Adam Smith and His Economic Ideas

The historical conditions for the formation of Smith’s ideas. The classical bourgeois political economy reached its highest development in the writings of British scholars Adam Smith and David Ricardo, since Great Britain was at that time the most advanced country in economic terms. It possessed relatively highly developed agriculture and a rapidly growing industry, and conducted active foreign trade.

The capitalist relations in England were greatly developed: the main classes of bourgeois society stood out here: the working class, the bourgeoisie and landowners. The bourgeoisie was interested in the scientific analysis of the capitalist mode of production. Thus, in the second half of the XVIII century. in Great Britain favorable conditions for the rise of economic thought developed, such as the work of the Scottish economist and philosopher A. Smith.

His Life

On June 5, 1723, Adam Smith was baptized in Kirkcaldy near Edinburgh (date of birth unknown). His father, Adam Smith Sr., an inspector of city customs, died suddenly before the birth of his son. Margaret Smith, nee Douglas of Stretentry, alone raised her son and devoted his whole life to him.

The boy early discovers a penchant for reading books and solitary thinking. In High School (Kirkcaldy) he is taught in Latin, history and geography. From the age of fourteen – Smith at Glasgow University. Among the twelve professors of the college at that time, Francis Hutcheson stands out, with Smith listening to a course in moral philosophy. Along with this, he also attends lectures on natural philosophy (including mathematics) and gets acquainted with the works of Newton.

Here he gains knowledge of Greek and takes private lessons in French. Since 1740 – Smith at Oxford. The atmosphere in college was clearly uncreative. “Most of the professors at Oxford for many years even shied away from the appearance of teaching.” But the magnificent library opened access to extensive English and French literature (poetry, history, philosophy): here Smith first reads Voltaire and Montesquieu – his older contemporaries.

At the same time, he visits the Jethro Talla farm, where he gets acquainted with intensive farming methods. In 1746, Smith returned to Kirkcaldy without definite plans and continued self-education. During raids in Edinburgh, he attends the literary circle of Henry Hume (Lord Keymes).

The latter, as well as James Oswald, Adam’s childhood friend, organized a series of Smith’s public lectures in Edinburgh. “Lectures on rhetoric and elegant literature” were successful and were extended for several seasons. In 1751, professors at Glasgow University unanimously elected Smith as their colleague (department of logic, since 1752 – department of moral philosophy).

Smith’s lecture course consisted of four parts: natural theology, ethics, state and law, “expediency” (ie, economics). The first section has not yet been discovered. The second was the basis of “The Theory of Moral Sentiments”, from the fourth subsequently grew the “Wealth of Nations”.

In 1759, Smith’s first serious work, The Theory of Moral Sentiments, was published. At this time, Hume wrote to Smith: “… I now have to tell you the sad news that your book has the most unfortunate fate: the public seems ready to applaud it to the utmost.” The great success of the book led to lifetime editions of 1761, 1767, 1781 and 1790. In 1764, one could say a turning point in the life of A. Smith: he accepted the offer to accompany the young lord, the stepson of a prominent political figure – Duke Bakli, during his overseas trip.

Not the last role in Smith’s consent was played by the financial side of the proposal: £ 800 a month until the end of life! This decision forced Smith to leave the department. The journey lasted from 1974 to 1766, i.e. more than two years, of which he spent a year and a half in Toulouse, two months in Geneva, where he happened to meet with Voltaire, and nine months in Paris. Close acquaintance during the trip with the French philosophers d’Alembert, Helvetius, Holbach, as well as with the physiocrats, including F. Quesnay and A. Turgot, were subsequently reflected in his main work, “Research on the Nature and Causes of the Wealth of Nations,” which he embarked on in Toulouse …

“Research on the nature and causes of the wealth of peoples”

Adam Smith took about nine years to create this work of economic thought. In the spring of 1767 (upon returning to Scotland from a two-year voyage), Smith retired to Kirkcaldy and lived there for almost six years, who he devoted to working on the book.

Unfortunately, this did not pass without a trace for health: a monotonous way of life and an excessive concentration of thought on one subject significantly shook it. Precisely for this reason (however terrible it may sound), but in order not to be taken aback by death, leaving for London in 1773, Smith considered it necessary to formally transfer to Hume the rights to his literary heritage.

