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Econ 265 > Topic 2: Adam Smith > Flashcards

Topic 2: Adam Smith Flashcards

1
Q

Compare and contrast Mandeville the Clown with Adam Smith

A
  1. Adam Smith
    • agreed with Mandeville the Clown that there’s unintended benefits from self-interested behavior
  2. Mandeville the Clown
    • disagreed with Smith that there were automatic adjustments/invisible hand to full employment
    • thought DEMAND CREATION caused full employment instead
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2
Q

IMPORTANT: What’s aggregate demand?

A

The total demand for goods and services in the economy

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3
Q

What’s the market price of labor?

A

WAGES

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4
Q

IMPORTANT: According to Adam Smith, what’s the relationship between market price (MP) and natural price (NP) of a good/service, ff there’s NO ECONOMIC INTERVENTIONS?

A
  1. MP > NP
    • Supply of that good or service increases, therefore decreasing the MP until MP = NP
  2. MP < NP
    • Supply of that good or service decreases, therefore increasing the MP until MP = NP
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4
Q

IMPORTANT: According to Adam Smith, what’s the natural price?

A

The natural price is the price that

  1. JUST covers the costs of production
  2. Ensures the Quantity produced stays constant (no entry/exit)
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5
Q

Who proposed the concept of Natural Price?

A

Adam Smith

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5
Q

In the long-run, what did Adam Smith think would happen to MP and NP?

A

MP = NP, as long as no economic interventions

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5
Q

According to Adam Smith, what changes when the NP and MP of labor are not balanced?

A

Supply of labor (pop’n) changes accordingly until MP = NP

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6
Q

What’re real wages?

A

Wages adjusted for INFLATION

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6
Q

IMPORTANT: According to Adam Smith, what’re the types of labor?

A
  1. productive labor
  2. unproductive labor
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7
Q

According to Adam Smith, what determines the demand for productive labor?

A

According to Adam Smith, the WAGES FUND determines the demand of productive labor

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8
Q

According to Adam Smith, what’s PRODUCTIVE LABOR?

A

According to Adam Smith, productive labor is labor employed to make a PROFIT, therefore a GOOD

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9
Q

According to Adam Smith, what’s UNPRODUCTIVE LABOR?

A

According to Adam Smith, unproductive labor is labor employed that does NOT make a profit and does NOT replenish wages fund, therefore a SERVICE

Eg. Servants, circus performers and other “buffoons” as Adam Smith called them LMAO

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9
Q

According to Adam Smith, what’s the effect of employing productive labor?

A
  1. employ productive labor that makes a good
  2. boss sells that good and make a profit
  3. boss uses profit to replenish the wages fund
  4. boss can now hire more productive labor with the wages fund
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10
Q

VERY IMPORTANT: According to Adam Smith, Malthus and Ricardo, what’s the WAGES FUND?

A

According to Adam Smith, the wages fund are a boss’s savings to employ PRODUCTIVE LABOR

The boss replenishes the wages fund with profits from employing productive labor

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11
Q

What’re public works?

A

Public goods and services necessary for societal welfare

But, they aren’t provided by the free market bc they AREN’T PROFITABLE to private firms

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11
Q

What’s free trade?

A

Trade with NO RESTRICTIONS (eg. no tariffs, quotas, bans, etc.)

11
Q

What’s the rule of law?

A

A system of well-defined laws that are FAIRLY APPLIED and ENFORCED

12
Q

Important: According to Adam Smith, what’s SPECIALIZATION/DIVISION OF LABOR and his belief of it?

A

Def’n: When each person is only responsible for ONE PART of the production process

Adam Smith is a BIG FAN bc he thought it improved productivity/output: he loves the pin factory example

13
Q

What’re Adam Smith’s thoughts on MP and NP of labor?

A

Adam Smith thought that real wages (MP of labor) > NP of labor forever as long as there’s enough saving and the wages fund grows proportionally to pop’n

14
Q

Did Adam Smith care about economic growth and why?

A

Adam Smith cared ALOT about economic growth through CAPITAL ACCUMULATION, bc it grew the wages fund

15
Q

How did Adam Smith think employment is created?

A

Adam Smith thought:

capital accumulation created economic growth, which then caused wage fund growth, which then created more employment

16
Q

What’s Adam Smith’s belief in natural law?

