There is perhaps not a more famous ongoing dialectic argument in the field of political economy than the one between Adam Smith and Karl Marx in regards to capitalism. The two thinkers, although coming to radically different conclusions about the outcomes of the capitalist system for all parties involved, agree on a surprising number of ideas such as labor being the source of commodities’ value, as well as the fact that the division of labor increases productivity. However, their different conceptions of what determines the price of a commodity, the driving force behind and the effects of the division of labor, and the purpose of the capitalist system have widespread implications that cause their holistic arguments to diverge considerably.
Marx’s analysis of capitalism begins with an investigation of the commodity because the wealth of capitalist nations is essentially “an immense collection of commodities” (Chapter 1). Marx differentiates between the use-value and the exchange-value of any given commodity. The use-value of a commodity refers to its qualitative ability to satisfy a human need, while its exchange-value is the “quantitative relation… in which use-values of one kind exchange for use-values of another kind” (Chapter 1). Therefore, exchange-value is not an intrinsic quality of a commodity; it is only discovered in comparing a fixed quantity of commodity A to a fixed quantity B. Since differing quantities of these two commodities appear to have the same value, Marx concludes, there must be a common element between them that allows them to be compared. That element is labor, measured in the socially-average metric of labor-time. Therefore, to Marx, the exchange-value of a commodity is wholly and exclusively the amount of useful labor put into it.
Here, Smith agrees with Marx, acknowledging that labor is “the only standard by which we can compare the values of commodities at all times and all places” (Book I, Chapter V). He too introduces the idea of exchange-value, although he calls it by a different name: the “real price,” consisting of the amount of “toil and trouble” (Book I, Chapter V) put into producing a commodity. However, Smith then makes an important distinction that Marx does not. Citing the difficulty in quantifying labor due to “different degrees of hardship endured, and of ingenuity exercised” (Book I, Chapter V) between different kinds of labor, Smith introduces the concept of nominal price, or the estimated value of the labor that gives a commodity its value, represented in a quantity of currency.
The nominal price is determined by rules of supply and demand: that is, the amount of a commodity in a given market and the number of buyers and the amount of said product they wish to purchase determining the price of that product. Because of this phenomenon, which Smith terms the “higgling and bargaining of the market,” the nominal price of a commodity may be either higher or lower than its real price, but has a “rough...