It was in London that Adam Smith spent another three years finalizing the “work of his whole life”. So, in 1776 in London, “A Study on the Nature and Causes of the Wealth of Nations” was first brought to the attention of the general public. But then even Smith himself did not know what a grand future awaits his book, and that even in the last century of the second millennium, his work will cause genuine interest …

Division of labor

“The greatest development of the productive power of labor and the predominant part of the skill, dexterity and quick wits with which it is applied or applied elsewhere, apparently, were the result of the division of labor” Smith begins his book with the division of labor, portraying it as the main factor in the growth of social productivity labor. After all, what is the “wealth” of society? According to Smith, this is the volume of production and consumption of products, which depends on two factors: 1) the share of the population engaged in productive labor, and 2) labor productivity.

Moreover, according to the author of The Wealth of Nations, the second factor, which is directly related to the division of labor, has an incomparably greater significance: in the days of manufactories, when machines were rare and manual labor prevailed, it was the division of labor that was the main factor in its growth (labor) performance.

Division of labor can be represented in two forms. Workers in one factory specialize in different operations, but ultimately they all produce the same product. This is a division of labor within a single manufactory. A completely different division of labor across the entire society, between individual enterprises and industries.

The cattle-breeder grows livestock and sells it to the slaughterhouse, the butcher slaughter the livestock and sells the hide to the tanner, he makes the skin and sells it to the shoemaker … In Smith’s imagination, society was drawn in huge manufactory from which a simple conclusion can be drawn: Smith doesn’t even talk about any classification of labor division did not think, he mixed both of these species without seeing the fundamental difference between them.

However, while singing and praising the division of labor at the beginning of the book, Smith later admits that this phenomenon also has side effects: “With the development of the division of labor, the overwhelming majority of those who live by their labor, that is, the bulk of the people comes down to a very small number of simple operations, most often to one or two … “It’s enough to recall the consequences of Smith’s monotonous work on his brainchild to understand what the same monotony, born of the division of labor, can lead to society …

The fact is that Smith feels the dangerous tendency of capitalism here: if everything is provided for in the natural course of affairs, then there is a threat of degeneration of a significant part of the population, he sees no other force besides a state that could rebuke This is true, although it is more than strange to hear this from the lips of a supporter of leissez faire.

Such is the Smith division of labor. In my opinion, the main essence of this concept is stated, it remains only to note that Smith still mentioned the principle that generates the division of labor: “… the consequence a certain feature of human nature, namely, the tendency to change, exchange, exchange one subject for another ”and that the division of labor is limited by the size of the market:“ When the market is insignificant, no one can be motivated to devote themselves to the goal to any one occupation, in the absence of the opportunity to exchange the entire excess of the product of their labor over their own consumption for the necessary products of labor of other people. ”

Theory of value

Smith laid the basis of his views on the theory of labor value: determining the value of a commodity by the labor expended on its (commodity) production and exchange of goods according to the amount of labor enclosed in them. Smith defined and distinguished between the use and exchange value of the goods.

He recognized the equivalence of all types of productive labor, as the creator and ultimate measure of value, showed the law that the value must certainly be expressed in the exchange value of the goods, in its quantitative ratio with other goods, and with a sufficiently developed commodity production – in money.

Smith did not study labor as a substance of value, did not distinguish between labor processes as processes of creating and transferring value, since all his attention was focused on exchange value, on a quantitative measure of value, on how it manifests itself in exchange ratios and, ultimately, in prices.

Smith understood that the value is not determined by the actual labor costs of an individual producer, but by those costs that, on average, are necessary for the production of a given product in a given state of society. He also noted that skilled and complex labor creates more value per unit time than unqualified and simple, and can be reduced to it by means of some factors. Fruitful was Smith’s concept of the natural and market value of goods.

By natural price, he understood the monetary expression of exchange value and believed that in a long-term trend, actual market prices tend to it as a kind of center of fluctuations. It ”as it were represents the central price, to which the prices of all goods are constantly gravitating. Various random circumstances can sometimes keep them at a significantly higher level and sometimes slightly lower them compared to her. But whatever the obstacles that deflect prices from this sustainable center, they constantly gravitate toward it.

” When balancing supply and demand in conditions of free competition, market prices coincide with natural prices. Smith also laid the foundation for an analysis of factors capable of causing long-term deviations of prices from value; he considered monopoly the most important of them. This, in particular, opened up the possibility of studying supply and demand as factors of pricing, as well as the role of various monopolies in this area.

