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Adam Smith's Theory of Value and Distribution: A Reappraisal.

Adam Smith's Theory of Value and Distribution: A Reappraisal. By Rory O'Donnell. New York: St. Martin's Press, 1990. Pp. viii, 284. $45.00.

Although often moving from radically different premises and placed in the context of different schools of thought, some relevant interpretations of Adam Smith's work--e.g., Schumpeter [7]; Hollander [4]; and Dobb [2] as a development of Sraffa [8] and clearly inspired by Marx [5]--have in common the idea that Smith's theory of the "component parts" of natural prices (wages, profits and rents) should be seen as an important anticipation of the neoclassical supply and demand approach to the theory of value and distribution.

The main purpose of this interesting and provocative book is to criticize this widely held view and to prove instead that Smith belongs in full to the Classical tradition of thought as defined--on the basis of Garegnani's contribution--by the so called "surplus approach" where profits (and rents) are viewed as the residual quantity left from aggregate production after the payment of wages.

To carry out the task the author engages first in a detailed examination of Smith's position on the question of value and distribution (Part I) and then in an equally detailed examination of some significant interpretation of Smith--those of Ricardo, Marx, Hollander, Dobb and Schumpeter (Part II). All this is done in the light of Garegnani's approach, which the Author uses as bench mark for the evaluation of both Smith's own statements and of the interpretations of his work supplied by later theorists.

Chapters 3 through 6 thus contain a discussion of several basic concepts of Smith's theoretical construction: surplus, competition, measure of value and the explanation of value and distribution--the central theme being represented by the idea that Smith did have a surplus explanation for the aggregate profits (plus rents), but did not use it to derive a theory of the rate of profit.

This conclusion represents the connection between Part I and Part II, which opens (Chapter 7) with a discussion of what the Author considers to be Ricardo's addition to Smith's analysis--the "new" theory of the rate of profit. Chapter 8 represents an attempt at a new evaluation of Marx's interpretation of Smith; Chapter 9 is a negation of Hollander's view of Smith as a "general equilibrium" theorist, while Chapter 10 focusses on a critical discussion of Dobb's "two-streams" proposition (i.e., the idea that Smith's work contributed both to the classical approach and to the neoclassical one), which is accompanied by frequent references to Schumpeter's interpretation of Smith. The final chapter (11) summarizes the findings concerning Smith's work and discusses their implications.

The general thesis of the book--as defined above--can be summarized in terms of the following points: (i) Smith did calculate the value of the social product and of the necessary consumption before that of the amount of profits, thus complying with the requisites of the surplus approach where profits are viewed as a residuum; (ii) Smith however did not use this result to derive a theory of the rate of profit, and considered instead this latter is given when building his explanation of natural prices; (iii) the necessary step forward in this direction was successively taken by Ricardo with his "new" theory of the rate of profit as the ratio between the relevant aggregates--since this latter is a development of Smith's surplus theory, "based firmly on his subsistence wage theory" [p. 122]. Smith and Ricardo, the author says, "can be seen to have contributed to the . . . same stream of theory" [ibid.]. In spite of its incompleteness, Smith's theory--this is the upshot of the argument--is firmly placed in the surplus approach.

O'Donnell is not particularly explicit as regards the crucial question of how Smith proceeded in his measurement of the value of the aggregate; but he seems to be reasoning in terms of a supposed equivalence between Smith's measurement in terms of labour commanded and that in terms of labour embodied. The Author's repeated reference to the argument relating to the secular constancy of the cost of production of corn and of the wage rate in real terms should provide the link between the two types of measurement, and allow the calculation of the relevant aggregates made up of different goods in terms of the latter measure.

