Marx.

IntroductionSmith refers to a single concept using three different terms: real price, value, and measureof value. At the end of Book I, ch. 4 of The Wealth of Nations, he says that to understandthe principles which regulate the exchangeable value of commodities, he shall endeavourto shew first what is the real measure of this exchangeable value, or wherein consists thereal price of all commodities. 1The terms measure of value and real price in this phraseare used to refer to the same concept. Something similar happens at the beginning ofthe next chapter, where Smith claims that the value of a commodity is equal to acertain amount of labour, and concludes that labour, therefore, is the real measure ofexchangeable value of all commodities2. The terms value and measure of value inthis passage are used as synonyms.

This indiscriminate use of the terms value, real price and measure of value, gives riseto an ambiguity regarding the role that Smith attributes to labour. Does he consider itan external measure of value or numraire, as can be gold or silver, or does he considerit (as Ricardo3 or Marx4 do) the foundation, the original source or the substance ofvalue? When asserting that labour [. . . ] is the real measure of the exchangeable valueof all commodities, is Smith ranking himself with those looking for a stable measure ofvalue, or is he founding the labour theory of value? This paper addresses the criticismmade by Ricardo and Marx against Smiths treatment of value and measure of value andconcludes that the inconsistency that both authors attribute to him actually results fromtheir misinterpretation of Smiths arguments.

The paper does not consider another discussion, also derived from the ambiguity of someterminology used by Smith in his discussion of value. He argues that the value of a thingto a man is the toil and trouble of acquiring it, or the toil and trouble which it can save to

School of Economics, Universidad de Costa Rica, adolfo.rodriguezherrera@ucr.ac.cr.1Adam Smith [1776], I.iv.14-17, p. 42.2Adam Smith [1776], I.v.1, p. 44.3David Ricardo [1806], p. 13.4Karl Marx [1867], p. 55.

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MDA-D428Cuadro de textohttp://economia.ucr.ac.cr/sites/default/files/files/EE%20UCR%20SDT%2014-01.pdf

Serie Documentos de trabajo. 14-01

himself. The expression toil and trouble has been object to multiple and contradictoryinterpretations. This paper understands it like Ricardo and Marx, as a metaphor forlabour objective working time, even if some defenders of the utility theory of valuelook at it rather as the psychological cost of labour and a premonition of disutility oflabour theory5. The discussion about the interpretations of toil and trouble is beyondthe objectif of this paper.

Smiths formulationLets see how Smith defines the value of commodities in the first paragraph of Book I, ch.5 of The Wealth of Nations:

The value of any commodity, therefore, to the person who possesses it, andwho means not to use or consume it himself, but to exchange it for other com-modities, is equal to the quantity of labour which it enables him to purchaseor command. 6

In the next paragraph this concept appears with two formal variations: the term valueof any commodity has been replaced by real price of every thing (which suggests thatSmith uses value and real price as synonymous), and the quantity of labour is re-placed by the toil and trouble, which thereafter seems to be the metaphor used by himfor labour. Nevertheless, immediately after this definition of value or real price asecond one appears, slightly different in its content. It reads:

The real price of every thing, what every thing really costs to the man whowants to acquire it, is the toil and trouble of acquiring it. What every thingis really worth to the man who has acquired it, and who wants to dispose ofit or exchange it for something else, is the toil and trouble which it can saveto himself, and which it can impose upon other people.7

Smith speaks in this paragraph from the perspectives of two alternative persons, each ofwhich leads to a different definition of value or real price. In the first sentence, thesubject is someone who wants a thing she has not. For that person, the real price (orvalue) of this thing is the toil and trouble of acquiring it, or, equivalently, the value (orreal price) of the thing is the amount of labour the toil and trouble the person mustincur if it had to produce it.

In the second sentence, the subject is someone who already owns a thing but desires toexchange it for another one. For that person, the real price (or value) of the thing she hasis the labour required to produce the thing she wants and which can be obtained throughexchanging hers. This is the very definition of first paragraph of Book I, ch 5 previouslyquoted, which refers to the person who possesses it [the commodity], and who means notto use or consume it himself, but to exchange it for other commodities.

Smith therefore gives two different definitions for the value of the thing. For anyone whodoes not have A and wants to procure it, value or real price of A is the labour requiredto produce it. For anyone who has A but likes B, value or real price of A is the labourrequired to produce the commodity B, which can be procured through the exchange ofA. Thus, VA, the value of A, is defined as follows:

VA =LA for whom does not own A and desires ALB for whom owns A and desires B

5For example Mark Blaug [1962], p. 50: The real value of a commodity is its labour price, meaningby labour, not a certain number of man-hours, but units of disutility, the psychological cost of work to theindividual, and meaning by value, esteem value rather than exchange value. See also Samuel Hollander[1973], p. 128.

