Chapter 4.0-1 PDF

History of Economic Thought I
By: MICHAEL T.(MSc.)
Dire Dawa University

College of Business and Economics
Department of Economics
November, 2018
CHAPTER FOUR
CLASSICAL
ECONOMIC THOUGHT
December 6, 2018 By: Michael T. 2

OUTLINE
 INTRODUCTION
 ADAM SMITH
 DAVID RICARDO
 THOMAS ROBERT MALTHUS

CLASSICAL ECONOMIC THOUGHT
INTRODUCTION
 Classical economics or classical political economy is a school of thought
in economics that flourished in B r i t a i n during 100 years after the
decline of P h y s i o c r a c y is named as C l a s s i c i s m .
 These doctrine were propounded by Adam Smith and his followers.

A d a m S m i t h has been regarded as the father of English Classical
Economics and the leader of the Classical School.
 The last quarter of the 18th century was characterized by full of new
events. Some important changes took place in the world. It was the new
era in economic and political organizations.
 It was a period of:
 The Beginning of the Industrial Revolution.
 The American Declaration of Independence (1775 – 1783)
 The Publication of Adam Smith’s Book in 1776 :

“An Inquiry into the Nature and Causes of the Wealth of Nations”
 This school comprised many illustrious writers and economists.
 Among these the most important were the following:
 Adam Smith
 David Ricardo
 Thomas Robert Malthus
 Jermy Bentham
 J. Mill
 Nassau William Senior
 Jean Baptist Say

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December 6, 2018 By: Michael T.
A DA M S M I T H
Adam Smith (1723 – 1790)

1 . ADAM SMITH (1723 – 1790)
 Adam Smith was born in June 5, 1723 in Scotland.

 He was truly regarded as the patriarch of the science of economics.
 He studied Mathematics at the University of Glasgow from 1737 to

1740. From 1740 to 1746 he continued his studies at the University of
Oxford. For three years he delivered free lectures at the University of
Edinburgh on English literature and political economy.
 In January, 1751, he was appointed as Professor of Logic at the Glasgow

University and continued there up to 1763.
 By the end of the same year he became Professor of Moral Philosophy.

 In 1759, he published his “Theory of Moral Sentiments” - a work of
great merit which brought him widespread recognition.
 In 1776, he published “We a l t h o f N a t i o n s ”. Adam Smith’s ‘The

wealth of Nation’ is usually considered to mark the beginning of classical
economics.
 Adam Smith was the first academic economist with much higher
degree of systematic thinking, who was able to achieve much as
compared with those who preceded him.
 Because of his contribution- the transformation of the subject of

economics and of the development of economic thought almost
completed into science.

FA C TO R S I N F L U E N C I N G S M I T H
 There were three formative influences that contributed to the economic
thought of Adam Smith. These are:
1. Immediate Predecessors
 Adam Smith was highly influenced by the works of his immediate

predecessors. Smith got food for his thought from his teacher Professor
Francis Hutcheson at the University of Glasgow and David Hume-a
personal friend and intimate associate of Smith.
 The M e r c a n t i l i s t s and P h y s i o c r a t s also had their share in

moulding the ideas of Smith. For example: During the 10 months he
spent in Paris he came into contact with the thinkers and statesmen of
the status of Quesnay, DuPont and Turgot.
 Josiah Tucker was another writer who influenced Smith between 1750
and 1756. Tucker wrote several essays on subjects relating to commerce
and taxation. He also emphasized on the importance of labor. Tucker
believed in the advantages of a large population of the country,
suggested a tax on celibacy; and advocated a policy of free trade based
on the harmony of interest.
2. C l u b s a n d T r a v e l s
 Smith`s association with the clubs which joined at Glasgow and

Edinburg had also influenced his economic ideas.
 In addition, his travels provided him an opportunity of meeting the

famous Physiocrats and other scholars and these in turn also affected his
thought.

3. E n v i r o n m e n t s
 The economic environments of the time also influenced the views and
ideas of Adam Smith. Emphasis was laid, throughout Europe, on the
importance of mobility of labor as a contributory factor to the increased
economic activity and happiness, on liberty, freedom of labor and
initiative of the entrepreneurs.
 The Mercantilists regulations of manufacturers (which placed restrictions

on the movement of labor) had lost their importance.
 Inspite of the fact that Smith owed a debt to his predecessors, the
important of his own contributions cannot be minimized. He collected
ideas that were lying scattered, wove them together, gave them a shape,
and thus enhanced their significance. His work, thus, created a
revolution in the domain of economic thinking.
CONTRIBUTION OF ADAM SMITH
A n a l y s i s o f t h e We a l t h o f N a t i o n s
 Adam Smith`s thought regarding the origin of wealth was different from
Mercantilist and Physiocrats. To M e r c a n t i l i s t s wealth comes from
the accumulation of precious metals. To P h y s i o c r a t s wealth
originated from a g r i c u l t u r e .
 But on his famous book “We a l t h o f N a t i o n ”, he explained the

nature and causes of wealth of nation, and stated that the origin of the
national wealth lies not in foreign trade (as Mercantilist did) nor in land
(as Physiocrats did) but in l a b o r .
 Contents of wealth are the produces of labor.

 He said that labor is the source of wealth and only labor is productive.
 Regarding c a p i t a l , he said that capital is previously produced,

but saved and invested, portion of national wealth.
 His ‘We a l t h o f N a t i o n s ’ is divided into five small books

dealing respectively with:
 Problems of production, distribution and exchange
 Capital
 Different economic policies pursued at various times by

different nations
 Previous systems of political economy and;
 Public finance.

Self-interest
 Adam Smith was chiefly guided by one universal principle, that of
self-interest, i.e., every individual has the desire to better his own lot.
 According to Smith,, it is self-interest that provides harmony. In his
‘Theory of Moral Sentiments’, he identified the following six motives that
guide human conduct:
 Self-love
 Sympathy
 The desire to be free
 A sense of prosperity
 A habit of labor
 The propensity to barter and exchange one thing for another.
 But in his analysis he gave more emphasis to the first- self love and the
last propensity to barter and exchange.
 So regarding self-interest he said that ‘each man was naturally the
best judge of his own interest, given complete freedom, he would not only
make effort to better his own lot, but would also promote general society.’
G ove r n m e n t I n t e r ve n t i o n
 He was the strong supporters of lassies-faire/free trade.
 Smith becomes a champion of laissez-faire even greater than that of

P h y s i o c r a t s because he applied the principle without basing it on the
view that agriculture occupied a distinguished position.
 According to him, all domestic measures designed to favor on trade or

suppress another, to encourage agriculture as against industry, or vice versa,
were unwise.
 Rather Adam Smith wanted to see a system where individuals are let free to
pursue their own interest with little government intervention.
 He was against of protection and he said government should take

positive action to destroy any monopolistic position.
 Though he was against of protection, he said some sort of government

interference may be necessary. The natural system allows only three
exception proper duties of government:
 Defense from foreign aggression
 Establishing an exact administration of justice
 Maintenance of public works that would not be
maintained by individuals

