Adam Smith’s ideas on Labour and Value (Part I)

Adam Smith (via FT)

The Wealth of Nations (Smith, 1776) is one of the most ambitious (set of) books ever written in history. Ambitious, not only in providing a compelling narrative of preceding Economic thought, but also in delivering profound insights into concepts which form the bed- rock of economic and political thought thereafter. His discussions on the concept of labour and value set the stage for the likes of Ricardo, Marx, Marshall, ‘the Austrians‘ and Keynes – albeit with some reservations – to develop those concepts further. Moreover, his analysis takes advantage of examples which (despite seeming dated to us now) were contemporary at the time of writing and hence carried a tremendous amount of influence in the late 18th Century Enlightenment. A common theme has since emerged among those who have studied Adam Smith; namely, that there is a economic and sociological contradiction in his work especially with regards to his ideas about Labour. The aim of this essay to demonstrate that these ‘contradictions’ are mischaracterized and that his stance on Labour and its primacy in the creation of wealth is indeed consistent. This will be done by re-examining his ideas of Labour and Value and their interplay in yielding a coherent narrative which attempts to confound these apparent contradictions. It is also worth bearing in mind that this is not an argumentative essay intending to defend every aspect of Smith’s thinking. Indeed the spirit of this investigation is to iron out the flaws in his thinking (of which there are a few) that the benefit of hindsight has allowed us to identify. The essay hopes to be objective in its appraisal of the ideas of Adam Smith and their efficacy in describing the nature of labour and value.

It is striking to note that, for an author who is widely regarded as the founding father of ‘Lassez Faire Economics’, Adam Smith is very keen to focus on the primacy of Labour in creating wealth. He opens his discussion in The Wealth of Nations by describing what labour entails by introducing the notion that it is linked to skill, dexterity and the proportion of useful and non-useful labour in the economy. There is an artful description of the rather basic view of labour as an endeavour to provide for the family and other members of the tribe. However – without hesitation from the outset – he points to this as a flawed way of organising labour in the society as it difficult to sustain for a large population. Smith noticed that even nations which codified this principle (through religious traditions and norms) of labour were poor ones; and despite social and traditional calls for ‘helping the poor, aged, and infants’ (through religious traditions for example) were unable to alleviate that condition. ‘Civilised and thriving nations’ – he noticed – have a greater produce of labour where a workman’s share of the wealth is much greater than he would have in poorer countries. Paul Mcnulty, who wrote the paper entitled “Adam Smith’s Conept of Labour” agrees with this statement. He contends that Smith’s thinking around this issue, grew out of the critique of the Mercantilist system which essentially relied on top-down mechanisms to intervene and ensure that the current economic dynamic remains in place. Smith felt that, this severely limited the potential of labour-created wealth.

It is within this framework, that he introduced his concept of the ‘division of labour’ (for convenience the phrase “Division of Labour will be abbreviated to DoL in the rest of this essay). The beauty of this concept that it not only weaves together the withering critique of the feudal system but also gives us a fascinating insight accounting for why a DoL is a more efficient system of production. He explains this through the production process for a pin maker. He draws attention to the fact that it is difficult for a group of people to produce pins if they are to undertake the entire operation individually and separately. If they can pool together and concentrate in specific subtasks within the pin-manufacturing process, they would be able to increase their production collectively. The explanation of this particular phenomenon is at the heart of Smithian Economics.

Social Science academia has always had to face up to the charge that its method of inquiry is not of the same standard as the more traditional Natural Sciences. However – bearing in mind this was 1776 – one can certainly see scientific rigour in the way Smith has approached this example. Not content with just assertion alone, he sought to demonstrate his concept of the DoL by conducting a comparative analysis. Although Smith seems to imply that the pin-making was a thought-experiment, (as opposed actual data that he collected) it is certainly not an abstract concept which cannot be evaluated quantitatively. Indeed a Scientific method would entail establishing a control group of pin manufacturers who crafted them individually and comparing with a group which followed the DoL model. What follows that is a comprehensive and detailed account of why the latter group would plausibly be more productive. By specialising in specific tasks, Smith points to the fact that individual will be able to take advantage of the repetitiveness and the simultaneity of the processes to produce these pins quicker. It also becomes a matter of expertise where one individual is able to devote his concentration to one specific (or other closely) related task(s). He also points to the number of useful and labour capital stock and the manner in which it is accumulated is a very strong determinant in the creation of wealth

