Adam Smith and the American colonies : a critique

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BEBR

FACULTY WORKING
PAPER NO. 1503

Adam Smith and the American Colonies: A Critique

Salim Rashid

College of Commerce and Business Administration
Bureau of Economic and Business Research
University of Illinois, Urbana-Champaign

BEBR

FACULTY WORKING PAPER NO. 1503

College of Commerce and Business Administration

University of Illinois at Urbana- Champaign

October 1988

Adam Smith and the American Colonies: A Critique

Salim Rashid, Professor
Department of Economics

Digitized by the Internet Archive

in 2011 with funding from

University of Illinois Urbana-Champaign

http://www.archive.org/details/adamsmithamerica1503rash

ABSTRACT

Two facets of Adam Smith are criticized in this paper:
first, it is argued that Adam Smith's views on the American
Colonies have no theoretical merit at all; secondly, that
Smith never fully accepted the mutually beneficial nature of
domestic trade.

ADAM SMITH AND THE AMERICAN COLONIES: A CRITIQUE

Even the best of men is a strange mixture of truth
and error, of insight and partial blindness, of
careful and slovenly thought and writing.

George Stigler, The Economist as Preacher

In assessing the contribution of the Wealth of Nations shortly
after the death of Adam Smith a writer in Times pointed out that Smith
was noteworthy as the creator of a "system" of economics. While the
principles of the system were not new, the Times wrote, it was Smith
who had argued for it at greatest length. It was a system which
tended to confuse "National Wealth with National Prosperity" — a clear
indication that Smith was seen to hold economic well-being as the
primary ingredient of prosperity. The originality and validity of
Smith's economic analysis — not his sociological insights, or his
historical knowledge, or his political astuteness — must be established
if Smith's fame is to be well-grounded.

In the case of the colonies at least, it would appear that Smith's
rhetoric is of much more importance than his economic reasoning. The

latest editors of the Wealth of Nations R. M. Campbell and A. S.

2
Skinner, frankly say of Smith's criticisms that it is a plausible,

powerful thesis which may be defended on a variety of grounds other

than those on which Smith relied." In other words, if colonial policy

is to be attacked, Smith's arguments are not the ones to use. This

radical implication is not however brought clearly forth and the

variety of praise given to Smith in the rest of Campbell and Skinner's

Introduction makes it impossible for the novice to grasp just how much

-2-

has been left unsaid. In view of the tedious frequency with which the
Wealth of Nations is linked with the American Revolution as harbingers
of a new approach it is worth taking a cold, hard look at Smith's eco-
nomic analysis of the American colonies. In order to avoid the accu-
sation of misrepresenting Smith, I shall quote his own words wherever

rvi 3

possible.

The manner in which the authority of a great name imposes upon us
is instructive. In the course of a fine critique of Adam Smith's
ignorance of the Industrial Revolution, R. Koebner feels it necessary
to praise Adam Smith's views on the "other" revolution — that in the
American colonies. While there is nothing wrong in thus attempting to
offset a critique of one part of an authors work with praise for another
part, it is surprising to find that Koebner quotes Adam Smith as declar-
ing that "parting in friendship" was the best solution to the conflict!
And this in spite of Smith's explicit rejection of the proposal for

peaceful separation and his extensive treatment of the benefits of an

4
imperial federation between the colonies and Britain!

-3-

II.

The section on colonies begins with a review of the motives for
establishing colonies and the history of some colonial ventures from
Greek times down to the Spanish settlements of North America. This is
all routine matter for Smith's contemporaries. Smith warms to his
topic when he discusses the English colonies in North America. They
are the most prosperous of American colonies and they are so because
they enjoy liberty and good lands. This liberty has been beneficially
used by restraining the engrossing of lands and thus permitting labor
to be freely exercised in Agriculture. As for the rules that govern
the trade of the colonies, Smith believes them to have been designed
by merchants who thought of them selves before all else. Nonethe-
less, English colonies are still not so badly off as the colonies of

other nations, primariLy because the colonials are British.

Smith then turns to examining whether Europe has benefitted from

having colonies. In general terms, Smith sees two benefits, the

increase of enjoyments and the increase of industry. Indeed, the wide

variety of new goods made available from America as well as the new

activity they gave rise to are undeniable. It is when Smitli turns to

the colonial system itself, whereby the mother country influences the

trade of its colonies, that we enter a potent field. Smith believes

the monopoly of the colony trade gives each mother country an advantage

over its rivals. This is however immediately and significantly

qualified by Smith. The impact of the above passage relies greatly

on its ambiguity. Are we being told that England would be better off

-4-

with free-trade permitted to its "colonies" even though all other
countries practiced a monopoly of their colony trade? This is obviously
wrong. Any policy feasible under free-trade is scill feasible under
monopoly, so one would scarcely expect a rational monopolist to be
worse off. Or are we being told that England should adopt free-trade
if all other countries also practiced free-trade? This is still wrong
and it is also irrelevant. It is wrong because a country can increase
its wealth above the free-trade level if it can monopolize a commodity —

who can say that the OPEC countries are not richer than they would

u
have been? It is irrelevant because no one can be expected to take

policy decisions on the basis of universal friendship and free-trade.

Smith, however, continues his argument by insinuating that England
has not gained at all from the colonies. The argument that follows
needs careful consideration because there is a substantial gap between
what is actually being argued, which is fairly innocuous and what the
argument seems to imply, namely, that colonies are actually disadvan-
tageous. It is scarcely possible to provide the impact of more than
ten printed pages of argument by means of quotes so the reader is
asked to look carefully at the original. As this is the economic
argument Smith lays greatest stress upon, his economic analysis of the
colonies must stand or fall with this section.

