[B. Adam Smith’s Theory of Cost-price]
[1. Smith’s False Assumptions in the Theory of Cost-Prices. Ricardo’s Inconsistency Owing to His Retention of the Smithian Identification of Value and Cost-Price]
Marx returns to the fundamental error made by Adam Smith about the value of commodities resolving into revenues.
““there are always a few commodities of which the price resolves itself into two parts only, the wages of labour, and the profits of stock”. ([The Wealth of Nations, Oxford University Press, London, 1928, Vol. I, p. 56; Garnier,] t. 1, l. 1, ch. VI, p. 103.) (p 216)
Ricardo inherits this false view from Smith. Smith starts off with a labour theory of value, but then flips it into a cost of production theory of value. In other words, he begins by saying that value is labour, and that the value of a commodity is equal to the labour required for its production. He divides this labour into the labour that is paid and covers the wages, and the unpaid labour that comprises profit, and rent and from which is also paid interest.
Elsewhere, he recognises that apart from those previously mentioned commodities that only contain labour, other commodities contain materials etc., but all these other materials, he argues, are also reducible to only paid and unpaid labour. All value then, he concludes is reducible to revenue, comprising wages, profit, rent and interest. But, having arrived at this conclusion, he turns it on its head and concludes that likewise the value of a commodity is the sum of these revenues, all of the costs of its production.
“... he makes them into independent exchange-values that form the exchange-value of the product; he constructs the exchange-value of the commodity from the values of wages, profit and rent, which are determined independently and separately. Instead of having their source in value, they become the source of value.” (p 217)
Marx quotes Smith to that effect.
““Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value” ([O.U.P., Vol. I, p. 57; Garnier,] t, 1, l. 1, ch. VI, p. 105).” (p 217)
Marx explains the reason for Smith's error in this regard, in Capital III, where Marx explains that these relations appear in their phenomenal form in competition, and, in competition, the real relation appears inverted. So, for Smith, the natural price of a commodity is its cost-price comprised of wages, profit, rent and interest. Each of these are independently determined and have their own natural price, applicable for the time and place.
If a commodity can be sold at a price that enables all of these factors to obtain their own natural price, then it is sold at its natural price. However, Smith recognises that, at times, the actual market price for any commodity may vary from this, as a result of fluctuations in demand and supply.
Ricardo, throughout his work actually rejects this second, cost of production theory of value, in favour of a labour theory of value. But, by identifying exchange-value and cost-price, as Adam Smith does, he thereby accepts the confusion at the heart of Smith's theory. For Smith, it is wrong, but legitimate, to equate the natural price, i.e. the price around which the market price rotates, with the cost-price and value, because his assumption in this second theory of value is that the value/natural price of the commodity is the sum of these various cost-prices. On that basis, the actual or market price would only vary from it, as a consequence of demand and supply.
But, Ricardo had rejected the idea of the value of commodities being only a sum of the costs of production. He recognised that the value was, as Smith had originally stated, determined by the labour required for production. In order to determine the values of the components of the value of the commodity, Smith ends up in a vicious circle.
“[In] Chapter VII, Book I “Of the Natural and Market Price of Commodities” [he says:]
“There is in every society or neighbourhood an ordinary or average rate of … wages and profit … and rent… These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail” ([OUP., Vol. I, p. 60; Garnier,] l.c., t. I, pp. 110-11). “When the price of any commodity is neither more nor less than what is sufficient to pay the rent […] the wages […] and the profits […] according to their natural rates, the commodity is then sold for […] its natural price” ([O.U.P., Vol. I, p. 61; Garnier,] l.c., p. 111).” (p 218)
So, here, wages, profit, rent obtain their normal returns and these costs, in total, determine the natural price of the commodity. But, this still leaves the question of what the normal level of wages etc. is, and how it is determined.
In terms of the profit, Smith is left saying that, if a capitalist cannot obtain the normal profit, they would employ their capital elsewhere. But, this does not tell us how much this normal profit may be. If I can make 10% on my capital in A,B, C or D, I will not employ it in E, where I can only return 5%. But, what determines that the rate of profit in A – D is 10%, rather than 5% or 1%, or 100%?
“The rate of profit, as of wages, is presupposed. They are indeed given for the formation of the cost-price. They are antecedent to the cost-price. To the individual capitalist therefore they also appear as given. The hows, whys and wherefores do not concern him. Adam Smith here adopts the standpoint of the individual capitalist, the agent of capitalist production, who fixes the cost-price of his commodity. So much for wages etc., so much for the general rate of profit. Ergo: This is how this capitalist sees the operation by which the cost-price of the commodity is fixed or, as it further seems to him, the value of the commodity, for he also knows that the market-price is now above, now below, this cost-price, which therefore appears to him as the ideal price of the commodity, its absolute price as distinct from its price fluctuations, in short as its value, in so far as he has any time at all to reflect on matters of this sort.” (p 218-9)
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