Adam Smith is considered to be one of the greatest economists and the founder of classicalschool of economics. This is one of the reasons that he enjoys so much attention from other economists and scholars that
An Inquiry into the Nature and Causes of the Wealth of Nations
isso intensively analysed and discussed. One such discussion is the paper by John F. Henry of California State University in Sacramento which focuses on Smith’s theory of value.John F. Henry Discussion of Adam Smith’s Arguments
Labour Theory of Value
John F. Henry argues than Adam Smith advocated a labour theory of value, - with labour as boththe cause and measure of value.
Henry further argues that Smith’s discussion of the separationof the value of a product into wages of labour, profits of capital and rent of land is pertains to thedistribution of value, but not the creation of value.
“That is, labour is the cause or origin of thevalue of output.”
In other words, the welfare of a nation depends on its economic output, whichin turn is the product of the social labour of the nation, working with capital and using naturalresources as inputs.
Capital increases the value created by labour only through the increase inthe productivity of labour.
Further, the value created by labour is distributed into wages of labour, profits of capital and rent of land.
Although labour produces all value, it earns only afraction of it.
The rest is earnings of capital and land. The value created by labour is split intowages, profits and rents because labour, capital and land become property of different people asthe result of changes in the social nature of production and the appropriation of different meansof production by different people.
Labour Theory of Value as Creation of Value Theoryand Cost-of-Production Theory of Value as Distribution of Value Theory
In Henry’s view, what some economists consider Smith’s cost-of-production theory of value is infact the distribution theory of value.
Henry points out that the total of the shares of labour,capital and land earnings must equal equilibrium price under normal circumstances (e.g.competitive markets).
“… [T]he value of output must equal total income.”
According toHenry, the controversy around the theory of value arose from the fact that Smith committed anerror in his discussion of the theory of value which could lead to his theory being interpreted asthe cost-of-production theory of value.
The error, or at least internally inconsistent proposition,is that on some occasions Smith said that the profits of capital and rents of land are subtractedfrom the value produced by labour, and on other occasions he said that profits and rent representextra amounts of value in addition to the value produced by labour .
It is obvious that if both aretrue the system of value equations does not hold. Since capital contributes to production, itcontributes to an increase in value, and its profits should be additions to, and not subtractionsfrom, the value produced by labour alone.
In this case the cost-of-production theory would beconsistent with Smith’s general approach.
However, there are two problems with this view.
First, the technology did not change, but rather the social nature of production and the relations between people with respect to property changed. Second, capital adds value only via increasesin the productivity of labour.
An increase in capital and a consequent increase in productivity of labour leads to a decrease in the amount of labour required for production of the same quantity of a given good and a decrease in its price as a result.
Henry finds that Smith contradicted himself by saying that the value is produced by labour but consists of, or resolves itself into wages of 3