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Discuss Adam Smith’s Conception of Labour and Value in the Wealth of Nations

Introduction

Adam Smith is one of the prominent philosophers, who has made a significant contribution in the development of economics, political science, sociology, and philosophy. He paid a particular attention to the essence of socioeconomic relations existing between people. In this regard, it is possible to refer to his Wealth of Nations, where the author pays a particular attention to the concept of labour and value and their role in the life of the society, economic relations and wealth of nations. The concept of labour and value developed by Adam Smith laid the foundation to many economic theories and contributed to the emergence of Marxism, for Smith’s ideas were borrowed by many economists and philosophers. At the same time, Adam Smith stressed that labour is the major value, which defines the competitive position of an individual in the labour market and creates the value of products and services, which otherwise, i.e. without the labour applied to them, would have equal values. Also, Smith revealed close relationships between labour and market and he revealed the dependence between supply and demand in the labour force market and the market at large. Smith revealed the symbolic meaning of money and their exchange value and he developed his own vision of how the price is formed on the ground of the value of materials and the labour force applied to them. In such a way, Smith considered self-interest, pursuit of each individual to improve his position as the main mover of human actions. The competition in the economy and the self-interest desire of everyone are to ensure the development of production and ultimately increase public welfare. Therefore, the labour became the crucial concept developed by Adam Smith and the important value that played an important part in the economic relations in the society.

Division of labour

Smith argued that the greatest improvements in the productive powers of labour, and the greater part of the skill, dexterity, and judgment, with which it is anywhere directed, or applied, seem to have been the effects of the division of labour (Smith, 10). Adam Smith established the primacy of labour as the ultimate source of economic wealth. “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life.” (McNulty, 346). At the same time, labour is crucial for every individual worker because their labour is their only source for living. Smith’s first proposition is that the worker tends to increase his dexterity by concentration on fewer processes. His second is that specialisation of labour brings a saving of time in changing from one process to another. His third is that the division of labour encourages invention and mechanization (West, 23). In such a way, the division of labour is the result of the growing competition between workers as they focus on their specific jobs. The specialization gives workers advantageous position in the market. In addition, the division of labour stimulates the further improvement of specific work through invention and mechanization.

Principles contributing to the division of labour

The wealth of the nation, according to Smith, is a product of material production, and the value of the latter depends on two factors:

  • the proportion of the population engaged in productive labour;
  • and labour productivity.

At the same time, according to Adam Smith, a man must be rich or poor according to the quantity of that labour [i.e. the labour of others] that he can command (Bladen, 506). In such a way, an individual, who has more labour power under his command is richer compared to those individuals, who have fewer labour power under their command. This means that the labour lays the foundation to the wealth of individuals.

A productive work was viewed by Smith as all the work of people employed in the sphere of material production, it is the work that increases the value of the object to which it is attached and which is fixed. The division of labour or specialization was viewed as the main factor in the growth of labour productivity, considering process operations to be the most effective. Adam Smith said that the deepening division of labour is the main source of growth of wealth of any nation. From a common point of view it is strange, or even incorrect, conclusion, but it should be understood that at the time of Smith’s the manufactory production, in which technological progress went along the way of division operations, prevailed.

Smith emphasises that the division of labour with all the above advantages is not the effect of any conscious regulation by the state but arises from a propensity in human nature to exchange, which in turn is linked to self-interest (West, 24). People exchanged products of their labour that stimulated the division of labour as people could reach perfectness in their specific job. Workers specialized on specific job can produce surplus of products. For instance, a farmer could produce more products he could eat and plant. As the surplus appeared, individuals needed to exchange the surplus part. The certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent of genius he may possess for that particular species of business (Smith, 19-20). Therefore, specialization is one of the key principles of the labour, according to Smith.

The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education (Smith, 20). Therefore, habit, custom and education are crucial for labour. Individuals need training to reach perfectness in their specialization, which may also be a result of habit and custom. At the same time, the most dissimilar people are of use of each other because they exchange the products of their labour.

The ratio between these different funds determines the character of its people for hard work or leisure in every country. Thus, the ratio between capital and income controls the relationship between hard work and laziness. Where the capital is dominant, hard work is dominated, where the income is predominant, there laziness prevails. Therefore, any increase or decrease of capital leads naturally to increase or decrease in economic activity, the number of productive workers, and hence exchange value of the annual produce of land and labour of the country, the real wealth and revenue of all its inhabitants. There is also need to mention that most of the accounts hitherto given of the development of Adam Smith’s ideas on the division of labour prior to the appearance of the Wealth of Nations have been based on a number of crucial assumptions made by early Smith scholars concerning the dating of the relevant documents-notably the so-called Early Draft of the ” Wealth of Nations ” and the two fragments on the division of labour discovered by Scott (Meek, 1094, p. 1973).

