Adam Smith on the origin of profits (2023)

From the June 2023 issue of the Socialist Standard

This year is the centenary of two of the pioneers in the study of what is now called the capitalist economy. Sir William Petty was born 400 years ago in May and Adam Smith 300 years ago this month. Smith is by far the better known but Petty deserves credit for succinctly expressing a key part of the Labour Theory of Value: ‘labour is the Father and active principle of Wealth, as Lands are the Mother’. In other words, wealth is produced by humans exercising their physical and mental energies to transform materials that originally came from nature into useful things.

This was so obvious that Smith took it for granted, as in the opening lines of The Wealth of Nations, published in 1776:

‘The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes…’

This is not yet a labour theory of ‘value’ (a theory of what lies behind the price of goods when they are produced for sale) but modern economics textbooks refuse to acknowledge that only ‘labour’ — humans working on materials from nature — creates new wealth. They want a role for ‘entrepreneurs’, as they call capitalists. What they are trying to do is to provide a justification for profits. They could do this, as in fact Smith does, without denying that wealth is only created by humans working on materials from nature, but they are not prepared to accept even this because of its possible anti-capitalist implications.

Smith does in fact go on to put forward a labour theory of value. But, even on the basis that only human work produces wealth, Smith can be shown as accepting that profits derive from what wage-workers produce.

He argues that, in an early stage of economic development, producers did receive the full product of their labour, but once a stock of wealth, in the form of instruments of production and means of subsistence, had come to be owned by individuals, the position changed. The producers had to cede a portion of what they produced to their employer:

‘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, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertaker of the work who hazards his stock in this adventure. The value which the workmen add to the materials, 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. He could have no interest to employ them, 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’ (p. 37, chapter VI of Book I, italics added).

This is Smith explicitly saying that profits come from the value added to capital by the work of those employed, even if he considers this justified by the risk taken by the employer.

He repeats this later when discussing productive and unproductive labour (where he is using the word ‘manufacturer’ in its original and logical sense of someone who makes something with their hands, not its current distorted meaning of ’employer’):

‘There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit. The labour of a menial servant, on the contrary, adds to the value of nothing. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers: he grows poor, by maintaining a multitude of menial servants’ (p. 253-4, chapter III of Book II, italics added).

Smith was no socialist and he did advocate laissez-faire capitalism, but this doesn’t detract from the fact that he accepted a theory of wealth which showed that profits derive from what wage-workers produce.

Adam Buick

Wisdom from the past (1923)

 From the November 1923 issue of the Socialist Standard

“It may be laid down for an undeniable truth, that where all work nobody will want, and to promote this would be a greater charity and more meritorious than to build hospitals, which very often are but so many monuments of ill-gotten riches, attended with late repentance.”

Wm. Petty, 1699.

The Importance of Marxism—(continued) (1940)

From the May 1940 issue of the Socialist Standard

In last month's Socialist Standard we dealt in some detail with Marx's important discovery—the materialist conception of history. We showed that this conception was a scientific guide to the interpretation of historical events. In the light of this discovery, capitalism is depicted as a passing phase of social development and Socialists as pioneers of a new and more progressive order of society. This primary aspect of Marxism does not, however, exhaust the range of "Scientific Socialism." The extremely complicated internal structure of capitalism stands also in need of analysis, for unless we understand the working of this mechanism our demand for a Socialist society can rest only on historical foundations. It is Marx’s complementary discoveries in the realm of political economy that have ranked Socialist theory as an economic as well as an historical science.

Introduction

If the reader were to take a bird's eye view of our present economic system he would see it as an intricate network of establishments embracing industry, commerce, finance, law and social administration. Having thus surveyed capitalism, the first question that would most probably occur to his mind would be, " How does such an involved structure keep intact?" or, to express the same point in the language of economics, “What are the economic laws of this mechanism?" This very question may be said to be the subject matter of inquiry of Political Economy, the science that deals with the nature of wealth and the laws that govern its production and distribution. As Marx's concept of value and surplus value can really only be clearly understood when viewed in relation to Political Economy, it is desirable for us to consider the aim, scope and historical background of that science. By presenting the subject in this manner we shall enable the reader to more readily grasp the full import of Marx's economic discoveries.

