On Adam Smith’s supposed commitment to the labour-embodied theory of value:
the proof of Peach’s pudding

Roy H. Grieve

Terry Peach has recently (2009, 2020) been putting forward the - one might say “surprising” – thesis that Adam Smith  was  a convinced and consistent proponent of the labour-embodied theory of value. Peach holds that, contrary to the conventional view, Smith did not limit his application of the labour theory to an “early and rude” state of society,^[1] but continued to apply that proposition even in analyzing the working of a “commercial” (contemporary) economy. The present author (2019) may have been the first to present a critique of Peach’s idiosyncratic reading of Smith’s magnum opus.^[2] I thought I had dealt pretty comprehensively and conclusively with Peach’s unorthodox conception. Peach, however, evidently unfazed (2020), defends his controversial “reappraisal,” dismissing my objections as a “misfiring critique”. In this note I continue to question the validity of Peach’s “reappraisal.” I focus here firstly on the question of what Peach understands by the labour theory of value and then discuss more fully his efforts to demonstrate that certain passages, cited from the Wealth of Nations, constitute undeniable evidence of Smith’s enduring continuing commitment to that theory. The proof of the pudding is said to be in the eating. The proof of Peach’s pudding lies in the validity, or otherwise, of his contention that throughout the Wealth of Nations, Smith made frequent resort to the labour theory of value.

            We begin by taking note of what Peach understands by “a labor theory of exchangeable value.” (He uses the phrase “labour theory reasoning” as synonymous  with the “labour theory of value.) For one thing he does not subscribe to the “idiosyncratic” view (“attributed to me by Grieve,”) that, the labour theory implies that “commodity values correspond to labor-embodied values” (as they would under “early and rude” conditions). Peach adds (2020: 172):

The type of “labor theory” I discuss and do attribute to Smith makes no use of a concept of individual or absolute value in Grieve’s sense, but instead relates to  the explanation “(of changes) in exchangeable . . . value either in terms of  ‘(changes in) quantities of labor’ . . .  expended on their production, or to (changes in) the ‘real price/value’ of commodities, understood as a function of the quantities of labor expended in production.

 And further, Peach (2020: 172-3):

For the purposes of this article, and without claiming that this is the only possible construction, a labor theory of  exchangeable value should  be understood as a theory maintaining that (changes in) exchangeable value between members of some designated class of produced commodities are determined by (changes in) the quantities of labor expended on their production.

             It would appear that particular emphasis is here placed on “changes” in quantities of labour” and on “changes in prices.” In the case of a normal exposition of the labour theory of value, insertion of these phrases would be redundant. We suspect, therefore, that what we are dealing with here is not a normal explanation of the labour theory of value. We surmise that Peach’s emphasis on changes in prices and changes in labour embodied, is intended to suggest the understanding that, while prices may, or may not, correspond to labour embodied, changes in the quantity of labour embodied must necessarily bring about corresponding changes in commodity prices. In other words, the labour theory of value (or rather Peach’s version thereof) focuses not so much on a given (static) relationship between labour embodied and commodity prices, but attaches particular importance to changes in the quantity of labour embodied, as responsible for changes in commodity prices.

           We find another peculiarity in Peach’s understanding of the meaning and implications of the labour theory of value. He seems to hold that - even in the “commercial” world with prices not necessarily equal to labour embodied - if a change in the quantity of labour embodied in a particular commodity occurs, and along with that, there (naturally, ceteris paribus) is induced a change in the price of the commodity, that scenario is to be interpreted (regardless of conditions elsewhere in the economy) as implying use of the labour theory of value. The crucial factor creating the link with the labour theory is apparently that  a commodity price change is directly attributed to a change in the quantity of embodied labour.

           Note how questionable this is: if, in the “commercial” world, a change in labour embodied and consequently of price occurs, affecting only one specific commodity, that attribution of cause and effect (respectively to the former and the latter changes) is described by Peach as an instance of “labour theory reasoning”, or, in other words, is regarded as an application of the labour theory of value.

          To attribute such views (at odds with what we normally understand as implied by the labour theory of value) to Peach, may seem far fetched, but we should notice  (this is further discussed below) how he, time and again, finds occasions of Smith employing with reference to the commercial society (when prices need not correspond to labour embodied) what Peach calls “labor theory reasoning.” But, in the instances cited, all that is  happening is that an increase or decrease in quantity of labour embodied is understood to result in an increase or decrease of the price of the commodity in question. That, per se, has nothing to do with the labour theory of value. Nevertheless, these instances are presented as examples of Smith employing the labour theory and not confining its application to an “early and rude state of society.” Peach finds several such cases. Our point is that it is open to question  that these have anything to do with the labour theory of value.

