Two- and half-centuries of equilibrium economics: Adam Smith and the evisceration of the spatial dimension from the theory of production

Abstract

Two concepts of Smith sealed off the relevance of the mercantilist and physiocratic traditions. Both concepts involve, although in different ways, the evisceration of the spatial dimension from the theory of production. The first, the division of labor, identifies the source of productivity and wealth while disregarding temporal heterogeneity across regions. This disregard produced an equilibrium economics that is, at first approximation, ill-equipped to explain the necessity of the state to protect its region, i.e., the ubiquity of protectionism. The second concept, the productive/unproductive labor distinction, specifies the source of steady growth while disregarding the environmental degradation arising from such growth. This disregard generated an equilibrium economics that is, at first approximation, ill-equipped to explain the necessity of technological and institutional innovations, i.e., the ubiquity of entrepreneurship. To account for both phenomena—i.e., the ubiquity of protectionism and entrepreneurship—we need to incorporate the spatial dimension into production theory.