Adam Smith’s economic theory

1. Adam Smith

Adam Smith (1723 – 1790) was a famous classical political economic theorist in England and around the world. He is the son of a tax official. Adam Smith studied at the universities of Glasgow and Oxford. After graduating from university, he studied and taught in Edinburgh and Glasgow for 13 years in theology, ethics, law, logic, philosophy and literature.

In 1763 he stopped teaching and traveled to European countries, mainly to France. And there, he came into contact with important farmers. In 1766, he returned home to focus on research and publish the work “Research on the nature and causes of the wealth of nations”. This work made him famous and became one of the great economic theorists. With a simple and humble nature, in the last fourteen years of his life, he was only a small official in the local tax industry.

Adam Smith’s research process was associated with the early stages of the industrial revolution in England, which became the factory of the world; The commercial bourgeoisie took the place of the merchant class. That practice proves that the source of England’s wealth is not in foreign trade but in industry. Therefore, the theory of mercantilism no longer has a solid basis. At the same time, the agrarian theory with its argument about the nature of the industry not producing pure products was also inappropriate, requiring a new economic program and Adam Smith’s theory was born.

Adam Smith’s worldview was fundamentally materialist. However, his materialism is still spontaneous and mechanical, because it is foreign to dialectics. Adam Smith’s methodology has a clear duality: on the one hand, it delves deeply into the internal nature of capitalist production, and on the other hand, it describes the external manifestations of that economy. this production. Therefore, his doctrine almost every issue raised is full of contradictions.

2. Main contents of Adam Smith’s economic theory
   2.1. The “invisible hand” theory (invisible hand)
   Adam Smith believed that in society there is always a natural regulation between the interests of each individual and the common interests of the entire society. Each individual always tends to improve his or her fate due to the motivation stemming from his or her selfish interests. And it is the individual’s efforts that will lead to integration in society.

For example, when each producer tries to make his product better, he only thinks about his own interests, that is, he only cares about self-interest, only follows his own self-interest, but unintentionally he did something useful to society.

Thus, in all cases, when pursuing personal interests, “economic people” are controlled by an invisible hand. That “invisible hand” is the objective economic laws that spontaneously operate and govern human actions. He called that system of objective laws “natural order”. For this natural activity to work, certain conditions must be present. That is the existence and development of commodity production and commodity exchange. The economy must be developed on the basis of economic freedom. It is necessary to have freedom of production, freedom of joint ventures, associations, and freedom of trade. On that basis, relationships between people are formed that depend on each other. In society, with the existence and development of the commodity economy, people always have economic relationships with each other.

Adam Smith believed that it was necessary to respect the natural order and respect the “invisible hand”. Production and circulation of goods are developed according to the regulation of the invisible hand. The state should not intervene in the economy.

According to Adam Smith, the State has the functions of protecting the property rights of capitalists and fighting against internal and external enemies. However, sometimes the state has economic tasks, when this task exceeds the capabilities of businesses such as building roads, digging rivers, and building large economic projects. He believes that economic laws are invincible, although the State’s economic policies can inhibit or promote the operation of economic laws. When asked: “Which economic policy is consistent with the natural order?”. He replied: Free competition. Society that wants to be rich must develop economically in the spirit of freedom.

2.2. Value-labor theory
First of all, according to him, all types of labor create value and labor is the final measure of value, labor is the absolute standard, the only, the most accurate thing to measure value. He clearly distinguishes the difference between use value and exchange value and believes that use value or utility is unrelated and does not determine exchange value. For example, “there is nothing as useful as water, but with it you cannot buy anything”. According to him, exchange value is determined by labor, value is determined by labor expenditure to produce goods. That is the correct concept of value.

He pointed out that the value of goods is determined by the average cost of labor required. Simple labor and complex labor affect the value of goods differently. In the same time, complex labor will create a greater amount of value than simple labor.

Adam Smith also stated a second definition of commodity value: the value of a commodity is equal to the amount of labor that people can buy using that commodity. This is the perversity and mistake of Adam Smith. Regarding the value structure of goods, he said that in a capitalist economy the value is composed of income sources, it is equal to wages plus profits and land rent. This idea is far from the labor theory of value. He confused the two issues of value formation and value distribution. He ignored (c) considering value as only (v + m), so he got stuck when analyzing reproduction.

