Adam Smith: capitalist icon? (2007)

From the January 2007 issue of the Socialist Standard

Mention of the name Adam Smith calls to mind the “invisible hand” of the market, free trade, even capitalism itself. And money makes this capitalist world go round. So the Bank of England’s decision to feature Smith’s face on its twenty-pound notes, starting this spring, certainly seems appropriate

The Bank’s Governor, Mervyn King, says that Smith reminds us of how “openness to trade with others” allows us to “seize opportunities to specialize” that result in higher “productivity, incomes and standards of living for citizens of all countries.” To drive this point home, the new banknotes will have an engraving of a pin factory, which Smith used as an example of how the division of labour increases productivity, with the caption: “and the great increase in the quantity of work that results.” King hopes the new banknotes will encourage visitors to Britain “press their own politicians to support the opening up of trade, which has been at the heart of the British Government’s efforts to reform the world economy.”

The image of Smith presented on the banknotes, while not incorrect, is certainly one-dimensional. It ignores those aspects of his investigation of capitalism that run directly counter to some of the cherished beliefs of his followers.

That is not to suggest, however, that Smith was an anti-capitalist. Some like Noam Chomsky have flipped through the pages of The Wealth of Nations to uncover ideas critical of capitalism, but this effort seems misguided and unhistorical. Smith undeniably had faith in capitalism, but this view arose naturally from living in an ascendant capitalist system that had yet to fully reveal its contradictions. Compare this to the contemporary cheerleaders for capitalism who can only maintain their belief by denying reality. In late 18th century Europe, there was no socialist spectre haunting the sleep of burghers like Smith. If anyone had insomnia it was aristocrats worrying about the rising bourgeoisie. With the peace of mind that this situation afforded him, Smith pursued the sort of disinterested study of capitalism that could only be carried out a century later by critics of capitalism, such as Marx.

A labour theory of value

Smith’s great interest in the “specialization” of production, which the new banknotes emphasize, naturally led him to ponder what regulates the commodity exchange that mediates this division of labour. In other words, he wondered what determines the “exchangeable value” of commodities. In using this term, Smith already makes an important distinction from what he calls “value in use.” Smith notes that something with great utility, like water, has no exchange value at all, whereas a diamond is of little real use but has great exchange value. Smith thus sets aside the issue of use-value, to instead “investigate the principles which regulate the exchangeable value of commodities.” The answer he arrives at later came to be known as the “labour theory of value.” That is, he identifies the labour necessary to produce a commodity as the factor that regulates its exchange-value.

This view is presented in chapter six of The Wealth of Nations, where Smith says that “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” He offers the example of “a nation of hunters” where it usually costs twice the labour to kill a beaver” than “it does to kill a deer.” The result is that “one beaver should naturally exchange for or be worth two deer.” In other words, “produce of two days or two hours labour” would naturally “be worth double of what is usually the produce of one day’s or one hour’s labour.”

Smith goes on to point out that more difficult or complex labour would naturally be worth more than simple labour: “If the one species of labour should be more severe than the other, some allowance will naturally be made for this superior hardship; and the produce of one hour’s labour in the one way may frequently exchange for that of two hours labour in the other.”

This view is expressed in such a simple and straightforward way that it may seem inconsequential. But the significance of Smith’s idea that commodities have intrinsic value, based on the labour “embodied” within them, becomes clearer if we compare it to other explanations of value.

The most common “explanation” of value, which most people would offer without thinking twice, is that a commodity’s value is the outcome of supply and demand. But on closer consideration, it becomes clear that this can only account for why the price of a given commodity might fluctuate higher or lower; it cannot explain why a price fluctuates around a certain level. Supply and demand might account for why the prices of 4x4s fell compared to hybrid vehicles, when oil prices soared, but won’t tell us why cars have far greater exchange value than, say, bicycles.

Another related theory is the idea that a commodity’s value is determined subjectively according to its utility. But, again, this does not answer the car-versus-bicycle question. Many people find bicycles infinitely more useful than cars, but that does not mean they are willing to pay dearly for them. A subjective theory can explain why a person dying of thirst in the desert would gladly exchange a diamond ring for a glass of water, but this does not help us understand everyday commodity exchange.