Theory of Value

The central theme of Political Economy is the theory of value—a theory intended to solve the riddle of what it is that determines price. Why, for instance, should a diamond generally cost more than a hat, or a jeweller receive a higher price for his services than does an agricultural labourer? Problems like these have occupied the attention of economists for centuries.

There is one proposition, however, upon which practically all economists, prior to and contemporary with Marx, have been in agreement, viz., That the average price of an article is regulated by a certain standard, which may be called the article's real value. As a matter of fact, all of us in our daily experience recognise such a standard, for we frequently use the expression "value" in an economic sense during current conversation. We often say, for example, "I've paid more for this article than it's really worth," or conversely, “I've received splendid value for money."

Current Theories of Value

If the reader were to ask the Economic League what determines the value of a commodity he would meet with a reply we have so often received, viz., The value of an article is what it will fetch.

The Economic League are not the only ones to advance this proposition.

The columns of the Catholic Herald have contained a similar thesis in an article devoted to refuting Marxism.

Samuel Butler put it forward in verse in his work " Hudibras," more than two centuries ago, when he wrote: —

“The value of a thing
Is just as much as it will bring."

There may be some justifiable excuse for Samuel Butler and the Catholic Heralds but not so for our modern economists, whose reply surely begs the very question that was raised.

For what a thing will fetch is neither more nor less than its price! Value and price must therefore be considered identical.

But, then, the question still arises, “What determines this value or price?" Does the Economic League think there is any determinant? If not let them explain why a house costs more than a loaf of bread.

Let us leave this fallacy and turn our attention to a much more widespread but equally mistaken notion—the view that supply and demand determine the value or price of an article. In this connection one thing is quite true. If the supply of goods exceeds the demand for them market prices will fall; conversely, where demand exceeds supply (instance torches to-day) market prices will rise.

But let us assume a case where supply and demand are equal.

For example: There are six customers in a shop, each of whom, shall we say, demands a tin of biscuits, and the shopkeeper has precisely six tins of biscuits to sell. What happens in these circumstances ?

Will the shopkeeper charge no price for his wares, just because supply and demand happen to be equal—or will he possibly ask one of his customers to walk out of the shop so as to enable him to fix a price?

Actually, of course, the average price of an article is fixed prior to supply and demand. The latter are factors which send the market price sometimes above the average and at other times below, but they no more determine the height of the average price of a commodity (i.e., the price considered, in normal circumstances, over a given period) than the oscillations of the waves of the sea determine the height of the sea level.

Besides—to those who contend that prices are determined by supply and demand, we would pose the following question: What determines supply and demand?

Finally, let us not omit a reference to the theory of marginal utility.

It would take us too far afield to enter into all the manifold aspects of this modern bourgeois theory, so it must suffice to point out the following:—

Utility, whether marginal or otherwise, cannot possibly serve as an indication of the magnitude of value, for utility itself cannot be measured.

How are we to ascertain, for example, how much more utility there is contained in a diamond than there is in a roll and butter ?

Moreover, quite apart from being an objective measure of value, utility cannot even serve as a subjective measure of value for the capitalist. For it is precisely because the goods his workers have produced are absolutely useless to the capitalist personally that he exchanges them for money. In fact, the ironical part about it all is that their only use value is to him their exchangeable value. And this conclusion alone would lead us to reverse the notion that attributes the exchange-value of an article to its use-value, which is the essence of the theory of marginal utility. Moreover, bootlaces are certainly much more useful than battleships (at any rate, in peace time!), but to the best of my knowledge they have never commanded a higher price. An objection may be here raised that I have merely emphasised one aspect of the theory of marginal utility. I am aware of the fact that there are various schools of thought on the question—that there are some who interpret marginal utility to mean “final demand" and others who include in their idea of utility the concept of “cost of production." These points, however, have already been met in other sections of the article.

