A. Smith Explains Source Of Profits In Exploitation Of The Worker

Karl Marx described the source of profits, interest, and rent as value added by workers not paid out in wages. That is, Marx said the value of a commodity produced under capitalism is the sum of the value of the goods worked up by the workers into that commodity and the value added by workers. Insofar as this value-added is not fully paid out to the workers, they are exploited. But, according to Marx, capitalism is sustainable only when a source exists for returns to capital, that is, only when workers are exploited. Adam Smith said much the same:

"As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials... The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced." -- Adam Smith (1976, Book I, Chapter VI)

Smith provided the same explanation of profit a few chapters later, albeit mixed with an account of the source of rent:

"The produce of labour constitutes the natural recompence or wages of labour.

In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belong to the labourer. He has neither landlord nor master to share with him...

...As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.

It seldom happens that the person who tills the ground has wherewithal to maintain himself till he reaps the harvest. His maintenance is generally advanced to him from the stock of a master, the farmer who employs him, and who would have no interest to employ him, unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit. This profit makes a second deduction from the produce of the labour which is employed upon land.

The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be completed. He shares in the produce of their labour, or in the value which it adds to the materials upon which it is bestowed; and in this share consists his profit." -- Adam Smith (1976, Book I, Chapter VIII)

This reading of Adam Smith, in which he offers an account of the source of profits in the exploitation of workers, was a commonplace in the 19th century among the so-called Ricardian socialists. I find it of interest that Adam Smith offers this account while rejecting the (embodied) labor theory of value. I'm not sure this account makes sense, as a quantitative approach, without the labor theory of value, or, at least, without Marx's invariants (see Table 8). I do not think the tremendous continuity, as well as differences, between the ideas of Adam Smith and of Karl Marx is any secret among scholars.

Update: Gavin Kennedy agrees with me that Smith thought the (embodied) labor theory of value inapplicable to commercial society, in which laborers do not obtain all of their produce. For some reason, Kennedy presents his agreement as disagreement. (Although I did not go into it in my original post, I also hold that Smith did not have a labor commanded theory of value, as opposed to a labor commanded theory of welfare.)

Selected References

• Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations
• Thompson, Noel W. (1984). The People's Science: The Popular Political Economy of Exploitation and Crisis 1816-34, Cambridge University Press