Classical economics

Cover of Adam Smith's book, The wealth of nations.

The classical economic theory refers to a school of economic thought whose main exponents are Adam Smith, Jean-Baptiste Say and David Ricardo. It is considered by many as the first modern economic school. It also includes authors such as Karl Marx, Thomas Malthus, William Petty and Frédéric Bastiat, some include, among others, Johann Heinrich von Thünen. The last classic is usually considered to be John Stuart Mill. With this school, we can affirm that the general framework for the capitalist model was created at the end of the century XVIII and during the XIX century.

The term "classical economics" was coined by Marx to refer to Ricardian economics - the economics of Ricardo and James Mill and their predecessors - but its use was generalized to also describe the followers of Ricardo and Mill as well as all those influenced by the general perceptions of those authors, including Marxism itself.

Origins

The publication, in 1776, of Adam Smith's work An investigation into the nature and causes of the wealth of nations —better known as The wealth of nations–. The school was active until the middle of the 19th century. Despite its rejection of the free market, the largest school of economics that still adheres to the classical forms is the Marxist school. However, New Classical Economics is strongly influenced by the general perceptions of the school.

In addition to the work of Smith, in which some of his most important theories were that of philosophy is naturalistic "natural law is superior to human law" and that the economy is governed by an "invisible hand" in which the state should not intervene, and that human beings act in their own interest: the businessman invests to obtain benefits, thanks to some of its applications to social philosophy, by John Stuart Mill (1848). Both were works in widespread use in "political economy" lectures until the introduction of Alfred Marshall's Principles of Economics (1890). Another text whose importance cannot be ignored is Capital, by Marx (1867).

Classical economists attempted to explain economic growth and development. They developed their theories about the “progressive state” of nations at a time when capitalism was in full swing after emerging from a feudal society and when the industrial revolution brought about enormous social changes.

Classical economists refocused economics, moving away from previous analysis that focused on the personal interests of the ruler and/or ruling classes. The physiocrat François Quesnay and Adam Smith, for example, identified the nation's wealth with the gross national product, rather than with the king's or state's treasury. Smith saw this national product as derived from labor applied to land and capital. That national product is divided "naturally" between workers, landlords and capitalists, in the form of wages, rent and profits.

Classical economics was largely displaced by marginalist schools of thought, which derived their concept of value from the marginal utility that consumers found in a good rather than the cost of expenses involved in producing it. However, some of the classical insights were incorporated into the neoclassical school, which began in the UK from the work of Alfred Marshall.

Characteristics of the classical school

Methodology of the classics

The methodology of the classics was heavily influenced by early scientific developments, stemming from Newton and the critical or analytic tradition traceable to Kant.

The classics sought to base their positions on the empirical study or reality in order to formulate, generally, conceptual models that would allow them to state natural laws relevant to the area of study, consequently they used extensively, but not exclusively, inductive reasoning.

The above seems to suggest, in general, a "static" of economic relations, in the sense that they are based on or owed to laws that, like physical laws, are supposed to be eternal and universal. But that should not be taken to mean that you lack any "flexibility" or "freedom" in relation to the processes or systems that implement those laws but rather as a suggestion that, if the laws are known and exploited, they give rise to (in Smith's words) to "... very different plans in the general way of using it, but not all of these plans lead equally to increasing the product. The policy of some nations has extraordinarily promoted rural economic activities, and that of others: urban ones. It is difficult to find a nation that has treated these different activities with the same equality and impartiality. Since the fall of the Roman Empire, the politics of Europe have favored the arts, manufactures and commerce (economic activities typical of cities) more than agriculture; rural economic activity. The third book explains the circumstances that gave rise to this policy, and advised to apply it.". Given a successful plan one obtains: "The great multiplication of productions in all the arts, originating in the division of labor, gives rise, in a well-governed society, to that universal opulence which spills over to the lower classes of the people.. Every worker disposes of a greater quantity of his own work, in excess of his needs, and like any other craftsman, he finds himself in the same situation, he is in a position to exchange a great quantity of his own goods for a great quantity of the created by others; or what is the same, for the price of a large number of theirs. The one provides the other with what he needs, and reciprocally, with which a general abundance is spread in all ranks of society.& # 34;

The question of whether or not it is possible to consider “economic laws” as natural laws remains today (early second decade of the century XXI, and based on Alfred Marshall's analysis) debated.

Objectives or areas of interest

As is generally accepted, the economics or classical school has the following areas of interest.

