Adam Smith "Value" Flashcards
Theory of Value
value in use, based on utility v value in exchange based on the power of purchasing other goods
which kind of value did Smith focus on?
value in exchange
contrast use and exchange value
e.g. water has great use, but less exchange value compared to diamonds which have little use but huge exchange value. there is no marginal utility in Smith’s theory
How is the value of a commodity (i.e. price) determined?
- labor embodied (i.e. labor theory of value) the direct and indirect labor that goes into production.
2) labor commanded (i.e. the quantity of labor that can be purchased with that)
3) exchange value in capitalist society
when are labor embodied and labor commanded equal?
can only occur in “early and rue state of society which precedes both the accumulation of stock and accumulation of land” when there is no rent or profit they are equal
which is great, labor commanded or labor embodied?
labor commanded will be greater because of rents and profits that must be paid
exchange value in a capitalist society
abandoned earlier ideas on value - the sum of costs and profits, value is based on cost “cost of production theory”. production expands and shrinks at constant costs, didn’t include increasing or decreasing costs with economies of scale - therefore demand doesn’t influence prices in the long run, but does determine which sector capital is allocated. supply determines price UNLIKE neoclassical. theory fails where there are increasing or decreasing costs.
role of demand in exchange value price determination
no influence on price, only influence on which sector capital is allocated to
role of supply in exchange value price determination
determines the price, but there are no increasing or decreasing costs. no economies of scale
labor embodied
k: capital coefficient L: labor coefficient z: labor directly and indirectly embodied z = L + zk = L/(1-k)
labor commanded
r: rate of profit w: monetary wages p: monetary price of a ton of corn p/w= labor commanded w/p= real wage wL= cost of labor pk = cost of capital advanced pkr = profit on the capital advanced p = wL + pk + pkr p/w = L + (pk)/w + (pkr)/w p/w = L + p/w(k(1 + r)) p/w - p/w(k(1 + r) = L p/w[ 1 - k(1 + r)] = L
why are labor commanded and labor embodied not equal
because there is a profit rate and labor commanded increases as profit rate increases
theory of profit as a residue
given the real wage and the amount of labor used, r is the only variable to be determined, can be generalized into n goods
what is natural price
long run equilibrium price. central price to which the prices of all commodities are continually gravitating. market price increase, more profit, more people enter the market, drives down price, drives down profit, repeats until it hits the long run natural price
what is market price?
depends on supply and demand, may deviate from the natural price
what provides distribution of capital among various industries?
in equilibrium situation forces of demand as well as capital mobility,
what is the key to the invisible hand theory
competition, because business people save and invest out of their own self interest capital accumulates and the economy grows - people don’t intend to promote the social best interest, but do it unintentionally the market is the best and only way to do this. businesses save and invest out of their own self interest
what does the harmony of interests in the market imply?
that intrusion by the government is undesirable - extended into international trade in Smith’s view
what are the desirable outcomes of the invisible hand
low prices, no monopoly prices, most efficient production, all goods that are desired are produced,
Did Smith see a role of the state?
yes significant, but limited
What were some roles of the state?
justice, because it was a main pillar of society; promotion and construction of public goods that aren’t privately profitable; enforcement of contracts; control over interest rate; limited role in international trade
intervention in international trade
if a domestic industry is profitable and necessary for the economy we should protect that industry; use tariffs to equalize the tax burden on domestic industries
wages fund theory
to explain wage levels and rate of increase in wages
average annual wages = wages fund / number of workers. Smith emphasized the importance of high wages.
Profit theory
investment is exposed to risk of loss, the lowest rate of profit must be high enough to compensate for such losses and still leave a surplus for the entrepreneur
rent
the price paid for use of land
interest rate
deduction from profit, not a separate distributive share
role of money and debt
deemphasized the role of money and hated growth of public debt and taxes required to pay interest on it. did not envision contemporary practice of deficit spending to counteract depression
economic development
emphasized the importance of growth and economic development
factors that promote economic growth
division of labor and capital accumulation are the primary factors, larger national output extends the market and creates opportunity for more specialization - international trade is thus important
