Comparison of Economic Theories Of Adam Smith and John Locke - Assignment Example

Economic and Social Analysis: Compare and Contrast Economic Theories Of Adam Smith and John Locke John Locke is a philosopher known for his contribution to the field of politics and economy. He is famous for the theory of property and the labour theory of value. John Locke’s labour theory of value disagrees with the economical thoughts of some of the historians who were interested with economics. The theory of property showed some relationship between labour and economic value. Locke’s idea of labour and value relates to his theory of supply and demand and the theory of market price. Economists argue that Locke provided a labour theory of value, which he substituted for his supply and demand theory of price in the short-run. The theories presented by Locke are brief mentions of the aspects of Locke’s thought in the context of the larger work. The labour theory, which identifies labour as the source of use value, the reason that people desire expertise in the first place. According to Locke, labour provides the justifiable claim for receiving the exchange of value of goods it produces. Economists identify as a contributor to the use value of a commodity; however, they disagree that it is not solely responsible for the use value. A labour theory of value most often means a theory that relates the price of one commodity to another and the amount of labour that has gone into producing each of good or service. Adam smith also believes in the labour theory, just like Locke, smith tries to explain the labour theory of exchange using the beaver deer example. Smith explains that, in the absence of capital, and scarce land the exchange rate of a deer and a beaver is equal to the inverse of labour that was utilized in hunting them. Economists also believe that a labour theory of value that admits capital as a productive agent can be created. This theory still shows that the relative changes in prices is still determined by changes in labour. Locke focused on labour as the primary source of use-value. Locke did not connect the determination of price with labour used to produce a product. Locke holds the labour theory in an ethical sense. He defines labour in an ethical manner and the ethical conclusions he makes favours capitalism. Smith focused on the determination of relative price. He came up with the three theories that determine relative prices theory of value, the cost of production the labour command theory of value and the labour cost theory of value. Smith examines the labour cost theory in a primitive society. In this society, we observe the accumulation of stock and an equal appropriation of land. In this society, the quantities of labour are utilised for acquiring the different objects is the only means that can facilitate the rule of exchanging then for another product of value. Smiths’ example is the idea that it costs twice the labour to kill a beaver that does not kill a deer. Usually one beaver costs two deers (Economictheories.org, 2009.p.2). Smith explains that in a society where land and capital are non-existent the quantity of labour utilised in producing the product is used to determine the price of the goods. In an advanced economy, smith observes that land is appropriated, and land is accumulated. Smith offers a different labour theory of value to this society. In an advanced economy smith, points out that there is no longer free goods, therefore, the final price of a product is must put into consideration the returns of the capitalist, which is the profit and rent to the property owner. The final income is a contribution from the factors of production (Economictheories.org, 2009, 3). Smith later considered the accumulation of capital with the appropriation of land, and the in the event that rents as well as labour has been settled. He states that the only possible explanation for the value of commodities would be the cost of production theory. The cost of production theory the payments to all factors of production determines the value of a good. According to smiths example the total cost of producing a beaver is then equal to the summation of the factors of production. Smith assumes that in the case of competition, the self-interest of the businessperson, labourer and property owner will result in the cost of production that is almost close to the natural price. Most of Locke’s arguments are based on the believe that everyone has a natural God given right. Locke relates the labour theory of value to the theory of property. He justifies the private ownership of goods and land based on labour. Vaughn observes the effort that people use to work on the land in order to produce things of value to humans. Locke in his work argues that before the existence of the governments all men had access to land and the products of the land, which God had provided (1978. p.2). Locke’s argument about private property is that it was established in the state of nature but by natural law. Locke believes that all men have access to Gods earthly resources. Private property is acquired through hard work. In the phrase, hard work translates to labour; Locke argues that labour in the process of appropriation of land, the process may involve ordinary acts like picking up corn, launching of a hard process of production to the acquisition of land. The utilisation of labour in the process of acquisition of land represents Locke’s theory of economic value. Locke’s basic premise is that land in itself provides little that is of value to mankind, however, when combined with labour then it produces goods of value (Vaughn, 198, p.3). We consider smiths argument on land and labour he argues that land and labour produces some fruit with time. This is what makes land valuable; however, economists also relate the relationship between the market