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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.

Suggested Citation

  • 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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    More about this item

    Keywords

    Labor theory of value; falling rate of profit; labor commanded; capital intensity;
    All these keywords.

    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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