In addition to these explanations, there is the theory of value that claims a commodity’s “value” is determined by the price of producing it (“cost price”). But this is a tautology that does not explain what determines this price.

Only a labour theory of value, which locates the intrinsic source of value, offers a way to move beyond these superficial explanations.

Dangerous implications

Capitalists have been vehemently opposed to the labour theory of value for good reason. A theory of intrinsic value leads towards an understanding of the source of profit, which capitalists are eager to obfuscate. If a commodity has no intrinsic value, and its price is only determined in the actual process of being exchanged, then profit is likewise something that arises out of thin air.

Smith’s idea that value is based on the labour embodied in a commodity, leads him to better understand where profit comes from. In the same chapter in which he presents his labour theory of value, Smith offers the view that profit is a “deduction” from the intrinsic value of a commodity. In other words, first we have the existence of value (determined by labour), and this is then broken down into the revenue of the various classes (i.e. profit, rent, and wages).

He writes: “The value which the workmen add to the materials [means of production], therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced.” And this same explanation is offered to explain the source of rent: “[The landlord’s] rent makes the first deduction from the produce of the labour which is employed upon land.”

There are still many unanswered questions here regarding the exact source of profit, but by generally locating it in the value created by workers, Smith is not far from a theory of surplus-value. He is certainly head and shoulders above the view, still common today, that profit arises from “buying low and selling high.” This explains nothing, really, because the gain on one side is a loss on the other. The end result, as far as society is concerned, is zero. Or, as Marx famously said, “the capitalist class as a whole cannot defraud itself.”

According to Smith’s argument, instead of profit arising ex nihilo from the process of exchange, it is a slice of the value originally created by the labour of workers. This is a very dangerous idea as far as the capitalist class is concerned. It implies that the interests of workers and capitalists are fundamentally opposed. Smith is not afraid to bluntly describe this reality. He says that the interests of the two classes “are by no means the same,” because “the workmen desire to get as much, the masters to give as little as possible.” There is no “win-win” situation in Smith’s mind. And he brilliantly depicts how, in industrial struggles, the workmen “are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands,” while “the masters…never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen.”

This realistic view of class struggle, so distant from the platitudes of Mervyn King, flows naturally from an understanding of the source of value and a “deduction” theory of profit.

A step backward

Smith was unable to consistently adhere to a labour theory of value, however. He concluded that this principle is only applicable to commodity exchange in pre-capitalist societies (the “early and rude state of society”). But if we examine why Smith abandoned this theory, we can appreciate how seriously he struggled to understand capitalism.

When he turns from pre-capitalist society (depicted as being made up of independent commodity producers who own their means of production), to examine the situation under capitalism, Smith is perplexed by a case of unequal exchange. This is the exchange between capitalist and wageworker, where the worker is paid a money-wage that contains less (embodied) labour than the (living) labour carried out in return for the wage.

Smith does not realize it, but in making this observation he is tantalizingly close to identifying the precise source of surplus-value. Marx was able to reveal this great secret of capitalist society by clarifying how surplus-value arises from the difference between (a) the value of the labour-power (or labour capacity) a wageworker sells as a commodity to the capitalist and (b) the new value created in production by the actual use of this labour-power (i.e. labour itself), with the latter being greater in value magnitude than the former.

Smith fell into hopeless confusion because he did not make this distinction between labour and labour-power, instead using the same the term “labour” to refer to both. Once this crucial distinction has been made, however, it becomes clear that the exchange between wageworker and capitalist is not unequal. The capitalist pays for labour-power according to its value, which is determined by the value of the commodities the worker consumes to “reproduce” this capacity to labour. What is unequal is not the exchange itself, but what happens next, in the production process, where the worker’s labour generates a greater magnitude of value than the value of the labour-power exchanged.

Far from contradicting the labour theory of value, it is only on its basis that this exchange between wageworker and capitalist can be adequately explained. But Smith, fixated on the very real inequality of the outcome, concluded that another theory of value was needed to explain capitalism. He turned away from the “deduction” theory of value, to embrace the opposite, “composition” theory where value is explained as the sum of profit, rent and wages. What this does not explain, of course, is what determines these three component parts.

