Political Economist

Research Note on Classical Political Economy

1. Adam Smith’s Theoretical Contributions to Classical Political Economy

The history of economics can be traced back to Plato and Aristotle, who tried to theorize the economic foundations for viable and socially desirable political communities. However, no one can deny that modern economics started with Adam Smith, because it was he who perceived modern capitalist economy as a dynamic system which was divided by social classes in conflict, and which had intrinsic tendencies toward continuous expansion. In this short essay, I would like to address the main theoretical contributions of Adam Smith to the development of classical political economy.

First of all, Adam Smith introduced systematic approaches to modern economic phenomena. He treated the introduction of the relationship between capital and labor as a totally new one in human economic history, and believed the division of labor in the process of production, with which he began his An Inquiry into the Nature and Causes of the Wealth of Nations, opened new era in the realm of modern economy. In order to grasp underlying principles in modern capitalist market economy, he examined the history of the introduction of money into the market.

Regarding this phenomenon, Smith raised the following questions: How can different goods and products which have different shapes and utilities be exchanged with each other on the market? How can we measure the value of various products in terms of money? At what point, and how can the price of goods be determined? While trying to answer these questions, Smith differentiated use value (‘value in use’) from exchange value (‘value in exchange’), ‘natural prices’ from ‘market prices’. With the help of Smith’s logical and genealogical inquiries, his theoretical successors such as David Ricardo and Karl Marx developed their own theoretical frameworks. From this perspective, Adam Smith can be justifiably regarded as the founder of classical political economy (Dobb, 1972, pp.53-54).

Smith is also the inventor of the ‘theory of labor value’ which was developed into the ‘theory of surplus value’ by other classical political economists. The main concept of the theory is that only labor can produce the value of a commodity. Without human labor, Mother Nature can only be either an alienated object or wild external threats to human existence. Only with the help of laborers’ productive activity can we buy and sell specific commodities and services on the market.

It was Smith who emphasized the significance of human labor in the production processes. While doing so, Smith also drew a sharp line between ‘wage’ and ‘profit’, between ‘profit’ and ‘rent’. With these distinctions, he revealed the secret sources of the modern concept of profit, which had been previously identified with other types of incomes (Meek, 1967, esp. pp.19-22). According to Smith, the source of an employer’s profit is originated from the employees’ productive labor. The profit is not at all a reward for the direction and/or inspection labor of the capitalist (Smith, 1999: Book Ⅰ, Ch. Ⅵ, p.151). In this very point, we can say that he was the inventor of the labor theory of value, and succeeded in providing us with systematic approaches to modern economic phenomena.

Finally, Adam Smith viewed the modern capitalist market as a continuously expanding economic system. Modern capitalist economy, according to his explanation, has tendencies toward unlimited expansion. Not surprisingly, the basic motive behind capital accumulation lies in capital’s insatiable instinct to amass profit. With the help of technological innovations – it was mainly the introduction of new machinery in Smith’s age –, and with the help of increased labor productivity based on the division of labor, capitalists can accumulate capitals continuously (Smith, 1999: Book Ⅰ, Ch.Ⅰ; Book Ⅱ, Ch. Ⅲ).

The only constraint on capital accumulation is associated with ‘equalization of the rate of profits’ in various production sectors which was forced by ‘market competition’ (Smith, 1999: Book Ⅰ, Ch.Ⅴ-Ⅶ). To put it in modern terms, Smith regarded competition in the market as the driving force of ‘effective resource allocation mechanism’ or ‘equilibrium condition for prices’, because he thought individual economic agents (i.e., laborers, capitalists and even landlords) could withdraw from or invest in particular production sectors their relative capital stock or land due to the existence of market competition. Upon this notion modern neoclassical economists laid their own economic doctrines or sacrosanct presuppositions such as ‘perfect market competition’, ‘transparency of market’ and ‘individual economic agents as utility maximizers’ and so on (For comparisons of different basic premises of neoclassical and post-Keynesian economics, see Shaikh, 2004). In this sense, Adam Smith can be considered one of founding fathers of modern mainstream orthodox economics.

In conclusion, Adam Smith’s classical political economy can be described as the center of theoretical divergence. On the one hand, his systematic and holistic approaches to modern capitalism, especially his primitive labor theory of value, together with his basic concepts of prices, values, and profits, etc., were succeeded by David Ricardo and Karl Marx in the name of ‘radical’ political economy (Ricardo) and ‘critique’ of political economy (Marx). On the other hand, Smith’s distinctive premises such as the primary role of market competition, and the conceptualization of markets as autonomous orders (‘invisible hand’) implicit in his theoretical framework would be exploited by neoclassical economists about 150 years later. All in all, no one can ignore Adam Smith’s theoretical contributions to the development of economic thought. And in this respect we can say justifiably that Smith is still alive.

References

Dobb, Maurrice. “Classical Political Economy.” in Political Economy and Capitalism,

Connecticut: Greenwood Press, 1972, pp.34-54.

Meek, Ronald. “Adam Smith and the Classical Theory of Profits.” in Economics and

Ideology and Other Essays, London: Chapman and Hall, 1967, pp.18-33.

Shaikh, Anwar. “The Power of Profit,” Social Research, Summer 2004, Vol. 71

pp.371-381.

Smith, Adam. The Wealth of Nations Books Ⅰ-Ⅲ. Andrew S. Skinner, ed. London:

Penguin Books, 1999.