THEORETICAL CONTRIBUTIONS OF ADAM SMITH
1. D iv i s i o n o f L ab o r
 Although the idea of division of labor is not new, the statement given by
Adam Smith is a real contribution to economic science.
 To him labor is the source of the wealth of nations- not all human exertion ,
but only productive labor.
 As a reaction against the physiocratic thought Smith laid on the importance

of the labor factor in producing the wealth of a nation.
 According to Smith Division of labor is not the result of an inherent

difference in the natural abilities of people. But acquired skills and
talents may emerge or get strengthen through the division of labor.
 To him division of labor increases labor productivity or efficiency due to the
following three reasons:
A. I m p r o v e m e n t i n s k i l l
 The improvement in skill which workers acquire through repetition on a special

practice. ‘Repetition brings improvement and practice makes man perfect.’
B. S a v i n g o f t i m e
 Since there is no changes in job.
 If a worker performs a number of jobs in sequences, sometime will be lost in

changing the tool.
C. I n c r e a s e t h e c h a n c e o f i n v e n t i o n and better use of machinery
 When a bigger job is broken down into smaller ones, workers are able to do their
part properly and look for better ways of doing things i.e., division of labor
stimulate invention of machinery due to specialization.
 Smith also pointed out the disadvantages of division of labor. Thus, he said
division of labor caused mental stagnation. Furthermore, specialization
decreased mobility of labor also.
 Adam Smith also states about the limit to division of labor. In this regard,
he pointed out that division of labor was limited by the following factors:
1. The extent of market :
 If the market is narrow, division of labor cannot progress as much as it should.

Thus, in order to have a higher degree of division of labor large scale of
production is extremely essential which depends upon demand.
2. The amount of capital available for investment:
 With more capital available, it is possible to bring more division of labor.
3. The nature of occupation
 He held that the industry will itself depends up on the extent of the market
2. T h e o r y o f Va l u e
 R i c h a r d C a n t i l l o n was the founder of the Classical theory of value.
He clearly stated that the v a l u e o f t h e c o m m o d i t y was
dependent on the quantity and quality land and labor entering into its
production. He also said that market price of a commodity was
determined by the supply and demand.
 A d a m S m i t h , who acknowledge his debt to Richard Cantillon, in the

Wealth of Nation, started his analysis bringing out a distinction between
‘Value in use’ and ‘Value in exchange’.
 Va l u e i n u s e - refers to the use to which a commodity is put. It

signifies the utility of some particular object. Va l u e in
e x c h a n g e refers to the capability of a good to be exchanged for
another good.
 Regarding this Adam Smith said that commodity which had great use
value had frequently little or no exchange value. And on the other
hand, he said that commodity which had great exchange value had
frequently little or no use value.
 Some of the most useful commodities such as air and water have scarcely
any value in exchange while others such as diamonds although of little use
can command a great deal of other commodities in exchange.
 Smith did not solve the paradox of value. This had to await later economists who
clearly saw the distinction between a good’s total utility and its marginal utility.
 Smith argued that in a society in which labor was the only resource (i.e., in a
primitive society), the relative value of a good (its exchange value) would
be determined by the amount of labor necessary to produce it.
 In other words he considered the value of a commodity be determined by
the cost of producing or the amount/quantity of labor necessary for
the production of the commodity.
 According to Adam Smith Labor, therefore, is the real measure of the

exchangeable value of all commodities.
 In general in a primitive economy, according to Smith, labor is both

the source of value and the measure of exchange value.
 But in a society where capital investments and land resources become

important (in an advanced economy), said Smith, goods will normally be
exchanged for other goods, for money, or for labor at a figure high enough
to cover wages, rent, and profits. Thus, he realized that the real value of
commodities can no longer be measured by the labor contained in them.
 Moreover, Adam Smith said that competition will drive prices go down to
costs, including a normal profit. Any increase in demand will not increase
value because the costs of producing each unit of the commodity remain
unchanged.
 However, if we assume either increasing or decreasing costs, Smith’s
principle becomes untenable. If the demand for the product rises, and if as
the industry expands it produces the good at higher costs, then the long-run
price (value) of the item will rise.
 If rising output results in falling costs per unit, then an increase in demand
will cause the long-run price of the good to fall.

3. T h e o r y o f Wa g e s
 Smith enunciated partly subsistence of labor theory and partly a cost-of-production
theory to lay the ground for determination of wage.
 According to him wages are determined by the bargaining strength of
both the employers and employees, i.e., depended upon the demand
and supply of labor.
 Employers are labor seekers
 Employees are supplier of labor
 opposing the low wage doctrine of mercantilism, Smith applauded the rise
of wages that accompanied economic growth. Smith said that high wages
increase the health and strength of the workers, animating them to do
their best work because high wages give hope for an improved life. In
contemporary terms, this concept is known as economies of high wages,
or efficiency wages
 In his ‘subsistence of labor theory’, Adam Smith regards the natural
value of labor as determined by what is necessary to maintain the laborer
plus allowance to enable him/her to rear a family and maintain the supply
of labor.
 Adam Smith stated that demand for labor depended upon the wealth of
the nation while its supply was determined by the average price of
provisions. The implication of this is that in a ‘stationary economy’,
laborers multiplied beyond their employment opportunities (the
increasing population), hence the wage level gradually comes down to
its subsistence level.
 But in a ‘developing (expanding) economy’, the wages may go above

subsistence for their demand increased in constructive and
developmental works.
4. Theor y of Rent
 With regard to rent, Smith expresses his opinion on the ground of:
 Monopoly
 Different fertility and location of land, and
 The bounty of nature.
 Smith assumes that land is a private property and that with the
progress of the society and an increase with population, the
demand for agricultural produce keeps on increasing.
 This, therefore, leads to a greater demand for land and gradually

land prices will rise. In addition, lands which are less fertile and
less accessible will also be brought under plough and demand.
 The r e n t o f l a n d is considered as the price paid for the use
of the land which is naturally a monopoly price. R e n t is the
portion of produce (raised by labor or farmers) given to land owners.
 The landlords have the capacity to withhold supply of land unless they are
paid rent for their land. This rent is not in any way related to the efforts
undertaken by the landowners. This also reflects that land is any free gift
of nature in which no contribution of human effort is involved.
 Rent of land is affected/determined both by fertility and situation.