The monopoly of the colony trade raised the profit rate in the
colony trade, attracted capital from other trades and eventually led to
a somewhat higher profit rate than existed before the establishment of
such a monopoly.

-5-

This superiority of profit in the colony trade could
not fail to draw from other branches of trade a part
of the capital which had before been employed in
them. But this revulsion of capital, as it must have
gradually increased the competition of capitals
in the colony trade, so it must have gradually dimin-
ished that competition in all those other branches of
trade; as it must have gradually lowered the profits
of the one, so it must have gradually raised those of
the other, till the profits of all came to a new level,
different from and somewhat higher than that at which
they had been before.

These increased profits, however, constitute a change in direction and

12
not a net increase in trade according to Smith. The redirected

stock of capital will of course be at a relative disadvantage in every

field in which the English do not have a monopoly. Since the general

profit rate has risen higher after the estabishment of the colonial

monopoly, it is but natural that some other markets, which cannot

match the high colonial profits, will now be unattractive to the

English.

All this may be readily granted, but what does it have to do with

the principal question — has Britain grown richer because of the colony

trade? The straightforward answer would be that the higher profits

mean greater GNP. National Income is the most meaningful way of

describing a "richer" economy. That the higher colonial profits

necessitate reallocation of capital from less profitable Europe to

more profitable America is undoubted but how can this deny that the

higher profits do make Britain richer? Smith's whole procedure is a

U
non sequitur.

Smith however is not done yet. He sets up an opponent who will

assert that the colonial trade is more advantageous (we are not told

why) and then proceeds to refute this opponent with his own theory of

-6-

sequent ially beneficiaL investment. This peculiar theory claims that

economic investments may be ranked in a hierarchy, according to the

benefit they provide the economy. In order of benefit, this hierarchy

is First, Investment in Agriculture, Next comes Manufacturing, followed

by transportation and finally comes distribution. A further analysis

then shows that a round-about trade is less beneficial than a direct

one. It is needless to elaborate upon the details because no one today

considers this hierarchical arrangement defensible. Today, we would

simply assert that what is most profitable is best. Campbell and

Skinner call this one of the "less successful" parts of Smith's agru-

ment and go on to emphasize "the great burden" this argument is made to

bear subsequently. Here is Smith applying it to the colonial trade.

The most advantageous employment of any capital
to the country to which it belongs, is that which
maintains there the greatest quantity of productive
labour, and increases the most the annual produce of
the land and labour of that country. But the quantity
of productive labour which any capital employed in the
foreign trade of consumption can maintain, is exactly
in proportion, it has been shewn in the second book,
to the frequency of its returns. ... A foreign trade
of consumption carried on with a neighbouring, is,
upon this account, in general, more advantageous
than one carried on with a distant country;

Since then the colonial monopoly has both turned trade from a neigh-
bouring to a distant country and often transformed a direct trade into
a round-about one, it is no doubt a less advantageous trade. That the
colonial trade has increased profits without enriching Britain and
that it has diverted industry from a nearer to a more distant market
thus constitute Smith's principal economic objections to the colonial
trade.

-7-

In addition to all the above, the colonial trade has also made
British trade insecure by forcing a greater portion of it into a single
American market instead of many small European markets. Smith
likens this situation to that of a blood-vessel which has an immo-
derate amount of blood forced through it and whose rupture therefore
carries serious implications for the health of the body. The repeal
of the stamp-act was popular with merchants precisely because it

assured them that the trade of the colonies would not suffer such a

1 8
complete stop. Smith has now introduced a new criteria for judging

the value of colonial trade, its riskiness, and the validity of this

objection deserves consideration. The argument derives its practical

force from the assumption that all the colonies would act as one unit,

a very questionable assumption in 1776. Analytically, it may be noted

that the argument depends solely upon the concentration of a large

volume of capital upon a single market. There is nothing to say that

such a concentration could not come about even under the most complete

19
free-trade. An unfriendly nation could always stop all trade — as

France tried to do under Napoleon. Indeed, the fact that the colonies

could carry out a non-importation threat is proof of the political

failure of colonial policy, as so many of Smith's contemporaries

observed. To blame economic policy, for political faiLure does not

help to clarify the real issues. Finally, the real comparison should

have been between the volume of trade drawn to the colonies under

free-trade and the volume drawn by monopoly and not a comparison

the latter with the total cessation of trade.

Smith goes on to consider the general effects of laying open the
colony trade and contrasts the general good effecs of the discovery of
the American market with the bad effects that have followed from bad
European colonial policy. It is only because the good effects were so

enormous tht the net effect of the colonies has nonetheless been fav-

21
ourable. This does not by any means excuse actual English policy.

The monopoly of the colony trade, therefore,
like all the other mean and malignant expedients of
the mercantile system, depresses the industry of all
other countries, but chiefly that of the colonies,
without in the least increasing, but on the contrary
diminishing , that of the country in whose favour it
is established. [emphasis added]

It is worth emphasizing Smith's remarkable conclusion. Britain has not

only suffered a "relative disadvantage," the non-argument already

discussed earlier, but has actually suffered because of the monopoly of

the colony trade! In case we mistake his meaning Smith goes on to

21
develop the point at length.

