Smith, in The Wealth of Nations, was concerned with value in the exchange context (Smith, 1978, p. 131). He postulated that value, in an exchange context, derived from considerations of both the division of labor, and the use of money (Ekelund & Hebert, 1983, p. 90). On the one hand, he held that the division of labor "arises from a propensity in human nature to exchange, for which each trader must have a surplus over his immediate needs with which to trade" (Ekelund & Hebert, 1983, p. 90). On the other hand, he held that money "enters the picture because it makes trade more convenient insofar as it is generally acceptable and portable" (Ekelund & Hebert, 1983, p. 90). From this basis, he concluded that value is determined by rules observed in the exchange of goods for money.

THEORY OF VALUE & DEVELOPMENT OF WEALTH

Smith considered many factors in the determination of value, and the development of wealth  labor, wages, and prices, to name but three. His considerations of these factors and others are presented in the discuss

Blaug, M. (1982). Labor theory of value. New York: McGrawHill.

He further contended that it was the relative expenditure of labor in the production of a good that mattered. His illustration was that, if it required twice as much labor to kill a beaver as it does to kill a deer, one beaver would exchange for two deer. Smith also contended, however, that the factors of supply and demand also affected the actual price levels of commodities in the market place.

The labor theory approach to the analysis of value postulates that value reflects the cost of production, as that cost is measured in terms of absorbed labor. In the formulation of economic theory, Adam Smith was principally concerned with the factors which led to increased wealth in an economy. He contended that the cost of labor provided the basis for the determination of the value of a commodity.

One of the principles upon which free market economics is based is the concept of scarcity. It is assumed that insufficient resources exist with an economy to satisfy fully, all demands. The price system within a free market economy is expected to address problems of scarcity, by restricting the ability to purchase. Thus, prices are an informal form of rationing in a free market economy.