• The focus of attention is the groups or classes of individuals. The classic economy (called political economy) studies what determines the wages received by workers in general rather than what each individual worker receives; or what causes the rate of profit to go up or down, rather than the factors that cause the gain of a particular company, etc.

• Interest in the generation and increase of the general wealth or of the nations — now known as the Economic Growth. The increase in wealth was conceptualized because of the generation of what the physiocrats were called surplus value. For example, the result of agricultural production is generally superior to the seed used. That "extra" amount is surplus value and implies that wealth has increased. This generation of surplus value is perceived as dependent, not only on production factors but on a multitude of elements and phenomena such as the forms of organization and exchange of the same, both at the business and social levels. The famous example of the manufacture of Adam Smith pins shows how a new form of production organization leads to a higher or extra production than previously obtained, without the use of resources -work, capital goods, etc- additional (see Work Division). In addition, from the classics, how the government approaches productive activities, for example, allowing or restricting the freedom of trade, cannot be ignored in economic analysis.

Doctrines and “economic laws#34; classic

It is necessary to note that not all the classics shared the totality of either these general assumptions and economic laws or the interpretation of them. However, the classics as a school can be characterized by them.

General assumptions

• Doctrine of self-interest or psychological selfishness. The classics assume that the basic and natural motivation of individuals is their own interest. The producers produce not because they want to do the good, but because it suits them. Consumers buy not because they are interested in the well-being of producers, but because they consider that what they buy is useful to them, etc. (see, for example: Ethics in David Hume).

• Doctrine of the rationality of individuals. The main characteristic of human beings is that they are rational animals. People act—or achieve their goals—more effectively when they do so according to reason (see Rationalism and Empirism).

• Doctrines of competition and cooperation. Individuals rationally pursue their interests sometimes by competing and sometimes cooperating. Smith emphasized the advantages of individual competition, suggesting that these individual competitive interests converge, as led by an "invisible hand" in the common interest (doctrine of the harmony of interests). Ricardo Is influenced by him (especially Marx) focused on the competition of groups or classes (see class struggle). Stuart Mill promoted the advantages of cooperation.

• Doctrine of work as a source of all wealth and value. For example, Adam Smith begins his The wealth of nations establishing that "the annual work of a country is the fund that originally provides it with all things necessary and convenient for life and that it consumes annually; and these things are always either the immediate product of that work, or what is purchased in other countries with that product."

• Developmental doctrine or progress. From Turgot economic processes are perceived taking place in historical times, which leads classics to a conception of evolutionary progress. (see "The maturity of the idea of progress: the French contribution" in progress). All classics advance theories of stages of social economic development, which generally, but not always (see Malthusianism) culminate in a stage of general abundance and well-being. These stages in turn can be subdivided into moments or stages, the whole based on the application (intentionally or not) of economic laws. Thus, for example, in Smith's scheme the progressive division of labour is closely related to two other phenomena: the accumulation of capital and the gradual extension of the market. The accumulation of capital allows to reach increasing degrees of specialization and this results in a continuous increase in the productivity of the whole of productive factors.

• Doctrine of the minimum distortion of economic activities. If “economic laws” are natural laws whose application leads to economic efficiency, at least their operation is distorted, the most efficient. Economic processes were regarded as capable of self-regulation, in other words, economic forces themselves will direct production, exchange and consumption at their most efficient level. This is usually interpreted, at present—but not quite correctly, as meaning “minimum state intervention”, laissez faire or free market: at least government, the best. The action of the state must be confined to protecting individual rights (especially property rights), providing national defence and some public services of general interest (justice, some types of education, etc.).

Main y#34;laws" economic

• Law on Petty and Engel Law: Technical progress reduces transport costs, which increases the income (or purchasing power) of the general population and expands and transforms the market, thus facilitating urban growth and the expansion of production.

• Market Law: Wealth depends on production. The more goods are produced, the more goods will exist, which will constitute a demand for other goods, which tends to be a situation (which the classics called Progressive State) in which all resources are used to the maximum, for general benefit.

