The Development of Economic Thought

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Throughout history, relationships between individuals and groups have been defined by the pursuit of the greatest benefit. Any emotional, business, or neutral relationship had economic overtones: the exchange of resources, information, or knowledge was directed — not necessarily primarily — toward the attainment of benefits. The driving forces that have caused the intensive development of economic thought should be pointed out. Economic-oriented thinking dates back to the manufacture of the first tools and the making of fire with primitive people’s hands (Svizzero and Tisdell, 2016). Evolution has continued to build the potential of economic relations, but the engines of progress have not changed. The individual expands their possibilities by exploring new activities, which entails powerful socio-demographic thoughts.

A similar pattern is relevant to new-age economic thought. Ever since society entered the industrial era, rationalists have sought to form a unified system of economic ideals. In this context, it is especially relevant to emphasize the critical roles of the Scottish philosopher Adam Smith and the British economist David Ricardo, whose views served as the foundation for creating a political economy. The economic model has undergone a radical metamorphosis since the eighteenth century, many inspired by the work of John Maynard Keynes, who described the possibilities of using fiscal and monetary policies of the state to mitigate the adverse effects of economic recessions (Chava and Deshpande, 2020).

Therefore, the works of Smith and Ricardo do not seem highly relevant to the current research agenda and are easily criticized. The study of fundamental theoretical foundations must be accompanied by a contextual study that situates the thinkers’ ideals within the framework of the era.

In particular, a critical discussion of the ideas of Smith and Ricardo should keep in mind technological and societal advances made possible by the current agenda. For instance, the science-based focus of modern research was not characteristic of Adam Smith’s work, which was more discursive (Campbell, 2013). It should be kept in mind that during the lives of Smith and Ricardo, the current economic model was generally less developed than it is today, as fewer resources and agents had the potential to be used. Thus, it is only by placing each thinker’s philosophy within the framework of their era that it is appropriate to test the relevance of ideas and make a comparative analysis.

A detailed discussion of the development of economic thought would not be possible without focusing on the works of David Ricardo. An ideological opponent of Adam Smith, Ricardo gained wide popularity after the publication in 1815 of his first pamphlet devoted to the determination of the regularities determining the profit from the sale of bread at a reduced price (Freni, Salvadori, and Signorino, 2019). Since then, the man has established himself as a classic of political economy, creating a coherent system of seven key theories. Perhaps one of Ricardo’s most recognizable models is the theory of value, which showed the conditionality of the relativity of commodity prices on the quantity and quality of labor (Estevez, 2021).

In other words, the prices of industrial products are determined by supply conditions, whereas the value of an agricultural commodity depends on both the nature of production and demand. Recognizing land as a physical resource, Ricardo attributed the dependence of the price of the agricultural product on cultivation to demographic growth and, as a result, the gradual deterioration of the quality and location of vacant land.

Ricardo’s other critical thoughts were the theories of capital, profit, wages, money, and reproduction. The economist showed that the driving force behind an individual’s shift in activity was the inequality of profit invested in the capital (Estevez, 2021). It was postulated that labor price is based on the balance of supply and demand for the specialist’s services. Ricardo established the possibility of periodic declines in profits as society progresses, concluding that the more advanced a society is, the greater the economic goods it demands. Moreover, in forming the postulate of reproduction, Ricardo developed the idea of Jean-Baptiste Say: that overcrowding of the market with one commodity would ultimately make it impossible even to cover capital for its production. In this case, money is only an instrument of value since a product is bought for a product or service.

A study of Adam Smith’s ideals is also critical to comparative analysis because it allows tracing the natural development of economic thought from Smith to Ricardo. First of all, it is worth pointing out that the main range of ideas of the Scottish scholar was published in 1776 (Elmslie, 2018). In his writings, Smith argued that the development of public welfare could only be effective in the free movement of goods and increased competition (Sharma, 2020).

Unlike Ricardo, Smith did not form a coherent system including several theories, but he explained the nature of capital extensively and showed the impossibility of state interference in the life of the economic system. In particular, Smith postulated the real value to capital not so much in money as in the labor of workers and the production of goods or services: money was thus also only an instrument of achieving a good. In terms of state intervention, Smith’s political economy pointed to the non-functional impermissibility of integrating power and the process of production.

There are similarities as well as critical differences between the two philosophers’ teachings. Ricardo’s scholarly career was directed toward a critique of Smith’s academic work. First of all, it should be noted that developing the methodological achievements of his predecessor, Ricardo, valued production as the primary source of income and profit. Thus any dynamic fluctuations were related to the transformational processes of industrial production.

