Table Of ContentAdam Smith’s Labor
Theory of (Real) Value:
The Case of a Misfiring Critique
Terry Peach
I am grateful to Roy Grieve for drawing attention to my reconsideration of
Adam Smith’s labor theory of (real) value (Peach 2009). Much as I regret
not having convinced Grieve of the merits of my case, it is at least a relief
to discover that, save for prompting me to revise my interpretation of one
passage in Smith’s work (although not in favor of Grieve’s reading, I
should add) I am unable to discover anything in his critique that persuades
me to change my position in any fundamental respect. In what follows I
will explain in detail why I have reached that judgement.
The Issues
As I stated at the outset of my article: “My purpose . . . is to question the
widely held opinion that Adam Smith confined his use of a labor theory of
exchangeable value to an ‘early and rude state of society’ in which inde-
pendent laborers exchange the surplus products of their labor. As I pro-
pose to establish, Smith continued to apply labor theory reasoning to the
later ‘commercial’ society, both to explain static exchangeable values and
their changes” (Peach 2009: 383). In the hope of clarifying what I meant
by “a labor theory of exchangeable value,” I appended the following note:
Correspondence may be addressed to Terry Peach by email: [email protected]. I thank
the editors of this journal for inviting my response to Roy Grieve’s article and Maggie Chen for
her proofreading.
History of Political Economy 52:1 DOI 10.1215/00182702-8009597
Copyright 2020 by Duke University Press
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172 History of Political Economy 52:1 (2020)
“For the purposes of this article, and without claiming that this is the only
possible construction, a labor theory of exchangeable value should be
understood as a theory maintaining that (changes in) exchangeable value
between some designated class of produced commodities are determined
by (changes in) the quantities of labor expended on their production”
(383n1). Perhaps, with hindsight, I should have attached a list of all the
things I did not mean by a “labor theory.” The list would have included
the following, attributed to me by Grieve (2019: 775–76), that “commodity
values [he means prices] correspond to labor-embodied values” (some-
thing that “could make sense only if labor-embodied was the same as
labor-commanded—implying that the situation in the ‘commercial society
corresponds to that of the ‘early and rude’ state”). With the price or “value”
of an individual commodity equated by Grieve with “the value of the labor
[that is, wages, for Grieve] employed in its production,” in turn equated
with “quantities of labor-embodied,” it is indeed the case that this “labor
theory can only apply (when it does apply) in the absence of payments
including profit, otherwise “labor embodied” does not equal “labor com-
manded.” But that was not my meaning of a “labor theory,” nor is it a
meaning I attribute to Smith. To repeat, the type of “labor theory” I discuss
and do attribute to Smith makes no use of a concept of individual or
absolute value in Grieve’s sense, but instead relates to the explanation
of “(changes in) exchangeable [i.e., relative] value” either in terms of
“(changes in) quantities of labor”—that is, relative quantities of labor—
“expended on their production,” or to (changes in) the “real price/value” of
commodities, understood as a function of the quantities of labor expended
in production: a theory, in either of the two formulations, that does not
require an equality between “labor embodied” and “labor commanded.”
Returning to my article, I point out that the presence of “labor theory
passages” in The Wealth of Nations “has been acknowledged by a small
number of previous commentators. However, because they believed that
Smith had restricted the labor theory to an ‘early and rude state,’ the pas-
sages were variously treated as anomalies, as evidence of confusion and
contradiction, as unexpurgated remnants from a previous draft, or as prop-
ositions relating solely to changes in exchangeable values implying no
commitment by Smith to a labor theory of static or ‘equilibrium’ exchange-
able values” (Peach 2009: 384). As I interpret them, these “labor theory”
passages fall into five categories: (1) those that explain the exchangeable
value of commodities explicitly in terms of the (relative) quantities of labor
expended on their production; (2) those that equate (changes in) the “real
price/value/dearness/cheapness” of commodities with (changes in) the
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Peach / Adam Smith’s Labor Theory of (Real) Value 173
quantities of labor required to produce and market them; (3) those that
equate changes in “real price” with changes in quantity of labor as reflected
in changes in the total cost of labor incurred in production and marketing
(relative to other commodities); (4) those that equate the “real dearness/
cheapness” of commodities with the (relative) cost of labor expended in
production (a reflection of the relative quantities of labor expended); (5)
and those maintaining that “real cheapness/cost/value” cannot change
unless there is a change in the total cost of labor expended on their produc-
tion (again as a reflection of the quantity of labor expended) even though
Smith’s own choice of “real measure” would give a quite contrary result.
