Adam Smith and Theory of Value
Introduction
Adam Smith is considered as one of the most important economist that has ever lived. His works have had a vital impact on the economy as well as the world. He is one of the founding fathers of different economic ideas and laws that rule the market today. Furthermore, he is one of the most important figures who contributed in the development of the economic theory. He had helped to established different theories and ideas that are useful today, for many businesses, organizations as well as individuals that are concerns in the field of economy. He had also help to create important guidelines for different nations in order to manage different aspects of economy that can improve the financial performance of their country.
The theory of value is considered as the heart of the economic science, hence, it is considered as the nodal points of the history of the entire political economy that reflected in the fortune of the theory of value (Arestis & Sawyer 2000, p. 436). This is due to the fact that it helps many business, organizations and individuals to analyze as well as decide regarding the process of setting the accurate and acceptable price or amount of a particular product or service.
Theory of value has a great impact and importance to the different works and theories of Smith regarding his different economic ideas. This paper will focus on the different impact as well as the importance of the theory of value to the works of Smith as well as his consistency in using the said theory.
This paper will show the different ideas of Smith regarding economics as well as its connection with the different theories of value.
Theory of Value
Theory of value is the general and common term that is used by economist that includes all the theories in economics that attempt to explain the process of the exchange of value or price of the goods and services (Busky 2002). There are different questions that are included in these economic theories such as: why a specific good and service is priced as it is; how the value of a specific good and service comes about, as well as how to compute the right price of specific good and service (Busky 2002).
There are two categories of theory of values, the intrinsic and the subjective. The intrinsic theories suggest that the price of the products and services are not a function of any subjective judgments. The labor theory of value is one of the greatest examples, which hold that the different prices in the market economy are the function of how much the labor was put into the production of a certain product. On the other hand, subjective theories firmly believe that for a particular object to have its economic value, it must first, satisfy the needs and demands of human, furthermore, it must also be limited in supply. The said category of theories focuses on the judgments of the neoclassic economists (Princeton University n.d.).
Adam Smith’s Works and Theory of Value
Theory of value is one of the most important as well as most studies aspect of economics. This is due to the fact that it has a great impact on the past as well as current run and situation of the entire global economy. Furthermore, theory of values plays an important role in many of the works as well as ideas of Smith.
Smith rejected utility as the determinant of value as well as accepted the labor theory (Clark, Douglas & Hollander 1928, p. 77). He had distinguished between the value in use as well as the value in exchange, furthermore he also believe that the value in exchange could not be dependent on the value that is in use. In order to support his ideas, he cited the Paradox of Diamonds and Water, and showed that there was small predictable relationship between the said values (William King 2008).
Division labor has been one of the most important as well as most used economic theories; there have been many countries that are already implementing it. This eventually made exchanges everywhere, and the ration at which the products or services one produces exchange for the products and services that one desires had become an important element for an individual as well as in national prosperity. Furthermore, it is not enough to produce a large physical quantity of goods. If one person is to be comfortable, it is also important to know that the ratios of these good in ratio, in terms of other products should also be sufficiently high in order to yield a comfortable real income in goods. The said ideas show the theory of production, and it is one of the important theories of values.
At first, Smith had considered the possibility of utility, but later on decided to dismiss it due to the paradox that had been pointed out by Locke in his Hutcheson Law, and Harris before him, that shows the relationship between the relative value of the water and diamonds. Upon Smith’s abandonment of the labor-embodied theory of value, he focuses on the cost-of-production theory in order to explain the values that are under the capitalist exchange relations. In addition, Smith also believes that wages, profit as well as the rent are the three original sources of all the revenue and exchangeable value (Henry n.d, p. 1).
According to him, nothing more will be useful than water, but it will purchase scarce anything; scarce anything can be had in exchange for it. On the other hand, a diamond, has scarce any value in use; but it has a very great quantity of other goods may frequently be had in exchange for it. That is the reason why he concluded that the value in use or the utility is an independent nature with the value in exchange. Furthermore, Smith also believes that the things that have the greatest value in use have frequently little or no value in the exchange. On the other hand, those things that have the greatest value in the exchange have frequently little or no value in use. The primary reason why Smith had abandoned utility as one of the important determinant of value is because he compared the total utilities that had been caused by the changing types of objects more than their marginal utilities (Clark, Douglas & Hollander 1928, p. 78).
The said theory of Smith had been able to give new ideas in the economics. This lead to the idea regarding the value of the commodity, which is considered as the sum of all the normal amounts of payable to all of the factors that are used in production. After some time, the price of commodity had been determined by the costs of production alone such as the wage, profit and the rent. However, due to some changes such as the capital in the productive process and privatization of the land, the labor theory of value of Smith had become the cost-of-productivity theory (cited in Henry n.d., p. 2).
Labor and Theory of Value
Smith believes that labor has as great impact to the process of pricing of any product and service in the market. According to him every man, regardless of his or her status in life, can afford to enjoy different conveniences as well as amusements in life. However, due to the application of division of labor, there have been a small part of it labor can supply him or her. Therefore, the value of the commodities is equal to the labor that enables a person to purchase or avail. That is the reason why Smith firmly believes that labor is one of the real measures of the exchangeable value of all types of commodities (cited in Henry n.d., p. 4).