The same ideas were characteristic of Smith, who gave production priority in forming the basis for developing the economic system. A second linking aspect is the development of the concept of Homo economicus, but there is a marked discrepancy in emphasis between the two scholars (Braun, 2021). Smith gave such a model of human the moral features of the real individual, showing that a concentration on personal interests could eventually lead to the formation of a modified public good. By contrast, in Ricardo’s paradigm, Homo economicus had grown to the scale of the bourgeois class, whereas Smith only hinted at this.

The most significant differences between the two views formed are noticeable in discussing the concept of labor value. Smith took a significant step in deepening the theory of labor value: by dividing value into use-value and exchange-value, the economist showed the importance of the role of increased productivity for the state. More specifically, the division of labor and the mechanization of production catalyze the improvement of workers’ skills, which, in turn, positively affects the reduction of time spent on work: it is the latter that has value for value. In more developed societies, value is determined by the sum of income in the form of wages, profits, and rents (Horwitz, 2019).

Smith asserted the identity of the value of goods and the labor that is purchased for those goods. Such views generally contradicted the ideals of Ricardo, who pointed out the unscientific nature of Smith’s methodology of interpreting the value of labor.

According to Ricardo, the law of labor’s value is a fundamental and immutable pillar, and thus one cannot argue for differences in the sources of value depending on the stage of development of society, as Smith did. The only source of such value is the productivity of labor: as a consequence, an increase in the quantity of labor must lead to an increase in the value of the commodity. In criticizing the identity of value and labor, Ricardo argued that a worker could not be paid more if they produced more goods.

The two philosophers’ views on the model of foreign trade did not coincide either. Adam Smith believed that historically some countries could produce more (Rice University, 2020). As a result, some nations had an absolute advantage in the arena because they could produce goods more efficiently. Ricardo disagreed with this view, creating a theory of comparative advantage (Watson, 2017). More specifically, state advantage is not related to geo-historical advantage but to balance the average cost of production and price. If the average cost of a particular state to produce a good unit is lower than that of others, that state has an advantage.

It is appropriate to state the more logically constructed system of views of Ricardo compared to Smith. Adam Smith asserted labor as the only measure that could be used to compare the value of different goods at different times. In more developed societies, however, value consists of the cost of labor and surplus capital. These ideas are reflected in the writings of Ricardo, who pointed out that it is erroneous to account only for labor costs. Instead, the value of labor should include the cost of producing the means of production combined with the cost of labor to produce materials. In addition, the two economists differed in their views on patterns of world trade. Whereas Smith postulated the possibility of absolute state advantage in the international arena, Ricardo described comparative advantage.

As a result, Ricardo’s theoretical system may seem preferable to modern economics. David Ricardo took the key ideas of his predecessors and reworked them for the current agenda. Nevertheless, if one goes into the details of his concepts and views, it may seem that in some points, Smith seems more progressive. Ricardo pointed out the impossibility of raising the cost of labor by exceeding the plan. Obviously, this approach seems wrong by now since the piecework wage model focuses on this very postulate (Kullabs, 2020). Capitalism was seen by Smith as a product of the productive forces, whereas Ricardo saw this system as the only way for society to develop.

The contemporary geopolitical agenda does not show the absolute advantage of some states but instead demonstrates the better ability of some countries to manage and sell resources compared to other countries. As a result, it is impossible to consider one philosophy preferable because each is rife with gaps. On the contrary, only by critiquing the two works together can we expect the economic system to develop.

In the second part of this study, it is appropriate to turn our attention to other key figures in economics who have also made significant contributions to the development of global thought. In particular, the central focus is on studying the ideas of John Maynard Keynes, the creator of the famous Keynesian strand of macroeconomics. More specifically, the critique that Keynes directed at the fundamental laws of Jean-Baptiste Say and the classical theory of money, repeatedly put forward by many researchers, is to be measured.

Numerous works are devoted to the study of the relationship between supply and demand. One of the most famous interpretations is the law of the French economist Say (Hagemann, 2019). In particular, the academic postulated that supply and demand must balance each other: thus, the producer must produce as much output as the end consumer needs to meet their needs fully. As a result, this law is based on the idea of the full realization of all goods and services offered on the market. In addition, the key aspect of Say’s theory is the statement that money is only a unit of account — the same views were noticeable in Smith — while the entire economy as a whole is a barter economy.

Meanwhile, scholars have never had any doubt that a worker should be paid, but the amount and nature of this payment varied from era to era. Throughout the economic sciences, monetary theories have been an integral part of the study, so by the current moment, a great variety of views and opinions have accumulated (Wray, 2014). For example, the metalistic theory of money saw an alternative to natural exchange in using universal monetary products made from metals.

In this paradigm, the central function of money was to realize the need to measure the value of a good or service. Nominalist theory postulated that money itself had no value and that its power was prescribed by the state. At the same time, a quantitative theory is based on the position that the purchasing power of the unit of money is characterized by the amount of circulating money. Although there are many more monetary theories, the above three form the classical framework on which the economists of more recent times have focused.

