Is There Another, Quite Different, “Adam Smith Problem”?

Abstract

Division of labor is thought to imply increasing returns to scale, which in turn implies that wages rise continually with economic growth. Yet the price theory of Wealth of Nations rests upon the assumption that the “natural” price of labor (and capital) is determined at any steady-state rate of balanced growth. There would seem, therefore, to be an irreconcilable contradiction between Smith’s exposition of the division of labor in Book I, chapters 1 to 3, and his price theory as set out in Book I, chapters 6 to 9.

Moral Philosophy or Economic Analysis?The Oxford Handbook of Adam Smith

“…There is thus a fundamental incoherence in Smith's economic analysis. Either his account of the division of labour is a valuable part of his theory of growth and development, in which case his price theory is useless; or his price theory is sound and we must draw a veil over the division of labour (Waterman 2014). …”