Notion of Supply by Adam Smith David Ricardo and Karl Marx

Notion of Supply by Adam Smith, David Ricardo, and Karl Marx

Adam Smith, David Ricardo, and Karl Marx are collectively referred to as the founding fathers of economics and with good reasons for their enormous contribution to our understanding of production. For instance, they have contributed to the development of the surplus approach which is centrally based on the notion of social surplus. This is the economic process that entails the production in excess of what must be reinvested back into the production process in order to increase production on an unimagined scale. Notably, the production according to classical economists produced excess including what was needed for consumption by workers in production sector, and the rest reinvested for further production. The focus was determined by the growth of the social surplus, the distribution among the varied social classes, and the size of different social classes.

The surplus approach was originally established and defined more clearly by François Quesnay in the third quarter of the 18th century (Martins 232). However, the approach was developed fully and explained in depth by Adam Smith in 1776, while David Ricardo (1810 and 1823) further added his insights to it. It was further developed by Karl Marx in 1867 in the Das Kapital. Thus, classical political economists emphasized on the study of distribution and reproduction of surplus, rather than scarcity. Although the provided discussion on the topic of scarcity, their major focus was on reproduction and distribution of surplus, as well as growth analysis. This paper provides an analysis and discussion the notion of surplus in three of the following Classical authors: Adam Smith, David Ricardo and Karl Marx.

Classical Theorists

In Classical Political Economy, the notion of surplus has been defined by both Marx and Ricardo from the capitalist point of view, whereby wages were established as necessary costs for production, hence the required inputs, while the rest of the output was regarded as surplus. On the other hand, Adam Smith took the landlord’s perspective in defining surplus. For instance, he considered both normal profit and wages as necessary costs; whilst rent was treated as surplus. In addition, Smith used the term ‘surplus’ to express ‘over and above’ which can be related to the notion of surpluses (Smith, Heilbroner and Malone 286).

All the three authors concentrated on the major conditions that ought to be satisfied so as to ensure repetitive productive processes of the economy on the same magnitude, leading to surplus. They noted that goods produced could either be classified as the necessary consumption and the remainder. The necessary consumption, was the portion that was ploughed back again into the productive process with the intent of repeating the process (Smith et al. 286). It could include subsistence of the workers and the replacement of all means of production consumed during the productive process (Smith et al. 286). Conversely, the remainder was also referred to as the ‘social surplus’ and its value entailed the income of the social classes rather than that of the workers (Smith et al. 286). Notably, the surplus is the portion that is employed by society without necessarily damaging the continuance of productive activity on at least the similar scale.

Karl Marx’s Perspective

As a political economists, by Karl Marx developed the surplus approach further and it was published 1867 in the Das Kapital. It is imperative to note that the surplus approach advanced considerably from the Physiocrats perspectives into Karl Marx. Surplus value is believed to the centre point of Karl Marx’s analysis of political economy.  Also referred to as value added, surplus value as advanced by Karl Marx combined the total gross earnings with the gross wage returns. On the other hand, Marx’s application of this concept is somewhat different. He uses the term Mehrwert in reference to the return on investment or yield. In other words, this is the value in capital increase. For this reason, Marx’s use of the term Mehrwert is largely regarded as a reference to “surplus value”, effectively drawing a distinction with the term “value-added”. Surplus value, in line with Marx’s theory, views surplus value on the same wavelength with the new value that workers create over and above their individual labour cost, and which capitalists regard as profit once they have sold their products (Marx 131). Thus, the total surplus value according to Marx was the mass or the sum of the net undistributed and distributed net rents, interests, profit, as well as taxes on production and other costs associated with production. Marx explained that the rate of excess worth was measured by the same level of exploitation of labour power by the capitalists or by capital through the labourer

Marx has focuses on rent, profit, and interest and   largely ignoring taxation. The work of Marx focused largely on capitalism while explaining the concept of surplus approach. He noted that surplus value as a component of the vale product which is estimated to be equivalent to the total sum of labor costs (applied on land) related to the capitalistically productive labor (Marx 132) and surplus-value.  With regard to production, Marx (135) argued that workers usually produce a value that is equivalent to their wages as well as surplus-value. In other words, workers employed by the capitalists are in a position to transfer portion of the value of fixed materials and assets to form a new product that is equivalent to economic depreciation. Both paid and unpaid labour is part of the surplus that is achieved after consumption by the workers, and reinvested by the capitalists for further production. Labour costs together with surplus-value have been classified as monetary valuations identified as surplus product and necessary product. This is also widely shared with Ricardo, especially on the aspect of net income flow. For instance, Surplus-value is the flow of net income that is provided by capitalists in terms of asset ownership. This, it is the primary source of investment fund of accumulation fund in the society, that is re-invested (Marx 135),

