The Rate of Interest and the Distribution of Income in a Pure Labour Economy

When Adam Smith considered the simplest economic system he could possibly think of, he envisaged an economy in which all goods are made by labor alone (or, if we wish, an economy in which each labourer makes his own tools in negligible time). In such a such a simple economy, relative value are determined by relative quantities of labor; and it does not make any difference whether one refers to “labor embodied” or “labor commanded”, since the two coincide. For the amount of labor embodied in any commodity will always “command”, through exchange, an amount of labor equal to itself. Adam Smith thought of such a simple scheme as referring to “that early and rude stage of societ which precedes both the accumulation of stock and the appropriation of land” (1904, p.49). But its relevance, on purely analytical grounds, is much wider than Adam Smith himself realized. The article shows that at a stage which (logically) precedes the introduction of capital accumulation and thus the emergence of any rate of profit, the theoretical scheme of a pure labor economy contains already a theory of the rate of interest and hence a theory of the distribution of income.