 In other words, he stated that a rent will vary from land to land on
account of differences in fertility as well as its location i.e. bounty of
nature. This was an idea borrowed from the Physiocrats.
 In this regard, Smith pointed out that rent diminished if the land was
distant from the market.
5. N a t u r a l a n d M a r k e t P r i c e
Smith also distinguished between Natural and Market Price.
A. Natural Price
 It is that price of the commodity which covers the natural rate of profit,
wages and rent. Thus, the concept of natural price is essentially “the cost
of production” theory of value.
B. Market Price
 Opposed to the natural price is the market price, which is determined by the
forces of demand and supply through the competition among buyers
and sellers, and around this natural price the market price oscillates.
 Under given conditions this price is determined by the conditions of

demand and supply, but under the influence of competition it constantly
tends to equal the cost of production. 29
6. P r o f i t a n d I n t e r e s t
 Smith couldn't make a clear distinction between profit and interest.
 An earning to capital is I n t e r e s t , if it is lent to someone else
(on borrowed capital).
 An earning to capital is P r o f i t , if the owner invests it himself
(on one's own capital).
 According to Smith the r a t e o f p r o f i t moves in sympathy with the
r a t e o f i n t e r e s t and the variations in the latter may be taken as
indicative of the variations in the former. In other words, the rate of
interest and rate of profit move together in the same direction, however,
they do not bear a definite proportion to each other.
 In a progressing economy when wages rise, profit rate would fall.

 Thus, to Smith the movement of wages and profits are along opposite
directions. 30
7. P r o d u c t ive a n d U n p r o d u c t ive L ab o r
 Adam Smith made conceptual distinction between productive and
unproductive labor. The labor set in motion by capital is called by Smith as
p r o d u c t i v e l a b o r , i.e., which “adds to the value of the subject upon
which it is bestowed”, which the unproductive labor does not.
 If a particular expenditure on labor employment was expected to bring a

return to the employer then it led to a productive employment and the
labor so employed was considered to be p r o d u c t i v e l a b o r .
 If the labor employment was only meant to add to the consumption of the
employer then such a labor was termed to be u n p r o d u c t i v e l a b o r .
 The labor of a menial servant, on the contrary adds to the value of nothing.
 In Smith's approach, we have three definitions of productive labor:
 Labor, which creates value
 Labor, which creates surplus to the employer
 Labor which realizes some particular subject - which is
linked with the output of material goods
 According to Smith, productive services such as accountants, teachers,

opera singers, doctors, lawyers and so on would not add to the
productive capacity of the economy which is to be termed unproductive.
 Smith said that a man grows richer by employing a multitude of

manufacturers; he grows poorer by employing a multitude of menial
servants. In general, Smith regarded those activities which result in
material goods as p r o d u c t i v e and exclude all services.
8. T h e o r y o f C a p i t a l a n d I n t e r e s t
 Adam Smith covers the analysis of capital and interest both in terms of physical
capital and capital as manifested in money terms. According to smith, types of
capital are also distinguished into circulating capital and fixed capital.
A. Circulating Capital:
 Is characterized by its changing ownership and periodic turnover.
 Most of the time, capital in terms of money are considered to be circulating

capital for its ease of liquidity.
 In simple term, circulating capital is synonymous to liquid capital.
B. Fixed Capital:
 Is a type of capital which is used for production without changing masters,
or without circulating any further. Mostly, physical capital is termed to be
fixed capital for the difficulty of its liquidity.
 Regarding s a v i n g , Smith said that it is very important for capital
accumulation of a nation. National savings might be increased either
through a shift from consumption into savings, or through diversion of
additional national income into savings.
 With regard to his contribution to the theories of loans and interest,

Smith claimed that loans are given and taken in terms of money; and
interest rate is determined by the supply of funds (by the owners of the
capital) and the demand for loans (by the borrowers).
 If supply of capital increases faster than the demand, there is a fall in the
rate of interest thereby the rate of profit falls as well.

9. P u b l i c F i n a n c e
 Smith deals with problems of public finance in a systematic manner
and covers public expenditure, public revenue and public debt.
 According to Smith's philosophy and analysis, the state is to follow a

laissez faire policy and thus is to confine itself to only three categories
of functions, namely; Defense, Justice, and Establishment and
running of 'social overheads'.
 Accordingly, his treatment ‘Public Expenditure’ is divided into three parts:
1. Defense expenditure
2. Expense of justice
3. Expense of public works and institutions

 Regarding P u b l i c R e v e n u e , Smith advised the state to collect public
revenue from two sources:
1. S t a t e p r o p e r t y -(Funds, land and Capital of the state)
2. Revenue collected from the people in the form of t a x e s
 Adam Smith did not agree with the Physiocrats that taxes should entirely fall
upon the rent of land (i.e., on the land lords). To him every tax must
ultimately be paid out of the three revenues of society: R e n t , P r o f i t s
a n d Wa g e s .
 In relation to taxes, he developed four cannons (principles) of taxation: The

Four canons of taxation suggested by Smith are the following:
♥ Equality ♥ Convenience
♥ Certainty ♥ Economy
A. The Maxim of Equality/Ability:
 Canon of e q u a l i t y o r a b i l i t y is considered to be a very
important canon of taxation. By equality it does not mean that all tax payers
should pay equal amount to the government.
 Rather by equality it means equality of sacrifice, i.e., people should pay taxes
in proportion to their incomes.
 In the words of Adam Smith “The subjects of every state ought to

In the words of Adam Smith “The subjects of every state ought to
contribute towards the support of government and as nearly as possible, in
contribute towards the support of government and as nearly as possible, in
proportion to their respective abilities; i.e., in proportion to the revenue
proportion to their respective abilities; i.e., in proportion to the revenue
which they respectively enjoy under the protection of the state”.
which they respectively enjoy under the protection of the state”.

B. Maxim of Convenience:
In this canon of taxation Adam Smith said that “Every tax ought to be
levied at the time or in the manner in which it is most likely to be
convenient for the contributor to pay it.”
 It means every tax should be levied in such a manner and a time which is
most likely to be convenient to the tax payers.
 For example in an agricultural country, tax should be collected only after the
harvesting has been done. More, a tax payable by a school teacher should be
collected after he gets his salary and not before it.

C. Maxim of Certainty:
Adam Smith further said “The tax which each individual has to pay ought
to be certain and not arbitrary. It should be certain to the tax payer
how much tax he has to pay, to whom and by what time the tax is to be
paid. The place and other procedural information should also be clear.
 For Smith, it would protect the tax payer from the exploitation of tax authorities
in any way. It will enable the tax payer to manage his income and expenditure.
 Similarly, the government will also be benefited by this principle. Moreover,
he stressed that uncertainty in taxation will lead to corruption. He therefore,
considered canon of certainty more important than canon of equality.

