Political Economist

1. Discuss the concept of productive labor in Smith. Why is the concept introduced? What is the characteristic structure of the argument? What are some implications of the concept? What arenas, if any, do you think it might apply to in the modern world?

The concept of productive labor and its differentiation from unproductive labor has an important meaning in most classical political economists. Even though, Ricardo did not use this term, it is certain that he also adopted the same notion. Furthermore, it is well-known that Marx tried to reconstruct the concept of productive labor in his major critique of political economics works.

Firstly, Smith distinguished productive labor from unproductive labor. The distinction between the two has nothing to do with moral judgement in the first place. This implies that labor which is not directly associated to material production, such as sales labor, military service, and government officials use up the wealth of scarcity.

Smith provided some examples for this labor. According to him, the sovereign with officers of justice and war who serve him, public servants, those who are engaged in the protection, security and defense of the commonwealth, churchmen, lawyers, physicians, players, buffoons, musicians, actor, etc., do not add to the value of the materials. Even though, their labor deserves to be rewarded, their labors do not fix or realize themselves in some particular subject or commodity. Rather, their labor products perish in the very instant of their performance. In this sense, they are maintained by the annual produce of the industry of other people.

The reason why Smith introduced this distinction between productive labor and unproductive labor can be traced back to his main theoretical concerns. According to Ronald Meek’s explanation, Smith, like contemporary economists, regarded the accumulation of capital as the basic cause of the increase of wealth, and therefore, his theoretical systems were primarily designed to illustrate the nature, causes and effect of capital accumulation. While doing so, Smith criticized and attacked certain socio-political institutions and attitudes hindered and discouraged the effective accumulation of capital, the general increase of the wealth of nations. (R. Meek, “Ricardo and the Labor Theory,” Studies in the Labor Theory of Value)

This distinction between productive and unproductive labor is also implicit in Ricardo’s works, even though he did not use these terms. Considering his theory of rent, especially where he dealt with different distribution of value into different social classes, and his passionate advocate of import of cheap corn from other European countries, Ricardo can also be considered a theorist who drew distinction between the two.

Another interesting point related to this concept is that modern neoclassical economists also have similar distinction between productive labor and nonproductive labor. However, contrary to Smith, their concept of nonproductive labor is only the thing that is oriented to non-market system. This means that all labors which produce certain amount of incomes (not values) are considered to be productive labor. This neoclassical conceptualization of (non-) productive labor seems to fails to understand the nature and cause of value, which had been a central issue or theme in classical political economy.

Finally, we can think of some implications of the distinction between productive labor and unproductive labor. To apply Smith’s notion to modern world, every politicians, government officials, and those who are mot engaged in direct material production, can be described to be nonproductive labor, even though they produce specific utilities for social community. Even though, it is impossible to apply this concept to complicated modern economic world without any modification, the very notion, point of which the only labor directly engaged in material production, may be used as a sort of parameter to which social scientists including economists estimate the social significance and utility of each occupation.

In summary, the concept of (non-) productive labor played a significant role in Smith’s theoretical framework. With this concept and distinction, he was able to reveal the nature and causes of the wealth of nations.  With this concept, he was able to justify the need for the accumulation of capital, and attack certain social institutions which hindered the increase of the wealth of nations.

2. What is meant by ‘value in use’ and ‘value in exchange’? What factors regulate each?

The concept of value has significant meanings in classical political economy. Major classical political economists, such as Smith, Ricardo, and even Marx, started their respective theory with this concept.

To begin with, to Smith, the word value has two different meanings: one is the utilities of some particular objects, and the other is the power of purchasing other goods which the possession of that object conveys. The one is called ‘value in use’ and the other, ‘value in exchange’. According to Smith, the commodities or goods which have the greatest value in exchange have frequently little or not value in use. Smith gave an example for this distinction with water and diamond respectively. (A. Smith, The Wealth of Nations, Book 1: Chapter 4)

Like Smith, Ricardo also drew a sharp line between value in use and value in exchange (exchangeable value). The exchangeable value has the same meaning as ‘exchange rate of other commodity’ and ‘exchanging power’ of particular commodity. If particular commodity can be exchanged on the market, it has to have utilities which satisfy social needs. Ricardo pointed out that commodities which were use value derived their exchange value from following two sources: scarcity and quantity of labor requited for its production.

