Everything you’ve ever wanted to know about Adam Smith but were afraid to ask Maurice Dobb

I recently dusted off my copy of Maurice Dobb’s fantastic survey of economic doctrines, Theories of Value and Distribution since Adam Smith: Ideology and Economic Theory, and once again, found two Adam Smiths. More precisely, Dobb delineates two “distinct and rival traditions” in nineteenth-century economic thought with respect to the “order and mode of determination of phenomena of exchange and income-distribution.” The first tradition, derived from Adam Smith, is identified as the “supply-demand-cum-component-parts-of-price” school, and is said to descend though Malthus, John Stuart Mill, Walras, Jevons, the Austrian School, and Marshall. Late nineteenth-century versions emphasized demand-determination and the exchange process, and deemphasized costs of production and social and institutional relations, which meant that concepts including surplus and exploitation lost all analytic value. The second tradition, also derived from Smith, gives prominence to production conditions; in particular, the amount of labour spent in the production process is taken as the primary determinant of exchange-relations. According to Dobb, David Ricardo, who solidified this second tradition, regarded distribution as central, and was dissatisfied with Smith’s relegation of distribution to the arbitrary functions of the supply-demand relation. Instead, it was the conditions of production that determined the ratio of profit to wage, and consequently, commodity exchange-values. Dobb traces this line of thought through Marx and more recently, to the neo-Ricardians.

While this might be a reasonable way to divide economic thinking, Dobb effectively creates a false Adam Smith Problem. In my view, the two traditions are unified in Smith’s dialectic of natural price and market price, where the latter fluctuates irregularly around the former. (Natural price in Smith is similar to Ricardo’s ‘price of production’ and Quesnay’s ‘prix nécessaire’. Marx however reminds us in chapter 10 of volume III of Capital that none of them distinguish between price of production and value—an issue for another time.) Recognition of the importance of this dynamic—which later becomes central to Marx in three volumes of Capital and the Grundrisse—would circumvent the common accusation that the classicals somehow value production over exchange.

Natural commodity prices in Smith—revealed only as statistical ex post averages—are determined by natural wages multiplied by labour spent, the natural rent multiplied by the amount of land used, and the natural profit rate multiplied by the capital employed. Observable market prices then gravitate around natural prices by “dint of the operation of competition upon supplies and upon demand.” What’s the problem? Well, Smith doesn’t really determine a theory of natural wages or profit required to build this so-called ‘adding-up’ theory of value. Worse, his theory of rent is inside out, since it is circularly determined by the natural commodity price.

Dobb can be harsh. He insists that Smith’s offering of a labour theory of value exists only in his initial thought experiment set in that “early and rude state of society”, which precedes the accumulation of capital and the appropriation of land. And even there he maintains two labour theories of value: one where exchange value is regulated by the quantity of labour necessary to acquire or produce any commodity, the other where exchange value is regulated by the quantity of labour that the commodity can command or purchase on the market. Yes, this is a major confusion, and it is indeed the whole basis for Ricardo’s critique, but in a model void of appropriated land and accumulated capital is there any difference between the theories? (Example: a deer may be produced or acquired by a worker expending one day’s labour, making the labour embodied in that commodity, one day. Since profit and rent do not yet exist, we can then imagine that if supply and demand balance, the labour which can be purchased or commanded on the market by the deer-commodity is also one day.)

In any case, Dobb insists that once stock is accumulated and land is appropriated Smith abandons both labour theories for an ‘adding-up’ theory of value. While Smith relates an excellent description of the equalization of profits and wages under competitive conditions (rooted in the above-mentioned distinction between natural and market price), there does not seem to be any explanation as to the particular level they take. Thus the ‘adding-up’ theory is certainly not a labour theory of value, and since the actual levels of the component parts to be added themselves are not conceived, for Dobb, this theory is not a theory of value at all. Dobb flatly rejects commentators who implicitly or explicitly treat the labour theory of value as a kind of first approximation containing nothing essential that cannot be expressed in other terms.