• Supply Law. Since certain goods can be sold (in other words: given the existence of desire for certain goods) the “value of change” or price of them depends on the offer. If there is a single producer, or producers act together, prices will be monopoly (i.e., the highest possible). If there are several producers and there is competition, prices will fall to the possible limit: the cost of production or natural price (theory of value as a cost of production) (note that this natural price includes the "salaries" of both work and capital and natural resources, including financial income). It is not that the classics ignored the demand, it is that they did not consider it important in the long term: "As abundant as the demand, it can never permanently raise the price of a commodity over the expenses of its production, including in that expense the profit of the producers. It seems natural therefore to seek the cause of the variation of the permanent price in the production costs. Decrease those and (the price of) the merchandise must finally decay, increase and surely rise. What has all that to do with the demand?" In other words: assuming competition, producers are forced to reduce the price to the minimum possible, otherwise they risk not selling while their competitors sell everything.

(These four laws can be seen as justifying the optimism of many classics, starting with Smith, in the sense of believing that progress leads to the “general opulence”, a belief that their critics — for example, Veblen, Schumacher; etc — call “theory of the most is better”-see also Stationary state economy.

• Theory of value-work: The value of a good or service is given by the amount of work employed in the production of that good or service.

• Decreasing yields Act: refers to the gradual decline in economic performances - especially the rate of profit - to the extent that, while maintaining the remaining constant factors, additional amounts of a specific resource are added. The general assumption is that both the expansion of the population and technological advancement leads to the use of increasingly difficult resources to exploit, or less productive. Given that prices at least do not increase, production/winning must decline.

• Iron Salary Law: Real wages tend "naturally" to a minimum level, which corresponds to the minimum subsistence needs of workers. Any increase in wages above this level causes families to have a greater number of children and therefore an increase in the population, and the consequent increase in competition for employment will cause wages to be reduced back to that minimum.

Issues and legacy

Economics as Dismal Science

The long-term vision of the future of many of the classics was rather pessimistic. This led many to label the discipline the dismal science. This is not, as many assume, just Malthus's view but rather a pervasive one in the school. In the words of Heinrich Sieveking:

"The encyclopaedists of the eighteenth century, and with them the physicists and Smith, believed that all the miseries that plagued the world were caused by the absurd and erroneous laws and institutions of men. Everything would be repaired with just giving free course to Nature. The horrors of the French Revolution gave a categorical mention to this optimism. It is not that it ceased to continue in the research work of the natural laws that preside over social evolution, but instead of seeing them through a prism of optimistic hope, they appeared as a pessimistic resignation. In this area is Malthus. His book on the population was published as a reply to the Inquiry concerning political justice and its influence on general virtue and happinessof Godwin (1793). While this was waiting for the relief of human miseries in the observance of natural law, Malthus tried to demonstrate that not a few miseries that plague the human race are based precisely on the nature of things. »

The problem was not only the fact that the increase in population leads —due to competition among those who seek work— to the appearance and maintenance of the iron law of wages (a situation exacerbated by technological advances that require fewer and fewer workers) but also to the progressive reduction of natural resources. Additionally, the law of diminishing returns implies that, in general, technological progress leads to a situation in which the production of goods will be increasingly easier in terms of worker effort, but more difficult in social terms: resources will be used every time. less and less productive, using progressively more complex machines, which need less direct work but increasing amounts of energy, etc. This situation has led Serge Latouche to suggest that 'since the 1970s the costs of growth (when they exist) have outweighed the benefits. The expected productivity gains are nil, or close to nil."

For example, both population growth and technological advances make it necessary and possible to farm land that is increasingly more difficult to work and less productive. But, and obviously, the earth is not an infinite resource. At some point, if the population continues to increase, no matter what technological advances and agricultural productivity, there will not be enough to feed the population. The same can be said of not only other natural resources but also labor: technical advance reduces the amount of labor required to produce consumer goods. Even if the population is maintained, this cannot but lead to a situation in which there will be no need for the amount of work necessary for people to earn enough to meet their needs.

Unless, adds Stuart Mill, population growth is limited, but even then, at least some natural assets will eventually become extinct.

The examples Stuart Mill gives are rather simplistic, but undeniable. For example, he suggests that the skins of some arctic animals will not be available for general consumption in the future. These products will command, at least, a special price, of scarcity. This implies that progress, instead of leading to a situation of general prosperity, will lead to a situation of increasing scarcity. At least in relation to certain products currently considered luxury (furs, ivory, silk, etc.) that future is our present. (See also: Steady State Economics.)

But, as suggested, the argument applies not only to a consumer item. In 1865, Jevons wonders how long Britain could continue to be an industrialized nation, considering that the growing demand for coal means that it will no longer be available for industrial purposes in the quantities needed in less than a century. "Are we wise [he wondered rhetorically] to allow the trade of this country to increase beyond the point at which we can sustain it?" (See The Coal Question).

