Smith called this average price as the 2natural price of a commodity. This analysis further posed the question: What constitutes the natural price of a commodity? It is in response to this question, that Smith proposed his labor theory of value. 3According to Smith, labor is the source of all value, that is, a commodity derives its value from the amount of labor that goes into its production. Smith proposed a labor cost and labor command theory. The labor cost theory deals with the actual embodied labor that goes in producing a commodity and is linked to the natural price of a commodity. The labor command theory is more relevant for the market price of a commodity. According to the labor command theory, the measure of a commodity is determined by the quantity of labor for which it (the commodity) could!.
be exchanged for in the market. In other words, the real worth of a commodity is its power of purchasing labor itself, as distinct from its power of purchasing the product of labor. .
Smith proposed the cost and command labor theories for "early and rude state of societies" and cost of production for advanced economy. The labor theories entangle in a circular reasoning: labor is the measure of commodities but what is the measure of labor? According to Smith, commodities are the measure of labor (because Smith defines, natural price of labor as the amount "sufficient to maintain him during the time of labor". The market price of labor too is governed by the same vagaries of supply and demand.
Illustration of Smith's labor cost theory and cost of production theory:.
For example if we take a society in which land and natural resources are abundant and communally owned/ or not owned by anyone, the wood/bark on a tree has no value (either use or exchange) as long as it is on the tree but when a person cuts the wood from the tree and chops it up it acquires value (both use and exchange). Hence it is the labor that gives it the value.
