MARX BOOK DAY TWO REVISED

 

Part One

 

The Classical Political Economy

Against Which Marx Writes

 

 

Marx called his great work simply Das Kapital, which is to say Capital (leading his mother, who was rather disappointed in her son, to remark "if only Karl had made Capital, instead of just writing about it.")  The subtitle of Marx’s work is “Critique of Political Economy.”  It is thus, in the first instance, a critique not of capitalist society but rather of what had been written about economics before Marx.  The three great theorists preceding Marx who established the discipline that was known as Political Economy were the 18^th-century French theorist François Quesney, the 18^th-century Scottish theorist Adam Smith, and the 19^th century English theorist David Ricardo.

 

The late medieval reestablishment of Mediterranean trade and the influx of precious metals from the new world together produced a centuries-long inflation in European prices, which in turn led to the widespread belief that wealth consisted primarily in stores of gold and silver. Quesnay, examining the success of the 18^th-century French economy, advanced the radically new theory that national wealth consisted not in stores of gold but in the products of a nation’s agriculture. In defending this view, Quesnay made central to his analysis a concept on which all economic theory came to depend: the concept of reproduction.

 

Reproduction is a very simple idea, but it is so important that we must spend a little time talking about it to make it absolutely clear. Agriculture in the Northern hemisphere produces a single crop each year.  As soon as the snows melt and the ground softens, seeds are planted. They are tended during the spring and summer until, in the fall, the crops are harvested. A portion of the crop is set aside to serve as seed in the next season.  Thus, the output of one season serves as an input into the next season and this cyclical process of reproduction continues, year after year. The same fundamental cycle of reproduction is exhibited in the production of the tools with which the peasants work. The shovels and axes used in one season of agriculture are made from the wood and metal produced in the previous season.

 

A cyclical structure of the process of reproduction is of course exhibited also in the population as well. This generation’s parents are the last generation’s children who are themselves the product of the previous generation’s parents.

 

This elementary idea is, as we shall see, the foundation on which are built the elaborate mathematical models of the 20^th century re-examination of the classical traditional political economy.

 

In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith poses three questions, the answers to which serve to constitute or found the discipline of political economy. What, he asks, is the real nature of economic wealth – of the wealth of nations? In what way, and by what institutional processes, is wealth distributed among the several classes of society? And what are the causes of an increase in national wealth, which is to say, of economic growth? His first answer, in effect, establishes the physical quantities approach as fundamental. His second answer specifies both who gets the physical surplus and how they get it. And his third answer tells us what is done with the surplus.

 

To the first question Smith replies, in contradistinction to the mercantilists, that the real wealth of a nation consists in the “necessaries and conveniencies of life which it annually consumes,” not in the gold and silver hoarded within its boundaries.

 

His answer to the third question, in brief, is that the progressive division of labour and the reinvestment of the annual surplus in an expansion of the scale of production will, together, bring about an increase in real, as opposed to merely nominal or monetary, wealth.

 

It is in his attempt to answer the second question that Smith makes his boldest and most important theoretical advance. The institutional arrangement through which the wealth of a nation is distributed to its several classes is the market, according to Smith, and with his introduction of the concept of natural price he lays the theoretical foundation for all of the political economy and economic theory that has followed.

 

Smith takes up and adapts to his purpose the ancient and very powerful thesis of the rationality of being – an idea which had for two millennia served as the basis for philosophical and theological accounts of the ontological structure of nature and of the relationship of human beings to God and to being in general.

 

The central idea is familiar enough and by Smith’s day had become a commonplace. The universe has been created or organised by a divine being according to a rational plan, which is embodied in nature in the form of certain universal laws or structures. The human mind has been created by this same divine artificer, and has had implanted within it a spark of the divine reason. To know being is to grasp the rational structure that the creator has imposed upon it. Our minds are adequate to the task of apprehending the objective rational order of being precisely because our reason is an imitation of the creative reason which has constituted the objective order. So nature is rational and the mind’s power of reason is adequate to the task of apprehending nature’s rational structure, its laws.

Smith now advances a powerful thesis, extending this traditional concept of nature. Society, Smith in effect asserts, is a second nature. Despite its conventional origins, it too has an order governed by laws, and hence it can also become the object of rational investigation. Indeed, left to itself, society will function regularly and in a law-governed manner. As he argues in his earlier Theory of Moral Sentiments, in a passage devoted to a criticism of Hobbes and others, “human society, when we contemplate it in a certain abstract and philosophical light, appears like a great, an immense machine, whose regular and harmonious movements produce a thousand agreeable effects.”

