History of Economic Thought

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Labor theories of value advanced by Smith, Ricardo and max

Marx measured value in units of “simple average labor”. According to Marx, skilled work counts for multiple values of unskilled labour. The average labour time expended in a unit of production can be measured in money. According to Marx’s theory of exploitation, labour can create profit on its own.

Labour power is a component of labour time, wages and profit. Exploitation can be explained in terms of profit. It is from money obtained from labour that a capitalist meets rent and interest expenses (Brue et al. 2007).

Smith advocates for division of labour. Division of labour saves time because workers improve efficiency in a task and specialized machinery can be developed for performance of the tasks. In division of labour, competition is emphasized since employees perform similar tasks.

Exchange value is determined by production costs without considering land and capital. The exchange value is determined by labour inputs. Smith supports growth in wages as a means of achieving equality. As profits increase, so the wages are to do the same.

Ricardo argues that in determining exchange value, labour associated with produce input should be considered. According to Ricardo, increase in wages lowers profits rather than increasing exchange values. Labour creates value, but this is not the absolute value.

Marx’s maintains value is absolute while Ricardo argues on relative values. Mercantilists consider the advancement of foreign trade to be a key to the attainment of state security and prosperity of a country. The expenditure of surplus is individuals’ contributes to the national income.

Physiocrats credited creation of national wealth solely to agriculture. To the physiocrats, the enjoyment of goods and services is viewed as the expenditure of surplus from agriculture. These two divergent views of wealth creation can be observed in the Ancient Greek economic thought.

On economic organization, Plato affirms that no man is self sufficient. To satisfy our myriad of needs, we need to find a person who has surplus which you need, and who is in want of what you are able to offer. To this end, division of labour is paramount. We will then have people practicing specialized trades, e.g. physicians, farmers, cobblers, etc. The state is the product of these different individuals living together symbiotically.

Nations will specialize in what they are good in, giving rise to international trade. Plato maintains that no country can attain self sufficiency. All the countries require imports from time to time. Countries should then strive to produce enough for their populace, to avail a surplus for international trade.

With trade, a unit of exchange that observes fairness is important. Aristotle affirms that commodities are not always portable in their natural state. To ease trade, currency was invented as a means of exchange. The portability of money and its international acceptability have made trading far easier, and increased the volume of trade.

According to Aristotle, the downside of a money economy is the Usury. There is a tendency to want money for accumulation, rather than for the purposes it was intended for. This should not be encouraged. The law of diminishing returns holds that for every extra particle of an item one obtains, the level of happiness attained from its acquisition diminishes.

Xenophon affirms that money can only create wealth for us in so far as we know how to use it. The aspects of wealth and the activities that encompass its creation in the Ancient Greek significantly inform Physiocratic and mercantile economic thought.

Similarities between Marxian analysis to classical tradition of Adam Smith and Ricardo

Like Smith and Ricardo, Marx can be credited with participation in determining the theory of exchange values. Like Smith, Marx maintained that growth in productivity activities was a positive aspect of capitalism.

Marx like Smith argued that as productivity increased, workers would be more susceptible to harm. Marx lauded an advance made by Smith beyond the physicrats that only agricultural labour creates value. General social labour is to be credited with creation of value.

A case in defense of classical economies

The notion that classical economies are excessively self centered and do not address aggregate economic activity is unsound. For instance, our moral faculties inhibit the extreme practice of selfishness. Our conscience and reason play a big part in inhibiting impulses of self-love.

Inadvertently, though of a selfish nature, our actions advance societal interests. For instance, a developer constructs a rental building after accumulating wealth. Division of labour means we don’t need to master all trade (Medema et al. 2003).

We only need to perfect one trade. The proceeds from that trade can be utilized in procuring services and goods that one cannot produce. By perusing our own interests, we inadvertently promote the good of the society more efficiently than we would if the societal interest had been our key objective.

The baker will bake the best cakes to maximize his sales while a butcher weighs his meat fairly to avoid a bad reputation. Engagements of the two entrepreneurs are informed by individual interest, but their interests are harmonized by the unintended societal good.

Society will only prosper if equity amongst its people is championed. Smith argues that wages should rise in tandem with economic growth. Workers should combine to bargain for wages in unison. As the economies prosper, more borrowers will want money.

Classical economists affirm that interest should be treated as a deduction to profits. It does not need to be higher than the rate of profit, but it is to be high enough to compensate for the loss occasioned by the lending.

Conclusion

The average labor time expended in a unit of production can be measured in money. According to Marx’s theory of exploitation, labor can create profit on its own. Labor power is a component of labor time, wages and profit. Exchange value is determined by production costs.

Without considering land and capital, the exchange value is determined by labor inputs. Smith supports growth in wages as a means of achieving equality. According to the physiocrats, the enjoyment of goods and services is the expenditure of surplus from agriculture.

These two divergent views of wealth creation can be observed in the Ancient Greek economic thought. To this end, division of labor is paramount. We will then have people practicing specialized trades e.g. physicians, farmers, cobblers etc.

Division of labor means that we do not need to master all kinds of trade. We only need to perfect one trade (Marshall 2009). The proceeds from that trade can then be utilized in procuring services and goods that one cannot produce.

By perusing our own interests, we inadvertently promote the good of the society more efficiently than we would have done if the societal interest had been our key objective. Ultimately, workers should combine to bargain for wages in unison. As the economies prosper, more borrowers will want money. Classical economists affirm that interest should be treated as a deduction to profits.

References

Brue, Stanley L., and Grant, Randy R. (2007). The History of Economic Thought. 7th edition. Mason, OH: Thomson-South Western.

Marshall, A. (2009 reprint). Principles of Economics. 8th edition. NY: Cosimo Classics.

Medema, S, G., and Warren J, S. (eds.) (2003). The History of Economic Thought: A Reader. London: Routledge.

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