On the other hand, Smith also believes that although the labor is considered as one of the direct measurement for the value of all commodities, it is not that by which their value is commonly estimated. Furthermore, Smith explains that the value is being measured by the quantities of the labor that had been spent in the output. Furthermore, the price will be deviate from the value, but to the point where in it will be troublesome for the business (cited in Henry n.d., p. 5).
Theory of value had been able to help Smith to explain the process where in the market translate the real, labor-embodied prices into money process. He believes that it serve as a conservative surrogates for the fundamental values. He also added that while the labor can be considered as the actual measure of the value, in a monetary economy, money itself, is the customary way of representing the value, but the nominal prices are adjusted using the basis on the labor that have been done in the production of the money as well as other commodities. On the other hand, when the barter stops, and when the money has become the general tool of commerce, each and every commodity will be exchanged more for money than other commodity. This situation shows that the exchangeable value of each commodity is estimated by the quantity of money than labor or other commodity in exchange for it (cited in Henry n.d., p. 6).
In the said theory of the relationship between value and labor, it is clear that Smith firmly believe that labor is the only universal and only accurate factors that can help to measure the value of a commodity. Furthermore, Smith also believes that it can also be the only standard that can be compared with the values of the different commodities of any time at every place (cited in Henry n.d., p. 6).
Distribution and Theory of Value
Smith also focuses on the different aspects that can affect the value of commodities aside from labor. He strongly believe that any price represents value that can be seen as amounting to the portions of a particular price that can constitute the income that is shared by the workers, capitalist as well as the landlords. Furthermore, the price or the value is not the results of the process of adding up the different costs of production, but it is the total of the shares must equal the price. Therefore, the sum of the different prices that represents the sum of the commodities that are being exchanged must be equal to the sum of different income shares that are being distributed or the price of the product must be equal to the total income (cited in Henry n.d., p. 7).
Smith had been able to show the relationship of the distribution process as well as the value of commodities. This had been able to show the different aspects, aside from labor that affected the process of setting the price of particular product or service.
Laissez-faire Liberalism
In the An Inquiry into the Nature and Causes of the Wealth of Nations by Smith, he had been able to show a theoretical system of a capitalist economy as part of its economic structure. He had also, been able to show the principle of the individualistic behavior that is guided by self-interest, as well as the harmony in an economic system due to natural liberty that is being guided by an invisible hand. He had been able to show the laissez –faire as the achievement from best policy by social order (Itoh 1988, p. 13). This shows the process of division of labor, where in each and every individual shares their own motivation that pushes them to work.
In the said concept, theories had been one of the important aspects in order for him to show the importance of the laissez-faire liberalism. He had been able to question regarding how a commercial society autonomously maintain itself, by the process of production as well as distribution basis of each value as well as the surplus value, which are universalized by the labor theory of value, as well as how the major classes are being converted into the capitalists, the landlords as well as the laborers (Itoh 1988, p. 13).
Conclusion
Theory of value had been able to help Smith to focus on the different aspects that are related with his theories such as theories of production and labor. Furthermore, it also important due to the fact that it serves as his references or evidence with connection to his works.
In general, Smith ideas focuses on the aspect that the amount of the labor that are required in order to produce certain good and service can be determine by the rate where in it can be exchanged for another good, but there are some exceptions that have been mentioned. Furthermore, he also firmly showed that if a supply of a specific product or service cannot be increased by the labor, the its value will be established based on its scarcity, not on the labor that are included and have been done in order to obtain the output or the finished product. This can be showed by the case of old paintings, where in it can no longer be produced due to the fact that the painters and artists that had painted those were already dead, therefore, the price of the said painting can rise to any height without considering the competing supply of the new production process.
Smith also considered monopoly as one of the exempted cases. This is due to the fact that businesses or organizations that are into this kind of market can maintain the limited supply of their product, thus thwarting the possible competitors or competition in new production.
Above all, Smith had been able to show that people can decide regarding production for themselves, at all times, rather than getting products and services in exchange for others. If people will give up more labor in order to get good by exchange, then it could help to produce for them. Furthermore, he also established the idea that if a certain individual cannot produce something for himself of herself, a group can. Thus this can lead to a possible competition from the new production that will help to maintain the different prices in the value of the labor.
Above all, regarding the issue of labor, he also added that there is a justice that exists, in the exchange of the values of labor. Labor is considered as one of the cost in the process of production, due to the fact that it requires effort as well as time in order to do so. On the other hand, the labor that is associated in a product and service is considered as a measure of the sacrifices that are involved in the process of production. That is why the exchange of the values in labor is considered as the exchange of equal and fair sacrifices.
Smith had been able to show consistency in establishing different ideas and theories that connects and relates the value of commodities and the labor. Furthermore, he also shows different factors and aspects that are connected with the relationship between the value and labor.
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