 

Inasmuch as human society is not the intentional product of a purposeful and rational creator, it is not immediately clear on what grounds we can attribute to it a rational structure whose formal characteristics can become the object of our scientific investigations. In order to get over this difficulty, Smith joins to the ancient doctrine of the rationality of being a more modern notion: the public benefits of private self-interest. In effect, he seeks to deduce the order of society from the interactions of countless persons whose actions can be comprehended, anticipated, and calculated precisely because they are grounded in rationally comprehensible self-interest. In place of the mind’s capacity to grasp God’s plan, Smith invokes the mind’s capacity to grasp the rationally self-interested plans of other human beings. The rational order of society is thus the unintended consequence of the actions of privately rational agents.

 

Since there is no overarching goal, no telos toward which individual actions are oriented, it is essential both to the objective rationality of society and to the subjective rationality of our cognition of society that each individual agent act in a self-interested, and hence calculable, fashion. Acts of beneficence or charity, or acts done from habit or custom, because they spring from the non-rational portions of the soul, will be inherently unpredictable and incalculable. Smith recognises this fact in one of the best known of the many quotable passages in The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

 

We arrive thus at the concept of the market as a system of individual interactions which naturally and unintendedly combine in stable patterns, regulated by rational laws. According to Smith, the key to an understanding of the market, and thereby of society, is the concept of economic exchange, which he traces, with characteristic eighteenth-century wit and superficiality, to a “certain propensity in human nature... to truck, barter, and exchange one thing for another.” Announcing his intention to investigate “the rules which men naturally observe in exchanging [goods] either for money or for one another,” he introduces the distinction between value in use and value in exchange which was to be taken up by Ricardo, by Marx, and indeed by virtually all economists up to the present day. The passage is worth quoting in full:

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 anything; scarce anything 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.

 

In order to investigate the principles which regulate the exchangeable value of commodities, I shall endeavour to shew.

 

First, what is the real measure of this exchangeable value; or wherein consists the real price of commodities.

 

Secondly, what are the different parts of which this real price is composed or made up.

 

And, lastly, what are the different circumstances which sometimes raise some or all of these different parts of price above, and sometimes sink them below their natural or ordinary rate; or, what are the causes which sometimes hinder the market price, that is, the actual price of commodities, from coinciding exactly with what may be called their natural price.

 

Smith now undertakes, by a series of logical and conceptual manoeuvres, to define a new object of investigation, namely natural price. He also advances a theory of natural price – more precisely, a theory of the factors which regulate or determine natural price. But as we shall see, his attempts at a theory are almost entirely unsuccessful.

 

it might be useful to ask at the outset why such a theory is so important to a critical understanding of capitalist economy and society. Briefly, the answer is this: the central social and economic issue in any society is how the annual surplus shall be divided up, and what shall be done with it once it has been divided. The question of distribution is important in its own right, and important as well through its implications for questions of economic growth, political domination, and cultural hegemony.

 

In a capitalist society, the social product is distributed to the several classes in the form of wages, rents, profits, and interest. Some of what is distributed is required for the reproduction of the economy and society at the existing level of output and activity. The rest is surplus, and may be wasted, consumed unproductively, or invested to expand the scope and level of production. As we shall soon have occasion to note, what are actually distributed are quanta of value in the form of money, not (by and large) physical stocks of corn, iron, or theology books. In order to determine how much money is allotted to workers as wages, to landlords as rents, to entrepreneurs as profits, to financiers as interest, and so forth, and in order as well to determine what that money will buy, we must have a theory of the factors influencing and determining prices, wages, rents, profits, and interest. Such a theory is precisely a theory of price, or, in the language current when Smith wrote, a theory of value.

 

In the unfolding of the argument in The Wealth of Nations, Smith advances his theory first, and only then presents an explicit definition of natural, as opposed to market, price. But we shall reverse the order of our analysis, for the concept of natural price is actually Smith’s major theoretical contribution to the discipline of political economy.

 

There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock. This rate is naturally regulated, as I shall show hereafter, partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment.

 

There is likewise in every society or neighbourhood an ordinary or average rate of rent, which is regulated too, as I shall show hereafter, partly by the general circumstances of the society or neighbourhood in which the land is situated, and partly by the natural or improved fertility of the land.

 

These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail.

 

When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.