D. M a x i m o f E c o n o m y :
 This canon of taxation refers the cost of tax collection.
 The cost of collecting taxes should be as minimum as possible.
 Those taxes which are expensive and difficult to collect should be avoided.
 That is, no need for uneconomical taxes.
In the words of Adam Smith “ Every tax ought to be contrived as both to
take out and keep out of pockets of the people as little as possible over
and above what it brings, in to the public treasury of the state.”
G e n e r a l l y, these are the four guiding principles suggested by Adam

Smith for the imposition of taxes.
Public Debts
 P u b l i c D e b t - is any means represent the transfer of funds from the

private into public hands.
 According to Smith Public debts are the result of two contributory factors:
1. The need of the state to keep the national welfare whether during
peace time or during wars
2. The loss of productivity of funds
 For Smith public debt is not good for the state because it shifts the
employment of capital from productive uses into unproductive one.
 The disadvantage of long-term public debts is the cost of servicing, which

puts additional burden and constraints upon the public budget.
CONCLUSION
 Adam Smith was the founder of economics of science and the father
of political economy.
 The “We a l t h o f N a t i o n ” was one of the most influential books
ever produced by Adam Smith. It was really a great book, without it the
development of economic thought in the years that followed could not
have been possible. Certain fundamental theories contained in the
book cannot be challenged even today.
 Adam Smith through his book not only influenced his own generation
but also governed the next.

 The ‘Wealth of Nations’ became the cornerstone of economic science.
Those who went before, prepared the way for him; those who came after,
carried on his work, either building upon the foundations of his thought or
endeavoring to correct his error.
 In spite of his important contributions, Adam Smith could not escape

from criticism. For example while regarding labor as the best measure of
value he has nowhere tried to prove that the value is determined by labor.
 However, it remains a fact that Smith`s name is undoubtedly the greatest

in the history of economic thought. Not only Smith`s followers adored
him , even his critics spoke high of him.
 Thus, his place in economics cannot be challenged and has not yet been
challenged by anyone.
DAVID RIC ARD O
D av i d R i c a r d o ( 1 7 7 2 – 1 8 2 3 )

2. DAVID RICARDO (1772 – 1823)
L i f e H i s t o r y a n d Wo r k s
 David Ricardo was born in London, England.
 Ricardo, the third of seventeen children, was born of Jewish immigrants

who had migrated to England from Holland.
 Ricardo was a British economist, one of the most influential classical

economist along with Malthus, Smith and James Mill. He was the last but
the greatest representative of the English Classical School. He has been
one of the most controversial figures in the history of economic thought.
 He has been regarded as the greatest economist of all times. In his hands
Classical English political economy reaches its final and complete form.
 Formerly, he was interested in the study of Mathematics, Chemistry, and
Biology; but when he studied the ‘Wealth of Nations’ in 1779, his
attention was wholly diverted to political economy.
 Ricardo had very little formal education till the age of 12 when he was
sent to Holland for two years for commercial education. Ricardo entered in
to business and began working with his father at the age of 14.
 He amassed a large wealth in a short time and became a landed

proprietor and a member of English parliament. Like Adam Smith,
Ricardo was an opponent of protectionism for national economies,
especially for agriculture.
 Finally, Ricardo died when he was fifty-one from an ear infection. At the
time of his death his fortune was estimated at about £ 6 0 0 , 0 0 0 .
 Although A d a m S m i th was the founder of the English classical
school and set its dominant tone, D a v i d R i c a r d o was the leading
figure in further developing the ideas of this school.
 Ricardo was chiefly known for his masterpiece “P r i n c i p l e s o f

P o l i t i c a l E c o n o m y a n d Ta x a t i o n ” which appeared in
1 8 1 7 . He was chiefly concerned with the study of the problems of
distributions and their solution. With the publication of this book
Ricardo established his permanent reputation as one of the leading
economists in the world.
 Ricardo was responsible for giving rise to many other school of thought
in economics viz: Historical School, Austrian School, and Marxian School.

INFLUENCES SHAPING IDEAS OF RICARDO
 David Ricardo like his forerunners was also affected by several multi-
dimensional factors prevailing at that time in England which shaped his
economic ideas. Most of the factors were related to the intellectual and
environmental influences of that period which are as follows:
1. Ricardo was greatly impressed by t h e w e a l t h o f n a t i o n ` s of

Adam Smith. He went through it and mentioned several criticisms in his
book “the principle of political economy and taxation.”
2. He must be indebted to James Mill and Bentham, as Ricardo

borrowed ideas from them.

 From James Mill he borrowed the system of philosophical ideas, but with a
little difference of opinion. From Bentham, he attained the hedonistic
principle, measurement of pain and pleasure, spread of education, belief in
practical programmes.
 But Ricardo`s economic ideas have made him certainly superior to

James Mill and Bentham.
3. Ricardo also read many other writers works of his time, like Malthus,
J. B Say, Edward West and so on to whom he had acknowledged his
indebtedness and had expressed his gratitude in his book. From Malthus,
he got raw material, especially on population and rent. From J. B Say the
law of market.
4. Beside the intellectual influences, Ricardo was extremely affected by the

socio-economic environment/conditions of England of his times.
Theoretical Contributions of David Ricardo
1. T h e o r y o f Va l u e
♦ The theory of value has been one of the most controversial subject in the
domain of economic theory.
♦ On the subject of value, he followed Adam Smith.
♦ On his theory of value, he differentiated between Natural/Normal value

and Market value.
♦ Ricardo was concerned with relative values, not with absolute value.
♦ According to David Ricardo natural value is stable while the market value
is variable which turns about natural value and ultimately tends to equalize
with it in the long run.
 In his ‘Principles of Political Economy and Taxation’ , Ricardo wrote that for a
commodity to have exchange value, it must have use value. Utility is not the
measure of exchangeable value, although it is essential to it.
 He said that commodities possessing utility (utility commodities), derive

their exchangeable value from two sources:
 From their scarcity and;
 From the degree/quantity of labor required to obtain them (or

simply the labor cost of production).
 According to David Ricardo Commodities whose exchangeable value

determined by their characteristics of scarcity alone are non-
reproducible/uncommon commodities such as rare works of art,
classic books, and old coins.

 According to David Ricardo for these items, supply is fixed, and therefore
demand will be the primary factor in determining exchange value:
Their value is wholly independent of the quantity of labor originally
necessary to produce them.
 Ricardo did not give much attention for these commodities in his theory of
value since these are so limited in number. He paid much attention for
common commodities, and regarding these he said that most commodities
are reproducible/common commodities and Ricardo assumed that they
are produced without restraint under conditions of competition.
 According to Ricardo, the exchange value of these commodities is

determined by the quantity of labor required to obtain them.

