Adam Smith theory of value

The two most significant economists that ever lived, and whose work has had a momentous impact on the economy and the world, are Adam Smith and David Ricardo. Those two great individuals were the founding fathers of economic ideas and law that governs market today. Moreover, both of them give path for future economists who gain an inspiration from their work.

In this paper I would like to discuss the key assumptions developed by Adam Smith and his friend David Ricardo. Also, I would like to point out the economics’ theories developed by these two great economists.

The labor theory of value has dominated research agenda of economics for over two centuries. It was first introduced by brilliant British economist David Ricardo who in his book “Principles of Political Economy” launched new economical ideas into the world. In the book, Ricardo explains that the value of a product was determined by the quantity of labor needed to produce it, the effort of the labor, or the amount of labor of others obtained in exchange (Labor Theory of Value). Ricardo got his inspiration from a book called The Wealth of Nations in which he found supporting information for his hypothesis. The author of The Wealth of Nations was Adam Smith, a father of modern economics. One of the issues that Smith pointed in his book was the division of labor. Smith provides an example on positive effects of division of labor and all benefits that it can bring for the firm as well as labor itself. As an example, he showed the pin factory where labor was divided chaotically and workers were performing many different tasks without getting master on it. Smith suggested that if the labor is divided wisely and each worker performs only one task of the process, the whole system can generate hundreds more items than before. Adam Smith observed that the productivity has a direct effect on price of a given item as well as it improves its quality. Smith’s conclusions about relation between productivity and price gave Ricardo indication on production processes that can increase quality and quantity of a product. Ricardo pointed that if the labor is more educated it can perform tasks better and even contribute to the improvement or development of a production process. Ricardo also saw a link between machinery and labor. He thought that labor was embodied in machinery and that the value of the output was proportional to how much the machinery was used up.

Today we live in a world where our lives are affected every day by economic laws. Those laws were created by people who believed that economy was the way to solve world’s problems such as hunger and poverty. They come out with theories that help us understand economy better, show us how the economy works and what effect does it have on our lives. Without their work our world would probably be struggling with inefficiencies in work places and global product shortages.