In analyzing the workings of free enterprise, Smith introduced the rudiments of a labour theory of value and a theory of distribution.
David Ricardo expanded upon both ideas in “Principles of Political Economy and Taxation” (1817). In his labour theory of value, Ricardo emphasized that the value of goods produced and sold under competitive conditions tends to be proportionate to the labour costs incurred in producing them.
Ricardo recognized, however, that over short periods price depends on supply and demand. This notion became central to classical economics, as did Ricardo’s theory of distribution, which divided national product between three social classes: wages for labourers, profits for owners of capital, and rents for landlords. Taking the limited growth potential of any national economy as a given, Ricardo concluded that a particular social class could gain a larger share of the total product only at the expense of another.
These and other Ricardian theories were restated by John Stuart Mill in his work “Principles of Political Economy” (1848), a treatise that marked the culmination of classical economics.
“An Inquiry into the Nature and Causes of the Wealth of Nations “(“The Wealth of Nations”) - the magnum opus of the Scottish economist and moral philosopher Adam Smith.
First published in 1776, the book offers one of the world's first collected descriptions of what builds nations' wealth and is today a fundamental work in classical economics.
Through reflection over the economics at the beginning of the Industrial Revolution the book touches upon broad topics as the division of labour, productivity and free markets.
“An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) by Adam Smith:
Book I: Of the Causes of Improvement in the productive Powers of Labour
Book II: Of the Nature, Accumulation, and Employment of Stock
Book III: Of the different Progress of Opulence in different Nations (Opulence means wealth)
Book IV: Of Systems of political Economy
Book V: Of the Revenue of the Sovereign or Commonwealth
“An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) by Adam Smith
Main ideas:
Division of labour has caused a greater increase in production than any other factor. This diversification is greatest for nations with more industry and improvement, and is responsible for "universal opulence" in those countries. Agriculture is less amenable than industry to division of labour; hence, rich nations are not so far ahead of poor nations in agriculture as in industry.
Division of labour arises not from innate wisdom, but from humans' propensity to barter. The apparent difference in natural talents between people is a result of specialisation, rather than any innate cause.
“An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) by Adam Smith
Main ideas:
Of the Origin and Use of Money: With division of labour, the produce of one's own labour can fill only a small part of one's needs. Different commodities have served as a common medium of exchange, but all nations have finally settled on metals, which are durable and divisible, for this purpose. Before coinage, people had to weigh and assay with each exchange, or risk "the grossest frauds and impositions." Thus nations began stamping metal, on one side only, to ascertain purity, or on all sides, to stipulate purity and amount. The quantity of real metal in coins has diminished, due to the "avarice and injustice of princes and sovereign states," enabling them to pay their debts in appearance only, and to the defraudment of creditors.
“An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) by Adam Smith