 

As introduced here, the concept of natural price does not rise much above the level of the most naive observation of surface phenomena. Practical men of affairs become aware, as they conduct their business, that a certain wage, rent, or rate of return is customary in a particular locale. Without asking why, they come to expect that they shall have to pay those rates, and like the occupants of Plato’s cave, they may even become adept at predicting fluctuations in the shadows on the wall. In the most elementary attempt at theory, Smith identifies the natural price of a commodity with the sum of the amounts which the entrepreneur must lay out in order to produce the good plus the profit which he himself is to reap.

Now, however, Smith rapidly advances his analysis with a series of arguments which carry him well beyond mere observation to genuine theory. First of all, he justifies his inclusion of the natural profit as a component of the natural price of the commodity by an appeal to the workings of material self-interest in a free, competitive market:

 

The commodity is then sold [i.e., when its price exactly covers the natural wage, natural rent, and natural profit] precisely for what it is worth, or for what it really costs the person who brings it to market; for though in common language what is called the prime cost of any commodity does not comprehend the profit of the person who is to sell it again, yet if he sells it at a price which does not allow him the ordinary rate of profit in his neighbourhood, he is evidently a loser by the trade; since by employing his stock in some other way he might have made that profit.

 

As Smith makes clear in the next paragraph, the argument turns essentially on a number of assumptions concerning the workings of a competitive market. Each entrepreneur is presumed to be engaged in a rationally self-interested pursuit of profit, in an economy which permits him to “change his trade as often as he pleases.”  With good, if not perfect, information, entrepreneurs will quickly learn of opportunities for greater profit in other lines of production, and unhindered by law or custom, will move their capital freely to follow the fluctuations of the rate of return.

 

“The actual price at which any commodity is commonly sold,” Smith now says, “is called its market price.” Market price is regulated by the relative strength of supply and demand. As these fluctuate widely, so will market price. Entrepreneurs, eager for greater profit, respond to the cues of market price by moving their capital hither and yon, fleeing from sectors of production in which an excess supply has driven market price below natural price, and moving toward sectors where an excess of “effectual demand” has driven up market price and produced a temporary super-profit for the shrewd or fortunate capitalists engaged in that line of production.

 

Smith now advances his analysis by the introduction of a powerful metaphor: “The natural price, therefore,” he says, “is, as it were, the central price, to which the prices of all commodities are continually gravitating.”

 

Although Smith makes very little of the image of natural prices as centres of gravity, it is worth exploring for a bit, because a number of deep and powerful theoretical assumptions are encapsulated within it. The use of the term natural is clearly intended to suggest an objective law-governed system, a “nature” analogous to physical nature, with a rational structure apprehendable by human reason. To characterise natural prices as centres of gravity is to impute to them some causal efficacy, or at least to claim that they could correctly be understood as having causal efficacy in a theoretical model designed to articulate the underlying structure of the market. They are clearly not to be thought of merely as statistical averages or unexplained regularities, but are to be construed rather as centres of force ineluctably drawing market prices to them. As bodies of a system in equilibrium, when displaced from their positions, tend to move back to their equilibrium locations, so prices, displaced momentarily by fluctuations in supply or demand from their natural levels, will tend to move back to their equilibrium positions. What is more, natural prices, like physical centres of gravity, form a system of interacting forces. As the movement of one mass anywhere in Newtonian space affects all other masses, so a change in one natural price will produce alterations in all other natural prices, which changes will then return to affect the original natural price. Smith himself does not draw out the implications of his metaphor, but they are implicit in it, and eventually become explicit in the theory of David Ricardo.

 

By characterising natural prices as centres of gravity, Smith encourages us to conceive of them as objectively real determinants of the economic system. Once we have accepted the distinction between natural price and market price, we must inevitably ask: What are the determinants of natural price? In short, Smith sets for himself and for all subsequent political economists the task of formulating a satisfactory theory of natural price.

 

Smith does not yet have a coherent notion of an economy in equilibrium, but the elements of such a notion are present in his distinction between natural and market price and in his account of the mechanism by which deviations of market from natural price, brought about by fluctuations in effective demand, are corrected through the self-interested responses of rational consumers and entrepreneurs.

 

Smith grounds his attempt at a theory of natural price in some elementary assumptions about the subjective tastes and preferences of individuals. First of all, he takes it for granted that labouring is unpleasant and painful – something one would engage in only from force of necessity. “Equal quantities of labour, at all times and places,” Smith asserts without argument, “[are] of equal value to the labourer. In his ordinary state of health, strength, and spirits; in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness.”