In addition to the basic definition of value, the amount of labor enclosed in a product, Smith introduced a second concept, where value is determined by the amount of labor that can be bought for a given product. In conditions of simple commodity production, when there was no wage labor, and the producers of goods worked on the means of production that belonged to them, it would be senseless to introduce the second definition, since it is identical with the first.

A weaver, for example, exchanged a piece of cloth made by him for boots. We can say that a piece of cloth is worth a pair of boots or that it costs the work of a shoemaker while he was making boots. But, in essence, this is far from the same thing that becomes clear in the conditions of capitalist production. If the shoemaker is employed by the capitalist, then the cost of the boots he made and the “cost of his labor”, that is, what he receives for his labor, are completely different things.

A piece of cloth still costs a pair of boots, but it costs more than the work of a shoemaker, since the value of boots now includes the surplus value appropriated by the capitalist. Smith came across a contradiction consisting in the fact that in the relationship between the capitalist and the worker (when hiring labor) the law of value, the law of the exchange of equivalents seems to be violated.

The capitalist pays the worker in the form of wages only part of the value that the labor of the worker creates and the capitalist receives. Smith could not explain this contradiction in the framework of the theory of labor value and concluded that value was determined by labor only in the “initial state of society”, when there were no capitalists and wage workers, that is, with simple commodity production. For the conditions of capitalism, he constructed another theory – the “theory of production costs”, according to which the value of the goods is formed by adding the wages, profits and rents per unit of goods.

For goods in the production of which the leased land is not involved, the price is composed of wages and profits. He wrote: “Wages, profits and rents are the three original sources of all income, as well as all exchange value.” He included in the term so constructed not just profit, but the natural, average rate of return on capital. It was obvious to him that in the absence of obstacles to the overflow of capital, the rate of return in various industries and for various applications of capital must be equalized.

Classes and Income

Smith proceeded from the fact that in society there are three main classes. In the hands of landowners is the main means of production – land. They receive income in the form of land rent, which acts directly as rent for land leased to capitalist farmers. Capitalists own other types of means of production (industrial buildings, equipment, ships, farms, stocks of raw materials), hire workers and receive income in the form of profit. If they rent land, then they are forced to give part of the profit in the form of land rent.

This may also apply to capitalists employed in the mining industry and renting mines. Smith did not make a fundamental distinction between capitalists employed in industry and in agriculture. However, he especially singled out loan capitalists among the capitalists, who lend to industrial capitalists.

Their income — loan interest — under ordinary conditions is part of the industrial profit that capitalist borrowers give them. Finally, the most numerous and the poorest class are wage workers who do not have any property and are forced to sell their labor for wages. Smith saw that a real society consists not only of these three classes, but also includes various intermediate groups and strata. But the main classes differ in that their incomes are primary, while the incomes of all other groups are secondary, redistributed. They have a final source, either in profit, or in rent, or in wages.

Wage

Smith said that by working with his own means of production and on his land, the producer of goods receives the full product of his labor. But since the means of production and land are owned by the capitalists and landowners, and the independent producer has become a wage worker, the latter has not received in the form of wages the value of the whole product of his labor.

Smith noted a tendency toward the disappearance of the independence of small-scale production, towards the general spread of wage labor. Smith wrote: “A man should always be able to exist through his labor, and his wages should at least be sufficient for his existence.” He believed that the value of the means of subsistence necessary for the life of the worker and raising children, who will replace him in the labor market, is at the core of the wage.

He noted that its lower limit is the physical minimum. If the cost of labor (normal wages) of wage workers falls below this minimum, this threatens the extinction of the “race of these workers.” This is possible only in society, Smith believed, where there is an economic regression: as an example of such a country, he called the territories in India, which were under the domination of the British East India Company, and China, where wages were only slightly higher than the cost of living, and the economy was in state of stagnation.

However, in countries where there was a moderate and even more rapid development of the economy, wages included, in addition to the physical minimum, a certain excess, the size of which was determined by prevailing consumption norms, traditions, and cultural level. Smith noted that, for example, in America, wages are higher than in England, since the economy was the first to develop particularly rapidly.

He believed that the spontaneous market mechanism keeps natural (average, normal) wages at a certain level, limiting deviations of actual wages from this level. A significant increase in wages causes an increase in the birth rate in the families of workers, the survival of more children, and as a result, an increase in the supply of labor and competition between workers. Under the influence of these factors, the normal level of wages decreases, which can cause the opposite trend: a drop in the birth rate, an increase in child mortality, a decrease in the supply of labor and increased competition between entrepreneurs.

