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Comment by astine | Hacker News Reader

Frankly, Smith's attachment to the labor theory of value is a bigger mistake than this. Wealth of Nations isn't an important book because Adam Smith was right about everything he wrote about in it but because it constitutes one of the first really comprehensive treatises on the topic. There is a lot of, for the time, great insight in that book. The biggest one is that the wealth of a nation is not measured by the size of its treasury but by the productive capacity of its economy. That might seem basic to modern people, but it was a much less well understood concept at the time.

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Smith's attachment to the LTV was not really misguided - it was arguably the foundation of thought about value and price. Marx notes that Smith and later Ricardo had hit on something, but only in the most disorganized and haphazard way. Marx's theory of value corrects many of the inconsistencies and ahistorical notes of Smith and Ricardo's theories.

Smith was attempting the understand the nature of value and where prices came from and concluded that labor, which in enlightenment thinking was commonly seen at the source of all value (al la John Locke,) must be the common denominator. His evidence for this was that price correlated more strongly with the amount of labor that went into a good than with any other good. (He has an interesting analysis of the relative merits of rents paid in grain vs silver to this effect.) Riccardo built on this idea and attempted to show that labor and price were strongly correlated across the board. Marx later came along and demonstrated that that correlation didn't exist and that price didn't match labor quantity at all. However, instead of throwing out theory after showing how it didn't match evidence, he instead decided that the theory was totally fine, and instead it was in fact reality that must be wrong. Marx's approach to this is a bit backwards, IMHO.

>Marx later came along and demonstrated that that correlation didn't exist and that price didn't match labor quantity at all.

The full theory of prices is only explained by Marx in the context of competing capitals, and the full development of M-C-M', but Marx does clearly accord correspondance between values and prices, even if they're not the same thing, and they're at different levels of abstraction. Marx does offer an argument for why labour is taken as the substance of value (and why socially necessary labour time is its magnitude) - and it's all developed further in the analysis of money. Yes, "labour" doesn't correlate with price in Marx's schema, but the "amount" of abstract labour, determined by the socially necessary labour time required to reproduce a commodity, does.

Shaikh and Tonak show that in the case of freely reproducible commodities, excluding things such as natural resources and land (covered in the theory of rent instead), some empirical research does show correspondance between labour-values and prices in subsets of the economy where it can be measured.

Marx's theory of exploitation requires a correspondance between wages (as money) and value (the product of the labour process). It wasn't as though Marx saw an inconsistency and ran with the theory anyway. Unfortunately for his detractors, the same arguments since Bohm-Bawerk have been repeated since they were made despite adequate refutation by those who hold to Marx's "LTV".

"Marx does offer an argument for why labour is taken as the substance of value"

The problem here is that we're talking about Smith's LTV and not Marx's. Marx may provide his own reasons for believing in the LTV but he disproved Smith's. So the fact that Marx had these reasons are irrelevant if we're trying to justify Smith's adherence.

Though, it is worth pointing out Marx did develop his LTV in part by reading the likes of Smith and Ricardo. The reasons he gives for the LTV in Capital are absent in A Contribution to the Critique of Political Economy in which he merely takes LTV as a given. Actually, that's not quite right, he quotes Smith, Ricardo, and Franklin among others in support of LTV so it's my conjecture that he in fact did see an inconsistency and run with the theory anyway. It was only later in his career that he felt the need to justify that decision.

>Actually, that's not quite right, he quotes Smith, Ricardo, and Franklin among others in support of LTV so it's my conjecture that he in fact did see an inconsistency and run with the theory anyway.

Of course, but his quotation is both praising and damning; he believed that he resolved the issue with the dual character of labour power, a qualitatively special commodity, to preserve the integrity of the theory, which previously failed to explain the origin of profits in a capitalist economy. He takes his critique of political economy from the rare gems of insight developed previously (by Smith and Ricardo). His criticism was that the theory as developed in classical political economy is inconsistent, but not inconsistent in the dimension you earlier pointed out - that prices do not match up to labour values. He took that part for granted.

