Subject: Essay on key points of Adam Smith, David Ricardo and John Stuart Mill Instructor: Prof. Dr. Juan Carlos Cachanosky
Student: Nevila Mehmetaj, Master in Management and Finance (MMF)
Date September 3, 2010
The classical writers of the eighteen and nineteen century when offering definitions of their science expressed themselves about the nature of the economic in two distinct ways. They could define the subject known as political economy. Or having defined the political economy as the science of wealth, they could proceed to set forth the nature of that wealth with which it was maintained that economics is concerned. (Israel M. Kirzner, The Economic Point of View, p 13). The earliest classical economist adopted the description of the economic side of affairs in terms of wealth, but developments narrowed down the concept of wealth to the idea of material wealth of mankind. The attitude toward the utility of economic inquiries in elevation of wealth became an object of scientific study. Investigations that aims finding the means of enriching people and the sovereign; discovering laws of governing and to make the nation wealthy. From the beginning alternative suggestions were made by the economists themselves about what should and what should not be included under the heading of wealth. Adam Smith in “An Inquiry into the Nature and Causes of the Wealth of Nations”, 1776, explains that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called “invisible hand”. He argued that self-interested competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. An often-quoted passage from The Wealth of Nations is: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."(Adam Smith, p. 18). Smith believed that economic development was best fostered in an environment of free competition. Smith saw no role for government in economic life but believed that the government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges that, he assumed, would not be worthwhile for individuals to provide. Interestingly, though, he wanted the users of such public works to pay in proportion to their use. Value theory was important in classical theory. Smith wrote that the real price of one thing is the labor and difficulty of acquiring it as influenced by its scarcity. Smith also believed that the main cause of prosperity was increasing division of labor. It would affect a great increase in productivity, one example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required making a pin, they could make a combined amount of 48,000 pins in one day (Adam Smith, ch. 1). Smith claimed that an individual would invest a resource—for example, land or labor—so as to earn the highest possible return on it. Consequently, all uses of the resource must yield an equal rate of return (adjusted for the relative riskiness of each enterprise), otherwise reallocation would result. Smith used this insight on equality of returns to explain why wage rates differed. Wage rates would be higher, he argued, for trades that were more difficult to learn, because people would not be willing to learn them if they were not compensated by a higher wage. Similarly, wage rates would also be higher for those who engaged in dirty or unsafe occupations, such as coal mining and butchering. In short, differences in...