Part II covers the classical economists who made labor central to the explanation of value and distribution: Adam Smith, David Ricardo, and John Stuart Mill, whose case for workers' cooperatives closes the part. Mill described himself as a socialist (Entry 13). Note: how the Ricardian socialists (Entries 14–17, Part III — Ricardian socialists), Marx (Entries 18–24, Part IV — Marx and Engels) and the mutualists (Part V) later turned premises from these writers against wage labor is set out in those parts (to verify). Unconfirmed details are flagged inline.
Entry 10. Adam Smith: labor, value and property
Entry 11. Smith on wages, profit, rent and markets
Entry 12. Ricardo: value, rent and distribution
Entry 13. John Stuart Mill: property, wage labor and cooperation
Entry 10. Adam Smith: labor, value and property
Overview. Adam Smith's Wealth of Nations (1776) made labor central to economics in two ways that Ricardo accused him of running together (Entry 12). Labor is Smith's measure of value: what a thing is really worth to its owner is the quantity of other people's labor it lets him "purchase or command," which this guide calls labor commanded. In an imagined early society without landowners or capital, labor is also the regulator of value: goods exchange in proportion to the labor needed to get them, which this guide calls labor embodied (Ricardo's word is "bestowed," Entry 12). Note: whether Smith held a labor theory of value turns on which of these is meant (see Objections and Entry 12; to verify). He also called the property in one's own labor "the original foundation of all other property," and in his Glasgow lectures he explained original title by occupation (see below). Whether this sets him apart from Locke's labor account (Entry 7) is disputed; Jeffrey T. Young's Reading below holds that Smith's "spectator theory" should be understood "as broadening the labor theory". This entry sets out these claims and the dispute over where Smith's value theory came from.
Labor as the measure of value. Text: in Book I, ch. v, "The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." The value of a commodity to an owner who means to exchange it "is equal to the quantity of labour which it enables him to purchase or command," so "Labour, therefore, is the real measure of the exchangeable value of all commodities" [C]. Equal quantities of labor are of equal value to the laborer, who "must always lay down the same portion of his ease, his liberty, and his happiness"; labor alone, never varying in its own value, is therefore the real standard by which values can be compared across times and places, and money is only their nominal price [C]. Smith concedes that hardship and skill make quantities of labor hard to compare, and says the market settles them "by the higgling and bargaining of the market" into a rough equality [E].
Labor as the regulator of value, and its limits. Text: Book I, ch. vi opens with "that early and rude state of society which precedes both the accumulation of stock and the appropriation of land." There the proportion between the quantities of labor needed to acquire things "seems to be the only circumstance which can afford any rule for exchanging them": if killing a beaver usually costs twice the labor of killing a deer, one beaver exchanges for two deer [C]. "In this state of things, the whole produce of labour belongs to the labourer" [E]. The clause is absent from ch. vi in the first edition, which reads only that the quantity of labor "is the only circumstance which can regulate" exchange in that state (1776, vol. I, p. 57); Cannan records that it appears in every edition at Book I, ch. viii. Once stock has accumulated, the value workers add "resolves itself in this case into two parts," their wages and their employer's profits; and once land has become private property, "the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce" [E]. Smith denies that profit is only the wage of the labor of inspection and direction: profits "are regulated altogether by the value of the stock employed," not by the hardship or skill of managing it [C]. In an improved society the quantity of labor is therefore not "the only circumstance" that regulates exchange value; price resolves into wages, profit and rent, "the three original sources of all revenue as well as of all exchangeable value" [C]. Labor still measures each component: "The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command" [C].
Property in one's own labor. Text: in Book I, ch. x, Part II, attacking apprenticeship laws, Smith writes: "The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable." To hinder a poor man from using his strength and dexterity as he thinks proper is "a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him" [N]. Smith's own phrase is "property … in his own labour"; "self-ownership" is later vocabulary. In a student's report of his Glasgow lectures, Smith lists occupation, "the taking possession of what formerly belonged to nobody," as the first of five ways of acquiring property, and says that "Occupation seems to be well founded when the spectator can go along with my possession of the object, and approve me when I defend my possession by force. If I have gathered some wild fruit, it will appear reasonable to the spectator that I should dispose of it as I please" (Lectures on Justice, Police, Revenue and Arms, ed. Edwin Cannan, 1896, Division III, §1, p. 108) [C]. Reading: Jeffrey T. Young, noting that the fuller account of Smith's property theory available since 1978 suggests that the view "that Smith simply followed Locke" is "either wrong or in need of some modification," holds that Smith's "spectator theory" should be "understood as broadening the labor theory in terms of what it allows as a legitimate basis for the claim of the first possessor to have an exclusive privilege" (History of Political Economy 27, no. 4, 1995, p. 757 n. 3) [C]. The earlier student report, of 1762–63 (LJ(A)), says in its section "1st Of Occupation" that an injury is done when "an impartial spectator would be of opinion he was injured," and that the spectator goes along with the first possessor, who "may form a reasonable expectation of using the fruit or whatever it is in what manner he pleases," and "The reasonable expectation therefore which the first possessor furnishes is the ground on which the right of property is acquired by occupation" (Lectures on Jurisprudence, Glasgow Edition, vol. 5, ed. R. L. Meek, D. D. Raphael and P. G. Stein, 1978; Online Library of Liberty text, pp. 54–56) [C]. The same paragraph ends with a dispute over the apple: "You may go to the forest (says one to me) and pull another. You may go as well as I, replied I. And besides it is more reasonable that you should, as I have gone already and bestowed my time and pains in procuring the fruit" (p. 56) [C].
