Why is Adam Smith important to modern economics?

Adam Smith is known as the father of microeconomics, the branch of economics concerned in the behavior of individual entities such as markets, firms, and households. In the book The Wealth of Nations (1776) Smith considered the manner in which individual prices are set, studied the determination of the prices of land, labor, and capital, and investigated the strengths and weaknesses of the market mechanism. And what is more important, he identified the remarkable efficiency properties of markets and observed that economic benefit results from the self-interested actions of individuals. All of the above is still relevant today, and while the study of microeconomics has come a long way since Smith’s time, politicians and economists alike continue to cite it.

Adam Smith laid the foundations of the philosophical thought of the economy as we know it today. It is almost impossible to talk about economics without mentioning this thinker.
Adam Smith was born in Scotland and gained popularity by writing the work “The Wealth of Nations” in the year 1776. In it he tried to explain the process of creating countries and their respective administration. This work allowed him to be considered the father of modern economics, to such an extent that he was named honorary rector of the University of Glasgow.
He is recognized as one of the forerunners of the free market. In addition to being a defender of private property and supply and demand as a mechanism for pricing. His influence was so great that six editions of his first book were published during his lifetime. It was translated into six languages and generated all kinds of debates in its time. Before his death he left several essays that his collaborators published over time, which increased his importance within the history of economics.
Life and work of Adam Smith
The considered father of modern economics was born in 1723 in a small Scottish town north of Edinburgh. He was mentored by thinkers such as Frances Hutcheson, David Hume and Francois Quesnay. At the age of 36 he published his first book: ‘The Theory of Moral Sentiments’. This is one of the most outstanding works of his style in the world. In it, Adam Smith shows how man has enough capacity for empathy to relate to others in order to achieve goals, something totally opposite to other theories.

However, what would take him to the top would be ‘The Wealth of Nations’, which coincidentally was published the same year as the independence of the United States. Here he touches on issues such as the division of labor, the origin and how the money or the salary of the workers is usually used. Also, about pricing. To continue his theory he wrote five more editions. In them, he spoke about productive and unproductive work, history, economic policies of European countries, and the collection of taxes and the administration of justice.

Adam Smith’s labor theory of value
This is one of Adam Smith’s best-known theories, despite the fact that it is more closely linked to Marxist economics. For him, the price of any merchandise is linked to the amount of work that is necessary to buy it, which exemplifies how much a person has to work to obtain that product. In this theory, he also talks about tools as a way to facilitate the acquisition of this good. That is, the value of a vehicle to transport us also includes everything we have worked to acquire it.

Here, Smith points out that labor is the most precise measure for determining the value of any product. While the value defines it as the work that would have in exchange for that good. This vision argues that in all merchandise the work of many men who carry out the process of creating an article intervenes. That is why the workforce has a price that must be remunerated to pay for the effort of the workforce.

However, in that theory there was a big gap and that is that the value of the effort is not always taken into account by the consumer. This generates a great conflict when it comes to reaching a final price. The customer can hardly ever know how much work a commodity takes to create. In addition to the fact that there are trades that require a lot of effort, but historically they have been the worst paid, like the workers. These inconsistencies forced him to create the theory of production costs.

Theory of production costs
In this way, the theory of production costs arises, thus responding to all the questions generated by the theory of value. Here Adam Smith points out that the price is equal to the sum of three elements: profit, rent and salary, so it includes many more variables than in the initial theory. The economist reaches this conclusion, since in his opinion the value of a good will depend on the expense that must be invested in its production.

In order to justify what he explained in the previous theory, Smith indicated that all the profits really came from small commissions that went towards salaries, the main cost of any entrepreneur. However, after a long time, he ended up accepting a situation that became the general norm. This situation implies that an increase in investment capital increases the value of the merchandise and does not decrease the percentage directed to salaries. This generated many discussions among his critics.

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