Man on Value

According to Marx . . .

That which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour-time socially necessary for its production. . . . As values, all commodities are only definite masses of congealed labour-time. — (“Capital,” Vol. I, page 46, Modern Library Edition.)

On the same page he says: —

The labour-time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.”

He then gives the following example of the theory: —

Diamonds are of very rare occurrence on the earth’s surface, and hence their discovery costs, on an average, a great deal of labour time. Consequently much labour is represented in a small compass . . . If we could succeed, at a small expenditure of labour, in converting carbon into diamonds, their value might fall below that of bricks.” (Page 47.)

We shall elaborate on this labour theory of value in a later article. Here we wish to draw attention to the formulation of this concept by economists before Marx—to the evolution of the theory, so to speak.

The Labour Theory of Value Before Marx

One of the first to grapple with the problem of value was Sir William Petty (1623-1687), Governor- General of Ireland. Petty has been called “the father of Economic Science." In his “A Treatise on Taxes and Contributions," written in 1662, he says: —

  If a man can bring to London an ounce of silver out of the earth in Peru in the same time that he can produce a bushel of corn, then one is the natural price of the other. Now if by reason of new and more easy mines a man can get two ounces of silver as easily as he formerly did one, then corn will be as cheap at ten shillings the bushel, as it was before at five shillings. (P. 43, Cambridge Edition.)
  Labour is the father and active principle of wealth as lands are the mother. (P. 68.)

Petty also held a very clear view on wages:

The value of the average daily wage is determined by what the worker needs—so as to live, labour and generate. (P. 60, “Political Anatomy of Ireland,” British Museum Copy.)

Petty was not, however, always consistent in his views. He laboured to a considerable extent under the Mercantilist illusions of his day—the view that only money had any real value. Expositors of the labour theory of value were also Benjamin Franklin (1706-1790) and Richard Cantillon (died 1734), but their views, like Petty’s, were vitiated by Mercantilist notions, which were more or less an expression of the interests of the rising merchant capitalists.

The Mercantilist economists were succeeded in the order of time by the “Physiocrats," the French school of Political Economy. In their works, Francois Quesnay (1694-1774) and S. R. J. Turgot (1727-1781), the leading representatives of this school, divide society into three classes—agricultural, land-owning, sterile (manufacturing, trading, artisan). Physiocratic theory coincides with the interests of the rising French farming class, at that time occupying an ever-growing influence.

Labour was the source of value and surplus value, thought the Physiocrats, but only so far as agriculture was concerned.

Solomon Goldstein

(To be continued)

The Labour Theory of Value Before Karl Marx (1934)

From the July 1934 issue of the Socialist Standard

The labour theory of value is the view that the value of an article is determined by its cost of production in human labour power—according to the conditions of the time. In its fully developed form it was analysed and explained in detail by Karl Marx in “Capital.” We are not concerned at the moment with the theory as it was finally worked out. We are only concerned with the forerunners of Marx, who contributed something to the view. Owing to limits of space we can only consider briefly the most outstanding of these forerunners.

Value presented an insoluble problem for over two thousand years. The first glimmerings of a solution did not appear until the middle of the seventeenth century, when a society mainly concerned with the buying and selling of goods began to take definite shape in this country and was in process of taking shape on the Continent.

As far back as the time of Aristotle—two thousand three hundred years ago—the problem was in the air. Aristotle himself, in his “Politics,” and in his “Ethics,” had something to say about it. He knew that there must be some property common to objects as unlike as bread and shoes that made it possible to measure them against each other. He knew that the common property was not their usefulness, but he was unable to find out what it really was. He ends his examination rather lamely with the remark that people have agreed to estimate value in money. And this after he had already pointed out that exchange existed before money. He makes the illuminating remark, however, that profit-making originated with coin.