That's a view that, broadly speaking, still holds up. That is the true tragedy of the commons. In the words of David Attenborough: “Tomorrow there will be a quarter of a million more people sitting at the table, waiting for food, water, energy; and the day after tomorrow another quarter of a million and the day after another quarter of a million more... population growth must stop in order to offer "a decent life" everyone".

Despite the above, the classics in general (including Malthus) had a rather optimistic view, believing that rationality would lead to the control of population growth necessary to avoid a descent into general misery. (The best account of this is in Stuart Mill, Principles, Book IV, Influence of Progress). Additionally, at least some believed that technical development would lead (as it has) to the replacement of depleted natural resources either with other natural resources or even with manufactured resources. For example, Friedrich Engels suggests: "And yet there is still a third factor, which the economists do not count on at all, it is true — namely, science, and the advancement of science is as unlimited and at least as unlimited." fast as the population. How much of the progress of agriculture in this century is due to chemistry alone, and in fact, to just two men — Sir Humphry Davy and Justus Liebig? But science multiplies at least as much as the population: the population increases in relation to the number of the last generation, science advances in relation to the total amount of knowledge bequeathed by the last generation, and therefore, in the most common conditions also in geometric progression — what is impossible for science?"

However, a wake-up call remains about the growing scarcity of farmland. In 1960 there was an acre of good arable land per person in the world — enough to support a reasonable European diet. At present, there are only 0.2 of a hectare for each one. In China, it is only 0.1 hectare, due to its dramatic problems of soil degradation.

Classic dichotomy

The classics believed that "nominal" or monetary and the "real" or physical can be analyzed independently. For example, it was proposed that things such as real product and profit can be analyzed without considering their nominal counterparts: the monetary value of that production and the rate of profit.

One of the most important effects of this assumption, especially at introductory levels in the discipline, is that it makes it possible to simplify the study of economic phenomena.

Dichotomy can be defined as the attempt to explain economic phenomena exclusively based on economic variables, excluding, among others, monetary variables, which obviously leads to the search for factors that allow economics to be explained without reference to such "external" aspects, including monetary ones.

This is clearly seen in the famous Say's Law, which seems to suggest that the only function of money is to serve as a medium of exchange, but it does not directly influence production or demand. Starting from the basis that the production and sale of goods only acquire their meaning when they end in another purchase, thus completing an economic transaction, Say suggests: «Money fulfills only a momentary function in this double change, and when the transaction is finally concluded, one kind of merchandise will always be found to have been exchanged for another." (J.B. Say, 1803).

It follows that any fluctuations in the "real" it is not due to monetary effects but to distortions or failures in it. But these distortions are merely local and transitory: in the long term, economic forces, by themselves, restore an equilibrium that implies, according to the law of Say, that the economic factors are being fully used. Perceiving that the product is in equilibrium in the long term prevents money from having real effects on the economy.

This is very close to saying that money is "neutral," in the sense that it affects only nominal aspects (for example, prices) but not real variables (production). It is necessary to note, however, that Say's suggestion does not strictly propose monetary neutrality, only that it is not rational to keep money idle.

Assuming neutrality, the dichotomy suggests that, in the short run, real variables do not react to a change in monetary policy, and are only affected by changes in other real variables. This implies that the aggregate supply must be perfectly inelastic to any disturbance originated in the aggregate demand. For example, in a monetary expansion, prices fully absorb the shock and output or output growth remains at its natural rate. In the long term, this is repeated or, more appropriately, is maintained, since the product is always at its natural or equilibrium level, that is, it is at the level of full employment of productive resources. Any monetary shock is totally absorbed by prices, generating only inflation or, perhaps, deflation.

However, the classics, especially the late ones, realized that money is not neutral in that sense. Changes in the amount of money in circulation affect the interest rate, which in turn affects the rate of profit and, consequently, decisions about investment and savings, which have an effect on the real economy. Even so, they made an effort to maintain the dichotomy, seeking to explain the effect of money through other variables, which produces a rather confusing situation. In the words of Stuart Mill:

"It is perfectly true that... an addition to the currency almost always seems to have the effect of lowering the interest rate; [...] because it is almost always accompanied by something that really has that tendency [...] although as a currency these monetary additions have no effect on the interests, as loans do they have it. »

All of the above is expressed in two problem areas evident throughout the classic work: the problem of money and the problem of value.