6Adam Smith [1776], I.v.1, p. 44.7Adam Smith [1776], I.v.2, p. 44. Italics have been added by the author.

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where LA is the labour necessary to produce A and LB is the labour necessary to produceB.

Are both definitions consistent? In the situation described by Smith, the exchange ofcommodity A for commodity B does not imply that both commodities are produced withthe same amount of labour, i.e. that LA = LB , and therefore the two definitions ofvalue or real price of A offered by Smith are not equivalent; that implies an apparentinconsistency of which he is not concerned. Later we will see that this inconsistencydisappears when the confusion between value and measure of value is clarified.

Criticism of Ricardo and MarxIt is not this inconsistency in the definition of value which Ricardo and Marx criticize, butanother one, more serious, which comes from an alternative interpretation of the seconddefinition of value given above, and more precisely of the LB meaning. Let us dwell onthis interpretation. Ricardo partially quotes the following passage from Smith, in whichthe latter presumably refers to two different amounts of labour as if they were identical:

Labour was the first price, the original purchase-money that was paid for allthings. It was not by gold or by silver, but by labour, that all the wealth ofthe world was originally purchased; and its value, to those who possess it andwho want to exchange it for some new productions, is precisely equal to thequantity of labour which it can enable them to purchase or command.8

The two sentences before the semicolon state that all wealth is acquired by working.Ricardo celebrates these sentences because they show that Smith coincides with his ownposition, which is that labour is "the foundation" or "original source of exchange valueof all things (excepting those which cannot be increased by human industry).9

In the third sentence, after the semicolon, Smith says that for those who possess wealthand who want to exchange it for some new productions, its value is precisely equalto the quantity of labour which it can enable them to purchase or command. Ricardointerprets that this expression does not refer to the amount of labour embodied in these"some new productions" but to the amount of living labour that can be hired in themarket in exchange for the salary equivalent to that wealth (the quantity which it cancommand in the market)10 , and thus concludes that Smith has himself erected anotherstandard measure of value and uses the terms bestowed on labour and commanded labouras if these were two equivalent expressions.

Marx shares the same interpretation, who even puts the term living labour into themouth of Smith:

[. . . ] he sometimes confuses, and at other times substitutes, the determina-tion of the value of commodities by the quantity of labour required for theirproduction, with its determination by the quantity of living labour with whichcommodities can be bought, or, what is the same thing, the quantity of com-modities with which a definite quantity of living labour can be bought.11

Ricardo and Marx affirm that Smith has two different kinds of labour in mind: the labourbestowed or embodied into the commodity A, LA, and the amount of living labour orlabour force L which can be hired by a salary equivalent to the price of commodity A.Let W be the market wage and PA the market price of commodity A. According tothe interpretation of Ricardo and Marx, the value of A, VA, is defined by Smith in twoalternative ways:

VA =LAL = PAW

8Adam Smith [1776], I.v.2, p. 44.9David Ricardo [1817], p. 13.10David Ricardo [1817], p. 14.11Karl Marx [1861-1863], p. 70 [notebook VII, p. 244].

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Both quantities of labour, LA and L the labour bestowed and the labour commanded,which is interpreted as synonymous of hired living labour would be equal only if labourersreceive all the product of their labour as a reward, without sharing it with capitalists andlandowners. In fact, when the private ownership over capital emerges, the product oflabour has to be shared between labourers and capitalists, and the price of A becomesthe sum of wage cost (WLA) plus profit. If profit is calculated as a proportion pi of thewage cost, then:

PA =WLA(1 + ) LA = PAW (1+)

It follows that both amounts of labour are equal only if the profit rate is 0 and so thewhole value added is going to the labourers as their wage, i.e.