 In his opinion, the market value deviate from the normal value/natural price
because of temporary fluctuations of supply and demand.
 If the market value is l o w e r t h a n the normal value, the owner
of capital will incur loss, thus capital flows out of the industry . This
result in supply to reduce and tends to bring the market price in
accord with the normal value/natural price.
 Meanwhile if the market price r i s e s a b o v e the natural price,
then profits rise and more capital is used to produce the commodity.
Hence the market price decrease and tends to bring in accord with
the natural price.

2. T h e o r y o f D i s t r i b u t i o n (A s s i g n m e n t )
Highlight
 The major contribution of David Ricardo to economic theory was the
emphasis which he laid on the distribution of the national income, in
extending the application of theory of value in the field of distribution.
 To him profit and wage work together in inverse proportion.

 His fundamental theory of distribution says that profits would be high or
low in proportion as wages were low or high.
 Wage depends on the price of necessaries.
 Price of necessaries depends on the price of food.
 The exchange value of food is determined by its cost of production in
terms of labor, at the margin of land utilization.
 He said in the long run wages tend to equal the exchange value of food and
the rates of exchange are equalized by competition.
3. T h e o r y o f Wa g e s
 Ricardian theory of wages is a combination of Smithian concept of

wages and Malthusian theory of population.
 He distinguished between natural price and market price of labor.
 According to him ‘N a t u r a l P r i c e o f L a b o r ’ mean the price which

is necessary to enable the laborers to subsist and perpetuate their race.
 To him the natural price of labor is determined by the level of

subsistence of the labor. He said that it is depend upon the purchasing
power of money or the price of essentials.
 In this regard he stated that if the price of food and other necessaries
increase, the natural price of labor will increase and vice versa.
 To him the ‘ M a r k e t P r i c e o f L a b o r ’ mean price which is really
paid for it. It is determined by the forces of demand and supply. But
the market price tends to fluctuate around the natural price.
 Further, Ricardo said that the s u p p l y o f l a b o r is determined by the

level of subsistence labor. He said that if the workers get wages more
than the subsistence level, the supply of labor i n c r e a s e . But if the
workers get wages less than the lowest required/subsistence level, the
supply of labor d e c r e a s e s .
 Regarding the d e m a n d f o r l a b o r , Ricardo said that the demand for

labor is determined by the amount of capital employed i.e. demand for
worker proportion to the amount of capital. He said if the amount of
capital employed in production i n c r e a s e s , demand for labor would
i n c r e a s e ,and vice versa.
 When the market price of labor e x c e e d s its natural price:-
 The condition of the laborer is flourishing and happy 
 They will increases the size of their family 
 Increase the number of their children 
 Number of labors (labor supply) increases 
 Wage again decline and finally M P L = N P L
 When the market price of labor b e l o w the natural price:-

 The condition of the laborer is most wretched 
 They will refuse to increases the size of their family 
 Number of labors (labor supply) decline 
 Demand for labor will rise 
 Wage again rise and finally M P L = N P L
NB. The long-run tendency is, therefore for workers to receive the
subsistence minimum wage.
4. T h e o r y o f R e n t
 David Ricardo propounded his theory of rent on the basis of the idea of
Adam Smith and Thomas Robert Malthus.
 He was the first to produce a systematic theory of rent though Ricardo

can’t be regarded as the founder of the theory of rent. Meaning, Ricardo
later refashioned and presented the theory of rent in his own way.
 According to A d a m S m i t h “ R e n t was the price which the landlord

receives for the use of his land. It was the free gift of nature.
 Moreover, Adam Smith remarked: the rent of land not only varies with its
f e r t i l i t y whatever be its produce but with its s i t u a t i o n s , whatever
be its fertility.”
 The P h y s i o c r a t s regarded “ R e n t ” as the free gift of nature that was
likely to increase the national wealth. But like Adam Smith, they did not try
to determine the amount of rent to be paid to landlords of different
categories.
 According to R i c a r d o , “ R e n t - is that portion of the produce of

the earth which is paid to the landlords for the use of the original and
indestructible power of soil.”
 According to Ricardo the land which was cultivated first in every country
was the most fertile and favorably situated.
 Ricardo believed that so long as the most fertile land was available, the
question of rent would not arise. And he said that less fertile land was
cultivated only when the population of the country increases.
 In this regard he said that as population increases, demand for food
became acute and this leads people to start cultivation on less fertile
and unfavorably situated land/I n f e r i o r l a n d . More, it will cause
better land to be worked more intensively.
 He called this land Second degree fertility land or M a r g i n a l l a n d .
 The Ricardian theory of rent assumes the operation of two
principles: the differential principle and the marginal principle.
1. D i f f e r e n t i a l P r i n c i p l e - refers the fact that equal amounts
of labor & capital may produce different amount of output.

 In this regard Ricardo states that in agriculture - equal quantities of capital
and labor produce different quantities of output in t w o w a y s .
 I n C a s e o f E x t e n s i v e C u l t i v a t i o n - Output differs when equal

quantities of labor and capital are employed on lands with different
qualities. Rent arises due to d i f f e r e n c e s i n s o i l f e r t i l i t y .
 In Case of I n t e n s i v e C u l t i v a t i o n - Due to the law of

diminishing returns output differs when equal quantities of capital and labor
are used successively on the same land. Here rent arises due to the l a w
of diminishing returns.
 Ricardo said that if successive units of labor and capital are added to a piece
of land while technology remains constant, each added unit of investment
will add less to the output than previous units.
 In general, according to David Ricardo, rent arises at both the extensive and
intensive margins of cultivation.
2. T h e M a r g i n a l P r i n c i p l e - this principle implies the price of the

produce is determined by the cost of production of the marginal producer.
M a r g i n a l p r o d u c e r - is those who produces under the most unfavorable
circumstances. Ricardo explained rent by comparing the produce of a first
grade land and a second grade land of equal area.
 He said if the first grade land produced 6 quintals of grains and the second
grade land produce 5 quintals of grains, the difference i.e. one quintals of
gain would be the rent, the second grade land being the marginal land which
simply paid for labor and capital.

