[Disclaimer: This is the second of a 2-part post of the same essay. The first part of the essay can be read here. Perhaps it would be useful for you to read the first part to get some context for the is post. Also DoL refers to “Division of Labour”]
While Smith did not explicitly forecast the advent of the ‘Industrial Revolution, he did lay the conceptual ground work for that to flourish. The key to that were once again, his ideas of DoL. He compared the agricultural process to the manufacturing process and came to the conclusion; that for the latter, labour capital stock is of much higher significance. Complementing this, he provided a sound rationale (as discussed earlier) as to how this ‘DoL’ leads to improvements in the production process as a result of vigour and focus. Underpinning that idea – according to Smith – is the desire to reduce ones labour as much as possible. For Smith, Labour can also be seen as a quantity with negative utility. Putting aside the psychological assumptions implicit in that statement, it is worth examining what it means in an economic sense. The desire to ‘reduce one’s labour’ is not a comment (at least in Smith’s mind) of the degenerative state of society. It is in fact the driving force which leads to innovation and technological improvements which assist and enhance the production process. An example of this was be the invention of the piston (a seminal innovation in the technology of that time) in a trains which essentially came about from a desire for a young boy who effectively wanted to save his labour and decided to think of solution which was not only sufficient in completing his designated task but also allowed him to save time to devote to activities from which he drew pleasure – in his case meant spending more time with his friends. The important conclusion to draw from this is that whenever DoL is allowed to flourish and take a central role in the production process, technological improvements are a very probable and predictable consequence. We have been able to establish the virtues of DoL and how magnificently catalytic its impact can be on an economic system. But we haven’t yet looked at what it is that causes this human affinity towards DoL. Smith believed that this is due to the innate nature of human beings to trade and to barter. One can look at a specific task as a type of good. For instance in a butcher shop, two people can divide the task of removing fat from the meat to cutting it in different pieces. Implicit in that arrangement is the sense of barter; i.e. the fat-remover is solely doing that because he trusts that the cutter will duly oblige with his task. This trust Smith would probably assert is that inherent human quality. The resultant increase in efficiency is the payoff for both people as they realise that their potential is best optimised by DoL.
However it has to be pointed that this assertion of innateness of humans in their ability to trade may not be entirely accurate. Smith surmised that this was ability only specific to human beings and no other animal has been able to replicate that prowess. This is indeed concurred by Thomas Lewis (“Political Consequences of Markets”) who also viewed the capacity to barter as innately human. Michael Shermer, a prominent academic and a prolific author on evolution and adaptive systems wrote in his book The Mind of the Market (which devotes a significant to discussing Adam Smith) that there are numerous studies in Chimpanzees which show an appreciation of the process of barter and trade. Since our lineage (in evolutionary terms) is very close to that of Chimpanzees as we share a common ancestor, one can deduce that the sense to barter does not necessarily entail innateness to human beings. However it is slightly inaccurate to state – as Smith did – that no other animal shows this inclination. There are many examples in the natural world that speak to the contrary. Still, nonetheless, it is self-evident that no other species has been able to incorporate so extensively the idea of barter, trade and eventually DoL in their day to day living as human beings
One of the fallacies of economic thinking (still exists today among many circles) is that it is competition which drives people in search of better and improved ways of producing their output – hence the advance in technology. Smith showed that this may in fact be an illusion. Technological advances are very similar scientific advances. Both require critical and rigorous evaluations of the status-quo mechanisms and addressing the existing flaws in order to imporve (often incrementally) on the previous theory, paradigm or technology. Smith shows quite succinctly and successfully that the optimum condition for that is not necessarily competition but DoL. Many economic systems have (to varied degrees) had success in initiating technological advances. The Soviet Union saw the emergence of many new technologies in many different types of production processes which assisted in their growth for a time. This was not a competition-based economic system. So how was it able to be so successful in being toe-toe with the US (if not better at one time) in technology race? One need not look further than read the first few chapters of The Wealth of Nations to answer this quandary. Smith would argue that the Soviet Union – despite being a command economy – had sufficient DoL and it is this division of labour which was responsible for their surge in technological advancement in 50s and 60s. An open competitive marketplace may be where this DoL is optimised but it certainly is not the ‘necessary’ condition for these advances to occur.