LA = L = 0

This is what happened in the early stages of society, where the reward of the labourer[was] always in proportion to what he produced and so the quantity of labour bestowedon a commodity, and the quantity of labour which that commodity would purchase, wouldbe equal, and either might accurately measure the variations of other things.12

If Ricardos and Marx interpretation were correct, Smith would be defining or measuringthe value of commodity A by two quantities of labour, LA and L, which are equal onlywhen there is no profit or rent. Furthermore, L depends on market salaries (inasmuchas L = PAW ) and hence is not a perfect measure of value. Marx exposes his criticism asfollows:

[Smith] makes the exchangevalue of labour the measure for the value of com-modities. [. . . ] The value of labour, or rather of labourpower, changes, likethat of any other commodity, and is in no way specifically different of anyother commodity.13

Most of contemporary readers of Smith share Ricardos and Marxs interpretation ofcommanded labour. Lionel Robbins, for example, affirms that as Ricardo pointed out,there is all the difference in the world between those two measures14. Ronald Meek, onother hand, interprets that for Smith the quantity of labour which it [your commodity]can enable you to command means the quantity of present labour which you can hirewith the process of its sale.15 Samuel Hollander, finally, affirms in an emphatic way, thatthe discussion of a measure of value in terms of labour command is not part of a theoryof the determination of value.16

A re-interpretation of commanded labourIt is very difficult to accept that Smith proposed these two measures of value of A, LAand L, without noticing they were so different. In fact, Smith knows that in the presenceof private ownership of land and capital, the annual produce transformed in money allowshiring a quantity of labour larger than the labour necessary to produce it. He also knowsthe reason, which is that the value added by labour has to be shared between wages,rents, and profits:

[. . . ] the annual produce of its labour [of a civilized country] will always be suf-ficient to purchase or command a much greater quantity of labour than whatwas employed in raising, preparing, and bringing that produce to market.17

12David Ricardo [1817], p. 14.13Karl Marx [1861-1863], p. 70-71 [notebook VII, p. 244].14Lionel Robbins [1980], p. 136.15Ronald Meek [1956], p. 64 note 1.16Samuel Hollander [1987], p. 64.17Adam Smith [1776], I.vi.24, p. 81. See also Adam Smith [1776], I.vi.7, p. 74.

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Rather than accepting that Smith was wrong, I prefer to point out that he uses theexpressions acquiring a thing and acquiring the labour bestowed on its productionsynonymously. There are several paragraphs in the Wealth of Nations that confirm thishypothesis and make his argument coherent. For example, when the owner of A exchangesA for B, she is acquiring B, and with B also acquires also the labour bestowed on theproduction of B; or, in Smiths words, she is acquiring the quantity either of other menslabour, or, what is the same thing, of the produce of other mens labour, which it enableshim to purchase or command.18 For Smith, according to my hypothesis, buying an objectmeans avoiding the toil and trouble of producing it, and for that reason buying an objectis equivalent to impose toil and trouble on other men. Therefore, Smith is not wrong. AsI have proposed, he is using different terminologies to express the same idea: in Smithslanguage labour commanded by A has exactly the same meaning as labour embodiedor bestowed in the thing acquired by A, the thing acquired by A being in our exampleB and the labour bestowed on it being LB .

There are many examples where Smith uses the expressions acquiring one product andacquiring the labour has produced it synonymously19. So when Smith says that thevalue of an object is measured by the labour that can be bought by it, he is not thinkingof labour force or living labour that can be hired in the labour market, but of labourbestowed on the production of the purchased commodities. It follows that Ricardos andMarxs criticism cannot be justified by Smiths inconsistency, but can be seen as a resultof their own interpretation of Smiths language.

If we accept my interpretation of commanded labour, we can now look at the expressionsvalue (or real price) and measure of value, which are also synonymous for Smith. Atthe beginning of Book I, ch 5, Smith says: Every man is rich or poor according to thedegree in which he can afford to enjoy the necessaries, conveniences, and amusements ofhuman life.20 Since nobody can produce all the things she requires, they are acquiredthrough exchange, so that the far greater part of them derive from the labour of otherpeople. The wealth of someone is thus measured by the amount of things that this wealthallows him to purchase, or, what is the same in Smiths language, the quantity of labourwhich he can command, or which he can afford to purchase. Benjamin Franklin, morethan fifty years before, proposed to measure wealth in the same way:

By labour may the value of silver be measured as well as other things. [. . . ]Thus the riches of a country are to be valued by the quantity of labor itsinhabitants are able to purchase, and not by the quantity of silver and goldthey possess; which will purchase more or less labor, and therefore is more orless valuable, as is said before, according to its scarcity or plenty.21

This criterion to measure the wealth of a person the labour required to produce thethings that can be purchased with it is extended by Smith to measure the value ofevery commodity, doing a sort of assimilation between wealth and value: The value ofany commodity, therefore, to the person who possesses it, and who means not to use orconsume it himself, but to exchange it for other commodities, is equal to the quantity oflabour which it enables him to purchase or command. 22

The two measures of valueNow back to the inconsistency we found for the two definitions of value offered by Smith;not the inconsistency attributed to him by Ricardo and Marx, but the quantitative dif-ference between LA, the labour bestowed on the production of A, and LB , the labour

18Adam Smith [1776], I.v.3, p. 45.19For example Adam Smith [1776], I.v.3, p. 45: The power which that possession [the wealth] imme-

diately and directly conveys to him [its owner], is the power of purchasing; a certain command over allthe labour, or over all the produce of labour which is then in the market. Italics have been added by theauthor.

