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Wednesday, March 26, 2014

The Economics of the Corn Dog: Correcting a Misattribution to Adam Smith

In his otherwise delightful piece on the economics of the corn dog, Brett Stone attributes the labor theory of value to Adam Smith. He writes: “The labor theory of value says that the value of a given product is proportional to the amount of labor involved in its production. On the surface, and perhaps even a few layers down, this is an apparently logical way to account for prices. Karl Marx based many of his conclusions on it and even Adam Smith was among its proponents” (The Freeman, January/February 2014, p. 25). But the attribution is incorrect, both to Marx and to Smith.

Adam Smith, in The Wealth of Nations, especially in volume 1, chapter 5, uses labor—“the ease, liberty, and happiness” (p. 37)—given up in producing a commodity as the measure of the commodity’s value: “Equal quantities of labour, at all times and places, may be said to be of equal value [worth] to the labourer. In his ordinary state of health, strength and spirits; in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.” Smith was trying to avoid the problem of using money (gold or silver) as a measure of value when variations in the supply and demand for money itself caused variations in money’s own exchange value with other commodities. John Stuart Mill (Works, 3: 580–81) long ago corrected the misattribution of the labor theory of value or price to Smith, noting that it confuses the thermometer as a measure of heat with the fire as a cause of heat. Perhaps restatements of the correction are needed to stop the misattribution.

Although Karl Marx argued the labor theory or determinant of value, he did not argue that the quantity of labor employed in the production of commodities determines their market prices. Marx accepted the supply and demand explanation of prices: “Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they cannot account for the value itself” (Wage-Labour and Capital: Value, Price and Profit, New York: International Publishers, p. 26; italics original).

Value to Marx is different from the market price, whose determination Stone wanted to explain. There is no need to ruin an otherwise informative explanation of the price of corn dogs with an incorrect attribution of the labor theory of value (prices) to other writers.

  • James Ahiakpor is a Professor of Economics at California State University, East Bay. He received his Ph.D. in economics from the University of Toronto and he has taught at Saint Mary's University and the University of Ghana.

    He is a member of the FEE Faculty Network