HISTORY AND PHILOSOPHY

OF ECONOMIC THOUGHT
ESSAY FOR THE FIRST EXAM
2021 PAO – II Term

PROFESSOR:

Ph.D. Federico Bocca

EXHIBITOR:

Jordan Álvarez
An essay about the analysis of the basic concepts of
"The Wealth of Nations" by Adam Smith.
What does the wealth of a country depend on? It is the question that people have always
asked themselves since ancient times. Philosophers like Aristotle were already
beginning to wonder how a nation like Ancient Greece could maintain economic power
over other neighboring nations, many were the conjectures. In his works "Nicomachean
Ethics" and in the introduction to "Politics" he managed to make a difference between
two related concepts, but of a very different nature that at that time people used to
confuse: economics and chrematistics. This conceptual difference is considered so
important that “the history of economic thought is the history of the different ways in
which the Aristotelian distinction between economics and chrematistics has been
interpreted” (Camacho, 1998). For Aristotle, economics is an activity aimed at
satisfying the infinite material needs of people, associated with "administration and the
natural form of virtuous coexistence". On the other hand, chrematistics, which is the
search for wealth that people have, was judged not as a creative activity but as a
usurping transfer of the gross added value generated by the economy for the particular
benefit of these people. The accumulation of wealth from the Aristotelian perspective
was abominable. A little later, when classical philosophy no longer viewed
accumulation badly, at the time of the schools of economic thought, the mercantilists
said that wealth was linked to the accumulated quantity of gold and silver and for the
Physiocrats it was linked to the farming. At the end of the 18th century, a new school of
economic thought was born, called the classical school, around the personality of Adam
Smith and his magnanimous work: “An inquiry on the nature and causes of the wealth
of nations”. They argued that wealth was linked to the production of consumer goods,
so that by increasing the production of goods, a nation's wealth was increased. As can
be seen, these philosophical concepts have been transformed as human needs and social
values change, however, new schools have emerged that have sought to continue
transforming these ideas, but the ideas of the classical school, mainly those of Adam
Smith, have been sustained over time. In this essay, the basic concepts of the famous
work of this English personage will be analyzed, trying to find the reasons why they are
still as valid today as before. Finally, the importance of the work, the bulwark it
represents in the economic spectrum, and the philosophical and academic inspiration of
many liberal-minded economists will be recognized.

For Aristotle, economics is an activity aimed at satisfying the infinite material needs of
people, associated with "administration and the natural form of virtuous
coexistence". On the other hand, chrematistics, which is the search for wealth that
people have, was judged not as a creative activity but as a usurping transfer of the gross
added value generated by the economy for the particular benefit of these people. The
accumulation of wealth from the Aristotelian perspective was abominable. A little later,
when classical philosophy no longer viewed accumulation badly, at the time of the
schools of economic thought, the mercantilists said that wealth was linked to the
accumulated quantity of gold and silver and for the Physiocrats it was linked to the
farming. At the end of the 18th century, a new school of economic thought was born,
called the classical school, around the personality of Adam Smith and his magnanimous
work: “An investigation on the nature and causes of the wealth of nations ”. They
argued that wealth was linked to the production of consumer goods, so that by
increasing the production of goods, a nation's wealth was increased. As can be seen,
these philosophical concepts have been transformed as human needs and social values
change, however, new schools have emerged that have sought to continue transforming
these ideas, but the ideas of the classical school, mainly those of Adam Smith, have
been sustained over time. In this essay, the basic concepts of the famous work of this
English character will be analyzed, trying to find the reasons why they are still as valid
today as before. Finally, the importance of the work, the bulwark it represents in the
economic spectrum, and the philosophical and academic inspiration of many liberal-
minded economists will be recognized.

Division of labour

Although the introduction discussed the fundamental concept that, for Smith, equates
what wealth is, we must mention what its accumulation depends on. One of its key
foundations is that increased productivity1 depends on the efficient level of organization
within the production process. Smith argued that the more specialized the workers of a
factory were in performing a certain task, the more goods they could produce, that is,
the more productive they became; this is what he called the division of labor. This
concept had three valid reasons: skill acquisition, reduction of production time and
technology that simplified processes. Thus, Smith argued that this division of labor
would increase productivity and this, in turn, resulted in greater savings in capital (K)
on the part of the investor, who, to make his factory even more productive, could invest

1
understood as the way to measure how many goods have been produced for each factor used in the
production process (worker, capital, time, land, etc.).
especially in those stages of the production process where it could be simplified with
the help of technology. In short, the division of labor, for Smith, depended ultimately on
the accumulation of capital, that is, on investment in machinery, equipment, tools and
technology, which leads to better specialization, therefore, higher productivity of the
economy. job. This wealth depends both on how productive its economic agents are,
and on the percentage of productive work existing in the economy; the productivity of
labor is caused by the division of labor, whose division can be explained by the
extension of the market as well as by the accumulation of capital (K), likewise, said
extension of the market is caused by the accumulation of capital; on the other hand, the
percentage of productive work will increase when the accumulation of capital (K)
increases. Therefore, it can be summarized that Smith considers the accumulation of
capital as the main cause of the wealth of a nation. These concepts are best illustrated in
the box below.

