Classical economists wanted to target the economic dynamics of their times with regards to the functions of free markets. Along with showing how capitalist markets operated, their theories pointed to the significance of production spheres when addressing societal needs. Accordingly, economic growth was seen as a main objective for their analysis (O’Brien, 2004, Chapter. 3, p. 63). Furthermore, capital allocation concerns in reproduction, and labor interactions with capitalism were seen as core elements in value determination and growth theories (Meek, 1974, p. 250).
As classical economists believed that supply created its own demand, classical authors entirely focused their enquiries on production efforts. Accordingly, the industrial side of economies were introduced as the income generating segment of societies. Division of labor was important to wealth creation, and power relations in the context of production played key roles in regards to income distribution analyses.
The three fathers of classical analyses: Adam Smith who published the “Inquiry into the Nature and Causes of the Wealth of Nations”, David Ricardo who wrote “The Principles of Political Economy and Taxation”, and finally, Karl Marx whom authored “Capital”, claimed that self-interestedness of individuals could have maximized any society’s welfare as a whole (Evensky, 2012, p. 10). As a result, free competitive markets were regulating themselves independently with no need for government interventions (Evensky, 2012, p. 10). Consequently, analysis of capitalist systems led to origination of many foundational market-based assumptions. For instance, it was presumed that all prices were flexible, both in regards to wages and commodities (Smith, 1776, Book 1, Ch. 7). In accordance to exploring market variables, classics had to identify the possible issues facing capitalism. One of such concerns addressed determination of price values within unregulated markets. Overall, all works of classical philosophers eventually led to development of theories of value, wealth distribution, division of labor, nature of exchange and trade, the origin and use of money, analysis of population, economic growth and reproduction, accumulation of capital, and public finance, which advocated for better understanding of the capitalist systems (O’Brien, 2004, Chapter. 3, p. 63). This paper is trying to illustrate how such classical theories were developed over time and how faulty assumptions were disregarded when fixed.
Before looking at the classical school of thought, the origins for their beliefs should be explored. It is commonly known that Physiocracy was the first known genuine school of political economic thought that critiqued mercantilism (O’Brien, 2004, Chapter. 1, p. 2). They promoted a radically different approach in opposition to maximization of exports and minimization of imports. Physiocrats were the originators of production condition studies (Walsh & Gram, 1980, Chapter 2, p. 26). Furthermore, they were seen as Adam Smith’s major influents in regards to his laissez-fair ideologies (Heilbroner, 1999, Chapter 3, p. 49). The motive behind Physiocratic analysis was to illustrate an economy’s undergoing operations (Walsh & Gram, 1980, Chapter 2, p. 26). Although their investigations with regards to surplus values, reproduction and division of labor were significant, many of Physiocratic assumptions were faulty and inaccurate (Walsh & Gram, 1980, Chapter 2, p. 43). Thus, a need for further examinations of production conditions was observed.
Just like Physiocrats, Smith wanted to detect and explain the realized activities of economies. However, he had to oppose Physiocracy by rejecting their faulty beliefs in regards to agriculture being the sole determinant of wealth (Heilbroner, 1999, Chapter 3, p. 49). He indicated that labor productivity and manufacturing should be championed instead (Heilbroner, 1999, Chapter 3, p. 49). With such a change in perspective, Smith’s focus was eventually expanded towards addressing the greater economic problem of growth (O’Brien, 2004, Chapter. 3, p. 63).
Smith’s thorough study of Physiocratic insights incentivised him towards figuring out all reproduction capabilities hidden in capitalistic production modes. Based on his analysis, he introduced division of labor as the engine for growth (Smith, 1776, Book 1, Ch. 1). Such a breakdown allowed him to find the roots of output increases, technical progresses and capital accumulation within economies (Smith, 1776, Book 1, Ch. 2). Upon further explorations, division of labor implied the need for exchange and trade (Smith, 1776, Book 1, Ch. 4). Trade also was a leading factor towards capital accumulation. For Smith, such accumulations meant growth in the long-run (Smith, 1776, Book 3).
Smith relied on a system which operated on free competition and self-regulation (Peters, Elliot, & Cullenberg, 2002, p. 222). In terms of explaining the prices seen in such markets, he had to describe the values associated to such prices (Meek, 1974, p. 249). On this basis, Smith saw development of a value concept as an important feature in advocacy for growth, a perception which Physiocracy lacked. Smith became the first economist to analyze the in-depth abstractions of value and surplus values.