Even here, though, Smith’s views are not without basis, since under capitalism commodities are sold at their “production prices,” rather than their values, and this is a composed price (cost price plus average profit). But Marx explained the relation this composed price has to intrinsic value, whereas Smith merely described it.

Smith’s thought was this mixture of science and a mere cataloguing of external phenomena. Defenders of the capitalist system draw on the latter, and love to quote from his superficial descriptions of the marketplace, but socialists can thank Adam Smith for taking an important step towards an understanding of what makes capitalism tick.

Michael Schauerte

The Theoretical System of Karl Marx (1968)

Book Review from the  1968 - number 3 issue of The Western Socialist

The Theoretical System of Karl Marx by Louis B. Boudin, Monthly Review Press, $7.50

The reprint of this book, sans introduction and hence free of possible reader misdirection, should be warmly received by all students of Marxism not having the good fortune to possess a long out-of-print copy. For verily this book may be deemed a Marxist classic, and belongs in the library of every socialist desiring a unifying understanding of Marx. It is indispensable reading for students of socialist fundamentals. 

Its primary role is that of serving as a somewhat advanced but lucid introduction to the study of the Marxian system with its "accent on the system, that is the relation of its different parts to each other and the unity of the whole." And this structural wholeness, this interdependency of its different parts cannot be overemphasized for one seeking a fuller grasp of Marxism. 

Written in the first decade of this century by a Marxist of exceptional originality and deeply penetrating perception, this invaluable book consists of "an exposition of the teachings of Marx" in their systematic relatedness and wholeness and a depth analysis of the various criticisms — pertinent to the specific subject matter under chapter discussion (Materialist Conception of History and Class Struggle, Value and Surplus Value, Economic Contradictions, and the Passing of Capitalism, etc.) — which blossomed following the deaths of Marx and Engels and which, then as now, manifestly attest to the eminent position of Marxism and the nascent apprehensions of the bourgeois. 

"The Theoretical System of Karl Marx" is a book to be read and reread and certain parts reread again; and then conveniently shelfed next to Capital to be referred to frequently in the face of present day anti-Marxists. 

The reader will note at the outset that there is one factor held in common by most, if not all, critics of Marxism, and that is that none 

"openly defend the theories which Marxism has supplanted. Almost everyone admits expressly the justifiability of Marx's criticism of the theories which predominated before his advent, and that Marx's theories were correct at the time they were first stated and a proper generalization of the data then at hand. What they claim is, that latter developments have shown that they were based on insufficient data and that our present knowledge requires the revision of some of his tenets . . . Hence, the name Revisionists, under which most of newer Marx critics are known, and the term Revisionism applied to their writings and teachings." 

The Revisionists, exemplified by their don, Eduard Bernstein, a leading theoretician of the German Social Democratic Party and one time intimate acquaintance of Engels, but who for reasons examined in Boudin's book was moved to a critical frame of mind, criticized the Hegelian background, the labor theory of value, "the exploitation theory," the doctrine of increasing misery, etc. 

As will become clear to the attentive reader, the Revisionists skimped on their homework. For they not only fail to prove their general criticisms but fail to prove the particulars in their particular indictment of Marxism. Since the "problems" raised by the Revisionists were vague and poorly formulated in their own minds, they were unable to get below the surface of the problems. Being vague as to what the problems actually were, being victimized by compartmentalized reasoning, as it were, their vision allowed them only glances at disconnected facts here and there and they lost the large and enveloping scene altogether. Because of this reliance on isolated statements or expressions and their disregard of the interconnected and inseparable interrelations of the Marxian system as a whole, they tail to get to the crux of the issues raised and consequently their satisfactory resolvment but rambles on in an aura of uncertainty and perplexity. 

There definitely was a problem — the problem of harmonizing a new factor which had entered the picture (that of corporate methods of doing business) which, on the surface, tended to vitiate the Marxian prognosis. Clearly and thoroughly formulating the issues raised by the Revisionists and others, Boudin provides within the framework of Marxism the needed harmony. 

