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John F. Henry’s Interpretation of Adam Smith’s Labour Theory of Value

John F. Henry’s Interpretation of Adam Smith’s Labour Theory of Value

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An essay for the 2012 Undergraduate Awards (International Programme) Competition by Lioutov Vladimir. Originally submitted for History of Economic Thought at McGill University, with lecturer William Watson in the category of Business & Economics
An essay for the 2012 Undergraduate Awards (International Programme) Competition by Lioutov Vladimir. Originally submitted for History of Economic Thought at McGill University, with lecturer William Watson in the category of Business & Economics

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Published by: Undergraduate Awards on Aug 31, 2012
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05/13/2014

 
John F. Henry’s Discussion and Interpretation of Adam Smith’s Labour Theory of Value2
 
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.
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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.
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“That is, labour is the cause or origin of thevalue of output.”
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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.
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 Capital increases the value created by labour only through the increase inthe productivity of labour.
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Further, the value created by labour is distributed into wages of labour, profits of capital and rent of land.
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Although labour produces all value, it earns only afraction of it.
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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.
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 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.
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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.
16 
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
 
labour, profits of capital and rents of land.
 Productive versus Unproductive Labour 
In addition, according to Henry, Smith argued that all value is produced by labour only and by productive labour specifically.
 “… [P]roductive labour produces value, including profit thatthen covers the wages advanced by the capitalist” to workers and that capital contributes tocreation of value only via productive labour .
 Labour-Embodied Theory of Value and Labour-Command Theory of ValueFurther, Henry notes that there is confusion between labour-embodied theory of value andlabour-command theory of value in
The Wealth of Nations
, but repeats that still “Smith adopted alabour standard in his analysis of the valuation process”.
In his paper, Henry also notes thatSmith held a view that labour is the standard measure of all values and that monetary pricesreflect the labour prices.
The real price of a product depends on labour content only and is alsomeasured in labour.
 
Contemporary Influences
Another interesting point made by Henry is that economic ideas as well as their interpretations,including those of Smith, are heavily influenced by the spirit of the time, including politicalconsiderations.
 This is a very good point. There are indeed differences in interpretations of Adam Smith’s ideas depending on many circumstances, including the current stage of economicdevelopment and the prevailing economic paradigm.
Summary of John F. Henry’s Arguments
To summarise, Henry argues that Smith had a labour theory of value for all stages of development of society and alternated between the labour-embodied and labour-commandapproach.
The separation of value into wages of labour, profits of capital and rent of land is thetheory of distribution of value and not the theory of creation of value.
Wages, profits and rentsmust equal total output and are determined by and measured in labour .
According to theargument of Rima provided by Henry, Smith implied that the cost of production is the long-rundeterminant of value.
 Despite holding a labour theory of value, Henry acknowledges the rightof capital owners to profits and the right of land owners to rents but stresses that “it is still thelabour that “adds value to the subject on which it is bestowed”.”
Critique of John F. Henry Discussion of Adam Smith’s ArgumentsJohn F. Henry provides an interesting critique of the theory of value discussed by Adam Smith in
The Wealth of Nations.
In my view, Henry correctly argues that Smith considered labour to be both the cause and the measure of value. In fact, Smith considered labour to be the ultimatemeasure of value of all products and commodities in an economy. This can be seen from hisdiscussion of what determines wealth and how to measure it.
The Nature and Causes of Wealth: Smith on the Labour Theory of Value
Smith argued that the wealth of a person depends on how much of the labour of other people hecan afford to buy.
 In his own words: “[A person] must be rich or poor according to the quantity4

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