Adam Smith Flashcards
Adam Smith similarities to John Locke…
● Similar to locke as they are working under liberal tradition, supporting private
property
● More rigorous theory of market economy
● Same general historical era
● Smith is already living in and trying to make sense of a rapidly developing modern
economy (that locke haven’t experienced yet). He is sort of an extension of Locke,
the next phase in liberalism that makes sense of capitalism in a mass scale
Adam Smith Background:
● Born scotland 1723 (dies 1790)
● Rapid emergence of large scale manufacturing
● New metals, new modes of transportation (steam ships, trains)
● Population shifts from rural to urban area
● Less interested in “speculative” theories of economy (Locke) more interested in
empirical study (observing patterns) in actual nations
● One of the first “macro” economists, developed GDP(Gross Domestic Product) to
measure value of production of a nation in a year
The Wealth of Nations:
● In this paper he attempts to answer the question: What is necessary for the
flourishing of a complex liberal economy?
● Remember: SMith is writing at the dawn of capitalism. Economy based on private
property and wage labor was very new in 1776. Still lots of feudal economies in
europe.
● Radically innovative at the time
The Division of labour:
● In order to develop and thriving free market economy needs a strict division of labor
● Emerging market economy to craft specialization (reigning mode of how things got
produced and traded prior to industrial revolution- blacksmith, farmer, carpenter,
weaver. You do one specific job, production is organized according to craft
● Not one single furniture maker (different furniture shops). And the process of table
making is broken down into 56 different steps, and each is given to a specific person.
● Dividing labor accelerated production of pin numbers (from like 20 pins to thousands
of pins)
● Dividing labor allows each worker to specialize in one task, which makes them better
at it
● it eliminates the need to spend time and energy switching tasks
● And it makes mechanization easier, the quicker we produce materials, the more we
can use the machines to produce
● Same thing as auto industry
● A discovery of modernity- only possible in a population that is large enough where
there is enough workers and need for mass production
Standard of Living
● Not just about raising wealth, everyone benefits (more jobs and more goods for
everyone the more labor is specialized)
● People have more time because they don’t need to make soap and clothes, they can
buy it
● Smith didn’t want this to create a cut throat market, believed in compassion
● But it isn’t the motivating force of his economic theory, it was self interest, believed it
would produce a general wealth that would be best for everyone
Exchange of Surplus labour value
● We have more labor power then we need- make way more milk then I need, so we
are inclined to trade things with one another
● Humans are predisposed to trade with one another
● We bring and take from the market according to our wants and needs
Specialization and Market Forces
● Whoever specializes most effectively will succeed
● What specialized needs are fulfilled and can be met?
● Especially market forces which reward us for specializing in something that is
desired by others
The invention of money
● In a society that divides labor, we get almost everything we need through trade
● So it makes sense to stockpile valuable commodities for trade.
● Precious metals are inconvenient
● Not about the actual value of the coin, fraud was not as easy
● Stamped coins make weighing gold less necessary
● 1 copper coin= 2 sacks of potatoes, money becomes the universal standard of value
of commodities
Exchange Value vs. Use Value
● Meet needs and be able to be exchanged for something else in order to be valuable
● Why are things that are the most useful not the most valuable?
● Eg. You can’t eat a diamond, but you can eat bacon, the value is titled for the food.
Water is useful but you don;’t buy water.
● It’s his vision that makes the sale of water a lucrative trade
Political Economy
● What should rulers do to ensure an increase in wealth for themselves (for public
works) and their subjects
● First to draw a link between government and economy
● Fundamentally interested in the relationship between policy and economic activity
● Should the government make all decisions about what to invest in, how production is
run, how value gets distributed among the population.
● Or the government picks a few of the biggest most important sectors, and leave
others to the market
● Smiths answer: leave individuals alone as much as possible to pursue their own
private interests
Leave the Invisible Hand of the Market Alone
● People will try to make production as efficient as possible for their own profit
● By investing capital inside the country he promotes an end that isn’t his intention but
is the benefit of everyone
● Individual ambition serves the common good
● If you intervene, you’re just gumming up the works!
● Smith: classical liberal economist
● Doug Ford/ Ronald Regan/ Justin Treudeua (Neoliberal, a return to the thinking of
the invisible hand and getting government out of the economy)
● Doug Ford: Ontario is open for business
A lot of Questions
● Trumps presidency: production in the US, promoting protectionism that goes against
the free trade policy of smith
● Smith’s vision sounds fine, but we don’t live in a society of generalized wealth, we
live in a world of extreme inequality. Those who have much money from capitalism.
And others are workers paid a pittance, others don’t have wages and fight to survive
● Also free universal health care tends to be a good thing
● Maybe Smith got some things wrong after all?