For hundreds of years this formed the limit of knowledge on the subject.

As commerce spread over society and accumulating money became increasingly the aim in social dealings, the question of the value of money came more and more to the front, particularly when succeeding representatives of the royal treasury sought to build up waning funds by debasing the coinage. Consequently, during the later middle ages, a considerable literature grew up around monetary matters. With the dawn of capitalist society, in the 17th century, the question became acute. The problem before the writers was: How did wealth originate? Or, as we would put, it: What was the source of surplus-value?

Out of these discussions two main schools of thought developed. The Mercantilists and the Physiocrats, one English and the other French. The Mercantilists claimed that wealth accumulated by means of trade, through buying from the foreigner cheap and selling to him dear. In other words, by having a favourable balance of trade,” an idea that still persists, as witness the nature of the discussions during the recent financial crisis. The Mercantilists, consequently, propagated the view that the traders were the most important group in the nation and were the builders of the nation’s wealth. An idea quite in harmony with conditions that were raising the trader to the most influential position in society.

Thomas Mun, a leading merchant of the time and a director of the East India Company, wrote a book that was published in 1664 entitled “England’s Treasure by Foreign Trade,” which puts forward the Mercantilist view very clearly and vigorously.

The Physiocrats, a group that originated nearly a hundred years later in France, a country whose main prop at the time was agriculture, held an entirely different view. According to them, wealth originated solely in agricultural production, as it was only by farming that a man received back for his work more than it cost to keep him, and, out of the surplus, the trader and the rest of the population lived. Turgot, a prominent Physiocratic writer, who appeared towards the end of their influence, puts their outlook very clearly in his book, “Reflections on the Formation and the Distribution of Riches,” published in 1766.. The Physiocratic doctrines were an expression of the interests and outlook of the capitalist farmer, and Mirabeau, one of their leading political representatives, took a prominent part in the French Revolution.

Turgot was a very clear thinker. He had a considerable knowledge of history and had travelled far enough intellectually to point out that the labourer’s wage was determined by his cost of subsistence.

Sir William Petty, an important member of the Mercantilist school of thought, was the first to make a real contribution to the labour theory of value. In a book he wrote that was published in 1662 and entitled “A Treatise on Taxes,” he states quite plainly that it is labour that gives value to things, but, under the influence of his trading outlook, he defines exchange-value as money, and the particular labour employed in the production of gold and silver as the value-producing labour. Hence he was led into confusion.

He wrote a series of essays in "Political Arithmetic,” which represents the first form in which economics is treated as a separate department of knowledge. These essays are remarkable for brevity and clarity. In one of them he explains in a paragraph the significance of the division of labour as illustrated by a watch, and he does it in a manner that showed he had a clearer grasp of the point than Adam Smith, although, writing a hundred years earlier. Adam Smith confused the social division of labour with the division of labour inside a single workshop, but Petty made no such mistake.

In 1733, Richard Cantillon, another merchant, wrote his book “On the Nature of Commerce in General." In it he stated that the value of a thing was nothing more than the measure of the land and the labour which enters into its production. He was influenced by the Physiocratic idea of the importance of agriculture, as also to some extent was Adam Smith. Cantillon held the view that the daily work of the humblest slave corresponded in value to twice the produce of the land on which he subsisted.

After Petty there was another thinker, probably the clearest thinker of his age, who put forward the labour theory of value in a broad form. This man was Benjamin Franklin, who, in 1729, when barely twenty-three years of age, wrote an essay entitled “A Modest Inquiry into the Nature and Necessity of a Paper Currency." In this essay he argues that the value of articles is measured by the time taken to produce them, but he considers that money has an extra value on account of the way in which it facilitates exchanges. In spite of his clearness of thought he, like his predecessors, was lost in the mystery of money. In fact, all those who preceded Marx got into difficulties when they came to treat of money. In their efforts to analyse money they frequently contradicted the sound views they had previously put forward on value in general.

