Adam Smith and disequilibrium economic theory

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.