Keynes strongly criticized the above fundamental law and theories, developing his system of economic models. In particular, Keynes did not share Say’s idea that overproduction was an impossible phenomenon. It should be recalled that according to Say’s law, there is an equilibrium between supply and demand, and therefore any excess supply in the market is eventually counterbalanced by corresponding demand. On the other hand, Keynes believed that supply does not necessarily generate legitimate demand, and therefore an overproduction crisis is a plausible market scenario in which the aggregate quantity of goods and services produced exceeds the need for them (Lumen, 2020).

It is important to understand that Say viewed the consumer as a strictly rational individual guided by the rules of logic and order. In contrast, Homo economicus, according to Keynes, lacked directional reasoning, and their decisions often lacked common sense. Keynes did not refute key aspects of classical views in the context of monetary theories but supplemented them. In particular, the academic showed that money’s circulation function is not the only one, but instead, it has savings and saving properties. Consequently, the functionality of money expands and increases its importance for the economic model compared to what the metalistic, nominal and quantitative ideologists proposed.

It is interesting to note the connection between the two mentioned aspects: since the consumer can accumulate and save money, this leads to an increase in the gap between supply and demand. Buyers do not have enough circulating money to buy a good or service, and therefore there is a crisis imbalance. Such a conclusion was drawn by Keynes based on the development of the concept of contingency: one cannot be certain of tomorrow, and therefore the individual is not inclined to put all available money into circulation. Eventually, such views were shaped into Keynes’s law, which states that demand can generate its supply.

The difference with Say’s law is also in the power of changes in aggregate demand: while Say asserted the impossibility of changes in GDP or employment — only the price level — Keynes expressed the opposite thoughts.

Thoughts about the impossibility of predicting future circumstances can also be seen in the analysis of monetary theories of the Keynesian school. In particular, according to Keynes, the velocity of money circulation is directly proportional to the interest rate but inversely proportional to the money supply. In this case, insufficient demand for money necessarily entails crisis phenomena and rising unemployment. In this sense, it is easy to see that the neutral role of money according to the classical school has been replaced by its active participation in market regulation according to Keynes.

It is fair to say that these thoughts were revolutionary to existing economic paradigms, and hence this shift is often referred to as the Keynesian upheaval of economic theory. Essential advantages of the new trend were the recognition of the psychological factors of the consumer, the impossibility of an accurate sense of the future, and the weakness of forecasting tools. Finally, Keynes’s ideas reflected objective reality as opposed to the abstract musings of philosophers. In particular, the state could intervene in the economic system by regulating fiscal and monetary policy to stimulate aggregate demand.

Reference List

Braun, E. (2021) ‘The institutional preconditions of homo economicus,’ Journal of Economic Methodology, pp.1-16.

Campbell, T. (2013) ‘Adam Smith: methods, morals, and markets,’ in Berry, C. J., Paganelli, M. P. and Smith, C. (eds.) The Oxford handbook of Adam Smith. Oxford: OUP Oxford.

Chava, S. and Deshpande, V.S. (2020) ‘Seeking fiscal prudence in union budget,’ The Management Accountant Journal, 55(3), pp. 85-90.

Elmslie, B. (2018) ‘Retrospectives: Adam Smith’s discovery of trade gravity,’ Journal of Economic Perspectives, 32(2), pp. 209-22.

Estevez, E. (2021) David Ricardo. Web.

Freni, G., Salvadori, N. and Signorino, R. (2019) ‘Back to agriculture? Malthus, Torrens, and Ricardo on international trade and structural change,’ History of Political Economy, 51(5), pp. 935-955.

Hagemann, H. (2019) Say’s law. Web.

Horwitz, S. (2019) Adam Smith on the labor theory of value. Web.

Kullabs (2020) Pay matters: the piece rate and health in the developing world. Web.

Lumen (2020) Say’s law versus Keynes’ law. Web.

Rice University (2020) What happens when a country has an absolute advantage in all goods. Web.

Sharma, R. (2020) Adam Smith: the father of economics. Web.

Svizzero, S. and Tisdell, C.A. (2016) ‘Economic evolution, diversity of societies and stages of economic development: a critique of theories applied to hunters and gatherers and their successors,’ Cogent Economics & Finance, 4(1), pp. 1-13.

Watson, M. (2017) ‘Historicising Ricardo’s comparative advantage theory, challenging the normative foundations of liberal International Political Economy,’ New Political Economy, 22(3), pp. 257-272.

Wray, L.R. (2014) From the state theory of money to modern money theory: An alternative to economic orthodoxy. Web.

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The Development of Economic Thought

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