Positions at a glance
| Topic | Smith |
|---|---|
| Labor theory of property | Property in one's own labor is the foundation of all property (I.x, Part II) [N]; original title by occupation, "well founded when the spectator can go along with my possession of the object" (Lectures, Cannan ed., 1896, p. 108) |
| Labor theory of value | Labor commanded is the real measure of exchange value (I.v) [C]; labor embodied regulates exchange only in the early and rude state (I.vi) [C] |
| Wages, profit, rent | Three component parts of price and three original sources of revenue (I.vi); see Entry 11 |
| Drew from | Pufendorf's natural law as taught at Glasgow by Carmichael and Hutcheson (extent disputed; see Readings); Locke on money and interest (cited in Cannan's notes to I.v) |
| Argued against | Mercantilist and corporate restraints on trade and employment (I.x, Part II; Book IV) |
Readings. Entry 6 (Part I) noted that Pufendorf's natural law was taught at Glasgow by Gershom Carmichael and then by Smith's teacher Francis Hutcheson, so whether Smith's value theory descends from Locke or also from Pufendorf is disputed. Reading: H. M. Robertson and W. L. Taylor hold that the doctrines on value taught by "the never-to-be-forgotten Dr. Hutcheson" "had come from Puffendorf via Gershom Carmichael" (Carmichael added "a critical expository commentary in footnotes" to Pufendorf's De officio, among them the summary that "the value of goods depends on these two elements, their scarcity and the difficulty of acquiring them"; in the 1769 Leiden reprint the note reads "Pretium rerum ex his duobus capitibus pendere, Indigentia, sc. & Acquirendi difficultate": Book I, ch. 14, note (y), pp. 439–40, signed "CARMICH."), that Pufendorf's discussion of value "lays direct emphasis on the two basic elements of usefulness and scarcity," that Hutcheson's treatment "anticipates not so much the more one-sided utility theory of Jevons and Menger, but rather the well-balanced, dual, 'both-blades-of-the-scissors' analysis of Marshall," and that "the ideas of Puffendorf, Carmichael and Hutcheson were fully at his disposal to build on had he wished." They ask "to what extent Smith, in the Wealth of Nations, chose to alter decisively the emphasis of his approach to value" away from "the ideas of scarcity and usefulness stressed by Hutcheson (and to some extent by Smith himself in his Lectures in 1762–63) in the direction of a one-sided, almost exclusive emphasis on labour and cost of production" ("Adam Smith's Approach to the Theory of Value," Economic Journal 67, no. 266, June 1957, pp. 181–198, at pp. 181–82) [C]. Reading: Nerio Naldi disputes the rendering "scarcity" from the 1718 first edition, whereas, he argues, Robertson and Taylor translated from the 1724 text. In 1718 the note adds that by indigentia "idem hic intelligimus, quod nonnulli vernaculo sermone appellant Demand," which he translates "with this name we refer to what some peoples in common language call demand"; in the 1724 and 1769 editions "the term demand does not appear." Since Carmichael's note on raritas places it under acquirendi difficultas, "scarcity, therefore, should be included in the category of acquirendi difficultas … and not contrasted with it as a translation for indigentia," and Carmichael's and Hutcheson's choice of demand "may be interpreted as a sign of their intention of distinguishing factors relating to demand from factors relating to what we may call supply." He grants that in the Scholastic tradition indigentia could express "either the need for a commodity or a combination of the need for it with the given availability of that commodity," and that if Carmichael meant the combination "we could consider scarcity more appropriate" ("Gershom Carmichael on 'Demand' and 'Difficulty of Acquiring': Some Evidence from the First Edition of Carmichael's Commentary to Pufendorf's De Officio," Scottish Journal of Political Economy 40, no. 4, November 1993, pp. 456–70, at pp. 460–63) [C]. Naldi and Robertson and Taylor exclude each other on the translation. Naldi's paper also holds that "Smith did not subvert, as maintained by many authors, an old tradition on price determination based upon subjective evaluation" (p. 457), which puts it nearer Young's Reading below than Robertson and Taylor's or Kauder's. Reading: Emil Kauder holds that "the analysis of subjective elements in economic valuation starts with Aristotle" and that "French, Italian and Swiss authors of the enlightenment have so perfected this analysis, that it might have been possible during the time of Adam Smith to base a system of political economy entirely on marginal utility calculation"; when Smith wrote "that water has a great utility and a small value," he "had made waste and rubbish out of the thinking of 2,000 years," and "The chance to start in 1776 instead of 1870 with a more correct knowledge of value principles had been missed" ("Genesis of the Marginal Utility Theory," Economic Journal 63, no. 251, September 1953, pp. 638–650, at pp. 638 and 650) [C]. In a companion article Kauder explains the split by religion: it was "the antagonism between the Aristotelian-Thomistic and the Protestant social schools of thought," the subjective value school being Catholic and "the defenders of the cost theory of value," Petty, Locke and Adam Smith, Protestants; drawing on Max Weber, he holds that anyone "exposed to Calvinism will be tempted to give labor an exalted position," while granting that religion "should explain only partly the thinking and writing of the mature authors" and that "Locke and Adam Smith did not see clearly the relation between their theory of labor value and Calvin's glorification of work" ("The Retarded Acceptance of the Marginal Utility Theory," Quarterly Journal of Economics 67, no. 4, November 1953, pp. 564–575, at pp. 565–67) [C]. The two Readings overlap: Robertson and Taylor start from Kauder's case, while saying they are "not, of course, attempting any kind of assessment" of it (p. 181), and both treat the utility tradition as available to Smith. They differ in their verdict: Robertson and Taylor speak of a choice of emphasis, while Kauder judges that Smith "had made waste and rubbish" of the earlier thinking. Reading: a third camp reads Smith's value theory as continuing natural jurisprudence rather than departing from it: Jeffrey T. Young argues that "the price theory of The Wealth of Nations … is wholly compatible with Smith's theory of property and that this latter theory creates a framework within which Smith's thinking on price theory must be understood," that "Smith's approach to property leads to an emphasis on the cost of production as the basis for the natural price of commodities," and that the connection between jurisprudence and Smith's theory of value "is to be found in the concept of injury and in the associated concept of cost." He studies "the determinants, rather than the measure, of natural price," and holds that this background "sheds new light both on Smith's use of, and subsequent abandonment of, the labor theory of value" ("Natural Jurisprudence and the Theory of Value in Adam Smith," History of Political Economy 27, no. 4, 1995, pp. 755–73, at pp. 756–57) [C]. Young overlaps with Robertson and Taylor in finding an emphasis on cost of production, but traces it to Smith's own jurisprudence of property and injury.
