SUPPLY-SIDE ECONOMICS: DEVELOPMENT, THEORY,
While Adam Smith is considered to be the founder of classical economic theory, he nevertheless incorporated several important concepts from thinking not generally ascribed to the classical school. David Hume's contention that the 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.
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 (131-136) contended that the cost of labor provided the basis for the determination of the value of a commodity. He contended further that it was the relative expenditure of labor that mattered. Smith (131-136) also contended, however, that the factors of supply and demand also affected the actual price levels of commodities in the market place.
Within the framework described in the preceding paragraph, Smith thought that the size of an economy's output should be limited only by the size of markets--or demand. The key element in the process, in Smith's perception, was the accumulation of capital. Smith thought that the accumulation of capital permitted the creation of plant and equipment to assist human labor and the full employment of labor. Smith also thought that free competition was essential for the development of an efficient economy. Adam Smith considered that the factors of supply and demand were the major determinants of commodity prices (although the value of labor consumed in their production provided a basis for the determination of value).
David Ricardo built on the work of Adam Smith. Ricardo's early writings were primarily concerned with money and banking; however, in The Principles of Political Economy an...