Criticizing the Economic Theories - Essay Example

Economic Theory
a) How Ricardo Criticized and refined Smith’s Theory
Classical economic theories are believed to have begun with Adam Smith’s The Wealth of Nations in 1776. Adam Smith’s works were so influential in the 18th and early 19th centuries, before a group of other classical and neoclassical economic theorists, led by David Ricardo emerged to modify Smith’s theories. Adam Smith is regarded as the father of modern economics, following his treatise, ‘the wealth of nations’ (Derek, & Steven, 2003). He developed his theory at a time when capitalism was beginning to take shape as society was gradually moving from feudalism to rapid industrialization in Europe at the time. His theories helped to establish the foundation of capitalism. Adam Smith postulated that markets were capable of regulating themselves without any external intervention. He introduced a new approach of measuring national wealth using income as opposed to the king’s treasury (Derek, & Steven, 2003). According to him, income was a product of land, labor, and capital, and that income is divided among capitalists, laborers, and landlords, in the form of interest, rent, and wages.
Smith’s theory had some limitations, despite helping to revolutionize economic thought at the time. David Ricardo identified the weaknesses of Smith’s theory and opted to rectify them and incorporate them into his own theory. Among the things he agreed with Smith’s theory include the use of income to measure a country’s wealth. He also agreed with Smith’s view of free markets. He, however, built his economic thoughts on the three main factors of production; land, capital, and labor, that had been identified by Smith (Derek, & Steven, 2003).
Ricardo introduced other new ideas in his theory to build on Smith’s ideas. He for instance introduced the idea of international trade as the best way to help the local markets. He introduced the concept of comparative advantage in international trade. Comparative advantage suggests that countries only produce those products that they have a higher comparative advantage and import those which they cannot produce efficiently.
b). Marx’s opposition to Capitalism
Karl Marx was one of the most vocal thinkers to be opposed to Capitalism. He saw capitalism as just any other historical stage that would eventually end and be replaced by Socialism. According to Karl Marx, capitalism introduced classism in society. The society was made up of the capitalists who were the land owners and owners of factories and the working class, who provided labor in the lands and factories owned by the capitalists. He identified that these two main classes had differing interests that were the source of conflicts in society. The capitalists’ main objective is to get profit and increase their wealth through minimizing their costs, including offering low wages to their workers (Derek, & Steven, 2003). The working class on the other hand strives to maximize their wages. These two compete for g interests will lead to conflicts in the society that would eventually lead to a decline in the capitalist system and create ground for socialism.
Marx was opposed to the capitalist system because of the instability it would create in the society where the working class would be left dependent on the capitalists who owned massive resources. According to Marx, leaving wealth to a few private individuals would create an imbalance in society, and preferred socialism would take the wealth from individuals and eradicate classes and ensure equality of all people in the community.
The labor theory of value originated from Adam Smith and formed a great basis for Marx’s economic argument (Keynes, 2007). The theory states that a product’s value is related to the amount of labor used to produce it. Commodities that take the same amount of time and labor to produce should cost the same, according to the labor theory of value. Karl Marx’s contribution to the theory was the recognition that workers put in a lot of effort and labor in order to have the final product. He argued that workers give their labor partly to add value to products in order to get their wages, while the remainder of their labor is aimed at enriching the capitalists (Keynes, 2007). He stated that the capitalists exploited the workers and their labor in order to benefit themselves and earn more profit.
Marx’s view on unemployment was that Capitalism encouraged unemployment in society. He argued that capitalists aim at keeping people out of the job market because this helps to maintain wages at a lower rate (Keynes, 2007). The few who get jobs cannot, therefore, demand better pay since they will be sacked and others hired from the big pool of unemployed and qualified individuals. Read More