CHAPTER 3 - ADAM SMITH AND THE FORMATION OF CLASSICAL ECONOMICS

Abstract

Adam Smith was the founder of the classical school of economics. Although Ricardo later developed classical economics and Marx insisted that he was the sole successor to it, Smith's economic theory was not strictly succeeded by the labor theory of value of Ricardo and Marx and it is much more similar to modern neo-classical economics. This chapter discusses the formation of classical economics. It presents a brief description of the life and early writings of Adam Smith and explains the content of The Wealth of Nations. The chapter also reviews Samuelson's mathematical model of Smith's economic theory. In section 3, Smith's theory of value and that of natural price, particularly his theory of the natural rate of wage, will be considered from the point of view of modern theories of economic growth and human capital, from which it will be concluded that Smith's theory is not properly developed by the Ricardo-Marx theory of embodied labor value. The last two sections are devoted to discussing Smith's two theorems on the division of labor, firstly that the division of labor is limited by the extent of the market, and secondly that capital accumulation is necessary for the division of labor.