Adam Smith, though much influenced by the Physiocrats and also interested in the growth of wealth, did not follow the method of analysis introduced by Quesnay.
ALTHOUGH SMITH broadly accepted the implications of natural law by encouraging individual pursuit of self-interest and government disinterest in the production of wealth through natural, albeit invisible, harmony, his method was to show by practical example, story, or analysis of specific cases. The existence of an agricultural surplus was a precondition for increasing the division of labour and thus the wealth of the nation. But Smith did not limit the definition of 'productive' solely to agricultural production. Unlike the Physiocrats he allowed that labour expended in industry, if it produced physical output, could also be productive, i.e. in the Physiocratic sense of having a produit net.
But he did not follow up this contention in terms of analyzing cost, output and price relations, although he did consider the possible inequality between cost, normal price and market prices. It was the explanation of this possible inequality that was to launch value theory into a field of its own and provide a persistent obstacle to the classical analysis of growth.It was to be the role of value theory to explain normal (natural) value which would serve as a reference point for fluctuating market prices.
The resolution of the possible inequality of exchange value and use value served to further complicate the determination of normal value and price.The classical economist was just as wedded to the concept of natural law as his French predecessors, but on an individualistic rather than a universal level. In a natural state of harmonious laissez-faire, commodities should exchange at their natural costs or commodities of equivalent cost should have the same exchange value and thus the same price. But market prices were not stable. Relative prices in the market were not constant. Value theory was to determine normal values, leaving capricious supply and demand to set market prices.
In addition, the Physiocratic idea of the surplus as a natural phenomenon was abandoned. Growth was influenced by what was done with the surplus, and thus closely linked to the distribution of the surplus among the social classes. Underlying the classical analysis is the implicit belief in the squandering behaviour of the landlords, the parsimonious nature of the capitalists, and the hapless existence of the working class bound to subsistence by un-harnessed procreation and competition. It is the capitalists who are the heroes of the classical scenario.If the distribution of the growing output was to be analyzed, the theory of value must also provide a consistent measure of the surplus to be distributed. But the distribution of income not only determined how much of the surplus was invested, but also the market values of produced goods, affecting any measure of value based on observed prices. Thus the search for normal value in actuality implied finding a value measure that was independent of distribution, e.g. a measure of value that was not itself a value determined by exchange, but which could be used as a consistent measuring-rod to measure the surplus and to compare with market prices.In the purely physical sphere which concerned the Physiocrats the problem was quite simple.
Assume that the economy produces corn or alternatively that corn is the numérair. The raw materials cost of producing corn is a quantity of com used as seed for planting. The cost of labour is the amount of corn necessary to support the farmer over the production cycle. At the end of the production period the output of corn less the real cost necessary to produce it (seed-corn plus the corn wage fund) is the net surplus of corn. Net surplus over cost yields the corn rate of surplus in the natural order. When corn changes at its natural value (at its real cost per unit), it replaces the seed-corn and food-corn used in production leaving a net corn surplus. Natural price is equal to real cost of production.
The story can also accommodate manufacturing as long as manufacturers are assumed to produce no surplus and thus their values are equal to costs in real resources with nothing left over. When the equivalence between corn cost and corn value holds, corn is a unique measure of value and price; commodities exchange at their natural (corn) values and the corn surplus remains as a free gift of nature which social relations allow the landlord to appropriate. The analysis of distribution and natural exchange value is one and the same process. This approach caused the Classical economists concern. If the necessary subsistence wage included commodities other than corn, the value of these commodities must also be determined before real cost and thus value could be determined. It was clearly no longer sufficient to assume corn = corn as a measure of value, for real cost could no longer be measured solely in terms of corn. With fixed capital in the picture the return to capital would also enter into costs of production. Values (and prices) must cover both labour costs and return to capital, which would be affected by the distribution of the total surplus.