Although he is at times hard on Smith, and in the end seems to eschew the quantitative use of labour-value magnitudes, Dobb maintains that the “labour-principle” makes an “important qualitative statement about the nature of the economic problem.” As such,

‘exploitation’ is neither something 'metaphysical' nor simply an ethical judgement (still less "just a noise") as has sometimes been depicted: it is a factual description of a socioeconomic relationship, as much as is Marc Bloch's apt characterization of Feudalism as a system where feudal lords “lived on the labour of other men”

While I think this quotation illustrates important “qualitative” aspects of the theory of value, it also gives up too much ground. Amid the influence of Cambridge political economy, and especially the work of Piero Sraffa, Dobb’s concession seems apposite. I would prefer to follow those modern ‘classicals’ who also maintain the quantitative aspect of value theory which proposes that the socially necessary labour-time in a given economic sphere, over a given period is expressed as the money value added to all produced commodities, and hence equals total wages plus total profits, or alternately, total capitalist revenues minus total costs of machinery and materials. I can’t resist quoting an example from Duncan Foley’s Adam’s Fallacy, which illustrates his interpretation of the basic hypothesis of the labour theory of value:

…the GDP of the U.S. economy in 2005 was about 12 trillion dollars, and the employed labor force of about 150 million persons worked an average of 1600 hours per year. The total labor time (making no correction for complex labor) comes to about 240 billion hours; thus each hour of labor produced on average about $50. Marx constantly uses this method of translating from labor time to its money equivalent throughout Capital. This “monetary expression of labor time” has the same units as a wage, dollars per hour, but it is not the same as the wage. The monetary expression of labor time tells us the whole money value added per hour of labor, but workers, as Marx’s theory will emphasize later, get only a part of this back in the form of wages. The average wage is typically only a fraction of the monetary expression of labor time.

I intended to conclude by commenting on some of Dobb’s other work—beyond Dobb the economist and Dobb the historian, there is also Dobb the public debater and labor educator who authored numerous popular pamphlets. Instead I digressed into the continuing imperative of value theory. Accordingly then, Ben Fine, in an essay from Capital & Class (No. 75, August, 2001) poses three central reasons why value theory, including both quantitative and qualitative aspects, must remain central to any political economy of capitalism. He’s very succinct, and all three points beg elaboration. I also think he’s correct:

First, it is the abstract basis on which to understand the social relations of capitalist commodity producing society. Second, it attaches complex forms, such as price and profit, to simple underlying determinants. Third, it addresses the dialectics of change and reproduction.

The Other Adam Smith Problem

The classic ‘Adam Smith Problem’ turns on the allegedly irreconcilable distinction between the self-interest central to the Wealth of Nations and the reciprocal altruism of the Theory of Moral Sentiments. After mild debate it is usually agreed that for Smith sympathy is but a form of self-interest. It turns out that the tension was just an illusion, and there was one, not two, Smiths all along. Duncan Foley, in Unholy Trinity, as well as in Barriers and Bounds to Rationality, hints at a more compelling and genuinely irreconcilable Adam Smith Problem.

Like the original, the new problem also contrasts two incompatible interpretations of Smith. The first interpretation presents Smith as a proto-neoclassical economist. In Whiggish fashion, a continuous line is drawn from Smith to Pareto to the static and efficient allocation of resources that defines modern microeconomic analysis. This vision of capitalism depicts a world defined more by unrestrained competition than unrestrained accumulation of capital. The second interpretation, emphasizing capital accumulation, is the complex systems theory reading. Here, the capitalist system, like other systems large and small is modeled as an organized but decentralized network constituted by scores of individual parts. And like other systems analyzed by complexity theorists, the capitalist system is taken to be adaptive, self-organizing, and unstable. Furthermore, these systems manifest emergent characteristics, which is to say that the micro properties of the individual components are not merely scaled down versions of the system itself. Differently put, changes in scale generate qualitative changes such that there is no one-to-one parallel between the whole and the sum of the parts. Emergence stands in direct contrast to the “isomorphic” relation between people and markets central to microeconomics. By contrast, when emergence is translated to classical political economy it implies a system generated by the unintended effects of the actions of individual capitalists, labourers and landlords. For example, individual capitalists endeavoring to maximize their own rate of profit may generate, once aggregated, a tendency toward the decline in the economy-wide average rate of profit.

