Review Questions Flashcards
What is the natural price? And what is its relation to the market price? And how does it happen?
- Natural prices are long run prices.
- Related to the market price because the market price, which is determined by supply and demand / is the short run price, gravitates toward the natural price
- this gravitation occurs in the following: 1) demand increases, 2) an increase in demand leads to price increase*, 3) production is more profitable and more production ensues, 4) supply increases, 5) then price decreases.
- this continues until market price gravitates to the natural price
*at this point, market price will deviate from the natural price
What kind of values does Smith consider; what one does he focus on?
- Smith only considers labor – NOT capital.
- Smith talked about the value in USE and the value in EXCHANGE - he focuses on value in EXCHANGE.
What is labor embodied? (the first approach to how value is determined)
1) Labor embodied is the sum of both direct and indirect labor.
2) Smith divides production into a series of human labors, which is divided into INDIRECT and DIRECT
a) indirect = goes into the production of tools, machinery, intermediate goods
b) direct = labor that is used, which uses the machinery to produce the final good
What is labor demanded?
Value of a good measured by the quantity of labor it is able to command. It equates the outcome of labor with how much time the labor took.
In general terms: “value of a commodity to those who possess it and who want to exchange it for some new product is precisely equal to the quantity of labor which it can enable them to purchase or command”
When are labor commanded and labor embodied equal?
When there is no profit and no rents (no capital accumulation)
What is the key to the invisible hand?
Competition - all of the resources are allocated to their highest valued uses, thus economic efficiency prevails
What does invisible hand accomplish under social wellbeing?
Invisible hand ensures the following under conditions of competitive equilibrium:
1) only those goods that consumers demand will be produced
2) production methods are most efficient
3) the goods are produced/sold at the lowest price which is the cost of production, inclusive of normal production.
What does wage structure depend on?
1) agreeableness of the occupation
2) cost of acquiring the necessary skills and knowledge
3) regularity of employment
4) level of trust and responsibility
5) probability or improbability of success
In what areas, in Smith’s opinion, should the government intervene?
1) administration of justice
2) protect society from foreign attack
3) public works - infrastructure (roads, education, institutions)
4) enforcement of contracts
5) control over the money supply and interest rate
6) protectionist tarrifs (only for national defense industries ***
* ** – otherwise, he was against trade restrictions
Why was Smith against trade restrictions (excepting those for national defense industries)?
Smith thought trade restrictions:
1) resulted in monopolies
2) believed that free trade lead to expanded markets which leads to more division of labor. As the size of the market increases, there is room for more division of labor, which creates productivity and growth
In what ways are Smith’s views relevant today?
1) against Trade restrictions (like most economists today)
2) doesn’t want politicians to intervene because he views politicians as being concerned only with short run issues (myopic)
3) just as he doesn’t trust politicians because they are myopic, he doesn’t trust them to be able to do long-term planning either
4) In favor of decentralizing government
5) Against government intervention: Individuals desire to better their condition – this is sufficient for economic development. We come from the womb with the desire to better our condition
6) Government is extravagant, and individuals are more thrifty –government shouldn’t try to make them save more by taxing them more.
7) Businesses are socially responsible
8) free market proponents agree with the invisible hand concept
9) views would be critical of modern day interventionist approach to social problems
- a lot of his views align with conservative thinkers
- against liberal thinkers
- but all parts of the political debate are present
What is the role that division of labor plays in economic development? (remember, economic development is equivalent to economic growth)
Division of labor increases productivity, which increases economic growth (this is the link between DOL and economic development)
What is the point Smith is making in his pin factory example?
- same number of workers in a work place; if you divide the tasks among them, opposed to not dividing, the same number of workers will produce more pins.
- thus, division of labor increases productivity
Through what mechanisms or processes does DOL increase productivity?
dexterity
time saving
propels invention
What types of dependencies are. left out in his analysis of his DOL?
1) market place dependencies – he reduced everything to faceless transactions. He said general opulence is divided among everybody. For that to happen, though, there has to be some dependency. This is not analyzed.
2) Workers depend on each other
3) views invention as done by 1 worker (because he does not consider groups of workers)
What kind of psychological explanation did we discuss for Smith leaving out analyses of dependencies?
He relied on his own benefactors and his mother and was very dependent on others. So he defended against it.
What is general interest according to Smith, and how does he define it?
1) Interest of the working class = general interest
2) He focuses on the real wage / real consumption of workers to define it.
ex) if the real wage / real consumption of workers is high, worker’s well-being is high and that constitutes the general interest of society
Whose interests are aligned with those of general interest?
Landlords most of the time (sometimes they get tricked by manufacturers to placate the interest of manufacturers who interest are not aligned with the interest of the working class)
