Friday, May 07, 2021

Adam Smith On The Source Of Profits And Rents In The Exploitation Of The Worker

"In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. 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...

...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. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertaker of the work who hazards his stock in this adventure. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced. He could have no interest to employ them, unless he expected from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock...

...As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part." -- Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter VI

Smith is saying that the price of a produced commodity, under a system with private property, consists of the sum of the value of the means of production used up in making that commodity and the value added by labor. And that value added by labor is not entirely paid out to workers as wages. Some of it goes to pay profits and rent. This is exploitation of the worker, as many saw it at the time.

I do not see that this claim necessarily depends on any quantitative relationship between the labor embodied in a commodity and "natural prices", where the latter are centers of gravitational attraction for market prices at a given point in time. Does it depend on the macroeconomic invariants Marx erroneously asserted to hold when he came to write on the transformation problem in Volume 3 of capital?

Many of the so-called Ricardian socialists thought of profits as rent imposed on top of prices proportional to labor values. It is this deviation of prices from labor values that, in their view, socialism would abolish. Some had the idea of even then of paying workers in labor vouchers that would be exchangable (in co-operatives?) for goods priced in terms of labor values.

Karl Marx, in many places, famously opposed this view.

  • W. Paul Cockshott and Allin Cottrell. 1993. Towards a New Socialism
  • Anton Menger. 1899. The Right to the Whole Produce of Labor (Trans. by Herbert Foxwell).
  • Adam Smith. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations (I go by the Cannan edition).
  • Noel W. Thompson. 1984. The People's Science: The Popular Economy of Exploitation and Crisis 1816-34 Cambridge University Press.


Anonymous said...

Maybe you could do some posting on vertical integration and its relationship with Pasinetti on Smith. There is some paragraphs on Mirante’s on this topic and I think that your take on fixed capital stopped without getting into vertical integration.

AXEC / E.K-H said...

Profit: The most powerful formula of economics
Comment on Robert Vienneau on ‘Adam Smith On The Source Of Profits And Rents In The Exploitation Of The Worker’

Adam Smith, one of the founding fathers of economics, was not a particularly smart guy: “Smith … disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter)

Accordingly, he got the foundational concept of economics ― profit ― wrong. That is bad, but what is worse is that economist did not get it right to this day.#1-#3

To make matters short here, the macroeconomic 3-sector (household, business, government) Profit Law is given with Qm≡(I−Sm)+(G−T)+Yd, Legend: Qm business sector's monetary profit, Sm household sector's monetary saving, G government expenditures, T taxes, Yd distributed profits. #4

The main drivers of macroeconomic profit/loss Qm are the difference between the business sector's investment expenditures I and the household sector's saving Sm, and the government's deficit/surplus (G−T).

The first half of the formula is dominant in early capitalism, the second half is dominant is late capitalism.#5

It is pretty obvious that profit has NOTHING to do with the Labour Theory of Value.#6 So, Adam Smith and Karl Marx got the profit formula wrong and later Keynes.#7

Economics is proto-scientific garbage because economists in their abysmal scientific incompetence do not get the profit formula right to this day. Walrasianism, Keynesianism, Marxianism, Austrianism, MMT are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL get profit wrong.

Egmont Kakarot-Handtke

#1 The profit theory is false since Adam Smith

#2 Dear idiots, Marx got profit and exploitation wrong

#3 Cross-references Profit

#4 Profit

#5 The U.S. economy hangs on the state ventilator for its survival

#6 Ricardo, too, got profit theory wrong

#7 How Keynes got macroeconomics wrong and Allais got it right