Most of Adam Smith’s arguments on capitalism, labor, class conflict, and stages of history (or social development) are contained in his book Wealth of Nations. The stages of history in Adam Smith’s writing, as reiterated by Paganelli (2020), are the age of hunters, the age of shepherds, the age of agriculture, and the age of commerce. Smith believes that these stages explain the progress of a man in society. The society started from hunting societies (in some publications such as Svizzero and Tisdell (2016) claim hunter-gatherers) who eventually realize that domesticating wild animals and collecting fruits was an easier way of obtaining food (the shepherds’ age). Population growth and other social developments demanded a more stable supply of food and agriculture developed as a result. The superfluous products left after meeting the consumption needs were traded for other products, and hence the rise of the commerce age.
Adam Smith is optimistic about capitalism because he sees it as the foundation of economic growth where individuals are allowed to produce as much surplus as possible and trade it for a profit. In the Wealth of Nations, Smith argues that the best economic system is characterized by natural liberty where individuals can trade items of value in exchange for others of greater value to them. He defines capital as stock and profit as the expectation of retaining revenues from improvements implemented on the stock (Smith, 2007). Capital and profit are, therefore, the major drivers behind the dynamic of capitalism according to Adam Smith.
The conflicts in capitalism are also highlighted in Adam Smith’s Wealth of Nations where the main idea behind the conflicts is competition. According to Hearn (2018), competition is central to the Wealth of Nations and it causes conflicting interests between the traders and/or manufacturers and the public. The traders/manufacturers seek to widen the market and narrow competition to enable them to gain profits above what they would normally get. Such intentions are contrary to the interests of the public who would like to acquire items at reasonable prices. According to Smith (2007), conflict is a part of human nature. Book III of the Wealth of Nations explains the sources of conflicts including the resources that are unevenly distributed and people went to war in pursuit of control of the resources.
Capital is seen as a power and the class conflicts are majorly between the capitalists and laborers emanate from conflicting interests. In chapter 8 of Book I, Smith (2007) argues that one of the two parties will have an advantage in disputes and would force the other into compliance. The capitalists are more powerful and the law authorized or failed to prohibit their combinations while at the same time prohibiting those of the workmen.
The logic of the labor theory of value in Smith’s analysis is that labor can be a tradable commodity whose value can be assessed in the same way as all others traded in a mercantile system. As mentioned earlier, surplus items are traded for items of greater value. When people possess skills needed in production, they become valuable to the manufacturer who attaches a price to the skills. In the Wealth of Nations, Smith (2007) argues that just like in barter where people obtained from one another the goods they needed, the division of labor allows people to produce commodities in surplus and trade them for those made by other people. Adam Smith also states that the possibility of exchanging the surplus of own labor encourages people to apply themselves to a particular occupation and to perfect their talents.
Main ideas of mercantilism and physiocrats
The main ideas of mercantilism are derived from Adam Smith’s Wealth of Nations where the term mercantile system was used to refer to the trade systems in the period between the 15th and 18th centuries. According to Beuve et al. (2016), the mercantile system was characterized by illiberal policies followed by the monarchs, including protectionism, money and power, and widespread monopolies among others. The mercantilism system seeks to achieve a balance between economic development and national power and wealth. The key objectives of such a system, therefore, include the expansion of the domestic industry, pursuing favourable commercial balances, augmenting bullion stocks, and acquiring large shares of the foreign trade. These ideas can be seen in Smith’s (2007) Wealth of Nations, specifically Book IV that discusses the systems of political economy. Smith (2007) argues that the mercantile system comprises of money that acts both as a measure of value and an instrument of commerce. The mercantile system is a system of wealth accumulation from commercial activity. Legal constraints such as duties on trade and prohibitions are also seen as elements of Smith’s idea of a mercantile system.
Physiocracy, on the other hand, can be seen as a contrast to the mercantile system that insisted on free trade to allow people to easily trade their surplus. Physiocracy is an ideological system that claimed that the economic activities should be determined by natural-divine laws and strictly called against the state’s interference with the operation of those laws (Genç & Kurt, 2016). The government control of the commercial activity in France is seen as the roots of Physiocracy. In 1764, economic policies such as the ‘freedom of grain’ resulted in high grain prices that ruined the poor with some dying of malnutrition. The policies were halted and the older regime of controlled prices and wages restored by the monarchy (Gauthier, 2015). The physiocrats perceived profit as more important than life itself and the traders wanted all the freedom regardless of the impacts of their action on the economy. The common ideas between mercantilism and Physiocracy is that they all sought free trade.