 I. Smith’s alleged commitment to “labour theory reasoning”

We now turn to consideration of instances identified by Peach as evidence of Smith’s continuing adherence to the labour theory of value, making use of that proposition even when analyzing the contemporary “commercial” economy in which, along with labour, capitalists and landlords compete for (and capture) shares of the output produced.

          In working through Peach (2020) we encounter several cases of what Peach regards as “labour theory  reasoning” – by which he appears to mean “use of the labour theory of value” – reasoning which, from the conventional reading of Smith, is out of place. Do  these examples actually lend support to Peach’s contention that Smith did not, as is generally believed, confine his application of the labour theory to the “early and rude” state of society?

          Consider first the case of “the recent high price of corn.” As Smith observes, recognition of the fact that the money price of corn having in recent years remained abnormally high relative to money wages, raised the question of what was responsible for that state of affairs. Did this phenomenon - as some observers explained it - simply represent a continuation of the historical trend for the value of silver to fall on account of its growing world supply from the mines of the Americas? No, says Smith, that is not the case: the true explanation is that, because of a succession of poor harvests, the supply of corn has fallen significantly below normal, causing the silver price of corn to reach unusually high levels. (In other words, the source of the disturbance in relative values lies with the cost of production of corn, not with the supply of silver.)

          Smith’s explanation constitutes, we believe, a straightforward and sensible interpretation (according to the labour-commanded standard) of the result of recent poor harvests. Peach, (2020) however, takes exception, reading this as an instance of the “corn-commanded standard” failing Smith’s “labour-embodied purpose.” Peach holds that Smith,  approaching the question initially in terms of his corn-commanded standard of value, on realizing that that standard gave – for him – the “wrong” answer (directing attention to the fall in the relative value of silver, presumably due to an increase in its supply), accordingly switched to  the labour-embodied standard.

          There is no reason why, as Peach supposes, Smith should have been employing corn-commanded in this instance; that standard was for use in special circumstances; in this case Smith’s labour-commanded would have been his natural (and perfectly adequate) choice. It rather looks as if Peach alleges use of corn-commanded simply because that gave him the opportunity to say that Smith was forced to change to labour-embodied to get the answer he wanted. Thus (allegedly) Smith was able to offer a labour-embodied explanation for the phenomenon at issue.

          Smith’s reason, as suggested by Peach, for so doing – was anxiety to refute the explanation, indicated by the corn-commanded standard, that a fall in the price of silver was the causative factor. We believe, rather, that Smith was simply making the point that corn had become expensive for labour to buy – due to weather conditions, not to a general change in the purchasing power of silver. However, according to Peach, Smith’s  abandonment of corn-commanded, and his focus on the increased labour requirement of corn production, is clear evidence of his continuing adherence to the labour theory of value. According to Peach, Smith’s underlying (but concealed) preference for the labour theory, explains the fact that Smith did not ditch the labour theory along with the assumption of an “early and rude” state of society.

          As he attempted to demonstrate, Peach does not believe that payments of rent or of profit are incompatible with, and undermine the labour-embodied theory of value. We submit that Peach’s interpretation is without foundation. To allow that increased labour inputs cause the cost of production of a commodity to be higher is perfectly compatible with Smith’s labour-commanded treatment of value (the commodity in question commands more labour); higher labour costs do not, in themselves, even when giving rise to higher prices, imply use of the labour-embodied theory. (Thus, to employ a modern example, to suggest that adoption of one-man operation for a fleet of buses would reduce costs, would not be read as implying acceptance of the labour-embodied theory of value.) I noted (Grieve, 2019) that Peach was, in using such examples, relying on an improper interpretation of the labour embodied theory of value, but my point was subsequently ignored in Peach (2020).

          This misunderstanding - that attribution of a rise in prices to increased labour costs exemplifies “labour theory reasoning,” - is responsible, in both Peach (2009) and Peach (2020), for more than a one-off instance of confusion. As we note below, when on several occasions Peach reveals his apparent belief that whenever Smith suggests that higher labour costs are responsible for higher commodity prices, he is thereby reasserting the labour-embodied theory of value. That may accord with Peach’s interpretation of the labour theory, but we see it as indicating a fundamental error in Peach’s reading of that theory (and of Smith’s understanding of it.) Smith was merely allowing, without adopting the labour-embodied theory, that any increase in labour (or other) costs, incurred in production must, together with a profit mark-up, (ceteris paribus) add to the necessary supply price of the commodities concerned.