The division of labour and its limitations to the market

Smith argued that as it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market (Smith, 21). The division of labour, he says, is limited by the extent of the market. But the market itself, or in other words effective demand, expands with production and prosperity, and this in turn is governed by the division of labour. In the absence of extraneous obstacles, therefore, it provides a motor or escalator of economic growth (West, 24). Smith tied the welfare of society with the growth of labour productivity. He considered the division of labour and specialization to be the most effective way to improve it, referring a classic example of a pin manufactory. However, he emphasized that the degree of division of labour is directly related to the size of the market: the broader market, the higher the level of specialization of its producers is. Hence, there was the conclusion about the need to remove such restrictions for the free development of the market as a monopoly, craft privileges, laws on residency, compulsory apprenticeship, etc.

Smith tied the welfare of society with the growth of labour productivity. He considered the division of labour and specialization to be the most effective way to improve it, referring a classic example of a pin manufactory. However, he emphasized that the degree of division of labour is directly related to the size of the market: the broader market, the higher the level of specialization of its producers is. Hence, there was the conclusion about the need to remove such restrictions for the free development of the market as a monopoly, craft privileges, laws on residency, compulsory apprenticeship, etc. Thus, the division of labour developed within the framework of the market and the balance of supply and demand.

Origin and use of money

Adam Smith traced the origin of money. For this purpose he traced back economic relations, to the time when people have just started to produce surplus. The early division of labour was closely intertwined with the surplus of products that workers could exchange. Hence, the exchange value was identified by Smith. Smith argued that each product had its exchange value, which was defined by the demand on certain products. Some products were more valuable than others. Smith argued that every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of someone commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry (Smith, 26).

Furthermore, according to Smith, money is needed to conduct the exchange. Money has become the universal means of exchange or the means of payment for products or services. They were used instead of products and certain amount of money matched the exchange value of certain products.

In addition, Smith argued that value is determined by the amount of labour which can be purchased for this product. If the simple commodity production is considered, the fundamental difference between the first and second concept does not exist. However, if one takes the production in which there are capital and wage labour, the picture is different. The entrepreneur receives a greater value than he pays for the labour. There is a violation of the principle of equivalence, which is the basis of the labour theory of value. Departing from this contradiction, Smith concludes that the cost of commodity is determined by labour only in “primitive” state of society.

Under conditions of capitalist production, according to Smith, value is the sum of the expenditures, including wages, profits and rents. And the price or exchange value of any commodity is reduced to all these three parts. This concept of Adam Smith was the basis of the theory, later called the theory of the three factors of production. It is impossible to say for sure whether Smith considered theory of labour value to be true or was he inclined to the theory of the three factors, or believed that the value is determined by something else, such as labour values, plus something else. Nevertheless, Smith definitely believed that labour’s value made product really valuable and unique in the market.

Kaushil points out that Smith has a three-factor theory of exchange value (Kaushil, 1973, p. 65). He also writes that the rationality and morality of man are still viewed by Smith together, and the belief in the harmony pervades with optimism the whole of his economic theory. This is reflected in the views on the prospects for economic growth and capital accumulation and the relationship between classes. Assuming that labour is the only source of wealth of the nation, its increased demand is considered by Smith as the most indisputable evidence of prosperity of any country. Of course, wages also increases.

The theory of product distribution implies from Adam Smith’s theory of the value and it is also twofold, as well as his theory of value. On the one hand, if the value of labour is the final reason, the whole produce of labour should belong directly to the manufacturer. According to Smith, such situation was in a society where one person was the owner of the factors of production and manufacturer. Under conditions of capitalist production, when the worker is alienated from the means of production, the part of the product he created is subtracted in favour of the landowner (in the form of rent), and in favour of the entrepreneur (in the form of profits). In essence, Smith considers these forms of income as the appropriation of unpaid labour but at the same time Smith has another interpretation of this source of income, derived from his concept of value as the amount of income. In this case, profit and rent cannot be deductions from the value of the created product, as capital and land as factors of production are equally involved in the creation of value of the product and, therefore, claim for their share.