Objections. David Ricardo objected that Smith used two different standards, the labor bestowed on a good and the labor it can command, and that only the first regulates value (Entry 12) [C]. Note: the marginalists objected from the other side that value depends on utility at the margin, and pointed to Smith's own contrast of value in use and value in exchange, water and diamonds (Book I, ch. iv), as a problem their theory solved (Part VI; to verify) [C]. Note: the Ricardian socialists read ch. vi and ch. viii, where rent is "the first deduction from the produce of the labour," as an admission that profit and rent are taken from what labor produces (Entry 14, Part III — Ricardian socialists; to verify) [N]. In the same chapters Smith presents profit as the farmer's condition for employing labor, who "would have no interest to employ him, unless he was to share in the produce of his labour" (I.viii), and as "regulated altogether by the value of the stock employed" (I.vi) [C].
Where to read it
- Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 2 vols. (London: W. Strahan and T. Cadell, 1776), Book I, ch. iv (end), ch. v, ch. vi, ch. viii (opening), ch. x, Part II. Editions: ed. Edwin Cannan (London: Methuen, 1904), the fifth-edition text with Cannan's notes on earlier variants, online at Econlib; and the Glasgow Edition, ed. R. H. Campbell, A. S. Skinner and W. B. Todd, 2 vols. (Oxford: Clarendon Press, 1976; reprinted Indianapolis: Liberty Fund, 1981).
- Adam Smith, Lectures on Jurisprudence, ed. R. L. Meek, D. D. Raphael and P. G. Stein (Oxford: Clarendon Press, 1978), report of 1762–63 (LJ(A)), "Private Law," section "1st Of Occupation" (Online Library of Liberty text of the Liberty Fund reprint, PLL v6.0, pp. 54–56); and the later student report, Lectures on Justice, Police, Revenue and Arms, Reported by a Student in 1763, ed. Edwin Cannan (Oxford: Clarendon Press, 1896), Division III, §1, "First way of acquiring Property: Occupation," pp. 107–09 (LJ(B) in the Glasgow Edition, whose editors date the notes probably to 1763–64).
- Francis Hutcheson, A System of Moral Philosophy, 2 vols. (Glasgow: R. and A. Foulis; London: A. Millar and T. Longman, 1755), Book II, ch. xii, "The Values of Goods in Commerce, and the Nature of Coin" (vol. 2).
- Samuel Pufendorf, De officio hominis et civis, ed. Gershom Carmichael (Glasgow, 1718; 2nd ed. Edinburgh, 1724), Carmichael's notes to Book I, ch. 14, on value (note (y), pp. 439–40 of the Leiden reprint, 1769; Robertson and Taylor quote a note at p. 247 of the 1724 edition).
- Readings: H. M. Robertson and W. L. Taylor, "Adam Smith's Approach to the Theory of Value," Economic Journal 67, no. 266 (June 1957): 181–198; Emil Kauder, "Genesis of the Marginal Utility Theory: From Aristotle to the End of the Eighteenth Century," Economic Journal 63, no. 251 (1953): 638–650, and his "The Retarded Acceptance of the Marginal Utility Theory," Quarterly Journal of Economics 67, no. 4 (November 1953): 564–575, at pp. 565–67 for the religious explanation; Jeffrey T. Young, "Natural Jurisprudence and the Theory of Value in Adam Smith," History of Political Economy 27, no. 4 (1995): 755–73; Nerio Naldi, "Gershom Carmichael on 'Demand' and 'Difficulty of Acquiring': Some Evidence from the First Edition of Carmichael's Commentary to Pufendorf's De Officio," Scottish Journal of Political Economy 40, no. 4 (November 1993): 456–70, at pp. 460–63. Further: W. L. Taylor, "Gershom Carmichael: A Neglected Figure in British Political Economy," South African Journal of Economics 23 (1955): 251–255; Jeffrey T. Young, "Law and Economics in the Protestant Natural Law Tradition: Samuel Pufendorf, Francis Hutcheson, and Adam Smith," Journal of the History of Economic Thought 30, no. 3 (September 2008): 283–296; Terence W. Hutchison, Before Adam Smith (Oxford: Blackwell, 1988).
Entry 11. Smith on wages, profit, rent and markets
Overview. Entry 10 showed that Smith treats the price of goods as dividing into wages, profit and rent. This entry asks how he understood each share and the relations between the people who receive them. Smith wrote of masters (employers who advance wages and materials) and workmen, and of stock (capital advanced for production). Three features of his account later pulled readers in opposite directions. He described profit and rent as deductions from the produce of labor; he held that masters have the upper hand in setting wages; and he argued that freely competing self-interest, not regulation, best serves the public. Note: socialists have cited the first two and free-market liberals the third; Entry 14 (Part III — Ricardian socialists) and Part VIII name the writers (to verify).
Wages and the two deductions. Text: Book I, ch. viii opens: "The produce of labour constitutes the natural recompence or wages of labour." In the original state before appropriation and accumulation, "the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him" [E]. That state "could not last beyond the first introduction of the appropriation of land and the accumulation of stock." Rent then "makes the first deduction from the produce of the labour which is employed upon land"; the farmer who advances the laborer's maintenance "would have no interest to employ him, unless he was to share in the produce of his labour," and "This profit makes a second deduction" [C]. In Europe, Smith says, twenty workmen serve under a master for one who is independent; the independent workman "is both master and workman, and enjoys the whole produce of his own labour" [E]. Smith calls profit a deduction, and in the same passage presents it as the condition on which the owner of stock will employ anyone at all [C].