Wealth of
Nation

Labor % Productive
productivity Labor

Division of K
Labor Accumulation

K
Market spread
Accumulation

K
Accumulation

Use value and exchange value

For Smith, all goods provided have a use value and an exchange value. The first term
comes from the fact that a certain good meets a need for the person who owns it (for
example, a hammer is used to hit nails on the person who has it); the second term is the
price paid in the market for said good. According to Smith, the exchange value depends
on the amount of labor used to produce it. For the interpretation of his analysis, he
found in the paradox of water and diamonds the best way to explain his own labor
theory of value:

“Nothing is more useful than water; but it will purchase scarce anything; scarce
anything can be had in exchange for it. A diamond, on the contrary, has scarce any
value in use; but a very great quantity of other goods may frequently be had in
exchange for it”. (Smith, 1776)

He also analyzed this theory of value between a primitive society and a modern
society. In a primitive society, the value of a good was a function of the amount of work
necessary to be able to produce it (L). While, in a modern society where capital
accumulation prevails, the value of a good is not only a function of the work used to
produce it but also of the capital invested (being these the capitalist's profits, the wages
and the income of the landowners). At this point, Smith explained the existence of three
very well identified groups in society in which each group owns a factor of production:

➢ Capitalists: owners of the money, equipment, and tools necessary to produce

goods.
➢ Landowners: Owners of the land and who charged a rent for its use (by way of
rent).
➢ Workers: Owners of the workforce in exchange for a salary.

Thus, Smith identified two types of prices: the already known market price and the
natural price. The natural price of a good will be determined by the sum of the
capitalist's profits, the landlord's income, and the workers' wages, that is, it will depend
on the forces of supply and demand. If the quantity of products manufactured is not
enough to satisfy the needs of all consumers, the price will be higher than the natural
price. And if the demand is equal to the supply, the markup price will be equal to the
natural price.

Theory of wages

In context, by the time that Smith published these thoughts, mercantilist thinking
dominated, who believed that the wages of workers had to be to subsist, only to satisfy
their basic needs. Smith did not believe in that so much and based his theory of value on
the fact that the wages of workers, who are also consumers, had to be high in order for
them to respond to the supply of goods and services in the market. In this way
prosperity would emerge. Smith mentioned this about it:

“No society can surely be flourishing and happy, of which the far greater part of the
members are poor and miserable. It is but equity, besides, that they who feed, clothe,
and lodge the whole body of the people, should have such a share of the produce of
their own labor as to be themselves tolerably well fed, clothed, and lodged. "

For this, Smith considers in his equation that the average wage of a worker is equal to
the wage fund divided by the number of workers. According to this, the more workers
there are in a company, the lower the salary per worker. There are several factors that
determine the wage pool, such as the rate of capital accumulation and the rate of
population growth. According to Smith, the salary fund depends on the total amount
that the capitalist must satisfy the needs of the worker, which are advances based on the
future benefits that he hopes to obtain from the sale of a certain product (Gerencie,
2020). In this way, if the national economy were growing, this would generate a growth
in the salary fund, causing an increase in the average salary of workers and for Smith, a
salary increase would increase labor productivity, since they would have higher
economic capacity to increase their quality of life and, consequently, their
workforce. Currently, this is known as efficiency wages.

Conclusions

As could be analyzed, Smith gives notorious relevance to his theory of the division of
labor, whose existence generates an accumulation of capital, and its combination leads
to a higher productivity of workers. Said increase in productivity generates an extension
of the markets due to greater accumulation (capitalist profits, landlord income and
wages), a product of this specialization of tasks. This results in new divisions of labor
within the production process and a marginal increase in capital. The increase in
productivity in the various markets of a country's economy implies an increase in the
production of goods and services. All this configuration leads to economic growth, that
is, to the accumulation of wealth by a nation, since the more goods a nation produces,
the richer it is.

Finally, the concept of the "invisible hand" is one of the central ideas of Adam Smith's
work, who orders activities in the market, but among his ethical postulates he assures
that no one can be guided by reasons of pure profitability. Smith is convinced that, for
the proper functioning of a market economy, its equivalences must be regulated. That is
why he defends the ideas of Political Economy that seek to assure the State sufficient
income to provide public services such as free education and poverty alleviation.
Bibliography

Camacho, F. G. (1998). Economía y Filosofía moral. Madrid: Editorial Síntesis.

Gerencie. (02 de Diciembre de 2020). Gerencie.com. Obtenido de
https://www.gerencie.com/la-teoria-del-fondo-de-salarios.html
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations.
Glasgow: Metalibri.