Adam Smith Classical theory

January 22, 2016
OlsonMResearch102016EssayAPA

The publishing of An Inquiry into the Origin and Causes of the Wealth of Nations by Adam Smith in 1776 was an event destined to change the world. By offering a powerful argument in favor of free markets, Smith helped to usher in an era of prosperity and to defeat the faulty premises of the mercantilists. However, the classical theory was not complete when Smith put pen to paper. It lay with Jean-Baptiste Say to complete what Smith had started and perfect the ideal of a capitalistic system of economics. Adam Smith laid the groundwork of classical economic theory through The Wealth of Nations, but because it lacked certain elements, Jean-Baptiste Say improved the theory with his entrepreneurial perspectives.

Adam Smith codified the tenets of capitalism in his magnum opus, outlining the principles of the division of labor, the nature of money, and the invisible hand, but neglected the value of entrepreneurs in an economy. The changes brought about by the Industrial Revolution were truly remarkable; it began a long period of unparalleled economic growth for the world. In The Making of Modern Economics, Mark Skousen pointed out that during the pre-Revolution era, a true compendium of economic thought had never been published. 1776 heralded the start of the modern economic saga. Before this watershed date, six millennia had passed without any comprehensive work being written on the topic that dictated every minute of nearly every human’s day: earning a source of revenue. The true per capita salary went practically unchanged for centuries. During the 1700s, when the typical adult did not live past the age of 40, the famous Enlightenment philosopher Thomas Hobbes asserted that life was “Solitary, poor, nasty, brutish, and short.”[17] At the dawn of the Industrial Revolution, during the 18th century, although great events were about to transpire, there was no concrete economic theory to explain it. Adam Smith stepped forward to rectify this situation.

Skousen writes that Smith saw the leading economic philosophy, mercantilism, as harmful and sought to swing the debate decisively towards free-market capitalism. Following more than a decade of writing The Wealth of Nations, its author was certain that he had found the correct type of economic theory to usher in worldwide prosperity. Smith believed this system to be one of “natural liberty.” It is now known as the classical model. Borrowing techniques from another Enlightenment scholar, Sir Isaac Newton, Smith advocated a similar system of universal laws governing economics. His greatest challenge was persuading others of the validity of the classical model, particularly the ruling elite of the 1700s. His goal was to detail the theory and convince his audience of its worth. By writing The Wealth of Nations, Smith issued a challenge to the mercantilists and the political authority, since he wanted to dismantle their erroneous view of wealth and move the world towards a great improvement in living standards, real wages, and life expectancy.[18] This challenge ultimately led to the downfall of mercantilism’s measure of wealth, which was simply “gold and silver, ” and replaced it with Smith’s definition of labor and productivity as standards of value. To explain how such wealth could be amassed, Smith outlined the division of labor and its ability to enhance productivity.

While explaining the nearly automatic process of the division of labor in The Wealth of Nations, Smith foreshadowed his coming argument about the invisible hand. The great benefits stemming from the division of labor are not caused by any human intelligence that can foresee the general prosperity that will be brought about. Rather, it is an obligatory conclusion brought about little by little due to a uniquely human inclination to negotiate, bargain, and exchange the products of labor… Paradoxically, it is not caused by any formal agreement, but is simply the coincidental event of multiple desires for the same object at the same time.[19] Simply put, the division of labor allows greater productivity using free exchange between individuals. By defining the division of labor as an extension of the process of exchange, Smith took aim at the mercantilists and their definition of wealth.

The mercantilists viewed money itself as wealth, but Smith identified the use of money as a substitute for actual economic value. Following the initial division of labor, it is impossible for a man to supply all of his desires through the pure production of his labor. Rather, he supplies the vast majority of his wants by trading the surplus of his labor, in excess of his own consumption requirements, for the surplus of others’ labor, as he requires. In the course of time, everybody survives by the mechanism of free exchange, becoming of necessity a trader to some degree or another, and a nation will mature into a fully commercial society.[20] The idea that society could function through...

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