Did Adam Smith Retard the Development of Economic Analysis?: A Critique of Murray Rothbard's Interpretation.

• Author: AHIAKPOR, JAMES C. W.

In the first volume of a two-volume work, An Austrian Perspective on the History of Economic Thought (1995), Murray N. Rothbard attempts to make the case that Adam Smith perverted the development of sound economic analysis by failing to advance valid extant theories of value, money, and income distribution. According to Rothbard, most of those ideas had been developed by the Scholastics but were little known to the English-speaking world until recently "simply because [they] had not been translated into English" from Latin (xi). He believes the ideas were "proto-Austrian," which is why their later discovery naturally has had to fall to the modern Austrian School, which he regards as "the major challenge to the Smith-Ricardo" tradition of modern economics (xiii).

Rothbard develops the specifics of his criticisms of Smith in chapters 16 and 17, where he claims there does not exist in The Wealth of Nations any consistent cost or relative-scarcity theory of value, let alone the concept of subjective valuation of objects by individuals. For Smith, profits are not payments for entrepreneurship, claims Rothbard, nor is Smith clear on whether rents enter into the determination of prices or prices into the determination of rents. According to Rothbard, Smith also does not recognize the money-supply-and-demand theory of the price level as argued by David Hume; nor does Smith include Hume's familiar price-specie-flow model of international price adjustments. Rothbard also faults Smith for not having been a consistent advocate of laissez-faire policies, alleging that Smith advocated various forms of state intervention in the economy, including the establishment of a government post office, and that he supported rigid usury laws. His overall assessment of Smith's scholarship is that Smith "originated nothing that was true, and whatever he originated was wrong; that [Smith] was a shameless plagiarist, acknowledging little or nothing and stealing large chunks, for example, from Cantillon" (435). Rothbard thus wants to awaken the economics profession to the truth about Smith's scholarship and to identify the Scholastics, Richard Cantillon, A. R. J. Turgot, and the Austrians as the true developers of what is good economics.

Rothbard may well have made a worthwhile contribution to the history of economic thought by drawing more attention to pre-Smithian economic theorists. And, of course, not every one of Smith's arguments in The Wealth of Nations is beyond valid criticism. Indeed, David Ricardo, in the preface to his Principles, for example, explained that it was to "advert to those passages in the writings of Adam Smith from which he sees reason to differ" (6), particularly with respect to the laws that regulate the "course of rent, profit, and wages" (5), that he was writing. But there is little evidence in Rothbard's book to justify the serious charges he levels against Smith. Rather, most of the claims are misrepresentations of Smith's arguments in The Wealth of Nations. Others derive from errors in Rothbard's own analysis. I illustrate these points with direct quotations from The Wealth of Nations, to which Rothbard refers but without providing specific pages where his claims may be verified. I also refer to some other sources in which more accurate evaluations of Smith's work may be found. I conclude that it is Rothbard who distorts Smithian scholarship by his arguments, and not Smith who is liable to the charge of having seriously perverted the development of sound economic analysis.

These days, when the study of the history of economic thought is fast disappearing from the curriculum of most economics students, misrepresentations such as Rothbard's appear to warrant the more extensive correction that some reviewers could only hint at (e.g., Lowry 1996). My reexamination of Smith's work also contradicts some concessions made to Rothbard by Paul B. Trescott (1995), including that "Smith's distinction between productive and unproductive labor is appropriately condemned" (319), "Smith helped perpetuate a materialistic fallacy that persisted into recent development theory and toyed too much with the labor theory of value" (320), and "Rothbard rightly notes that Smith failed to identify any useful services provided by landlord and capitalist which would justify their shares of income" (321).(1) My assessment follows the sequence of topics in Rothbard's book, beginning with a restatement of Smith's theory of value.

Smith's Theory of Value

Smith's theory of value is an explanation of the "principles which regulate the exchangeable value of commodities" (Smith, The Wealth of Nations [hereafter WN], 1: 33), including money, in the marketplace, namely, the principles of supply and demand or relative scarcity. Smith recognized the difficulties associated with ascertaining individual valuations or "value in use" (32) and therefore focused instead on explaining "values in exchange," or relative prices, which are observable. He called the rate of exchange of any commodity for money (cash) its price.

Modern economics pretty much continues along Smith's line of analysis, although designating money as a measure of value. Smith, on the other hand, uses the quantity of labor time as the real measure of value. Thus Smith explains:

The value of any commodity to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. (WN, 1: 34, emphasis added) Again, Smith explains that

the real value of all different component parts of price is measured by the quantity of labor which they can, each of them, purchase or command. Labour measures the value not only of that part of price which resolves itself into labour [i.e., wages], but of that which resolves itself into rent, and of that which resolves itself into profit. (56, emphasis added) Smith has a good reason for choosing labor rather than money as a measure of value, and he is not guilty of the perversion of thought Rothbard (1995, 456-57) attributes to him. He indeed gives a historical account of the use of money as a measure of value (WN, 1: 36). However, he explains that the exchange value of a commodity in terms of money (i.e., the price) may rise while its exchange value in terms of other commodities falls or remains unchanged. But labor (exertion or toil) is entailed in the production of all commodities, including money itself. Moreover, labor's exchange value in terms of money (the average wage) also changes in the same direction as the price level. Therefore, Smith argues that it is more reliable to estimate the value of commodities in terms of the amount of labor for which they will exchange rather than in terms of money or nominal prices. Thus, says Smith:

At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; that is 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. (37, emphasis added) It is instructive that Thomas Robert Malthus, whom Rothbard identifies very closely with Smith's economic analysis (apparently so as to tie Smith with Malthus's population theory and its implications), also recognizes Smith's use of labor as a measure of value in The Measure of Value (Malthus [1823] 1957, esp. iii-v; also cited in Hollander [1973, 176 n]. Alfred Marshall [1920, 51-52] and Thomas Sowell [1974, 100-101] are also helpful on this point). However, the problem of defining a common unit of labor by which all values may be measured, a problem noted by Smith (WN, 1: 35) himself, led Ricardo, for example, to his unsuccessful search for an alternative, invariable measure of value. Economists, including the Austrians, still have not found one.

Rothbard's charge that Smith argued a labor theory of value and that it took later theorists employing marginal utility analysis--particularly the Austrians (e.g., Rothbard 1995, 450-52, 502)--to explain relative prices by consumers' demand or marginal utility is not new.(2) The charge has been around for a long time (e.g., Bohm-Bawerk [1890] 1970, 73,269) and has appeared in several economics textbooks. Will Mason (1974) describes it as the "Marxist and (ironically) Austrian misconception that classical value theory made labor the source, rather than merely the regulator, of value" (567 n. 1, emphasis in original; Mason [ 1982, 544, 546] repeats the point). A basis for the charge is Smith's explanation that in the absence of any tools or instruments of production, in the "early and rude state of society which precedes both the accumulation of stock [investment funds] and the appropriation of land" (WN, 1: 53), goods would exchange for the relative amounts of labor time spent in acquiring them--beaver and deer "among a nation of hunters" in Smith's example. But in explaining the relative prices or exchange values of commodities where labor, land, and capital goods are used, Smith indeed accounts for their relative prices by the commodities' relative costs of production, including wages, rent, interest, and expected profits in the long run, or relative scarcity (quantifies supplied relative to demand) in the short run (WN, 1, chaps. 6, 7).

Of course, Marxists, who find the labor theory of value important for their cause, namely, waging war on private property, go on to assert that the emergence of private ownership of land and capital (funds as well as capital goods) prevents all of labor's product from being paid to laborers. But that misuse of Smith's argument should be seen for what it is and not confused...