...as capital can be increased only by savings from
revenue, the monopoly, by hindering it from affording
so great a revenue as it would otherwise afford, nec-
essarily hinders it from increasing so fast as it would
otherwise increase, and consequently from maintaining
a still greater quantity of productive labour, and
affording a stilL greater revenue to the industrious
inhabitants of that country. [emphasis added]

The spectacle of a nation of shopkeepers embarking on a policy of loss

and sustaining it for almost two centuries boggles the mind, but Smith,

nothing daunted, develops it with exquisite patience.

How then has Smith analyzed the economic consequences of colonial

policy in North America? He provides us with one irrelevant argument

on the loss of non-colonial trades, another dubious argument regarding

the possibility of a complete cessation of the colonial trade, and,

-9-

finally, clinches the issue with an incorrect argument about the dif-

22

ferent productivities of capital. To make the argument completely

23
decisive he finally adds an objection deriving from human nature.

Nor are the merchants the only individuals to be debauched by high

profits.

If his employer is attentive and parsimonious, the
workman is very likely to be so too; but if the
master is dissolute and disorderly, the servant who
shapes his work according to the pattern which his
master prescribes to him, will shape his Life too
according to the example which he sets him.

The reader is now faced with a considerable problem. Smith's entire

theoretical system is based upon the devotion to gain and accumulation-

an urge that comes with us from the womb and never leaves us till we

are in the grave. And now we are told that this mighty force can be

deranged by success! We are told to trust in a slab of granite that

will bear everything but weight.

-10-

III.

The fact that Campbell and Skinner have attempted to be occassionally
critical of Adam Smith is itself considerable progress. A more tradi-
tional view may be found in the following paregyric, written by an

author who had carefully studied both the prior and the subsequent

25
literature on colonies.

Indeed, his [Smith's] treatment of the subject
doubtless constituted so much of an improvement
over previous English theorizing, that, in respect
to this subject, his work, may be called truly
revolutionary. While, in the field of economic
theory and general commercial policies, numerous
predecessors had anticipated his contributions,
in the field of coloniaL theories, i.e., in the
application of the principles of theoretical
economics to the subject of colonial trade, he had
virtually none. In this specific field, too, all
that was left to his successors was to expand,
elaborate, qualify, and, above all, disseminate his
conclusions. On the subject of colonies, then, The
Wealth of Nations marks the most revolutionary
advance in the evolution of British thought.

It wold be unfair to blame Klaus Knorr for an admiring attitude that is
all too widespread, but one is tempted to remark that Adam Smith's
views on the colonies are spoken of in a vein which suggests that the
Wealth of Nations had never been written.

That there are several perceptive remarks in the chapters on
Colonies, such as the costs involved in maintaining the British mono-
poly, is true, but these are all secondary points in the critique.
The curious point is that none of his major arguments stand up to
careful scrutiny. Now Adam Smith was also a professor of rhetoric and
in his lectures on the subject we find a very careful and detailed
account ot how the readers are influenced by good writing. At more

-11-

than one point, Smith draws a sharp contrast between the styles of the

9 h

orator and that of the historian.

The orator insists on every particular, expresses it
in every point of view, and sets off every argument
in every shape it can bear. What the historians
would have said barely and in one sentence, by this
means is brought into a long series of different
views of the same argument. The orator frequently
will exclaim on the strength of the argument, the
justice of the cause, or anything else that tends
to support the thing he has In view; and this, too,
in his own person. The historian, again, as he is
in no pain what side seems the justest, but acts as
if he were an impartial narrator of facts, so he
uses none of these means to affect his readers. He
never dwells on any circumstance, nor has he any
use for insisting on arguments, as he does not take
part with either side, and for the same reason he
never uses any exclamations in his own person.
When he does so we say he departs from the character
of the historian and assumes that of the orator.

In view of the many accounts that praise Adam Smith's critique of

British Colonial policy one may wonder whether generations of schoLars

have not been persuaded by a master of rhetoric, who moved with ease

from his role as historian to his role as an orator?

-12-

NOTES

Times , 6 August, 1790. In addition to his economic arguments,
Adam Smith also made a number of sociological observations on the
nature of politics in the colonies, on the ambitions of colonial poli-
ticians etc. (Most of these were uncomplimentary.) As these anec-
dotal remarks are not relevant to my critique of his economic argu-
ments, I shall simply ignore them in the body of the essay, but shall
make a conjecture on their possible rhetorical influence in the con-
clusion. Among Smith's contemporaries, Thomas Pownall, the former
Governor of Massachusetts, provided several sound criticisms of
Smith's views in A Letter to Adam Smith... (London 1776). Smith made
no response to these criticisms. A more notorious approach to the
colonial issue was that of the Rev. Josiah Tucker who advocated total
separation. While the most knowledgeable scholars of the colonial
period, such as V. T. Harlow and L. H. Gipson, have given high praise
to Tucker, his merits are generally unappreciated. S. Rashid "He
s tartled. . .as if he saw a spectre: Josiah Tuckers proposal for
American Independence" Journal of the History of Ideas (1982), XLIII,
3, 439-460.

2

"An Inquiry into the Nature and Causes of the Wealth of Nations,

ed. R. M. Campbell and A. S. Skinner (Oxford, 1976), 2 volumes.

(Hereafter WN). I, 34 (emphasis added).

3
My quarrel with Smithian scholarship goes deep and this is scarcely

the place to engage in it. In order to minimize the length of this

piece I shall avoid referring to the secondary literature. For a good

recent example of misleading scholarship however, see, A. W. Coats,

"Adam Smith and the Mercantile System," in Essays on Adam Smith ed. A.