In addition to the Revisionists, there is dealt with an anti-Marxist group who, in the opinion of Boudin, an opinion, it is safe to assert, shared by all scientific socialists, "conclusively establishes not only the preeminent position occupied . . .  by Marxism as the recognized doctrine, but also the fact that there is no doctrine capable of competing with it for establishment or even dividing honors with it . . . " This group holds

"that the whole system must be thrown overboard as unscientific . . . These . . . critics of Marx do not dare accept in its entirety any other system, wholly or partly original with its authors, which would be capable of taking the place of Marxism as an explanation of social phenomena, They almost all, therefore, fall into what may well be termed Nihilism, that is to say, they are led to deny the existence, nay, even the possibility, of any social science. In other words: Marxism is so much the scientific doctrine in its sphere (which covers all the life of humanity in organized society, including all its social and intellectual manifestations) that you cannot destroy it without at the same time destroying all scientific knowledge of the subject." 

Carried to its utmost extreme, Nihilism explains the underlying cause of much contemporary historico-philosophic writings of obfuscation, pessimism, mysticism, and the seemingly complete abandonment of reason on the part of its practitioners. Forsaking "the scientific doctrine," denying or refusing to recognize its existence and validity, and devoid of any substantial substitute, these despairing representatives of the capitalist class, who would infuse in the working class the failure and hopelessness of the capitalist class to further promote social advancement and progress, who in their desperation deny any social science and hence any hope for mankind, perforce wander up and down the corridors of darkness, confusion, and negativism. 

Boudin groups the critics of Marx according to their treatment of him, though this grouping is by no means rigid. Disregarding the overlapping of the groups, they are: 

"First, the philosophers, who dwell principally on Marx's philosophic system; secondly, the economists, who examine his economic theories; and thirdly, the sociologists, that is to say those who concern themselves chiefly with Marx's theories of laws which govern the development of the capitalist system." 

As the reader will soon discover, these critics for the most part are prone to suffer an ailment diagnosed by Boudin as "Confusion of Terms and Ideas." This mentally retarding and truth-concealing ailment lead Marxist critics, those of today as well as those treated by Boudin, to substitute their own terminology for that of Marx's, and to ascribe to Marx (and his disciples) all sorts of things which he did not say or, having said, in a larger context conveying an entirely different meaning than his critics would have their readers believe. Not only does this ailment afflict those relatively ignorant of Marxism, but less understandably, infects those who otherwise allow no doubt of their knowledge of Marxism. Were it possible overnight to cure this apparently contagious malady with some miracle drug, there would immediately follow a vast lessening of anti-Marxism, and that remaining, legitimately raised and clearly marked, could be satisfactorily disabused. 

The book contains several amusing criticisms of Marx. For example: Was Marx a philosopher and is Marxism a philosophy? Grave and profound dissertations were written on this, for it was considered of revealing import by certain critics of the time. It apparently never occurred to them, as it does not occur to many present day critics, to examine the works of Marx and Engels to ascertain what they had to say on the subject in conjunction, of course, with the teachings of the system as a whole. Had they done so they would have found Marx and Engels expounding the opinion that philosophy had reached its zenith and demise with Hegel, "that henceforth the place of philosophy is taken by science." Quoting Engels, Boudin writes: "This conception (the materialist conception of history) puts an end to philosophy on the historical field, just as the dialectic conception of nature makes all natural philosophy unnatural and impossible." No, in the words of Boudin, "Marxism is no abstract philosophy. It is just the reverse, it is concrete science, and therefore the heir and successor of all philosophy." 

Another amusing criticism of Marx was occasioned by the supposed contradiction between the first and third volumes of Capital — and this despite the fact that "most of the third volume, and particularly those portions of it which are supposed to modify the first volume, were actually written down by Marx in its present form before the publication of the first volume!" 

One Russian Marxist of some prominence was so moved by his inability to reconcile the seemingly opposing doctrines laid down in the first and third volumes that he questioned the latter volume's genuineness and practically labeled it a fraud — and this he did notwithstanding Engels preface to the third volume which leaves no doubt as to its authenticity. It seems that even friends of Marxism can contribute to its misunderstanding for reason of their personal inadequacies. 

