1.6 Factors Influencing the Price of Commodities
In general, the price of goods is relative to the amount of labor to produce them: if the production of one item is two hours, it should follow that it can be exchanged for four of an item that takes only half an hour to produce.
However, it is noted that not all "species of labor" are valued equally, which is easily enough witnessed in a situation of employment in which a skilled tradesman commands a higher wage than an unskilled laborer, and even among men of the same profession, there are disparities of compensation, in that a worker who produces more output than his fellows is awarded higher compensation by virtue of his industriousness.
(EN: What comes to mind is the demand for equal payment for equal work - generally on the part of the less productive laborer who wants equal payment for equal time, not necessarily for equal productivity. This is an inherent problem of a system in which workers are paid a fixed hourly wage rather than payment based on piece-count of work output.)
The evolution of industry is such that an individual seeks to make a profit from the labor of others. A carpenter whose business is successful will employ an assistant, then another, then another, and eventually reach the point where his employees carry out all the tasks of labor and his own effort is reduced to supervising and managing them, and negotiation with suppliers and customers. And further, to the point where specialized employees handle even these tasks, to the point that the "carpenter" no longer practices carpentry at all, but merely collects a profit from his business.
At this stage in evolution, it is also possible for an individual to provide capital (which Smith calls "stock") to found a business, leaving the labor and organization to others, and expect to collect a share of the proceeds. As such, the price demanded by a supplier of goods in an industrial economy accounts not for the labor to produce them, but for the cost of the wages of the workers who perform the actual tasks of production (which is a direct though imperfect reflection of the amount of labor), along with the cost of component materials, facilities and equipment, and finally along with the profit he seeks to derive from his investment.
It is also the natural proclivity of the capitalist to seek to invest his capital where it will earn the greatest return. Given the opportunity to invest in an operation in which invested capital will earn a five percent return and a separate operation in which invested capital will earn a ten percent return, it is only logical for a capitalist to choose the latter.
(EN: This is often the subject of much criticism, but even on the level of a single individual, division and specialization of labor is rooted in the desire of the individual to invest his time, rather than merely capital, in the activity that generates the greatest profit to himself. This is not avarice, but merely common sense.)
As such, the price of commodities is an effect not only of the labor of production, but also of non-labor costs (materials, equipment, and facilities) and the demand for profit. In every society and for every commodity, the price of goods resolves itself to these three components.
The author provides several examples that illustrate how the price of a good is thus considered. (EN: which is a bit tedious and repetitive, but more or less accurate - except that the division of "wages" and "rents" are bit imprecise, the former seeming to denote costs that fluctuate with the level of production and the latter the fixed costs regardless of output.)
Smith also briefly addresses the notion of interest for the loan of capital, and considers it to be a derivative of the profit made on borrowed money. In effect, the lender is investing in a productive operation and "interest" is his share of the profits, guaranteed by the borrower because the lender has no oversight of the operation of control over the way in which the funds are used - hence a fixed rate of interest is the borrower's guarantee of profit, and should he fail to generate the projected profit, the interest he pays out-of-pocket is a penalty for his failure to manage his business efficiently.
(EN: This notion of "interest" is of particular interest in regard to the religious prohibitions against usury. Smith doesn't make this point directly, and it may not have been his intention to do so. However, it exploits a loophole in religious dogma, as both Christianity and Islam forbid collecting interest on borrowed sums, but permit a person to profit by contributing to a productive venture. As such, commercial lending might be considered tolerable, though it would be more difficult to use the same grounds to ameliorate dogmatic sentiment about consumer lending, where borrowed funds are spent on goods for consumption rather than invested in a productive venture.)
There is also the notion of pricing goods to enable the producer to replenish his stock of materials and equipment, which might be better conveyed by an example: a carpenter who buys logs prices his goods to cover their cost. However, a carpenter who obtains logs from cutting timber on his own land must also charge as if he had purchased them - while his immediate stock of material seems to be essentially "free," his supply is finite and to perpetuate his business, he needs the funds to buy logs for future production when he has depleted the timber of his land.
On of Smith's examples also seems to obliquely refer to the problem of fixed wages. A laborer agrees to contribute work for a fixed price that, in theory, represents his share of the profit from the goods that result from his labor. But because his wages are fixed, he does not participate in the risk of sale - that the goods he creates can be sold at a given price, or at all - and the employer thus mitigates risk by offering a wage based on a conservative assessment. The employer thus suffers a loss or reaps a profit if the sale of goods generates less or more revenue than projected, while the employee is shielded from such risk.
(EN: This is another common objection by those who consider wages to be "unfair" to the workers - though their perspective is entirely one-sided. If profits exceed projections, they would suggest that employees are owed a larger share, perhaps a bonus to adjust wages upward to accurately reflect their share of a higher profit. But it is unlikely they would also accept the notion that, if profits are less than expected, the employer has a right to demand the return of some portion of wages to adjust wages downward, to "fairly" adjust wages to a share of a lesser profit. Essentially, it's an argument of how risk should be born proportionally by employer and employee.)
Smith also asserts that "there are but few commodities of which the exchangeable value arises from labor only." This is essentially correct, but it excludes from consideration much of the service industry, where the majority of cost is labor (while other expenses exist, they are negligible), and excludes from his theory the supplier-side consideration of the price of labor. These are not "commodities," so Smith is essentially correct in his statement, but given that manufacturing has become a small part of the modern (twenty-first century) economy, and that the labor market in industrialized nations is a cause of great concern, this may be an oversight that limits Smith's theory to the specific segment of the market that is concerned with manufacture of physical goods.