In the complex-systems view, Smith’s advocacy of laissez-faire is rooted in the unintended effects generated by individual capitalist accumulation. Capital accumulation will widen the extent of the market, which Smith shows, in the third chapter of the Wealth, to be responsible for the growth of the division of labour (it should be noted that Smith was referring here to the growth of the social division of labour, which emphasizes the availability of different forms of employment. He was not referring to the detail division of labour which describes an increasingly rote division of tasks within one form of employment. Confusingly, it is the later which is described in the pin factory of chapter one). This then increases the productivity of labour, which lowers costs and increases incomes, extending the market and generating further increases in the division of labour in cyclical pattern. Capital accumulation is the original intention; the expansion of the market and the division of labour to the benefit of other capitalists is the unintended effect.

Whether or not this system of positive feedbacks benefits labour remains unclear. The Smithian process of economic development entails the growth of wealth followed by the growth in population, which in turn, may cut into any gains made by labour. While Smith insists on the concept of a subsistence wage, he also insists that subsistence must reflect socially and historically determined standards, leaving open the possibility of absolute gains to labour. In contrast, elsewhere in the Wealth, Smith points to the eventual ‘stationary state’ of capitalist economies where individual capitalists in tight competition with each other unintentionally drive the profit rate down and consequently drag down the wages of labour.

Before this inevitable heat death, the complex-systems depiction of Smith entails what neoclassicals would dub increasing returns to scale. However, Foley notes that widespread increasing returns to the application of capital and labour to land are fundamentally inconsistent with the assumptions underlying the general formulation of neoclassical competitive equilibrium. The evolutionary and dynamic Smith cannot be squared with the static general equilibrium Smith. One of the architects of general equilibrium theory, Kenneth Arrow recognized the other Adam Smith Problem in the Foreward to a book by Brian Author on Increasing Returns and Path Dependence in the Economy:

The concept of increasing returns has had a long but uneasy presence in economic analysis. The opening chapters of Adam Smith's Wealth of Nations put great emphasis on increasing returns to explain both specialization and economic growth. Yet the object of study moves quickly to a competitive system and a cost-of-production theory of value, which cannot be made rigorous except by assuming constant returns.

Instead of reading Smith as a theorist of optimal resource allocation as does Arrow, Foley reads him as a theorist of a capitalist development process which is complex, self-organizing and most importantly, non-equilibrium.

In this process, the trajectory of capitalist development remains uncertain. It is a determinant system in that connections between parts can be traced backward ex post, but it is not predetermined in that there is no way to predict the system’s evolution. Foley points to the kinds of questions this type of analysis grapples with, and those which it avoids:

We know that the wolf, for example, must maintain nutritional balance with her environment to live, but this observation does not allow us to predict her life cycle, where she will migrate, mate, or, eventually die. Smith’s vision of capitalist economic development is analogous: he can explain the metabolic processes, accumulation and competition, that support the evolution of the capitalist economy but not its history, the specific development of its technology, or its sociology.

Foley also admits to his political attraction to complex-systems theory. The following quotation might imply a hope for some kind of market socialism, which could explain his interest in Oskar Lange and the socialist calculation debate. Yet, that debate was defined by the static neoclassical conceptualization of optimality. Perhaps instead, complexity theory allows for a new way to parse through the old problems of democratic socialism:

Theory suggests that it is impossible to control complex, adaptive, self-organizing systems by directing the behavior of the individual entities that comprise them. Traditional conceptions of social policy, on the other hand, depend precisely on an ability to link individual behavior and aggregate outcomes. The methods of Classical political economy offer some hope of surmounting this apparent dilemma. We may be able to design systems that influence the self-organization of society as a complex, adaptive system in particular dimensions, even though we must give up any hope of stabilizing the actual evolution of the system in the hope of attaining once and for all such goals as justice and equality.

I would argue, in fact, that there is much to be gained from this shift in understanding. We avoid the Scylla of utopian fantasies of an end to the dialectical historical development of human societies, which, in the complex systems view, will continue indefinitely. But we also elude the Charybdis of conservative complacency in the face of the very real moral and social problems capitalist society creates and reproduces. What we need is a better understanding of the process of self-organization that are amenable to our influence.