value of the economic inputs that produce these fruits and the market value for the production of these fruits. Economic theory explains that economic value is subjective meaning that the economic value is subjectively calculated. The economic value is not a value of labour. However, labour does make a significant contribution depending on its output. Smith explains that land and labour make the original factors of production. Capital he explains is a product of land and human labour. Locke and smith have the same idea of the relationship between land and labour. In Locke’s analysis, labour does put a difference of value on everything. Whatever is produced is the property of those who put an effort into producing it. Labour is what extracts the value from land Locke’s concept of economic inequality is derived from his understanding of equality especially the concept of political equality. Locke does support the right to acquire without the fear of expropriation by others enables a society its wealth. Locke developed political theories that find economic inequalities acceptable and the state plays no role in trying to fix the situation. Locke’s theory prohibits the state from rearranging society’s class structure by supporting the right to property. However, in economics value forms the centre of everything, value is given to every object independent of their environment. Dolfsma argues that value is a secondary quality it is a social construct (1997.p 412). Gilmore examines Locke’s theory of money. We note that most of the Lockes economic theories were not meant to lay down basic principles, but they led to action. During the 1660s and 1670s, Locke had suggested that the lowering of interests, and raising the value of the currency. Locke on the issue of devaluing the currency entails the raising of the denomination of the coin. It also involves lightening its weight or debasing its alloy. This leaves the silver coin with less silver while maintaining its strength as a currency. Locke suggested the ideas at a time when England was facing an economic crisis. The war had affected the England’s economy the profitable trade with France had ended. Trade with the colonies in America and East Indies was reduced. England did survive the crisis because they clipped coins. On the issue of the interest rate, Locke considers whether the law can control the interest rate. His answer to his query is that it is impossible for the government to set the interest rate. He argues that no matter what the interest rate is people will always borrow money. He explains that people borrow out of necessity for the money. Therefore, they accept the money at the cheapest interest rate, which is set by market forces. Locke argues that the interest rate is the value given to the of the money, which depends on its true and natural value. Lower interest rates correspond with a higher availability of money. Locke believed that when there was a high supply of money in any economy it was a pleasant thing because it implied political power. However, England having a greater supply meant making relatively stronger. Hecksher explains that money was identified with capital (1994, p.199). The mercantilists could not clearly distinguish between money capital and stock. These made them attach the size of the national stock as a subject of immense importance. Locke tries to distinguish the function of money as capital and money as a general means of exchange. Locke states that, money had the ability by its interest to yield a yearly income making it have the nature of land (Locke, 1990, p.246). He continues to explain that money has a value, it is capable of procuring the necessities of life this takes the nature of a commodity; however, it serves only by exchange and not by consumption. Locke clearly treats money as capital and money as a means of exchange are one and the same. Heckscher states that, money serves partly as a factor of production and party as a general means of exchange (1994, p. 204). In his argument of money as the centre of the economy, Locke argues that it is money that settles debts and makes purchases. Locke argues that property, money and value come before government and that the state had no power to declare what was valuable. Locke had a strong belief in the pre-governmental state of money. Locke describes money as a measure of commerce and the importance of maintaining its rate as steady and invariable by all means. He advocates for the maintenance of money as a measure and store of value. For the state of England, Locke believed that they would increase their money by force, borrowing or trade (1990, p.299). He suggests that increase the money of the country was by either digging the mines of their own country or by getting it from the neighbouring countries. Smith is considered a better monetary economist during his time. Smith believed that the commercial society was held to rest upon the foundation of an extensive division of labour. Smith suggests that for such a specialization to occur men have to be able to exchange with ease their surplus produce. A failure to do this would result to a double coincidence of wants, which would hinder the power of exchanging the surpluses; this would impede the growth of the divisions of labour and the advancement of commercial order. To solve these problems smith outlines that a liquid medium of exchange is vital (1979, p.37). He argues that many different commodities function as a medium of exchange throughout history. He believes that there is a reason why the precious metals have proven to be the strong medium of exchange. The reasons being of the durable and the divisible nature of the precious metals. Smith describes money as purely intermediary. He argues that in a rude state of the society, man has no need for stock, but, in an advanced society, the absence of stock would