Most current macroeconomic schools (including New Keynesian Economics and monetarists) reject the dichotomy, since, furthering Stuart Mill's suggestion, they consider that the quantity of money in circulation affects basic economic calculations, especially those related to with the interest rate. However, some versions of classical New Economics and some heterodox schools accept it.

The question of the amount of money in circulation

The classics, especially the early ones, were heavily influenced by the Quantity Theory of Money which they inherited from Locke's positions' Hume. and Richard Cantillon.

However, this theory does not clearly specify how the relationship between money and goods is established, that is, how prices are established. It was generally suggested that money (gold, silver, etc) is valuable "because it has value" (see Money Illusion and Commodity Fetishism). This gave rise to a lengthy but not bloody debate about the conception of money.

Starting with Ricardo, the classics began to advance what can be called the theory of money as merchandise, according to which money (gold, silver) has a value which, Like any other merchandise, it depends on the amount of work required to obtain it. In Ricardo's words:

Gold and silver, like all other goods, are valuable only in proportion to the amount of labor needed to produce them and bring them to the market... The amount of money that can be used in a country must depend on its value... Although the [papel currency] has no intrinsic value, however, by limiting its amount, its exchange value is as large as an equal denomination of metal coins, or ingots of that metal.

Note that the commodity theory of money (also called "metalism") inverts, or at least alters, the relationship between money and value suggested by the quantity theory. According to that, money generates prices. Its excess produces inflation, its lack, deflation. According to metalworkers, it is the variation in prices that leads, as with any other commodity, to variations in the amount of gold in circulation: an increase in what can be bought with a certain amount of gold (deflation of other goods) gives rise to an increase in currency, which can eventually lead to reestablishing the original parity or establishing a new one (if the gold relationship with other goods is not what it was).

Put it another way. The production of precious metals, like any other merchandise, is determined by the profit obtained from its production. If that profit increases - more goods can be bought with the effort required to produce a certain amount of gold - there will be interest in engaging in producing gold. That will lead to an increase in the available amount of that metal. Like any other producer, the precious metals (or money holders) will take their product where they can make the most profit.

The above implies that money (considered in its quantity, or money actually circulating) depends on the market. If your "value" (what can be obtained for a certain amount in relation to the work necessary to produce it) increases, the amount of money in circulation will increase "naturally". And vice versa.

However, the classics were aware that at certain historical moments there had been inflation. If the amount of currency naturally depends on the market, how can we explain that? The situation became urgent given that England suffered, during the Napoleonic Wars, from the 1790s, an inflationary period, which led to a debate that was essentially about the value and increase in the amount of money that is enough to facilitate trade but not enough to cause inflation.

Two positions or schools became evident: the bullionists and the bankers.

The original (bank) position is based on what might be called the "collateral documents" or mortgage support in Spanish (Real bills doctrine in English, Doctrine des effets réels in French). The bankers argued that the backing of money in gold is not necessary, as long as the currency issued by the banks, especially as credit, is equivalent to financial deposits (credit title, etc.) backed by a real right over tangible physical assets and redeemable in the short term (60 days was initially suggested). Given that condition, banks could issue as much money as the economy requires without producing inflation. This theory was held by, among others, Adam Smith and James Mill.

The general assumption of this position is that, if money is only a medium of exchange between commodities, anything, including paper money, can serve as a standard of value, provided it establishes a stable relationship accepted by those who use it with the labor necessary to produce goods. If a bank is willing to accept, for example, the deed to a house as collateral or payment, and the owner of the house and others are willing to accept a & #34;promising note" (bank note) of that bank as payment for its goods or properties, those documents have functioned as money and, insofar as they do not change any essential "real variable", cannot cause inflation by the mere fact that the backing, in instead of being a certain amount of gold in the bank, it is the value of some tangible good. After all, both "merchandises" represent or contain the same amount of value or work, that necessary to produce them. (For Smith the process crucially depends on the trust that bankers generate or acquire.)

A similar proposal was finally adopted in Germany during the Weimar period with the Rentenmark and, during Nazism, with the so-called "Mefo Bonds" (see Economy of Nazi Germany), in both cases with great success.