S. Skinner and T. Wilson (Oxford, 1976). Product differentiation is

an unfortunate necessity and this has led me to make several remarks

upon Andrew Skinner, the one recent scholar who has hinted at several

of Smith's faults. It will be clear that I do not feel Skinner (and

others) go far enough. The real question is not whether Smith made

some (minor) mistakes but whether his primary arguments make any sense.

A. S. Skinner, "Adam Smith and the American Economic Community. An

Essay in Applied Economics," Journal of the History of Ideas, 37,

(1976), 59-78. I do follow Skinner in emphasizing Smith's rhetorical

ability as an explanation for his success. I am grateful to A. W.

Coats for insisting upon this point.

4 .

Adam Smith and the Industrial Revolution, Economic History

Review (1959), 381-391.

WN, II, 571-573.

b
op. c i t . , 584.

op. c it., 590.

-13-

8op. cit., 594-595.

9
There is always the possibility of retaliation; but this does not

affect the argument that the enforcement of a monopoly can be benefi-
cial, given the right circumstances. It is not an issue to be
dismissed on theoretical grounds. With some asperity, Smith does
recognize the benefits of trade restrictions in a different part of the
health of Nations, but none of those considerations are brought to bear
on the colonial problem. See WN , I, Book IV, Chapter 2.

Opponents of Free Trade, from Alexander Hamilton and Friedrich
List to modern days, have repeated this objection: proof of the bene-
ficence of universal free-trade presupposes the existence of a (bene-
volent) world government.

WN, II, 596.

12

op. cit. , 598.

op. cit . , bOO.

14

Skinner (1976) summarizes this whole argument without comment.

Indeed, the subsequent remarks would even suggest that Skinner agreed

with Smith's evaluation, op. cit . , 63.

There are various qualifications about externalities, social costs
and so on, which are not relevant to the present argument.

op. cit . , 6U(J.

op. cit . , 604.

L8

op. cit., 505.

19

Indeed some one domestic branch of an economy could also assume

"unhealthy" proportions.

20

up. cit . , 610-611.

up. cit . , 611.

22

My difference with the existant style of Smithian scholarship is

clearly illustrated by the following (penultimate) evaluation oJ
Andrew Skinner, the nost critical contemporary Smithian scholar:

It would, however, be rash to conclude that Smith's
views are unchecked, incomplete and unremarkable.
Criticism of the type we have considered [Skinner has
just cast doubt on several aspects of Smith's analysis,
facts and originality], although perhaps justifiable
given the elaboration of Smith's argument, only teaches
us caution in reading Smith's account and confirms its
positive value [emphasis added], up. cit., 77.

-14-

Araong the items of positive value noted by Skinner are the differential
growth rates of Britian and the colonies — well-known before Smith as
Skinner himself notes — and the advocacy of economic union — a policy
which had also been well discussed, especially in the context of
Ireland. How the fact that Smith did not fall behind his age on two
relatively commonplace issues serves to rescue his reputation is a
mystery to me.

Skinner's final evaluation of Smith as a consummate rhetorician is
excellent and I follow it in my conclusion.

23

op.

cit. , bl2.

Ik

iip.

cit*, b 1 2 .

Klaus Knorr, British Colonial Theories 1570-185U (Toronto, 1944),
175. Without admitting in quite explicit terms the utter failure of
Smith's economic analysis of the colonial problem scholars try to
achieve perspective either through "historical" analysis, as in the
earlier referred to piece by Coats, or focus on Smith's ideas in a
political framework, e.g., D. Winch, Adam Smith's Politics (Cambridge
1978). It is indicative of the reverence with which Smith is treated
that all his mistakes require "explanation." An impartial spectator
may be amused at the treatment meted out to one who is said to have
claimed that the free expression of ideas was the surest road to the
truth.

Lectures on Rhetoric and Belles Lettres ed. J. M. Lothian
( London, 19b3) , 31-32.

Acknowledgements: I am grateful to Arthur Diamond, Larry Neal and

/\. S. Skinner for their most helpful comments.
A. W. Coats kindly provided me a long and extended
critique of an earlier version of this essay, but I
regret to say that our differences still continue
to be quite sharp.

U/124

SMITH, MARX, AND SURPLUS-VALUE

The problem is not how did the socialists reach their revolutionary
conclusions, but rather how did the classics reach their conservative
conclusions .

Gunnar Myrdal

I.

In view of the detailed credit given to Adam Smith in the Theories
of Surplus Value it is surprising that the Smithian parentage of
Marxian surplus value has not been generally recognized. The fact,
however, needs to be advertised more widely, especially since it bears
not only on our understanding of both Karl Marx and of Adam Smith but
also on the entire debate regarding value that pervaded classical eco-
nomics. A careful reading of this issue suggests a reading of these
authors that "solves" seemingly contradictory statements by referring
them to different orders of reality. Before forming a final judgment
on the validity of such an approach the neo-classical economist is
asked to recollect how plentiful are the theorems showing the impos-
sibility of forming accurate economic aggregates and how more plen-
tiful are models making use of just such aggregates.

That the concept of surplus-value is central to the economic

aspects of Marxism would appear to be an uncont roversial statement.

The origins of the surplus concept are therefore of some interest.

