Over the years, various individuals have endeavourer to help shape the field of economics. While some have made modest contributions, there are those who have had a great impact on this field of study. The modern development in economics can be traced from the work of Adam Smith, an early British philosopher. He is widely considered as the father of modern economics. He built his economic ideas from a consolidated body of works from physiocrats predecessors of the eighteenth century. His major contribution in the field of economics is well documented in his dissertation, ‘The Wealth of Nations’. Most of Adam Smith economic thoughts formed the basis on which the modern economists develop their economic ideas. Although some economists have differed with Adam Smith perception on economic ideologies, most of his critics’ views on certain economic aspects can be traced from his work. The development of modern economic thought reflects the work of early economists especially Adam Smith. As Hutchison points out it is clear that ‘for two centuries the concentration and specialisation carried through by successive generations beginning with Ricardo and Senior has largely paid off’ despite criticism from economists such as Karl Marx (Hutchison 1976, p. 513).
Adam Smith has been credited with the evolution of the labour theory and the development of the capitalistic market situation. His contributions to free market economies were later developed by the 19th century’s economists like Ricardo. He advocated for an economy where capital was left to run naturally without any government intervention. The free market economy theory was however heavily criticised by socialist economists. His contribution to labour theory and labour productivity cannot be over emphasized. He advocated that increased productivity was the key to economic growth and hence wealth creation of any economy. However the Adam Smith advocated that the labour theory had its weaknesses and hence it worked best in less developed economies. He argued that in a small economy, the amount of labour used to produce a good could determine its exchange value. This was also reflected on the amount of labour that good could purchase. Modern economists argue that the price of a commodity in today’s economies is not proportional to the costs of labour as the value of the good as the compensation for the owner’s process of production must be included. The outcome of labour is not entirely an outcome of the labour input alone. The labourer must share it with the owner of other factor of production. Modern economists maintain that labour theory contrasts the view of the subjective theory of value. Accordingly, it is argued that the value of a good does not rely on the labor involved but instead, depends on its usefulness an d scarcity in as far as need satisfaction is concerned.
To Adam Smith, the labour cost alone was enough to regulate the value of the commodity in the early and less developed economies but not in modern economies where owners of other factors of production other than labour earned profit (Hutchison 1976, pp. 514-518).
To increase productivity, he advocated for division of labour as the driver of economic competence. Division of labour is done in line according to the worker’s knowledge and area of competence and the ability to do the work without overlapping others. Adam Smith pointed out that productivity would increase significantly with employment of the concept of division of labour in production process. With division of labour, specialisation is achieved. Whereas such a move has the potential to increase the overall worker output, in addition, the production cost for every single unit of a god also reduce. Division of labour is widely practiced in manufacturing firms where mass production methods are practiced. Each worker is given a task according to the area of expertise. The end product is of high value as it is a product of combined efforts of several specialists. As he observed in the pins manufacturing industry, productivity was greatly increased with introduction of the concept of division of labour. The realized advantages of division of labour were the bases of today’s wide spread diversification of industries and trade as well as the development of the modern industries. He stated that division of labour resulted to labourer’s handiness, which was brought about by specialization, good time management and reduced time wastage moving from one task to another and it resulted to the use of specialised machines that resulted from use of specialised labour. A worker became exceedingly productive due to consistent focused efforts while working in a particular area. He further states that specialisation benefited the early societies in a natural way. Size of the market often determines specialization as the will add to the degree to which an economy in question apply this concept.
. In a small market the cost of specialization is greater than the benefits derived from such a move. When division of labour has been well introduced in a manufacturing plant, the use of human labour is greatly reduced compared to the extent to which products are produced. It is a very small part of once labour that can supply him. The rest must come from the labour of others. In this light, a man is poor or rich depending on the amount of labour he commands or can be able to buy. The value of a product therefore to the owner who decides to exchange it with another good is equivalent to the amount of labour that was used to acquire the commodity. With this view, the exchangeable value of all goods is accurately measured by the labour involved. It is therefore true according to Adam Smith that the actual price of a commodity to a person who wants to acquire that commodity is the labour of acquiring it (Klaus 2008, pp. 452-456).
