Comparison of the Economic Theories of Adam Smith and David Ricardo - Essay Example

Student’s Name] [Instructor’s Name] [Class] Compare and contrast the economic theories of Adam Smith and David Ricardo. One of the first modern schools of economics that narrated the field to the modern needs has been linked back to the classical school. The major contributors to the modern economics have been David Ricardo and Adam Smith among many others. The school has been a popular subject of research and debate for many decades and has been diversified to be applied in many different fields of academia. Classical economists’ work has been a path to restructure the field of economics towards analysis and study of an individual rather than the state. Adam Smith and David Ricardo have played a vital role in transforming theories and their theories combined may be studied to realise more advanced theories in economics (Mankiw, 2001). In comparing and contrasting the works of both the artists, it is imperative to study the works of Adam Smith in light of how David Ricardo has changed, added or negated the work of Smith. Adam Smith gained his place in classical economics through his works titled the “Wealth of Nations.” The theories presented in Smith’s work have been the foundation in building the free market policies for the modern economic structures. Adam Smith believed that among the factors of production, labour was an integral function in the forming of any economic autonomy. He refined his approach to state that the division of labour will play a major role in optimising and increasing production (Mankiw, 2001). Furthermore, the theory stated that although the division of labour was a direct positive affect on the increase in efficiency of production an excessive division in labour will cause a fall in the efficiency and will decrease the production and adversely affect the capital owners. Adam Smith’s theories in ‘Wealth of nations’ were applied in modern economics in such a way that they gained importance in a short time. It lead to economists leaving the earlier theories asode and focusing on the improvement and research on Adam Smith’s ‘Wealth of Nations.’ (Skousen, 2001) David Ricardo is one of the economists who studied the works of Adam Smith and extended the original works. Ricardo conformed with many theories of Adam Smith and developed them further to make Smith’s work turn into the field of classical economics known today. David Ricardo built o these theories to state his iron law of wages in relation to the subsistence level as compared to the Adam Smith’s postulation which formed a comprehensive relationship of wages with an increase in population (Skousen, 2001). Since most of the theories shared by Adam Smith and Davis Ricardo run parallel and one is the extension of the other, many scholars state that both their theories are not opposite. One of the major differences in their writings have been that Adam Smith had viewed society, capital owners and the government in a very optimistic way. Whereas, David Ricardo had not shown support for the optimistic view point of Adam Smith and in extending or defining his theories of Economics has shown his pessimism about several factors that influence the behaviour of people, capital owners and governments (Skousen, 2001). Furthermore, because of that optimism, and the assumptions relating to it, the works of Adam Smith have been relatively simpler in explaining economic behaviour. In contrast, David Ricardo due to his pessimistic approach in defining models for economics used very complex cases and explained his theories in a more intrinsic nature. David Ricardo in his works called ‘On the principles of political Economy and taxation,’ discussed the works of Adam Smith and infused his pessimistic approach in the frameworks laid down by him (Peach, 2003). David Ricardo, through his works on the explanation of models framed by Adam Smith started the industrial revolution in his time and his extensions of theories became popular on the very basis of reforms and advanced models that he had presented. Although, Ricardo had been able to reform many theories of Adam Smith, he had also evaluated many current events in the states and had postulated a diverse range of models to be developed in highly complex models. However, as they both had their works running parallel to each other, their theories in contrast had their own pros and cons (Peach, 2003). Adam Smith had laid down his discussion and theories on the basis of the involvement of an invisible hand structure in the application of free trade. He had discussed that it was an invisible force that acted as a natural sector of all business functions and capital oriented entities. He had explained in his theories that if one businesses’ factors of production along with the idea, price levels and sales techniques were not competitive or better than the other businesses, the competition would destroy the weak business (Groenewegen, 2002). He further explained that if on the other hand the factors of production and the rest of the structures of business were more than competitive, only then the capital owners or the business could become rich and expand. These two possibilities were explained as disordered