Masters and workmen. Text: in Book I, ch. viii, Smith says wages depend on a contract between "two parties, whose interests are by no means the same." The masters, being fewer, combine more easily, "and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it" [E]. Masters can hold out a year or two; "Many workmen could not subsist a week"; and masters are "always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate" [E]. There is nonetheless a floor, "the lowest which is consistent with common humanity," and wages rise above it where national wealth is growing, because masters then bid against one another for hands [E]. Smith defends high wages on two grounds: "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable," and "It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged" [N]. His remedy is not a legal wage; he says experience shows "that law can never regulate them properly" [E]. He also holds that when the legislature regulates "the differences between masters and their workmen, its counsellors are always the masters," so that a regulation "in favour of the workmen" is "always just and equitable," as is the law obliging masters "to pay their workmen in money and not in goods" (I.x, Part II) [N].
Interest, rent and profit compared. Text: interest is "always a derivative revenue," paid from the profit the borrower makes with the money; part of that profit belongs to the borrower, "who runs the risk and takes the trouble of employing it," and part to the lender, "who affords him the opportunity of making this profit" (I.vi) [C]. Smith nonetheless supported a legal ceiling on interest a little above the lowest market rate, which Jeremy Bentham attacked in Defence of Usury (1787), whose added letter is addressed to Smith (ceiling: Book II, ch. iv; Bentham's imprint: see register) [N]. Rent is the price of the licence to gather what was once common (I.vi) and, in Book I, ch. xi, a price that depends on what the farmer can afford to pay rather than on what the landlord has laid out [C].
Markets and the public interest. Text: in Book IV, ch. ii, on restraints on imports, an individual who prefers domestic to foreign industry "intends only his own security," and in directing it so that its produce is of greatest value "intends only his own gain"; he is "led by an invisible hand to promote an end which was no part of his intention," and "Nor is it always the worse for the society that it was no part of it" [C]. The same chapter calls merchants and manufacturers "the original inventors" of the restraints that secure them "the monopoly of the home-market" [N]. In Book I, ch. x, Part II, Smith warns that people of the same trade seldom meet together without the conversation ending in a conspiracy against the public, and in Book V, ch. i, he argues that the division of labor, carried far, leaves workers who perform a few simple operations without the use of their understanding, unless government "takes some pains to prevent it"; the public can "facilitate," "encourage" and "even impose" the learning of reading, writing and arithmetic, through parish schools whose master is "partly, but not wholly, paid by the public" (Part III, Art. ii) [E] [N].
Positions at a glance
| Topic | Smith |
|---|---|
| Wage labor | Normal condition in Europe (twenty workmen to one independent); a contract between unequal parties, with masters advantaged by numbers, reserves and law (I.viii) [E] |
| Profit | A deduction from the produce of labor and the inducement to employ it; regulated by the stock employed, not by the labor of direction (I.vi, I.viii) [C] |
| Interest | A derivative revenue paid out of profit; legal ceiling supported (II.iv, to verify) |
| Rent | The first deduction; a price for the use of land once common (I.vi, I.viii, I.xi) |
| Markets | Competition and free employment serve the public better than privilege or regulation (I.x; IV.ii) [N] |
| Drew from | Cantillon on subsistence wages (cited in I.viii); Hume (cited in Cannan's notes to I.v and I.viii); the Physiocrats (Book IV, ch. ix) |
| Argued against | The mercantile system; laws against workmen's combinations as one-sided (I.viii) |
Readings. Note: Smith's account of the relation between masters and workmen has been read both as an early statement of class conflict over the product and as a description of market bargaining distorted by legal privilege, which competition would correct; Entry 14 (Part III — Ricardian socialists) and Part VIII set out the rival Readings with their authors (to verify). Note: later free-market critics of capitalism cite Smith's remarks on combinations and the laws against them (Part V; to verify) [C].
Objections. Note: socialists argued that if rent and profit are deductions from labor's produce, Smith had stated the case against them and drawn back from its conclusion (Entry 14, Part III — Ricardian socialists; to verify) [N]. Note: defenders of profit replied that the produce Smith measures is produced with advanced stock, and that the deduction is a payment for waiting and risk, a position developed in the marginalist theories of interest (Part VI; to verify) [C]. Note: free-market critics of the wage system argue that the advantage Smith gives masters comes from law (the Combination Acts, enclosure, corporate privilege) rather than from the market as such, so that removing privilege would raise wages toward the whole product (Part V; to verify) [C].
In context. The Wealth of Nations draws repeatedly on the British colonies in North America. In Book I, ch. viii Smith reports that wages for common labor, ship carpenters, house carpenters and tailors in the province of New York were all above the London rate, that provisions were cheaper, and that the colonies' population doubled in twenty or twenty-five years; North America was not yet so rich as England but was "much more thriving." A note added in the second edition says these figures were "written in 1773, before the commencement of the late disturbances" (Cannan records "present disturbances" in eds. 2 and 3). In the same chapter Smith argues that free labor comes cheaper in the end than slave labor, "even at Boston, New York, and Philadelphia, where the wages of common labour are so very high," and contrasts "the British constitution which protects and governs North America" with the East India Company in Bengal. Book IV, ch. vii, "Of Colonies," calls the prohibitions on colonial manufactures "impertinent badges of slavery" while granting that they "have not hitherto been very hurtful to the colonies," and says colonization began in "folly and injustice" (Part II of that chapter). Alexander Hamilton's Report on Manufactures (1791) argued that new branches of industry need "the extraordinary aid and protection of government"; according to its modern editors (Introductory Note to the Report, The Papers of Alexander Hamilton, ed. Harold C. Syrett, vol. 10), it relies on the Wealth of Nations for its discussion of the division of labor, quotes it on the advantages of transportation, and paraphrases Smith's criticism of the Physiocrats' classing of manufactures as unproductive, but it rejects "Smith's notion of the superior productivity of agriculture" and criticizes "Smith's view that private interest was led by an invisible hand to support the type of activity most beneficial to society." Note: how other American statesmen read the book after independence is not covered here; to verify.