Another youthful writer, an Italian named Ferdinando Galiani, published a book, in 1750, entitled, “Dell Moneta." He was only twenty-two years old when he wrote it. In this book he pointed out that labour was the sole source of value, but he confused the wages of the worker with the value of the article produced. For instance, he contended that the value of a woollen article was equal to the cost of the raw wool plus the cost of supporting the men who produced the woollen article.

In 1777, Adam Smith’s “Wealth of Nations" appeared. In it he attributed the accumulation of wealth to the division of labour. He made a considerable advance in the analysis of questions concerning economics, but he was still far from understanding the real nature of value. He held that the determination of the value of an article by the labour-time taken to produce it was true of earlier times, but not of the developed capitalism of his day. He also fell into the same error as Galiani, confusing the value of what a man produces with the value of what he gets—his wages. If this view were accepted, then the value of all the articles produced would only be equal to the total wages paid to the workers who produced them.. This was the state of affairs the later Utopians yearned for and what they would have called “fair exchanges." Adam Smith also failed to see that the labour of an engineer and the labour of a bootmaker could not be compared as such—they had both to be reduced to a common basis, the simple expenditure of human energy.

How weak Adam Smith’s grasp of the problem was may be gathered from the fact that he put “labouring cattle" under the heading of productive labourers, and also attributed value-creating properties to “profits of stock” and to the forces of nature.

The progress in knowledge of the labour theory before Marx really ended with David Ricardo, a stockbroker, who made the final contribution in his book, "On the Principles of Political Economy and Taxation,” published in 1817. His fundamental proposition is that the values of all articles, including the value of labour-power, is determined by the labour required to produce them with the prevailing skill and methods. But, as Frederick Engels has pointed out, Ricardo did not see that it was labour-power and not labour that was the value-producing quality, and hence, that the transformation of money into capital was based upon the buying and selling of labour-power. It was the discovery of this fact that gave Marx the key to the problem, and it was Ricardo’s failure to see it that landed him into difficulties when he came to treat of the more complex forms of money.

As a capitalist himself, and one who made a fortune on the stock exchange, Ricardo was quite clear, in fact brutally clear, about the basis of the present social system and its aim, which, he pointed out, was production for profit. He was against State interference in industry, and contended that wages should be left to free competition. He also held the view that the prevailing economic tendency was for wages and rent mutually to increase until they swallowed profit, and he foresaw a time when all property would belong to owners of land and receivers of tithes and taxes. He was quite clear, however, about the fact that neither wages nor profit, nor rent, entered into the determination of the value of an article. Surplus-value, he showed, was the portion of value left after deducting the wages of the producer from the value he added, but he was inclined to confound surplus-value with profit.

As already mentioned, the analysis of value really ended with Ricardo. Nobody after him added anything of importance to his work. The so-called “Ricardian Socialists” who followed him accepted his view that labour was the source of value, and, on the basis of it, demanded that all products should belong to the labourer.

The first of these writers was William Thompson, an Irish landlord, who, in 1824, wrote a book entitled “An Inquiry into the Principles of the Distribution of Wealth most conducive to human Happiness.” As the title of his book suggests, the ideas of the “Utilitarian” philosopher, Bentham, had an influence on his outlook. He defined the existing social system as one of force and fraud, and he proposed a new system on Owenite principles. He was very much interested in the Owenite co-operative experiments and visited the Owenite colony at Ralahine, in Ireland.

He took as his basis the view that all wealth is the product of labour. He contended that all men are equal, or nearly so, and therefore capable of producing equal quantities of wealth. Wealth is unequally divided, therefore the few possessors must abstract it from the many producers.