make it flounder. Smith considered banking to have a role in facilitating the process of economic development. Smith observes that banking could facilitate an expansion of the stock that could be employed for productive practices. Smith believes that the sole purpose of money was to facilitate the circulation of consumer goods. He concludes that the quantity of money annually employed within a country is relative to the price of goods that are annually circulated in the country. He proves that the monetary system had the potential of deranging the commerce of a country this agrees with Locke’s idea. Smith focuses on the economic growth, which he believes is achievable by increasing the divisions of labour. This he relates mainly to the specialization of the labour force. His idea is that each worker becomes an expert in a given field of specialization. He explains that when workers do not have to switch between tasks; therefore, time and money is saved. The disadvantage of specialization in smiths view is that work force tends to become ignorant and dissatisfied. He extended the role of the government in avoiding such situations had an obligation to ensure that their workers received an education. Smiths idea was that education could combat the deleterious effect of the factory. Smith had the idea that a productive division of labour should lead to the production of tangible objects, and it should create a surplus that can be reinvested into production. In his effort to determine value, smith strongly believed in labour as a source of value. Smith asserts that the number of hours that a good can be exchanged constitutes its inherent worth. The value of good can also be referred to as the natural price. Smith states that, the natural price does not represent the true value of the product. He believes that competition was expected to push the market price towards the natural price. Smith in his work also had ideas on natural law, personal liberty and function of the state, which he saw them as passive police officers. He strongly argued that increased production largely depended on division of labour and specialization. He stated that trade increased divisions of labour, and it increases production. Smith also looked at the volume of trade, and he believed this depended on every person being free to pursue interests. He also explained that in pursuing gain one was guided by the law of supply and demand in meeting the needs of the society. Smith was against economic controls by state trade unions or guilds. He considered these controls as a threat to trade. He was against Locke’s thought that the wealth of a nation was dependent on achieving a surplus of exports or crippling the economies of neighbouring countries. Smith believes that trade should work for the benefit of all countries. He asserts that the prosperity of every nation depends on the success of all other nations. Locke, on the other hand, argued that individuals to see to it that their rights to freedom, life, property, against enemies are protected by the formed political systems. Let us conclude the discussion by celebrating the contributions’ of both Adam smith and John Locke on their contribution of the field of economy. Smith reshaped the subject of economics Smith in the issue of the theory of value we found that both Locke and smith were in agreement that the value of any product was derived from the amount of labour it took to produce. However, smith believed that represented the nominal value and not the real value of the goods. He also added that the cost of production, the role of the capitalist, the businessperson, and the profit they desired determined the value of a commodity. We had a look on their theory of money value we found out that lockes idea on money value was on the basis of the crisis facing England, and Locke tries to find a solution to the crises by focusing on lowering of interest as well as raising the value of money by devaluing the money. On the other hand, smith believes that money is the vital instrument for which all commodities are bought and sold or exchanged for one another. In the concept, of focusing on liberty as an economic system Locke’s idea of rights did provide the foundation for the modern concept of liberty, which played a crucial role in support of American Revolution. Locke’s idea was that people possess natural rights, and the role of the government was to protect those rights. Locke identifies liberty as an economic and political system. Smith also had his views on natural law the role of the state and personal liberty. He believed that the state acted as passive police officers. He agrees with smith that rights did provide the foundation for liberty. Bibliography Dhamee, Y. 1995. Adam Smith and Divisons of Labour. http://www.victorianweb.org/economics/division.html (accessed January 25, 2012). Dolfsma, W. 1997. “The Social Construction of Value: Value Theories and John Locke's Framework of Qualities.” European Journal of the History of Economic Thought, 400-416. Gilmore, O. 2007. “A Critique of John Locke and The Value of Money.” Student Economic Review, 1-7. Halcombe, R. 2002. “Liberty and Democracy as Economic Systems.” The Independent Review, 407-425. Heckscher, E. 1994. Mercantilism Vol II; with a New Introduction by Lars Magnusson. London: Routledge. Jones, D. 1988. War and Economy: in the Age of William IIIand Malborough. Oxford: Blackwell. Laidler, D. 1981. “Adam Smith as a Monetary Economist.” Canadian Journal of Economics, 185-200. locke, J. 1990a. Some Considerations of the Consequences of the Lowering of the Interest and Raising the Value of Money in Locke on Money. Oxford: Clarendon. Locke, J.1690b. Two Treatises Of Government. Cambridge : Cambridge University Press. Smith, A. 1979. An Inquiry into Nature and Causes of The Wealth of Nations . Oxford: Clarendon Press. Read More