Examine Adam Smith views on Theory of Value?

Adam Smith views on Theory of Value:

Adam Smith developed two theories of value which are-

(i) The labour theory of value

(ii) The cost of production theory of value.

In his labour theory of value Adam Smith said the value could be measured by the quantity of labour. In other words, the amount of labour involved in the process of production of a good was the real measure of the exchangeable value. This is because he gave more importance on labour them other factors of production.

Adam Smith views on Theory of Value

Smith's concept of natural price was essentially the cost of production theory of value. He considered that the value of a good was to be determined by it's cost of production. Therefore, rent, wages, and interest were the three components which entire into the price of the commodities. But he didn't give a comprehensive explanation of the cost of production theory of value. Later on Jevons took the idea from Smith and developed a comprehensive theory of value.

Adam Smith distinguish between value in use and value in exchange. Value in use denotes the utility of value of good. As for example- The value of rain, the value of Sun shine, etc. On the other hand, value in exchange denotes the market value of a good which is determined by labour unit of time and cost of production. 

He also has started that the commodity which had the greatest value in use had frequently little or no value in exchange and which had the greatest value in exchange had frequently little or no value in use. For example- Water which possessed greatest value in use have little value in exchange. But diamond which which possessed little value in use and having the greatest value in exchange. This is also known as water diamond paradox

Criticism of Adam Smith theory of value:

(i) There is the difficulty of measuring labour cost of production. All the labours are not equally efficient.

(ii) Smith has misdirected that labour possess value.

(iii) He completely ignores the influence of demand in his theory.

Adam Smith's "Naturalism" and "Optimism"

Like physiocrats Smith also believed in natural order. He called his natural order "naturalism". It denotes the rule of the nature. "Optimism" says that naturally created institution are based on the influence of self Interest. But the self interest at least leads to greater social welfare.

Every individual is self interest. Every man is the maximised of gain and maximised of loss. Therefore every man under takes that activity which appears to him to be the most profitable. The entire society is based on this concept. As a result the gets different types of socio economic institution. These institution are spontaneous in character. As for example- The institution of money, the instruction of family, educational institution and so on.

Every individual is self motivated and they are controlled by 'invisible hand' to promotes the social interest and welfare. The invisible hand denotes the automatic mechanism. Smith believed that personal interest leads to greater progress and prosperity of the nation through the creation of certain socio-economic institutions, Adam Smith had great contribution in the efficiency of human action. However pointed out that there should be certain restrictions in individual action.

Adam Smith views on Division of Labour:

Adam Smith in his book "Wealth of Nation" has developed the concept of division of labour which is the starting point of his theory of economic growth.

When a particular work is divided into several parts and the worker is asked to work on a small part according to their ability and aptitude then that process is called division of labour. Division of labour is also known as specialisation for instant in a large scale readymade garment factory, a man cutting of cloths, the second man stiches cloths with machine, 3rd bottom and the 4th makes folding and packing etc.

Advantages of division of labour:

(i) Each worker specialises in a particular type of work, therefore productivity of worker increases.

(ii) Since each worker performs the same work again and again, therefore there is improvement in skill.

(iii) It result in great production.

(iv) Division of labour at International level has made International trade possible.

Disadvantages of division of labour:

(i) Since a worker is required to do the same work again and again, hence he becomes bore.

(ii) It divides the responsibility for which there are more chance of shifting.

(iii) It hinders the mobility of labour.

(iv) It operations in one department are stopped then whole of the industry suffers.

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