20Adam Smith [1776], I.v.1, p. 44.21Benjamin Franklin [1719], p. 265.22Adam Smith [1776], I.v.1, p. 44.

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bestowed on the production of B, which is acquired by A through exchange. As we saw,Smith says that VA, the value or A, is LA for the man who desires A, and LB for theman who has A and wants to exchange it for B. I will show that this formulation is notso different from that made by Marx in his Book I, ch 1 of Capital.Marx postulated the co-existence of two different measures of value. For him commodityA has an intrinsic or immanent measure of value, which is the labour necessary to produceA, and an extrinsic measure, which is its exchange value, B itself. When A is exchangedfor B, the owner of A gives the commodity A and receives the commodity B. The valuehe gives is VA, the value of commodity A. Which is the value he receives? He receives B,which is the exchange value of A, and which has a value as a commodity that is VB . ForMarx the existence of a quantitative difference between the two measures (the differencebetween value and exchange value or, when the commodity taking the role of exchangevalue is money, the difference between value and price) is normal; Marx explains thisdifference in his famous theory of transformations of values into prices.

For Smith the value of commodity A, VA, also has also two measures, LA and LB . LA isexactly what Marx calls the intrinsic measure of value of A, the amount of labour sociallynecessary to produce A. LB can be seen as the extrinsic measure of value of A. The onlydifference between both authors is that for Marx the extrinsic measure of value is a thing,not a value nor an amount of labour, while for Smith the extrinsic measure of value of Ais the value of B, defined as LB , the amount of labour necessary to produce B. If we lookat it this way, the quantitative difference between the two measures of value proposedby Smith, LA and LB , would not be an inconsistency but rather it would reflect thedifference between value and exchange value.

The different formulation of the extrinsic measure of value B for Marx and LB for Smithis possibly related to the distinct perspective of each author. Both authors start from acommodity A, which has to be sold to become a second commodity, B. The total processis AMB, where M is money. Marx analyses the measure of value and wants to measurethe value of a commodity, and he measures that in money because the social form ofvalue par excellence is precisely money; Smith, on the other hand, is measuring wealth,but without money, given the distortions caused by money. Marxs individual has in herhands a commodity A that she has produced and wants to exchange for money; the valueof A is thus measured by its ability to be sold, i.e. the amount of money M in which Ahas to be transformed during the first stage of metamorphosis, AM. Smiths individualhas in her hands a commodity A that she has also produced and wants to exchange, notfor money but for the commodity B; the value of A is measured by its purchasing power,but its purchasing power is not the money she receives when she sells A; the purchasingpower of A is the value of B that she can buy with the money in which A is transformed.The different perspective of each author Marx looking for the transformation of A intomoney, Smith looking for the transformation of A into B explains, at least partially, whythe external measure of value for Marx is money and commanded labour, B or LB itselffor Smith.

Finally, we are able to answer the initial question: Is labour for Smith an external measureof value, as gold or silver, or is it the foundation, the original source or the substance ofvalue, as it is for Ricardo and Marx? The difficulty in answering this question is that inSmiths language there is no difference between value and measure of value. When Smithis asked What is value? he answers very often another question instead, How can wemeasure it? Because for him there is no difference between value and measure of value, hisanswer lies in the theory of value: the value is the amount of labour necessary to producethe commodity. His statement labour [. . . ] is the real measure of the exchangeable valueof all commodities, means that labour is the internal measure of value, what Marx callsthe substance of value. In this way, Smith can be considered, as was already said,23 thefounder of the labour theory of value.

23David Ricardo [1817], p. 13: Smith [. . . ] defined the original source of exchangeable value and [. . . ]maintain that all things became more or less valuable in proportion as more or less labour was bestowedon their production [. . . ].

