Adam Smith

Question 1

Quote on division of labour

Answer 1

“division of labour is the great cause of the increase of public opulence

Question 2

The impartial spectator

Answer 2

conscience guiding actions

sympathy not selfishness

Humans live with a “desire of bettering our condition” which points to a “certain propensity in human nature”

Question 3

Smith and self-interest

Answer 3

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

Question 4

Why people get paid more according to smith

Answer 4

jobs with disagreeable conditions

required special training

trust needed job

probability of success is low, pay off high

Question 5

Smith on the free market

Answer 5

“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

Question 6

Buchholz critique

Answer 6

relatively unregulated Economy produces more marketable innovations than other countries

Question 7

What society comprises of

Answer 7

State - coercion

market - self-interest

civil society - benevolence

Question 8

Why was the free market a system of natural liberty

Answer 8

Natural - way society would behave if left to itself

Liberty - you are leaving it to itself

System - produces order and harmony

Question 9

Smith’s Theory of Price

Answer 9

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

Question 10

Labour Theory of Value

Answer 10

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

Question 11

What determines wages?

Answer 11

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

Question 12

Does market wage adjust to natural wage?

Answer 12

Yes, but slowly

In a growing economy demand for labour is high

• market wage continuously exceeds natural wage
• birth rate rises -> growing population

Question 13

Division of Labour = Growth

Answer 13

1. Workers save time by not having to pass from one task to another
2. Specialisation by ability
3. Specialisation increases ability
4. Specialisation gives incentive to innovate

Question 14

Cost of division of labour

Answer 14

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

Question 15

Causes of economic growth

Answer 15

1. Extension of division of Labour
2. Amount of saving
3. Tax burden

Impediments to system of natural liberty including monopoly and unfree trade go against economic growth

Question 16

Smith and Free Trade

Answer 16

1. trade is good as it benefits both parties or else they wouldn’t trade
2. Free trade leads to peace
3. 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

Question 17

Why is smith Hostile to the State?

Answer 17

1. 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
2. On side of the rich - “whenever the legislature attempts to regulate difference between masters and their workmen, its counsellors are always the masters”
3. 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
4. State can’t manage the economy - businessman contrast to government employer running economy

Question 18

Role of state - Defence

Answer 18

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’

Question 19

Role of state - Justice

Answer 19

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

Question 20

Role of state - society

Answer 20

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