According to the nominal value of commodities, Smith outlines that the price of a commodity reflects wages, rent and profit, which are the returns to the capitalists for owning the resources. Modern economists concurs with Smith that the market price of a commodity is subject to the level of demand and supply. When the amount of any product brought to the market is less than the effectual demand, it means that all the willing and able to pay customers will not get the amount they so need. Competition of the few available products will occur and this raises the market price. When the amount of the product available into the market is more than the effectual demand, the supply will be more than the customers who are willing and able to pay the labour of acquiring it. This results to the fall of the market price.
Although there is a slight difference between today’s school of thought and the views of Adam Smith regarding demand and supply and the price mechanism, it is clear that the basis of arguments by today’s economists has their background from Adam Smith economic principles. Smith laid down a foundation on which wages of labour could be based. He argued that the wages of labour primarily depends on the competitions among workers and the masters. When workers are more than the available jobs, they compete for the available employment opportunities and this result to a fall in wages of labour. Consequently, when the employers compete for few labourers, or when the labour supply is low than required in the job market, there is a rise labour wages. He concluded that the process of competition can be altered by combination either among employers or among workers. A lack of competition amongst the employees may result in falling wages. The vice versa is also true.
Although Adam Smith advocated for free market economy that revolved on the bases of secure property, widening markets, capital accumulation and division of lobour, he did not rule completely the role of government involvement in the market. He pointed out that the government has three roles to play. The government is mandated to erect and maintain a certain level of public works and public institutions. These institutions are supposed to provide interest where few individuals or a group of persons could not. It should also erect and maintain all systems which activities points towards development of a particular type of industry which will consumes a greater amount of capital from the society and lastly it is supposed to hold back instead of speeding up the rate at which the society is progressing towards real wealth accumulation (Hicks & Hollander 1977, pp.351-357).
He advocated for a market system whereby the number of sellers were many as opposed to creation of monopolies. He admits that the government provides avenues where some people take to make super normal profits. Such measures are exploitative and lead to creation of monopolies. Monopolies lead to high profitability through unjustified means such as maintaining effective supply consistently below effective demand. The government creates monopolies which keep a commodity market constantly under stocked the so that through increased effective demand, the price of the commodity is always above the natural price. The price of the monopoly is always on the higher edge while the natural price which is the price in a free competition market is the lowest that can be taken. This is actually the price at which the buyer can afford to give and at the same time the lowest price the supplier will accept to take. He further criticised the government on its role in supporting monopoly and monopolistic market structures which constantly charges higher prices impoverishing the buyer further. Adam Smith advocated for a free-market economy where the forces of demand and supply would be left to determine the price of a commodity. His contributions toward free market economy inspired the works of later economists like Malthus in the early 19th century that is credited with the development of the underconsumption theory. Like Adam Smith they outlined the role of government in an economy is to reduce vices such as unemployment and alleviate economic downturns. His views on have been developed further by economists like John Maynard Keynes, which later came to be known as the Keynesian economics. It is from Adam Smith line of economic thinking that today’s economists heavily relies on. In most developed economies, the free market economies dominate the market with little government interventions. Prices of most commodities are left to be determined by the interplay of demand and supply forces in the market. Government interventions occur to regulate the consumption patterns in order to control consumption of certain products. It also occurs where the government comes in to provide essential goods and services where the private sector can not adequately provide although they are essential to the public due to low returns on investment. The government also interferes to provide an enabling environment for traders to carry out their duties effectively. It is clearly evident that modern economic views are related to those of Adam Smith and represents an advance of what was proposed by Him (Hicks & Hollander 1977, pp. 358-369).
Hicks, J, & Hollander S. 1977. Mr. Ricardo and the Moderns”, Quarterly Journal of Economics, V. 91, No. o3: pp. 351-369.
Hutchison, T. 1976. Adam Smith and the Wealth of Nations”, Journal of Law and Economics, Vol. 19, No.3, pp. 507-528.
Klaus, H., 2008, The Labour Theory of Value. A Historical-Logical Analysis. Paris: Eurodos.