Adam Smith

1723-1790

Adam Smith
 In

addition to the text, you should read the Chapter on Adam Smith in the book the Worldly Philosophers, by Heilbroner  This chapter will provide you with additional background material

Personal
 Born

in Kircaldy (Scotland)  Father died before he was born and his mother lived to the age of 90  Kidnap by Gipsies when he was 4 and was left abandon
 Walked

15 miles in Nightgown until awoken by

bells

Professorial Syndrom
 Walk

in a distracted fashion and fell in a Pit  Would work through academic matters out loud  Brewed himself a drink of bread and butter and pronounced it the worst tea he had ever dranked  “I am a beau in nothing but my books”

as Chancellor of the Exchequer. he • Refused to let colonist elect their own judges • Increase the duty (tariff) on American Tea  Townshend married well to the widow of a duke .Tutoring  His book on moral theology attracted the attention of Charles Townshend  Notorious to Americans since.

Tutoring (continued)  He chose Adam Smith to tutor the son of the widow  The contract was for 500 pounds per year plus expenses and a pension of 500 pounds per year for life after done  Smith had never collected more than 100 pounds per year from fees collected directly from students  His students refused refund when he had to leave saying they had more than received their return .

Tutoring (continued)  For 18 months Smith and his student went to France  Met Voltaire in the south of France  Met Francois Quesney in Paris  He agreed with the Laissey Faire of the Physocrats but did not agree with • Agriculture being the source of all productivity • Believed labor was an important component of production .

Life  Smith met with Benjamin Franklin  He was impressed with Mr. Franklin and his descriptions of the Colonies  Probably why he later wrote about the Colonies • a nation “which. indeed.”  An admiration that is later also shared by Karl Marx . seemed very likely to become one of the greatest and most formidable that ever was in the world.

Life  Adam Smith lived with his mother until she reached the age of 90  2 years after he published the Wealth of Nations he was appointed  Commissioner of Customs for Edinburgh which paid 600 pounds a year  His death went relatively unnoticed .

Professionally  Perhaps the most amazing aspect of Adam Smith’s work is the fact that in the absolute chaos and crude conditions of the labor markets of his time he was able to view the beauty of the market system  He viewed the potential it had in developing economic growth and  The difficulty it provided if unregulated .

Strahan. Strahan & A. Edinburgh. Bell. Edinburgh. Millar. W. Kincaid & J. A. Millar. Rivington. A. sixth edition considerably enlarged and corrected. Kincaid. Creech. 1790).A. Bell. 1759) second edition. A. Cadell. revised 1761. W. Edinburgh. enlarged as The Theory of Moral Sentiments. 1767) fourth edition (London. & A. A. & F. 2 volumes (London. Cadell. Longman and T. . A. 1774) fifth edition 1781. Creech & J. third edition. T. To which is added A Dissertation on the Origin of Languages (London. J. Smith: First Classical Economist  Comparison with Shaskepere  Very Careful Writer • The Theory of Moral Sentiments (London. Bell. Edinburgh. W.

third edition with "Additions and Corrections. revised. Strahan & T. Strahan & T. 1789 (Philadelphia. 1784). Cadell. Strahan & T. 2 volume (London. 1786). 1778. Cadell.Published Works  An Inquiry into the Nature and Causes of the Wealth of Nations. W. Thomas Dobson. fifth edition. 1789 . 3 volumes (London. Cadell. fourth addition (London. 1776) second edition. A. A.

MAIN INTEREST  Economic Development and Policies to Promote Economic Growth • Assumption: An economy always employs its resources fully in production • Methodology: Deductive Theory and historical Description • Vision: – 1. – 2. Interdependence of the segments of the economy Policies to be followed to promote wealth of nation .

and Laissez Faire • Scientific Investigation can reveal (discover) factual cause and effect relationship • Human beings are rational. Contextual Economic Policy • Arguments based on observation of historical and institutional circumstances  B.Markets  A. calculating and motivate by self interest . Natural Order. Harmony.

and every man is certainly in every respect fitter and abler to take care of himself than of any other person (Theory of Moral Sentiments) . Is first and principally recommended to his own care.Human Interest Every man….

as to be without wish of alteration or improvement of any kind (Wealth of Nations) . In the whole interval which separates those two moments. come with us from the womb. though generally calm and dispassionate. and never leaves us till we to to the grave.Human Interest  …the desire of bettering our condition [is] a desire which. there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation.

