Adam Smith Flashcards
Quote on division of labour
“division of labour is the great cause of the increase of public opulence
The impartial spectator
conscience guiding actions
sympathy not selfishness
Humans live with a “desire of bettering our condition” which points to a “certain propensity in human nature”
Smith and self-interest
states that man needs help from others, show them it is for their advantage - self-interest motivates
“Invisible hand to promote an end which is no part of his intention” - true orchestrator of social harmony is the free market
Why people get paid more according to smith
jobs with disagreeable conditions
required special training
trust needed job
probability of success is low, pay off high
Smith on the free market
“I have never known much good done by those affected to trade for the public good”
Under a market system the poor can prosper
under centrally guided system, political power determines economic position
market rids of racism - buy for best price not ethnicity
leads to economic growth as labour supply increases, labour subdivided, labour quality rises through new machines and therefore higher living standards
Buchholz critique
relatively unregulated Economy produces more marketable innovations than other countries
What society comprises of
State - coercion
market - self-interest
civil society - benevolence
Why was the free market a system of natural liberty
Natural - way society would behave if left to itself
Liberty - you are leaving it to itself
System - produces order and harmony
Smith’s Theory of Price
Market price - short-terms, depends on demand for the good (use glove, shoe example)
Natural price - long-term, depends on cost of production
In a primitive economy, cost is Labour cost which corresponds to no. hours of labour
Labour Theory of Value
Imagine it takes 1 hour to catch a beaver and 2 hours to catch a deer.
1 deer = 3 beavers
the 2 hours of hunting gives you 1 deer= 3 beavers but would only give you 2 beavers if you hunted beavers
therefore no beavers are hunted and prices rise until they reflect relative labour costs
This won’t do in a modern economy as not all costs are Labour costs and as hunters are self-employed
What determines wages?
Market wage - current wage rate depends on current demand for labour
Natural wage - determined by cost of production of Labour
e. g cost of raising a family
- if cost is high, birthrate falls, supply of labour falls
- and so price of labour (wage) rises
Does market wage adjust to natural wage?
Yes, but slowly
In a growing economy demand for labour is high
- market wage continuously exceeds natural wage
- birth rate rises -> growing population
Division of Labour = Growth
- Workers save time by not having to pass from one task to another
- Specialisation by ability
- Specialisation increases ability
- Specialisation gives incentive to innovate
Cost of division of labour
Smith: “it confines the views of men to give their entire attention to the 17th part of a pin or the 80th part of a button”
Resulting in gross ignorance and stupidity
workers incapable of ‘conversation’, ‘sentiment’, ‘judgement’ and courage
should counter this with education - an ‘opulent society’ can educate everyone in
Causes of economic growth
- Extension of division of Labour
- Amount of saving
- Tax burden
Impediments to system of natural liberty including monopoly and unfree trade go against economic growth
Smith and Free Trade
- trade is good as it benefits both parties or else they wouldn’t trade
- Free trade leads to peace
- trade leads to growth of the wealth of nations by enlarging the free market so there is a division of labour between countries as well as individuals
Why is smith Hostile to the State?
- Wasteful - Govts. noted for “thoughtless extravagance that not only prevents accumulation, but frequently encroachers on the funds destined for more necessary expenses” - Wealth of Nations
- On side of the rich - “whenever the legislature attempts to regulate difference between masters and their workmen, its counsellors are always the masters”
- Govt. employers get rewarded regardless of effort - “act as their situation naturally directs…and cannot be but idle, profligate, negligent, expensive and oppressive” - Wealth of Nations
- State can’t manage the economy - businessman contrast to government employer running economy
Role of state - Defence
protect society from violence and invasion of other independent societies
Normal person can’t just leave his work
Art of war developed with longer campaigns
a richer society is more likely to be attacked
modern firearms - less order and obedience unless there are trained soldiers
damaging effects of division of labour make ordinary worker ‘incapable of defending his country in war’
Role of state - Justice
Wealth of nations: “protect as far as possible, every member of society from the injustice and oppression of evert other member of it
Hunters have little property/theft so no need for magistrate
Shepherds have property and inequality so need for government
only with a magistrate can the rich ‘sleep a single night in security’
need a class suitable for government so a rich shepherd acquires authority and looks like convincing protector
Leads to beginning of government which supports itself with fines and bribes but in a modern society with taxation and salaries for judges
Role of state - society
a state should build and maintain public works which are advantages to society but not profitable to the individual
e.g roads - unprofitable to owner to maintain so should be public
Canals - profitable to owner to maintain so should be private
institutions for education etc
