Adam Smith "Value"

Question 1

Theory of Value

Answer 1

value in use, based on utility v value in exchange based on the power of purchasing other goods

Question 2

which kind of value did Smith focus on?

Answer 2

value in exchange

Question 3

contrast use and exchange value

Answer 3

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

Question 4

How is the value of a commodity (i.e. price) determined?

Answer 4

1. 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

Question 5

when are labor embodied and labor commanded equal?

Answer 5

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

Question 6

which is great, labor commanded or labor embodied?

Answer 6

labor commanded will be greater because of rents and profits that must be paid

Question 7

exchange value in a capitalist society

Answer 7

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.

Question 8

role of demand in exchange value price determination

Answer 8

no influence on price, only influence on which sector capital is allocated to

Question 9

role of supply in exchange value price determination

Answer 9

determines the price, but there are no increasing or decreasing costs. no economies of scale

Question 10

labor embodied

Answer 10

k: capital coefficient L: labor coefficient z: labor directly and indirectly embodied z = L + zk = L/(1-k)

Question 11

labor commanded

Answer 11

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

Question 12

why are labor commanded and labor embodied not equal

Answer 12

because there is a profit rate and labor commanded increases as profit rate increases

Question 13

theory of profit as a residue

Answer 13

given the real wage and the amount of labor used, r is the only variable to be determined, can be generalized into n goods

Question 14

what is natural price

Answer 14

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

Question 15

what is market price?

Answer 15

depends on supply and demand, may deviate from the natural price

Question 16

what provides distribution of capital among various industries?

Answer 16

in equilibrium situation forces of demand as well as capital mobility,

Question 17

what is the key to the invisible hand theory

Answer 17

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

Question 18

what does the harmony of interests in the market imply?

Answer 18

that intrusion by the government is undesirable - extended into international trade in Smith’s view

Question 19

what are the desirable outcomes of the invisible hand

Answer 19

low prices, no monopoly prices, most efficient production, all goods that are desired are produced,

Question 20

Did Smith see a role of the state?

Answer 20

yes significant, but limited

Question 21

What were some roles of the state?

Answer 21

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

Question 22

intervention in international trade

Answer 22

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

Question 23

wages fund theory

Answer 23

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.

Question 24

Profit theory

Answer 24

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

Question 25

rent

Answer 25

the price paid for use of land

Question 26

interest rate

Answer 26

deduction from profit, not a separate distributive share

Question 27

role of money and debt

Answer 27

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

Question 28

economic development

Answer 28

emphasized the importance of growth and economic development

Question 29

factors that promote economic growth

Answer 29

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