Tutorials

Question 1

According to Smith, in which way does the division of labour lead to additional production?

Answer 1

• Dexterity
• More efficient
• development of machinery
• benefits of surplus

Question 2

According to Smith, in which alternative way could means could people get others to do what they want them to do?

Answer 2

Try to persuade people by appealing to their benevolence or relying on friendship.

Problem: we cannot make enough friends to ensure we get what we need

Question 3

Explain how a society that develops according to Smith’s theory becomes strongly interdependent.

Answer 3

We are dependent on others, and we are unable to provide everything we need for ourselves.

Question 4

Why does the extent of the market limit the division of labour, according to Smith?

Answer 4

Since Smith sees the (market) exchange as the cause of the division of labour, it is leading. Note that Smith’s example relates to population size.

Question 5

Hayek addresses central planning. The issue is whether “economic planning” should be done by a government authority, or rather should be left to individuals. Why is Hayek in favour of the latter?

Answer 5

To Hayek, a central authority would never be able to collect the information that is necessary to do planning well. The price mechanism, however, does combine and communicate that information. For that reason, Hayek believes in decentralized decision-making.