A

Adam Smith believed that human behavior depends on universal principles they gain through experience and reasoning

17
Q

Compare Adam Smith’s thoughts on how employment is created with Mandeville the Clown

A

Adam Smith thought that capital accumulation -> economic growth -> wages fund growth -> employment

Mandeville the Clown thought that private vices -> more consumption/spending -> economic growth and employment

18
Q

What’re Adam Smith’s thoughts on gov’t intervention?

A

Adam Smith thought the gov’t should have a LIMITED ROLE in economy but with 3 essential functions (3 P’s) in order to ensure capital accumulation

  1. Protect against external violence
    • via national defense
  2. Protect against internal violence
    • via rule of law and property rights (promotes societal order and saving/investing)
  3. Provide public works
19
Q

What’s Adam Smith’s belief in natural equilibrium?

A

Adam Smith believed that free markets can be balanced and efficient WITHOUT gov’t interference, through:
1. individual self-interest
2. natural price mechanism

19
Q

IMPORTANT: What were Adam Smith’s thoughts on the economy? (4)

A

Adam Smith believed in:

  1. natural law/equilibrium
  2. automatic adjustment
  3. invisible hand
  4. limited gov’t intervention
20
Q

What’s Adam Smith’s belief in the invisible hand?

A

He believed that free competitive market naturally regulate themselves through the actions of self-interested individuals

Bc those consumers and producers create demand/supply dynamics that auto-lead to market equilibrium/unintended social benefit

20
Q

What’s Adam Smith’s belief in the natural price mechanism?

A

That markets self-correct to ensure a good’s price is EQUAL to its cost of production

21
Q

What’s Adam Smith’s LABOR-COMMANDED theory of value?

A

The idea that how much labor is required to buy it COMMANDS the value of that commodity

In units of “time-price” of that good

21
Q

What theory of value for commodities did Adam Smith propose?

A

Adam Smith proposed the LABOR-COMMANDED theory of value

22
Q

What’s time-price in Adam Smith’s LABOR-COMMANDED theory of value?

A

Time-price is how much time a person needs to work in order to buy something

23
Q

IMPORTANT: What was Adam Smith’s beefs with the 3 approaches to political economy before him?

A
  1. Scholasticism
    • He hated Aristotle lol
  2. Mercantilism
    • He hated their heavy gov’t intervention to force a trade surplus, thought it caused resource misallocation and unecessary wars lol
    • He also hated their tariffs and protectionist policies bc he was pro-free trade to expand specialization/division of labor and therefore productivity
  3. Physiocracy
    • He thought they focused too much on agriculture and not enough on manufacturing
24
Q

IMPORTANT: What were some of Adam Smith’s SPECIFIC beefs with Scholasticism and Aristotle?

A
  1. Smith thought trade was NATURAL to humans, but Aristotle thought it was UNNATURAL and suspicious of it
  2. Smith thought division of labor is due to differences in ppl’s environment, NOT natural difference b/n ppl like Aristotle thought
25
Q

According to Adam Smith, what’re the ways that specialization/division of labor improve productivity? (3)

A
  1. no more task switching
  2. ppl will find shortcuts over time
  3. improving through repetition
25
Q

IMPORTANT: What did Adam Smith think determined national wealth?

A

Adam Smith thought LABOR determined national wealth

esp SPECIALIZATION/DIVISION OF LABOR bc it improved productivity, and productive labor bc it makes a profit via a good

25
Q

How did Adam Smith measure a nation’s wealth?

A

Adam Smith measured national wealth with consumption per person

26
Q

What’re Adam Smith’s thoughts on trade and why?

A

He supported FREE TRADE bc he thought specialization/division of labor (which he supported) was limited by the size of the market

And increasing size of market would increase opportunities for specialization, then increase productivity gains

27
Q

What was the Water-Diamond paradox?

A

It differentiated between value in use and value in exchange

  1. Water has high value in use but low value in exchange
  2. Diamonds have low value in use but high value in exchange
28
Q

IMPORTANT: What’s value in use?

A

Value in use is the PRACTICAL UTILITY of a commodity

29
Q

IMPORTANT: What’s value in exchange?

A

Value in exchange is HOW MANY OTHER goods/services you can exchange a commodity for

Econ 265 (5 decks)

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