According to Marx (10), society is divided in three distinct social classes, namely, the landowners (aristocrats), who derives income from property of land; the bourgeois (inhabitants of towns) who professionals or businessmen; and the workers or labourers who depend on wages as they are employed in industrial commercial and agricultural industries. To better explain the concept of surplus, Marx applied the theory of value.  Marx’s production conceptualization was divided into the cost of production and the surplus value. According to Marx (10), cost of production was the time spent by the labourers while producing the goods in order to benefit the landowners and the bourgeois. In the same context, surplus value was what was left after the cost of production was deducted from the price attached to the good. He noted that in a capitalist society, economy was bound to produce more goods in order to pay all the social costs linked to production (Marx, 12). The real costs of production were the capital costs and the labour costs. Marx’s surplus value can be linked to those of the physiocrats’ concept of net product, especially Ricardo’s (Marx 135). The capitalists exploited the labourers in order to gain profits from the surplus. Marx regarded unpaid labour as exploitive since the worker was exploited by the capitalist because the worker needs to labour for survival. In addition, benefits from the production (exploitation according to Marx) were redistributed and shared among the capitalists and the landowners.

 

Smith’s Perspective

Adam Smith is mainly remembered for his work on free-market economy. He was also instrumental in popularizing the notion of an “invisible hand” believed to be at the centre of the market forces of demand and supply. This saw Smith develop the invisible-hand theory, conduct extensive research on freemarkets and how capitalism advocates for competition for limited resources.  Smith’s notion of supply was based on the shifting market periods whereby the quantity supplied relied heavility on the market rates of return achieved in the previous peiod (Smith 10).  Like other classical theorists, Smith acknowledged  that demand and supply were the major determinants of price, which is well elaborated through the land  and rent theory.  For instance, he noted that the capitalists engaged directly with the bourgeoisie in order to obtain an income derived from the employment of money in productive activities or production. The revenue was the excess of costs and was also referred to as profit.  In most cases, the profit or excess revenues was invested back into production as capital and further reinvested in order to create shops, factories, and endless expansions. The key beneficiaries of these endless expansions according to Smith are landlords but crucially, capitalists as well (Smith 163). Capitalists tend to be exploitative because they are always use the demand and supply theory to attract workers and pay them little even when there is of scarcity of labour supply. Smith maintained that rent was a surplus. He further contends that land as a factor of production produces higher yields in excess of the labour needed to get the produce into the market. Smith further notes that there is always surplus food, more than is needed to replace stock needed to pay labour and the profit generated.  This means that the landlord is always left with something in the form of rent (Smith 163).

 

Smith implied that when investments are carried on the land, then enough food is generated for the workers, and the quantity that remains and is reinvested is referred to as surplus. In a more elaborate form, Smith, Heilbroner, and Malone (286) explained that the interests of cultivators and proprietors are to ensure production and generate surplus. Thus, the unproductive classes have no business in oppressing the other classes. Smith et al. (286) explained that remainder after deductions of cultivators’ and proprietors’ share or the surplus of the land that is the reinvested so as to retain and employ unproductive classes. Smith et al. (286) noted that the higher the surplus, the greater the level of employment and maintenance of the unproductive class. In his work titled, “The Wealth of Nations”, Smith provided an explanation on how the notion of surplus is applied to generate wealth. He explained that the larger surplus helps to maintain enhanced quantity. As a result, a landlord is best placed to either command or buy more of it (163). In other words, the landlord capitalizes on rent with the intention to acquire surplus.

Ricardo’s Perspective

The basis of the notion of surplus and its association with the theory of income distribution originates from the three classical theorists, under their urge in the causes, and in the manner to grow, the “wealth of nations” (Smith 1). It is imperative to note that the use of surplus is used to determine the evolution of economy, and the speed of its decline or growth. The level of utilization is experienced as fundamentally relying on how the surplus in the market is distributed among varied social classes. For example, Ricardo (23) saw the surplus as entailing of the income of landlords and capitalists, and is in favour of giving whereby a greater portion of this surplus was given to the capitalists instead of the landlords who were the owners of the land. The reason behind this was that the capitalists re-invested the greater part of their income, thus promoting the growth of production (Ricardo 23). Conversely, the landlords consumed their income in luxuries. Thus, the expansion of production by capitalists has the capability to increase the portion of piece of land rents in the surplus. Ricardo concluded that economic growth at this point tends to inevitably slow down and lastly coming into a halt.

