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Labour Theory

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Published in: Economics
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Adams Smiths Labour Theory of Value

Roshan K / Hyderabad

2 years of teaching experience

Qualification: B.A (UNIVERSITY OF HYDERABAD - 2017)

Teaches: All Subjects, Hindi, Mathematics, Science, Geography, Social Studies

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  1. Adam Smith theory of value So that labour is the only universal standard to measure the value of a commodity, but in ordinary transactions money is sufficient Normal price and Real price in smith's view The amount of money is required for exchange of a commodity id nominal price The amount of labour is relatively required for exchange of a commodity is Real price The distinction between nominal and real prices (the metal coin value changes by availability of raw material which uses as measure of value of the commodity, whereas the embodied and command labour values are relatively consistent in expressing the value of the commodity) Labour embodied and commanded by the commodity in the capitalist economy (wage is a fraction of the price of the commodity) For instance one year labour and 0.5 seeds can produce 25 bags of paddy, The net product of the year is 24-5 bags of paddy. If the real wage of worker is 12 bags, remain 12.5 bag are equal to rent and profit. It means labour embodied 12 bags and commanded 24-5 bags (2 years of labour). The price of the commodity contains prices or money value of share of all factors contributed in the production
  2. Component parts of the price The natural values of factors get from natural price of the commodity Natural price = Labour x Natural level of wage + Land x Natural level of Rent + Capital x Natural level of Profit. The market price chase the natural price but can not catch, the natural price try to follow the market price but can not reach The gravitation is nothing but market mechanism under two conditions, higher market price contribute higher profits and leads to increase the wages and cost of production and further it leads to increase natural price, so natural price follows the market price ' An increase in natural price leads to decline in profits, savings, capital accumulation and demand for labour (factors) and it leads to decline in the wages (prices of the factors)lt affect the factors incomes and their demand for commodities negatively, then market price of the commodity will fall down and again natural price followsNatural price in one hand, it follows the trend of market price and then it pull down the market to the original position ' Competition and Gravitation play an important role behind the trends of market price and natural prices of the commodity
  3. The relationship between market price and natural price of the commodity Changes in the market price and natural price of the commodity Cost of production Market price / Natural price Profits Prices of factors
  4. The relationship between market price and natural price of the commodity Changes in the market price and natural price of the commodity Cost of production Natural price Profits Prices of factors
  5. Natural price and market price Market price and Natural price The amount of money which the commodity changes hands at any particular movement is Market price Natural price which tending to push the market price back to certain minimum level. It's like marshals analysis of short-run and long-run supply curve determined equilibrium price O Market period equilibrium price D/S O Long-run supply equilibrium price D/S
  6. Smith's labour theory of value Labour theory of value refers to in which the relative prices of commodities depends primarily on the relative amount of labour it requires to produce them Deer and buffalo hunting examples in the traditional economy (If deer is one man day labour and buffalo is 10 man days. There is no difference in technology in hunting deer or buffalo but no. of man days and methods of hunting) But in the case of labour shifting from one line of production to another in the modern capitalism depends upon the ownership of assets, skill and ensuring the market for the commodity which is planned to shift. Value Added Accounting Profit = Sales Revenue - Cost of inputs - Wages - Rent Value added = Sales Revenue - Inputs cost = Wages + Rent + Profit The concepts of 'productive' and 'un-productive' labourers Employers and Workers Employers have structural advantage over the workers Workers unions were illegal during 18th century British law But the employers have different methods in like Oligopoly or monopolistic competitive market conditions (Tacit, cartels and price leaderships)
  7. Smith's theory of Wage Wages and subsistence Allowing the workers to produce themselves Population growth is the consequence rather than the cause of development This is the reason behind to prefer subsistence wage theory of workers At higher population growth, the workers move to urban areas to get better wages, if the urban wage decline to less than the subsistence level then, the worker get back to rural areas temporarily In a growing capitalist economy, the wages are generally above the subsistence level due to implementation division labour, and technology. Wages and Growth High wages and standard of living of workers with a growing capital country get the development rapidly rather than a low wages and low capital stock countries Natural level of wage Smith's theory of wages addresses the forces tend to fluctuate the wage level more directly rather than the determining factors of wage at a point of time An increase in the real wage will be the reason to decline profit rate where, even though the capital accumulation rate is high.
