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51
Smith's doctrine of the division of labor
Labor, according to Smith, is the only source of wealth for the population. The
main factor in the growth of labor productivity is the division of labor.
Thanks to the division of labor and specialization in the economy, the
following occurs:
1) improvings of the worker’s dexterity;
2) time economy during the transition from one type of work to another;
3) the invention of machines that facilitate and reduce labor.
In his work, Smith gives an example from the production of pins, illustrating
the advantages of the division of labor. An individual artisan can produce a maximum
of 1 to 20 pins per day. By dividing the production process into 18 operations,
training individual workers in these operations and forming a technological chain
from them, we can produce 48,000 pins with 10 less skilled workers. In other words,
productivity increases 240 times — due to the division of labor.
Smith's theory of value
There are three concepts of value in Smith's work.
1. Value is the necessary labor contained in a commodity.
Thus, Smith considers labor not only a source of wealth, but a measure of
value, which determines in what proportions goods are exchanged for each other.
This theory is promoted by supporters of the "labor theory of value" in
economics.
2. Cost is determined by the amount of labor that can be purchased for a
given product.
This is not entirely true, since the capitalist receives more value than he pays
for labor.
3. Cost consists of the costs of production of goods: wages, profits and rent.
The doctrine of the economic man and the principle
of the "invisible hand" of the market
The central place in the teachings of A. Smith is occupied by the concept of
economic liberalism, which is based on the idea of natural order. Smith constantly
emphasizes that market laws can best influence the economy when private interest is
above public interest, i.e. when the interests of society as a whole are considered as
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the sum of the interests of its constituent individuals. In developing this idea, Smith
introduces the concepts of the "economic man" and the "invisible hand" that later
became famous.
Smith characterizes the "economic man" as a perfect egoist striving for
personal enrichment, namely: "He will sooner achieve his goal if he appeals to their
(his neighbors) selfishness and is able to show them that what he demands them to
dois in their own interests. Anyone who offers another a transaction of any kind is
offering to do just that. Give me what I need, and you will get what you need — this
is the meaning of any such proposal. It is not from the benevolence of the butcher, the
brewer, or the baker that we expect our dinner, but from their observance of their own
interests. We do not appeal to their humanity, but to their selfishness, and we never
tell them about our needs, but about their benefits".2
The meaning of the "invisible hand" is to promote such social conditions and
rules under which, thanks to the free competition of entrepreneurs and through their
private interests, the market economy will solve public problems and lead to harmony
of personal and collective will with the greatest possible benefit for everyone and
everyone. "Each individual person has in mind his own benefit, and not at all the
benefits of society, and in this case, as in many others, he is guided by an invisible
hand towards a goal that was not a part of his intentions. By pursuing his own
interests, he often serves the interests of society more effectively than when he
consciously strives to do so".
In accordance with the principle of the "invisible hand", the state does not need
to interfere in the market. The state must control:
1) costs of public works and public institutions;
2) costs of ensuring military security;
3) costs of justice, including the protection of property rights.
So, according to Smith, "every powerful and inevitable economic laws operate
in every civilized society". For economic laws to operate, free competition is
necessary. Free competition brings the market into balance if it is not interfered with
by the collusion of people and the state.
Smith criticizes protectionist policies. He believes that the private owner of
capital should direct it to where it is profitable. Based on this, Smith formulated the
position about the absolute advantage of international trade — it makes no sense to
produce in a country thing that can be bought cheaper in another country. This rule is
based on the natural advantages of various countries (availability of natural resources,
special climatic conditions, etc.), which make it possible to produce goods at the
lowest cost.
2
Смит А. Исследование о природе и причинах богатства народов. М : Эксмо, 2007. С. 442–443.
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A. Smith's doctrine of income
Smith identified three sources of income: the worker — labor, the landowner —
land, the capitalist — machines. Everyone receives income from their factor of
production: the worker — wages for labor, the capitalist — profit for the means of
production, the landowner — rent for land.
Wages, in Smith's view, are directly dependent on the level of national wealth
of the country. Changes in wages depend on fluctuations in labor supply and demand.
Smith regarded the profit of capitalists as a reward for the organization of
production. But at the same time, he believed that profit is a part of the value created
by workers.
Smith is considering several annuity options:
1) rent is the sale of agricultural products above cost;
2) rent is a deduction from the worker’s product;
3) rent is the result of the physical productivity of land.
Smith's Concept of Productivity and unproductive labor
Smith considered productive labor to be the labor embodied in a commodity, in
an object. Everyone who is engaged in production is a person of productive labor.