          Further examples of Peach mistakenly attributing to Smith adherence to the labour theory of value may readily be found. Thus Peach observes  (2020: 179):

The proportion between the value of gold and silver and that of goods of any other kind, depends in all cases ... upon the richness or poverty of the mines ... It depends upon the proportion between the quantity of labour which is necessary in order to bring a certain quantity of gold and silver to the market, and that [i.e. that quantity of labour] which is necessary in order to bring thither a certain quantity of any other sort of goods.

            Peach continues:

At the expense of stating the obvious, the “richness or poverty of the mines” is distinguished in terms of the quantities of labour expended on bringing the metals to the market: a case of “labour embodied reasoning” that should be accessible even to the most unimaginative reader.

         We reiterate: while the richness or poverty of the mines will certainly be reflected in production costs and consequently the price of what is produced, recognition of the fact of higher labour costs causing higher commodity prices does not, of itself imply adherence to the labour-embodied theory of value. For that to be so, it would have to be supposed also that rent and profits did not contribute to costs of production.

         Again (2020: 179) we find Peach highlighting what he supposes to be Smith’s propensity to resort to the labour-embodied theory of value. As confirmation of Smith’s supposed use of “labour theory” reasoning, he points to Smith’s argument (1981 [1776]: I.xi.g.28) that, on account of “the greater expence (sic) of land carriage in Europe, it costs more labour, and therefore more money, to market commodities in Europe relative to [the empires of Asia]” where “the extent and variety of inland navigations save the greater part of this labour and consequently of this money.” Smith, in thus explaining these differences in exchangeable value in terms of differences in quantities of labour expended is once again interpreted by Peach as employing the labour-embodied theory. Our response is again that, while it may be indisputable that these differences in transport costs, reflect differences in labour expended, this nevertheless cannot be cited as a “case of labour-embodied thinking” - unless it were understood that no elements of profit or rent entered, along with wages, into the costs of the commodities transported.

         If we now turn to Smith’s discussion of the observed fact that the price of corn is higher in Amsterdam (which imports corn) than in Dantzick (sic) from whence it is exported, we encounter yet another instance of Peach wrongly reporting Smith  to have resorted  to  the  labour theory of value. Thus: Smith (1981 [1776]: I.xi.e.38) “It does not cost less labour to bring silver to Amsterdam than to Dantzick: but a great deal more to bring corn. The real cost of silver must be very near the same in both places; but that of corn must be very different.” To Smith’s observation, Peach responds (2020: 187): “In terms of corn, ‘the real cost of silver’ would be lower in Amsterdam, from which I inferred that Smith was again falling back on a direct identification of ‘real cost’ with labour expended.”

         We suggest that Peach’s inference is mistaken: he has incorrectly imagined that Smith was employing his corn-commanded standard and so, on realizing that that standard implied (contrary to the observed fact) a drastic fall in the real value of silver, again turned to labour embodied to explain the relative values of silver and corn. What Peach does not appreciate, is that, in all probability, Smith was all the time (and appropriately) employing labour-commanded.

         Finally, notice the same confusion on Peach’s part as to how Smith explained the fact of corn being dearer (in silver) in “great towns than in the countryside” where it is grown. Smith (1981 [1776]: I.xi.e.38) points to the “real dearness” of corn: “It does not cost less labour to bring silver to the great town than to remote parts of the country, but it costs a great deal more to bring corn.” Again, while we reckon that Smith is (appropriately) employing labour-commanded, Peach attributes a labour embodied explanation to him. Thus Peach (2020: 187):

   As I commented: “silver is ‘really cheaper’ (its price/real value is lower) in great towns, because, on Smith’s own criterion, it commands less corn . . .   Now, unwilling to follow the logic even of his own corn-commanded measure, Smith has identified ‘real dearness’ and ‘real cheapness’ not with the results of his ‘measure’, which gave the ‘wrong’ result, but directly with the quantities of labour expended in production.

        Notice that, in terms of Smith’s labour-commanded standard, far from being lower, as supposed by Peach, the real value of silver (labour commanded) is actually not much altered.

