Ricardo
In most cases, Smith argued, that something else would be the labor used up in the production of the commodities. He was certain that would be the case in an "early and rude state of society," in which, Smith suggested, it might require the same amount of hunting time to capture two deer or two beaver. Then, Smith suggested, two deer would exchange for one beaver. Therefore, the relative price of a deer would be two beavers, the same proportion as the labor required to produce (catch) them.
We should not take Smith too literally in this talk about "an early and rude state of society." Smith was well aware that machinery was increasingly being used to produce goods and services, and this would complicate matters a bit. If woolen clothing were produced by means of machines (looms), then the production of cloth would use up labor in two ways. First, the work of the weaver sitting at the loom would enter into the value of the cloth. Second, the work of the machine-maker who had made the loom would enter into the value of the cloth, as the loom was worn out making cloth. The value of the woolen cloth would depend on the total labor embodied in the cloth -- both directly (the weavers' labor) and indirectly (the machine-maker's labor). Smith's references to an "early and rude state of society" are no more (I think) than a way of avoiding that complication to make the exposition easier. But the labor embodied indirectly would be very important in the discussions on the labor theory of value that were to follow.
As a general matter, Smith thought, the amount of labor required to produce the goods would determine the rate at which they could be exchanged for one another, though he mentioned some exceptions. If the supply of goods could not be increased by labor, then their value would be determined by their scarcity, and not by the labor embodied in them. Old master paintings would be a case in point -- no more could be produced, since all the old masters were dead, so the price of these paintings could rise to any height without calling forth a competing supply of new production. Monopoly would be another exception. The monopoly would be able to keep the good scarce, preventing any competing new production. The general idea seems to have been the people can always choose to produce for themselves rather than obtaining goods and services in exchange for others. If they must give up more labor to get the good by exchange, then they would produce for themselves instead. Even if an individual cannot "produce for himself," a group can, and this potential competition from new production would keep the relative prices at the labor value. There is also a certain kind of justice in exchange at labor values. Labor is a cost of production because it is laborious -- it requires of us an unpleasant effort and concentration of attention and energy that we might prefer to devote to some other, more entertaining activity. Conversely, the labor embodied in a good or service is at least a rough measure of the subjective sacrifice involved in its production -- the "pain cost" of production -- so exchange at labor values is something like the exchange of equal sacrifices.
Thus we arrive at a central proposition of most nineteenth century economics, including Marxism:
1. Proposition: Exchange Value must depend on something common to all goods. Embodied labor is the one common factor on which exchange value depends.
A counterproposition that would eventually undercut the labor theory pretty seriously has already been suggested:
2. Counterproposition: There are too many exceptions, and the exceptions are too important, for the labor value rule to be considered a correct general theory of exchange value.
One very important exception seemed to be land. After all, land was one of those goods that could not be increased in supply by more labor. And, in a world in which most people were still farmers, this seemed a quite important exception.
Ricardo