According to him, exchange value which is determined by its scarcity can only forms a small part of masses of commodities. For example, the quantities of scarce paintings, picture, stamps, statues, and rare wines which can only be produced specific regions of the earth are highly limited, and their value is not influenced by quantity of labor requisite for their production. Utilities are not the measure of exchange value, although they are essential to it.

On the contrary, exchanges value which are determined by the quantity of labor required to obtain them form vast bulk of commodities. The value of these commodities is dependent on the relative quantity of labor which is necessary for their production. In other words, the quantity of labor embodied in commodities regulates their exchangeable value. (D. Ricardo, The Principles of Political Economy and Taxation: Chapter 1 On Value)

With this distinction, Smith and Ricardo explore the determinants of exchange value. If vast bulk of commodities or goods have exchange value, and they are actually exchanged with each other on the market, what kind of rule regulate their relative value of commodities? And what is the underlying principle which regulates market price? What’s the relationship between price and value? Smith and Ricardo tried to deal with these questions in their respective works. Whatever their concrete answers may be, their common theoretical questions would be called the rudimentary ‘labor theory of value’.

To sum up, the concept of value and the distinction between value in use and value in exchange dwell on the center of classical political economists. With this distinction, they were able to develop their researches to the general principle which regulate the relationship between value and labor, the source of income, different components of income, and their relative distribution.

3. What are the sources of profit and rents? What are the conflicting arguments in Smith, and where does Ricardo stand on the matter? What is the significance of this issue?

The theory of profit was a central issue in Smith’s classical political economy. Smith was the first who appreciate the existence of profits and rent, and accordingly the existence of conflicting social classes. In order to understand his argument on ‘class income’, it is necessary to introduce his basic notion of labor theory of value.

Smith started from ‘early and rude state of society’ where there is no accumulation of capital, no appropriation of land, and thus no profits and rents  in order to develop his theory of value and price. In this imaginary society, competition among producers resulted in equalizing net incomes among them. Smith provided the relationship between beaver production and deer production for examples to illustrate this point. Consequently, incomes become proportional to producers’ labor time in this society. The determination of exchange value by the relative labor time required to its production is the gist of labor theory of value.

Smith went further in order to examine the possibilities of modification of this principle, when modern capitalist production relation was prevailed. According to him, in the more developed situation, there started to be profits and rents because there is ‘stock’ of means of production owned by non-producers. Smith asserted that due to the existence of profit and rent, the rule which was held in rude and early state of society can no long hold.

Ricardo started his theory of value criticizing Smith’s value theory. According to him, even though there are accumulation of stock and appropriation of land, the rule is not necessarily modified. The exchange value of commodities, the relative value of commodities is determined by the relative quantity of labor required for its production. Ricardo pointed out the same logic could also be applied to the rent.

In this sense, the introduction of profit and the appreciation of the existence is a critical point with which reader can differentiate Smith from Ricardo. Even though they shared theory of labor value in common, Smith abandoned his theory on account of the existence of profit and rent.

However, both Smith and Ricardo seemed to fail to understand the nature of profit. They regarded it as a category of income. But they failed to provide scientific explanation of the origin and distribution mechanism of profit and rents.

4. How does accumulation affect the level of the rate of profit over time? What accounts for these changes, and what are some of their implications?

5. How and why does the consideration of equal profit rates alter the relation between the relative price of two commodities and the relative total labor times required for their production?

6. What is meant by Smith’s argument that labor is “the fund which originally supplies all necessaries and conveniences of life?” Does this ignore capital? Land?