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bestowed on the production of B, which is acquired by A through exchange. As we saw,Smith says that VA, the value or A, is LA for the man who desires A, and LB for theman who has A and wants to exchange it for B. I will show that this formulation is notso different from that made by Marx in his Book I, ch 1 of Capital.Marx postulated the co-existence of two different measures of value. For him commodityA has an intrinsic or immanent measure of value, which is the labour necessary to produceA, and an extrinsic measure, which is its exchange value, B itself. When A is exchangedfor B, the owner of A gives the commodity A and receives the commodity B. The valuehe gives is VA, the value of commodity A. Which is the value he receives? He receives B,which is the exchange value of A, and which has a value as a commodity that is VB . ForMarx the existence of a quantitative difference between the two measures (the differencebetween value and exchange value or, when the commodity taking the role of exchangevalue is money, the difference between value and price) is normal; Marx explains thisdifference in his famous theory of transformations of values into prices.

For Smith the value of commodity A, VA, also has also two measures, LA and LB . LA isexactly what Marx calls the intrinsic measure of value of A, the amount of labour sociallynecessary to produce A. LB can be seen as the extrinsic measure of value of A. The onlydifference between both authors is that for Marx the extrinsic measure of value is a thing,not a value nor an amount of labour, while for Smith the extrinsic measure of value of Ais the value of B, defined as LB , the amount of labour necessary to produce B. If we lookat it this way, the quantitative difference between the two measures of value proposedby Smith, LA and LB , would not be an inconsistency but rather it would reflect thedifference between value and exchange value.

The different formulation of the extrinsic measure of value B for Marx and LB for Smithis possibly related to the distinct perspective of each author. Both authors start from acommodity A, which has to be sold to become a second commodity, B. The total processis AMB, where M is money. Marx analyses the measure of value and wants to measurethe value of a commodity, and he measures that in money because the social form ofvalue par excellence is precisely money; Smith, on the other hand, is measuring wealth,but without money, given the distortions caused by money. Marxs individual has in herhands a commodity A that she has produced and wants to exchange for money; the valueof A is thus measured by its ability to be sold, i.e. the amount of money M in which Ahas to be transformed during the first stage of metamorphosis, AM. Smiths individualhas in her hands a commodity A that she has also produced and wants to exchange, notfor money but for the commodity B; the value of A is measured by its purchasing power,but its purchasing power is not the money she receives when she sells A; the purchasingpower of A is the value of B that she can buy with the money in which A is transformed.The different perspective of each author Marx looking for the transformation of A intomoney, Smith looking for the transformation of A into B explains, at least partially, whythe external measure of value for Marx is money and commanded labour, B or LB itselffor Smith.

Finally, we are able to answer the initial question: Is labour for Smith an external measureof value, as gold or silver, or is it the foundation, the original source or the substance ofvalue, as it is for Ricardo and Marx? The difficulty in answering this question is that inSmiths language there is no difference between value and measure of value. When Smithis asked What is value? he answers very often another question instead, How can wemeasure it? Because for him there is no difference between value and measure of value, hisanswer lies in the theory of value: the value is the amount of labour necessary to producethe commodity. His statement labour [. . . ] is the real measure of the exchangeable valueof all commodities, means that labour is the internal measure of value, what Marx callsthe substance of value. In this way, Smith can be considered, as was already said,23 thefounder of the labour theory of value.

23David Ricardo [1817], p. 13: Smith [. . . ] defined the original source of exchangeable value and [. . . ]maintain that all things became more or less valuable in proportion as more or less labour was bestowedon their production [. . . ].

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References[1] Franklin Benjamin [1719], A modest inquiry into the nature and necessity of a paper

currency, en Jared Sparks (ed) The Works of Benjamin Franklin, Wittemore, Nilesand Hall, volume 2, Boston, 1856.

[2] Mark Blaug [1962], Economic Theory in Retrospect, Cambridge University Press, 4thed, London, 1992.

[3] Hollander Samuel. The economics of Adam Smith. Heinemann Educational Books,Canada, 1973.

[4] Hollander Samuel [1987]. Classical Economics. Basil Blackwell, Canada, 1992.

[5] Marx Karl [1861-1863]. Theories of Surplus-Value, Progress Publishers, Moscow, 1978,Part I.

[6] Meek Ronald L. [1957]. Studies in the Labour Theory of Value, Lawrence and Wishart,London, 1973.

[7] Ricardo David [1817]. On the Principles of Political Economy and Taxation. PieroSraffa (editor), The Works and Correspondence of David Ricardo, Volume 1, Cam-bridge University Press, London, 1990.

[8] Robbins Lionel [1980]. A History of Economic Thought. The LSE Lectures. PrincetonUniversity Press, Oxford, 2000.

[9] Smith Adam [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations.Glasgow Edition, Liberty Fund Inc, USA, 1981.

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