The Wealth of Nations · Chapter
Of the Component Parts of the Price of Commodities explained
Smith analyzes how the price of every commodity resolves into three component parts: wages of labor, profits of stock, and rent of land.
What happens
Smith analyzes how the price of every commodity resolves into three component parts: wages of labor, profits of stock, and rent of land. He begins with a primitive state where labor alone determines exchange value, then shows how accumulation of stock and appropriation of land introduce profit and rent as additional components. Through examples (beaver and deer, manufacturing, corn, flax, linen, sea-fish, Scotch pebbles), he demonstrates that in advanced societies, price always resolves into some combination of these three parts, which are the original sources of all revenue.
Themes in this chapter
Labor Theory of Value
In early society, the quantity of labor determines exchange value; later, labor remains a component but is supplemented by profit and rent.
Social Class and Inequality
The division of revenue into wages, profit, and rent corresponds to distinct social orders: laborers, employers, and landowners.
Characters to notice
- Adam Smith
Author and narrator of the chapter, explaining the component parts of commodity prices.
- The Employer
The undertaker who hazards stock in manufacturing, earning profit from the workmen's labor.
- A Workman
Laborer whose wages are one component of price; in early society, the whole produce belongs to the laborer.
Key passages
“In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another.”
Before private property and capital exist, the only factor determining how much of one good trades for another is the amount of labor needed to produce each.
Smith introduces the labor theory of value in its simplest form.
“As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials.”
Once some individuals have saved capital, they hire workers, providing materials and wages, and expect to earn a profit from selling the finished goods.
Smith explains the emergence of profit as a distinct component of price.
“Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value.”
All income and all value in exchange ultimately come from one of these three: labor wages, capital profit, or land rent.
Smith summarizes the threefold division of revenue.