 If the third grade land was brought under cultivation under the pressure of the
population, and it yielded only 4 quintals of grains, then rent would be as follow:
 On the first plot of land: 6 – 4 = 2 quintals
 On the second grade of land: 5 – 4 = 1 quintal.
 If on further pressure, the fourth grade land was cultivated which yielded 3
quintals of grain only, the rent would accrue on the first three plots of land
in the following quantities:
 On the first plot of land: 6 – 3 = 3 quintals
 On the second plot of land: 5 – 3 = 2 quintals
 On the third plot of land: 4 – 3 = 1 quintals

 According to theory of differential rent: the cost of production of
agricultural product will vary due to differences in the fertility of the soil.
 As population and the demand for food increase less fertile lands have the
tendency to be put for cultivation. Consequently the society will face both
fertile and non-fertile land.
 The price of the produce on non-fertile land must be high enough to cover
the highest cost of production. In a competitive environment production
with higher level of price in the market will not have any demand.
 Hence no producer has the tendency to look for non-fertile lands. As the
result rent is absent on non-fertile land. To conclude: the differential
refers to the surplus generated from the land for being fertile.
Criticisms of his ‘Theory of Rent’
 It does not appear sound to treat capital and labor as a single homogeneous factor.
 Ricardo did not connect rent with any particular quantity of land. It is the capital
and labor applied to land which yields rent.
 His assumption that best lands are cultivated first is not supported by any
empirical evidence. Moreover, the existence of marginal or no rent land is also

challenged. In practice it is difficult to find a land that earns no economic rent.
 Modern economists explain the concept of economic rent by the scarcity

principle and not by the differential principle. Like all other factors rent is paid
because land is scarce in relation to its demand.
NB: The scarcity principle explains why rent arises and the differential principle
explains why rent is different on different grades of land.

5. T h e o r y o f E c o n o m i c D e ve l o p m e n t
 Smith had shown that profits on average tended to fall with economic
progress because the accumulation of capital increased competition among
capitalists which led to reduction in the rate of profits.
 But Ricardo does not accept this view. He tries to show that accumulation of
capital would leads to the reduction of profits, not always, but under certain
conditions/circumstances. The accumulation of capital will lead to reduction
of profits if it is accompanied by rising wages.
NB: He stated that profits and wages move in inverse proportion.

 And Ricardo posited that war, taxation, fashion will alter the relative
profitability of different branches of production both in the country in which
these factors operate and in the countries maintain trading relations with it.
 He also indicated that technological advancement is the major weapon for the
way out of a stationary state.
6. T h e o r y o f I n t e r n a t i o n a l / Fo r e i g n Tr a d e
 Ricardo like Physiocrats and Adam Smith, he also supported the

policy of laissez fair.
 He was aware of the benefit of free trade system.
 He was a perfect trader.
 Ricardo explained how economic forces bring about the balance of

trade automatically in its equilibrium position.
 The chief contribution of David Ricardo to the theory of

international trade was his discovery of the laws governing the
movements of money from one country to the other country.

 He observed that if a country has an adverse balance of trade, excessive
money will be exported and the scarcity of money will be experienced in
the country. The scarcity of money will leads to an increases in its value
and prices will fall.
 Low prices will stimulate exports and ultimately the money which was
sent abroad will come back. Consequently, price would rise, export will
be curtailed and imports will increase, thus leading to the export of
money. The cycle will go on.
 Ricardo, thus, held that under automatic operation of the economic

forces, the balance of trade will itself come to a position of equilibrium.
 But he thought that this position of equilibrium may not be established so

quickly. It may take some time before prices may rise or fall under the
influence of quantity of money.
7. T h e o r y o f C o m p a r a t ive C o s t
 Among the notable ideas that Ricardo introduced in ‘principle of political

economy and taxation’ one was the theory of comparative cost.
 Ricardo’s theory of comparative costs is also known as t h e l a w o f

c o m p a r a t i v e a d v a n t a g e . In his theory Ricardo sought to explain
why nations trade and how trade benefits all nations that participate.
 For Smith international trade was based on differences in absolute costs

(i.e. absolute cost advantage), everybody buying in the cheapest market.
 For Adam Smith trade between two countries will occur if and only if each
country has an absolute cost advantage over the other in one commodity.
 Smith’s absolute cost advantage can be illustrated as follows (using Ricardo`s

example of England and Portugal).
Table 1: Hours of Labor Necessary to Produce One Unit of Wine and Cloth
Countr y Wine Cloth Domestic Barter Rate
Por tugal 100 50 1 wine = 2 cloth
England 50 100 1 wine = 0.5 cloth
 From the example, England has an absolute cost advantage in w i n e and
Portugal in c l o t h . Therefore, Smith said England will specialize in wine
and export it to Portugal because Portugal is willing to pay a price greater
than what it costs in England.
 Similarly, Portugal will specialize in cloth and export it to England because

England can pay a higher price than Portugal domestic barter rate.
 Ricardo made a brilliant and lasting contribution to economic thought by
developing t h e t h e o r y o f c o m p a r a t i v e c o s t . He said that it
should be relative-cost ratio than absolute costs that must be considered.
 Unlike to Smith, Ricardo shows that even if one country is more efficient
than another in producing all commodities, trade between the two
nevertheless can be of mutual benefit/advantageous.
 In other words Ricardo argues that countries should specialize in

production of goods in which they not only have an absolute advantage but
also a relative advantage over other countries in order to promote benefits
of international trade.
 According to Ricardo the more efficient country should export those

commodities whose comparative cost is lowest and it should import
those whose comparative cost is highest.
Lets illustrate Ricardo`s theory of comparative cost advantage using his own example as follows.
Table 2: Hours of Labor Necessary to Produce One Unit of Wine and Cloth
Countr y Wine Cloth Domestic Barter Rate
Por tugal 80 90 1 wine = 0 . 8 9 cloth
England 120 100 1 wine = 1 . 2 cloth
♦ In this example: Portugal has an absolute cost advantage over England in

both Wine and Cloth production, but it has a comparative cost advantage
over England only in W i n e . Because to him the important thing here is we
have to compare cost-ratio (i.e. 80/120 and 90/100 to Portugal and
120/80 and 100/90 to England) not costs.
♦ Regarding this he said Portugal’s comparative advantage over England is

W i n e relative to Cloth because 8 0 / 1 2 0 < 9 0 / 1 0 0 .

♦ On the other hand, England`s comparative cost advantage over Portugal is
on C l o t h relative to Wine this is because 1 0 0 / 9 0 < 1 2 0 / 8 0 .
 From the table it is observed that international trade based on comparative

cost doctrine shows an overall reduction of production cost.
 Before trade, E n g l a n d requires 2 2 0 hours (120 + 100) of labor to
produce one unit of Wine and Cloth each. P o r t u g a l requires 1 7 0 hours
(80 + 90) of labor to produce one unit of Wine and Cloth each.
 But after trade, Portugal produces 2 units of Wine in 1 6 0 (80 + 80) labor hours
and England Produces 2 units of cloth in 2 0 0 (100 + 100) hours of labor.
 The total number of hours of labor required by both countries before trade was
3 9 0 which reduced to 3 6 0 after trade, a reduction of 3 0 hours of labor.
 Comparative cost theory does not tell us what the actual terms of trade
will be. Rather it gives us upper and lower limits of the range in which trade
between the two countries will be mutually beneficial.
 If Portuguese Wine is exchanged for English Cloth at the rate of 1 wine = 0.89
cloth, then all the gains of the trade will go to England. If Portuguese Wine
is exchanged for English Cloth at the rate of 1 Wine = 1.2 Cloth, then all the
gains of the trade will go to Portuguese.
 Ricardo did not specify clearly how the gains would get divided between
England and Portugal. Although his theory defines the limits within which
the ratios of exchange between internationally traded commodities could
fluctuate, it does not attempt to explain what determines the ratios. It was
J o h n S t u a r t M i l l (Chapter 6) later presented a theory of reciprocal
demand that addressed this question.
CONCLUSION
 David Ricardo was considered as a great economist next to Adam Smith.
 Ricardo made several lasting contributions to economic analysis. Of particular