An interpretative puzzle arises if (a) we accept that the “labor theory”
passages exist; and (b) we believe that Smith had explicitly confined the
applicability of the labor theory to an “early and rude state”; and/or (c) we
believe that Smith was fully aware of reasons for “confining” the labor
theory, regardless of any explicit renunciation. I maintain that the passages
do exist, and that he had not explicitly confined the applicability of the
labor theory to an “early and rude state.” I also accept that he recognized a
potential difficulty for the labor theory arising from the payment of rent,
and that he was aware of a “compounding” effect of profit and (relatedly) of
differences in the “time profile” of labor inputs between production pro-
cesses: differences that could be said (and were said by Ricardo) to “mod-
ify” the labor theory. However, I argue that in the case of rent, he had his
own procedure for “getting rid” of the perceived difficulty, whereas for
“time profiles,” he did not draw out the implications for the labor theory
treatment of exchangeable value (that had to wait for Ricardo). In sum, I
argue that the puzzle surrounding the labor theory passages is purely chi-
merical: there is nothing strange about their presence because Smith never
knowingly had confined the theory to an “early and rude” state of society
(whether “we” think he should have done so is another matter entirely).
In addition, I draw attention to the peculiarity of Smith’s identification,
in all but the first category of labor theory passages, of (changes in) “real”
magnitudes (price, value, cheapness, dearness, cost) with (changes in) the
quantity of labor expended in production or the costs of the labor expended.
On my interpretation, Smith’s “real measure of exchangeable value,” in
terms of which “real” magnitudes are calculated, was poorly suited to
establishing the link with (changes in) quantities of labor expended in pro-
duction (for reasons I rehearse below). I therefore take Smith’s evident
desire to unambiguously link “real” magnitudes with labor expended as
evidence of his embrace of, and commitment to, labor theory reason-
ing; and that is how I likewise interpret his transformation of the “corn
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174 History of Political Economy 52:1 (2020)
commanded” proxy for “labor commanded” into a labor embodied stan-
dard by drawing attention to the supposedly constant labor cost/quantity in
the production of corn: something that is irrelevant to corn’s proxy “labor
commanded” usage. Finally, I take it as significant that in the fifth category
of labor theory passages, Smith simply abandons his “measure” when he
cannot make it yield his desired result and directly identifies “real cheap-
ness/cost/value” with the cost/quantity of labor employed in production.
Turning to Grieve, he shares my conviction that an interpretative puzzle
is absent, but his reasoning is quite different. For him, firstly, the labor
theory passages do not exist (the words are all there, but they do not bear a
labor theory construction); second, Smith accepted “that the simple
labor-embodied theory of value (the proposition that the value of a com-
modity corresponds to the value of the labor employed in its production
[i.e., wages]) applies only in the context of a society in which all income is
received by labor without any share going as rent or profits” (Grieve 2019:
753)1; third, Smith’s “recognition of the differing conditions of production
across industries implies an understanding [by Smith] that the relative
prices of final goods would [not] be . . . proportionate to labor costs” in the
later “commercial” society (760); and fourth, “a serious misunderstanding
on Peach’s part of the labour commanded approach” pretty much torpe-
does my entire interpretation (or “revolutionary transformation—of
Smith’s theory of value,” as Grieve dramatizes it [762]). I examine further
these and other related propositions below under the section headings of
my original article.
Confinement of the Labor Theory?
For most commentators, Grieve included (if for his own peculiar reasons),
Wealth of Nations I.vi begins with Smith’s application of a labor theory of
value to an “early and rude state of society which precedes both the accu-
mulation of stock and the appropriate of land.” In such a society,
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
1. This being Grieve’s interpretation of a “labor theory.”
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Peach / Adam Smith’s Labor Theory of (Real) Value 175
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. (Smith 1776: I.vi.1)
To stress, commodities exchange at ratios determined by “the quantity of
labour necessary for acquiring them” in the sense of producing them. The
same point is made a couple of paragraphs later, this time with introduction
of a new concept, “labour commanded”: “In this [early and rude] state of
things, the whole produce of labour belongs to the labourer; and the quan-
tity of labour commonly employed in acquiring or producing any com-
modity, is the only circumstance which can regulate the quantity of labour
which it ought commonly to purchase, command, or exchange for” (I.vi.4).
