Adam Smith

With Adam Smith the surplus includes manufactures too, and profit upon capital advances is recognized as a second source of appropriation of the surplus besides land rent, and as accruing tendentially at a uniform rate upon the value of capital, owing to competition.

The determination of the surplus in classical authors rests on three groups of “interme­diate” data (that is - see Garegnani 1987, 2007 - not exogenous to the overall theory, but treated as already determined when the purpose is the determination of incomes other than wages). The explanation of wages in terms of custom and of relative bargaining power of workers and “masters” (with a clear advantage, stressed by Smith, of the latter who can resist much longer in case of conflict) makes it legitimate, when one attempts to determine the rate of profits and its variations, to treat (1) the average real wage (and relative wages as well) as given or as an independently varying parameter.

The consideration of the social product as determined in its size and composition by the past accumulation of capital, by the dominant production methods that affect reproduction needs, and by the consumption habits of the social classes makes the same treatment possible for (2) the quantities produced, and for (3) the methods of production adopted, these latter viewed as depending on the “marginal” land and on the division of labour (in turn dependent on the extension of markets and on the stage of technical knowledge).

These three groups of data allow the determination of (4) the advanced capital physi­cally specified, that is, the quantities of means of production and wage goods used up in order to produce the social product (these quantities are assumed adapted to the “effectual demands”, according to the general classical method of concentrating on the “normal positions” toward which actual magnitudes tend to gravitate owing to com­petition); wages are included in the advances because of the importance of agriculture, where workers must be able to subsist for the year before the harvest.

This simple analytical structure determines the physical surplus as well as physical capital advances and land use, but not yet the rates of the incomes other than wages: the rates of land rent, and the rate of profits. These rates, each one tendentially uniform owing to competition, enter normal prices (natural prices, in Smith’s terminology: the centres of gravitation of market prices) in different proportions for different products, rendering relative exchange values dependent on these rates; this creates the main analyt­ical problem of the approach: the rate of profits, being the ratio between exchange value of the surplus product net of land rents, and exchange value of the capital employed, requires for its determination the determination of the relative natural prices of com­modities, which depend in turn on the rates of land rent and on the rate of profits. The question becomes whether data (1), (2) and (3) are sufficient to determine the value of capital and the rate of profits in spite of that reciprocal dependence or additional considerations are needed.

Let us see how the problem presents itself to Smith. The surplus approach makes it natural to attempt to determine the rate of profits through the “surplus equation”:

r = value of surplus (net of rents) / value of capital advances (inclusive of wages)

According to Marx’s interpretation (followed also by Sraffa), Smith, although not endowed with the theory of differential rent which will allow Ricardo to “get rid of rent”, nonetheless regards land rents as determinable independently of the rate of profits; but he still has the problem of determining the value of the surplus net of rents relative to the capital advances: these latter he essentially identifies with wage advances, because he replaces the value of the used-up non-wage capital goods in the natural price with the wages, profits and rents these goods have cost, but then forgets that these incomes were paid in previous periods, and views the value of the given social product as corre­sponding to current wages, profits and rents - which requires capital to consist of wage advances only. His conception of the natural price as resulting from the adding-up of wages, profits and rents at their natural rates makes him occasionally reason as if a rise in one of the three rates could be accommodated by a rise of the natural price without decrease of the other two rates.

The diminution of the capital stock of the society... as it lowers the wages of labour, so it raises the profits of stock, and consequently the interest of money. By the wages of labour being lowered, the owners of what stock remains in the society can bring their goods at less expense to market than before, and less stock being employed in supplying the market than before, they can sell them dearer. Their goods cost them less, and they get more for them. Their profits, therefore, being augmented at both ends, can well afford a large interest. (Smith 1776 [1976], Wealth of Nations, I.ix.13)

Thus wage decreases tend to raise profits, but a given real wage does not suffice to deter­mine the rate of profits, which also depends on the prices at which goods can be sold, that is, on aggregate supply relative to a purchasing power treated as independently determined.

According to a different recent interpretation which is gaining some following (O’Donnell 1990; Dome 1998), Smith does not lose sight of the constraint binding the rates of rent and the rate of profits, and determines rents residually; the key is how he envisages corn production, which he treats as utilizing the best (“improved”) lands, and using essentially corn as advances (he treats the given real wage as if consisting of only corn, evidently taken, in the words of Petty, “to contain all necessaries for life, as in the Lord’s Prayer we suppose the word Bread doth”, Hull, 1899: 89); he views corn­producing land as yielding the highest rent rate (which determines the upper limit for other rates of rent too, by determining the maximum price of the products of other lands as the one that would permit replacing corn with them on corn land without lowering the rent rate); this rate is determined residually once the competition-of-capitals theory of profits allows taking the rate of profits as given in addition to the given wage; the inde­pendence of the rate of profits from the real wage is then not logically contradictory, a higher real wage without change of the rate of profits will imply a decrease of rent and a rise of the price (in terms of corn) of the goods in whose natural price rent does not enter.