This essay considers these strands of Adam Smith’s theory of classical economics by investigating their interrelation.
In the Wealth of Nations Smith offers a famous example of a primitive value system. Using the example of a beaver and a deer, he states that it takes twice as long to hunt the beaver as the deer, so that the beaver should be worth twice as much as the deer. In this example the value of a good is directly related to the labor that is required to procure it, therefore the profit is the compensation or cost of doing business. Smith states, “In this state of things, the whole produce of labour belongs to the laborer” (Medema & Samuels, 2003, p. 162). Smith acknowledges that such an example is not only simplistic, but due to the complications of the contemporary economic structure is no longer feasible. Indeed, the contemporary market (18th century United Kingdom) has given way to a process he refers to as division of labor, which complicates this example.
In the Wealth of Nations Smith argues that one of the fundamental characteristics of the 18th century British economic structure is the division of labor. According to the division of labor In Chapter 1 (Medema & Samuels, 2003), Smith describes a situation where labor is divided within a pin factory so that the ultimate number of pins produced is greatly increased. In order to achieve this increase in production the capitalist must engage the services of the laborer and the landlord, and invest heavily in machinery. It follow that “In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts” (Medema & Samuels, p.162). Smith is ultimately stating that the price of the commodity, after factoring in the costs of the land, labor, and machinery, is the residual profit.
Smith distinguishes between natural prices and