Political economy is a term coined to explain the manner in which production, consumption and distribution of goods that are desired can be exchanged, are regulated. [Macvickar, J. 1825 p7-8] Adam Smith and David Ricardo are both highly notable classical political economists, promoting the idea of liberal economic theories which lay the groundwork for many of the contemporary economic thought. Both Smith and Ricardo’s opposition of mercantilism play a large role in the decline of the system, whilst their liberal, free market approach remains present in current economics; thus indicating that both individuals have made significant contributions to the tradition of political economy. In this essay, the theories and views of Smith will be explored and criticism of his work will be discussed. This essay will then proceed to acknowledge and explain Ricardo’s principles, contributions and his critics in addition to assessing which of the two classical political economic thinkers made the most important contribution to the tradition of political economy.
Adam Smith’s, ‘The Wealth of Nations’ and his Theory of Moral Sentiments are two of the most well acknowledged theories in traditional political economy. Ideas from Smith are also reflected in the views of other notable classical political economists such as David Ricardo. Smith’s contributions to political economy largely relate to his suggestion that a free-market economy would lead to the best economic outcome.
Smith furthered the idea that the division of labour is what allows economic growth in ‘The Wealth of Nations’. By using the renowned example of pin production, Smith explains that productivity is increased by dividing the specialised tasks between workers, therefore increasing economic prosperity. Smith also suggests that one would only invest in labour or land in order to gain a maximum return and proceeds to explain this in relation to wage differences. According to Smith, wages ought to be established based on the difficultly level of the labour, indicating that higher wages ought to be offered to those who have a higher skill level. Smith’s reasoning for this difference in wage is explained by the suggestion that individual workers would be unlikely to work harder in order to learn more difficult skills if there is no promise of a higher wage as a reward. Moreover, Smith believed that those who worked in unsanitary or hazardous and risky conditions should also be receiving higher salaries in order to motivate and compensate individuals; an idea which led to the cotemporary thought of human capital. Smith’s theory is currently known as the theory of compensating wage differentials. The influence Smith’s theory has on modern economics indicates his large contribution to the tradition of political economy. [Henderson, D. 2002]
Adam Smith is also greatly known for his criticism of a theory of international trade, Mercantilism. The mercantile system is the name devised by Smith to explain the political system in Western Europe in the sixteenth century which suggests the best economic policy is one where the exportation of goods are promoted, whereas the importation of goods is limited by tariffs and quotas. [Fay, C.R, 1938 p304-316] This system suggests that wealth and power are linked and therefore exportation will allow the accumulation of precious metals and gold and silver, with the aim of attaining an economic balance. Due to the limited quantities of gold and silver, a particular nation would profit whilst another would lose, ergo a “zero sum game”. [Cherunilum, F., 2008 p123-125]
The mercantile system promotes the interest of state supported merchants. A prime example of this includes the East India trading company. Furthermore, the mercantile system saw the formation of colonies and the expansion of European countries, in addition to a higher level of