The trajectory of Smith's theory is as follows. He begins by correctly identifying value as determined by labour, and its quantity by labour-time. This value, he says, then resolves into the revenues of wages, profit and rent. This is wrong, as previously shown, because a part of the value of output also consists of constant capital, of dead labour, which resolves into revenue for no one. But, setting aside this error, Smith turns his argument upside down so that instead of the value being determined by labour and then resolving into these revenues, it is rather the value of these revenues which are posited as the determinant of the commodity's value. So, the commodity is only brought to market if its price is equal to this sufficient price, which covers wages, profit and rent.
There is a sense in which this is correct. In other words, it is correct that the commodity will not be brought to market if the sufficient price does not cover the wages, profit and rent. In the same way, the price of production of a commodity, is determined by Marx as its cost of production, k, (c + v + d) plus average profit, p, and producers will not bring the commodity to market, i.e. enter production of it, unless they can sell it for this price of production. But, the difference is precisely in the profit. The cost of production of a commodity, whether it is sold at its exchange value or at its price of production is objectively determinable. It is the exchange-value (price of production) of the commodities that comprise the constant and variable capital consumed in its production, i.e. the exchange-value (price of production) of the laid out capital. But, Smith, and following him Ricardo, proceeds on the basis that, in the same way that wages represent a natural price for labour, profit represents a natural price for capital, whilst having no objective basis for determining what that natural price is.
If commodities sold at their exchange-values, then it is clear that the profit can only be the residual of the commodity's exchange-value, after its cost of production has been covered. It is then clear that the exchange value of the commodity cannot be a composite of these revenues, but is determined independently of them. Contrary to the supposition of Smith and Ricardo, that there must be some natural price of capital, represented by a rate of profit, which is then added to the cost of labour, it is the value of the commodity, and the value of its cost of production, which determines the rate of profit. And, it is this rate of profit, which determines the average rate of profit, and then forms the natural price of capital. It is again true that commodities that do not sell at a market price that returns the average rate of profit, then do not get brought to market, and, for those already in production, their supply is reduced, as capital moves to higher profit areas, until market prices rise to the price of production.
On this basis, the value of the commodity, less the value of the constant and variable capital, gives the extent of the surplus value, and similarly the rate of profit. As Marx has described earlier, and in Capital III, the explanation for rent, then, resides in the existence of a surplus profit, above the average rate of profit, which is not competed away, due to the existence of landed property. But, Smith has proceeded to determine the value of commodities on the basis of the costs of their production, in which he defines the revenues – wages, profit and rent. Having done so, he then argues that rent is, after all, a surplus after the sufficient price of the commodity, equal to wages and profit, has been met.
“Profit and wages as constituent elements of the price are causes of the price; rent, on the other hand, is only its effect, its result. It does not, therefore, enter into the composition of the price as an element, as do profit and wages. And this is what Smith calls entering into this composition in a different way from profit and wages. He does not appear to be in the slightest bit aware of the fact that he has thrown over his doctrine of natural price. For what was the natural price? The central point around which the market-price gravitated: the sufficient price, below which in the long run the product could not fall, if it were to be produced and brought to market.” (p 353)
Smith is, of course, correct, however, that the prices of some products of the land are always above the sufficient price, so as to result in a surplus profit, and so provide rent. But, that is because the monopoly of landed property is able to withhold land from production, in these spheres, until market prices, for these commodities, are high enough to result in those surplus profits.
Smith then says that he will analyse those products which always result in rent, those that sometimes do, and sometimes don't, and the relation of these two types of product to manufactured commodities during the development of society.
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