ADAM SMITH CLASSICAL

THEORY (1723-1790)
• The thoughts on the economy were greatly developed in
the XV century when the agricultural revolution in Europe
occurred. However, economic recognition as a branch of
independent sciences was only recognized in the XVIII
century, after Adam Smith emerged. Adam Smith was the
main figure of economic thought. The thought that
developed by Adam Smith is called the classical thought.
In fact, the ideas that he wrote, it has been widely
discussed by economic experts far before.
• There is two economic thought who were influential for
Smith, namely Francis Hutcheson and David Hume. They
were Smith's teacher and lecturer during a college. After
graduating from college, Smith became a lecturer at
Edinburg University and moved to Glasgow University.
Smith as lecturers often taught moral philosophy. Then in
1776, Smith wrote The book The Wealth of Nations which
later the book was regarded as the first designer of the
History of economic development and he was given the
title of "Father of Economic sciences".
• In many ways, Smith's thought is in line with the
Physiocrats ' understanding of the production of goods
and services as the main source of the prosperity of a
nation. While Smith was becoming a visiting lecturer in
Toulouse, France, he often met physiocrats figures, such
as Quesnay, Turgot, Necker, D'alembert, Helvetius, and
Marmuntel. In fact, the framework of The Wealth of
nations has begun to be compiled when he was a visiting
lecturer at Toulouse. Although many are similar, there are
some differences in the view of Smith with the view of
Physiorats, which is to emphasize the dominant factor in
determining the prosperity of the state.
 The Essence Of Greedy Humans
• Humans, in fact, possess the greedy, egoistic, and selfish already
known to ancient Greek thought, such as Plato and Mandeville.
Mandeville considers this human greedy attitude to provide
negative socio-economic impacts for society. To avoid this impact,
Mandeville advocated a the role of government in the economy.
Instead, Smith argues that human selfish attitudes can accelerate
economic growth as long as there is free competition. Although the
motive of selfish is not good, it does not mean that we have to
resist doing business with others, it will only self destruct.
 Free Market Mechanism
• Smith strongly supports the motto laissez faire-laissez-passers who
require minimal government intervention in the economy. Later
there will be an invisible hand that will bring the economy to the
balance. If any government interference, the market will
experience distortions that will bring the economy to inefficiency
and imbalance. Smith's view then marked a revolutionary change
in political thought. During the mercantilism, the State placed
above the individual. In contrast, according to the classics and
physiocrats, the individual must take precedence. The country's
task is to ensure the creation of conditions for each person to act to
do their best for themselves.
 Value Theory
• According to Smith, goods have value, namely value in use and
value in exchange. The exchange-value or price of goods is
determined by the amount of labor that produces the goods. How
to? Smith, stating to measure the labor force in producing goods
can not only be measured from working hours but to workers'
skills. Smith uses "price" labor or wages as a measuring
instrument. The wage rate also determines the difference in labor
skills. The difference in labor skills in the resultant use of Smith's
goods to price
• According to Smith, the relationship between use-value and
exchange-value of goods that have high use-value, sometimes can
not be exchanged for other goods. The exchange-value for Smith
can be interpreted with the ability of an item to acquire other
goods. If you noted, Smith's concept of value is ambiguous. Smith
did not understand the relative price, the difference between total
utility and marginal utility and average utility. Smith only focused
on total utility The weakness of Smith's thought, could be solved by
his own disciple, Alfred Marshall.
 Division Of Labor
• According to Smith's view, the division of Labor will
encourage specialization; People will choose the work that
suits their talents and abilities. There are specialties,
everyone does not need to produce any items needed
individually. However, generating one type of goods that
excess goods on their own needs is traded on the market.
This division of work causes everyone in their respective
fields. Thus, productivity increases, so the total
production will also increase.
• Adam Smith explains the best way to increase profits is by
investing, i.e. buying machines and equipment. With the engine
and equipment, labor productivity will increase. Labor productivity
means an increase in the company's production. If all companies
do the same, the national output or society's welfare will increase
as well. Smith considers the importance of capital accumulation for
economic development. Thus the classic economic system by Smith
is often called the liberal economic system, also often called the
economic system of capitalism. The capital's accumulated theory
was heavily criticized by socialist scholars, especially by Karl Marx.
 The Influence Of Adam Smith's
Thought
• The influence of Adam Smith's thought was vast, almost
all economic discussions were attributed to Smith's
thought. Smith's thoughts were mostly taken from
previous thought. For example, individualism and
materialism actually derive from the understanding of
hedonism already developed by ancient Greek thought.
There is a difference between a hedonism and a Smith
thought. If hedonism, the ultimate pleasure is for
individuals, in the view of Smith the ultimate delight is
aimed at many societies
• Materialism is often disseminated, it turns out that many countries
embrace this teaching. But materialism and individualism are
difficult to be dammed, even by the church. The church wanted to
stem this materialism teaching, but the various attempts were
made unsuccessful. Pope Leo XII then held cooperation. He
reduced his attacks and encouraged the economic actors to act as
good Christians. Such cooperation is a new momentum in the
economic life of European society.
• A very high appreciation of Smith was that he succeeded in creating an
economic system of a market economic system which is also more commonly
known as the liberal economic system or capitalist economic system. The
appreciation of the market's economic system is because of its simplicity which
is very potent to improve the community economy. The system does not need to
be monitored by any party. Leave everything to the market, then an invisible
hands will bring the economy to the point of balance. If there is too much
government interference, the market will experience distortion. Smith's thought
marked a revolutionary change in economic thought. The economic system
developed by Smith is often recognized as the best community organization
developed. This is evident with the growing number of countries that embrace
this system.
 Adam Smith or Prophet Muhammad
• Most textbook economies of Western are too high to reward
Western thought like Smith. However, it gives less space for
thinkers from the east, especially from the Islamic world. For
example, the idea of a market mechanism is Smith's thought. In
fact, long before Smith was born, the Prophet Muhammad had first
encouraged his people to utilize the market mechanism. Prophet
Muhammad forbade the government to intervene in set prices.
• In Islamic thought, governments are not allowed to favor buyers by
pegged the lower price or favoring the seller by pegged the higher
price. Policies taken by the Government should prioritize welfare for
all parties. While Governments recommend using market
mechanisms, sometimes governments may use pricing policies in
special circumstances. Such as in the case of injustice in the
market, among them if there is a monopoly practice, there are
those who play the price or there is a grip from a capital
entrepreneur. Some argue that the use of pricing policies is allowed
for goods that are declared by state-owned companies such as
BBM, electricity, telephone, clean water, etc.
THANK YOU