Where to read it
- Adam Smith, Wealth of Nations (1776), as in Entry 10: Book I, ch. vi (on interest), ch. viii, "Of the Wages of Labour," ch. ix, "Of the Profits of Stock," ch. x, Part II, ch. xi, "Of the Rent of Land"; Book II, ch. iv, "Of Stock Lent at Interest"; Book IV, ch. ii, ch. vii, "Of Colonies," and ch. ix; Book V, ch. i (education of the laboring poor). Cannan's notes to ch. viii identify the statutes against workmen's combinations that Smith had in mind.
- Jeremy Bentham, Defence of Usury (London: T. Payne, and Son, 1787), the added "Letter to Adam Smith, Esq; LL.D."
- Further: for the reception of these chapters by labor writers, see Entry 14, Part III — Ricardian socialists; by later free-market writers, Parts V and VIII.
Entry 12. Ricardo: value, rent and distribution
Overview. David Ricardo's On the Principles of Political Economy and Taxation (1817) set out a model of how the product is divided among landlords, capitalists and workers. Its core claim is that the relative values of goods are regulated by the quantity of labor needed to produce them, the embodied labor that Smith had reserved for the early and rude state (Entry 10). Ricardo also set out the theory of differential rent, for which he credited Malthus and West with "the true doctrine of rent" (Preface): rent arises because land differs in fertility, and it is paid on the better land out of the difference between its yield and that of the worst land in use. Note: within a decade writers in London were using Ricardo's value theory to argue that labor is entitled to the whole product; how far they drew on Ricardo, and whether the label "Ricardian socialists" fits them, is disputed (Entry 14, Part III — Ricardian socialists; to verify).
Value. Text: chapter 1, "On Value" (1817 edition, pp. 1–48), holds that the exchangeable value of commodities depends on the relative quantity of labor necessary for their production, including the labor bestowed on the tools and buildings that assist it [C]. Ricardo criticizes Smith for treating labor sometimes as the quantity bestowed on a good and sometimes as the quantity it can command, as if these were equivalent; only the first, he argues, regulates value: Smith speaks of the two "as if these were two equivalent expressions" (ch. 1, sec. I, in the third edition of 1821; the 1817 page was not checked) [C]. A rise in wages therefore does not raise prices generally; it lowers profits, since the value of the product is fixed by the labor required and is divided between wages and profit (ch. 1, secs. III, IV and VII, 1821) [C]. Ricardo qualifies the rule himself. Where goods are produced with different proportions of fixed and circulating capital, or with capital of different durability, a change in wages alters their relative values, and he calls this "a considerable modification to the rule" (1817, pp. 22–48, quotation at p. 48; see register) [C]. Whether the modification leaves a labor theory of value at all is the central interpretive dispute (see Readings).
Rent. Text: chapter 2, "On Rent," defines rent as the portion of the produce paid to the landlord for the use of the original and indestructible powers of the soil [C]. As population grows, poorer land is brought into cultivation; the price of corn is set by the labor needed on the worst land in use, which pays no rent, and rent on better land is the surplus over that cost [C]. Rent is therefore an effect of the high price of corn, not its cause: "Corn is not high because a rent is paid, but a rent is paid because corn is high" (ch. 2) [C]. In chapter 24 Ricardo adds that "the interest of the landlord is always opposed to that of the consumer and manufacturer," since all classes except landlords are injured by a rise in the price of corn, and that where corn could be imported more cheaply, the loss from not importing outweighs the landlords' gain (both chapters as in the third edition of 1821) [N].
Wages and profits. Text: in chapter 5, "On Wages," the natural price of labor is "that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution"; the market price may, "in an improving society, for an indefinite period, be constantly above it" (third edition, 1821) [E]. Because wages must rise in money terms as food grows dearer on poorer land, and the value of output is fixed by labor, profits tend to fall as cultivation extends [C]. Reading: John B. Davis speaks of "the contest between capitalists and landlords of the first two editions" (see Machinery below) [C].
Machinery (1821). Text: in the third edition (London: John Murray, 1821) Ricardo added chapter 31, "On Machinery," giving up his earlier opinion that the laboring class would, "equally with the other classes," share in the advantage from machinery (an opinion he says he had supported "in other ways" without publishing anything he needed to retract): "the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers" (wording confirmed in the 1821 text; Sraffa ed., Works, vol. I, p. 388) [E]. His argument is that converting circulating capital, which maintains workers, into fixed capital can reduce the gross produce and with it the fund that employs labor [C]. He adds that the employment of machinery "could never be safely discouraged in a State" [N]. Reading: John B. Davis reads the new chapter as shifting Ricardo's account of distribution from a contest between capitalists and landlords to one between capitalists and laborers ("Ricardo's Theory of Profit and the Third Edition of the Principles," Journal of the History of Economic Thought 15, no. 1, 1993, pp. 90–106; summary checked against the published abstract; article not read) [C].