As I noted: “The ‘quantity of labor which [a commodity] ought com-
monly to purchase, command, or exchange for’ should be understood
either as the ‘living labour’ that could be purchased with the commodity
[for example, if two days’ labor is expended in ‘acquiring or producing’ a
commodity, the commodity could be exchanged for two days of ‘living’
labouring activity] or, alternatively in this context, as the quantity of labor
expended on a second commodity for which the first commodity is
exchanged” (Peach 2009: 386n10).
With the appearance of profit-seeking “owners of stock,” the situation
changes:
In this state of things, the whole produce of labour does not always
belong to the labourer. He must in most cases share it with the owner of
the stock which employs him. Neither is the quantity of labour com-
monly employed in acquiring or producing any commodity, the only
circumstance which can regulate the quantity which it ought com-
monly to purchase, command, or exchange for. An additional quantity,
it is evident, must be due for the profits of the stock which advanced the
wages and furnished the materials of that labour. (Smith 1776: I.vi.7;
my italics)
As I remarked, “It may be that the italicized lines have been read, over-
hastily, as evidence of Smith’s abandonment of the labor theory” (Peach
2009: 387). That would certainly apply to Grieve, who takes the mere
point that profit (and rent) must be paid as decisive proof that prices can
“no longer correspond to labor embodied,” hence that “the simple
labor-embodied theory of value . . . applies only in the context of a society
in which all income is received by labor”: something that Smith allegedly
accepted (Grieve 2019: 753). However, any appearance of credibility in
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176 History of Political Economy 52:1 (2020)
Grieve’s ruminations is specious: it derives solely from his idiosyncratic
interpretation of a “labor theory” that can only apply in the absence of
“capitalists” and landlords; and that is neither my conception of a “labor
theory” (the one in the article that Grieve purports to criticize), nor is it the
one that I attribute to Smith.
It is almost surprising that Grieve does not conclude his critique with
what is, if only for him, irrefutable proof that Smith did confine the “labor
theory” to the “early and rude state.” But, commendably, he finds his way
back to my argument that an inequality between “the quantity of labor
commonly employed in acquiring or producing any commodity” and “the
quantity [of labour] which it ought commonly to purchase, command, or
exchange for,” in and of itself, “implies nothing about the ‘rule’ governing
the exchangeable value of commodities”: that depends on the relative pro-
portions in different prices between the profit-plus-rent components and
the wage component (on the assumption that the size of the wage compo-
nent is in proportion to the quantity of labor expended per unit of output).
In the case of rent, I pointed to Smith’s (1776: I.vi.14) own belief that its
significance as a component in the prices of manufactured commodities
will be diminished in “the progress of the manufacture” (involving the
use of more manufactured inputs): “As any particular commodity comes
to be more manufactured, that part of the price which resolves itself into
wages and profit, comes to be greater in proportion to that which resolves
itself into rent” (my italics), with the result that “prices of manufactures
tend increasingly to sums of wages-plus-profit” (Peach 2009: 391). In
view of Grieve’s silence on this argument, I will take it as uncontested.
With regard to the profit component, as I stated, “‘modifications to the
labor theory will arise (as we should know from Ricardo) if there are dif-
ferences in the ‘time profile’ of labor inputs between production processes.
Smith was aware of such differences (although, of course, he did not put it
that way himself)” (389; my italics). On my reading, however, “there are no
grounds for suggesting that he possessed an appreciation of the analytical
issues such that he should, or would, have rejected the labor theory because
of those ‘modifying’ influences.” Grieve disagrees: “Smith’s recognition of
the differing conditions of production across industries implies an under-
standing that the relative prices of final goods . . . [are not] equal to labor
embodied [and also] the possibility that they are proportionate to labor
costs is effectively ruled out by the dissimilarity of production conditions
across industries” (Grieve 2019: 760).
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Peach / Adam Smith’s Labor Theory of (Real) Value 177
The point about commodity prices not being “equal to labor embod-
ied” is relevant only to Grieve’s conception of a “labor theory” and
deserves no further comment. As to the “implication” that relative prices
cannot be “proportionate to labor costs,” I made the very same point
myself. Our difference is over Smith’s own grasp, or comprehension, of
the logical implication.