significance were his contributions to the use of abstract reasoning, his
theory of comparative advantage, his employment of marginal analysis, his
presentation of the law of diminishing returns in agriculture, and his widening
of the scope of economic analysis to include the distribution of income.
 He was one of the most powerful influences shaping the course of

development of economic science in the 19th century.
 He succeeded even more than Adam Smith in isolating the chief categories of
the economic system. He left his successors many unsolved problems, but he
also indicated ways in which they might be solved.
 Ricardo’s writings fascinated a number of early socialists in the 1820s, who
thought his value theory had radical implications. Hence it is concluded that
Ricardian theory of value is the starting point of modern socialism.
 Above all, Ricardo was responsible for giving rise to many schools of thought
in economics; viz, Historical School, Austrian School, and the Marxian School.
 Although some of his analysis were weak or inaccurate in several respects, all
scholars agree that Ricardo’ s ideas had a tremendous influence on later
developments in economics and considered him an extremely important figure
in the development of economic analysis.

THOMAS
ROBERT MALTHUS
Thomas Rober t Malthus (1766 – 1834)

3. THOMAS ROBERT MALTHUS (1766 – 1834)
 Thomas Robert Malthus was born in 1766, in Rockery, England.
 Malthus is an important, although controversial, figure in classical
economic thought, and several of his conclusions were at variance with
those of other members of the classical school.
 After studying Philosophy and Theology, he graduated from Cambridge
University in 1788. In 1805 he was appointed as Professor of History
and Political Economy in the College of East India Company at
Haileybury near London until his death on December 29, 1834.

 Malthus is known for his t h e o r y o f p o p u l a t i o n . He was a
p e s s i m i s t i c thinker and was therefore, against a dense population.
 Malthus`s thought was chiefly influenced/molded by the socio-economic

conditions of England. He was impressed by the views of population in
the wealth of nations and the works of earlier writers, and by the law
of diminishing returns.
 Prior to Malthus, it was generally believed that a rapidly increasing
population necessarily leads to national economic prosperity and that the
wealthiest and the strongest countries were often the most populous.
However, after Malthus, rapidly increasing population became hindrance
to economic development.
Malthus’s view on population
 Among classical economists, Malthus was the first person who

formulated his famous theory of population and presented in his
treatise “A n E s s a y o n t h e P r i n c i p l e s o f P o p u l a t i o n ”.
 Although Malthus was known for his essay on population, he was not
the first to lay bare the danger of over population. In fact he was
not even the originator of the idea that population tends to
increase at a faster rate than the means of subsistence.
 The first edition of the book was published in 1798, contained 396 pages.
 This book had 7 editions: 1803, 1806, 1807, 1817, 1826, and 1872.

 Malthus deduced that the power of population is infinitely greater than
the power in the earth to produce subsistence for the man.
 According to Malthus the population when unchecked, increase in a
g e o m e t r i c a l p r o g r e s s i o n ( i.e. 1, 2, 4, 8, 16…) whereas food
supply/means of subsistence increased only in an a r i t h m e t i c a l
p r o g r e s s i o n ( i.e. 1, 2, 3, 4, 5, 6…). He pointed to the rapid population
growth in America (the India of its day) for proof of his propositions.
 In his opinion, Malthus said that the population can exist only in
proportion to the available food supply. If the population in the country
continues to increase without restriction, soon it will reach the point it will
be just more than the means of subsistence.
 In general Malthus has summarized his doctrines in to three prepositions.
 The three prepositions are:
1. Population is necessarily limited by the means of subsistence.
2. Population invariably increases more than the means of subsistence

unless prevented by some powerful and obvious checks.
3. The checks which repress the superior power of population keep its effects.
 Regarding the first preposition, Malthus said when population unchecked
goes on doubling itself every 25 years or increases in a geometrical ratio.
As regards to the second proposition, he has written: “it may fairly
pronounce that the means of subsistence could not possibly be made to
increase faster than in an arithmetical ratio.

 Regarding the third proposition Malthus said that excess population could
be controlled by two kinds of checks:
1. Preventive Checks and
2. Positive Checks
 By “ C h e c k s ” Malthus, however mean the means of establishing an

adjustment between the population and the means of subsistence.
1. Preventive Checks:
 He also called it man made checks.
 These checks are applied by people consciously to limit the number of

children or all those checks which diminished the birth rate.
 These checks are divided in to two:

A. M o r a l R e s t r a i n t : which includes
 Postponement of marriage
 Abstinence from marriage/ self-restraint
 Abstinence from sexual gratification
 Others
B. A r t i f i c i a l R e s t r a i n t s (Vices):
 Includes the acts of sexual intercourses that do not result in pregnancy includes:
 Professional prostitution
 Promiscuous intercourse
 Use of contraceptives and etc

2. Positive Checks:
 He called it natural checks.
 These checks are applied by nature compulsory, to increase the death

rate and resulting in a shorter life span. Example:
 Wars
 Famine
 Diseases, plague, epidemics
 Earth quakes, storms, cyclones
 Extreme poverty and etc
 In his opinion, the preventive checks were better than the positive checks to
control the population. Since positive checks are harder/horrible and causes of
miseries, Thus, Thomas Robert Malthus suggested adoption of preventive
checks: like self-restraints, late marriage, and celibacy.
 Malthus said self-restraint and celibacy were the better measure to control
the number of births, and he badly criticized the artificial and unnatural
modes of checking population like sex fraud, use of contraceptives and free
exercise of sexual relation. and he called them e v i l s o r v i c e .
 According to Malthus these positive checks are natural punishments for
people who had not practiced moral restraint i.e., for the failure by the “lower
classes “to restrain their reproduction.
 He said if the positive checks could somehow be overcome, people would
face starvation because a rapidly growing population would press upon a
food supply that at best would grow slowly.

 Therefore, as a practical policy measure, Malthus proposed that people
should be discouraged from helping to increase the population. In other
words he suggested that there must be no government relief or aid for
the poor. Because for him to give them aid would cause more children to
survive, thereby ultimately worsening the problem of hunger.
 As a consequence Malthus was a strong opponent of poor relief. He
advocated that the state should not recognize the right of the poor to
receive support and it should abolish the poor law.
M a l t h u s , who married at 38, had three children but no grandchildren. R i c a r d o ,
who married at 21, had eight children and twenty-five grandchildren. Had this
progression continued, England would have been overrun with Ricardos!