Adam Smith argues that there is one kind of labour adds value to the object, which it is dedicated to, and the other kind of work does not render such action. The first one, because it creates some value, may be called productive labour, the second – unproductive. Thus, the artisan’s labour usually adds value to materials that it processes, namely, adds value to the amount of its contents and benefits of its owner. By the way, according to Smith, the words 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. The one may be called ‘value in use;’ the other, ‘value in exchange” (Smith, 2005, p. 30). Domestic servant’s labour, in contrast, does not add any value. While the artisan receives wages advanced to him by master, in reality he does not last any cost, because the value of its wages is usually returned to him together with a profit of increased value of the object, which work of employees is dedicated to. In contrast, the cost of maintaining a domestic servant is never refunded. A man grows rich by giving employment to a large number of workmen, and he is impoverished if he maintains a large number of domestic servants. However, labour of the latter has its value and deserves a reward as well as the labour of the former. The artisan’s labour is fixed and realized in any particular subject or product available for sale, which has existed for some time at least, after labour is completed. Thus, a certain amount of labour is deposited in reserve and accumulated, to be use, if necessary, in any other case. This subject, or, equivalently, the value of this subject, can afterwards set in motion the quantity of labour equal to that which originally produced it. Labor of domestic servants, in contrast, is not fixed and cannot be realized in any particular subject or product suitable for sale. His services usually disappear at the very moment of their delivery, and rarely leave behind a trail or any value that could then deliver an equal amount of services.

Price

The concept of price is closely intertwined with the concept of labour because Smith believed that the price is shaped on the ground of the value of materials used for production of goods and the labour applied to the goods. For instance, Smith argued that although 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 (Smith, 33).

Therefore, the employer may value the labour differently and apply higher or smaller value to the same amount of labour. In such a way, Smith developed the concept of the real and nominal price. The nominal price is the price of materials used for the creation of products, while the real price includes a complex of costs of the production, including the labour value. When the degradation in the value of silver is combined with the diminution of the quantity of it contained in the coin of the same denomination, the loss is frequently still greater (Smith, 35). In such a way, Smith reveals the relative value of certain products.

On analyzing the concept of the exchange value in chapter 5, Smith arrives to the conclusion that only labour is the only invariable measure of the exchange value, while other measures, such as corn and silver, which used to be popular measures of exchange value in the time of Smith, are variable (Kaushil, 62). The explicit formulation of the concept of normative natural price is consistent with this value and provides a way of assessing how well it is being achieved by the market. It also provides a justification for substantial political supervision of the labour market, both to restrain the division of labour when it destroys men’s capacity for self-direction and to adjust the price of labour in the case of deadlock between employers and employees (Lewis, 47).

Adam Smith turned his attention to measurement of changes in real price, changes in the degree of cheapness, changes in productivity as affecting particular commodities (Bladen, 506). If the real price of a commodity at a particular time cannot be measured, changes in that real price over time, Adam Smith thought, might be measured at least roughly (Bladen, 506). He wanted some rough index of such changes so that significant improvements in productivity could be ascertained (Bladen, 506). Two fundamental ideas running through the Wealth of Nations may be regarded as evidence of this. The first is the stress which Adam Smith laid upon men’s propensity to barter as the origin of a socio-economic organisation based on the division of labour (Robertson & Taylor, 191). The second lies, of course, in his stress on there being a necessary connection between the apparently independent sets of prices comprised under his classification of “natural price” and “market price” (Robertson & Taylor, 192).

Smith argued that gold and silver were equivalent of money. By the money price of goods, it is to be observed, I understand always the quantity of pure gold or silver for which they are sold, without any regard to the denomination of the coin. Six shillings and eight pence, for example, in the time of Edward I., I consider as the same money price with a pound sterling in the present times, because it contained, as nearly as we can judge, the same quantity of pure silver (Smith, 44)

Wages of labour

The produce of labour constitutes the natural recompence or wages of labour (Smith, 58). Adding the cost of the income of different classes of society, Smith attempts to identify what determines the natural rate of each type of income, paying particular attention to factors determining the level of wages. According to his observations, the usual wages depends on the contract between employers and workers but whether its dimensions are determined by cost of living, which Smith calls “the lowest rate, which is only compatible with the simple humanity”? Smith does not accept this point of view, emphasizing that the theory of cost of living is not suitable for an explanation of how wages are determined in real life. He gives the following arguments:

  • The level of agricultural wages is always higher in summer than in winter, although the cost of living for workers in the winter is, of course, higher;
  • In different parts of the country salaries vary, but food prices are the same everywhere;
  • Wages and food prices often move in opposite directions, etc.