The first case to which I drew attention was Smith’s (I.vi.6) discussion
of two manufacturing processes with different “time profiles” of labor
inputs, in which the differential compounding effect on profit is such that
“their profits are so very different.” No doubt, this does carry the logical
implication that prices will not be proportional to quantities of labor
expended in the production processes (or to “labor costs,” as Grieve puts
it). But that was not an implication drawn by Smith, whose attention was
on refuting the view of profit as a reward for “the labour of inspection and
direction,” his punchline being not that the exchangeable value of the final
goods is “so very different” from the proportions given by quantities of
labor expended in production, but that the amount of profit received is
“very different” even though the “labour of inspection and direction” may
be “either altogether or very nearly the same” for both manufacturers.
Similarly, at the close of I.ix, to which I also drew attention, Smith’s
discussion of the “compounding effect” on profit in the manufacture of
linen could be viewed as a preliminary step in a demonstration of “modi-
fying” influences on the labor theory; but completion of the demonstration
would require the introduction of at least one different production process,
a step he did not take, and it would require a focus on the implications for
exchangeable value, which he did not have: his focus in this case was to
show that “high profits tend much more to raise the price of work than
high wages” (because of compounding), hence to castigate “merchants
and master-manufacturers [who] complain much of the bad effects of high
wages in raising the price [of goods]” but “say nothing concerning the bad
effects of high profits” (I.ix.24).
One set of passages I did not discuss, by which Grieve sets great store,
gives a description of the considerable differences that are said to exist by
Smith in the proportions of fixed to circulating capital in different industries
(II.i.8–9). For Grieve (2019: 759), the passages provide “a clear indication that
he understood the time patterns of applications of labor inputs to vary signifi-
cantly between industries”; hence, again by “implication,” he also understood
that prices cannot be “proportionate to labor costs [or quantities].”
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178 History of Political Economy 52:1 (2020)
However, what strikes me as “clear” is that Smith did not himself
reconceptualize different proportions of fixed and circulating capital in
terms of “time patterns of labor inputs”; and, more importantly, that any
link with exchangeable value is notably absent both in the passages and in
the chapter of which they are a part. To take Smith’s own statement of his
agenda: “in the first chapter [II.i], I have endeavoured to show what are the
different parts or branches into which the stock, either of an individual, or
of a great society, naturally divides itself” (Introduction, II.6). And that is
precisely what he did, no more and no less: investigating a connection
with exchangeable value was not part of his agenda.
I stand by my judgement that although Smith was aware of underlying
circumstances that would result in a “modification” to the labor theory, he
himself did not make the necessary link with exchangeable value: his pre-
occupations were elsewhere. One might say that the basis for the difficulties
that were subsequently to plague Ricardo was latent in Smith work, but that
is all. It was as a result of commission (in the case of rent) and omission (in
the case of profit) that I believed it was possible to understand why Smith’s
“labor theory” pronouncements would not have been thought by him to
involve self-contradiction, and to close this part of my argument I gave three
examples of what I believed were instances of Smith’s use of such reason-
ing. On reflection I now accept that my interpretation of the first example,
dismissed by Grieve (erroneously) as having “nothing to do with the
labor-embodied theory of value,” is not so straightforward as I suggested.
In I.xi.g.28, the passage in question, Smith was discussing the reasons
for differences in the money prices of “the greater part of manufactures” in
the “great empires” of China and Indostan compared with Europe. He pro-
nounced: “in countries of equal art and industry, the money price of the
greater part of manufactures will be in proportion to the money price of
labour,” which I took as a direct statement of the proportionality of prices
to quantities of labor expended on production on the assumption of a uni-
form money wage rate. I now realize —mea culpa—that Smith’s statement
related to the “proportionality” of prices “in countries of equal art and
industry” when money wage rates differ between the countries. His state-
ment therefore amounts to saying that if, for example, the money wage rate
(per unit of labor) is double in Europe what it is in China and Indostan, then
the money price of the same manufactures produced in places of (roughly)
“equal art and industry”—Europe and the “great empires”—will, by “pro-
portionality,” also be (roughly) double in Europe what they are in the
empires: a statement that is true only if the quantities of labor expended
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Peach / Adam Smith’s Labor Theory of (Real) Value 179
per unit of output of “the greater part of manufactures” are (roughly) the
same in all locations and if there are no differences in “time profiles” (or,
probably more likely, if the question of “time profiles” is ignored). Further-
more, the argument also implies that money prices “of the greater part of
manufactures” within the empires, and within Europe, are also in propor-
tion to the quantities of labor expended in production in those places.
