E.K.Hunt on Adam Smith, part 2
eqwq.lrogers at state.ut.us
Fri Feb 2 19:26:47 MST 1996
E.K.Hunt 1992 _History of Economic Thought: a critical perspective_,
Chapter 3 Adam Smith
summary by Lisa Rogers
[begin part 2 of 2]
Smith's Value Theory
Smith never presented a consistent labor theory of value, but he had
many ideas that were later used by Ricardo and Marx. Smith said that
labor produces all material wealth; tools increase the productivity
of labor, but tools are themselves products of labor too. He saw
labor as the determinant of exchange value only in foraging
societies. However, under farming/ feudalism and capitalism, he
claimed that exchange value is the sum of wages, profits on capital
and land-rent, aka the "Adding-up Theory" of prices. (Smith rejected
the utility theory of value.)
Since profits resulted solely from ownership of capital, prices could
be proportional to the labor embodied in commodities only if all
sectors of production had the same value of capital employed per
worker, which Smith thought was just obviously not so. This was
worked out later by others, such as Marx.
Smith's cost-of-production price was called a 'natural price', but
the market prices fluctuated around this level, and was determined by
S + D. Sustained differences between market and natural prices would
drive the flow of capital between the production of various
commodities. Results included the matching of supply to demand, the
return of market price toward natural price, and the equalization of
profits in different industries.
There are two major weaknesses in Smith's theory of prices. Wage,
profits and rents are all prices or derived from prices, and a theory
that explains prices on the basis of other prices cannot explain
prices in general, because of the circularity of the argument.
The second problem is that it made conclusions about the general
level of all prices, i.e. the purchasing power of money, rather than
the relative values of different commodities. By Smith's theory,
price changes for any commodity that is widely used as a productive
input (such as grain) affects the price of silver (money) which
affects all prices equally. However, no input commodity is used
equally in all production. Therefore, the prices of grain-intensive
commodities would be affected much more than the prices of others.
Smith was unable to show how a labor theory of value could explain
This is another example of ambiguity in Smith's work; he explicitly
stated that when capitalists owned the means of production and
landlords owned the land, that the quantity of labor-embodied no
longer regulated the value of commodities, yet he commonly wrote as
if the labor theory of value did suffice to explain prices [perhaps
with an unspoken ceteris paribus clause? LR]
Smith's Theory of Economic Welfare
Smith made policy recommendations intended to promote human welfare,
which he defined as per capita GNP. Also welfare could be increased
by matching the types and quantities of commodities produced to the
needs and desires of the consumers. He assumed that selfish,
acquisitive motives characterized economic behavior, which became the
foundation of neoclassical economics.
Within his theory of history, capitalism would reach its greatest
height in the state of laissez-faire with unhindered competition.
Smith calls it "the obvious and simple system of natural liberty"
where "Every man ... is left perfectly free to pursue his own
interest in his own way, and to bring both his industry and capital
into competition with those of any other man". Smith claims that
this would maximize economic welfare, i.e. _average_ income.
That conclusion is based in part upon the following argument:
Total production depends on productivity, which depends on the
division of labor (not only within a factory but in the whole
economy), the extent of which is determined both by the size of the
market and the quantity of fixed capital per worker. The
accumulation of capital was the principal source of economic
progress, and profits were the source of new capital. Therefore,
unhindered profit-making results in the greatest GNP per capita.
Government interference only misdirect capital, restrict markets and
generally reduce the rate of accumulation and accordingly the level
of social production.
(This is part of his disagreement with the Physiocrats; productive
labor included all labor that produces profits/commodities. Only
menial servants did unproductive labor.)
Class Conflict and Social Harmony
Smith knew that selfish, acquisitive motives led to individual and
class conflicts, but the 'invisible hand' automatically resolved
conflicts in a way most conducive to [average, per capita] human
happiness. This is a major contradiction, obviously. His influence
[and Ricardo's] can be seen in both of the two rival traditions in
19th and 20th c. economic thought, one that emphasizes the LTV and
class conflict, another that emphasizes the utility theory of value
and the "invisible hand" that creates social harmony.
[end part 2 of 2]
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