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2024 | OriginalPaper | Chapter

4. Adam Smith’s Wealth of Nations

Author : Lefteris Tsoulfidis

Published in: Competing Schools of Economic Thought

Publisher: Springer Nature Switzerland

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Abstract

In this chapter, our objective is to present the main contributions of Adam Smith (1723–1790) starting from his first book The Theory of Moral Sentiments (1764) and continuing with his main book, An Inquiry Into the Nature and Causes of the Wealth of Nations, which established him as the founding father of economics. The Wealth of Nations was published in 1776, the same year as the Declaration of Independence of the American Colonies. Heilbroner (1972) notes that there is a close relation between the two events, since the Declaration of Independence describes the requirements of a capitalist society, while Smith’s book lays bare the mechanisms that govern the operation of such a society. In what follows, we deal with the first effort of Smith to create what we call a theory-generating concept and then with his theory of value, his growth model and his theory of the falling rate of profit and the stationary state. A discussion on taxation and public debt follows, and finally, a summary and some remarks conclude the chapter.

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In these different editions, there were many changes indicating that Smith was not fully satisfied with the text.

The ideas that are developed in the next pages are based to a great extent on Heilbroner (1972).

We purposely avoid the word harmony because we do not want to rule out social conflict, which is inherent in Smith’s work.

Hence, there is production of surplus as a result of the employed labor. Naturally, the surplus must be proportional to the employed labor, provided that exchange is theorized as systematic and not accidental.

For a formal statement of the labor-commanded theory of value, see the Appendix to this chapter.

The term is attributed to Sraffa (1951, p. xxxv) see also Dobb (1973, p. 46) and Kurz and Salvadori (1995, p. 7).

It is true that Physiocrats and some forerunners of the classical economists (e.g., William Petty and James Steuart) made such a clear distinction, but it is only after Smith’s analysis that the distinction became widely known and accepted.

Since the 1960s, the object of analysis of neoclassical economics, at least in the so-called inter-temporal equilibrium, strand is no longer natural prices. On this question, we return to Chaps. 8 and 9).

Marshall who had an inclination to explain almost everything in neoclassical terms attributed to Smith the wish to have a demand curve, where each point on the curve was a possible equilibrium point or natural price (a notion of demand which is different from that of the effectual demand of Smith). After this, it was easy for Marshall to argue that the difference between the market and the natural price was a difference of degree related with the time interval during which the process of equilibrium was taking place (see Garegnani, 1983, pp. 309–313).

Though Smith never used this expression (see also Löwe, 1975, p. 417).

Although Smith was writing during the industrial evolution, there is no evidence that he was aware of the tremendous changes that were taking place and which, in a short period of time, would transform economic life completely.

Hence, it is assumed that the introduction of machinery does not replace workers, so in Smith, employment can only increase (see Löwe, 1975, p. 419; Heilbroner, 1975, p. 526).

There are many references in the Wealth of Nations, where Smith describes competition as a race or contest and not as the static situation of perfect competition envisioned in neoclassical economics.

Nowhere does Smith describe any model of economic growth in the current sense of the term. Simply, many authors—among them are included: Löwe (1975), Robert Heilbroner (1975, 1981) and Walter Eltis (1975, 1984, 1987)—by reading Smith’s text, managed to put together the necessary elements and create what today is called a model of economic growth.

Malthus explicitly drew upon Smith’s suggestion when he formulated the population principle.

This section is based on Paitaridis and Tsoulfidis (2009).

The profit rate expresses the total profit as a percentage of invested capital in the production process. With respect to this issue, Smith notes: The entrepreneur would have “no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of this stock” (WN, p. 48).

With the exceptions of vegetables by products of improved methods of production and hides, as when the demand for cattle increases the price of hides falls.

Smith argues that at the beginning of the eighteenth century, the rate of interest in England and elsewhere was somewhat higher than 10%, and at the time of the writing of the Wealth of Nations, did not exceed 6%, Fig. 4.3a above is consistent with Smith’s view.

The inclusion of landed property in a linear system of production is difficult and the difficulty increases when we come to Smith who does not really have a single theory of rent. In one instance he argues that “High or low wages and profit, are the causes of high or low price; high or low rent is the effect of it. It is because high or low wages and profit must be paid, in order to bring a particular commodity to market, that its price is high or low” (WN, p. 146). How does this view reconcile with the adding-up theory of value where it is assumed that absolute rent is a question for which the researcher cannot find definitive answers in Smith's writings.

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Title: Adam Smith’s Wealth of Nations
Author: Lefteris Tsoulfidis
Publisher: Springer Nature Switzerland
Book: Competing Schools of Economic Thought
Print ISBN: 978-3-031-58579-1

Electronic ISBN: 978-3-031-58580-7

Copyright Year: 2024
DOI: https://doi.org/10.1007/978-3-031-58580-7_4