rate of interest depended on the rate of business profits formed the basis for Smith's interest rate theory, and Hume's quantity of money theory remains a part of economic theory. The quantity of money theory is at the heart of monetarism (Kaldor, 1991, pp. 79-100). While neither David Hume nor the Physiocrat thinkers are included in the classification of classical economists, the fuzzy boundary between classical economic theory and that thinking which preceded it does not permit their complete exclusion from the classical school.
Two of the most influential of the first generation market economists were Adam Smith and David Ricardo. In the formulation of economic theory, Adam Smith was principally concerned with the factors which led to increased wealth in an economy. Smith contended that the cost of labor provided the basis for the determination of the value of a commodity (Smith, 1978, pp. 131-136). Smith further contended that it was the relative expenditure of labor that mattered. Smith also contended, however, that the factors of supply and demand also affected the actual price levels (inflation) of commodities in the market place. While Smith considered that the factors of supply and demand were the major determinants of commodity prices, the value of labor consumed in their production was held by Smith to provide the basis for the determination of value of commodities.
David Ricardo built upon the work of Adam Smith. Ricardo contended that costs and profits were the same on all land, regardless of its marginal productivity. Ricardo further contended that as labor cost the same regardless of which land on which it was applied it would encourage capital to be invested at the place of highest return, until the process of diminishing returns caused profits on all cultivated land to become equal.
According to Ricardo, as costs and profits were the same on all cultivated land, a surplus was earned on non margina...