Ricardo noted that “there are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply” (12). In this context, Ricardo was trying to provide an explanation on some commodities which are part of mass production, but are scare. He further explained that some rare pictures and statues, coins and scare books, wines of a certain quality that can be created only from grapes grown on a special soil, and characterized by a very limited quantity (Ricardo 12). In this context, the value is independent of the quantity of labour principally required for its production, and differs with the variations in the wealth and inclinations of those who desire to own it. Ricardo further noted that these commodities were part of the large volumes of commodities that were used for daily trade and exchanged in the market.

Because they are objects of desire and attract attention from wide range of consumers, especially the rich, they increased demand. In addition, human labour is used to procure them and they are increased through reinvestment provided that the necessary labor is provided.  In Principles, Ricardo  contended that “In speaking then of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we mean always such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint” (Ricardo 12). The implication made is that even rare commodities were invested and reinvested, resulting to surplus.

The notion of surplus is also applicable to states. For instance, in 1812, the grain prices in Europe fell and Ricardo noted that “we are happily yet in the progressive state, and may look forward with confidence to a long course of prosperity” (17). The implication made is that although countries in the Europe were producing, they were not reinvesting or producing surplus, hence the fall in prices. He further stressed that “the richest country in Europe is yet far distant from that degree of improvement”, that is, the stationary state, and that “it is difficult to say where the limit is at which you would cease to accumulate wealth and to derive profit from its employment” (Ricardo 179). In this context, wealth is created and accumulated when there is surplus in production and reproduction is also enhanced. In such cases, nations can accumulate wealth. He further contemplated that “If machinery could do all the work that labour now does, there would be no demand for labour. Nobody would be entitled to consume anything who was not a capitalist, and who could not buy or hire a machine” (Ricardo 399-400). Thus, demand for labour is only necessary when there is no machinery for production, and as such, labor would not be necessary. However, the use and introduction of machines in production process enhanced surplus.

In Chapter XXVI of his Principles Ricardo observed that “Adam Smith constantly magnifies the advantages which a country derives from a large gross, rather than a large net income… What would be the advantage resulting to a country from the employment of a great quantity of productive labour, if, whether it employed that quantity or a smaller, its net rent and profits together would be the same? “(371). In this perspective, Ricardo was able to illuminate the major advantages associated with production and gross income. He added that whether a nation employed 5 or 7 million productive labourers, and as a result produce net revenue that is used by the 5 mullions, then the clothing and food for the 5 million would be the country’s net revenue. Lastly, employing a lot of men would be necessary in improving value to the nation in terms of revenues and taxes.

Conclusion

The contribution of Adam Smith, David Ricardo and Karl Marx to the notion of supply is well documented in literature. Starting with Smith in 1776, followed by Ricardo and Marx in 1823 and 1867, respectively, all three sought to develop the surplus approach as a means of emphasizing on the study of distribution and reproduction of surplus, as opposed to scarcity. While Ricardo and Marx defined the notion of surplus from a capitalist perspective, Smith assumed the landlord’s perspective. Specifically, Marx noted that capitalists and land owners exploited the workers because they needed to work in order to survive. Marx viewed surplus as what remained after the cost of production had been deducted from the price of a commodity. Smith viewed rent as a surplus, while Marx defined surplus as the amount of increase on the value of capital. Elsewhere, Ricardo viewed surplus as involving the income of capitalists and landlords, with the capitalists getting the bigger portion even as the landlords were the owners of land. Smith adopted their idea of market price and converted it into the supply and demand analysis. Smith can be regarded as a Marxist because he emphasized on the idea of conflict as a result of capitalist society.

Works Cited

Martins,  NunoOrnelas. The Cambridge Revival of Political Economy. New York , NY: Routledge, 2013. Print.

Marx, Karl. Capital A Critique of Political Economy Volume I. 2015. Web. 07, Nov. 2015. < https://www.marxists.org/archive/marx/works/download/pdf/Capital-Volume-I.pdf>

Ricardo, David. On the Principles of Political Economy, and Taxation. London: John Murray, 1821. Print.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. London, UK: N. Kelly, 1801. Print

Smith, Adam, Robert L. Heilbroner, and Laurence J. Malone. The Essential Adam Smith. New York: W.W. Norton, 1987. Print.