The alternative position, ingotista, was that the amount of money in circulation (coins and paper) must be equivalent, in a fixed and stable proportion, to the amount of precious metal in the banks. If banks are not required to convert notes to gold at a certain rate, they will be tempted to issue notes in excess of their gold or silver reserves in their vaults. This will lead to an excess supply of money, which will lead to various distortions, including inflation. To avoid all of this, they argued, it is necessary to maintain a strict equivalence between the amount of currency issued by any and all banks and the amount of gold and silver held as backup. This position, represented, among others, by Ricardo, prevailed until after the First World War. (see gold standard).

According to that position, any increase in the amount of gold or silver in a given country would lead to an increase in prices in that country, which would mean that the currency (precious metals) would go somewhere else, in which could be exchanged for goods at a more favorable rate. Conversely, a deficiency in the quantity of gold would cause a local drop in prices, which would lead to the export of goods and import of gold or silver. This would have the effect that, in the long term, there would be a tendency to maintain a stable relation of the value (understood as purchasing power) of those metals.

John Stuart Mill suggested an intermediate position, according to which banks need to keep only a certain proportion of what is issued as gold and/or silver deposits, the rest being able to be supported according to banking doctrine. This could perhaps give rise to some inflation, but any trend in that direction would lead note holders to exchange for cash, forcing banks to redeem their loans in order to obtain the gold needed to redeem their notes. Both processes in turn would reduce money in circulation, eliminating inflation. This position eventually gave rise to the fractional reserve banking system that existed from that date and exists today in all industrialized countries. (The gold deposits being replaced by deposits in dollars that, until 1971, maintained a fixed relationship, of 35 dollars per ounce, with gold. From that date, the backups are made up of the so-called Reserve Currency.- See Bancor).

Clarifying, Stuart Mill, while generally accepting the quantity theory, suggests that the problem is not so much the physical quantity of money, but credit and purchases (or demand) (Stuart Mill considered that only the Cash was money itself. Bills are promissory notes and, together with other promissory notes - bank or individual, either "at sight" (or "on demand") or on time - such as checks, credit "on the books" or "on account," etc., constitute credit.): "But now we have found that there are other things, such as banknotes, bills of exchange, and checks, which circulate like money, and carry out all the functions thereof: and the question arises: Do these price substitutes operate in the same way as money itself? Does an increase in the quantity of transferable paper tend to increase prices, in the same way and to the degree that an increase in the quantity of money does?..." "There has been a great deal of debate and argument on the question of if any of these forms of credit and, in particular, if bank notes, must be considered as money. The matter is so purely verbal that it is hardly worth raising, and one would have some difficulty in understanding why so much importance is attached to it, were it not for some authorities who, still adhering to the doctrine of the infancy of society and economics politics, that the quantity of money compared to that of commodities determines prices in general, they believe it is important to show that banknotes and not other forms of credit are money, in order to support the inference that banknotes bank and not other forms of credit influence prices. It is obvious, however, that prices do not depend on money, but on purchases. Money left with a banker, and against which no debits are created, or which is debited for purposes other than the purchase of merchandise, has no effect on prices, just like unused credit. Credit used to purchase products affects prices in the same way as money. Money and credit are thus exactly on a par in their effect on prices; and if we choose to classify the banknotes in one or the other, it is in this sense completely indifferent.

It should be noted that this debate gave rise to other, more complex, differences of opinion, differences of which it has been alleged that "even today, there are important injuries to be learned." For example, from the above the The study of the effects of credit assumes great importance, which finally gave rise -through the work of Knut Wicksell- to monetarism and modern conceptions in this regard: if credit is properly regulated, there will be no abrupt currency fluctuations (see money aggregate and money supply).

The issue of value

The other problematic aspect is the issue of [economic value|value]. If we assume that the productive processes can be explained without direct relation to monetary considerations, we have to suggest a method that allows evaluating them without reference to such aspects. The obvious solution is found in surplus value; that is, to the fact that the purpose of all productive processes -to the extent that they are of interest to economic science- is to produce more goods or "value" than the employee or spent in the process itself. An economic process will be productive to the extent that the result, measured in goods for use and consumption, is greater than those used to produce them, whatever the measure or the "monetary" for individuals participating in that process.

This requires, of course, a measure of value that is not based on monetary calculations. Adam Smith considered that the exact measure to quantify value was labor. For him, value was the quantity of commodities that one could produce with, or receive in exchange for, his labor (and, vice versa, the value of a commodity). is the quantity of either other commodities or labor that can be received in exchange). Specific merchandise can change, but what always remains invariable is work, that is, the expenditure of energy to produce them, work being then the definitive and invariable standard of value: what consumes one hour of work to be produced has, from this point of view, exactly the same value as anything else that costs another hour of work to produce. This came to be known as the labor theory of value.