 

There are powerful theoretical motives for this attempt by Smith to locate something in the economic world whose worth is everywhere and always the same, motives that prompted Ricardo, half a century later, to search for an “invariable standard of value.” The problem is this: the price of a commodity expresses how much of that commodity one will give in the market for other commodities, or, what is the same thing, how much of other commodities one can obtain with the given commodity. The price of a commodity is actually a relation between it and other commodities. A relation, or ratio, changes when either of its terms changes (or, save in special cases, when both terms change). If a bushel of corn will buy more cloth today than it bought yesterday, that may be because something has happened to make corn worth more, or it may equally be because something has happened to make cloth worth less. From the mere fact of the change in their relative value, nothing can be concluded concerning the causes of the change.

 

Smith was persuaded, as was Ricardo, that a satisfactory theory of natural price should be able to tell us which of two commodities has changed in value when the rate of exchange between them alters. To Smith, this could only mean finding some one special commodity whose value, being constant, would serve as a standard against which all other commodities could be measured, and in terms of which we could chart the fluctuations in the value of those other commodities.

 

To an earlier age, the precious metals, gold and silver, might have seemed natural candidates for the role of invariant standard, but Smith was quite conscious of the fact that the influx of precious metals from the New World in the sixteenth and seventeenth centuries had depressed their price dramatically. So he hit upon labour as a commodity whose value to its owners was ever constant: “Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.”

 

If labour never varies in its value, what then determines the value of other commodities? Smith actually advances three different answers to this question, two of which at least he somewhat confusedly considers equivalent to one another. His first answer, on which Ricardo erected his own theory, is that goods exchange in the market in proportion to the quantities of labour required to produce them. Although Smith considered this explanation to be correct only in a primitive state of society, and therefore devoted scarcely a page to it, it is in fact the theoretically most promising of his three attempts, and will repay close analysis. Here is the explanation in its entirety, in one of the best-known passages in the text:

 

In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days or two hours labour, should be worth double of what is usually the produce of one day’s or one hour’s labour.

 

What we have here, in the graceful and ingenuous style characteristic of Smith’s exposition, is a theorem in the theory of rational choice. The logic of the proof is clear enough, but a world of presuppositions, abstractions, and simplifications are hidden within it. We are to imagine a state of affairs in which hunters are capable, on average, of catching a beaver in twice the time required to catch a deer. Smith does not say so, but the argument demands that they hunt with their bare hands, for the use of weapons comes under the heading of “the accumulation of stock” and introduces theoretical difficulties which were to remain unsolved until the publication of Ricardo’s Principles. Under the circumstances, let us posit two days' bare-hand hunting per beaver, and one days per deer. It is essential to the argument that all hunters be equally skilled at hunting either beaver or deer, and that there be no economies of scale or efficiencies from specialisation and the division of labour.

 

Now we are to imagine two hunters, Diana and Orion, encountering one another in a clearing in the forest after two weeks’ hunting, Diana bearing ten deer and Orion five beaver (assuming a five-day work week). Let us suppose that each has declining marginal utility for beaver and deer, and hence wishes to trade a portion of his or her catch for a portion of the other’s catch. In what proportions will they be willing to trade, assuming that each is self-interestedly rational?

 

To begin with, each views the labour of hunting as painful and tedious, a cost rather than a benefit, even in the idyllic conditions here posited. Hence neither will work a day longer than necessary. Furthermore, each is quite capable of catching a beaver in two days of averagely stressful labour or a deer in one day of equally stressful labour.

 

With these premises, we can now deduce what the shape will be of each hunter’s bargaining space. Suppose that Diana offers to trade one of her deer for one of Orion’s beaver. After some reflection, Orion will refuse, for he will reason thus: If I make this trade, I will be in possession of four beaver and one deer, for which I will have expended ten days’ labour. (Smith assumes that there are no transaction costs, and that the bargaining process, being neither a joy nor a labour, does not figure in the calculation.) But if what I want is four beaver and one deer, I can have them for only nine days’ labour – eight hunting beaver, and a ninth hunting deer. I can then spend the tenth day resting, and as I prefer four beaver, one deer, and a day’s rest to four beaver, one deer, and no rest, clearly this trade is not in my interest. To be sure, I have already expended ten days’ effort, and that is therefore a sunk cost. But in future – which is to say, in long-run equilibrium – I would do better to do all my hunting myself rather than concentrate on beaver and trade for deer.

 

So Orion rejects Diana’s offer and proposes instead that she give him three deer for one beaver. By an analogous process of reasoning, Diana concludes that such a trade will not be in her self- interest, and she rejects the proposal.