Finally, if there should be any lingering doubt about Smith’s use of “labor
theory” reasoning in I.xi.g.28, it should be dispelled by considering a later
stage of his argument, within the same paragraph, where he is in effect
holding money wage rates constant and distinguishing other reasons why
international money prices might differ. Thus, because of the greater
“expence of land carriage” in Europe, it “costs more labour, and therefore
more money” to market commodities in Europe relative to empires in
which “the extent and variety of inland navigations save the greater part of
this labour, and consequently of this money.” Smith explains these differ-
ences in exchangeable value in terms of differences in quantities of labor
expended as reflected in the (relative) costs of the total labor inputs.
My second example is from II.ii.105, where I “imaginatively but incor-
rectly” find “labor embodied thinking,” according to Grieve, who adds:
“all that Smith is saying is that, other things being the same, the poorer and
more difficult to work are the mines from which these metals are derived,
the more expensive gold and silver will be relative to all other commodi-
ties” (Grieve 2019: 760). But that is not “all that Smith is saying”:
The proportion between the value of gold and silver and that of goods
of any other kind, depends in all cases . . . upon the richness or poverty
of the mines . . . It depends upon the proportion between the quantity of
labour which is necessary in order to bring a certain quantity of gold
and silver to the market, and that [i.e., that “quantity of labour”] which
is necessary in order to bring thither a certain quantity of any other sort
of goods. (II.ii.105; italics added)
At the expense of stating the obvious, the “richness of poverty of the
mines” is distinguished in terms of the quantities of labor expended on
bringing the metals to market: a case of “labor embodied reasoning” that
should be accessible even to the most unimaginative reader.
My third example is, for Grieve, yet another instance of my “undue
readiness to find evidence of the labor-embodied theory in Smith’s work.”
Here is Grieve’s rendition and interpretation of the passage in question
(I.x.c.19):
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180 History of Political Economy 52:1 (2020)
What Smith actually says is that higher wages and profits in the towns
“give the traders and artificers in the towns an advantage over the land-
lords, farmers and labourers in the country and break down that natu-
ral equality which would otherwise take place in the commerce which
is carried on between them.” Specifically, as Smith explains, the labor
of the townspeople has a greater purchasing power over goods and ser-
vices than that of the labor of country people. Contrary to Peach’s con-
tention, there is nothing here which points to the labor-embodied the-
ory: the trading advantage of the townspeople (as compared with the
“natural equality” which would otherwise have existed) is expressed in
terms of labor-commanded with no reference to labor-embodied.
(Grieve 2019: 761)
What Smith “actually” and “specifically” says, rendered invisible by
Grieve’s self-servingly elliptical quotation, is this:
Whatever regulations . . . tend to increase those wages and profits [in
towns] beyond what they otherwise would be, tend to enable the town
to purchase, with a smaller quantity of its labour, the produce of a
greater quantity of labour of the country. They give the traders and the
artificers in the town an advantage over the landlords, farmers, and
labourers in the country, and break down that natural equality which
would otherwise take place in the commerce which is carried on
between them. (Smith 1776: I.x.c.19)
What this suggests, at least to me, is that a “natural equality” occurs when
the produce of a given “quantity of labour” from the country exchanges
for the produce of the same “quantity of labour” from the town (as Smith
states within I.x.c.19, the town pays for country produce with the “materi-
als,” that is, the produce, “wrought up and manufactured” in the towns): a
proposition that unmistakably “points to the labor-embodied theory.”
Real Price/Real Value and the
“Real Measure of Exchangeable Value”
My purpose in this section was to show that Smith’s choice of “labor com-
manded” as the “real measure of exchangeable value,” hence of the mea-
sure of “real” prices/values and other “real” magnitudes,” was unsuited to
measuring (changes in) labor expended on the production of commodities.
This demonstration was a prelude to considering passages in which he did
identify (change in) “real” magnitudes with (changes in) labor expendi-
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