Adam Smith & David Ricardo Term Paper

Excerpt from Term Paper :

(Smith, 1904)

Smith on Labor

The importance of the labor skills and the method of production of which the factor labor contributed the major share was the theme of the ideas of Smith. In the Wealth of Nations Smith argued that it was labor which created wealth and supplied the necessities - "The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labor, or in what is purchased with that produce from other nations." (Smith, 1904) the fundamental factor being labor, it is the dexterity and the skill with which labor is employed that ultimately created the surplus called wealth. This surplus must be regulated by the market process and forces. "But this proportion must in every nation be regulated by two different circumstances; first by the skill, dexterity, and judgment with which its labor is generally applied; and, secondly, by the proportion between the numbers of those who are employed in useful labor, and that of those who are not so employed." (Smith, 1904)

Division of Labor

The improvement in the quality of labor is a direct result of the division of labor. "The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labor." (Smith, 1904) Even from the manufacture of small things the power of specialization and the division of labor will be evident if we consider the method of production. Any work can be split and made into many parts, and this will result in specialization. The illustration that Smith gives is from the pin making industry where a single laborer if engaged in the complete production of pins would scarce make a single pin a day because it involves multiple steps and different activities that require various skills. The division of labor thus employs many persons who specialize in various parts of the manufacture and sticking to their designated parts can easily contribute to making more of the product than can be done if done individually. Smith graphically illustrates this in pin making: "One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations." (Smith, 1904)

Smith was of the view that the division of labor would have no increase with regard to agriculture's productivity, and the increasing of the dexterity of the workman as well as the consequent improvements in production was relative in the terms of value. The machinery that saves the labor and labor time thus will be a key to the future production process. If we were to remember that this book and ideas were written at a time when the industrial revolution was barely taking shape, we can understand the depth of the idea of what will develop and farsightedness of Smith. He further argued that the different wants and the richness of the society was on the level of affluence of the labor, and the comparative value of affluence is relative and therefore to set values on the contributions of labor, the relative backgrounds have to be noted. In the words of Smith, "the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages." (Smith, 1904)

David Ricardo however has argued against this contention of Smith and propounded that the wages will come down and reach a stagnation level. The theory has international connotations and the theory of wages was such that "A rise in wages, from an alteration in the value of money, produces a general effect on price, and for that reason it produces no real effect whatever on profits. On the contrary, a rise of wages, from the circumstance of the laborer being more liberally rewarded, or from a difficulty of procuring the necessaries on which wages are expended, does not, except in some instances, produce the effect of raising price, but has a great effect in lowering profits." (Halsall, 1997)

Value and International trade

The surplus over the international trade, where the superior basis of production created a better product that could be trades at an advantage overseas was the proposition that was attacked first by Ricardo. However the theory of 'surplus' also originated in considering the international trade and the agility or dexterity of labor. The greatest critic of Smith, Marx therefore borrowed the theory of surplus and made it the focal point where the surplus generated by labor was skimmed off by the capitalists in an unjust manner. Value according to Smith could be of two kinds. Dissecting this Ricardo in his book observes that as per Smith, a commodity's value is being decided by the quantity level of another commodity that can be got in exchange, or the barter value. This value will be determined by the quality of labor. (Halsall, 1997)

According to Adam Smith the term Value can have two meanings in context to its use. The utility of the object can comprise its intrinsic value and the exchange it can affect or the purchasing power of other goods that can be got by its possession or its exchange value is also value. There are things that have great value in use but are not having exchange value. Water for example has great intrinsic value but does not have an exchange value. The contrary that certain things have value but are useless in use like gold for example which has exchange value but no practical use was pointed out by Ricardo who then went on to argue that the Utility cannot be thus the ultimate determinant of value as argued by Smith. No doubt utility was essential, and the theory of values he proposed was more practical in saying that the value of a commodity, following the lines of Smith, could be determined by its scarcity and the amount of labor that was required to produce it. "Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labor required to obtain them." (Ricardo, 1929)

Relevance of Adam Smith in Modern Economic thought

Adam Smith was one of the greatest influences of his times. We cannot ignore the fact that he was instrumental in providing the basic methods of analysis for economics. However the contributions by Smith may have been a natural consequence of the flow of the ideas during his times. While we attribute many things to the writer, it is argued that the work is not complete in all aspects, and some of the theories do not bear the test of time and events that followed. For example Adam Smith did not linger much on the theory of value or of distribution. Smith's ideas on value and the value in exchange actually gave rise to the issues of distribution of the national product which in turn gave rise to the socialist doctrines that came after Ricardo and ended with the labor theory of Karl Marx. (Clark; Douglas; Hollander; Morrow; Palyi; Viner, 1928)

In reality the exchange rate plays a great role, and production with efficiency and more quantity does not count as it was shown with the case of farm products. (Clark; Douglas; Hollander; Morrow; Palyi; Viner, 1928) it is a great difficulty to day to exactly enumerate the contributions of Smith and its effects, partly because the doctrines form a part of our general thinking today that any idea that was not in keeping with the doctrines is argued upon. There may have been better ideas that came down to us from other sources, or even the ideas of Smith may have a genesis in others works, but we are not inclined on account of being indoctrinated with the Smithian concepts to acceded even to the possibility of thinking beyond it. (Clark; Douglas; Hollander; Morrow; Palyi; Viner, 1928)

We are also at a loss to fathom the influence of the French school of thought and how much of the ideas were in essence contributed by them. The concepts of Smith is now a part of the modern economics and the basis of many theories which uses…

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