This insight carries great implications for the way an economy would be structured. One can almost suggest that his discussions on interests of private citizens (or self-interest – a term often misappropriated in modern parlance) have inadvertently (though perhaps not quite, as the rest of the essay will hope to demonstrate) given birth to a theory of labour which aptly accounted for much of the economic realities of his time. For instance, it can be said that this particular insight predicts the industrial revolutions that were to sweep the majority of the Western world towards the tail-end of the 18th century and the beginning of the 19th Century. Smith would explain this by pointing to the difference in Agricultural and Manufacturing processes.

Agriculture is subject to the same forces namely, the division of labour will no doubt help in increasing the yield. It will almost certainly aid in technological advancements that will lead to more efficient production. However – and Smith was keen to point this out – Agricultural output is not solely dependent upon the machinations of the labour force. Land, fertility and climate play just as much (if not more) of a role in the production process. This means that wealth created through DoL has bright but limited prospects in an agricultural economy. It is well worth noting that Adam Smith was very clear in pointing this out and it is this ability to critically appraise his own ideas is what makes him one of the most compelling theorists in Economic thinking.

In fact it was an exhaustion of this line of thought which led Smith to do a comparative analysis of countries in Europe. Ronald Meek and Andrew Skinner co-authored the paper ” The Development of Adam Smith’s Ideas on the Division of Labour”, making use of older extracts of Adam Smith’s work from before, revealing the evolution of Smith’s ideas on Labour.  Adam Smith noticed in the refined version of The Wealth of the Nations that richer countries had great prowess in both agriculture and manufacturing, whereas as the poorer countries such as Poland (at the time) were agriculture-heavy and weak in manufacturing. This meant that the Polish workforce had a more limited scope of DoL and ultimately less national wealth. He did not believe that the English worker was inherently superior to the Polish worker. Quite the opposite, in fact, as he pointed to systematic forces (of DoL) which aided the English workers become partners in a more prosperous economy. He outlined three points which spoke to this assertion. First, he postulated that due to the specialisation of the workmen involved in the manufacturing process, their know-how and dexterity to account for various set-backs allows them to increase the output. Second, he felt that the manufacturing process (and for simplicity sake we assume that it is where significant DoL occurs) would lead to more repetition and simultaneity in the production process which will undoubtedly speed up the production process. Third – and perhaps most pertinently – he felt that the manufacturing process meant more advancements in technology (for reasons of DoL) which in turn drove production and consumption.

This accounted for the huge gulf in Wealth between the rich and poor countries. It is a remarkably elegant and simple explanation of the ‘richness’ of countries like Britain. However, he did not devote as much time to the colonial activities of these countries as perhaps he ought to have done. This is not a suggestion that this omission completely negates everything Smith has to say about relative wealth of nations. Quite the contrary as it is a very handy way of describing these competing systems in play out but a discussion on Europe’s colonial history would have been in order as it is certainly a confounding factor. Although – in all probability – Adam Smith would retort back to that criticism by suggesting that the colonisations of those lands meant that there was a top-down force effectively forcing these economies to remain agricultural in nature. He would no doubt add that had these countries been allowed to properly flourish their DoL, it would have meant an increase in their Manufacturing production prowess. An article by Thomos J Lewis entitled “Political Consequences of markets” complements this point of view. Lewis reckons that many modern criticisms of Smith’s ideas regarding DoL and markets are caricatures of what his actual position was. Smith maintained that dominance of any class was a bad thing and that wealth, political liberty and individual characters all rested on the DoL.

The 2nd part of the article can be read here.

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One Response to Adam Smith’s ideas on Labour and Value (Part I)

  1. Pingback: Adam Smith’s Ideas on Labour and Value (Part II) « Quackonomics

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