The whole argument is however opened to some serious critiques:

1) It runs counter Smith's own explicit--and perfectly sound--statement that the measurement in terms of labor commanded and of labor embodied in general do not coincide (the numerical coincidence between the two is verified only in the special case of the "early rude state of society");

2) It attributes to Smith the almost unbelievable incapability to calculate a ratio (whose nature was perfectly clear in his mind) between two aggregates that, according to O'Donnell, he had already calculated with precision;

3) It ignores the fact that what O'Donnell views as Smith's blunder (taking the rate of profit as given when analyzing natural prizes) represents in fact the main building block of a structured alternative conception which contradicts the Author's central thesis and shakes the very foundation of the attempt to prove the residual nature of profits in Smith's theory of value. When O'Donnell writes for instance that "for the purpose of determining natural prices the rates of wages, profits and rents are taken as given" [p. 90. italics in the text]; or that "[i]n explaining price he [Smith] consistently took the rates of wages and profits as given" [pp. 213-14], the reader may wonder on what other possible ground, different from the determination of prices, Smith might have been interested to show instead that profits should not be taken as given, but considered as the residual quantity left over from national product after the payment of wages. And if the answer is "none"--as the very title of the book suggests--then the author's basic argument appears to be questioned. Moreover the two approaches to the problem of profits are basically incompatible since nothing guarantees in general that the exogenously given rate of profit coincides with that resulting from the ratio between the relevant aggregates. O'Donnell seems to recognize this circumstance and to believe that Smith's theory of prices should be simply discarded in order save his surplus approach. This however would leave in Smith's analytical apparatus exclusively the embodied labor theories of exchange and of the rate of profit. that he had clearly confined to the special case of the "early and rude state of society";

4) It is founded on a very restrictive and unacceptable interpretation of Ricardo's contribution to the theory of value and distribution. According to O'Donnell this contribution would simply amount to the drawing of a line of fraction between the value of two quantities already calculated by Smith in the proper way in terms of labour embodied. This way of looking at Ricardo implies the neglect of his remarkable and lasting contribution which consists in his tenacious attempt to overcome the limitations of the labour theory of value, an attempt which paved the way to Sraffa's theoretical construction of the "price equation method."

O'Donnell argument is carried out through the use of a procedure, frequently employed in the literature, that is legitimate and even useful (within certain limits): the emphasis on the passages that lend support to the thesis maintained by the author, and the attempt to minimize the importance of the material that conflicts with such reading. In this direction, however, O'Donnell probably goes too far. The effort to extract the desired meaning from the text risks to turn at times into a subversion of the clear meaning of the quotations (a striking examples is that of pp. 44-45, where Smith's argument about the residual nature of the rate of interest is presented as a proof of the residual character of profits). On the other hand the abundant material pointing in the opposite direction is either substantially ignored in the definition of the book's basic lines, or presented as a series of unimportant deviations from Smith's main line of research.

The attempt to evaluate the relevance of the work under review cannot however be fully carried out without posing a question that goes beyond the scope of the book and relates directly to Garegnani's application own his own theory of the "core"--O'Donnell's central point of reference--to the interpretation of Smith.

Garegnani's interpretation is in fact based not only on the above mentioned idea of "surplus approach" qua common feature of all classical economists, from Quesnay to Smith, Ricardo and Marx (I shall call this for convenience Garegnani's first proposition), but also on a specific set of remarks about the structure of Smith's analysis (I shall call these Garegnani's second proposition) in which--presumably with reference to the stage in which the labour theory of value is no longer valid--he explicitly maintains that the surplus approach cannot be applied to Smith. For instance:

If . . . we use Smith's measure [labour commanded]

. . . the value of the physically given social product will

not be known before the rate of profit is known . . .

We may accordingly seem to be reasoning in a circle

when we follow the surplus approach and attempt to

determine profits by difference [social product minus

necessary consumption]: in order to do that we need

to know the size of the social product, which is not

known until we know the very rate of profit which is

to be determined [3, 30, italics in the original text].

Oddly enough--though coherently with his objective to prove, for Smith, the validity of Garegnani's first proposition--O'Donnell neglects the existence of Garegnani's second proposition, while in fact the very raison d'etre of his book--as defined above--amounts to an attempt at a frontal criticism of this latter second proposition.