        It should, we think, be recalled that, as we understand him, Smith introduced the corn-commanded standard of value as a practicable proxy for his chosen labour-embodied standard – for use only when the price of labour was not available to be set against other prices in order to calculate “real value”.^[3] But Peach seems to suppose that Smith, after having introduced the concept of “corn-commanded” was, as a matter of course, applying that standard even in what we might describe as “everyday” circumstances, with all information required to apply the labour-commanded standard to hand. We see no reason why Smith should, in these instances, have gone for corn-commanded. It appears that, on several occasions, Peach incorrectly assumes that Smith is employing corn-commanded, when it is more likely that Smith was thinking in terms of labour-commanded – his chosen standard of “real value.”

         We hold that, as regards what Peach describes as instances of Smith’s “labour embodied thinking,” he quite mistakenly is reading these passages as demonstrating Smith’s commitment to the labour-embodied theory. We reject his contention that Smith, merely by allowing that changes in labour inputs can affect real commodity values is making use of the labour theory of value. Peach’s argument  evidently depends upon a non sequitur.

         The essential labour theory proposition is that, throughout the economy, overall costs of production  are solely attributable to (direct  or indirect) payments  for  the  services  of   labour.^[4] As that is not the context in which the several “labour theory passages” identified by Peach are found, they cannot be read as instances of application of the labour theory of value. It therefore makes no sense to charge Smith of resorting, beyond the bounds of an “early and rude society”, to habitual application of “labour theory reasoning” (aka the “labour theory of exchangeable value”).

II. Conclusion

           What Professor Peach apparently understands by “a labor theory of exchangeable value” (or by “labour theory reasoning”) and its implications, bears little relationship to what is generally understood by “the labour-embodied theory of value”. For one thing, where Smith was thinking in terms of “labour-commanded” Peach supposes that Smith had reverted to “labour-embodied;” and again, instances of “labour theory reasoning” presented by Peach as exemplifying use of the labour theory of value, we read as amounting to nothing more than expression of the innocuous proposition that “a change in the price of a commodity may be expected (ceteris paribus) to be brought about by a change in the quantity of ‘labour embodied’ in that commodity”. That statement, per se, carries no implications as to the validity or otherwise of the labour theory of value. Peach seems to be  finding, if not “reds under the bed,” what we see as imaginary cases of use of the labour theory of value sprinkled about the text of the Wealth of Nations.

        In the proverbial nutshell, the “labour-embodied theory of value” which we attribute to Smith was intended for use only with reference to “early and rude” conditions and is very different from Peach’s version of the labour theory which is supposed to be applicable to a contemporary economy in which labour, capital and landed proprietors compete for shares of income. We  find that none of the instances of “labor theory reasoning” attributed to Smith by Peach require Smith to have resorted, beyond “early and rude” conditions, to the labour-embodied theory of value. The “pudding” fails the test.

 

References

Grieve, Roy H. 2019. “On Terry Peach’s Unconvincing ‘Reconsideration’ of Adam Smith’s Theory of Value.” History of Political Economy 51 (4): 753-7.

Peach, Terry. 2009. “Adam Smith and the Labor Theory of (Real) Value: A Reconsideration.” History of Political Economy 41 (2): 383-406.

Peach, Terry. 2020. “Adam Smith’s Labor Theory of (Real) Value: The Case of a Misfiring Critique.” History of Political Economy 52 (1): 171-90.

Smith,  Adam. 1981 [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis, IN, USA: Liberty Fund, Inc.

 

^[1]Peach (2020: 171) observes that “As I stated at the outset of my [2009] article: ‘My purpose ... [is] to question the widely held opinion that Adam Smith confined his use of a labour theory of exchangeable value to an ‘early and rude state of society’ in which independent labourers exchange the surplus products of their labour. As I propose to establish, Smith continued to apply labour theory reasoning to the later commercial society, both to explain static exchangeable values and their changes.”

^[2] Perhaps Peach’s “reinterpretation” had so far not attracted much notice. Peach (2020) thanks me for drawing attention to his 2009 paper.

^[3] Note: we do not accept Peach’s theory (Peach 2009) that Smith adopted corn-commanded  as a stepping-stone towards affirmation of the labour-embodied theory of value. See further Grieve (2019).

^[4] Peach, we are sure, (see 2020: 176) would not agree, but would be happy to accept a “proportional” version of the labour theory of value, which would apply if, across all industries, commodity prices exceeded labour costs by an equiproportional mark-up for profits plus rent. We do not consider that proposition acceptable as a version of the labour theory of value: (1) Smith’s (fundamentally important) association of labour value prices with particular (classless) social conditions is ignored; and (2) in sidestepping the consequent difficulty, resort to the condition of equal proportionality required in all industries, of labour and property incomes, must be considered unrealistic in the extreme.