Adam Smith: History of Economic Thought
Adam Smith: History of Economic Thought
Adam Smith: History of Economic Thought
• Hunting – “The lowest and rudest state of society such as…the native tribes of North America.” A precarious
existence characterized the absence of institutionalized forms of privilege and power, generally egalitarian.
• Pasturage – More advanced then hunting societies with production based on a nomadic lifestyle oriented around
the domestication of animals and herding. Under this system cattle, as property, became one of the first forms of wealth.
• Agriculture – The economy of feudalism, anchored to the ownership of land as the dominant power relation,
characterized by the permanent settlement of land and defined by great estates. For Smith the system was constrained by
a lack of outlets for the surplus of the estates, and the extreme hierarchical power relations that denied freedom to the
majority of producers.
• Commerce – Characterized by the development of cities that were economically independent of the estates and
yet permitted by the medieval nobility by virtue of the rents that could be collected. In cities a new political attitude
developed allowing greater freedom to producers to create wealth for themselves rather than for the overlord and
unleashed “one of the most powerful human motives, the desire to accumulate material wealth.”
Chapter 3 - 2
Smith, Class Conflict, and Property Ownership
Chapter 3 - 3
Smith’s Identification of Three Social Classes
“The three great, original and constituent orders of ever civilized country”
Chapter 3 - 4
Productive and Unproductive Labor
Chapter 3 - 9
Smith’s Value Theory (Labor theory of value)
• Never actually presents a consistent labor theory of value
• Labor produces all material wealth.
• In Foraging Societies, labor is the determinant of exchange values (prices)
• Under farming, feudalism, and capitalism,
1. Tautological Nature:
~Prices (wages+profits+rents) beget prices beget prices. Smith’s
analysis offers no real origin for prices and is therefore circular.
2. Absence of an Invariant Measure of Value:
~Smith could find the general level of all prices, however if any one
price rose all prices would simply rise with some prices rising more
or less relative to others depending on which price(s) initially rose.
Chapter 3 - 7
Smith’s Interpretation of the Labor Theory of Value (LTV)
• The Necessary Prerequisite for any Commodity to have Value was that
it be the Product of Human Labor:
~In a Commodity Producing Economy this means that:
Exchange Value = Amount of Labor Embodied in the Commodity =
(Indirect + Direct Labor)
Chapter 3 - 5
Smith and Economic Welfare
I. The Level of Production depended upon the Number of Productive Laborers and
their Level of Productivity.
II. Productivity, in turn, depended upon the Division of Labor.
• "the obvious and simple system of natural liberty" where "Every man ... is left perfectly
free to pursue his own interest in his own way, and to bring both his industry and capital
into competition with those of any other man".
III. The Division of Labor depended upon
~Specialization, which depends on the size of the market.
~The Accumulation of Capital.
Selfish, Acquisitive motives characterized economic behavior.
• Later becomes the basis of neoclassical economics.
Chapter 3 - 8
Smith and Government
I. National Defense (Law Enforcement)
• “the duty of protecting the society from violence and invasion of other independent
societies”
II. Administration of Justice
• “the duty of protecting, as far as possible, every member of the society from the
injustice or oppression of every other member of it”
III. Erect Public Works and Public Institutions
• “the duty of erecting and maintaining certain public works and certain public
institutions, which can never be for the interest of any individual or small number of
individuals, to erect and maintain.”
Chapter 3 - 10
Class Conflict & Social Harmony
• Selfish, Acquisitive motives would lead to individual and class
conflicts, but the invisible hand would automatically resolve conflict
in a way most conducive to (average, per-capita) human happiness.
• Influences seen in the two rival traditions in 19th and 20th century
economic thought
• One emphasizing the Labor Theory of Value and class conflict
• The other emphasizing utility theory of value and the “invisible hand” that
creates social harmony.