Question:

Analyse the extent to which there are two distinct and inconsistent theories of value in Adam Smith’s word, 1 based on the `natural rates` of wages, profits and rents, the other a labour-value theory.

Introduction:

The labour theory of value states that the value of goods will be determined by the amount of labour employed in the production method of that very good, therefore the value of the goods according to this theory depends on the amount of labour used, the much more the quantity of labour utilised in producing a certain excellent the much more its value will be.[1]

Adam smith advocated for the free of charge market where the government need to not interfere with the marketplace, the free market economy would guarantee that the optimum natural rates of labour, rent and profits which are rewards for the elements of production is achieved.

He also advocated for totally free trade and according to the factor equalisation theory which states that if elements of production cannot move from 1 country to another while the goods produced can, then the totally free movement of goods will ultimately equalise factor costs when there is trade, to this theory factor costs will be equalised across two countries if there is trade.[2]

According to the natural rates of wages, rent and profits theory, wages are rewards for labour, profits are rewards for enterprise whilst rent is the reward for land, these rewards according to Adam Smith will be optimally be determined by the free marketplace economy and consequently there ought to be no interference of the market by the government.[three]

Inconsistence of the two theories:

According to the labour value theory the value of goods is determined by the amount of labour employed in the production process of that very good although according to the second theory that advocates for a totally free market economy the value of goods is determined by marketplace forces or the supply and the demand of that very good. The two theories consequently are inconsistent in that the value of goods is determined by the quantity of labour employed according to the labour value theory whilst the other the value is determined by the free of charge market.

The labour value theory is based on only one factor of production which is labour even though there are other aspects that are considered in the natural rates theory such as land, enterprise and labour, the labour value theory only considers 1 factor of production even though the second theory considers all other factors of production.

The labour value theory does not take into account a totally free marketplace economy but considers an open economy in which the differences in labour productivity among countries will cause trade among countries even though the natural rates theory considers free marketplace economies which trigger the rates of wages and profits to be optimal.

The labour value theory is based on some drastic assumption that there exist only one factor of production, it also assumes that labour productivity is homogeneous where the production function is specific and that labour productivity is always equal. The natural rate theory takes in consideration that labour productivity is various and that the market economy determines the value of goods and also the rewards for the elements of production.

Conclusion:

The labour value theory assumed that labour was is the only factor of production and that the differences in labour productivity will trigger the differences in the value of goods, in his natural rate of wages and profits he considers other factors of production which consist of labour, capital and land, which in a free of charge market economy their rewards will be optimally be determined by the market.

References:

Paul Anthony Samuelson (1964) Economics, McGraw-Hill publishers, USA

Ian Livingstone (1970) Economics and Development: an introduction, Oxford University Press, Oxford

Oxford College