Adam Smith distinguished between natural prices and market prices. He believes that natural price is the center, market price is the actual selling price of nature when goods are brought to the market in sufficient quantity to “satisfy actual demand”. But due to fluctuations in supply and demand, the market price is different from the central price.

2.3. Theory of money
He criticized the views of the mercantilists, saying that money is a convenient tool for circulation and exchange of goods. He called it “technical means”, he compared money to a wide road, on which people carried hay and wheat, a road that did not increase the hay and wheat. Thus, he incorrectly evaluated money, considering it just a simple intermediary. He considered money “the great wheel of circulation” and a special tool of exchange and trade. He pointed out that replacing gold and silver coins with paper money is completely reasonable because paper money has many advantages and issuing paper money needs to be undertaken by banks. He stated the rule for issuing paper money: the number of paper money must correspond to the number of gold coins that paper money replaces in circulation.

Adam Smith opposed the quantity theory of money, explaining it as follows: “It is not the quantity of money that determines the price, but the price that determines the quantity of money”, the quantity of money is determined by the value of the block. amount of goods in circulation.

2.4. Theory of wages
He believes that before capitalism, all products belonged to the workers. In a capitalist society, wages are part of a worker’s income, part of the product of labor. Factors that directly determine wages: First, the value of the means of living, secondly, the demand for labor. Adam Smith declared that high wages are a good thing. He did not believe that high wages would make workers lazy as believed by some contemporary authors. On the contrary, he saw high wages as enabling economic growth and relatively higher wages as a stimulus, making it clear that capitalists had nothing to fear from paying workers high wages. Because the labor market mechanism will adjust the appropriate salary level.

Adam Smith also reasonably distinguished nominal wages and real wages (money price and real price of labor). Adam Smith did not deny social conflict when he pointed out that “workers want to receive as much money as possible, and employers want to pay as little as possible.”

2.5. Reasoning about profits
He considered profit as a part of the profit generated from profits, and profit as a part of the products created by production workers. This is a correct and scientific argument. On the other hand, Adam Smith also believed that the source of profit is from all investment capital, both the production and circulation sectors create equal profits, this is his limitation.

Adam Smith pointed out the factors that affect profits: when wages increase, profits decrease and vice versa. He also discovered a tendency to average profit rates across industries and a tendency for profit rates to decrease. According to him, the more capital invested, the lower the profit rate. However, he did not see the role of increased organic structure of capital slowing down the speed of capital circulation, leading to a decrease in profit rates.

2.6. Theory of land rent
Adam Smith considered rent the same as profit, a “deduction from the product of labor.” He considered land rent as “Money paid for the use of land”. Thus, he discovered something important

important: Exclusive private ownership of land is a condition for possessing land rent.

He believed that the size of land rent was more or less the result of product prices. He considered land rent to be the result of monopoly prices, the result of high prices, not the cause of high prices. . He distinguished between land rent and rent (field rent). According to him, rent is equal to land rent plus the profits of capital spent on land improvement.

According to Adam Smith, the land rent on a field is determined by the income of that field and cleverly shows that the land rent on fields where the main crops are grown (food and feed for animals) determines the land rent. Other crops are grown in the field.

Regarding the theoretical limitations of land rent: He considered land rent to be a permanent category. He did not understand differential rent II and denied absolute land rent; due to the influence of agrarianism. Adam Smith said that agricultural labor productivity is higher than industrial labor productivity, because in agriculture there is also the help of nature.

2.7. Theory of capitalism
Unlike the agrarian doctrine that considers all wealth as capital, Adam Smith believed that consumer goods cannot be capital and not all means of production are capital, only the part of property that brings profit. Profit is capital.

He distinguished between fixed capital and mobile capital, which he believed brought income to its owner as a result of the consumption of goods. Liquid capital includes: money, food reserves, raw materials, and goods in warehouses. According to him, merchant capital belongs to mobile capital. Fixed capital is capital that brings profits without transferring ownership. Fixed capital includes: machinery, tools, construction works, etc.

What is valuable in Adam Smith’s reasoning is the economical perspective. He said that to have capital, capitalists must spend part of their income to expand production and create more jobs.

In short, his economic ideas were contradictory, but they created a deep resonance among bourgeois scholars and laid the foundation for classical bourgeois economic theory. He is revered by later scholars as the father of economics.

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