“But when he abandons this correct course, he falls into a vicious circle. By what is the natural price of the means of subsistence determined, which determine the natural price of wages? By the natural price of “wages”, of “profit”, of “rent”, which constitute the natural price of those means of subsistence as of all commodities. And so on infinitum.” (p 96)
In other words, in one place he determines the value of commodities correctly by the labour-time required for their production, but in another determines their value as nothing more than the sum of their costs of production, which he reduces to the revenues wages, profit and rent. But, when he comes to explain how these particular prices are determined, he can only refer back to the value of the commodities required for their own reproduction.
Nor can this be resolved by a resort to supply and demand, precisely because, if they are in balance, the prices charged by the supplier, which equals the natural price, is equal to the price the buyers are prepared to pay for that quantity.
“In fact, at first it was the value of the commodity which he saw as regulating wages and profit and rent. Then however he sets to work the other way round (which was closer to what empirical observation showed and to everyday ideas), and now the natural price of commodities is supposed to be calculated and discovered by adding together the natural prices of wages, profit and rent. It is one of Ricardo’s chief merits that he put an end to this confusion.” (p 96-7)
In fact, from the standpoint of the industrialist, they see a fairly consistent value for each commodity, irrespective of the fact that wages and profit move up and down, whilst this commodity value, out of which the wages and profit are paid, remains static.
Having deduced the value of wages and profits from the value of commodities, i.e. commodities are produced and have a value determined by the labour-time required for their production, and out of this value a part reproduces the constant capital consumed, whilst another part equal to the new value created is the basis of wages and profit.
“It is necessary therefore to call attention to this peculiar train of thought in Adam Smith’s book: first the value of the commodity is examined, and in some passages correctly determined—so correctly determined that he traces out in general form the origin of surplus-value and of its specific forms, hence deriving wages and profit from this value. But then he takes the opposite course, and seeks on the contrary to deduce the value of commodities (from which he has deduced wages and profit) by adding together the natural prices of wages, profit and rent. It is this latter circumstance that is responsible for the fact that he nowhere correctly explains the influence of oscillations of wages, profit, etc., on the price of commodities—since he lacks the basis [for such an explanation].” (p 97)
The confusion is demonstrated by Smith again, when having correctly identified that the value of commodities is determined by the labour-time required for their production, and surplus value is a proportion of the new value created by labour, that is appropriated by capital, he writes,
““Rent … enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit are the causes of high or low price; high or low rent is the effect of it” ( Wealth of Nations, b. I, ch. XI, [O.U.P. edition, p. 165]).” (p 97)
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