The uthentic Adam Smith: his life and ideas - Essay Example

Adam Smith, one of the foremost proponents of laissez-faire economics and free trade, has often been credited with the transformation of economics into an academic discipline. The argument, as presented, maintains that prior to the publication of his Inquiry into the Nature and Causes of the Wealth of Nations the study of economics adhered to neither a defined school nor an established methodology (Buchan, 2007). Smith, according to Buchan (2007), did not simply found a school of economic thought but he established economics as a field of academic inquiry. The veracity of the aforementioned is amply evidenced, not only in the fact that Smith is still being studied and debated today but, in the fact that his economic treatise, as expressed in his Inquiry, effectively instigated a substantial amount of reactionary literature and, indeed, served as that which other economists, including Ricardo and Marx, south to refute in their own works (Buchan, 2007). The implication here is, therefore, that Smith incited an economics debate which gave rise to the field as we know it today. Within the context of the stated, Adam Smith's Inquiry into the Nature and Causes of the Wealth of Nation, assumes singular importance. The mentioned work was concerned with a number of problems and issues, central of which was to inquire into the nature and causes of wealth. The purpose of this essay is to consider the essential ideas which Smith claimed or proposed concerning "value" and try to understand their place in his inquiry into the nature and causes of the wealth of nations, alongside the presentation of critical opinions voiced by a number of economists and scholars. After observing that "The word 'value' has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys" - which he respectively calls "value in use" and "value in exchange" - and then noting that "things which have the greatest value in use have frequently little or no value in exchange" - and counterwise, "those which have the greatest value in exchange have frequently little or no value in use" (Smith, 28), he goes on to observe: 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 the division of labour has once thoroughly taken place, it is but a small part of these with which a man's labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase (Smith, 30). From these, he infers that "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 labour which it enables him to purchase or command," in which case, "labour, therefore, is the real measure of the exchangeable value of all commodities" (Smith, 30). The idea that labour is the "real measure" of value and that the value of a commodity to a person ("who means not to consume it") is equal to the quantity of labour which it can command are of central importance in Smith's Inquiry. This "labour commanded" view - one among several of the "dimensions" of meaning of the term "value" which Smith distinguished and explicated - is quite intimately related to what may be termed the "objective-instrumental" view. As Smith later wrote: The power which that possession immediately and directly conveys to him, is the power of purchasing; a certain command over all the labour, or over all the produce which is then in the market. His fortune is greater or less, precisely in proportion to the extent of this power; or to the quantity either of other men's labour, or, what is the same thing, of the produce of other men's labour, which it enables him to purchase or command. The exchangeable value of everything must always be precisely equal to the extent of this power which it conveys to its owner (Smith, 31). Smith also emphasized a somewhat different, though related, dimension of the meaning of "real value" to the previous ones he discussed: The real price of everything, what every thing costs' to the man who really wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people (Smith, 30). Here the idea of "real price" or "real worth" - presumably identical to "real value"- of "everything' is reckoned in terms of the "toil and trouble" of acquiring something, or that which can be saved when in possession of something he could get something else for it. In what may be called the labour-centric view, Smith also writes, a few sentences later, that "money or goods indeed save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity" (Smith, 30). This latter idea as expressed appears to contradict Smith's labour commanded view of value. Now it appears that Smith's chain of reasoning using the preceding ideas proceeds as follows: (1) he begins from a seemingly self-evident notion of a person's (or "per capita") wealth as those things which afford a person enjoyment of "the necessaries, conveniences. and amusements of human life," (2) he relates this notion of wealth to some notion of power or command over such things or resources; (3) he sees such necessaries, etc. as the produce of human labour, and that with the division of labour (4) these are mostly the produce of other people's labour; (5) the "real price" of everything is to be reckoned in terms of the "toil and trouble" it can save a person or impose on other people; (6) one of Smith's central conclusions is that the "value" of one's wealth (if it is not consumed) is the command or power over the labour of other people or the necessaries, etc. which are the produce of other people's labour; (7) he concludes further that the value of a person's wealth is "equal" to the amount of labour it can purchase or command; (8) he further claims that labour is, therefore, the measure of this wealth. Hollander (1973) sheds added light on the interrelationship between command over labour and the phenomenon of wealth. Smith effectively argued that the extent of one's command over labour is a measure of one's wealth. While not exactly disagreeing, Hollander (1973) appears to correct this view. Command over labour is not a measure of wealth per se, but it is the means by which one ultimately accesses wealth or obtains purchasing power. The distinction may seem very fine but, in Hollander's (1973) opinion, it is an important one. The idea of "real value" or "real price" as opposed to "nominal price" is further developed by Smith. Corn and silver, he claims, "vary little in their value," and are "sometimes cheaper and sometimes dearer" (Smith, 32). He then concludes that corn and silver cannot be the measure of real value: But as a measure of quantity, such as natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity which is itself continually varying in its