 

After some time, “by the higgling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life,” Diana comes to see that two deer are the most it is rational for her to part with for one beaver, and Orion in turn comes to see that two deer are the least he will accept for one of his beaver. Since their bargaining spaces intersect at a single point, the two consummate a deal at precisely that point, and so it comes to pass that the going exchange rate for deer and beaver is two deer for one beaver.

 

I have gone on at such length about so simple an example not merely because it is the archetype of all such examples in economic theory, but also because contained within this classic pastoral tale, either explicitly or implicitly, are many of the theoretical assumptions that play so large a role in the more sophisticated theories of Ricardo and Marx. We can name, among the principal assumptions: the total instrumental rationality of the agents, the disutility of labour, the social achievement of a degree of standardisation and homogenisation of labouring activity sufficient to allow us to say precisely how long it takes to catch “a” beaver or “a” deer (as opposed to this beaver or that deer). Also present, but quite unnoticed by Smith, is the crucially important assumption of the standardisation of the product – the beaver and the deer – so that either, by a process of selective breeding, all beaver have come to be of equal size and usefulness and all deer the same, or else some way has been found to index the multidimensional variations among beaver and deer so that one can calculate the standard time required to catch the standard beaver or deer.

 

Equally important is the willingness of Diana and Orion to adopt purely functional attitudes toward their hunting activity. Neither imbues the hunt with a religious, mythic, aesthetic, or familial significance that would interfere with the cost/benefit calculations out of which arises the natural price of two beaver for one deer. 

 

In addition to the theory that commodities exchange in proportion to the amount of labour required to produce them – a theory which came to be known as the “labour embodied” standard – Smith also argues that commodities exchange in proportion to the amount of labour which they can, in effect, command – what came to be known as the “labour commanded” theory of price. Smith argues thus:

 

Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. 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.27

 

It is not immediately clear how we are to interpret these and other similar remarks by Smith. Perhaps the most natural interpretation is simply to construe Smith as claiming that commodities will exchange in proportion to the quantities of labour which each will buy. If a bushel of corn will exchange in the market for half a day’s labour (which is to say that I can hire a worker for half a day for a wage of one bushel of corn), and if a yard of cloth will exchange in the market for a full day’s labour, then two bushels of corn, Smith might be saying, will exchange for one yard of cloth. For:

 

1 bu. corn = 1/2 day’s labour

 

and

 

1 yd. cloth = 1 day’s labour

 

imply that

 

(1 bu. corn)/(l yd. cloth) = (1/2 day’s labour)/(l day’s labour)

= 1/2

 

or

 

2 bu, corn = 1 yd. cloth.

 

But this claim, although true, is trivial. It amounts to nothing more than the assertion that a consistent, complete price system exists. So although many of Smith’s assertions appear to reduce to the claim that commodities will exchange in proportion to the quantity of labour they can purchase in the market, we must search for a more interesting interpretation of the text if we are to rescue Smith from triviality.

 

According to a second interpretation, for which a good deal of textual evidence can be cited, a commodity can be said to command a quantity of labour in the sense of commanding or purchasing or exchanging for another commodity into whose production a certain quantity of labour has gone. Thus, if it takes ten hours of labour, one way or another, to produce one yard of cloth, and if two bushels of corn will purchase a yard of cloth, then one bushel of corn might be said to “command” five hours of labour. As Smith says: “The power which that possession [of a fortune] immediately and directly conveys to him [who possesses it], is the power of purchasing; a certain command over all the labour, or over all the produce of labour which is then in the market. His fortune is greater or less, precisely in proportion to the extent of this power, or to the quantity either of other men’s labour, or, what is the same thing, of the produce of other men’s labour, which it enables him to purchase or command.”

 

Smith does not distinguish this labour-commanded theory of price from the labour-embodied theory that holds in the “early and rude state” and on occasion he seems to identify the two. Ricardo was exceedingly critical of Smith for this confusion (as Ricardo saw it), and indeed it is not difficult to see that in general the two theories are quite distinct. Suppose that under current conditions of agricultural production, it takes one hour of labour to produce one bushel of corn. Then a bushel of corn embodies one hour of labour. Suppose as well that an agricultural labourer’s wage for an eight-hour day is four bushels of corn. Then one bushel of corn commands two hours of labour. A rise or fall in the wage, unaccompanied by an alteration in the technology of corn production, or alternatively a change in the technique of corn production unaccompanied by a change in the wage, will cause one of these two quantities (labour commanded or labour embodied) to vary while the other remains unchanged, thus decisively proving that they are distinct.

