Contributions of Adam Smith in economics

August 20, 2016
Adam Smith s Contribution To

N The Wealth of Nations Adam Smith focuses most of his attention on the problem of economic growth. His interest in this subject stems from the belief that an evolving capitalist system could benefit society as a whole. According to Smith's analysis the economy possesses unlimited upward potential. Events failed to confirm this hypothesis, however. In Britain war and crop failure stymied economy development. As a result, the economists following in Smith's footsteps adopted a more skeptical view towards the market's potential.

David Ricardo maintained that the economy generally moves towards a standstill. His analysis is rooted in a modified version of the labor theory of value. He held out the belief that the rate of profit for society as a whole depends on the amount of labor necessary to support the workers who farm "the most barren land that can still maintain agriculture" This model breaks land down into categories based on average fertility rates. The most fertile land naturally produces more food than land of poorer quality. As a result it commands a higher rent. The poorest land utilized for agriculture receives no rent, with all of its earnings going to cover labor and capital costs. The difference between the output from the least fertile land which can still be farmed and that of a higher quality constitutes the source of rent on the better land. As the population grows, poorer land must be cultivated in order to meet the growing demand. The cost of rent for good land then increases. This, coupled with the fact that poor land necessitates increased labor input to maintain minimal output results in falling profit levels. As rents rise, profits fall. Essentially, rent costs gobble up profits as the population increases. Since profits lead to reinvestment and thus growth rising rent costs indirectly prevent economic progress.

In Ricardo's model the interests of landowners directly oppose those of general society. Ricardo preempted Karl Marx in describing adversarial class relations. Marx, in fact, based a great deal of his economic theory on Ricardo's writings. Although Marx identified capitalists, not landlords, as the source of societal grief he co-opted Ricardo's labor theory of value. Marx also utilized Ricardo's forecast of economic stagnation in predicting a working class uprising. When capitalism eroded its own underpinnings the resulting misery was expected to bring social strife and revolution. It is unlikely that Ricardo would have supported Marx's revolutionary brand of political economics, but the ties between the schools of thought are undeniable.

It is ironic that although Ricardo's ideas helped provide a basis for Marxist critiques of the capitalist system, he own policiy recommendations, like those of Thomas Malthus, are grounded in the doctrine of free trade. Ricardo believed that the Corn Laws, in particular, constituted a burden to the agricultural economy. He believed that these trade barriers kept food prices artificially high and encouraged a bloated rent rate. In Parliament Ricardo actively campaigned against the Corn Laws as well as other government interventions. Essentially this economic stance mirrors Adam Smith's teachings: the market, although imperfect, is best left untouched. Government action only prevents the economy from righting itself. Although Ricardo did not share Smith's complete confidence in the market he recognized that tampering with the system would only result in further economic stagnation.

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