[7. Smith’s Dual View of the Relationship between Value and Revenue. The Vicious Circle of Smith’s Conception of “‘Natural Price” as the Sum of Wages, Profit and Rent]
Smith treats both rent and profit as deductions from the additional value added by labour to the value of materials. To the extent that it is the capitalist who first obtains profit out of this labour, and only then pays rent out of it, it can be argued that rent is also , therefore, a deduction from profit. It is simpler, therefore, to consider things from the perspective that the new value created by labour is divided just into two – wages and profit.
Marx gives an example of a commodity, excluding the value of the constant capital. It requires 12 hours for its production, and assuming that 12 hours is also the value represented by 5 shillings (£0.25) in money, we can equate the value of this commodity with a value or price of £0.25. It could just as easily by £5, $5, €5 or whatever.
“By the natural price of commodities Adam Smith understands nothing but their value expressed in money. (The market-price of the commodity, of course, stands either above or below its value. Indeed, as I shall show later, even the average price of commodities is always different from their value. Adam Smith, however, does not deal with this in his discussion of natural price. Moreover, neither the market-price nor still less the fluctuations in the average price of commodities can be comprehended except on the basis of an understanding of the nature of value.)” (p 95)
What Marx means here is this. By “natural price”, Smith means what orthodox economics today would call “equilibrium price”. It is the price at which demand and supply are balanced. For Smith, this natural price represents the value of the commodity, but it is different to the actual market price, because, at any one time, demand may be higher or lower, whilst supply is not able to immediately respond.
If the natural price of a commodity is £1, and the supply is 1,000 units, then the market price will also be £1, if at this price, only 1,000 units are demanded. But, if demand rises to 1,200 units, and supply cannot immediately rise, the market price will rise above the natural price, so as to reduce the demand down to the available 1,000 units of supply. In time, additional supply will be added, so that the whole 1,200 units of demand can be met, and then the market price will settle back down at £1.
Marx has a number of concepts related to this, which demonstrate why it is impossible to understand market prices without understanding value. For Marx, the starting point is value. Each individual commodity unit has its own individual value, expended on its production. But, in reality, not only is it impossible to know this value, as each unit is just one produced along with a multitude, but it is irrelevant, because, as Marx says, in Capital I, each commodity unit, in relation to its value, is merely a representative of its class. In other words, the value of each commodity unit is determined not by the labour-time embodied within it, but by the social labour-time currently required for the production of that entire class of commodity.
If we take a producer of this class of commodity, therefore, they may produce 1 million units of these commodities, and each one of them will have embodied slightly different amounts of labour-time in their production, but this is irrelevant, because the producer is only concerned with the labour-time/cost of producing the total 1 million units. If the total labour-time required for this production is 10 million hours, then this is the individual value of this producer's output.
But, other producers may similarly produce 1 million of these commodities, at a cost of 7,8,9,11,12,13 million hours. Each of these other producer's output will then have its own individual value accordingly. The actual socially necessary labour-time required for the production of these commodities would be the total quantity of production divided by the total labour-time required for production.
On this basis, our first producer would be the average producer, and their individual value would be the same as the social value. The social value of each commodity would be equal to 10 hours of labour-time, not because that is what had actually been embodied within it, but because that is the amount of social labour-time it represents proportionally to the total amount of labour-time expended upon all commodities of that type.
If all commodities exchanged at their value, it is this social value which would be the market value, around which the market price would fluctuate. It would be the equivalent of Smith's natural price. Ricardo also believed that it was the value around which market prices fluctuated, but this led him into contradiction in trying to explain a general rate of profit.
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