 

As soon as we leave the early and rude state and enter a society in which the appropriation of land and the accumulation of stock have taken place, the simple beaver/deer explanation of exchange ratios ceases to apply. To see why this is so, let us imagine that while Diana and Orion have been out hunting, Demeter has been raising grain on her ten-acre plot of land. Before she begins her planting, she must spend 100 days felling trees, pulling stumps (also, for the sake of theoretical simplicity, with her bare hands), and generally preparing the field. Another 100 days of planting, weeding, and reaping produces, at the end of the year, a total harvest of 800 bushels of corn. The question now arises in what proportions will Demeter, Diana, and Orion exchange their corn, deer, and beaver with one another? The terms of trade between Diana and Orion have not altered – two deer for one beaver. But when they attempt to enter into stable patterns of exchange with Demeter, many troublesome problems crop up. Demeter has spent 200 days raising 800 bushels of grain, which is to say she has spent a day’s labour for each four bushels she has grown. She therefore proposes to exchange four bushels of grain for one deer, or eight bushels for one beaver. At first sight, this might appear a reasonable proposal, but neither Diana nor Orion is likely to accept it, for in fact it is heavily biased in Demeter s favour.

 

The point, of course, is that once her field has been cleared by the 100 days’ labour, it is fit for cultivation for many seasons, not for one season only. We can imagine Orion reasoning to himself thus: I now hunt 200 days each year for an annual catch of 100 beaver. If I want 80 bushels of grain, I can obtain it by spending 10 days clearing an acre of forest and 10 more days cultivating the soil. The 20 days lost to beaver hunting will diminish my annual catch by 10 beaver, so it might seem equally reasonable for me to hunt the year round and exchange with Demeter 10 of my beaver for 80 bushels of her grain, at a ratio of 1 beaver to 8 bushels. But the following year, I shall still want 80 bushels of grain and 90 beaver (or else I shall be able, if that is what I have, to trade without trouble). In that time period, since my acre will already be cleared, I will have to work only 190 days total – 180 to catch 90 beaver and 10 on the cleared land to raise 80 bushels of grain. It follows that I can do better by hunting and farming than by hunting and trading with Demeter. So I will reject her offer.

 

The same reasoning leads Diana to refuse Demeter’s proposed terms of trade.

If we could specify how long the field will remain cleared – over how many cycles of production – we might be able to come up with a proposal that would win the agreement of Diana, Orion, and Demeter. But now we realise that there are other factors to be taken account of, even in this simplest and most fanciful of examples. Diana’s bow takes some time to fashion (assuming that she has moved beyond bare-hand hunting), and it lasts for more than one season. So too does Demeter’s hoe. And the wood from which the bow and the hoe are made is of a special sort, carefully gathered at an earlier time and aged before being worked. In addition, Diana and Orion cannot so easily shift to agriculture, for the best land has already been spoken for by farmers who will demand a price for its use.

 

In short, we have come face to face with that “appropriation of land and accumulation of stock” which Smith correctly identified as the reason why goods fail to exchange in proportion to the labour time directly required for their production. Smith himself offers a rather curious and superficial explanation for this failure:

 

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people... in order to make a profit by the sale of their work [the employer] could have no interest to employ [the workmen], unless he expected from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock.

 

And, a bit later on in the same chapter:

 

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.

 

But these “explanations,” although charming, are not really explanations at all. Smith tells us that the prudent entrepreneur is unwilling to venture his capital without a return, and that the greedy, feckless landlord seeks to use his monopoly of the land to get something for nothing. But Smith has not explained what determines how great a return the entrepreneur can reasonably expect, and he has therefore not told us what effect the profits of stock will have on the rate at which commodities exchange with one another. (Strictly speaking, he has also not explained why the entrepreneur can rationally expect any return at all on his investment, but that is an objection first raised by Marx, and we shall have to postpone consideration of it for a bit.)

 

At this point, Smith offers what some readers of The Wealth of Nations have taken to be a theory of price, namely the so-called adding-up theory. As Smith says, “when the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.” But this is not a theory of natural price. It is, as we have seen, merely a definition of the term “natural price”.

 

In fact, Smith has no theory of the determination of natural price. Hence, he has no theory of wages, rents, and profits, and so no theory as well of the distribution of the social product among the several great classes of society. Nevertheless, Smith has successfully identified the object of investigation of political economy, namely the market, and he has formulated the central analytical concept, natural price. It remained for David Ricardo, forty-one years later, to advance the first coherent, fully worked-out theory of natural price.