John Smith's Influence On Economic Thought

Smith’s contribution to and influence on economic thought was tremendous. More than any other writer of his time, he saw the central ideas and forces that govern a market economy. However, his work is not without problems. Smith confused himself and generations of economists by failing to elaborate separate theories of, and distinguish clearly among, relative prices, the general level of prices, and changes in welfare. Historians of economic ideas have debated whether Smith propounded a labor theory of value. If this means a labor theory of relative prices, the answer is yes and no. He applied a labor theory of relative prices to a primitive economy, but for a modern economy he held to a cost of production theory. According to Smith, the general

He was able to describe the functioning of competitive markets with greater precision than previous writers. In the details of his theoretical structure, particularly in his attempts to formulate a value theory, he provided a necessary point of departure for Ricardo and other theorists who followed. Smith was not a pure theorist. Rather, he was a political economist who was able to supplement a grand vision of the interrelatedness of the sectors of a market economy with descriptive and historical material and to influence economic policy for at least two hundred years. The pure theorist Ricardo was followed by J. S. Mill, and Mill by Alfred Marshall; both tried to return economics to Adam Smith’s contextual analysis and policy. With few exceptions, the methodological position of orthodox economists since Marshall was one of almost exclusive focus on pure abstract theory, with little attention to historical and institutional material. In that focus, modern mainstream orthodox theory has rejected the Smithian methodology. However, it has been kept alive by heterodox economists who rejected Smith’s laissez-faire policy