Neither he nor those of the same group who followed him really understood the nature of value. They thought the seller arbitrarily raised the value of articles above the wages paid to the producers, which they took to be the real value. He held that labour was not, at present, an accurate measure of value, on the ground that desires are apt to vary, but he contended that in a future social system such as he proposed, commodities would exchange at the “ value of real use." He assumed that the future system would also be a system of commodity production, but “fair" exchange would be the social principle.

Thompson's confused views of value are illustrated by the fact that he believed machinery added additional value to products beyond the value as mere instruments of production, and also that, in certain instances where labour is saved in the production of an article, value is added to it by this saving of labour.

In 1825, a year after Thompson's book, appeared, Thomas Hodgskin wrote his “Labour Defended against the Claims of Capital," and, in 1827, “Popular Political Economy." Hodgskin, a retired naval officer, was a friend of ] Francis Place and a member of the radical circle that gathered round Jeremy Bentham.

He also argued that the labourer should receive the whole of his product, but he included in the term "labourer" the master and the buyer and seller. He accepted commodity-production as the basis of a future society, but wanted to rule out profit. On the question of value, he was not clear. He confused the value of goods with the quantity, and asserted that the more goods there were the greater was the total value, in spite of a proportional decrease in the quantity of labour required to produce them. He also appeared to think that profit and rent were amounts added on to the value of articles.

Although his outlook on this fundamental question was confused, Hodgskin’s destructive criticism of existing society provided the Chartists with useful weapons in their struggle. He did a considerable amount of lecturing, founded with Robertson the “Mechanics' Magazine," in 1823, and was instrumental in the founding of the Mechanics' Institute, where he lectured. He later joined the staff of the Economist and the Morning Chronicle, dropped out of the active propaganda movement, and lived to a ripe old age.

 

After Hodgskin comes John Gray, a successful business man, who delivered a series of lectures on "The Nature and Use of Money," which were published in book form in 1831 and again later in 1848. In these lectures he claimed to have discovered the real source of social troubles, which he attributed to a flaw in the monetary system. He urged that demand should be based upon production, instead of production being based upon demand, which, he claimed, was the basis of the existing system. He proposed to rectify matters by establishing standard banks which would issue credit in the form of transferable vouchers based upon the stock, etc., or, in other words, based upon the powers of production.

So convinced was Gray of the soundness and the magnitude of his discovery that he had his book widely distributed, particularly to economists and universities, and he offered a hundred guineas to anyone who could refute his views. In recent times the Douglas Credit Theory has had a certain popularity, but there is little in the fallacious theories of the Douglas scheme that was not anticipated by Gray a hundred years ago.

Gray's views on value were quite erroneous. He believed that gold was no true measure of value and that there was none. He contended that the scarcity of gold prevented its value from being determined by labour. He, again, took for granted the continuation of commodity-production, but proposed that, in future, labour should be the measure of value. This was to be accomplished by the producer fixing his own price for his product and the competition of producers determining whether this price was right or not!

Gray was, at one time, considerably influenced by the views of Robert Owen, and, in 1815, he managed an Owenite colony at Orbiston.

The last writer we will refer to is J. F. Bray, a journeyman printer and the author of "Labour’s Wrongs and Labour's Remedy," published in 1839. His book is long and very wordy and full of conceptions of justice and equal rights, inspired by the economic analysis of Ricardo. His fundamental proposition is that as the earth is common to all, and labour is the sole source of wealth, each human being has a right to the fruits of his own labour. He claimed that as wealth was produced by labour, the capitalist, who did not work, lived by the legalised robbery of the producer. He claimed further that the problem was the same in all countries, whatever their form of government, and that, therefore, the solution applied internationally. A strain of anarchism runs through his writings, but he made some very apt criticisms of existing arrangements and had very clear conceptions on particular points.