Unproductive labor is the labor spent on services. All workers in the service
sector — teachers, doctors, artists, officials — create nothing, their work is not
productive.
Smith's doctrine of capital and reproduction
Smith identified capital with the means of production.
Capital, according to Smith, is the part of the stock from which a person
expects to receive income.
Smith distinguishes between fixed capital (which does not change ownership)
and circulating capital (which generates income through exchange).
But when analyzing the capital structure, Smith made a mistake, which was
later called "Smith’s dogma". He did not take into account that the value of a product
always contains part of the means of production consumed.
Characterizing what constitutes the "whole price of the annual product of
labor" to be distributed, Smith reduces it to the income of the capitalist, landowner
and worker. At the same time, he states this: "The price of any commodity must
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ultimately be reduced to all these three parts, since every part of the price must
necessarily turn out to be someone’s profit". In other words, according to Smith, we
are not talking about expanded, but about simple reproduction, in which
consumption excludes accumulation to replace the cost (depreciation) of the means of
production.
Smith's teaching on money
Smith considered money a special commodity, a fleeting intermediary in the
exchange of goods.
He views money only as a technical instrument for exchange and trade, placing
its function as a means of circulation in the first place. Money is the wheel of
circulation of goods, and it is necessary that the costs of these "wheels" for society to
be as small as possible.
Smith did not understand that money is at the same time a social form of
wealth, the embodiment of social labor.
Smith's Principles of Taxation
A. Smith essentially laid the theoretical foundations of the state's tax policy. He
developed four fundamental principles of taxation:
1) the principle of fairness — every taxpayer must participate in the financing
of the state in proportion to his capabilities. In this case, the size of the tax payment
should change with the growth of the individual’s income on a progressive scale. "It
cannot be ignorant for the rich to take part in state expenses not only in proportion to
their income, but also a little higher";
2) the principle of certainty — strict certainty is necessary regarding the
amount of the contribution, the method of collection, the time of payment, and
uncertainty is even more destructive than inequality. "The uncertainty of taxation
develops arrogance and promotes the corruption of that category of people who are
not popular even if they are not distinguished by arrogance and corruption";
3) the principle of convenience — the tax should be collected at the most
convenient time for the taxpayer and in the most convenient way for him;
4) the principle of economy —the costs associated with the administration of
the taxation system should be significantly lower than the income received from tax
collections. "Every tax should be conceived and designed in a way that it takes and
retains from the pockets of the people as little as possible beyond what it brings to the
public treasury".
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6.2. Economic doctrine of D. Ricardo
A follower and at the same time a critic of some of A. Smith’s provisions was
the English economist David Ricardo. He presented his works at the beginning of the
19th century, during the period of the industrial revolution, when the transition was
made from manufacturing production to large-scale manufacturing industry.
Large factories appeared, employing hundreds of people. Cities grew, and the
wool and cotton industries developed. Machines replaced manual labor, which
created a need for fuel. Coal and iron mining developed. Steam became the main
source of motive power.
Industry developed most intensively in England. Significant changes have
occurred in the economy of this country:
- small and medium-sized landowners disappeared, land renters — large land
owners and farmers — appeared;
- landless peasants became miners, diggers, factory workers, hired agricultural
workers;
- the process of population stratification sharply accelerated — hired workers
became poor, capitalists got richer;
- working conditions were very difficult, the working day lasted 14–16 hours,
workers felt like appendages of machines;
- wages provided only a half-starved existence for workers, any association of
workers was prohibited, worker riots broke out periodically (for example, the
Luddites in 1811–1812, they broke machines that doomed them to unemployment or
terrible working conditions);
- contradictions between industrial capitalists and landowners grew —
landowners kept high prices for bread, thereby increasing production costs in the
industry.
Smith's teaching did not fully explore the new relations of production. A
deeper analysis of economic life was required, which was given in the works of
D. Ricardo. His teaching is considered the highest point in the development of
classical political economy.
David Ricardo (1772–1823) — English economist, representative of classical
political economy.
He was from a Spanish-Dutch Jewish family immigrated to England. Born in
London, becoming the third of seventeen children of a securities trader. He never had
to study at college or university, since under the influence of his father, from
childhood he began to comprehend the basics of commerce, helping him in trading
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and stock exchange operations. But by the age of 16 D. Ricardo, although newer
receiving a systematic education, could independently cope with many of his father’s
business assignments at the stock exchange and in the office.