and natural in a way that government intervention would eventually play a major role in the development and profit making of the business entities. Furthermore, this invisible hand- government role, would be feared as it had the authority to control the prices, wages and other factors that affect the revenues of any business (Groenewegen, 2002). The idea of free trade, as seen in the examples of socialism and communism, was applied in such a way that as more of the people live in the lower income groups, the free hand would favour only those capital owners who would provide cheap materials and lower prices so the masses could afford it. In contrast to Adam Smith, the theories of David Ricardo was never used and infused in the system because it was too complex to be understood by the people in general (Groenewegen, 2002). Ricardo’s belief was that all individual countries and states should use their competitive advantage by using their strengths more and producing accordingly and collectively benefit each other through being more competitive collectively and keeping the prices low for their respective productions- due to the competitive advantage one would have over the other (Groenewegen, 2002). As Adam Smith had used the invisible hand theory to explain that eventually all prices would fall in place for the key player in the economy, Ricardo’s theory faced the challenge of the protectionists and their demands. This contrast may be explained by an example that if someone wants to bring us something that we can make ourselves for free. In this case there are two options available, either to not to receive those goods, or to take those goods as well. The protectionists point of view would be to not to take those free goods as they would be seen as infringing the local economy and the business. However, on the other hand, the free traders would welcome any such good or service into their economy and business. This contradiction made a major distinction between the two economists (Skousen, 2001). Adam Smiths theories in the wealth of nations were mainly inclined on the economic growth of countries. He supported the idea that a developing capitalistic system would eventually be beneficial for the society in general and people would be happier with the existence of such a system. Smith stated that the economy of any country had the potential to expand in an upward direction without any limitations. Many events in history later on give much room for his theories to be successful- such as the war in England which obstructed the economic development, and his theories were later on studied with a more sceptical approach and a different view of the market system (Skousen, 2001). On the other hand, David Ricardo believed that the movement of the economy is shifted towards a standstill. He debated on the modification in the labour theory of value and believed that the rate of profit in relation to society was directly related to the amount of labour. This amount of labour was defined to be linked to the number of workers, which were needed to maintain and harvest the farmlands for the growing economy (Manikiw, 2001). David Ricardo’s model broke down the land into two main categories- which were sustained upon the average fertility rates of the land. The more fertile lands would be responsible for higher production of food and other agricultural products. This parity would state that the high fertile lands would attract higher rents than the low fertile lands and the land that was not fertile at all would receive no rent as it had no utility and yielded no competitive advantage and its earning would all go to cover labour and capital costs that are incurred (Manikiw, 2001). Although the theory is extensive, but in summary, Ricardo’s model states that the landowners interest in would be strongly against the betterment of the society. Furthermore, he believed that the Corn laws were a burden to the any economy that was based on agriculture. Any trade barriers that arose due to this factor were to influence the price to hike and therefore would adversely affect the rent of the land (Peach, 2003). The economic theories of David Ricardo mirror those of Adam Smith in all their basic fundamentals. However it is the application of these theories that makes them deviate from common economic thought. Both conform to the belief that the best thing that can happen to the market is for it to be left un touched by any external factor and let the free market system correct itself on its own through demand and supply. Government action, they believed, was only an obstacle in the development of the economy and the invisible hand restricts growth rather than promoting it. Even though David Ricardo did not see the free market to be as free as Adam Smith, he still had the economic thought that the main reason for economic stagnation could be government intervention. Works Cited: Mankiw, G. Essentials of Economics. Harcourt College, 2001. Groenewegen, P. Classics and Moderns in Economics: Essays on 19th and 20th Century Economic Thought. Routledge, 2002. Peach, T. David Ricardo: Critical Responses. Routledge, 2003. Skousen, M. The Making of Modern Economics: The Lives and Ideas of the Great Thinkers. M.E. Sharpe, 2001. Read More