By: Cadet Ryan Smith
In 1776, Adam Smith transformed the world of economics with the publication of his work The Wealth of Nations. His ideas and theories laid the foundation for many subsequent economists. His ideas, however, were often modified by other classical thinkers. As a result, Adam Smith’s ideas were combined with and modified by other economists to become what we now know as Classical Economics.
Adam Smith revolutionized the way economists thought about value with the introduction of his own theory in 1776. While Smith recognized value as both value in use and value in exchange, he would focus mainly on value of exchange. Originally, like many of his predecessors, Smith primarily focused on labor. However, he soon expanded his theory to include an advanced economy where value of commodities can be measured by “the quantity of labour which they can, each of them, purchase or command”. However, David Ricardo felt that Smith had missed an important aspect of value with his “value commanded” theory. Ricardo felt that the exchange value of a commodity depends on the work involved in making the commodity as well as the labor involved in raw materials and capital to produce it. This account by Ricardo was moving in the correct direction by attempting to account for capital and imbedded costs of a commodity. Yet, both economists failed to understand the “other half” of the value argument that Malthus saw and John Mill explained. John Mill, was the closest at understanding the true forces of value. John Mill introduced his supply and demand schedules into the debate with a distinction between demand and quantity demanded. While Smith had understanding of natural price and market price in the short run, he failed to grasp the scope of supply and demand in the overall market. The legacy of the Classical Economists and their definitions of value is simply a legacy of sharing of ideas and moving in the correct direction. All of the economists involved in the debate helped direct the school to the truth.
Another theory of Smith that was eventually altered was his theory of Harmony of Interests and Limited Government. Smith believed that what sympathy produces in people in the moral world, has the same results as self-interest in the economic world. Simply put, if individuals seek self-satisfying goals then they will benefit society by achieving such objectives. Jeremy Bentham, found fault with Smith’s reasoning on the Harmony of Interests. While Bentham believed most regulation was harmful, he did believe that where people’s interest conflicts, that the state should create an “artificial harmony”. Bentham sought to produce the greatest amount of happiness to the most people. While considered a “philosophic radical”, Bentham would provide modification to the Laissez-Faire form of government by promoting government regulation on monopolies, education reform, suffrage, prison reform, and unemployment. While critics of Bentham found fault with his simple utility theory, his call for government-induced harmony found root in many people’s minds. Bentham’s basic principles would begin to take root as the industrial revolution’s ugly side began to rouse public sympathy for the laborers.
Also, Smith’s belief in the unproductive producers was later challenged by other classical economists. Smith believed that soldiers, churchman, lawyers, and other service-based professionals were unproductive laborers because they do not result in tangible goods. Senior, however, felt that service labor is productive because it promotes wealth. Senior recognized that service labor aids in the production of goods either through protection (doctors, lawyers, soldiers), skills (teachers), or in other areas. Still, all of the Classical economists failed to understand that both service jobs as well as production jobs factor into national output and the choice of one over the other merely signifies societies increase in demand for a specific product.
Adam Smith’s contributions to economics lead to the greater success of nations by providing an optimistic road map for the attainment of wealth. While not all of his theories proved to be completely correct, they were amazingly insightful considering their time of origination. The fact that subsequent thinkers added or pondered his writings acts as a estament not only to his accuracy as an economist, but to his timelessness as well. When men speak of “standing on the shoulders of giants”, they could easily be describing Adam Smith.
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