In the readings we discussed last week, Rousseau quoted Locke: “Where there is no property there is no sense of injury.” They agree on something, but Rousseau takes a statement from Locke and incorporates it into his model of government. Marx’s work has a similar relationship to Smith’s – they may share a common point, but they’re heading in very different directions; therefore, contextually, the point that labor was (perhaps) the first medium of common exchange for goods is very different in Smith’s view than Marx’s.
Smith takes his idea of pricing and labor in the direction of laissez-faire, as clearly evidenced in Book I Ch. X part II: Inequalities occasioned by the Policy of Europe. Ricardo tweaked Smith’s idea of labor to make it fit the model better. It’s not necessarily labor that determines the price, but the opportunity costs of the time spent in that labor and preparing for the occupation, and the opportunity costs of the stock and land tied up in the product. It’s the freedom to move our labor and capital into occupations that will return better dividends that promotes progress in a free-market society. In the long run, due to competition, all investments will return at the same rate. Smith understood this and the importance of allowing goods and labor to flow where there’s the highest effectual demand, but the basis is not a labor theory of value.
So maybe Smith was wrong about something. Maybe the labor theory of value and quotes like the one in question don’t belong in his laissez-faire model, and maybe he did plant the seeds of communism because of the inconsistency. Chalk up another point for the Scots for the invention of the modern world.