As a result, Smith turns out that the price of goods includes not only income but also advanced capital.
Smith attached great importance to high wages, saying that it encouraged workers to work more productively, and strongly disagreed with Malthus, who considered worker poverty inevitable. Thus, the main advantage of Smith’s theory was that it contributed to the movement through the welfare of society as a whole.
In the theory of wages, A. Smith pointed out that of the value of goods created by labor and a certain amount of this labor, only a part of the worker remains in the form of wages for effort. The balance of value added by labor is the profit of the entrepreneur. In some cases, he must pay a certain amount of this profit as land rent or interest, if borrowed capital was used.
A. Smith called profit all the difference between value added and wages, and in this case he meant value added. In another interpretation, he understood income as the balance after the payment of rent, as well as interest, and then called profit, in fact, entrepreneurial income.
According to A. Smith, the amount of profit was determined by the amount of capital invested in the business, and not by the complexity and difficulty of work on supervision and management, as determined by the profits of his predecessors. But he immediately said that profit is a special element of supporting production, a natural result of the productivity of capital, the reward of capitalists for their activities, work, risk. In this case, the double interpretation caused a clear contradiction.
In theory, there is another misunderstanding, so if the profit is generated by unpaid labor, it should be proportional to the amount of labor used, not the capital employed.
Despite some shortcomings in the theory of A. Smith, it was quite progressive. Thus, the author noted a downward trend in income, and pointed out that it is lower in developed capitalist countries. In addition, we must not forget that A. Smith lived more than 200 years ago, and it is necessary to treat his views with understanding.
Theory of productive labor
A. Smith sought to find out what types of work contribute to the growth of the nation’s wealth. This problem has retained its significance to this day. To solve it, he divided labor into productive and unproductive.
A. Smith considered labor productive, which creates added value, and explained it on the example of a factory worker, whose work increases the cost of materials he works on, the cost of keeping the worker and the profit of the owner of the production. A. Smith called unpaid labor unproductive. So is his example of a servant who is kept on the income of the master of the house and whose work does not create value.
However, A. Smith in parallel puts forward another principle of division of productive and unproductive labor: the first is embodied in a product that has a certain life or service life, and the second is not fixed anywhere. In fact, this condition is not mandatory, it is enough to take the types of work that are a continuation of the sphere of production in the sphere of circulation (transport), and the statement loses its meaning.
But this interpretation of labor allows A. Smith to make bold remarks that the work of the monarch, government officials, lawyers, the army, etc., is unproductive. Further logic leads to the fact that as the share of unproductive workers in society decreases, its well-being will increase faster. This view once again confirmed that A. Smith was a supporter of the progressive bourgeoisie.
The theory of capital
A. Smith’s economic system was based on the view that capital represents stocks that are intended for further production.
In his views on fixed and working capital, A. Smith expressed the views of physiocrats, but overcame the limitation of their understanding of productive capital (which gives an increase in value) as only capital employed in agriculture. A. Smith’s categories apply not only to one farmer’s capital, but also to any other form of productive capital.
Under working capital, A. Smith understood the capital used to make a profit, which constantly goes to the owner in one form. and returns to him in another.
Working capital according to A. Smith consists of four parts:
money, with the help of which the return of other parts of it is carried out; stocks of products other than those available to consumers themselves; raw materials or semi-finished products that are in the process of work in progress; finished but not yet sold goods.
The main A. Smith called capital, which brings profit "without the transition from one owner to another and without further turnover." To him he attributed:
machines and means of labor; buildings used for commercial and industrial purposes; land improvement; useful features of members of society.
A. Smith attaches great importance to the accumulation of capital. He says that while maintaining a significant portion of revenue and expanding production, the business owner gives the job an extra fewworkers and contributes to the growth of the wealth of society as a whole.