Marriage at the age of 21 without the blessing of his parents could result in
difficult experiences of poverty for D. Ricardo. After all, upon marriage, he
renounced his religion and, expelled by his father, broke with his family, having only
£ 800. However, 5–6 years later, when he already had three children (there were eight
children in total), natural abilities and talent helped him succeed in stock exchange
operations without the guardianship of his father and achieve sufficient financial
well-being. It allowed him to combine the activities of a businessman with the study
of mathematics and natural sciences, and other sciences.
By the age of 38, D. Ricardo had become a major financial figure, the owner of
his own house in an aristocratic quarter of London and a personal country residence.
According to D. Ricardo, economics aroused his special interest after a
thorough acquaintance in 1799 with A. Smith’s "Wealth of Nations". In addition, he
was familiar with many economists of that time. But he developed a special friendly
relationship with the famous political economist James Mill, who influenced
Ricardo’s creation of his main scientific work, "On the Principles of Political
Economy and Taxation" (1817).
In 1819, Ricardo left business and, in order to bring his economic ideas to life,
became a member of the English Parliament. He advocated the abolition of the "Corn
Laws" (which imposed high duties on imported grain), supported demands for
liberalization of the economy, freedom of trade and the press, preventing restrictions
on the right of assembly, etc.
In 1821, Ricardo founded the first political economy club in England.
The main work of D. Ricardo is "On the Principles of Political Economy and
Taxation".
The structure and style of the work are similar to A. Smith's "The Wealth of
Nations". However, Ricardo's work contains more theory, and his conclusions are
more concise and precise.
Creating his theory, Ricardo used methods of logical abstraction, scientific
deduction, and also applied mathematical methods in economic research.
In the preface to the book, Ricardo defines the main task of political
economy — to determine the laws that govern the distribution of income.
Like Smith, he distinguishes three main classes in society (owners of land;
owners of money and capital necessary for its cultivation; workers whose labor it
processed) and three types of income (rent, profit, wages).
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For Ricardo, it is class relations that underlie the processes of income
distribution in society, since he was convinced that the growth of income of
capitalists (profit) necessarily reduces the income of workers (wages) and vice versa.
Theory of value by D. Ricardo
Ricardo paid great attention to the theory of value. When considering this
problem, he continues the ideas of Smith, but at the same time he polemicizes with
him on certain points.
According to Ricardo, the value of goods is determined by the amount of labor
embodied in them. The reason for changes in the value of goods is an increase or
decrease in the amount of labor required for their production.
The cost of goods should take into account labor, not only spent directly on
their production, but also materialized, i.e. spent on "the production of tools and
machines required for the type of labor in which they are used".
The value of some goods depends not only on the amount of labor spent on
their production, but also on their rarity (for example, objects of art, ancient
books, etc.).
Ricardo's doctrine of wages, profit and rent
Salary is the price of labor. At the same time, Ricardo highlighted:
- "natural price of labor" — the worker’s ability to support himself and his
family for his labor, paying for food, basic necessities and conveniences;
- "market price of labor" — payment that takes into account the real
relationship between supply and demand.
Ricardo believed that as wages rise, workers will begin to have more children,
and as a result, wages will fall due to the fact that the number of workers will
increase faster than the demand for their labor.
Ricardo considered profit to be a value proportional to the capital advanced. A
high level of profit is a source of economic prosperity. Rising wages lead to
decreasing profits.
Unlike Smith, he believed that the source of rent is only labor, and not the
special generosity of nature. Land plots differ in fertility. Labor productivity in the
best areas is higher, which determines the amount of rent.
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According to Ricardo, the main trend characterizing the dynamics of income is
the following: with the development of society, wages remain unchanged, rent grows,
and the level of profit falls.
Theory of money
Ricardo supported the "gold standard" system, which was established in
England at the end of the 18th century. In accordance with this system, money was
tied to gold, i.e. paper money was in circulation, but could be guaranteed to be
exchanged for gold.
The theory of comparative advantage in foreign trade
Ricardo developed Smith's theory of a country's absolute advantage in
international trade. He proved that even if a country does not have absolute
advantages, it is still beneficial for it to participate in international trade.
Ricardo gave the example of Portugal and England selling wine and cloth. In
Portugal, 80 workers are required to produce a certain amount of wine, and 90
workers are required to produce cloth. In England, 120 workers are required to
produce wine, and 100 workers to produce cloth. It can be seen that Portugal has an
absolute advantage in both wine and cloth.