Marx himself stressed the difference between arriving at ideas and

explaining them in the second German edition of Capital, Book 1 . "

Of course the method of presentations must differ in
form from that of inquiry. The latter has to appro-
priate the material in detail, to analyse its dif-
ferent forms of development and to track down their
inner connection. Only after this work has been
done can the real movement be appropriately pre-
sented, (emphasis added)

Who, if anyone, did Marx adopt the surplus-value concept from'

-2-

In a perceptive article on the importance of simple primitive

economies in guiding the concepts of classical economists Stanley H.

Moore draws out the various senses in which a labor theory of value

can be used.

There is the proposition that long-run prices of
freely producible commodities are determined solely
by labour costs. I shall call this the labour
doctrine of price. There is the proposition that
the real cost of anything is the quantity of effort
or sacrifice entailed by the labour of producing
it. I shall call this the labour doctrine of real
cost . There is finally the proposition that for
any economy — viewed as a whole and through time —
natural resources are free requisites of production
and capital goods are produced requisites of pro-
duction, so that for a capitalist economy — viewed
from this standpoint — the aggregates of rent and
profit represent deductions from the aggregate
product of labour. I shall call this the labour
doctrine of surplus.

Most of the literature has focused upon the first two aspects of
the labor theory of value but it is the third that is of greatest nor-
mative importance because it sets the tone of one's entire approach to
economic problems. The distinction between "essence" and "appearance"
is of considerable importance in Marxist thought and is worth recall-
ing. "Essences" are a higher and more basic order of reality than
"appearances." in our present context, prices are immediately visible
and serve as appearances while the underlying labor-values form the
essence. If prices come to reflect labor-values, this is most welco-
me; but even if they do not, it is the labor doctrine of surplus that
is fundamental.

-3-

II.

Even before Marx began a detailed study of political economy he
had already determined that labor held the key to the problems of
modern civilization. In the Economic and Philosophical Manuscripts,
Marx had already reached the conclusion that alienated labor was the
cause of the inhumanity of capitalism. It was his reading of the
political economists which led him from the individualistic viewpoint
to a more social one. In tracing the influence of Adam Smith on Marx
it is important to note that Marx had read Smith as early as 1844
without reaching the labor theory of value. Since Marx was already
convinced of the importance of labor on philosophical grounds, the
following extracts from Theories of Surplus Value should be taken as
serving to confirm Marx's philosophical views as well as giving them
specific economic content.

The existence and use of the social surplus in general terms had
already been described by Turgot and by Scots such as Adam Smith and
Adam Ferguson, there is no doubt that Marx felt it necessary to explain
the origin of such a surplus. Initially, Marx had accepted the exis-
tence of a wedge between cost price and market price as the primary
source of surplus-value but he later converted to the fundamentally
different viewpoint that surplus-value arose in production. Marx
credited the Physiocrats with being the first to grasp this important
point. (In the middle of the following quote, Marx is himself
quoting the Physiocrats)

The Physiocrats transferred the inquiry into the
origin of surplus value from the sphere of circula-
tion into the sphere of direct production, and
thereby laid the foundation for the analysis of
capitalist production.

-4-

"The cultivator produces his own wages, and, in addi-
tion, the revenue which serves to pay the whole
class of artisans and other stipendiaries...."

The proprietor has nothing except through the
labour of cultivator .. .Thus in this passage surplus-
value is explicitly stated to be the part of the
cultivator's labour which the proprietor appro-
priates to himself without giving any equivalent,
and he sells the product of his labour, therefore,
without having bought it.

Physiocratic thought however was incomplete because they focused upon

the creation of a material surplus and upon use-values.

Whence, therefore, comes surplus-value? That is,
whence comes capital? That was the problem for the
Physiocrats. Their error was that they confused
the increase of material substance, which because
of the natural processes of vegetation and genera-
tion distinguishes agriculture and stock-raising
from manufacture, with the increase of exchange-
value.

Adam Smith, however, distinguished himself by his generalization of
the surplus concept to labor in general and Marx dwelt upon these
aspects of Smith in some detail. He begins by quoting Smith's own
words in Chapter 6 of Book 1 of the Wealth of Nations and then com-
menting upon the significance of the quote.

The value," Adam continues immediately, "which the
workmen add to the materials, therefore, resolves
itself in this case" (when capitalist production
has begun) "into two parts, of which the one pays
their wages, the other the profits of their em-
ployer upon the whole stock of materials and wages
which he advanced." [emphasis given by Marx]

Hence therefore Adam Smith explicitly states:
the profit which is made on the sale of the com-
plete manufacture originates not from the sale it-
self, not from the sale of the commodity above its
value, is not profit upon alienation. The value,
that is, the quantity of labour which the workmen
add to the material, falls rather into two parts.
One pays their wages or is paid for through their
wages. tSy this transaction the workmen given in
return only as much labour as they have received in

-5-

the form of wages. The other part forms the profit
of the capitalist, that is, it is a quantity of
labour which he sells without having paid for it.
If therefore he sells the commodity at its value,
then his profit originates from the fact that he
has not paid for a part of the labour contained in
the commodity, but has nevertheless sold it.

The critical distinction between the exchange value and the use value

of labor-power is already apparent above and Marx makes the point

quite explicit in his characterization of profits.

Profit is consequently nothing but a deduction from
the value which the workmen have added to the mate-
rial of labour. They add to the material, however,
nothing but a new quantity of labour. The work-
man's labour-time therefore resolves itself into
two parts: one for which he has received an equiv-
alent, his wages, from the capitalist; the other
which he gives to him gratis and which constitutes
the profit. Adam Smith rightly points out that
only the part of the labour (value) which the work-
men newly adds to the material resolves itself into
wages and profit, that is to say, the newly-created
surplus-value in itself has nothing to do with the
part of the capital which has been advanced (as
materials and instruments).