Adam Smith however was keen to point out that “the division of labour is limited by the extent of the market”. In other words, Smith was of the view that the greater the extent of the market, the greater the prospect of DoL. This would in turn lead to increased productivity. He stressed on the markets because there is a feedback quality to them which by definition point to (through demand) gaps or openings which can be filled. The invisible hand – a term he coined to describe the corrective behaviour of the markets – is key in his advocacy of markets being that optimum place for DoL to flourish. Indeed he quite elegantly points to the urban-rural divide and how, one can spend an entire life in urban areas and not know how to do basic DIY activities. In cities or urban areas, one can always hire an expert at a cost to do this task ably and effectively. This is not the case in rural areas where survival requires – often intimate – knowledge of various aspects of sustenance. That is why there is a vast wealth-gap between rural and urban areas.
A closer examination of this profound idea tells that this is – rather like Darwin’s natural selection – an extremely simple explanation of why and how we are settled the way we are. It explains why most urban areas throughout the world are more likely to be ports – thereby facilitating trade. It explains why historically civilisations were able to enrich themselves beyond the crude militaristic explanations. It explains why some countries are richer (not withstanding colonialism) and some poorer. It is even relevant to the example of the Soviet Union. The reason why the Soviet Union – despite its massive boom at one point – was unable to sustain itself was because of its failure to appreciate the role of markets in DoL. It failed to take advantage of the natural feedback mechanism which a bottom up market-based economy can employ to create more DoL and thereby more wealth. It also allows us to put into proper perspectives the decadence of ‘western aristocrats’ matched by the decadence of ‘African aristocrats’ and how the latter is a far more significant burden on their society as opposed to the former. E.G West, the author of the paper “Adam Smith’s two views on the Division of Labour” contends that if one is to follow through on Smith’s thinking, a contradiction emerges namely; as wealth increases via DoL, the needs and wants of the population are redefined and as such from a sociological point of view begin to diminish as more prosperity begins to take hold of the work force. While it is an apt summary of the Wealth of Nation, West’s extrapolation towards sociological consequences is both exaggerated and unsubstantiated. It is true that, more wealth does indeed create a situation where the needs and wants of society change to a point- where the old satisfactions may not not be enough. However, it is a mistake in that view is to assume that all economic states are fixed and not dynamic. And that is the key mistake in this analysis; because often it is the aversion to negative utility is what drives prosperity and this is what makes Smith’s approach to this question very robust. In short while lassez faire economics is a concept central to Adam Smith’s thinking; one cannot truly appreciate his final analysis without his discussion on Labour and how that labour is divided in an economy.
Division of Labour (DoL) was central in the origin and use of money. As systems become more complex and difficult to arbitrate, the need for a uniform notational placeholder for value is ever more important. This is where the introduction of money was key, in facilitating more DoL. Many commodities have served as the ‘medium of exchange’ but most nations and societies settled on metals such as gold, silver and bronze as the ideal commodities for this purpose. The reason for that is twofold; firstly because they were durable and portable meaning that they did not depreciate in their own value and were relatively easier to carry around. Secondly they were divisible which meant that even more complex trades of goods and services would be easier to undertake to everyone satisfaction. The ‘divisive’ nature of the metals eventually leads to coinage and currency. To digress briefly, this introduction of coinage meant that the value of metals went down and this ended up benefiting borrowers at the time who were now able to pay back their creditors with lesser valued ‘money’. There are quite solid foundations in the book and elsewhere that suggest that this was a way for the aristocracies to alleviate their own financial burden
Smith saw the advent of money as an important thing, not because it was a more comprehensive store of value but because it facilitated more DoL. It would be easier for people to return the favour in monetary terms as opposed to entering into negotiations over how much different types of labour was worth. This is a counterintuitive development in Smith’s thinking because throughout he has maintained and championed the free bottom up flourishing of trade and markets without influence from above. However, this has led him – with consistency it has to be pointed out – endorsing what is effectively top-down arbitration in terms of money. Perhaps this is an inkling towards the fact that his ideas maybe somewhat different today had he been alive to witness the exponentially more complex economic systems of today. He might have even favoured Keynesian top-down thinking if they facilitated more DoL. In fact he might have been pro-immigration not because it may the means of alleviating some the populations of failing states – compelling though this argument is – but primarily because that would be good for DoL.