His fundamental ideas, however, clouded his analysis of the present economic framework. He believed that the capitalist made his profit through unequal exchanges—buying goods at their values and selling them for more than their values. For instance, he saw that the capitalist paid the worker for a day’s labour a wage that was only equivalent in value to the product of half a day’s labour, but he did not see that what the worker was paid was the value of his labour-power. He did not realise the implication of his view. He fell into the same error as many before him and believed that value was equivalent to the wages paid to the producer.

Like the rest of the Utopians, Bray believed that the world had been searching for thousands of years for a just form of society and it was now discovered. To him the correct society was the result of knowledge based upon first principles which were true for all time, and could have been established as easily two thousand years ago as to-day.

It will, therefore, be seen that he had no fresh contribution to make to the labour theory of value. On one point, however, he was quite clear and emphatic—that mere governmental changes would not alter the worker’s position. Hence he advocated a complete change in the social basis—but it was not really so complete as he imagined.

To sum up, it may be said that the analysis of value from the point of view of the labour theory begins in 1662 with Petty, and ends in 1817 with Ricardo. Although the Utopians did not further this analysis, they did excellent service in pushing forward the worker’s case, in the course of which they made valuable and biting criticisms of capitalist society. As Marx has pointed out, the kernel of the matter was contained in their outlook, and their attitude logically led to Socialist ideas.

Gilmac.

Notes on Economic History (4) (1961)

From the February 1961 issue of the Socialist Standard

Before the Physiocrats

Sir William Petty (1623-1687)

Marx, in Volume 1 of Capital, says: "Once for all, I may add that by classical political economy I understand that economy which since the time of W. Petty has investigated the real relations of production in bourgeois society, in contradiction to vulgar economy, which deals with appearances only".

This is a tribute to the genius and originality of Sir William Petty, the founder of modern political economy. It is in his Treatise of Taxes and Contribution, London 1662, that we find the first idea of surplus value.

Petty distinguishes the natural price of commodities from the market price, the "true price current". By natural price he means value. This is his main point, as the determination of surplus value depends on the determination of value itself. What, then, is value? Petty determines the value of commodities by the relative amounts of labour which they contain; he is concerned not with appearances, but with foundations.

In the following quotation from his Treatise of Taxes and Contributions we get the first definition of value:

If a man brings to London an ounce of Silver out of the earth in Peru, in the same time that he can produce a bushel of corn, then one is the natural price of the other; now if by reason of new and more mines a man can get two ounces of silver as easily as formerly he did one, then corn will be as cheap at ten shillings the bushel as it was before at five shillings, caeteris paribus (all things being equal).

The next quotation from the same work interests us, as it is the early examination of the value of labour;

The law . . . should allow the labourer but just the wherewithall to live; for if you allow double then he works but half so much as he could have done, and otherwise would; which is a loss to the publick of the fruit of so much labour.

In modern words, in receiving for six hours' labour the value of six hours, the labourer would receive double what he receives if he worked for twelve hours and got only the value of six. he would therefore not work more than six hours. Thus the value of labour is determined by the minimum necessary for subsistence. To induce the labourer to produce surplus value and to perform surplus labour, it is necessary to compel him to expend all the labour power of which he is capable, as the condition upon which he may earn the necessities of life.

Petty recognises two forms of surplus value, ground rent and money rent (interest). He divides the second from the first which, for him, as later for the Physiocrats, is the true form of surplus value. He depicts rent not as simple surplus of labour expended over and above necessary labour, but as a surplus, of the surplus labour of the producer himself over and above his wages and the replacement of his capital; as for example the following"

Suppose a man could with his own hands plant a certain scope of land with corn, that is, could dig, or plough, harrow, weed, reap, carry home, thresh and winnow so much as the husbandry of this land requires; and had withal seed wherewith to sow the same. I say that when this man has subtracted his food out of the proceed and given to others in exchange for clothes and other natural necessaries, that the remainder of the corn is the natural and true rent of the land for that year, and the medium of seven years, or rather of so-many years as make up the cycle, within which dearth and plenties make their revolution, doth give the ordinary rent of the land in corn.