Marx is careful to point out that Smith explicitly rejects the notion

9
of profits as payment for some sort of work, and is happy to empha-
size that Smith himself extended the analysis to rent.

One of the objective conditions of labour alienated
from labour, and therefore confronting it as other
men's property, is capital; the other is the land
itself, the land as landed property. Therefore
after dealing with the owner of capital, Adam Smith
continues :

"As soon as the land of any country has all be-
come private property, the landlords, like all
other men, love to reap where they never sowed, and
demand a rent even for its natural produce... He"
(the labourer) "must give up to the landlord a por-
tion of what his labour either collects or produces.
This portion, or, what comes to the same thing, the
price of this portion, constitutes the rent of land."
[emphasis given by Marx]

-6-

Like industrial profit proper, rent of land is
only a part of the labour which is added by the
labourer to the materials and which he gives up,
hands over to the owner of the land without being
paid for it; hence, only a part of the labour-time
which he works to pay his wages or to return an
equivalent for the labour-time contained in his
wages.

Thus Adam Smith conceives surplus-value — that
is, surplus-labour, the excess of labour performed
and realised in the commodity over and above the
paid labour, the labour which has received its
equivalent in the wages — as the general category,
of which profit in the strict sense and rent
of land are merely branches.

Marx sees Smith's greatness to lie precisely in the above deduc-

t ions .

We see the great advance made by Adam Smith beyond
the Physiocrats in the analysis of surplus-value
and hence of capital. In their view, it is only
one definite kind of concrete labour — agricultural
labour — that creates surplus-value.... But to Adam
Smith, it is general social labour — no matter in
what use-values it manifests itself — the mere quantity
of necessary labour, which creates value. Surplus-
value, whether it takes the form of profit, rent, or
the secondary form of interest, is nothing but a part
of this labour, appropriated by the owners of the
material conditions of labour in the exchange with
living labour.

It is clear that Marxian surplus value is a developed form of Smithian

surplus value. The importance of this debt can be gauged from the

claim, made in a letter to Engels, that Marx felt his principal

12
achievement to lie in his analysis of surplus value in general.

This reading of Marx's indebtedness bears upon two aspects of the

current literature on Marx. First, the domination of the subject by

the labor-embodied versus labor-commanded theories of price would

appear to be unfortunate. It is not as a theory of price that labor

values are important but rather as a theory of value creation in the

-7-

radical meaning of the term. Marx was very insistent that surplus did
not arise in the sphere of exchange, hence theories of price, or

exchange-value, appear to be distractions; it is only in the analysis

13
of production that true surplus can be found.

If prices reflect labor-embodiment, well and good. If not, one
had to distinguish between different orders of reality. The fundamen-
tal contrast was the division of output between labor and other orders
of society. Then came a secondary division between the members of the
propertied classes. So long as the primary division of output, i.e.,
to labor was settled outside the market it was a matter of lesser impor-
tance whether the surplus be distributed according to power or scar-
city. This interpretation would preserve what Garegnani has focussed

14
upon as a "core" concept in Quesnay, Smith, Ricardo and Marx.

[These authors] shared not so much the idea of a
wage determined by the level of subsistence as the
more general concept of a wage determined by eco-
nomic and social forces before and independently of
the other shares of the social product.

On the above reading, Marx had reason to be delighted with Ricardo 's

use of the labor theory of prices because they helped to focus upon

essence and appearance simultaneously. If, however, the labor theory

of prices were jettisoned this would not influence the validity of the

Smith-Marx insight into labor as the creator of surplus-value. The

famous Transformation Problem — from the values of Volume I to the prices

of Volume III of Capital — is now seen to be of secondary importance.

Secondly, it has been stated that Marx was insufficiently appreciative

of the radical analysts of the 1820's, such as Thomas Hodgskin and

William Thompson, sometimes called the Ricardian socialists. Not only

-8-

is the term Smithian socialists more appropriate in explaining the
origins of these critics of capitalism, but also in pointing out that
many of the solutions offered by these radicals focused upon the adop-
tion of a more laissez-faire approach in order to achieve equity.

III.

The origins of Marx's views on surplus-value also bear upon our
reading of Adam Smith. Did Marx misread Adam Smith and find out some
passages that would support his preconceived ideas? Such an inter-
pretation is untenable in view of the fact that both Lord Lauderdale
and T. R. Malthus read Smith exactly as Marx did. Samuel Read also
agreed that Smith had made an erroneous assertion (without drawing any
preinicious consequences therefrom) and went on to illustrate the
curious hold (by modern standards!) that "labor" had on classical

economists by insisting that "value" made sense only in conjunction

• u , u 16
with labor.

Ricardo's difficulties with the concept of value are too well-
known to require detailed rehearsal. In every edition of the Prin-
ciples , Ricardo praises Smith for having "so accurately defined the
originial source of exchange value" in labor. His adoption of the
labor theory of exchange value was, by the third edition of the Prin-
ciples (but not in the first two) a convenient, albeit realistic,
approximation. Yet Ricardo's mode of reasoning continues to utilize
the Smithian notion that labor creates surplus. Consider the numerical
example employed in Ricardo's revised thoughts on machinery in the
third edition of the Principles . To begin with, we have a farmer
whose yearly activities can be summarized as follows:

-9-

Fixed Capital 7,000

Wages (Circulating) 13,000

20,000
Profits (10 percent) 2, 000 (used for consumption)
Total 22,000

The circulating capital is said to "replace the value of 15,000,"
i.e., to provide the required profit of 2,000. Why does the surplus-
value arise from labor alone? Ricardo continues the train of thought
that surplus value arises from circulating capital in his treatment
of year 1, when the capitalist sets half his workers to construct
machines, and considers the profits of 2,000 arising in equal parts
from the workers in farming and the workers in machines.