The supposed contradiction in the first and third volumes took its classic form in Bohm-Bowerk's "Karl Marx and the Close of his System." It was a favorite theme of the Revisionist, who held that 

"Marx's theoretical ideas had passed through an evolutionary process, the main tendency of which was from 'unscientific,' hard and fast monistic dogmas, at the outset, to mild and loose eclectic 'science' at the conclusion. This they applied equally, and with equal justification, to the whole Marxian theoretical system, to his historico-philosophic and his economic theories alike." 

Had the Revisionists been content to limit their criticism to Marx's historico-philosophic ideas they might have stood a fair outside chance of getting away with it (despite its absurdity in face of the written order of Capital), since these views of Marx are not codified in any treatise, but "are strewn over the whole mass of his writings in a more or less fragmentary condition, and it requires an intimate acquaintance with his theories to see the improbability of this claim." 

But the Revisionists were not content or were inherently unable to limit their criticisms of the supposed contradiction to Marx's historico-philosophic views, but included as well his economic views. This lack of discrimination was their undoing, for the economic views of Marx ring loud and clear in most all his writings. On this issue, Boudin could not let the matter go unexamined and unchallenged, for, he writes, "if there really is such a contradiction, and if the doctrine of the third volume is virtual abandonment of the labor theory of value, it makes, of course, very little difference when the different portions of Marx's book were written, or what he thought of one portion when writing the other, except, of course, as an interesting study of a great aberration of an extraordinary mind." Hence, Boudin undertakes a tightly reasoned analysis of this bugaboo of the Revisionists and other critics and completely vanquishes it. 

Boudin's book in its relatively intense brevity (286 pages) is of immense scope and rich in historical interest. Notwithstanding the death thrust and burial given the anti-Marxist arguments by Boudin, their topicality is still very much with us as evidenced by the not infrequent sallying forth of contemporary anti-Marxists with pretty much the same opposing arguments as their long dead progenitors. 

REN

Editorial: The class war is not over (1999)

Editorial from the November 1999 issue of the Socialist Standard

"The class war is over," Blair proclaimed at the Labour Party Conference in Bournemouth last month. "The 21st century," he went on "will not be about the battle between capitalism and socialism but between the forces of progress and the forces of conservatism."

The class war—as the struggle between those who own productive resources for profit and the rest of us—is far from over. It can only end with the dispossession of the owning minority and the consequent disappearance of classes and class-divided society. In other words, with the establishment of the common ownership and democratic control of productive resources that is the basis of socialism.

Blair probably wouldn't disagree that the end of the class war means the disappearance of classes. Only he claims that this is what has already happened: that the vast majority of us are already classless. This is not the case, neither in the facts nor even in people's minds. A minority still monopolise productive resources and live in luxury off the profits they derive from this, and most people still consider themselves members of the working class—some 55 per cent according to an ICM poll published last September (surprisingly high given the barrage of propaganda for the view that "we're all middle class now").

Those who proclaim that "we're all middle class now", "goodbye to the working class", "the class war is over" are not stating a fact. They are putting forward a political programme. They want us to think that we are all just isolated classless individuals who can only improve our lot by our own individual efforts. It is an attempt to disarm the working class ideologically, to get us to give up the idea of collective struggle, whether on the industrial front or to replace capitalism with socialism.

At the moment—as a result of the continuing economic crisis and the defeats of the 80s—things seem to be going their way. People do seem resigned to trying to improve their lot only individually. But the class struggle is a matter of structure not ideology. It is built-in to the capitalist system, based as this is on the extraction of surplus value from the work of those who are forced to sell their mental and physical energies for a wage or salary (and that includes the mythical "middle class"). In other words, on exploitation. And wherever there is exploitation there will be struggle, first to lessen it and then to bring it to an end.

The 21st century will prove Blair wrong. As governments continue to fail to solve problems, as profits continue to be put before needs, as exploitation continues, "the battle between capitalism and socialism" is by no means off the agenda. The class war is not yet over.