CHAPTER IV

CRITICISM OF THE THEORIES OF ADAM SMITH.

1. In this chapter it is the intention to examine more fully the reasoning by which Adam Smith sought to establish his main contentions concerning the relation of labor to value. As for a proof that, under “philosophical” primitive conditions, goods would exchange in proportion to their costs in labor, none is given. It is considered obvious that this would be true:

“It is natural that what is usually the produce of two days’ or two hours’ labour, should be worth double of what is usually the produce of one day’s or one hour’s labour.”[36]

In support of the theorem of the _labor-command standard_, however, in contrast with that of labor-cost, he makes a show of argument, which is contained in the following quotation:

“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 very small part of those with which a man’s own 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. 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_. Labour, therefore, is the real measure of the exchangeable value of all commodities.”[37]

This passage permits of but one interpretation. If I am rich, in the sense of owning things with a money price or exchange value, in proportion to the quantity of labor which, by means of these things, I can purchase or command, _quantity of labor_ here can mean but one thing, namely, quantity of _productive power_ as opposed to quantity of toil, pain, subjective sacrifice, or disutility. In society, I am supplied with this world’s goods virtually in proportion to the amount of productive power of labor at my call; and this amount is asserted to be the true measure of value. This we may describe as a view of _labor as potential commodity_. Labor to be performed is commodity in the making. What kind of commodity it shall be in the particular case depends upon the will of him who has command over the labor. A later sentence bears out this explanation perfectly:

“[A person’s] fortune is greater or less precisely in proportion to the extent of this power [over labor]; 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.”[38]

This signifies, then, that the value of any article to its possessor must be measured by the amount of labor which it can command in exchange, _because_ this labor is the means of obtaining valuable articles in general. To Smith, labor is the great homogeneous, undifferentiated, common denominator to the wonderfully diverse mass of goods which come into existence out of it, and the value or “real worth”[39] of each of these goods follows the quantity of the source-stuff turned to its production.

2. The law of supply and demand and the law of entrepreneur’s cost are proximate empirical principles which, although possibly of much more practical importance than a philosophy of value, do not give an ultimate explanation of the riddle of this phenomenon. Adam Smith’s theory of labor as “potential commodity” is an attempt to give an ultimate explanation, but as such it should be judged a failure, for it really avoids the question of ultimate explanation. It begins: “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.” Air is a necessity to human life, but a man is not rich in proportion to the quantity of air he can command. The object of this statement is not to make a carping criticism of Smith, but only to point out that by “necessaries, conveniences and amusements” he means here solely such of these things as have economic value. Since he has already passed judgment that the _economic quantity_ of these things is completely independent of the _quantity_ of their utility, he sees no way of measuring these things, as economic quantities, except by looking to their origin in a measurable and, as he believes, homogeneous something called labor. In criticism of this we have but to note that if the only means, or the first means, of determining the _economic quantity_ of a physical complex of goods were by measurement of the labor turned to its making, the economic system of things would be turned upside down. If the value of the articles produced for me by that part of the labor of society over which I have command, can be determined solely by reference to the quantity of this labor, I am left without the slightest guidance for the application of this labor under my direction. The truth is, the command or direction of labor necessarily implies the ability to estimate _values_ independently of the quantity of labor employed in the production of them, previously to its employment. Value is the guiding-star to labor. How can the point of attack of labor against the physical environment be selected unless the results to be expected in different cases can be compared in value, independently of the quantity of the labor? If the quantity of labor determined the value, it would make no difference where the labor was turned; the value of the result would always be the same. Turned in an indefinite number of directions, labor will produce no value whatsoever; turned in certain directions it will bring forth the maximum value of which it is capable. It is one of the main functions of the entrepreneur in modern economic society to turn labor-power in the directions of maximum value return. All these things are perfectly obvious, yet value theorists uncounted have ignored them. Quantity of labor-cost, even when conceived of as being an entity of superior homogeneity to quantity of satisfaction, cannot be the first or fundamental means of measuring value.

The view that cost is the essence of value is thus obviously irrational, and no escape from this difficulty is afforded by the concession made explicitly by Ricardo, and after him by Marx, that utility is a _condition_ prerequisite to value. The problem of directing labor in production is a question of _how much_ labor can be economically employed in making such and such a useful thing. In the theories of Ricardo and Marx, the _quantity_ of value is held to have no relation to the _quantity_ of utility, but to be determined by the quantity of cost. There must be a quantity of utility to which the quantity of productive power destroyed in its obtainment is adjusted. Utility properly conceived, there is such a quantity, and value is its measure.

3. In the first general argument for the labor-command standard, Adam Smith seems to regard labor solely in the aspect of productive power; but, as the reader will recall, we do not advance far in his many-sided discussion before we encounter labor as _disutility_. Labor is later said to be an “invariable measure,” because it stands for a constant amount of hardship. Beyond a doubt, _disutility_ is associated with value (as “_Bedeutung_”) in some very intimate relation.[40] This is, at bottom, the explanation of the remarkable vitality of the labor theory, even in forms that are absurdly incorrect.