Adam Smith’s discussion of value is also dominated by the concept of labour. He defines the value of commodities by the labour embedded and the labour commanded by those commodities. A paper called ‘Command over Labour – a study in Misinterpretation’ by V.W Bladen contends that many of his ideas were misappropriated in aid of concepts which Adam Smith himself would not be comfortable with. The important thing to remember in these situation is to consult the primary text and Adam Smith’s concept of Value is dominated by Labour. The following extract more than makes this clear;
“What every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. That this is really the foundation of the exchangeable value of all things, excepting those which cannot be increased by human industry, is a doctrine of the utmost importance in political economy” (Smith, Wealth of Nations 1776)
Moreover he puts the emphasis of that in ‘primitive societies’ the amount of labour used in producing a good is what determined its value (in exchange). But he did not extrapolate this concept into more advanced economies; he stated that the market price is not representative of the labour cost. He explained this by pointing to the fact that the entire produce of labour ‘does not always belong to the labourer’. He was intimating to the myriad forms of favours other people have to do for him to produce the output (most case being the land owners of course) According to Smith, the value of the good or commodity would reflect that layer of complexity
The emphasis of value is firmly put on to labor in no uncertain terms. This is also evident in his subsequent criticisms of groups of ‘politically aligned’ individuals who use their influence (also known as special interest lobbying in modern parlance) to manipulate the governing bodies to cater for their interests which may not necessarily linked to the interests of the collective economy. In fact this is the key point where his criticism of government involvement begins to take shape. He felt that governments or states are entities subject to easy manipulations from the interest groups and thus are able to secure unfair subsidies which give them an unfair advantage into proceedings. State-subsidies drew people to the trades that would otherwise be normal, and as a result it would collectively lower their wages. As mentioned before, Smith views labour as the opposite of utility (e.g pain, toil and effort) and value can be seen as a minimization of labor. As a result activities from which one draws pleasure are not quite labour in Smithian terms. They can be partially labour, but not quite in the same sense as he would understand it. And he saw value first and foremost as the amount of labour it can command and embody. The following passage makes this abundantly clear
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary” (Smith, Wealth of Nations 1776)
However his discussion on value does not end at as a mere function of labour (though it is highly significant). He points to the usefulness and utility of a commodity as a chief identifier of value in a commodity. This however proves no more than a good rule of thumb as the diamond-water paradox exemplifies. He articulates this with characteristic eloquence that is very evident in the entire book
“The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use ;’ the other, ‘value in exchange.’ The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” (Wealth of Nations)
Once again it is his ability to spot the paradoxes in his own ideas which make him a formidable theoretician. A paper entitled “Adam Smith’s approach to the Theory of Value” by H.M.Robertson and W.L Taylore discusses the genesis of Smith’s thinking into this. While there is speculation around the various concepts that existed prior to Smith, the comprehensive nature of Smith analysis is seldom rivalled. Indeed this model of Value as a function of use or utility fails to account for the Water-diamond paradox, however his work in identifying this was key in the development of theory of Marginal Utility Theory by his successors such as Jevons, Menger and Walras. His ideas about Value do not begin and end with a discussion on Use alone. He also defined Value ‘in exchange’ i.e the relative proportion with which a good exchanges for another good. This could also be a discussion of relative prices of goods if money is injected into the analysis. S Kaushil, the author of ‘The Case for Adam Smith’s Value Analysis’ delves deeper into this point. He points that the differences in his definition of values is not of a conceptual nature but rather as a consequence of his cause versus measure analysis. What causes this value and how to measure are two different things; and this is something Smith was mindful and was thoroughly consistent in articulating.