Question

Are price and value different? What does Adam Smith have to do with this?

Answer 1

Profit occurs when a business is selling a good or service for more than it costs to produce. So we should be able to understand income by understanding the prices of the goods and services that the company sells, and the prices of the products that the company buys, like labor. Generally though, the word price connotes anything temporary. Price can rise or fall due to temporary demand shifts, or even weather changes. It didn't take a Moral Philosophy professor to examine how weather-induced declines in wheat crop drive up wheat and bread prices. Nor was it appropriate for the wheat farmer to have read The Wealth of Nations to understand the wheat prices this year

One way of understanding the difference between interest and consumer price is to view the water level in the ocean as a commodity at a given time. The waves go up and down. It is also subject to wave and other disturbances more naturally shifting, yet these motions will gravitate around the level defined by the tides. The tides are therefore equivalent to prices, even if the real price is higher or lower than the value at any moment

According to Smith, therefore, the worth of any commodity to the person who owns it, and who means not using it himself or using it, but exchanging it for other commodities, is equal to the quantity of labor which he can purchase or order. Consequently, labor is the true measure of the exchangeable value of all commodities.

Smith goes on to argue that the value of labor has a permanence which can not explain the variations in nominal prices we observe on the market. These fluctuations may be due to changes in the value of the goods and services resulting from changes in the value of money resources (such as gold and silver) used to purchase them. Nevertheless, the labor which is the common element in determining the value of all goods and services is the basis of all those market processes.