Adam Smith's Wealth of Nations, published in 1776, has rightly been credited with ushering in a new era in economics. Smith still shared many of the characteristics of the earlier periods, his economics being a part of a system of morality. He was concerned with the ends, the purpose, the ethical values of the society and was not averse to shaping them. But the desire to abstract, generalize and arrive at universal laws had its own demands. He postulated "a logical system of economic relationships based on an underlying law of human nature (analogous to Newton's law of gravity).” The essence of this law was self-interest, which ensured order in the apparent chaos of the exchange economy and also propelled the system towards growth. The individual, as consumer, appeared as the chief actor on the economic scene since his wish was realized by the market mechanism. Any interference from any quarter, especially from the government, was bound to disturb the perfectly harmonious operation of the system, which promised to maximize the social good through maximizing the individual good. Thus he, "provided moral defence and a scientific blueprint for the market exchange system.” Smith had many a disparaging aside on the traders and the capitalists but the self propelling system seemed to him to be too powerful either to admit a need for social coercion to thwart their maneuver or to assign them – or to investment as such – as prominent a role in the system as he assigned to the consumers and their demand. The heart of his economics was the theory of value of which he considered labor to be the essence. Applied to capital (goods) this posed a serious problem with which Ricardo, the second architect of the classical economics, was to grapple throughout his life, only to conclude that relative value was affected not only by labor but also by the rate of profit, which had nothing to do with it. "After all, the great question of rent, wages and profit must be explained by the proportions in which the whole produce is divided between landlords, capitalists and laborers and which are not essentially connected with the doctrine of value, he said." Ricardo added much to the rigor of economic analysis, carried abstraction to a level higher than that found in Smith and showed a far greater predilection to logical reasoning from a priori axioms and demonstrated the determination of economic variables by economic variables. He had little use for Smith's deep insights into a reality which was far too complex to admit such rigor and ruthless enough to allow "experience" or "observation" to deter him from the logical conclusions to which his Cartesian methodology led him. But his preoccupation with the "laws of distribution” led the future course of economic theory, in both its Marxian and Marginalist versions, to envision a composite theory of value and distribution which was henceforth to form the core of economics for more than a century.
But before we pass on to Marx or the Magrinalists, a brief mention is due to the Historical School which originated in Germany. Though it failed to change the course of mainstream economics, it did serve as a caution against sweeping generalization and abstract laws and concept of the classical economics.
Source: Dr. Muhammad Nejatullah Siddiqi, Economics An Islamic Approach. Republished with permission.
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