Fixed Capital (Old) 7,000

Wages (Farming) 6,500 i „ , . -, fc

„ °. . ,„ 7 v , ™^ r Used in agriculture

Profits (Farming) 1,000 J 6

Wages (Machines) 6,500 i _ , . . , . , .

r. c- fvi .. • \ i nnn i Embodied in machines

Profits (Machines) 1,000 J

Total 22,000

Once again, we find Ricardo claiming that all the surplus arising from
circulating capital or labor. Whatever Ricardo's difficulties with
the labor theory of price may have been, he appears to have clearly
accepted the claim that labor alone creates value. This reading of
Ricardo suggests that he lived in a dual world — one of markets and
prices and another one of surplus values. Recent attempts Co find a

consistent reading of Ricardo have become so contorted that this

1 ft
cutting of the Gordian knot may even be acceptable.

In a passage that strikes one as peculiarly Marxian in its thrust,

John Stuart Mill, solemnly reproduced the Smith-Ricardo heritage on

19
the existence of profits.

-10-

The cause of profit is, that labour produces more
than is required for its support... We thus see
that profit arises, not from the incident of ex-
change, but from the productive power of labour.

Those who consider this dichotomous reading of the classical econo-
mists to be fanciful should recollect how repeatedly they urged that
value should be an absolute concept in that it should be independent of
the market. It was their inability to find the repository for such a
concept that probably led into their vacillations over the measures of
value and particularly to their search for an invariable measure of
value. In his latest thoughts on this problem Ricardo wrote clearly to
this effect. Malthus spent much time pointing out that in common speech
value did not mean exchange-value and even a critic of the thought

patterns of these economists, Samuel Bailey, had to admit that common

■ j 20

usage was on their side.

Perhaps the most unorthodox conclusion of this discussion is the
light it throws on Adam Smith. Instead of being seen only as a sup-
porter of mutual gains through free trade, Smith is now also an expo-
nent of the exploitative nature of capitalist relations. It is true
that many scholars have commented upon the extent to which Smith modi-
fies any harmony view of Capitalism by his frequent and somewhat acer-
bic description of "masters." However, all these points relate to the

21
economy as a system of power. What is significant about the above

reading is that Smith considers profits and rents to be deduct ions

from the worker without any reference to monopoly or power relations.

Exploitation arises simply as a consequence of capitalist production.

How clearly did Adam bmith grasp the foundational premise of

modern economics on the mutual beneficience of market exchange? Later

-11-

scholars have been content to note that since Adam Smith admitted
capital to be productive he could not have meant to imply the radical
conclusions of a labor theory of value. However, this is to force a

consistency that the rest of Smith's work appears to deny. As Alec

22
Macfie has said, "Consistency was not his [Smith's] shining virture."

Marx put his finger on the crux of the issue in a commenting on the

23
irrelevance of Samuel Bailey's critique of the notion of value.

Bailey clings to the form in which the exchange value
of the commodity as commodity appears... The most
superficial form of exchange value, that is the quan-
titative relationship in which commodities exchange
with one another, constitutes according to Bailey,
their value. The advance from the surface to the
core of the problem is not permitted.

In other words, the crucial methodological principle involved is
whether an explanation of the cause of phenomena is also bound to ex-
plain the quantitative magnitude of that phenomena. Such a principle
was not entirely foreign to the classical period. Historically, the
justification of taxation had long proceeded along political lines,
while the amount of taxation was discussed using costs, equity and
other economic criteria. Adam Smith himself had used a dichotomous
mode of reasoning on several occasions. For example, the source of
the division of labor was the propensity to truck, barter and exchange
while the quantitative impact of the division of labor was measured by
market forces; the real value of a commodity was given by its labor
disutility — the toil and trouble of acquiring it — while its market
value was given by money price; labor itself was either productive or
unproductive, with no intermediate gradations, even though Smith's
reasoning would be consistent with degrees of productivity; finally,

-12-

sorae scholars have noted how Smith uses a totally inelastic savings

function for profit rates above the minimum, so that consumers either

24
save a fixed amount or they do not save at all. Surely it is not too

far-fetched to claim that such an author would explain the existence
of profits with one set of arguments and their numerical magnitude
with another.

Paul Douglas noted this aspect of Smith in his sesquicentennial
lecture and concluded that Marx had adopted his views from Smith via
the Ricardian socialists. Even though Douglas did not see the concep-
tual difference between the Ricardian socialists and Marx's viewpoint

or refer to Marx's explicit acknowledgement in the Theories of Surplus

25
Value , the conclusion drawn by Douglas still has some validity.

Marx has been berated by two generations of orthodox
economists for his value theory. The most charita-
ble of the critics have called him a fool and the
most severe have called him a knave from what they
deem to be the transparent contradictions of his
theory. Curiously enough, these very critics gen-
erally commend Ricardo and Adam Smith very highly.
Yet the sober facts are that Marx saw more clearly
than any English economist the differences between
the labor-cost and labor-command theories and tried
more earnestly than anyone else to solve the con-
tradictions which the adoption of a labor-cost
theory inevitably entailed. He failed, of course;
but with him Ricardo and Smith failed as well.
There are, it seems to me, few more unfair in-
stances in economic thought than the almost com-
plete unanimity with which the English-speaking
economists of the chair have heaped condemnation
upon the overworked and poverty-stricken Marx, who
worked under such great difficulties, and, save
for the comments of Jevons and a few others, have
heaped praises upon Smith and Ricardo. The failure
was the failure not of one man but of a philosophy
of value, and the roots of the ultimate contradic-
tion made manifest to the world in the third
volume of Das Kapital lie embedded in the first
volume of the Wealth of Nations.

