While building Adam Smith’s resource allocation system, I have often been asked: “What measure of value does it use?”
Unlike the current economic system which uses money, Smith’s system uses real value as a measure of value. He suggests corn as a long term measure of value, and precious metals as a measure of short term value. However, what does the corn and precious metal actually represent? Smith says that it represents ‘labour’. But labour is ambiguous. Marx uses the same measure in Das Capital and ends up with the strange concepts like ‘labour power’ and ‘labour time’ as measures of physical labour, and these lead to the oppressive rationing system in Communist countries. Because they use the same words, people confuse Smith’s ‘labour’ theory with that of Marx.
A Deeper Look Into Smith’s Theory
Fortunately, Smith’s explanation of his theory is condensed and fully explained in just one chapter — Book 1, Chapter 5 of The Wealth of Nations. Here, it becomes clear that ‘labour’ to Smith is rooted in psychology instead of physics when he equates it to toil and trouble:
“The real price of everything.. is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil.”
Toil and trouble are not objective. Person A who has no interest learning how to play the guitar might ‘toil’ a lot if forced to learn guitar, compared to Person B who naturally likes it. Therefore, the ‘high toil’ or suffering of Person A in learning guitar is consistently high always and everywhere he is. Likewise, the low toil or suffering of Person B in learning guitar is consistently low always and everywhere. This is evident in Smith’s maxim:
“At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.”
Thus, the ‘cost’ or ‘price’ of guitar learning will be consistently ‘expensive’ to Person A but consistently ‘cheap’ to Person B. If their society naturally values guitar music, then Person A will be poor, while Person B will be wealthy especially since he can arbitrage his high quality but cheaply-earned guitar skill by selling it to society at a price that is high to them.
So the core idea in Smith’s theory is psychological toil and trouble instead of physical labour. To establish this core idea, we replace ‘Labour theory of value’ with ‘Effort Theory of Value’ since the word ‘effort’ best combines both psychological and emotional toil and trouble with physical work.
Most importantly, effort can connote struggle towards a goal as either a single person or with a team, as seen in the words ‘team effort’, which is consistent with the idea of division of labour in Book 1, Chapter 1. Note that ‘team labour’ is not commonly used.
But effort alone will not lead to value-creation unless the person is interested in what he is applying the effort to — he has to be deeply interested in whatever task he is doing. This is where his ‘self-interest’ comes in. Whatever one is interested in is a natural part of the invisible hand of his dharma. A person interested in guitars will naturally create higher quality guitar music than someone who is not interested in guitars. Society would therefore have more value and quality if its bakers baked and its brewers brewed, instead of its bakers brewing and its brewers baking.
The effect of using ‘effort’ in understanding Smith’s resource allocation system is significant, as seen in the translated texts below:
But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity which is itself continually varying in its own value, can never be an accurate measure of the value of other commodities. Equal quantities of labour, at all times and places, may be said to be of equal value to the labourer. In his ordinary state of health, strength and spirits; in the ordinary degree of his skill and dexterity, he must always laydown the same portion of his ease, his liberty, and his happiness. The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labour which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.
Translated with ‘toil and trouble’
A commodity that always varies in value can never be an accurate measure of the value of other commodities. Just as a natural foot, fathom, or handful can never be an accurate measure.
Always and everywhere, equal quantities of toil and trouble is of equal value to the worker. In his ordinary state, he must always lay down the same portion of his ease, liberty, and happiness.The price which he pays must always be the same, though sometimes it buys varying amounts of commodity. But it is the value of the commodities which varies, not his toil and trouble.
Always and everywhere:
- a thing is expensive if it is difficult or costs much toil and trouble to acquire.
- a thing is cheap if it can be had easily or with very little toil and trouble.
Toil and trouble never varies in its own value. Therefore, it alone is the ultimate and real standard by which the value of all commodities can be estimated and compared always and everywhere.“It is their real price; money is their nominal price only.”