Adam Smith is considered to be the founder of modern economics. He was a pivotal figure in the Scottish Enlightenment, a period of intellectual and scientific creativity that swept across Scotland in the mid to late 18th century.
Smith is best known for his 1776 book The Wealth Of Nations. In it he analysed the dawn of manufacturing and put forward theories about where wealth came from and how markets worked.
Today Adam Smith’s work has been appropriated by neoliberal ideologues who want to smash up trade unions and drive privatisation into every aspect of life.
In fact Smith was far more subtle and rounded a thinker than the right wing caricature would suggest.
While he did believe that markets left to their own devices could lead to benevolent outcomes for all, he had a much wider vision of political economy.
The Wealth Of Nations begins not with a discussion of markets, but a discussion of labour. Smith was fascinated by how emerging industrial techniques broke production down into a series of simpler tasks. This “division of labour”, he argued, led to huge efficiency gains.
One famous example – illustrated alongside Adam Smith on the back of the new £20 note – involves the manufacture of pins.
“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head,” he wrote.
“The important business of making a pin is, in this manner, divided into about 18 distinct operations which, in some factories, are all performed by distinct hands.” Many of these simpler operations could be automated, Smith noted, boosting output still further.
Smith thought that production under capitalism would develop more or less evenly as the division of labour led to efficiency gains that brought the market into new areas of the world. This would increase the division of labour yet further.
His focus on labour and the production process led him to propose a radical solution to a question that had confounded his predecessors – what is the source of wealth?
Smith argued that human labour was the crucial factor. “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life,” is the opening sentence of The Wealth Of Nations.
The economists that claim to speak in Adam Smith’s name today pass over this “labour theory of value”. Yet it is a vital component of his work.
Smith illustrates this theory with the example of a primitive hunting society where it takes one day to catch a deer but two days to catch a beaver. In such a society, “one beaver should naturally exchange for, or be worth, two deer”, he writes.
Smith’s work was extremely influential. The reactionary thinkers of his day – those who hankered after the old order and did not approve of the bourgeois upstarts that threatened it – weighed in against Smith’s optimistic vision of capitalist development.
But the liberals who supported him also encountered problems.They found inconsistencies within Smith’s ideas. For example, he did not apply the labour theory of value consistently.
David Ricardo, a London stockbroker, tried to remedy these deficiencies. He did so by focusing on the labour theory of value, clarifying it and extending it to operate as the basis for the entirety of political economy.
Writing in 1817, Ricardo noted that the amount of labour a particular commodity could buy on the market was not necessarily the same as the amount of labour required to produce it.
It was this latter amount – the labour “embodied” in a commodity – that determined its value, he argued. Ricardo went on to recast political economy on a more rigorous basis than Adam Smith.
Ricardo’s framework for political economy proved very successful. But it too harboured problems. According to Ricardo, labour should be priced just like any other commodity – by reference to the cost of producing it.
That would mean the level of wages should be enough to feed, clothe and house workers – but not much more.
Yet the commodities those workers produced fetched far more than this, allowing the capitalist to make a profit.
Where did this profit come from? And how could it be justified? Next week we will see how these questions were answered by revolutionary socialist Karl Marx – and how his answers turned bourgeois political economy on its head.