Adam Smith Flashcards
Wealth of Nations and Market System (20 cards)
economies will grow if they have the…
right institutions and good government
what questions does the wealth of nations bring up?
what is wealth? (person to person, subjective), what causes economic growth?
what did Adam Smith call his economic philosophy?
a system of natural liberity
what are smiths insights into the market system?
division of labor, self interest, exchange (law of association), private property, individual freedom (freedom of choice and enterprise), limited government, capital and technology, competition, markets and prices (supply and demand), money
what is division of labor?
dividing production into specific tasks preformed by different individuals, market economies rely on this, takes advantage of innate differences, repetitive –> learning by doing, saves time, increases total output, ultimately leads to higher wages, not without problems
what is self-interest?
enables one to act toward maximizing profit or minimizing loss (producer), enables one to act forward maximizing utility (consumer), enables one to potentially receive the highest possible price for their resources even if the only resource owned is one’s labor, gives direction to the system –> order from “chaos”, self interest assumes man is a rational animal
what is exchange/ law of association?
fundamental social relationship (idea that man serves in order to be served, we enrich ourselves by enriching others), exchange and trade are necessary once division of labor established, mutual gains from the trade (positive sum, not zero sum game), more efficient resource use, satisfies more individual wants, more humane
what is private property?
smith does not philosophize on this subject, probably the most important of all the characteristics, meaning of: the individuals are free to have property in “things” –> goods, services, resources etc., right/ability of ownership encourages best use (investment, improvement, innovation, exchange, maintenance etc., right of contract, right to bequeath, intellectual property (trademarks, copyrights, patents)), helps the innovative discovery process
what is individual freedom?
freedom of enterprise (freedom to acquire resources, use them in production and dispose of the produce as one sees fit), freedom of choice (freedom of an individual to purchase goods and the services in their perceived best interest; the ability of individuals to vote with their dollars), consumer sovereignty (the idea that consumers, through their preferences, determine what and how things are produced (voting with dollars)
what is limited government?
smith saw government as a necessary institution, freedom of action under law, codifies/defines rules, guarantees/protects your right to property, ensures contracts, is the impartial arbiter between individuals and entities (the umpire cannot be a player as well), provides limited public goods (non-excludability/rivalry- no one can be excluded from benefiting from the good (exclude), one’s “consumption” of a good does not prevent some other individual from “consuming” the good (rival)), liberty under law or ordered liberty, government was not to do those activities that individuals could do in their own capacity, examples of public goods: roads, police, military defense
what is capital and technology?
stored up labor, natural resources and time in the form of economic goods who’s possession reduces the time necessary to attain some goal of human endeavor; “round-about-production”: production process whereby capital goods are produced first, then, with the help of capital goods, the desired consumer goods are produces, technology helps improve on existing processes, or eliminates them all together with something new, deepens the division of labor; compels individuals to become more “specialized” in their production tasks
what is competition?
fulfills 3 vital functions (discovery, coordination, control of economic power), works well only in private property rights are protected and people are free to make contracts under the rule of law, requires independent buyers and sellers, requires individuals free entry to and free exit from markets
what are markets and prices?
markets (a man-made institution or mechanism bringing together buyers and sellers in a cooperative, or competitive manner), both markets and prices are coordinating mechanisms, prices are signals, they convey info and knowledge about goods and services (remember: prices must be able to tell the truth), markets and prices link all the characteristics of the system together
what is money?
market systems cannot function without it, allows man to rise above barter conditions and more easily from capital (makes trading and saving easier, trade=exchange of present goods for present goods, savings=the exchange of present goods for future goods), is requires for division of labor to occur to any significant degree
what is the definition of “just”
what one is due
what are the systems of economic order?
planned and market
what are planned systems?
socialism, communism, fascism, equally distributed resources, dictatorship, unsuccessful economically, prison like, disincentive (get ahead of others), no private ownership
out of socialism, communism, fascism, which of them have public ownership of the means of production (lack of incentives)
socialism and communism
out of socialism, communism, fascism, which of them have centralization- lack of knowledge (bureaucracy, profit, loss, private, socialized?
communism and fascism
what are market systems?
decentralized, individuals (highest being), self interest, liberty, local in nature (ex. worry about town you live in)