-13-

How are we to reconcile such a view with the Adam Smith of the chap-
ters on Mercantilism? Is free trade mutually beneficial in inter-
national trade and exploitative in domestic production? Does the
evidence not indicate some basic indecision and inconsistency in Smith
regarding the benefits of free exchange, contrary to popular wisdom
and generations of textbooks?

-14-

NOTES

1. Indeed, the connection is explictly denied in the most widely-
used advanced text on the history of economic thought, Blaug
(1984), 52. Some Marxists, e.g., Althusser (1970) treat Marx's
adoption of the Smithian viewpoint as axiomatic. However, many
other scholars, perhaps a majority, Marxist and non-Marxist
alike, minimize the surplus-value notion and focus upon prices.
An excellent recent account of Marx's thought repeatedly empha-
sizes the labor theory of prices. Oakley (1985), 48, 74. The
Smith-Marx nexus is quite absent in most of the textbook or
popular literature, e.g., R. Lekachman, A History of Economic
Ideas (New York: McGraw-Hill, 1976); J. Barzun, Darwin, Marx,
Wagner (New York: Anchor, 1958), and is curtly dismissed in
specialist accounts that refer to this issue, D. Winch, Adam
Smith's Politics (Cambridge: C.U.P., 1978), 90. Even authors
who otherwise display considerable sympathy for the Marxist view-
point, quite miss the link with surplus-value in a developed
capitalist economy, e.g., G. Freudenthal, Atom and Individual in
the Age of Newton (Riedel: Dordrecht, 1986), 157, or T. Tinker,
Paper Prophets: A Social Critique of Accounting (Praeger: New
York, 1985), 120-123. For articles on Smith that claim Smith
limited a labor theory to primitive conditions, see the pieces by
Bitterraan (no. 17), West (no. 33), Lamb (33), and Henderson (58)
in Wood (1984).

2. Marx (1967), 19.

3. Moore (1966), 318-319.

4. Claeys (1984), 229.

5. Marx (1963), 45 and 57.

6. Ibid, 62-63
7

Ibid,

79.

Ibid,

80.

Ibid,

81.

Ibid,

82.

Ibid,

85.

9,
10,

11,

12. Mandel (1971), 83.

There is some (unintended) irony in the claim of von Mises that
"Neither will the reader find in the Wealth of Nations a refuta-
tion of the teachings of Marx..." von Mises (1953), v.
When a link between Smith and Marx is posited it is on the basis

-15-

of the four stages theory of historical materialism. Raphael
(1985), 1. Apart from missing the analytical link regarding
surplus value, such statements can also be misleading because
Marx admired the historical awareness of Sir James Steuart more
than that of Adam Smith.

13. Hunt (1977), Meek (1974).

14. Quoted in Caravale (1985).

15. King (1983), 360, 367-69.

16. Lauderdale (1804), 157-58; Malthus (1836), 76; Read (1829), viii.
In his Glasgow lectures Smith used labor as the only factor —
neither rents nor profits are mentioned. Lectures on Jurispru-
dence, eds. R. L. Meek, D. D. Raphael and P. G. Stein (Oxford:
O.U.P., 1978), 495-496. See Bowley (1973) for more details.

17. Ricardo (1951), 388-395. Two careful accounts of the wider
significance of Ricardo on Machinery are the essays of Walter
Eltis and of Ferdinando Meacci in G. Caravale (1985). In a
recent debate on Ricardian and Marxian linkages, while con-
siderable attention is given to the Physiocratic concept of
surplus, Smith is mentioned only once, and that too in passing.
See the contributions by P. L. Porta, P. Groenewegen, G.
Dastaller and G. Faccarello in History of Political Economy
(Fall, 1986).

18. There is, of course, a long tradition which attributes Ricardo's
influence on socialists to the (mis?) interpretation of Ricardo
having attributed labor to be the source of all value. H. S.
Foxwell's introduction to Anton Menger, The Right to the Whole
Produce of Labour (London 1899). For a recent discussion of the
justice of this attribution, see Hollander (1980). The difficulties
in finding a consistent interpretation of Ricardo are noted by

Mark Blaug in the introductory essay to the volume edited by
Caravale (1985).

19. Mill (1874), 417.

20. Bailey (1823), 1.

21. Samuels (1973).

22. Hollander (1973), 150-154. Macfie (1959), 217.

23. Marx (1963), Vol. Ill, 139.

24. Bowley (1973), 193-199. The most influential recent resolutions
of "Das Adam Smith Problem" — the conflict between the views of
human nature found in the Theory of Moral Sentiments versus that
in the Wealth of Nations — now turn on the two books referring to
different levels of abstraction.

-16-

25.

Douglas (1928). This approach is repeated in McNulty (1980).
It should be noted that a reliable edition of the Theories of
Surplus Value was not available at the time of Douglas' essay,

-17-

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