Price, value, Adam Smith, and the exorcism of significance

Came across some notes on The Wealth of Nations, attributed in the HTML (and in the URL) to Michael A Tate. I went right away to Tate's notes on my favorite part of Adam Smith's book -- Book I, Chapter VI -- where Tate says only

Smith argues that the price of any product reflects wages, rent of land and "profit of stock," which compensates the capitalist for risking his resources.

I'd say much more: Smith comes up with the concept we now call the factors of production: not a detailed list of inputs, as it is sometimes given, but broad categories of cost -- land, labor, and capital. The costs are natural resource costs, wages, and profit. These, according to the title of Smith's chapter, are the component parts of the price of commodities. This is one of the most useful concepts I've ever come across.

In Smith's time the three classes associated with these cost categories were, as I have it, the aristocracy (land), the commoners (labor), and those who accumulate stock (capital). Smith simply looked at the world around him and described what he saw.

Things are similar today except that we've not had an aristocracy for a good long time. And "land" now seems to be counted as a financial asset rather than a natural resource. So instead of an aristocracy, it seems we have those who accumulate financial wealth, and its cost (finance). We still have cost categories, but the list of categories is a little different.

Anyway, looking thru Tate's notes, I found this quote from Smith's Chapter Five:

The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.

Tate's immediate response:

This is known as the labour theory of value, a defining feature of classical political economy.

I've heard of the labor theory of value but I never knew what it was, so I followed the link. Wikipedia says:

The labor theory of value (LTV) is a heterodox theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it, rather than by the use or pleasure its owner gets from it (demand) and its scarcity (supply).

and

Mainstream neoclassical economics tends to reject the need for a LTV, concentrating instead on a theory of price determined by supply and demand.

Okay. So they reject the need for a theory of value, in favor of a theory of price. Yes, I've seen it: They say that prices determine the value of things. The value of a thing is equal to what we are willing to pay to buy it. Or to what we can sell it for. They say.

I have some trouble with that. When I guess the price of a thing, the going price is often three times my guess, or more. And even my low-side estimate is, in my view, usually higher than what I think the thing is really worth.

Nay, I don't even think in terms of what a thing is worth, but only in terms of how much I'd have to pay to buy it.

Value is what a thing is worth. Price is what you have to pay to get it. These days, there seems to be little connection between value and price.


I like Smith's idea that the value of the labor that goes into making something is the measure of the "exchangeable value" of the thing. It's an important concept because it ties monetary value to real output. I don't see "supply and demand" doing that. Not any more.

Supply and demand is just an arrangement. It's the way things happen to be, these days. When you can buy a hardened washer for your lawn tractor for $2 or $3 in one place and $12 or $14 in another, price no longer signifies something meaningful. It's just what we have to pay to get a thing. And please don't explain to me that the $14 "includes shipping". That's just another example of the exorcism of meaning from the concept of price. (Anyway, they tell you shipping is free!)

On top of that, we've got everyone from Universal Basic Income supporters to Helicopter Drop theorists saying it might be a good idea to throw money at people as a way to make the economy work better. I have to say (number one) that throwing money at people has nothing to do with the way the economy works.

I have to say (number two) that if we're throwing money at people so people can buy things, then we've got consumers with income that has no relation to what they've given up in exchange for that income.

So we've got consumers with income that is doesn't match up with work done, buying from producers setting prices that don't match up with the costs of production.

The economy exists in the exchange of value. When things are exchanged at prices that have no significance, the price system no longer conveys useful information.