The two concepts developed different views possibly because of the different motives pursued in trade. Smith’s (2007) idea of mercantilism was intended to facilitate the trade of the surplus produce in exchange for items of equal or greater value. The physiocrats, on the other hand, pursued an intervention-free economic environment that allowed to fully exercise control of the economic activities. The control sought in Smith’s mercantile system was of the resources or capital for the wellbeing of the state as opposed to the wellbeing of the individuals. In mercantilism, therefore, government intervention was not seen as a major problem or hindrance to the exchange. There are modern examples of mercantilism and physiocracy manifested by the various forms of government and economic systems. Mercantilism is seen from government regulation of commerce where almost all sovereign nations regulate both domestic and foreign trade. Physiocracy, on the other hand, may be seen in other unregulated global commercial activities, specifically the online activities such as Bitcoin mining as explained by Edwards (2018). Both of these systems are defined by the level of regulation and the extent to which the participants embrace government intervention.
Malthusian Population Theory
The Malthusian theory of population is among the most important models of population control. The main tenet of the Malthusian theory is that when unchecked, the population increases in a geometrical ratio while the subsistence of man increases in an arithmetic ratio (Malthus, 1998). First published in 1798 in his Essay on Population, Malthus simply sought to explain that the population grew at a faster rate than the rate of food production (among other sustenance products). The geometric progress can be displayed as 1×2, 2×2, 4×4.nx2. The arithmetic progression can be expressed as 1, 2, 3, 4…n. With these two models, it is observable that the population grows by multiplying itself while the sustenance is naturally sluggish (Rahman, 2018). The dangers of allowing population to grow unchecked are explained by Malthus (1998) using the idea of hunting as a means of obtaining food. He argues where hunting is the major occupation and an only mode of acquiring food and where the subsistence is scattered over a large territory, then the population must be comparatively thin to be supported by that economic activity.
The logic of the population theory is perhaps the fact that resources are scarce and do not increase in response to their demand. Population increases mean rising demand for sustenance from the scarce resource. Most importantly, the resources should be able to support human life meaning the only way to ensure a balance between the two elements is by controlling the population. Such logic is apparent in the developing world where the theory holds as opposed to the developed world where Malthusian theory fails to apply (Rahman, 2018). Subsequently, much of the politics of population control focus on the third world where the population has exploded over the past decades. Fertility rates in those countries are very high while the economic variables such as per capita GDP, urbanization, forced labor, and education levels are substandard (De Silva & Tenreyro, 2017). The developed world does not face such issues possibly because population control mechanisms have been effective.
Malthusian theory can be criticized for not basing its principles on historical facts as there is no evidence of population growing in a geometrical progression. In Sub-Saharan Africa, for example, the population growth is estimated at 2.7% a year year (The Economist, 2020). While that rate is the highest in the world, it does not show any form of geometric progression. The economic variables such as GDP for the same region indicate that the GDP growth rates for 2016, 2017, 2018, and 2019 are 1.43%, 3%, 3.27%, and 3.07%. Such figures indicate that the rate if sustenance growth could be matching the rate of population growth. Sub-Saharan Africa is used here because the region is a perfect example of developing countries and the population and economic dynamics should reflect those of the ordinary third world. Additionally, with technology advancements, it can be argued that the rate of sustenance growth can surpass that of the population growth with more efficient machines and methods of production. In the developed world, therefore, the theory would not apply as the production could potentially be higher than the rate of population growth.
Ricardo’s Rent Theory
Ricardo is considered to be among the most rigorous classical theorists. His rent theory states that the economic rent on land is the equivalent to the value of the difference in productivity between a piece of land and the poorest and/or most expensive land producing the same products under the same conditions. The idea behind this theory is that the appropriation of land and the consequent creation of rent often varies relative to the value of produce and independently of the labor quantities necessary for the production of the commodities (Ricardo, 2001). The landowners, therefore, are not free to choose the economic rent to charge on land as the rent was determined by the costs of the labourer. The marginal productivity, as opposed to labor, determines rent in contrast to Malthus argument. Such an argument could also contrast Adam Smith’s argument that the land rents also failed to reflect the landowner’s efforts (Ryan-Collins, 2017). Ricardo would have expected that the landlords would expropriate all the profits made from the land.