own value, can never be an accurate measure of the value of other commodities (Smith, 32-33). Kaushil (1973) concurs and maintains the above stated comparison to be valid. Corn and gold do not differ in value but what distinguishes the one from the other and, accordingly, influences a variation in their price, is the 'toil and trouble" that entered into the production of each (62). If Smith found a proponent in Kaushil (1973), he finds critics in Robertson and Taylor (1957). In direct commentary upon Smith's Theory of Value and immediately relevant to Smith's argument on varying value, Robertson and Taylor (1957) draw attention to a fundamental principle which is absent in Smith's treatise. This is the economic principle of "scarcity" (184). Scarcity, referring to disparity between supply and demand, whereby the latter exceeds the former, quite effectively ensures that goods which should be of equal value, or a good whose value should remain consistent over time, are not equal and is inconsistent. The fact that Smith fails to consider scarcity in his discussion of value and formulation of a theory of vale, seriously undermines the value of that theory, according to Robertson and Taylor (1957). Smith, however, takes a different view on the value of labour. In immediate comparison to the value of goods and commodities, the equal quantities of labour, at all times and places, may be said to be of equal value to the labourer. In his ordinary state of health, strength, health and spirits; in the ordinary degree of his skill and dexterity, he must always lay down some portion of his ease, his liberty, and his happiness. The price he pays for must always be the same, whatever may be the quantity of goods which he receives in return for it (Smith, 33). He indeed recognizes that "though equal quantities of labour are always of equal value to the labourer, yet to the person who employs him. They appear sometimes to be of greater and sometimes of smaller value" That is, "he purchases them sometimes with greater and sometimes with smaller quantities of goods, and to him the price of labour seems to vary like that of all other things. It appears to him cheap in the one case and dear in the other" (Smith, 33). He concludes that "labour alone, therefore, never varying in its value is alone the ultimate and real standard by which the value of all commodities can at all time and places be estimated and compared. It is their real price; money is their nominal price only" (Smith, 33). Meek (1973) is as critical of Smith's theory of the value of labour as Robertson and Taylor (1957) were of his Theory of Value, per se. According to Meek, Smith's understanding of the value of labour is, ultimately limited by the fact that it does not delve into the consequences of the methodology of labour valuation. In comparison to Smith, and the classical economists, Marx both investigates those consequences and examines the rationale behind the under-valuation of labour. He extends beyond Smith and, in a way, addresses the detected limitations. It need be noted here that Bladen (1975) insists that Meek's (1973) critique is founded upon a misinterpretation of Smith's treatise. Despite the criticisms launched against Smith by both Meek (1973) and Robertson and Taylor (1957), there is a basic logic of Smith's argument why there is a need for an invariable measure of value. This logic proceeds as follows: a commodity (like gold or silver) which itself varies in value (presumably measured by some invariable standard) cannot itself be a measure of value (for it would then be impossible to know whether it is the commodity which is being measured or the one being used to measure which varied - so the argument would seem to go. Hence, following this basic logic, if the labour commanded is to be the measure of the value of commodities, by Smith's reasoning, then a "unit quantity of labour" must be invariable in value; otherwise, quantities of labour commanded would not serve as a good measure of value. The fact that Labour is paid differently - a historical fact which he explicitly recognized relative to whether a society is advancing, stationary, or regressing - he appears to regard in the preceding argument, as not relevant. To speak, thus, of the "real value of x" where x is a commodity, is to presuppose some invariable measure, say m which in Smith's reckoning should be in terms of units of labour (commanded). This idea of labour commanded, and thus of "real value of x," however, would have to assume some notion of "value" or "price of labour" which refers to the greater or lesser quantity of goods paid for a unit of labour. And to argue that a unit of labour is invariable, he also had to speak of the "value of labour" (as being equal at all times and all places), which should not then be measured by labour itself; his reasoning then why the value of a unit of labour is invariable is couched in a different sense of "value." It seems evident that Smith moves on different senses of the term "value" here. Now for Smith, labour, like commodities, may be said to have a real and nominal price: "Its real price may be said to consist in the quantity of the necessaries and conveniences of life which are given for it; its nominal price, in the quantity of money. The labourer is rich or poor, is ill or well rewarded, in proportion to the real, not to the nominal price of his labour" (Smith, 33). And he later notes that, "Equal quantities of labour will at distant times be purchased more nearly with equal quantities of corn, the subsistence of the Labourer, than with equal quantities of gold or silver, or perhaps of any other commodity." From this he concludes that, "Equal quantities of corn, therefore, will, at distant times, be more nearly of the same real value, or enable the possessor to purchase or, command more nearly the same quantity of the labour of other people." But he adds immediately that, "They will do this, I say, more nearly than equal quantities of almost any other commodity; for even equal quantities of corn will not do it exactly." He goes on to say that "The subsistence of the labourer, or the real price of labour ... is very different upon different occasions; more liberal in a society advancing to opulence than in one standing still, and in one that is standing still, than in one that is going backwards" (Smith, 35). Despite this recognition of the variability of the "real price of labour," Smith later reiterates-apparently oblivious of any possible inconsistency or difficulty in his position--his conclusion: "Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places" (Smith, 