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Adam Smith’s Theory of Value and the Falling Rate of Profit: Uncommon Conceptions and Common Misconceptions

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  • Tsoulfidis, Lefteris

Abstract

Smith's theory of value and distribution, which emphasizes labor time as the determinant of prices, has been widely misunderstood. Ricardo misinterpreted it as relevant only to primitive societies, while Marx mistakenly aligned it with his own labor theory of value. In reality, Smith’s perspective oscillates between a labor-based and a labor-commanded approach to relative prices, intended for modern economies. Neoclassical economists further distorted Smith’s views by incorporating utility theory. Moreover, while Smith is often linked to the theory of a falling rate of profit due to competition, he actually attributed it to rising capital intensity. Contrary to the belief that Smith was a staunch advocate of free markets, he supported reasonable government intervention.

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  • Tsoulfidis, Lefteris, 2024. "Adam Smith’s Theory of Value and the Falling Rate of Profit: Uncommon Conceptions and Common Misconceptions," MPRA Paper 124796, University Library of Munich, Germany, revised 20 May 2025.
    • Handle: RePEc:pra:mprapa:124796
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    References listed on IDEAS

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    1. Lefteris Tsoulfidis, 2024. "Competing Schools of Economic Thought," Springer Studies in the History of Economic Thought, Springer, edition 0, number 978-3-031-58580-7, March.
    2. Shaikh, Anwar, 2016. "Capitalism: Competition, Conflict, Crises," OUP Catalogue, Oxford University Press, number 9780199390632.
    3. Verdera, Francisco, 1992. "Adam Smith on the Falling Rate of Profit: A Reappraisal," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(1), pages 100-110, February.
    4. Terry Peach, 2009. "Adam Smith and the Labor Theory of (Real) Value: A Reconsideration," History of Political Economy, Duke University Press, vol. 41(2), pages 383-406, Summer.
    5. John Henry, 2000. "Adam Smith and the Theory Of Value: Chapter Six Considered," History of Economics Review, Taylor & Francis Journals, vol. 31(1), pages 1-13, January.
    6. Anwar M. Shaikh, 1998. "The Empirical Strength of the Labour Theory of Value," Palgrave Macmillan Books, in: Riccardo Bellofiore (ed.), Marxian Economics: A Reappraisal, chapter 15, pages 225-251, Palgrave Macmillan.
    7. Lefteris Tsoulfidis, 2023. "Exploring near-linearities in price–rate of profit trajectories and the concept of effective rank in input–output matrices," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 12(1), pages 1-19, December.
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    Keywords

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    JEL classification:

    • B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • B51 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Socialist; Marxian; Sraffian
    • N00 - Economic History - - General - - - General

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