At least two important questions are at stake:

(i) The compatibility between the two propositions--if the second is true, then Smith cannot be said to share the classical surplus approach as defined by the first. This is what Garegnani consistently does and what O'Donnell inconsistently, in my views, tries to negate;

(ii) The degree of validity of Garegnani's second proposition. Although Garegnani's argument is here certainly correct, the problem goes beyond the Smithian case of the choice of labour commanded as unit of measurement. In fact not only when we use Smith's measure is the value of the social product impossible to be known before the solution of the model is arrived at; but, as we have all learned from Sraffa's price equation method, always, whatever the numeraire chosen for the system. In general, in the Ricardo-Sraffa case, when the real wage is taken as given together with the matrix of technical coefficients, the solution refers to prices and to the rate of profit; in the Smithian case--when the money wage is taken as given (as the numeraire of the system) together with the rate of profit (as the expression of the monopolistic type power of capitalists)--the solution of the model refers to prices and to the real wage. In both cases the value of the social product and of the share of profits cannot be known before the determination of prices and of the distributive variable which was not taken as given [1, pp. 175-78].

Therefore, the residual nature of profit can, for the general case, no longer be affirmed in the "strong" sense of the surplus approach, but only in the far weaker sense of the endogenous determination of the value of the share of profits--once the technical conditions of production and one of the two distributive variables are taken as given from outside the model--which is simultaneous with that of equilibrium prices and of value of the social product.

Although the surplus approach qua general criterion for the identification of the classical school of though thus withers away, the above conclusion neither implies that it becomes impossible to define another criterion for the identification of the classical school nor that there are no grounds for the opinion that Smith belongs in full right to such school. But to do this Garegnani's definition in terms of the theory of the "core"--and the connected notion for the distributive antagonism as expressed exclusively by the inverse relation between real wages and profit with a given matrix of technical coefficients--must give way to a more flexible alternative definition. This should pivot around the existence of a distributive antagonism among social classes which can take up various forms in the different theoretical contexts: e.g., the inverse relationship between the labor content of "corn" and the general rate of profit (with a given real wage rate) in Ricardo, as expression of the clash of interest between the land owners and capitalists (Caravale [1]); the direct relation between money wages and the price level (with a given rate of profit) in Smith as expressing the contrast between workers and capitalists (Nistico, [6]).

The fact that Smith, with his "general theory of natural prices, belongs in full to the classical school of thought--the objective of O'Donnell's book--can therefore be proved making no violence at all to the text of the Wealth of Nations and incurring in no logical contradiction. In other words, while the theoretical objective of O'Donnell is sound, the path he decided to follow to reach it appears to be a dead end. This well informed and intriguing book should therefore be read with great critical attention. Giovanni Caravale University of Rome "La Sapienza"


[1]Caravale, Giovanni. "Diminishing Returns and Accumulation in Ricardo," in The Legacy of Ricardo, edited by Giovanni Caravale. Oxford and New York: Blackwell, 1985. [2]Dobb, M. H. Theories of Value and Distribution Since Adam Smith. Cambridge: Cambridge University Press. 1973. [3]Garegnani, P., "Value and Distribution in the Classical Economists and Marx." Oxford Economic Papers, 1984, 291-325. [4]Hollander, Samuel. The Economics of Adam Smith. London: Heinemann, 1973. [5]Marx, Karl. Theories of Surplus Value. London: Lawrence & Wishart, 1861-1863. [6]Nistico, S., "Prices and Distribution in the Work of Smith and Kalecki." Journal of the History of Economic Though, Spring 1991. [7]Schumpeter, J. A. History of Economic Analysis. London: Allen and Unwin, 1954. [8]Sraffa, P. "Introduction", in The Works and Correspondence of David Ricardo, edited by P. Sraffa with the collaboration of M. H. Dobb, Volume I. Cambridge: Cambridge University Press, 1951.
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Author:Caravale, Giovanni
Publication:Southern Economic Journal
Article Type:Book Review
Date:Apr 1, 1992
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