Philosophy of Society

Philosophy of Economics (Economic Theory)

Mature Classical Economic Theory

The ideas laid down by the representatives of classical economic theory in its early period reached their zenith in the works of the most eminent figures in economic thought, Adam Smith and David Ricardo. The Scotsman Adam Smith (1723-1790), a professor in Glasgow and author of "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), more commonly known as "The Wealth of Nations," produced a work unparalleled in its impact on economics. Smith articulated several concepts that became pivotal for liberal economics:

• Like his predecessors, Smith posed the question: what is the source of wealth? In answering, he diverged from the physiocrats, who asserted that the source of wealth lies in the land. Smith noted that while the quantity of land had not increased over the centuries, the wealth of nations had significantly risen. Thus, the source of wealth was not land. He identified the division of labor as the true cause of wealth: the better the division, the more productive it becomes. Quality distribution of labor requires knowledge and skills that must be continuously updated.
• Smith introduced the concept of the "economic man," illustrating that economic activity is intrinsic to human nature. It is inherent in humanity to create and augment wealth, that is, to engage in organized economic activity.
• The economy should be entirely free from any control by the state. If neither the state nor any other institutions attempt to regulate the economy, it will flourish most effectively. This assertion rests on human selfishness; since each person seeks to secure benefits for themselves, they will work to obtain them. The sole means of acquiring what another possesses is to produce other goods and exchange them for what is needed. For instance, a baker will inevitably feed a shoemaker with his produce, not out of love or concern for the shoemaker, but because he needs shoes; the only way to obtain shoes, produced by the shoemaker, is to trade something the shoemaker requires. Therefore, if economic processes are left unchecked, they will organize themselves, guided by the "invisible hand of the market."
• The role of the state in the economy is purely protective. Its duties include ensuring peace and preventing any attempts to obstruct the workings of the invisible hand of the market, such as combating monopolies, establishing moderate taxation, and exercising patience while the invisible hand accomplishes its tasks autonomously.
• Smith adhered to the labor theory of value. The just price of a commodity should correspond to the amount of labor invested in its production under the least favorable circumstances. If a producer improves production efficiency and generates more goods with less labor than would occur under the worst conditions, the difference constitutes profit. Thus, in Smith's theory of income, four types of income are delineated: the price of labor, which the producer receives for selling their goods; profit, that is, surplus income; rent, which is solely received by the owner of agricultural land as a result of its leasing; and interest, the additional income obtained by the owner of free capital when loaned to others.

No less significant was the impact of the English economist David Ricardo (1772-1823), whose principal work was "On the Principles of Political Economy and Taxation" (1817). Like Smith, Ricardo strictly adhered to economic liberalism and criticized any forms of protectionism. His views can be summarized in the following points:

• As Smith demonstrated that the division of labor is the source of wealth, the primary task of political economy is to ascertain the laws governing the distribution of labor.
• The role of the state in the economy should be minimal. The state must levy taxes to fund its own existence, but tax collection should be the sole economic activity of the state. Taxes should not be high; otherwise, they would undermine the economy.
• Ricardo accepted the labor theory of value (the true value of a commodity should correspond to the labor cost incurred in its production). However, the market price does not always align with true value. Smith believed that the free market could rectify all economic issues, including discrepancies between market price and true value. In reality, this difference persists. Investigating the causes of this discrepancy became the focus of Ricardo's research. Firstly, the true value of a product comprises not only the labor invested in its production but also the labor expended in producing the tools of production, without which the final product cannot materialize. Secondly, under varying conditions, the value of a commodity will differ. The true value should be regarded as that which corresponds to the labor costs incurred in producing the commodity under the least favorable conditions. A highly industrialized enterprise with an efficient division of labor will expend significantly less effort to produce a good, thus its net profit will exceed that of an enterprise employing inefficient labor division and outdated technologies.
• An important issue for Ricardo was the theory of wages. In analyzing this matter, he distinguished the natural wage of labor, which is the remuneration sufficient for a worker to sustain themselves and their family. In reality, wages never correspond to the natural value of labor. Wages are determined by the market price of labor. Labor becomes more expensive when workers are scarce and cheaper when abundant. This is why the wages of highly skilled specialists are higher than those of unskilled laborers, as there are fewer skilled workers. Ricardo believed that the free market would self-correct wages: when workers are scarce, their wages will rise, allowing them to have and support many children. This will increase the workforce, leading to a decrease in wages. Poor families will be unable to support numerous children, resulting in a reduced workforce and an increase in wages. Thus, the market regulates income levels and population growth.
• The principle of the division of labor should apply not only to workers within a single country but also between nations. It is unnecessary for every country to produce everything. Each country must determine which goods it can profitably produce independently and which it should acquire from others, as each country has unique advantages not shared by others. It is the specialists' task to identify their country's advantages. However, Ricardo argued that these advantages are relative, not absolute. This means that even if producing a certain good is highly costly, it may still be advantageous if neighboring countries would expend even greater resources to produce it. These considerations are termed the principle of comparative advantage.