Adam Smith

Question 1

Smiths view of the economy - general + explanation:

Answer 1

He believed in less government intervention and that a free market would be more efficient as people would be more efficient at informing producers of exactly what they wanted and at what price compared to a government.
He also believed less taxes and tariffs would allow for more investment and less leaching from the economy.

Question 2

What were taxes like in Smiths time and what did he think of them?

Answer 2

During the late 18th century around 10% was given to the government and he thought that was too much and so would likely not approve of todays governments tax schemes.

Question 3

What were the two books that Smith published?

Answer 3

1759 published Theory of moral sentiments
1776 published the wealth of nations

Question 4

What was Smiths belief in nurture vs nature?

Answer 4

Smith believed people were born as a blank slate and that their behaviour was based primarily on education and experience.

Question 5

According to Smith what were the 3 sections of society?

Answer 5

The state which runs on coercion
The market which runs on self-interest
Civil society which runs on benevolence

Question 6

Why does the markets run on self-interest?

Answer 6

Firms are self-interested and aim to maximise profits through the self-interest of others.

Self-interest of the firms to maximise profits leads to the division of labour which also benefits the consumer creating an easier job.

The market system doesn’t require people to be self-interested but works if they are as people want to make money and if you sell what other people want you are both making money and providing a good for somebody else.

Question 7

What is the definition of benevolence (not needed just understand the idea)

Answer 7

The quality of being kind and meaning well.

Question 8

How does Smith explain how civil society works through benevolence?

Answer 8

He argues that people help each other and overall boosts a community through benevolence.

However, he argues that this comes from the self-interest of wanting to get praise / avoid blame from others for not doing anything.

Question 9

Benevolence in civil society example:

Answer 9

He gives the example if you could chop off your arm to stop an earthquake in Chile that killed 1 million you wouldn’t do it for them as you would never be impacted by the event.
Instead, you would do it either so others didn’t blame you or, if no one is watching / knows what you’ve done, an impartial spectator.
Smith says the impartial spectator comes partially from us putting ourselves in their shoes and asking how we would feel.

Question 10

Is Smith inconsistent with his view on self-interest vs benevolence?

Answer 10

There is some level of inconsistency between The Wealth of Nations that looks at self-interest being the primary force and Theory of Moral Sentiments in which benevolence is the primary force.

However, in reality there is no inconsistency as benevolence is deemed to be primarily self-interest, where they operate in different settings and at different ranges.

Question 10

How is a free market a system of natural liberty?

Answer 10

Smith says its natural because it’s how the market would behave if it was left to itself.
Smith states it’s a system because it produces order and harmony.
Profit motive steers producers to produce what consumers want to buy so it’s in order.

Question 11

How does range impact self-interest vs benevolence?

Answer 11

Smith states that benevolence is the strongest force at close range but as the event becomes further away people can more easily detach from it and so it weakens with range.

Self-interest is always strong and doesn’t diminish with range as a firm would want to sell a good whether they are selling in the UK or outside as their self-interest wants to make a profit.

Question 12

What is the market price?

Answer 12

This is the day to day price in of a good in a market due to the demand for the good.

Question 13

What is the natural price?

Answer 13

This is the long term price for a product based on the cost of production.

Question 14

Describe the changes in price from price rises to equilibrium caused by the change in demand between two products?

Answer 14

If one day the demand for a product increased, the price would rise and in turn profit would rise.

To produce more of this good, they would need more workers so wages would rise.

This causes overall capital to increase to produce more of the good.

The increased supply of this product would lower the price back towards the natural price.

In this example the reverse would happen to another competing product and they would both return back towards their natural price levels
In this scenario the market price is always being pulled back towards the natural price as time progresses.

Question 15

What is the invisible hand?

Answer 15

The way in which society gets firms to produce what they want through the market mechanisms of buying demanded products causing price changes and subsequent shifts in supply.

Question 16

What is Smiths theory of wages?

Answer 16

Market wage – current wage rate – depends on the demand for labour
Natural wage – determined by the cost of production of labour e.g., cost of raising a family

Therefore,… Cost high -> birth rate falls -> supply of labour falls -> price of labour rises.

Question 17

Why is the market wage slow to adjust?

Answer 17

There is a time lag in population changes resultant from changes in birth rate.

Question 18

How does this explain population changes in a growing economy?

Answer 18

Demand for labour is high, so the market wage is consistently higher than the natural wage and so the population grows.

Question 19

What is the division of labour?

Answer 19

This is where the labour force is split and each worker takes on a different specific task and specialise in it, leading to an increase in labour productivity and economic growth.

Question 20

How does it create growth?

Answer 20

Specialisation / the division of labour creates growth by increasing the output of an economy as it increases workers ability, prevents time loss from switching tasks and gives workers the incentive to innovate and so become more efficient/save time.

Question 21

What was Smiths counterarguments to the division of labour?

Answer 21

Smith argued that too much specialisation, especially in the factories at the time, would lead to stupidity and ignorance in the workers and that the state should educate all workers in reading, writing, counting and simple science.

Question 22

What were the 4 main causes of growth according to Smith?

Answer 22

Extension of division of labour

Amount of saving – large savings can allow for investments

Low tax burden – high taxes reduces investment

Few impediments to the system of natural liberty including monopoly and unfree trade

Question 23

What were Smiths 3 main arguments for free trade?

Answer 23

Trade must be good for both parties or one of the parties wouldn’t participate in the trade.

Free trade = peace as it strengthened relationships and creates interdependence on each other rather than creating divides.

Trade creates growth as it enlarges the markets so division of labour can happen on a larger global scale with different countries specialising in industries.

Question 24

Why was Smith hostile towards the state?

Answer 24

He thought they were wasteful as some of the extravagance they spent money on prevented the spending on more important expenses.

He believed they were always on the side of the rich, especially when creating new legislation.

Govt employees get paid regardless of results and so there is a risk they can become negligent and idle.

Question 25

For what did smith believe a government was needed for?

Answer 25

He believed that it was needed as a society became more advanced to protect the people.

Question 26

What were smiths 4 stages of society?

Answer 26

Farmers
Shepherds
Agriculture
Commerce

Question 27

Why as an army needed in the last 2 stages of society?

Answer 27

Individuals can no longer fight for themselves and so a national army is needed.
Manufacturers cant leave their work and in the later stages, people going off to war shuts down whole industries rather than individual farms.
Also war is developed and increasingly strategized with new weapons leading to longer campaigns and the need for a dedicated army.

Question 28

How does the government initially form?

Answer 28

Hunters have minimal property so there is very little theft but shepherds have property, creating inequality and theft / crime.
Also due to the increased inequality, the wealthy are able to take a position of authority and create the beginnings of a government.

Question 29

What did smith believe the governments money should be spent on?

Answer 29

Besides the national army to protect the people he believed that this should be spent partially on public works which are advantageous to society but not profitable to the individual.

This includes roads that aren’t profitable to maintain but for example doesn’t include canals as they are more profitable to the owner and have lower maintenance costs.