If it is my labor which is commanded in exchange by a given commodity, the personal value to me of this commodity for which I have given my labor might well be carried in my mind in terms of the disutility it cost me. So, in a general way, if the amount of some kind of commodity which can be bought by a day’s wages (_i. e._, which “commands” a day’s labor) alters, the significance of this commodity to wage-earners in general will alter. Some persons might conceive the change in significance chiefly in terms of altered disutility cost. This fact is probably considered by statisticians when they investigate questions of real wages, or changes in family budgets. But Adam Smith’s proposition that labor commanded in exchange is a precise and invariable measure of “_exchangeable_ value” is not a good form of stating so mild a principle.

Further discussion of this subject must be attended by extreme difficulties. For in endeavoring to ascertain what Smith meant, or “ought to have meant,” we encounter the difficulties due to the laxness and paucity of Smith’s explanations superposed on the difficulties inherent in this intricate subject. His various expressions suggest that his labor theory of value means more than the thought that the disutility of each person’s labor may measure the “subjective” value _to that person_ of commodities obtained by him in exchange for his own labor.[41] Smith speaks of labor as the “real measure of exchangeable value.” The exchange-value of a commodity in a given market is the same, whoever its owner may be and whatever may be his needs, or the relation of this commodity to his particular needs. This relation may give it value _to_ him; but we would never speak of the commodity’s exchange-value _to_ him. This independence of market-value from the particular needs of the particular owner is one of the things desired to be conveyed by the Austrian economists in their term, “_objective_ exchange-value.” Now Smith fails to distinguish between the “real worth” of goods and their “exchangeable value.” There can be no doubt that he would be quite willing to speak of the “real exchangeable value” of a good as being that which is measured by labor.[42] Thus, I believe, Smith conceives of a “real worth” independent of worth to any particular person. This “real worth” in a good is measurable by the labor commanded in exchange for the good, because, as he first suggests, labor, as productive power, is the homogeneous source-stuff of commodities. But secondly, the suggestion enters that a unit of labor is also a unit of disutility, a unit assumed to have an independent and invariable significance. This kind of real worth and such a unit of disutility are compounded abstractions. No one can hold it against a concept, except in the infancy of thought, that it is an abstraction, but, after my best effort, I for one cannot see that these concepts are meaningful abstractions.

If we grant this conception of “real worth,” and the conception of a unit of disutility in general, distinguishable in the different labors of different persons, we still find difficulties ahead. The same commodity may exchange for two days of common labor or one day of skilled labor. Either of these is the quantity of labor commanded in exchange. According to Smith’s conception, either must measure its “real value.” Now the fact is, one day of skilled labor ordinarily involves _less disutility_ than two days of common labor.[43] Competitive wages are paid in proportion to _efficiency_, not in proportion to disutility. A given piece of labor will count as a great or small quantity when commanded in exchange in proportion to the wages paid for it. It is then a difficulty with Smith’s labor-command standard that he implies that labor derives its capacity to serve as a measure of real value from its disutility, while the same commodity will command _different_ disutilities in different exchanges. The attempt to reduce skill to disutility by urging that the higher wages of skill are in proportion to the disutility of acquiring the skill is futile. The tendency of the wages of skilled labor to proportion themselves to the comparative disutility of that labor—_i. e._, to the sum of the disutility daily felt plus some share or other of the past disutility cost of acquiring the skill—is so completely submerged beneath other forces that it is negligible. In addition to this, much skill is not acquired, but is inborn without having entailed any disutility cost of acquisition to its possessor.

To conclude with this question, so far as Adam Smith means to suggest that the economic worth of a good to a given person can be measured _by him_ in terms of its disutility cost _to him_, the position and some of its consequences mentioned above are well taken. Smith’s theory, however, failed to penetrate the problem as do later theories of the final equivalence of utility and disutility. But the implications of his arguments further than this seem incapable of defense.

4. Adam Smith states that since under the division of labor any man must derive almost all his necessaries, conveniences and luxuries from the labor of other people, he must be rich, in the sense of possessing things of value, in proportion to the quantity of this labor which he can command. The assumption implicit in this is that the quantity of labor expended upon the production of things for this man, _as labor-cost_, determines their values. For if the economic goods obtained by him from the labor of others, which he is enabled to command, should have values out of proportion to the quantity of labor so commanded, namely, their labor-cost, this man would not be rich or poor merely in proportion to the labor which he commands. Since, therefore, the labor-command standard of value is made to depend upon labor-cost regulation of value, according to the principal argument advanced by Smith, it follows that Smith is really estopped from applying the labor-command standard as he does under the conditions of advanced society. For he himself has stated that labor-cost regulation of value fails under these conditions.

Adam Smith’s _empirical_ account of value by no means made future improvement of statement impossible, but it was an excellent theory of proximate principles. His _philosophical_ account was an unsystematic body of suggestions, so filled with difficulties that it is doubtful if the present writer has been able to keep his interpretation and criticism of this account free from fallacy. The carrying over of the labor-command standard of value from the philosophical to the empirical account seems only to introduce an impurity into the latter.