The problems of value, price and distribution were intertwined.There was a seemingly easy way around the problem. A subsistence wage is a subsistence wage no matter what it is made up of in cost or value terms. By definition, subsistence wages would always purchase the same amount of labour. It would be much easier to measure real cost in terms of labour which would always be identical with itself but also basic to production.The labour measure of value thus comes from the attempt to preserve the relation between real cost and value in the measurement of the surplus when labour receives a wage made up of a bundle of goods.
But this approach to labour value did not provide the desired unique measure of value, and it served as the basis of further confusion. As measures of real costs and value, labour and corn were each unique. For the Physiocrat the real cost of labour was the subsistence amount of corn. When the quantity of labour is the measure of value it is not consistent to reverse the relation and look upon the subsistence wage as the measure of real cost, the quantity of labour. It was easy to confuse the real cost of labour in terms of effort-time with the wages cost of labour necessary to produce output. The confusion is especially easy when labour is assumed to receive a subsistence wage which is the real cost of maintaining labour-power. But it then becomes immediately clear, as it did to Marx, that a sharp distinction must be made between the effort-time necessary to produce output (the real cost of production) and the natural value of labour-power - a commodity which was exchanged against the wage and thus not suitable as a unique measure independent of valuation within the system.
The confusion results from equating real cost (effort-time) with the subsistence wage (the real cost of the commodity labour-power). This equation is, of course, true from the point of view of the employer, but not valid in terms of a valuation measure independent of distribution.Ricardo, while clearly desiring a non-valued measure of value, did assume that the wage was the best way of measuring the quantity of labour But Ricardo was less interested in preserving the pre-classical al relation between real cost and natural value than he was in analyzing the distribution of the net surplus of the system among the classes of the community: landlords, workers and entrepreneurs. For Ricardo, valuation was a necessarily practical problem in the unique measurement of the surplus, a measurement that must be invariant to the way in which the surplus was distributed among the classes of the community.But, as Ricardo eventually discovered (by the third edition of the Principles), the problem of fixed capital still caused a crucial snag. Competition would drive the rate of profit on capital employed in different industries to uniformity and assure uniform wages for labour of equivalent quality.
Thus, accepting the wage as the real cost of production, the wage fund would be proportional to wage costs, and, with a uniform rate of profit, profit would be proportional to labour time embodied in production. As long as the wage fund was a uniform proportion of labour costs, prices (and values) would be proportional to labour costs. But this implies (in modern terminology) a uniform capital-labour ratio. When fixed capital is introduced (even if it measured In terms of stored-up labour time) the assumption is unnatural. When capital-labour ratios are not uniform, prices need not be proportional to labour costs. It thus became clear that there was no economic reason for the specified unOrm1tY relation to hold between stored-up and current labour (whether measured in terms of effort-time, quantity or wage cost).Prices need not be proportional to wages (or effort-time), and equality between real cost, value and price could not be maintained.
Prices will instead equal wages plus profit on capital employed, which is proportional to labour cost only in the special case where the capital?labour ratio is uniform in all lines of production.This disturbed Ricardo, not so much because it invalidated his theory of value, but rather because it meant that net output could no longer be measured consistently in terms of real cost or labour. Ricardo?s main concern was not value, but the distribution of the net surplus among the classes that he observed in the existing state of society. In order to approach this problem, it was necessary to have a measure of output that did not change as the distribution of income changed. If the study of growth is to be anything more than simple preoccupation with increasing the aggregate material goods of the economy, the analysis must recognize the effect of the distribution of income on the growth of the system, and on the economic values that the system employs in its decisions about future development. The interconnections between value, distribution, and the growth of an economic system in political economy are obvious, and underline the reasons why growth was the basis of the early study of political economy.
The problems surrounding natural (normal) prices and values will be left unresolved at this stage, for at this point a new attempt at explaining natural harmony takes the centre of the economic stage. It would not be correct in the Physiocratic conception of the problem to identify use value with normal value and market value with exchange value, although the Classical economists did so. The two sets of problems are mutually distinct. The problem of determining normal value implies that normal exchange values can also be explained.