Positions at a glance
| Topic | Ricardo |
|---|---|
| Labor theory of property | Note: no labor justification of property has been found in the Principles (to verify) |
| Labor theory of value | Relative values regulated by embodied labor, with a modification for differing capital structures (ch. 1) [C] |
| Wage labor | Natural wage enables laborers "to subsist and to perpetuate their race" and "essentially depends on the habits and customs of the people"; machinery can injure laborers (chs. 5, 31) [E] |
| Interest and profit | Profits fall as wages rise: "there is no other adequate reason for a fall of profit but a rise of wages"; interest "ultimately and permanently governed by the rate of profit" (ch. 21; see also ch. 1) |
| Rent | Differential surplus on better land, no part of the cost that sets price (ch. 2) [C] |
| Markets | "Leaving unrestricted the importation of foreign corn" (Advertisement to ed. 3); the landlord's interest opposed to that of consumer and manufacturer (ch. 24) |
| Drew from | Smith; Malthus, whose 1815 Inquiry gave "the true doctrine of rent" (Preface), and on the poor laws (ch. 5). James Mill pressed Ricardo to write and helped with wording, but Sraffa judges his influence on the theory "negligible" (Introduction, sec. II) |
| Argued against | Smith's labor-commanded measure and his account of rent as a component of price |
Readings. Whether Ricardo held a labor theory of value is disputed. Reading: Piero Sraffa, introducing Ricardo's Works, proposes that the early principle that "the profits of the farmer … regulate the profits of all other trades" rested on corn being both capital and product, so that the rate of profit could be found "without any question of valuation"; he presents this as a "rational foundation" that is "never explicitly stated by Ricardo." In the Principles, on Sraffa's account, labor took the place of corn "on both sides of the account," and the general theory of value let Ricardo determine the rate of profit for the economy as a whole. Sraffa also rejects the view that Ricardo retreated from the labor rule under criticism: edition 3's theory "appears to be the same, in essence and in emphasis, as that of edition 1" ("Introduction," in The Works and Correspondence of David Ricardo, vol. I, Cambridge: Cambridge University Press for the Royal Economic Society, 1951, secs. IV–V, from p. xxx) [C]. Reading: Samuel Hollander denies that the profit rate in agriculture plays "the strategic role in the system envisaged in the various mathematical formulations of the Ricardian system," among which he sets out Sraffa's "corn profit" model; he argues that Ricardo, unlike Sraffa, analyzed adjustment through changes in output and the balance of demand and supply, and that Ricardian and neoclassical procedures share "a common heritage or 'central core,' which amounts largely to allocation theory and mechanisms of demand-supply analysis." What he finds "characteristically 'Ricardian'" is "the use of a special theory of value involving an absolute standard in deriving the inverse relationship between wages and profits" ("Economics and Ideology: Aspects of the Post-Ricardian Literature," Literature of Liberty 2, no. 3, July/September 1979; the full argument is in The Economics of David Ricardo, Toronto: University of Toronto Press, 1979) [C]. The two exclude each other on the corn model and on continuity, and overlap in treating Ricardo's theory of value as the means by which he determined the rate of profit and its inverse relation to wages (Sraffa, sec. IV; Hollander, as quoted). George Stigler's estimate that Ricardo held a "93 per cent" labor theory, an empirical approximation, is listed in Where to read it.
Objections. Malthus objected that to call the labor employed on a commodity its real value is to "confound at once the very important distinction between cost and value"; Ricardo replied in a note to chapter 1 that his doctrine makes cost and value the same only "if he means by cost, 'cost of production' including profits," and that Malthus "has not clearly understood me" (Principles, 3rd ed., 1821, ch. 1, note quoting Malthus's Principles of Political Economy, London: Murray, 1820, ch. II, sec. I, p. 61) [C]. In the posthumous second edition (1836), Malthus adds in a note that Ricardo's calculations proceed "without any modifications, although in two previous sections he had acknowledged that considerable modifications were necessary," and sets out to show that relative values "are very far from being governed" by the labor bestowed on production (ch. II, sec. V, p. 93 n.; whether the note stands in the 1820 text is unchecked) [C]. Samuel Bailey argued that value "denotes merely the relation in which two objects stand to each other as exchangeable commodities," so that "the very term absolute value, implies the same sort of absurdity as absolute distance" (A Critical Dissertation on the Nature, Measures, and Causes of Value, London: R. Hunter, 1825, ch. I; Entry 14 (Part III — Ricardian socialists) treats his contemporaries) [C]. Note: the marginalists rejected cost-based value (Part VI; to verify) [C]. Note: from the left, the Ricardian socialists and Marx took up Ricardo's value theory, each with revisions of their own, to ask why the laborer receives only the wage; Entries 14–17 (Part III — Ricardian socialists) and Entry 19 (Part IV — Marx and Engels) set out what each accepted and rejected (to verify) [N].
In context. Ricardo's rent chapter states that "the most fertile, and most favorably situated, land will be first cultivated." The American economist Henry C. Carey argued from the settlement of the United States that the order ran the other way: settlers began on the light, easily cleared uplands and moved to richer bottomlands only as population and capital grew, so that "rent is paid for the use of the improvements which labour has accomplished," and the progress of cultivation brings "an increasing tendency to equality of condition" rather than the opposed interests of landowner and laborer that he attributes to Ricardo (The Past, the Present, and the Future, Philadelphia: Carey and Hart, 1848, ch. 1, "Man and Land," pp. 9–65). In The Harmony of Interests, Agricultural, Manufacturing, and Commercial (Philadelphia: J. S. Skinner, 1851), Carey argued for protective tariffs, holding that the power to obtain cloth in exchange for labour had "invariably grown in the protective periods, and diminished with every approach to free trade." Marx, writing to Engels on 26 November 1869, judged that "Carey's only merit is that he asserts, just as one-sidedly, the movement from worse to better land as Ricardo asserts the opposite," since "soil-types of differing grades of fertility are always cultivated simultaneously" (Marx and Engels, Collected Works, vol. 43, p. 385).
Where to read it
- David Ricardo, On the Principles of Political Economy and Taxation (London: John Murray, 1817), ch. 1, "On Value," pp. 1–48; ch. 2, "On Rent"; ch. 5, "On Wages" (see register for imprint and ch. 1 pages). Third edition (London: John Murray, 1821), with ch. 31, "On Machinery." Standard edition: The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the collaboration of M. H. Dobb, vol. I (Cambridge: Cambridge University Press for the Royal Economic Society, 1951), which prints the third edition with all variants of editions 1 and 2, and the latter part of edition 1's chapter 1 as an appendix (pp. 52–66).