As a result, wages may rise. Such an understanding was consistent with Smith’s general idea of ​​the role of the free market in establishing a certain economic equilibrium. One of the main reasons for the low wages, its proximity to the physical minimum, Smith saw in the weak positions of the workers in relation to the capitalists. Smith assigned a large role in setting a specific wage level to the struggle of the workers and the balance of power between them and the capitalist employers.

Analyzing the question of payment by profession, Smith very well justified the need for increased payment for those types of labor that require special training. Higher, he argued, must also be paid for hard, unpleasant labor, those types of labor to which society is contemptuous. From his point of view, it is quite natural that the work of honorary professions is paid relatively low. Smith advocated high wages with great energy, since he believed that this best suits the conditions of sustained economic growth.

Relatively high wages (especially “piece wages”) are the most important stimulus for the growth of labor productivity. This, in turn, enhances the accumulation of capital and increases the demand for labor. He categorically denied the widespread belief that high wages make workers lazy and reduce incentives to work. In addition, he urged entrepreneurs not to be afraid of wage growth, since the spontaneous mechanism would limit this growth anyway.

Theory of profit

Smith wrote:

“It is only in the hands of private individuals that capital begins to accumulate. Some of them, naturally, seek to use them in order to occupy the work of hardworking people whom they supply with materials and means of subsistence in order to get profit from selling the products of their labor or from what these workers added to the cost of the processed materials. ”

In this position, the historical process of the emergence of capitalism is clearly expressed. Smith said that out of the value of goods created by labor and determined by the quantity of this labor, the worker gets only a part of it in the form of wages. The rest of the value added by labor is the profit of the entrepreneurial capitalist.

In some cases, he must give part of it in the form of land rent, part – in the form of loan interest, if he used borrowed capital. Smith called profit the whole difference between labor added value and wages, and in these cases he meant surplus value. In other cases, Smith meant by profit the remainder after paying rent, as well as interest, and then called profit, the entrepreneurial income of the capitalist.

He emphatically rejected the view that profit was simply another type of wage that compensates for the work of supervising and managing the enterprise, and cited convincing arguments to justify his view. Profits were determined in his opinion, not by the quantity, severity or complexity of this alleged work on supervision and management, but by the amount of capital used in the matter.

In addition, in many large enterprises, oversight and management functions are transferred to the hired manager. Smith considered profit the natural result of capital productivity and the reward of capitalists for their activities, labor and risk. Smith noted the tendency of the rate of profit to fall, pointed out that profit is lower in the developed capitalist countries.

He considered the direct calculation of the rate of profit practically impossible, but he proposed replacing the comparison of the rate of profit in time and space by comparing the rates of loan interest. In England, he wrote, it is generally believed that the percentage can be about half the profit.

Smith gives the following explanation of the downward trend in interest and the rate of return: in rich countries and with the course of economic development, an excess of capital forms, which causes an increase in capital competition and a decrease in profitability. Smith saw low interest rates and profit margins as a manifestation of the country’s economic development and health.

Land rent

Smith rejected the notion that rent is a legal fee, a kind of interest on capital once invested by landowners in land improvement. ”As soon as the land becomes private property, the landowner demands a share of almost any product that the worker can grow on this land or collect from it. His rent is the first deduction from the product of labor spent on cultivating the land. ”

The landowner requires rent both for land that has never been improved, and for natural objects that cannot be improved at all, and even requires an increase in rent in the case when land improvement is made by the tenant at his own expense. Smith noted that plots of land differ in both fertility and location, and both differences can cause differential rents.

Smith characterized the rent, along with profit, as unearned income, as a deduction in favor of the landowner from the value of the goods. Landowners, Smith pointed out, want to reap where they have not sown. They appropriate what is produced by the labor of others. He defined rent as the excess of value over the wages of workers and the average profit of the capitalist farmer. Smith argued that along with wages and profits, it forms the value of the goods.

Conclusion

Adam Smith fulfilled a great historical task in science by defining and outlining the boundaries of political economy and bringing into the system the accumulated by that time sum of economic knowledge. His works are one of the peaks of social thought of the XVIII century. They served as the basis for the emergence and development of new economic theories.

Smith died in Edinburgh in July 1790 at the 68th year of his life …