Abstract
A great classic often has many different aspects that permit many different and mutually inconsistent interpretations by later scholars. The Wealth of Nations (WN) of Adam Smith is a good example of such a classic. Smith’s theory of natural prices has been interpreted and developed as an equilibrium theory by modern economic theorists. We shall try, however, to interpret Smith’s economic theory as disequilibrium theory. Of course, there already exist some disequilibrium approaches to Smith on the dynamic process of growth involving increasing returns to scale. We shall rather be concerned, however, with a disequilibrium approach to the problems of markets, that is, international trade, competition and division of labor, and a disequilibrium interpretation of what economists now refer to as “increasing returns to scale.” We shall start this disequilibrium analysis from a study of Smith’s theory of international trade. Smith explained international trade by the existence of disequilibrium, that is, surplus, and was criticized by Ricardo from the point of view of the equilibrium theory.
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Notes
- 1.
For Smith’s theory of economic growth, see Kurz and Salvadori (2003), which emphasizes the classical traditions in the recent equilibrium theories of endogenous growth in the current mainstream economics.
- 2.
- 3.
The natural rate of each component part of the price of a commodity, that is, the equilibrium price of a factor of production, is also determined by its demand and supply. See Negishi (1993).
- 4.
- 5.
Haberler (1959, p. 9) seems to suggest that the vent for surplus is part and parcel of the productivity theory.
- 6.
One might ask whether the final equilibrium price can be higher if final exports were less than initial excess supply. Such seems unlikely, however, since increasing returns in Smith’s theory is due to the division of labor which, once made, might not be lost.
- 7.
An example of vent for surplus export in a developed country is the tendency of exports to increase in recessions, which has been observed in Japan since the end of the 1950s and called the export-drive effect of a recession. See Komiya (1990, p. 357).
- 8.
On the comparative static analysis of a maximizing equilibrium, see Negishi (2000).
- 9.
- 10.
Smith criticized the East India Company which insisted that the increase of demand in the Indian market raised the price of Indian goods.
- 11.
Even if the market is not perfectly competitive, excess supply will appear, since firms perceive subjective demand curves, like Chamberlin’s dd curves, which are more elastic than the true objective ones. See note 15.
- 12.
Vassilakis (1987) stated that Adam Smith, among others, formulated the proposition that the division of labor is limited by the stability of the market in the sense that a reduction in demand uncertainty is equivalent to an increase in market size and reduction in uncertainty will increase the degree of division of labor. We cannot agree with this statement in this otherwise highly instructive survey, since it is the demand uncertainty and the instability of the large competitive market which will increase the degree of division of labor.
- 13.
The use of the term “unstable” is not in the Walrasian sense. It is in the sense of Vassilakis (1987). See note 12.
- 14.
“For Adam Smith, as well as for other classical economists, competition is characterized by free entry” (Sylos-Labini 1976, p. 200).
- 15.
The firm’s dd curve is perceived under the supposition that other firms’ supply remains unchanged (Chamberlin 1948, pp. 90–4). Roughly speaking, a demand curve is more elastic if the percentage increase in quantity demanded is larger for a given percentage reduction in price.
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For comments or other forms of help, the author is grateful to the editor, referees and Professor Hiroji Nakamura. The usual caveat applies.
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Negishi, T., Negishi, T. (2014). Adam Smith and Disequilibrium Economic Theory. In: Developments of International Trade Theory. Advances in Japanese Business and Economics, vol 2. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54433-3_18
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