Smith’s Concept of Value Added

Written by Jeremiah Harris on January 28th, 2009

Adam Smith, in the fore mentioned paragraph makes a broad statement about what adds value to a commodity.  Even though this loosely parallels Karl Marx’s labor theory of value, it does imply in the least bit that the “father of modern economics” is communist.  What it means is that both scholars came to the same conclusion about what adds value to commodities.  It is at this point that their philosophies go different directions. 

Through his life experiences, Smith realized that labor can take an item of little worth and increase its value proportionately to what the buyer does not have to do himself.  This concept holds true if the government will take a laissez-faire approach to managing the economy.  Contrary to this idea, the governments at the time of Smith, as well as now, often step in and try to control prices through the use of tariffs, subsidies, taxes, and many other methods that keep items from trading at the true value as perceived by the market.  This supersedes the value that should be added based on marginal utility or labor investment. 

In Chapter XI, Of the Rent of Land, Smith gives the following example of how this system functions.  “The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price.  It is not proportionate to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.”  This helps the reader to understand the true price of an item is based on what benefit it will yield the buyer.  In this case the owner [landlord] can not set the price, but is held to what amount the farmer [renter] is willing to pay.  The amount will leave the renter room to make at least a normal profit beyond the rent.  Paying the true price for an item is the basis for a free market economy where price meets value. 

 

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