Adam Smith Flashcards
Mercantilism
- Advising Sovereign how to regulate economy to enhance wealth and power of the state
- Zero-sum game: if one becomes richer - the other becomes poorer
- Accumulation of wealth in one nation, reduced in another
- International Economy all about EXPORT of GOODS
Physiocrats
- 18th C challenge to Mercantilism by French
- Wealth created by agriculture - seed grows to produce!
- Building houses/boats is pointless
- Agriculture is basis of economy - power to yield surplus
Briefly… Adam Smith
- Father of Economics - Wealth of Nations laid foundations of economic thought!
- Labour source of wealth (buildings valued based on labour)
- Agriculture not the only surplus-generating economic activity
- Human activity creates wealth!
Key Adam Smith Ideas
- Invisible Hand of Market
- Division of Labour
- Labour theory of value
- Competition
Invisible Hand
- James Tobin (1990) believed most important legacy
- Inspiration for Neoclassical macroeconomics
- Expect competitive markets to transmute self-interest into public interest in macro+microeconomic activity - Market prices harness self-interest and work to benefit society
- Division of labour - market assign roles as superior in determining efficiency (state not coordinate)
- Institutional restrictions unhealthy - thwart widening of market, divert economic activity from natural course
- E.G. Poor Laws restricted mobility of Labour - suppress economic growth
Role of the State
- High taxation system - large societal role
- Maintain workers
- Protect society from invasion, injustice, oppression
- Provide education
- Build roads - improve worker mobility
James Tobin (1990)
- Believed most important legacy of Smith was invisible hand
- Inspiration for Neoclassical macroeconomics
- Expect competitive markets to transmute self-interest into public interest in macro and micro economic activity
Division of Labour
- Specialisation and division = more output
- E.G. pin producing factory, 10 workers make 48’000 pins each day when each specialise in productive function
- If making individually, no more than 20 each per day
- Specialisation = take advantage of existing skills and abilities
- Organisations adopt complex, large scale production techniques
- Society = higher productivity + better organisational performance = higher profit
Competition
- Lead to self-interested individuals promoting general welfare
- Less competition = raise prices, less innovation incentive
- Gwartney (2000) - competition disciplinary force for buyers and sellers
- Low cost goods in interest of consumers
- Efficiency improved to produce more value - Smith - monopolies a necessary evil
- Countries promote competition bc resources limited + interest of society to max usage
Gwartney (2000)
- Competition disciplinary force for buyers and sellers
- Low cost goods in interest of consumers
- Efficiency improved to produce more value
Class-Based-Society
-Society constructed into orders (classes)
-Wages - working class, profits, rents etc.
-Blurring edges/ overlapping - not sure smith accounted for this
-Smith - landowners ‘reap where they never sowed’
BUT agricultural innovation initiated by progressive landowners (also capitalists)
-Harmony of interest - no class struggle
-All gain as wealth of nation increases
-Benefits of growth shared by all of society
Labour Theory of Value
- Value of commodity determined by no. hours of labour can be commanded by price
- Exchange price gravitate toward no. hours to producing commodity
- Smith not explain why
- Exchange value shared into wages, profit, rents
- Value independent of market whims
- price fluctuate but value constant - Competition push market price down to natural price
- Natural price = value
Problem with Smith’s Labour Theory of Value
-Smith’s theory can’t function if productivity increased
-Unit cost reduced when higher technologies applied in large concentrations
(Smith didn’t account to new technologies to such an extent as Industrial Revolution)
-BUT aware expansion of economy = higher productivity
-Economic system growth = division of labour extended
-Gain productivity uniformly distributed
Subsistence Wage
-Maintain health and productivity - cannot go below as labour force will shrink
-Demand for men regulate production of men
-Wage rise = more men
BUT neutralised by expansion of production
-Wages relating to circumstance of economy
-Expanding economy = rising wages
Profit determinations
- Wage increase = decline in profits
- High wages =increased output per worker
- Increasing competition = economic expansion
- Competing down rate of return, falling profits reduce prices
