Entrepreneurship, knowledge and employment

On ‘Effectual Demand’ and ‘Extent of the Market’ in Adam Smith and David Ricardo

Thomas Alex, Azim Premji University

In Adam Smith’s theory of value, ‘effectual demand’ is taken as a given. Smith’s growth theory, while emphasizing the importance of net capital accumulation, also recognizes the importance of the ‘extent of the market’. Moreover, the interrelations between aggregate demand (in the form of ‘extent of the market’) and technological progress (in the form of division of labour) found in Smith continue to remain invaluable. David Ricardo’s political economy also possesses something akin to Smith’s ‘effectual demand’ in his discussions on ‘natural price’ or ‘value’. While Ricardo adopts Say’s law in his value theory, he clearly recognizes the importance of aggregate demand in his growth theory. And it is technological progress which connects ‘value’ and ‘riches’ in Ricardo. This paper undertakes a textual analysis of the key works and correspondence of Smith and Ricardo to closely examine the direct and indirect uses of ‘effectual demand’ and ‘extent of the market’. The resultant output underscores the central methodology of classical economics – the analytical separation between the value and quantity system.

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Keywords: Effectual demand, extent of the market, Smith, Ricardo, technological progress

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