Test Two Study Cards Flashcards
How does the Wealth of Nations refute mercantilist wealth?
Wealth doesn’t equal amount of gold and silver. Wealth=#of consumable goods.
What is the sole end purpose of all production?
Consumption
According to Smith, whose wealth counts?
Everyone's consumption counts: cannot negate a class of individuals. Cannot ignore the poor. If there is a large impoverished class, then the nation is not rich. Smith refutes the rise of utility of poverty theory. (radical)
What did Smith believe about the equality of man?
All men are created equal: “by nature a philosopher is not…half so different from a street porter.” (WN)
We have different preferences, but that benefits society.
When we imagine ourselves in each other’s shoes, all men must be equal.
Why is natural liberty so important to society?
Encourages spontaneous order in which society becomes better off.
What is the assumption about capitalists?
That free market means that we just support the rich/elite businessmen.
Capitalists encourage business competition so that society can benefit as a whole
Why was Smith anti-business?
Because he thought businessmen always looked for monopolies and privileges. He instead favored pro-markets, pro-competition.
What did Smith say about regulation?
“When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.”
What are payments in kind?
Agreeing to be paid in money, but getting paid in corn instead. Smith emphasized the enforcements of law on contracts.
Did Smith’s main concern lie with the poor or the rich?
The poor
What was Smith’s legacy?
He created a moral philosophy of liberty and a legacy of concern, not for the privileged, but for the everyman (very different idea than that found in mercantilism)
What did Smith believe about wealth generation?
He believed in not just rearranding the pieces between two countries, but working together to mutually benefit. Very different from mercantilism. Discouraged reallocation of resources.
Who created the idea of comparative advantage?
David Ricardo
What is comparative advantage?
The total output of a group of individuals, an entire economy, or a group of nations will be the greatest when the out[ut of each good is produced by the person (or the firm) with the lowest opportunity cost of production for that good.
Gains through specialization.
Looking at a static picture (taking a snapshot of the economy)
What is the opportunity cost of production?
How much it costs to make the next good. Usually priced according to what the manufacturer must give up in order to make that good.
What is an absolute advantage?
Even if you are better at making everything, and I’m worse at everything, we can still gain from specialization and exchange.
As long as relative production costs of two goods differ between the 2 people, gains from trade will be possible.
What are relative production costs?
The fraction of the good it costs to make the other product.
Shows how much you are giving up to make a certain good.
Why do we not make the things we most love?
Not economically beneficial: it’s a bit odd and counterintuitive to not make the things that you most desire.
If I want more of something, I should do something else to get money and then buy the good from someone else.
Who thought of the gains of division of labor?
Adam Smith
What is division of labor?
The division of a complex production process into a number of simpler tasks, each one of which is undertaken by a different individual.
Observed throughout time, and is not static.
Even if we were all exactly the same (drones), we could still benefit from division of labor.(does not work in comparative advantage)
What is the lesson learned from the pin factory?
There are great increases in production through specialization in certain aspects of the process of production and division of labor.
What are the 3 dynamic gains from specialization?
- Economies of scale 2. Learning by doing 3. Technology gains from familiarity.
what are economies of scale?
Cost advantages that a business obtains due to expansion. A farmer can provide everything for himself and have crappy tools to work with, or he can specialize in one job and invest his capital into better technology. From this, he may trade.
What is learning by doing?
When you make a product, after a while, you get better at making it. Practice makes perfect. The extra productivity that comes from doing one thing over and over.