Values were expressed in terms of utility from use and purchasing power. By forgoing the utility portion, Smith successfully managed to distinguish between market prices and natural prices (Smith, 1776, Book 1, Ch. 7). Separation of prices was done in such a way that market prices were supposedly influenced by rather strange and difficult to theorize factors, while natural prices were the sum of natural wage rates, profits and rents (Smith, 1776, Book 1, Ch. 7). Smith described wages, profits and rents as the original sources for revenue making (Meek, 1975, Chapter 2, p. 52). After describing market and natural prices, Smith saw a connection between the two via the process of “gravitational attraction”. For Smith, market prices tended to converge into natural prices in the long-run, a work of the invisible hand of the markets (Smith, 1776, Book 1, Ch. 7).
Smith held that the labor embodied into production was the key determinant of price values (Smith, 1776, Book 1, Ch. 5). Thus, this hints to the fact that Smith was concerned with labor as a measure of welfare (Smith, 1776, Book 1, Ch. 5). Accordingly, determination of values by labor was to be analyzed via wages (Smith, 1776, Book 1, Ch. 8). For Smith, profits and rents could also have been linked to determination of values (Smith, 1776, Book 1, Ch. 7). It is believed that the importance of land and allocation of surplus output were once again formulated from examination of Physiocratic analyses. However, upon his investigations, Smith was forced to see prices as being solely dependent on labor embodied measures (Smith, 1776, Book 1, Ch. 5). Profits, as a notion only emergent in capitalist systems, were mere deductions made on wages (Smith, 1776, Book 1, Ch. 9). And rents were miscalculated, representing profits again (Ricardo, 1817, Chapter 2). However, it should be noted that Smith did hypothesized that the profits accumulated by landowners and capitalists led to capital accumulation. In other terms, profits were the means for economic growth in the long-term. Yet, they still had no contributions in the price determination theories of Smith`s (Meek, 1975, Chapter 2, p. 63).
As seen, Smith’s breakthroughs in the field of economics were rather noteworthy. He analyzed the system carefully and wanted to find the secrets behind market operations accordingly. However, he failed to confirm his hypotheses to the fullest. Thus, the unfinished works of Adam Smith were continued by contributions of David Ricardo and other classical economists of the years to come.
The ideas on what determined natural prices varied within the classical school of thought. Although Ricardo saw Smith’s theory of value as a good approximation for prices, his endeavors modified Smith’s version of value theory. He agreed with Smith on values being determined through accountancy for the labor embodied into production, but he also held opposing views on labor values being shown through wage rates (Ricardo, 1817, Chapter 1). Instead, he proposed that measurements for labour should have been calculated by the amount of time which laborers dedicated to production (Ricardo, 1817, Chapter 20). Since immediate labor efforts could not have been the only source involved in such computations, Ricardo theorized that capital goods were also influencing prices (Walsh & Gram, 1980, Chapter 4, p. 96). For Ricardo, accountancy of capital goods was accomplished through capital depreciation rates (Ricardo, 1817, Chapter 1). In other words, the number of hours required to produce the capital requirements served as stored-up labor values in his analysis (Walsh & Gram, 1980, Chapter 4, p. 97).
Ricardo believed that prices were explained by additional alternative factors beyond mere wages (Meek, 1975, Chapter 2, p. 67). Just like Smith, he insisted that determination of values through labor-time measurements were consistent with existence of wages, profits and rents. But, factors of rents and profits were given more importance in Ricardo’s analyses (Meek, 1975, Chapter 2, p. 68). When compared to Smith, Ricardo was re-explaining values in a less ambiguous manner.
Ricardo’s corn model reiterated the significance of profits in value determination theories (Ricardo, 1817, Chapter 6). Profits were reflections of surpluses gained from crops (Walsh & Gram, 1980, Chapter 4, p. 87). Aside from the direct conclusions drawn on profit rates, Ricardo’s models also hinted towards visible differences in land fertility levels (Ricardo, 1817, Chapter 2). Based on soil fertility degrees, the differences between the outputs harvested from lands determined rents. He emphasized that if a population was to grow over time, lands of poorer quality were to be used in cultivation (Walsh & Gram, 1980, Chapter 4, p. 102). Hence, as prices were determined at the margins of land productivity levels, the need for cultivation of lousier fields displayed the causes behind rent increases of better lands (Walsh & Gram, 1980, Chapter 4, p. 88). In accordance to what mentioned, Ricardo reasoned that rents were purely dependent on the demand for food (Ricardo, 1815). Therefore, in Ricardian analyses, the margins used in terms of rent were not relevant to price calculations (Ricardo, 1817, Chapter 2). His calculations criticized Smith for seeing rent as a price-determining, instead of a price-determined factor (Ricardo, 1817, Chapter 2). For Ricardo, land cost increases translated into additional declines in profits (Walsh & Gram, 1980, Chapter 4, p. 89). Lower profit rates meant lower capital accumulation rates. Since capital accumulation was only possible through reinvestments of money, Ricardo’s point of view concluded that declining profit rates meant prevention of economic growth (Walsh & Gram, 1980, Chapter 4, p. 86).
