Part Iii; Vol. Ii, P. 128.)

The correspondence between selling price and the cost of production seemed to Smith to be of the very essence of justice. Complete correspondence would realise the ideal of the just price.

Wealth of Nations, Book I, chap. 4; Cannan, vol. i, p. 30. The passage is well known. “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.”

The statement has been qualified because in the passage referred to Smith seems to define utility in the vulgar sense (i.e. utility as contrasted with mere agreeableness). This want of exactness was corrected by Ricardo, and is the subject of a searching criticism by Mill. The following passage from his Lectures on Justice may serve to throw some light upon the definition: “There is no demand for a thing of little use; it is not a rational object of desire.” Smith could not conceive the possibility of a demand or even a desire for a commodity which was useless from a rational point of view. But this is evidently a great mistake.

The radical separation of the two ideas was perhaps more a matter of expression than of reasoning, for in his Lectures on Justice, p. 176, value in use, coupled with the purchasing power possessed by those who desired the commodity, was regarded as one of the elements which determined the demand for it and fixed its market price. The whole discussion of the theory of value by Smith is very unsatisfactory.

We ought perhaps to have said that he had to choose between three possible definitions, for in the Lectures on Justice we find a third definition of “natural price” (p. 176).

Wealth of Nations, Book I, chap. 7; Cannan, vol. i, p. 58.

Ibid., Book I, chap. 5; vol. i, p. 33.

Pareto in his recent article L’Économie et la Sociologie au point de vue scientifique (Rivista di Scienza, 1907, No. 2) expresses himself as follows: “Underneath the actual prices quoted on the exchanges, prices varying according to the exigencies of time and place and dependent upon an infinite number of circumstances, is there nothing which has any constancy or is in any degree less variable? This is the problem that political economy must solve.”

Wealth of Nations, Book I, chap. 5; Cannan, vol. i, p. 32. In this passage Smith seems to imply that the value of an object is determined, not by the amount of labour which it cost to produce it, but by the amount of labour which can be bought in exchange for it. Fundamentally the two ideas are one, for objects of equal value only can be exchanged, so that the amount of labour anyone can buy with any given object is equal to the amount of labour which that object cost to produce. “Goods,” says Smith, “contain the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity.”

Ibid., Book I, chap. 5; vol. i, p. 33.

Ibid., Book I, chap. 6; vol. i, p. 50.

Wealth of Nations, Book I, chap. 7; Cannan, vol. i, p. 57.

Ibid., chap. 6; vol. i, p. 51. Here, for example, is a passage in which, as Böhm-Bawerk forcibly remarks (Kapital und Kapitalzins, 2nd ed., 1900, p. 84), the two conceptions are found in juxtaposition without any attempt at reconciliation: “In this state of things [where labour and capital have already been appropriated] the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, command, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour.” At the beginning of the passage the workman shared the produce of his labour and profits constituted a deduction from the value created by labour alone; at the end of the paragraph profits issue from a supplementary value which is an addition to the value already given it by labour. Other passages where the two conceptions come into contact are also cited by Böhm-Bawerk. Interest and rent are also occasionally taken as evidence that the workman is being exploited, and this entitles Smith to be regarded as the father of socialism. More than one passage in his work seems to point to this conclusion. “In other countries, rent and profit eat up wages, and the two superior orders of people oppress the inferior one.” (Book IV, chap. 7, part ii; vol. ii, p. 67.) Concerning property he writes: “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.” (Book V, chap. 1, part ii; vol. ii, p. 207.) And finally there is the famous passage from the sixth 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.… He [the workman] must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part.” (Book I, chap. 6; vol. i, p. 51.) Dr. Cannan in his History of the Theories of Production and Distribution goes the length of declaring that the theory of spoliation is the only one in Smith’s work. It is to Smith that we owe that idea so frequently expressed by socialists, namely, that the workman in modern society never really obtains the produce of his toil.

Cf. supra, p. 64, note 2.

Wealth of Nations, Book I, chap. 7; Cannan, vol. i, p. 59.

Smith only gives at most seven or eight lines to monopoly price. He simply states that “the price of monopoly is upon every occasion the highest which can be got.” (Ibid., Book I, chap. 7; vol. i, p. 63.) To-day the theory of monopoly prices is one of the most important in the whole of economics.

Wealth of Nations, Book I, chap. 8; Cannan, vol. i, pp. 81-82.

“That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value.” (Wealth of Nations, Book IV, chap. 1; Cannan, vol. i, p. 396.) The whole chapter is an attempt to get rid of this prejudice.

Ibid., Book IV, chap. 1; vol. i, p. 416; also Book II, chap. 2; vol. i, p. 274. “Though the weekly or yearly revenue of all the different inhabitants of any country, in the same manner, may be, and in reality frequently is, paid to them in money, their real riches, however, the real weekly or yearly revenue of all of them taken together, must always be great or small in proportion to the quantity of consumable goods which they can all of them purchase with this money. The whole revenue of all of them taken together is evidently not equal to both the money and the consumable goods; but only to one or other of those two values, to the latter more properly than to the former.”

We meet with this expression several times: in Book I, chap. 11,