Criticisms of Malthusian Theory
 Thomas Robert Malthus was afraid of increasing human population. He
warned the people against the rapidly increasing population which was
causing a lot of misery, poverty, and starvation.
 In this regard, Malthus was badly criticized. The main criticisms of the
Malthusian doctrine are as follows:
 Malthus has tried to prove that the population doubles itself every 25
years. This condition is not correct. More, the concept that population
increases in geometric progression is also wrong.

 The concept that the means of subsistence increases in the arithmetical
ratio was wrong. He did not visualize the impact of technical innovations,
like the application of new farm techniques, machinery, high yielding
variety of seeds, fertilizers, pesticides and so on, in the field of agricultural
production.
 In view to critics, the means of subsistence include not only agricultural
products but also vegetables and meat that have been ignored by Malthus
theory of population. Since the population of animals and birds increase
many times more than the population on woman, it was therefore, wrong
conception that means of subsistence would increase in arithmetic ratio.

 Malthus doctrine has been further attacked in respect to positive checks.
He said population could be checked through it but some diseases were
removed from the world.
 Malthus was also wrong not to differentiate between the desire of sex and
the desire of children. The desire to have sex is natural desire and is found
in every man, but the desire of children is related with social and religious
desires. Man can not have control over the desire to have sex, but the desire
of children can be restricted by the use of contraceptives.
 Malthus avoided migration. But humanitarians everywhere say if the

population of a country or a state or a region increases more than the
means of subsistence available in the area, the emigration is undertaken.
 Malthus thought that the poor were responsible for their poverty and
starvation and suggested not to marry. He opposed the poor law of
England, as it had helped the poor to marriage, and then, to increase
population without any increase in food supply.
 In recognizing many of criticisms arose against Thomas Robert Malthus,
however, we must also emphasize that Malthus’s population theory still has
considerable relevance in today’s world.
 For some of the world’s poorer inhabitants, the Malthusian predictions of
famine, malnutrition, and disease are all too real.

OTHER ECONOMIC VIEWS OF MALTHUS
On Rent
 Malthus did not enunciate any theory of rent.
 His views on rent are contained in book entitled “An Enquiry in to the
Nature and Progress of Rent”, in 1815.
 He stated that the cause of high prices of food was the population
growth and progress. The growth of population leads to the scarcity of
good land. The scarcity of good land is a cause of scarcity of food.
 Prices of the produce raised from the already cultivated land increases- an
application of the law of diminishing returns.
 He said that since rent arises due to the difference between the price
and cost of production, the rise in price was the sole cause for the
origin of rent.
Reading Assignment
Malthus`s view towards ‘t h e T h e o r y o f M a r k e t G l u t s ’

CONCLUSION
 Malthus holds a unique place in the history of economic thought.
 He was the first economist to throw light on the dangers of excessive

population, in such a style and in such a language, which were full of
exuberant sprit of the youth.
 He has rightly been called the founder of the science of demography.
 As an economist, he not only brought in to the field of economic science

a new subject of study but also made others to realize the economic
significance of the subject.
 According to Keynes, “I have long claimed Thomas Robert Malthus

as the first of the Cambridge Economists.”
GROUP ASSIGNMENT
1. Discuss and write briefly the economic ideas of

J. Bentham, J. Mill, N. William Senior, and J.B Say.
2. Briefly explain the major important contribution

of David Ricardo to economic theory i.e. his
“Theor y of Distribution ”.


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History of Economic Thought I

By: MICHAEL T.(MSc.)

Dire Dawa University

December 6, 2018 By: Michael T. 2

 THOMAS ROBERT MALTHUS

December 6, 2018 By: Michael T. 3

 These doctrine were propounded by Adam Smith and his followers.

 The American Declaration of Independence (1775 – 1783)

 The Publication of Adam Smith’s Book in 1776 :

 This school comprised many illustrious writers and economists.

 Among these the most important were the following:

 Thomas Robert Malthus

 Nassau William Senior

 Jean Baptist Say

December 6, 2018 By: Michael T. 7

 Adam Smith was born in June 5, 1723 in Scotland.

 He studied Mathematics at the University of Glasgow from 1737 to

 In January, 1751, he was appointed as Professor of Logic at the Glasgow

 By the end of the same year he became Professor of Moral Philosophy.

December 6, 2018 By: Michael T. 8

 In 1776, he published “We a l t h o f N a t i o n s ”. Adam Smith’s ‘The

 Because of his contribution- the transformation of the subject of

December 6, 2018 By: Michael T. 9

 Adam Smith was highly influenced by the works of his immediate

 The M e r c a n t i l i s t s and P h y s i o c r a t s also had their share in

 Smith`s association with the clubs which joined at Glasgow and

 In addition, his travels provided him an opportunity of meeting the

December 6, 2018 By: Michael T. 11

 The Mercantilists regulations of manufacturers (which placed restrictions

 But on his famous book “We a l t h o f N a t i o n ”, he explained the

 Contents of wealth are the produces of labor.

 Regarding c a p i t a l , he said that capital is previously produced,

 His ‘We a l t h o f N a t i o n s ’ is divided into five small books

 Different economic policies pursued at various times by

 Previous systems of political economy and;

December 6, 2018 By: Michael T. 14

 He was the strong supporters of lassies-faire/free trade.

 Smith becomes a champion of laissez-faire even greater than that of

 According to him, all domestic measures designed to favor on trade or

 He was against of protection and he said government should take

 Though he was against of protection, he said some sort of government

 Defense from foreign aggression

 Establishing an exact administration of justice

 Maintenance of public works that would not be

December 6, 2018 By: Michael T. 17

 As a reaction against the physiocratic thought Smith laid on the importance

 According to Smith Division of labor is not the result of an inherent

 The improvement in skill which workers acquire through repetition on a special

 Since there is no changes in job.

 If a worker performs a number of jobs in sequences, sometime will be lost in

C. I n c r e a s e t h e c h a n c e o f i n v e n t i o n and better use of machinery

1. The extent of market :

 If the market is narrow, division of labor cannot progress as much as it should.

2. The amount of capital available for investment:

 With more capital available, it is possible to bring more division of labor.

3. The nature of occupation

 A d a m S m i t h , who acknowledge his debt to Richard Cantillon, in the

 Va l u e i n u s e - refers to the use to which a commodity is put. It

 According to Adam Smith Labor, therefore, is the real measure of the

 In general in a primitive economy, according to Smith, labor is both

 But in a society where capital investments and land resources become

 However, if we assume either increasing or decreasing costs, Smith’s

price (value) of the item will rise.