In conclusion, Ricardo stated that wages of laborers and profits were the only two factors involved in price calculations. Although both factors were rather significant to Ricardo’s works, labor played a more significant role in his value theory (Zera, 2008, Ricardo Labor Cost Theory Definition).
Although the structure for Marx’s achievements was mostly based on Ricardo’s theories, his ideas varied in essence (Sweezy, 1942, Chapter 1, p. 11). Unlike Ricardo who saw capital accumulation through profits as a beneficial factor within a capitalist system, Marx identified the process as immoral and exploitative (Zera, 2008, Karl Marx Labor Theory of Value).
Marx saw some basic weaknesses remaining in Ricardo’s theories in which he had to overcome. For instance, Marx emphasized that the analysis of the present unique social relations within capitalism was ignored by Ricardo and his predecessors (Sweezy, 1942, Chapter 1, p. 11). He believed that Ricardo took capitalism for granted and therefore did not develop such ideas for a truly in-depth analysis (Walsh & Gram, 1980, Chapter 4, p. 100). It should be noted that Marx did not directly attack Ricardo’s work because of its quality. However, as explained, he did find inadequacy in the abstractions employed by him. Marx’s focus eventually varied in a such a way that his main goal was to figure out the laws of motion within modern societies (Sweezy, 1942, Chapter 1, p. 12).
Marx believed that Ricardo’s understanding of the existent relationship between values and prices was poorly formed (Sweezy, 1942, Chapter 1, p. 14). He restructured Ricardo’s work by concluding that value was only dependent on labor measures (Zera, 2008, Karl Marx Labor Theory of Value). As a result of his findings, Marx implied that the prices of commodities were only composed of the costs and the values relevant to the works of laborers (Sweezy, 1942, Chapter 2, p. 28). In other words, values only consisted of the wages and profits created by workers. Thus, profits were a subset for the work of laborers. Eventually, this allowed Marx to develop an exploitation theory. To prove his claims, Marx had to concentrate his focus on the social relations within the production sphere.
In order to conduct a thorough social analysis, Marx disregarded the differences seen in the skill sets of laborers, creating a uniformed abstract labor (Sweezy, 1942, Chapter 3, p. 42). Upon his standardization attempts, he also replaced the word labor with the concept of labor power (Zera, 2008, Karl Marx Labor Theory of Value). His assay saw labor power as the potential to work, exchanged for wages (Zera, 2008, Karl Marx Labor Theory of Value). Thus, for Marx, the commonly misused term of labor represented a mere asset, traded as a fictitious commodity. Eventually, this sort of analysis led Marx to present the concept of surplus value created by the working class (Zera, 2008, Karl Marx Labor Theory of Value). This factor distinguished Marx’s economic growth theory from those works of Smith and Ricardo. Marx saw that the surplus value created by workers was not devoted to them (Zera, 2008, Karl Marx Labor Theory of Value). Instead, it was appropriated by the capitalists. This was the notion of gross profit accumulation. Through such conclusions, Marx recognized that profits were the outcome of a misconduct (Zera, 2008, Karl Marx Labor Theory of Value). Additionally, the motive for profit maximization allowed capitalists to further abuse laborers. Aside from laborers being denied to inherit their surplus values; a supplementary rise in profits was achievable if wages were to be lowered. Thus, exploitation of wage earners by their employers allowed capitalists to gain more and more for their greed.
As seen, Marx insisted that prices were solely governed by the necessary labor efforts used in production (Sweezy, 1942, Chapter 2, p. 28). As wages were the original form of income, Marx adopted Smith’s perception towards profits. All non-wage factors were deductions on wages. Once again, it could be concluded that Marx saw profits – which were supplied by the value-added of laborers not paid out in wages – as the key exploitive factors of capitalist systems.
In conclusion, it is evident that all the aforementioned authors carried out their decisions in relevance to figuring how the markets worked. As shown in the body of this paper, the classical school was attempting to create a systematic science towards analyzing the political economy of their times. However, classical philosophers did not quite agree with one another. As the definition for the term science suggests, contrary evidences demand for further analysis of past arguments, which allows for modifications to be made to the basic theories at hand. On this notion, classicals had to study one another so they could criticize each other’s faulty judgements. Over time, this allowed the classical school of thought to discard the outdated theories of the past. Such invalid theories were replaced with more meaningful resolutions of the time. In this context, the classical school is seen as a body of thought benefitted from the works of a few outstanding thinkers over time.