However, in Portugal, to produce an additional volume of cloth, 1.125 (90/80)
of the volume of wine will have to be given up, and in England, to produce an
additional volume of cloth, 0.83 (100/120) of the volume of wine will have to be
given up.
To produce additional wine, Portugal will have to give up 0.89 (80/90) cloth,
and England — 1.2 (120/100) cloth.
It can be seen that cloth is cheaper to England, and wine is cheaper to Portugal.
In other words, England has a comparative advantage in the production of cloth and
should specialize in its production and sell it to Portugal. And Portugal has a
comparative advantage in wine production and must sell it to England.
Thus, Ricardo discovered the law of comparative advantage, according to
which each country specializes in the production of those goods for which its labor
costs are comparatively lower, although in absolute terms they may sometimes be
slightly higher than abroad.
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The problem of crises
Ricardo advocated the freedom of the market, which is a self-adjusting
mechanism and provides, to the necessary extent, sellers, and buyers. In this regard,
the scientist considered it impossible for crises of overproduction to arise.
However, two years after Ricardo's death, in 1825, a major economic crisis
occurred in England. Subsequently, such crises were repeated every 10–11 years on
the scale of the world economy.
In general, the economic theory of D. Ricardo has become a worthy
continuation of the classical political economy of A. Smith and is still in demand in
the analysis of many economic processes.
6.3. T. Malthus and his economic views
Thomas Robert Malthus (1766–1834) — English economist, founder of
demography, priest.
Born into a wealthy noble family, he studied at college in Cambridge,
graduating from which he remained there as a professor; received holy orders and
became a priest.
In 1798 he published the book "An Essay on the Principle of Population",
thanks to which Malthus is considered the founder of the theory of population. The
creation of this theory was partly stimulated by the fact that in England at the end of
the 18th century there was a significant increase in population, caused primarily by a
decrease in mortality.
The essence of Malthus's theory.
All the population's ills lie in overpopulation. People reproduce faster than
food supplies increase. He writes that the population doubles every 25 years. At the
same time, due to decreasing soil fertility, it is not so easy to increase food supplies.
According to Malthus, the population is growing in geometric progression, while
food at best is only in arithmetic. Therefore, in order to maintain a balance between
population and food supply, it is necessary that the natural reproduction of people
encounter obstacles and delays.
Malthus divides existing obstacles into two categories:
1) preventive obstacles — stem from people’s ability to weigh their actions and
control their instincts (moral abstinence, late marriages);
2) destructive obstacles — wars, diseases, hunger, hard work, etc.
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Malthus considered overpopulation not only a curse, but also a blessing, since
it forces the naturally lazy worker to work hard. And yet, he called on the common
people to practice prudence (conscious refusal of childbearing, moral abstinence) to
reduce poverty.
Malthus's book was a great success. His ideas were subsequently developed by
the "Malthusians" and in modern times by the "neo-Malthusians". However, history
has not yet confirmed Malthus's main fears. Humanity is finding means to increase
the production of vital goods. Another question is about the uniform distribution of
these goods: after all, now 20 % of the population living in industrialized countries
consume 80 % of the world's goods. In addition, according to Malthus, population
growth is limited by food shortages. Practice shows something else: an increase in
living standards leads to a reduction in the birth rate.
Malthus also wrote a number of works on political economy. Thus, his work
"Principles of Political Economy Considered with a View to their Applications" is
famous. There he criticized Ricardo’s theory of labor value and supported one of
Smith’s versions of value: the value of a product is determined by the amount of
labor purchased. Malthus was also wrong in defining profit. He believed that profit is
not created by surplus labor, but is obtained as a result of the sale of goods above
their value.
Malthus created the theory of "third parties" — an unproductive class that does
not produce, does not sell, but only buys (government officials, the army). This class
is needed to prevent a crisis of overproduction in the economy.
6.4. J. B. Say and his role in the development of market theories
Jean-Baptiste Say (1767–1832) — French political economist, follower of
A. Smith, supporter of economic liberalism.
Born into the family of a Protestant merchant, he managed a cotton factory and
worked in an insurance company. He volunteered for the army after the French
Revolution in 1789, then become an editor of a magazine. In 1799 he was appointed a
member of the Finance Committee. In 1816 he opened a course of lectures on
political economy. In 1830 J. B. Say headed the department of political economy
specially created for him at the College de France.
Main works: "A Treatise on Political Economy; or The Production,
Distribution, and Consumption of Wealth" (1803), "A Catechism of Political
Economy" (1817), "Complete Course in Practical Political Economy" (1828–1829).
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