The idea of landowners capturing all the economic rent on the land has not been achieved in reality because it would require the landlords to have the powers of expropriation. The landowners, however, did not have such powers and the profits were usually shared with the tenant. Ricardo (2001) uses a simple expression stating that “corn is not high because a rent is paid, but rent is paid because corn is high” (p. 44). He goes further to argue that that rent paid on the land will become part of the price of the sold produce. Additionally, the land yields no rent when most abundant, most fertile, and most productive. Only when these powers diminish does a share of the original produce set apart for rent. The falling rate of profit insinuates that with the land rents constant, the profits from land diminished as more labor was used in the production.
In comparison to Malthus’ under-consumption theory, the falling rate of profit produces the same effect as the under-consumption theory. Malthus’s (1998) population theory, it should be emphasized, was not advocating population controls as an end to itself, but as a means of balancing the population growth and the capital needs. The under-consumption theory crisis as proposed by Malthus (1820), states that the habits of the working class depending on commerce and manufacturers may work against the economic controls of population. Increasing the wellbeing of the working class may make them unwilling to work and a new source of labor would be needed. Therefore, the stagnation in production was not the result of the scarcity of capital, but rather the result of under-consumption. The similarity between the under-consumption theory and the theory of falling profit is that in both cases, increasing production does not necessarily lead to growth.
Ricardo’s rent theory, as mentioned earlier on, does not always agree with other economists on the same subject. However, he recognizes the challenges in his own interpretation as compared to those of Malthus and Adam Smith. Ricardo and Malthus, however, seem to agree on matters of productivity of the land and other forms of capital. Malthus’s (1820) held that fluctuations in the output could be the result of temporary declines in the demand (or consumption). Such a statement would conflict with Ricardo’s idea that the decline in production leads to the realization of the land rent.
References
Hearn, J. (2018). How to read The Wealth of Nations (or why the division of labor is more important than competition in Adam Smith. Sociological Theory, 36(2), 162-184.
Paganelli, M. (2020). Adam Smith and economic development in theory and practice: A rejection of stadial model?Journal of the History of Economic Thought. Web.
Svizzero, S., & Tisdell, C. (2016). Economic evolution, diversity of societies and stages of economic development: A critique of theories applied to hunters and gatherers and their successors. Economic Methodology, Philosophy, & History, 4, 1-18.
Smith, A. (2007). An inquiry into the nature and causes of the wealth of nations – books I, II, III, IV, and V. MetaLibri.
Malthus, T. (1820). Principles of Political Economy, Considered with a View to their Practical Application. John Murray.
Malthus, T. (1998). An essay on the principle of population. Electronic Scholarly Publishing Project.
Ricardo, D. (2001). On the principles of political economy and taxation. Batoche Boks.
Ryan-Collins, J. (2017). How land dissapeared from economic theory. Web.
Beuve, J., Brousseau, E., & Sgard, J. (2016). Mercantilism and bureaucratic modernization in the early eighteenth-century France. The Economic History Review, 70(2), 1-32.
Edwards, E. (2018). Bitcoin and value: A labor theory perspective. The Partially Examined Life: Web.
Gauthier, F. (2015). Political economy in the eighteenth century: Popular or despotic? The physiocrats against the right to existence. Economic Thought, 4(1), 47-66.
Genç, S., & Kurt, F. (2016). The changing role of the state during the development of the economic thought: Mercantilism, pysiocracy and classical economists. International Journal of Scientific and Engineering Research, 7(11), 552-556.
De Silva, T., & Tenreyro, S. (2017). Population control policies and fetility convergence. Journal of Economic Perspectives, 13(14), 205-228.
Rahman, M. (2018). Validity of Malthusian theory of population in 20th century in terms of using scientific technology to the economic growth and strength. International Journal of Tax Economics and Management, 1(1), 13-21.
The Economist. (2020). Africa’s population will double by 2050.