- Readings: Sraffa, "Introduction," in Works, vol. I (1951); Samuel Hollander, The Economics of David Ricardo (Toronto: University of Toronto Press, 1979); John B. Davis, "Ricardo's Theory of Profit and the Third Edition of the Principles," Journal of the History of Economic Thought 15, no. 1 (1993): 90–106. Further: George J. Stigler, "Ricardo and the 93% Labor Theory of Value," American Economic Review 48, no. 3 (1958): 357–67; Paul A. Samuelson, "Ricardo Was Right!," Scandinavian Journal of Economics 91, no. 1 (1989): 47–62.
- Henry C. Carey, The Past, the Present, and the Future (Philadelphia: Carey & Hart, 1848), ch. 1, "Man and Land"; The Harmony of Interests, Agricultural, Manufacturing, and Commercial (Philadelphia: J. S. Skinner, 1851).
Entry 13. John Stuart Mill: property, wage labor and cooperation
Overview. John Stuart Mill's Principles of Political Economy (1848) contains two arguments that matter for this guide. First, Mill justified private property by the producer's right to what he has produced, and then argued that this justification does not cover land, which no one made. Second, in passages rewritten for the third edition (1852), he predicted that the wage relationship would give way to partnership, ending, "perhaps finally in all," in associations of workers who own their capital and elect their managers. Mill described himself and Harriet Taylor as socialists while defending competition; whether to call him a socialist is disputed (see Readings).
Property and its limits. Text: in Book II, ch. i, §1, Mill treats the distribution of wealth, unlike its production, as "a matter of human institution solely" [C]. He judges private property by comparing it with communism and the socialist schemes of his day, and concludes that the comparison should be made with property "as it might be made," not as it is, since the distribution of property in modern Europe was the result "not of just partition, or acquisition by industry, but of conquest and violence" (Book II, ch. i, §3, a section rewritten for the third edition of 1852) [N]. The institution, in its essential elements, consists in the recognition of each person's right to the exclusive disposal of what he or she has produced by their own exertions, or received from producers by gift or fair agreement "without force or fraud"; "the foundation of the whole is the right of producers to what they themselves have produced" (Book II, ch. ii, §1) [N]. In the same section he answers the objection that the workers in a factory produce "the whole produce": what they work with is "the fruits of previous labour," and "an equivalent must be given to those who have, both for the antecedent labour, and for the abstinence" by which its produce was saved [C]. Land is the exception: "No man made the land. It is the original inheritance of the whole species"; its appropriation is "wholly a question of general expediency" (Book II, ch. ii, §6, wording of the third edition, 1852). The state may tax the future "spontaneous increase of rent," after a valuation that exempts the present value of all land, since landlords "grow richer, as it were in their sleep, without working, risking, or economizing" (Book V, ch. ii, §5) [N]. He draws the land exception from the same principle: "The essential principle of property being to assure to all persons what they have produced by their labour and accumulated by their abstinence, this principle cannot apply to what is not the produce of labour, the raw material of the earth" (Book II, ch. ii, §5) [N].
The futurity of the laboring classes. Text: in Book IV, ch. vii, "On the Probable Futurity of the Labouring Classes," Mill argues that workers will not long accept dependence on employers, and that the relation of masters and work-people "will be gradually superseded by partnership, in one of two forms: in some cases, association of the labourers with the capitalist; in others, and perhaps finally in all, association of labourers among themselves" (Book IV, ch. vii, §4; "perhaps finally in all" is the wording of the fifth edition, 1862, where the third edition read "temporarily and in some cases …, in other cases and finally in all") [E]. The form of association which, "if mankind continue to improve, must be expected in the end to predominate" is "not that which can exist between a capitalist as chief, and work-people without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves" (§6) [N]. Capitalists, he expects, will find it to their advantage to lend to the associations "at a diminishing rate of interest, and at last, perhaps, even to exchange their capital for terminable annuities" (§6) [E]. The change is to come "without violence or spoliation" (§6), and Mill holds that it "should by all just and effectual means be aided and encouraged"; competition between associations should continue, and he "utterly" dissents from the socialists' "declamations against competition" (§7) [N]. Note: Ashley's variant notes show that the §4 prediction of partnership replaced the 1848 text in the third edition (1852) and reached its present wording in the fifth (1862); Gregory Claeys dates §6's definition of the workers' association to the third edition (1852), citing Collected Works, vol. III, p. 775 ("Mill and Marx on Inequality," Nineteenth-Century Prose 47, no. 1 [2020]: 238 and n. 20); Ashley's note to §6 agrees: its opening paragraphs and the account of French cooperative societies that follows were added in the third edition (1852), replacing a section of the 1848 text. The third edition itself (London: Parker and Son, 1852, vol. II, p. 341) already prints the account of the Paris associations, saying that there "exist, or existed a few months ago, upwards of a hundred successful, and many eminently prosperous, associations of operatives in Paris alone." On the same page Mill quotes Feugueray in French ("la caisse était tout-à-fait vide"), where Ashley's text gives English (the French runs through pp. 341–45); Mill's own account of the associations' rules is in English, and the sentence quoted under Readings ("carry none of the capital") already reads as in Ashley (1852, vol. II, p. 346).