In general, the theory of fixed and working capital is very interesting, although there are a number of errors. Yes, it is impossible to say that the capital invested in cars or real estate does not circulate. On the contrary, its value is transferred in parts by specific labor to the manufactured goods (in the form of depreciation deductions), so the connection of capital with the physical properties of goods is incorrect. Here A. Smith mixes the differences between fixed and working capital, with the difference between commodity and money capital.
A. Smith’s view on the accumulation of capital was inspired by the views of physiocrats. In his imagination, the accumulation of capital takes place through the transformation of value added into variable capital consumed by workers. And social capital consists entirely of variable, ie in the hands of workers is wages. Here A. Smith incorrectly equates the value of productive capital with the value of its part, which goes to the maintenance of productive labor.
Smith’s theory of the reproduction of social capital is based on the theory of its value. The value of A. Smith is divided into three parts: wages, capital gains and rent for land use, ie consists of income.
Thus, there is no fixed capital there, and ignoring it limited A. Smith’s ability to analyze the process of reproduction, as what was produced during the year was consumed annually. However, A. Smith comes out of the impasse, distinguishing between gross and net income. If by the first he means the entire annual product produced by the population of a given country, then by the pure – that part which the population can attribute to its consumer stock. As a result, Smith turns out that the price of goods includes not only income but also advanced capital.
Thus, A. Smith’s mistake is that he identifies the value of all annual production with the newly created value for the year. If the latter is only the product of the previous year, the former includes the cost of means of production that were produced earlier. A. Smith suggested a number of other miscalculations that stem from his understanding of value. For example, according to A. Smith, in the industry that produces consumer goods, income includes both price and product. Or an explanation of personal income as a personal consumption fund without mentioning the part that goes to expand production.
Despite these shortcomings. For its time, this theory was very progressive. The loss of fixed capital in the analysis of reproduction will later be called "Smith’s dogma."
A. Smith singled out rent as the exclusive income of the landowner topics for narrative writing, questioning the fact that rent is only a percentage of the capital spent by the landowner on land improvement, as the landowner receives rent for land that has not been improved. Thus, A. Smith separated rent from rent, proving that the return on capital is only a supplement to the original rent. Thus, only Smith’s land rent is a deduction from the product that was spent on cultivating the land. However, due to the dualism of his methodology, A. Smith sees in rent also the reward of the landowner for the right to use his land. In the views of A. Smith, there are elements of physiocratic theory: rent is "a product of nature, which remains the deduction and reimbursement of all that can be considered a creation of man."
From what has been said, it is clear that A. Smith did not give an exact definition of rent, although in his theory there were many correct ideas and opinions. For example, he noted that differences in the quality of land can be the reason for the formation of differentiated rents.
Issues of economic policy in the theory of A. Smith
A. Smith paid much attention to the study of country policy during the period of free competition capitalism. And the main demand he put forward was to ensure economic freedom, non-interference of the state in economic life. Yes, he strongly opposed the guild regulations, outdated legislation, corporate privileges and trade monopolies. Any restriction on the spontaneous development of events and competition, according to A. Smith, will inevitably hinder economic development. However, a number of functions of the state, he assessed positively, considering the support of the authorities in the country and ensuring its military security, important conditions for successful economic development.
A. Smith attached great importance to the financial activities of the government. He justified only those costs that are made in the interests of society as a whole. He put forward the thesis of a "cheap state" which was accepted by all subsequent representatives of classical bourgeois political economy. He laid the foundations of tax policy, saying that taxes should correspond to the "strength and capabilities of citizens" and tax collection should be as cheap as possible, and the form and time of tax collection should best meet the interests of taxpayers.
As the ideologue of the industrial bourgeoisie, A. Smith argued that the object best suited for state taxation was land rent. For example, he claimed that the income tax was ineffective because the entrepreneur would transfer the losses from it to the consumer in order to maintain profits by raising the prices of his products.
Smith also considered it inappropriate to pay taxes, because the entrepreneur is obliged to provide the employee with a living wage, and in order not to incur losses, he will have to shift the burden of taxes on the consumer again.