Moreover, for the first time in the economic theory of Adam Smith said about the possibility of stimulating productivity by wages, and with some exaggeration it is possible to say that Smith says about the growth of labour supply with an increase in wages.

Smith linked changes in wages to the economic condition of the country, believing that wage growth is evidence of economic progress, as wage growth is due to greater demand for labour. Smith’s concept is often misunderstood and this fact is thoroughly examined in the work of Bladen. The most serious misunderstanding of Adam Smith he finds “in those who apply the idea of labour command as an indirect index of purchasing power over commodities, not to individual or class incomes, but to the aggregate social income, the national dividend, the GNP” (Bladen, 1975, p. 510).

According to Smith’s ideas, profit is not only a monthly fee for a special kind of labour management, it also includes other elements, since it is obvious that the amount of profit is determined by the size of capital and not related to the severity of labour. With regard to trends in profit margins, they are caused by the same factors that cause an increase or decrease in wages, i.e. they depend on the increase or decrease of the wealth of society but these reasons are quite different effect on wages and profits. The increase of capital, which increases wages, leads to a decrease in profits, as in a situation where many capital are invested in one industry, their mutual competition naturally tends to decrease of their profits. Therefore, Smith has repeatedly stressed that private business interests never coincide with the interests of the public, since the higher the level of production and national wealth, than the rate of return is less and since the rate of profit is inversely related to social welfare, then the class of entrepreneurs is usually interested to lead society astray, and even to oppress it. Smith advises to have extreme distrust to any proposal of the new law, coming from this category of people. He also notices the pursuit of monopoly inherent in this class. Smith also wrote about the talents of people: “The difference of natural talents in different men, is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour (Smith, 20).

The increase in the wages of labour necessarily increases the price of many commodities, by increasing that part of it which resolves itself into wages, and so far tends to diminish their consumption, both at home and abroad. The same cause, however, which raises the wages of labour, the increase of stock, tends to increase its productive powers, and to make a smaller quantity of labour produce a greater quantity of work (Smith, 77). In such a way, changes in the market may affect wages. However, wages vary depending on the industry, specialization of workers.

Conclusion

Thus, taking into account all above mentioned, it is important to place emphasis on the fact that Adam Smith contributed to the emergence of new concepts and laid the foundation to many economic theories. The division of labour is the crucial concept developed by Smith, for he implied that each individual specialized on specific job, where he reached perfectness through improvements and innovations. The division of labour allows individuals to reach the surplus of products and gain benefits from exchanging the surplus. In fact, Smith developed the concept of labour as one of the major values that define the wealth of individuals and nations. At the same time, Smith revealed the fact that the labour adds value to products but the assessment of labour value varies. As a result, the price of products varies too. The labour implies certain rewards, wages, which depend on the market situation but they are not always fair. Finally, Smith found out that the more labour force an individual has under his command the richer he can be and this idea can be extrapolated on nations.

 

Works Cited:

Bladen, V.W. Command over Labour: A Study in Misinterpretation. The Canadian Journal of Economics / Revue canadienne d’Economique, Nov., 1975, Vol. 8, No. 4, p. 510.
Kaushil, S. The Case of Adam Smith’s Value Analysis. Oxford Economic Papers, New Series, Mar., 1973, Vol. 25, No. 1, pp. 60-71
Lewis, Thomas J. Adam Smith: The Labor Market as the Basis of Natural Right. Journal of Economic Issues, Mar., 1977, Vol. 11, No. 1. pp. 21-50.
McNulty, Paul J. Adam Smith’s Concept of Labor. Journal of the History of Ideas, Jul. – Sep., 1973, Vol. 34, No. 3 pp. 345-366.
Meek, Ronald L., Skinner, Andrew S. The Development of Adam Smith’s Ideas on the Division of Labour. The Economic Journal, Dec., 1973, Vol. 83, No. 332 pp. 1094-1116.
Robertson, H. M., Taylor, W. L. Adam Smith’s Approach to the Theory of Value. The Economic Journal, Jun., 1957, Vol. 67, No. 266 pp. 181-198. Print.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 2005. The Pennsylvania State University. Pp. 9-60. Print.
West, E. G. Adam Smith’s Two Views on the Division of Labour. Economica, New Series, Feb., 1964, Vol. 31, No. 121, pp. 23-32