Positions at a glance
| Topic | Mill |
|---|---|
| Labor theory of property | Property justified by the producer's right to the product of his exertions; land excepted, since no one made it (II.ii) [N] |
| Labor theory of value | "Value is a relative term"; natural value of reproducible goods is cost of production (wages and profits), of which "the quantity of labour required for the production is the most important" element (III.vi, §1) [C] |
| Wage labor | Expected to give way to partnership and workers' associations (IV.vii) [E] [N] |
| Interest and profit | Profit resolves into interest ("the remuneration of abstinence," Senior's expression), insurance for risk, and wages of superintendence (II.xv, §1) [C]; "The cause of profit is, that labour produces more than is required for its support" (II.xv, §5) [C] |
| Rent | Ricardian; future unearned increase of rent open to special taxation, present land values exempt (V.ii, §5) [N] |
| Markets | Competition retained among associations; "Laisser-faire … should be the general practice: every departure from it, unless required by some great good, is a certain evil," followed by stated exceptions, among them education, children's labor, perpetual contracts, practical monopolies, poor relief and colonization (V.xi, §§7–15) [N] |
| Drew from | Ricardo; Saint-Simonians and Harriet Taylor, by his own account (Autobiography, 1873, p. 246); Fourierists; Reading: Helen McCabe holds that Fourierism "had an important, but overlooked, role to play in the development of Mill's political philosophy," including his profit-sharing proposals and his vocabulary of "association" and "friendly rivalry" ("John Stuart Mill and Fourierism: 'Association', 'Friendly Rivalry' and Distributive Justice," Global Intellectual History 4, no. 1, 2018, pp. 35–61); W. T. Thornton, On Labour (1869), in whose review Mill abandoned the wages-fund doctrine ("Thornton on Labour and Its Claims," Fortnightly Review, May–June 1869) |
| Argued against | Communist and socialist rejection of competition; defenders of existing property who confuse it with property as it might be |
Readings. Note: whether Mill was a socialist, as he described himself and Harriet Taylor in his Autobiography (1873) as "under the general designation of Socialists" (ch. vii; 1873 ed., pp. 230–34; Collected Works, vol. I, p. 239), or a liberal reformer who accepted cooperation within a market economy, is disputed. Reading: Wendy Sarvasy holds that Mill "does embrace the two necessary tenets that have always distinguished socialism from capitalism: collective ownership of the means of production and a public determination of individual distribution" ("A Reconsideration of the Development and Structure of John Stuart Mill's Socialism," Western Political Quarterly 38, no. 2, 1985, p. 313) [C]. Reading: Pedro Schwartz holds that "the assertion that Mill was a socialist must be rejected," citing "his belief in the relative efficiency of competition, and his fears for liberty in a socialist commonwealth"; Mill's rejection of the schemes he examined, "whether Utopian or revolutionary, is final," though he put forward "proposals for important reforms in the competitive system" (The New Political Economy of J. S. Mill, English translation of the 1968 Spanish original, Weidenfeld and Nicolson, 1972; copy read: Durham, NC: Duke University Press for the LSE, 1972, ISBN 0-8223-0277-2, pp. 191–92) [C]. The Paris associations whose rules Mill reports and praises (Book IV, ch. vii, §6) provide that members who leave "carry none of the capital with them," which "remains an indivisible property" [E]. Note: the objection from the theory of the labor-managed firm that members then have reason to underinvest in that capital, and Ellerman's proposal of individual capital accounts in answer to it, are treated in Part IX (to verify) [C]. The 1848 text of the chapter, removed in 1852, had held that if those who "supply the funds, and incur the whole risk" obtained "no greater reward or more influential voice than the rest, few would practise the abstinence" that creates capital (Ashley's note 2 to §6) [N].
Objections. Note: from the market side, critics hold that Mill's prediction has not been borne out, since worker cooperatives remain a small share of enterprises in market economies, and take this as evidence that the conventional firm has advantages in raising capital, bearing risk and monitoring work; Part VIII gives the evidence and its authors (to verify) [E]. Note: defenders of cooperatives reply that they face legal and financial obstacles that do not reflect efficiency (Part IX; to verify) [E]. Note: Marx both praised workers' cooperative factories and held that within capitalism they reproduce its shortcomings; Entry 23 (Part IV — Marx and Engels) sets out his texts and later socialists' views (to verify) [C]. Note: objections to Mill's distinction between land and other property are set out in Part VII (to verify) [N].
In context. Mill wrote on the American Civil War in "The Contest in America" (Fraser's Magazine, vol. 65, February 1862, pp. 258–68). He argued that the South had "proclaimed slavery as the one cause of separation," and blamed "the tone of our press, and in some degree, it must be owned, the general opinion of English society" for criticism aimed "almost solely against the party in the right"; he granted that the Union government was "not an abolitionist government" but a "Free-soil party" fighting slavery's extension. How American labor and reform movements of the later nineteenth century read Mill's chapter on the futurity of the laboring classes is to verify before anything is added here; an episode will be included only on documented reception of Mill, not because it resembles his proposal.
Where to read it
- John Stuart Mill, Principles of Political Economy, with Some of Their Applications to Social Philosophy, 2 vols. (London: John W. Parker, 1848): Book II, chs. i–ii, "Of Property"; Book IV, ch. vii, "On the Probable Futurity of the Labouring Classes"; Book V, ch. ii (land) and ch. xi (laissez-faire). Third edition, revised (1852), for the expanded cooperative passages. Standard edition: Collected Works of John Stuart Mill, vols. II–III, introduction by V. W. Bladen, textual editor J. M. Robson (Toronto: University of Toronto Press; London: Routledge and Kegan Paul, 1965), with variant readings (variants to verify); also online at the Online Library of Liberty.
- John Stuart Mill, Autobiography (London: Longmans, Green, Reader, and Dyer, 1873), ch. vii, "General View of the Remainder of My Life" (pp. 230–34 for Mill's account of his socialism); Collected Works, vol. I, ed. John M. Robson and Jack Stillinger (Toronto: University of Toronto Press; London: Routledge and Kegan Paul, 1981; imprint to verify), which prints the text of Mill's manuscript rather than the 1873 edition.
- John Stuart Mill, "Chapters on Socialism," Fortnightly Review (1879), published posthumously with a "Preliminary Notice" by Helen Taylor dated January 1879 (new series vol. 25, January–June 1879, called also vol. 31 of the old series; February, March and April 1879 issues, nos. CXLVI–CXLVIII, in three installments: 217–37, 373–82 and 513–30).
- John Stuart Mill, "The Contest in America," Fraser's Magazine vol. 65, no. 386 (February 1862): 258–68.