But those exchange rates do not necessarily remain constant. This led Smith and others to introduce two associated concepts: use value and exchange value. In the words of Stuart Mill: "Adam Smith, in an oft-quoted passage, has descended on the obvious ambiguity of the word value, which, in one sense, means utility, in another, purchasing power.", in your own language, value in use and value in exchange"... and "most modern writers, in order to avoid wasting two good words on a single idea, have employed &# 34;price" to refer to the value of a thing in relation to money, the amount of money for which it will be exchanged. By the price of a thing, then, we will understand its value in money; by value or exchange value, their general purchasing power, the command that their possession gives in general over purchasable merchandise".

However, the "wasting energy to produce" The amount of labor involved in producing a thing also varies, generally decreasing with technological advance. Additionally there is a problem with practical determination (for the purpose of calculating the value of a good) with how one can measure, at least potentially, different "modalities" of that wear and tear or work: for example: is the value produced by an hour of work by a surgeon or doctor the same as that produced by an hour of work by an unskilled worker? And how do we relate these extreme cases to the work of a baker, carpenter or skilled worker?

Stuart Mill summarizes in his work the position of Smith and others. Simplifying, it can be said that it is the case that different types of work command different prices in relation to things such as competition between workers, time and difficulty of learning, security or not of reward, difficulty and displeasure in doing it, etc. Stuart Mill notes that the nastiest and hardest jobs are generally the least paid since those who do them often have no other choice. This being the case, the relation of the value of a good is maintained as depending on the amount of work necessary to produce it, with the proviso that the "real wage" or value (that is, the merchandise that can be acquired by "price per unit of work") of each type of work in particular are different from each other, but can never be in total greater than that determined by the level of competition among workers: "Liberality, generosity, and the credit of the company, are motives that, in whatever degree they operate, preclude taking the maximum advantage of the competition, and those motives could and still do now, act on employers of labor in all departments of great industry, and it is most desirable that it be so. But they can never raise the average wages of labor beyond the ratio of population to capital. By giving more to each worker employed, they limit the power of employing numerous, and, however excellent the moral effect, they make little difference economically, unless the pauperism of those who are excluded leads indirectly to readjustment through greater limitation in the population." (Stuart Mill, op. cit, conclusion)

But those different types of jobs are distributed differently across industries. For example, many of the workers employed in an AI company have different levels of education and qualifications than those employed in a bakery. It follows that the price of the respective products cannot be determined only in relation to a general average salary. This gives rise to the classical Production Cost Theory of Value: "To recap: supply and demand determine the value of all things that cannot be increased indefinitely, except that even for them, when produced in industry, there is a minimum value, determined by the cost of production. But in all things that admit of indefinite multiplication, demand and supply only determine value disturbances, during a period that may not exceed the time necessary to modify supply. Thus determining the oscillations of value, they themselves obey a superior force, which makes value gravitate to the Cost of Production, which would deposit it and keep it there, if new disturbing influences were not continually arising to prevent them from deviating again.. To continue the line of the metaphor, demand and supply are always rushing toward equilibrium, but the condition of stable equilibrium is when things exchange with each other according to their costs of production, or, in the expression we have just used, when things are at their Natural Value".

It is now considered, following Piero Sraffa's analysis, that much of the above analysis is unproductive, since there is no generally valid algorithm or formula that transforms "units of value" in "monetary units", in other words, that solves the so-called transformation problem.

Clarifying: surplus value must be considered a physical measure. It is, to the extent that it happens, a measure of the increase in material goods available, either for consumption or use as investments, that ultimately result from work. This increase can be expressed or measured in relation to any other merchandise (for example, it can be said that a kilo of bread is the product of the use of x liters of oil, therefore, the price of bread will increase if the price of oil increases) including, if desired, standard business hours. But there is no such formulation that makes it possible to univocally transform such a relationship into "price units", since these, ultimately, do not correspond only to the cost of production, they also depend on demand.

Consequently, although it is correct that, from the point of view of societies, the interest of production processes resides in the capacity or ability to generate value (satisfy material needs), it is important to proceed carefully and keep in mind when considering perform or consider the calculations that the conceptual schemes and/or the measures and results related to value and those in prices (or nominal) are not simply "mixable". (see Added value).

Citations and references