  8. Smith's theory of Wage The major issues in Smith theory of wage are understanding functional relationship among 'subsistence wage', 'market wage' and 'natural wage'. The origin of raising profit from the functional relation among the above three concepts The behavior of 'rate of profit' and 'wage rate' during long period and variations And the role of rate of profit and rate of wage in the growth of the economy If assume that in the initial stage of the economy, the above three wages are same, at subsistence wage the demand for labour will be more responsive than the supply of labour and tend to increase the market wage. At subsistence wage the profit level also will be higher and tend to create more demand for labour and leads to increase market wage The natural wage also will increase by positive change in the market wage and leads to increase in cost of production in one hand and incomes of the labourers on the other The level of subsistence wage also will increase by positive change in the natural wage respectively but these three types of wages would not equalize at any point of time
  9. Variability of wages and profit Smith argues that the profit rate and wage rate get equalize by the competition among capitalists and labour respectively in the industry. But it also leads to long-lasting differences in the wages and profit rates between different 'Employments' of the both labour and capital. The agreeableness of the work also a factor which determine the wage rate and as well as profit rate The profit rate depends on the efficiency of the worker and orgnizer, the efficiency come from proper training, every line of training involves the cost and high costs of training would have correspondingly higher wages and profits. The higher variability of demand causes the higher wage rates, for instance, construction industry demand labour with higher variability but not profit rates. The profit rate could not effected by the variability of demand due to nature of the capital. The most of the capital was 'circulating capital' during 18th century and that can be quickly moved from one employment to another in response to change in demand, but not in the case of fixed capital like in modern economy. Trust and morality can bargain more wage, for instance, doctors and Goldsmiths can have more wage than agricultural labourers and other workers. Scarcity also another reason for having higher wage in these cases.
  10. Natural wages and profits The variability in probability of success also play an important role in wage determination, lower probability success involves more risk and bargain more wage. For instance, a successful lawyer wage will be more than a successful shoemaker Capital stock and depreciation MRc = r + dp MRc > r + dp for profit Labour and training cost MRL = w + trc MRL > w + trc for profit Profit from the commodity Profit = (MRc - (r + dp)) + (MRL - (w + trc)) Profit = (MRc + MRL) > ((r + dp) + (w + trc) The rate of depreciation and rate of cost of training labour must be lower than the MR from capital and MR from labour. For the long-run existence of the firm, either the profit increasing rate must be higher than the r+dp+w+trc, or the increasing rate of r+dp+w+trc must be lower than the profit rate
  11. Rate of profit and rate of interest An increase in the supply of the commodity due to more accumulation leads to decline in the price of the commodity, it leads to decline in profit Raise or fall in the real wage depends on population growth rate (supply of labour). An increas in the real wage leads to increase in the incomes of the labourers, fertility and population and supply of labour and it leads to decline in real wages ans vize -versa Profit and Rate of interest rate Rate of profit and level of capital stock Rate of profit and Rate of capital accumulation Profit rate < Rate of accumulation Profit rate > Rate of accumulation Profit rate = Rate of accumulation The profit rate and Interest rate If the profit rate < Interest rate If the profit rate > Interest rate If the profit rate = Interest rate The decline in rate of interest depends on the savings, incomes and wages.
  12. Profits on Stock Competition tends to equalize profit rates If one firm's profit rate is higher than the average profit rate of the industry, that firms profit rate will come down by the 'self regulating system' and the profit rates will be eqaulised. If X firms' profit rate > Industry profit rate, then Natural rate of profit The movement of the capital is to seek profit rate equilisation is a central part of the metabolism of capitalist economy Pr -........»C .........+L 1
  13. Profits on Stock Profit rate and Interest rate Rate of profit Supply of Cost of investment production and capital Rate of Interest
  14. Profits on Stock Profit rate and Rate of capital accumulation Profit Capital accumulation Supply Price
  15. Profits on Stock Share of profit and share of natural wage Profit Capital accumula ion Employment/ Productivity Wage/ cost of production
  16. Profits on Stock Profit rate and Interest rate Profit Wage / Traini g cost Productivity/ Increasing returns Marginal cost

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