To Petty, the value of the corn is determined by the labour time which it contains, while rent, equivalent to the total product after the deduction of wages and seed, equals the surplus labour represented by surplus product. Rent, therefore, includes profit which is inseparable from it.

Petty also shows that the individual character of the labour is of no consequence. Labour time is what matters.

As a final tribute, and summing up of Petty's contribution to political economy, we quote the following extract from Volume III, of Capital.

Petty . . .  and in general the writers who are closer to feudal times, assume that ground rent is the normal form of surplus value, whereas profit to them is still vaguely combined with wages, or at best looks to them like a portion of surplus value filched by the capitalist from the landlord. These writers take their departure from a condition, in which the agricultural population still constitutes the overwhelming majority of the nation, and in which the landlord still appears as the individual, who appropriates at first hand the surplus labor of the direct producers through his land monopoly, in which land therefore still appears as the chief requisite of production. These writers could not yet face the question, which, contrary to them, seeks to investigate from the point of view of capitalist production, how it happens that private ownership in land manages to wrest from capital a portion of the surplus-value produced by it at first hand (that is, filched by it from the direct producers) and first appropriated by it.

John Locke (1633-1704)
John Locke is probably better known for his philosophy than he is for his contribution to political economy. He follows William Petty in that he regarded human labour as the principal source of wealth, though Petty regarded both labour and land as the important factors. For Locke, nature was out of the prime importance. He believed that the laws of nature established personal labour as the natural limit of private property—the limit arising from the physical limitation on the amount of labour an individual can perform, and from the fact that no one should accumulate more than his needs.

Locke was opposed to the private ownership of land. In his opinion ground rent was no different from usury and, due to the unequal distribution of the means of production, was a transfer from one person to another of the profit that should have been the reward of one man's labour. The following quotation from his Consideration of the Lowering of Interest is an illustration of this:

Money, therefore, in buying and selling, being perfectly in the same condition with other commodities, and subject to all the same laws of value, let us next see how it comes to be of the same nature with land, by yielding a certain yearly income, which we call use or interest. For land produces naturally something new and profitable, and of value to mankind; but money is a barren thing, and produces nothing, but by compact transfers that profit that was the reward of one man's labour into another man's pocket.

Locke's importance is that he is the voice of the juridical theories of capitalist society as opposed to feudalism. His work in philosophy was the basis upon which the thinking of subsequent English economist rested.

Sir Dudley North (1641-1690)
Sir Dudley North is best known his Discourses upon Trade. This is mainly concerned with commercial capital, and as such is outside the scope of these notes. The importance of North is that he reflects in his writing the period in which he lived.

From 1663 to 1798, except for the years 1708 and 1709, wheat prices were falling. Landlords complained continuously about falling rents. Industrial capitalists and landowners were concerned about, and did in fact bring about, a reduction in the rate of interest. Up to 1760 it was considered to be in the national interest to maintain and increase the value of land. From 1760 onwards an economic investigation began into the rise in rents, about the increase in the price of land and corn, and of other consumer goods.

The years 1650 to 1750 were full of struggles between "monied interests" and "landed interests". The landowners gradually lost out to the money lenders and financiers of the period. The financiers, with the establishment of the credit system, and the system of State debt, became predominant in society.

Petty, in his works, refers to the complaints of the landlords regarding the fall of rents. He defended the monied interests against the landlords, and placed the rent of money and rent of land in the same category. North, in his writing, follows Petty. It was in this form that capital gave landed property its first set-back, since money-lending at interest was one of the main means for the accumulation of capital.

North seems to have been the first to understand interest correctly. He included both capital and money in "Stock". On price and money his observation that gold and silver serve not as gold and silver in themselves, but only as forms of exchange value, is, for his day, remarkable.

To sum up, the position of the economists before the physiocrats was that they had to try and understand the conditions in which the landlord was being forced out, to the advantage of finance capital which was growing.

Bob Ambridge