Value and Prices

The distinction between value in use and value in exchange is perfectly clear in Adam Smith (1776, p. 82):

The word 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’. The things which have the greatest value in use have frequently little or no value in exchange ... Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

Value in use is thus a prerequisite of value in exchange: a good that has no use, and which is not desired by anybody, cannot have a positive value in exchange. But once this condition is satisfied, the value in exchange of any commodity is determined on the basis of elements different from value in use: it depends on the conditions of reproduction of the economic system, not on the utility of the commodity under consideration. More precisely, the Classical economists do not consider the value in use of a commodity as a measurable quantity. At most, like Smith in the passage quoted above, we may speak of a greater or lesser value in use, but in a rather generic way that does not entail a complete ordering of the preferences of economic agents, and Smith explicitly rejected the idea that it is possible to explain the value in exchange of two commodities on the basis of their greater or lesser value in use.

When they referred to the value of a commodity, the Classical economists commonly meant value in exchange. However, the problem of value may assume different features, according to whether: (i) the aim is to go back to the first principle - the ‘source’ - of value; (ii) the focus is on the standard of value for inter-temporal comparisons or comparisons involving different countries; and (iii) the theoretical problem of determining exchange values is tackled.

Whatever specific problem came under consideration, economists initially focused on labour. Theories of labour-value were already common among the natural law philosophers; labour reappeared, side by side with land, among the elements that constitute the content in value of a commodity in the theories of Petty and Cantillon. However, labour-value theories assumed different meanings in the different authors. Natural law philosophers conceived labour-values as an index of the sacrifice made by people to obtain the desired commodity; Petty and Cantillon were nearer to a theory of physical production costs, devoid of the metaphysical features that characterise the idea of labour as sacrifice: labour-values are essentially no more than a simplified way of expressing the relative difficulty of production of the commodity under consideration in relation to that of other commodities.

In Smith both features were present; furthermore, the labour-value theory was proposed both as a theory of necessary labour (labour required for the production of the commodity: labour contained, in Marx’s terminology) and as a theory of labour commanded. Let us consider this latter first:

Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. (Smith 1776, p. 47)

In the passage quoted previously Smith did not intend to point out the factors that determine exchange values but simply to indicate the standard with which to measure them, and among other things he justified this choice by referring more generally to the central role of labour in the economy. Labour commanded, moreover, constitutes a standard particularly suited to comparison between different countries or different times within the same country and is thus appropriate for a dynamic theory of the wealth of nations like that proposed by Smith. It is also an appropriate measure for a society based on the division of labour, since exchange between the products of different sectors is in substance an exchange that connects the workers of the different sectors, bringing them together in a single society, within which each person depends on the labour of the others.

However, the problem of value in its usual sense remains open, namely that of identifying the factors that determine the value in exchange of the different commodities. We may obtain the quantity of labour commanded by a given commodity by dividing its price by the wage rate, although this clearly presupposes knowledge of both price and wage rate.

A solution to the value problem may be provided by the necessary labour theory, according to which the exchange ratios between two commodities are proportional to the quantities of labour necessary to produce them. Smith, however, considered this theory valid only in ‘that early and rude state of society which precedes both the accumulation of stock and the appropriation of land’.[1] According to him, we can no longer utilise necessary labour to explain exchange values when we refer to a society in which workers are no longer the owners of the capital goods and land that they use in their work. In fact, necessary labour takes no account of the rents and profits that enter into the price of every commodity when capitalists and landlords constitute social classes distinct from the working class. In such a society, exchange values correspond to the ‘natural prices’, which Smith defined distinguishing them from ‘market prices’: ‘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.’[2] In other words, the market price is the price we see looking at the actual acts of exchange; the natural price, instead, is the theoretical price that expresses the conditions of reproduction of the productive process. In a society divided into social classes, the exchange values or ‘natural prices’ must cover production costs and guarantee, in addition, a return equal to that obtainable in other sectors for the capital invested in the productive activity.

Reference to costs of production is in itself insufficient to build a theory of prices, since it would imply circular logical reasoning: if we need steel in order to produce coal and coal in order to produce steel, we cannot determine the price of coal if we do not already know it. For this reason some economists, before and after Smith, had recourse to a first principle such as necessary labour (or labour-and-land, as in the case of Petty and Cantillon), which enabled them to explain prices without their having to be explained in turn. However, as we have seen, Smith did not agree, since he considered necessary labour as an explanatory principle acceptable only for an ‘early and rude society’.

Exchange values remain an open issue in Smith’s analysis. An attempt at solving it is seen by some exegetists in what has been called the ‘adding- up-of-components-theory’: namely, the idea that ‘the price of every commodity finally resolves itself into some one or other, or all of those three parts’, ‘rent, labour, and profit’ (Smith 1776, p. 68). In other words, the price of a commodity corresponds to wages, profits and rents plus the costs borne for the means of production other than labour and land; such costs are in turn decomposed into wages, profits, rents and costs for the means of production; we thus proceed backwards until the costs for the means of production have disappeared or become insignificant. The theory re-proposes a national accounting principle at the level of an individual commodity: the value of the national product corresponds to the value of national income, or in other words to the sum of the incomes of the different social classes, as Smith himself (1776, p. 69) stressed. However, it ignores the difficulties that arise at the level of the individual commodity because of the necessity to assume that the three distributive variables are independent the one from the other and of the fact that the residual of means of production cannot in general be reduced to zero. Thus it came under criticism from Ricardo, on account ofits implicit idea that an increase in the wage rate causes an increase in the price while leaving unchanged the rate of profits. We can say, in conclusion, that Smith did not provide a fully adequate theory of exchange values; only with Ricardo did the theory of value, in its modern meaning of theory of relative prices, come to centre stage.

  • [1] Smith 1776,p. 65. Smith did not refer to any real primitive society but to an ideal modelof society in which economic agents (hunters and fishers) adopt the rational behaviourtypical of a mercantile society, while the primitive character is given by the abstracthypothesis of absence of division into the social classes of workers, capitalists andlandlords.
  • [2] Ibid., p. 72.
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