36). Apart from Smith's ideas on value discussed above, which we interpreted as intimately linked with his attempt to constitute an alternative concept of wealth and to provide some inter-temporal, ordinal measure of it, Smith also attempted to develop a "theory" of "natural prices." In explaining his views on prices, Smith introduces an important distinction between the "natural" and "market price" of commodities "There is in every society or neighbourhood," he claims, "an ordinary or average rate both of wages and profit in every different employment of labour and stock which is naturally regulated ... partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment." Likewise, "in every society or neighbourhood an ordinary or average rate of rent, which is regulated too ... partly by the general circumstances of the society or neighbourhood in which the land is situated, and partly by the natural or improved fertility of the land." These ordinary or average rates he calls the "natural rates of wages, profit and rent," "at the time and place in which they commonly prevail." He then defines the "natural price of a commodity": When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing and bringing it to the market, according to their natural rates, the commodity is then sold for what may be called its natural rate (Smith, 55). On the other hand, the "actual price at which any commodity is commonly sold" is called its "market price" which may "either be above, or below, or exactly the same with its natural price" (Smith, 55). This market price of every particular commodity is supposed to be "regulated by the proportion between the quantity which is actually brought to the market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of rent, labour, and profit, which must be paid in order to bring it thither." This "regulation" proceeds in such a way that when the quantity which is brought to the market falls short of effectual demand, some of the effectual demanders may be willing to pay more, and "competition" among them will raise prices more or less above the natural price: and when the quantity brought to the market exceeds the effectual demand, their market price will sink more or less below the natural price, as "some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole" (Smith, 57) . But when the quantity brought to the market is Just sufficient to the effectual demand and no more, the market price "naturally" comes to be exactly, or as nearly as can be judged of, the same with the natural price" (Smith, 57). Smith, however, claims that, the natural price is "the central price, to which the prices of all commodities are continually gravitating:" Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this centre of repose and continuance they are constantly tending towards it (Smith, 58) This account of the "gravitation" of market prices around natural prices shows how Smith's distinction between the two kinds of prices can help explain the "order bestowing" role of the market as an allocative mechanism. Despite the continuous expansion, transformation, and dynamic interaction of the market and the division of labour, not to mention the accompanying technological changes, which was central to Smith's account of the nature of the process of accumulation of wealth in capitalist society, this system remains an orderly system, the centripetal forces generated by self-interest working toward this orderly state, as the same self interest generates the dynamic forces leading to continued expansion. Bladen (1975) analyses the distinction between real and market prices, as argued and presented by Smith. Following through on Smith's logic, Bladen (1975) similarly notes the price of commodities, insofar as it is measured (among other things) by the amount of "toil" that entered into its production, is a subjective measurement (514). Added to that, the measurement of "real" price is further complicated by the heterogeneous nature of labour. Labour forces are not equal in their capacities, abilities and skills, with the implication being that "toil" is an immediate outcome of the aforementioned, on the one hand, and is a variable and inconsistent measurement, on the other. Insofar as Bladen (1975) is concerned, therefore, and even as he acknowledges the criticisms which reputable economists have launched against Smith's theory of value, Smith's methodology for determining real versus market value is both valid and viable. Kaushil (1973), like Bladen (1975) belongs to the school of Smith proponents. From the onset of his argument, he acknowledges that countless economists have sought the projection of Smith as "a confused and confusing scholar" (60) whose theory of value is limited and erroneous. This is not true. Certainly, some readers may be led into believing that Smith (1973) overemphasises labour as a determinant of value. Labour is a determinant of value but to claim that Smith overemphasises it to the degree of projecting a "labour theory of exchange value" is to misread Smith's Theory of Value (65) . labour is a source of value and has been presented by such as Smith but so is nature, as in land, and it has been give equal consideration and acknowledgement in Smith's theory. The fact that Smith looks at all the determinants of value, rather than just one - labour - is often not acknowledged, leading to erroneous interpretations of his theory. Proceeding from the above presented explication of Smith's Theory of Value, it is interesting to note that writers such as Das Gupta (1960) believed that Smith did not propose a theory of value per se. He explained and defined value but did not theorize it. Needless to say, this view is hardly shred by either the proponents or the opponents whose criticisms were presented in the foregoing. What this indicates, if anything, is that there are multiple layers to Smith's theory of value and, hence, multiple interpretations, ultimately culminating in controversy over the theoretical implications, and of course validity and viability, of Smith's understanding of value. Irrespective of critical opinions, however, the fact remains that Smith's place in the academic study of economics is well-preserved, despite the passage of time and in spite of the rise and development of counter-theories. His theory of value, as evidenced in the foregoing research, remains an important area of study within the larger field and has retained enough relevancy as would incite scholarly reactions to this day. Buchan, J. (2007) The Authentic Adam Smith: His Life and Ideas. NY: W.W. Norton. Read More