Smith's work has holes, at least according to Marx, but the insight he developed, labour being the substance of value (more precisely, exchange value) was crucial to Marx's development of the theory. My point is that the theories can't be lumped together, since Marx presents such a radical break from Ricardo (and thereby Smith).

Again, several thoughts.

1. I agree absolutely that Smith's principle value is as an early (though not the first) notable and thoughtful (though often mistaken) commentator on the nature of political oeconomy. As such, he either made several interesting original observations or conclusions, or promoted those of others (notably the Physiocrats, particularly Quesnay, and somewhat famously and controversially, James Steuart (not to be confused with James Mill or John Stuart Mill).

2. He's also been both mischaracterised (the "invisible hand" myth), and curiously ignored: his many cautions about monopolies, joint stock corporations, labour organisation, and the fundamental welfare of basic citizens. To that extent, reading Smith directly is a useful countermeasure to much spin that's been applied since.

3. On the labour theory of value, Smith's observations strike me as more valuable than many critics (particularly those inspired by opposing anything suggested by his mid-19th century German-British antecedent) give proper credit for. I'd argue that the Marginalists' focus on just marginal market cost and value is also fundamentally flawed, though frequently behaviorally accurate, at least in the short term.

Smith's discussion of prices, of the prices of various types of goods (commodities, rents, interest, labour, assets (coinage, though this can be extended) and, coached as "expenses of the sovereign", public goods, is actually quite informative, though it requires some interpretation.

In particular, Smith advances an idea largely ignored since the Marginal Revolution of a natural price, from which the actual observed market price may be higher, lower, or equal to:

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 market, according to their natural rates, the commodity is then sold for what may be called its natural price....

The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price.

https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/...

Smith does write that "Labour was the first price, the original purchase-money that was paid for all things," but that's possibly better understood on several bases:

- Where all individuals are self-sufficient, this is fundamentally the case. Cost is time.

- Where there is a means of exchange for the labour of others, paying for that labour is the first and most evident, or manifest, cost.

- But labour is clearly not the only input, and more complete and accurate cost-based accounting systems reflect this. When Alexander Hamilton Church developed the foundations of what became modern cost accounting, his entries reflected the extant purchasing practices of manufacturers, whose major expenses were labour, raw material inputs, and plant capital.

https://archive.org/details/properdistribut02churgoog/page/n...

https://en.wikipedia.org/wiki/Alexander_Hamilton_Church

(And yes, related to the other A.H.)

The question of value in economics is still one that bedevils it, and for which a suggestion of Marx has excellent merits: what's discussed as "value" is actually three distinct constructs:

1). Cost. The requirements of poduction, including labour, rents, capital, and fully-accounted natural resources.

2). The exchange price, or ratio in some maximally-fungible commodity (usually money or an equivalent) by which one party is entirely willing to exchange to another.

3). Value. Most specifically use value or net benefit, which should almost certainly exclude merely short-term compulsion (viz: drug addiction and social media FOMO), but rather some long-term lifetime benefit or quality measure. Healthcare quality-adjusted life years would be an example, or Leslie White's Law of energy throughput as a measure of cultural development.

Note that Smith contradicts his own price theory when discussing rents:

"Rent, considered as the price paid for the use of land, is naturally the highest which the tenant can afford to pay in the actual circumstances of the land."

https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/...

That is: rents are not based on the labour required to provision them, but on the added labour value which can be extracted by way of rents.

So clearly there's more than just labour at play, even within Smith.

The extension of the "cost-of-inputs" model I find most attractive -- that's an "all costs are opportunity costs", extends beyond just presently-realised costs, ultimately taking into account natural resource costs, as energy- or time-of-formation, particularly at a given rate of utilisation vs. replenishment, against total utilisation time, which gives rise to significant revisions of pricing of exhaustible resources (or sinks) well beyond the clearly flawed visions of David Ricard, L.C. Grey, and Harold Hotelling.

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