) • Competitive markets exist in which factors of production advance economic advantage • Natural process resolves conflict better than human arrangements (physiocratic idea) • Optimum allocation of resources occurs in competitive markets with out intervention .Market (Cont.

workers) . capitalists. wages and rents among economic sectors (landlords.The Working of Competitive Markets  Market vs. Natural Prices  Market Prices a Short-Run phenomenon  Natural Prices a Long-Run phenomenon • NOTE: in the LR NP will equalize rate of profits.

given competitive market & absence of government intervention.)  In other words. resulting natural prices bring about optimum allocation of resources because consumers receive goods they want at lowest prices and maximum rate of growth occurs IS THE INVISIBLE HAND ANALOGY  THIS .The Working of Competitive Markets (cont.

vital records.Exceptions to laissez faire  protection of infant industries by tariffs  provision of public goods (roads. schools. FREE ENTERPRISE SHOULD BE CHECKED AND NOT LET GO UNREGULATED: . national defense)  ALSO. justice.

or in some contrivance to raise prices. but the conversation ends in a conspiracy against the public. Book 1. by any law which either could be executed. It is impossible indeed to prevent such meetings. People of the same trade seldom meet together. . much less to render them necessary. Wealth of Nations. it ought to do nothing to facilitate such assemblies. But though the law cannot hinder people of the same trade from sometimes assembling together. Chapter 10. or would be consistent with liberty and justice. even for merriment and diversion.

Capital Accumulation (basis of wealth of a nation)  Determines division of labor and proportion of population engaged in production  Leads to economic development  Individual self-interest plus accumulation of capital leads to optimum allocation of capital among industries .

)  Capitalists are the benefactors of society so unequal distribution of income in their favor benefits society by promoting economic growth instead of immediate consumption of all production . etc.Capital Accumulation (basis of wealth of a nation) (CONT)  Labor cannot accumulate capital because wage level permits only satisfaction of consumption desires (subsistence level wages)  Landholders do not accumulate capital because they spend it on unproductive labor (servants.

An Inquiry into the Nature and Causes of the Wealth of Nations  Book I: value theory. distribution of income  Book II: capital as a cause of wealth of nation  Book III: economic history of several nations used as illustration  Book IV: history of economic thought & practice including mercantilism & physiocracy  Book V: public finance . division of labor.

Purpose of production  Purpose: for consumption and export • End purpose of economic activity is consumption • One purpose of exports is to pay for imports  Source of wealth produced by labor (physiocrats emphasized land as the source of wealth) • Wealth of a nation is measured in per capita terms • One purpose of exports is to pay for imports .

Causes of the Wealth of Nations  Productivity of labor  Proportion of laborers usefully and productively employed  Summary .

    Depends on division of labor and specialization Pin factory example .workers dehumanized by repetitive. monotonous tasks Division of labor depends on extent of market and capital accumulation • volume sold increases opportunity for division of labor • production process time consuming so stock of goods (capital) needed to maintain labor during production • capital stock of goods comes from saving (this is the function of the capitalist) Productivity of labor .increase from 20 to 4800 pins per worker per day when divided into 18 operations Social disadvantage .

. military (i.e. justice.included sovereign. less govt.Proportion of laborers usefully and productively employed  Productive labor • employed in producing vendible commodities  Unproductive labor • employed in producing service (normative judgment) . the better for the economy implication: should lower taxes on capitalists so they can accumulate more capital to save and invest) .

depends on division of total output between consumer goods and capital accumulation (the larger capital accumulation the greater the rate of growth) .Summary of the causes of the wealth of nations  Accumulation of capital is the bottom line  Economic growth .

Summary of the causes of the wealth of nations (cont)  Requirements for highest rate of growth: • free markets (no govt intervention) • private property • unequal distribution of income to allow accumulation of capital .

subjective measure • value in exchange .  Diamond-Water Paradox: Water has great utility but little exchange value. Ambiguous.the purchasing power of an object. a diamond has little utility but great exchange value .Meaning of Value  Two Values: • value in use . Objective measure of price expressed in the market.the utility of an object.

on the contrary. . but a very great quantity of other goods may frequently be had in exchange for it. A diamond. it is to be observed. has two different meanings. and. The one may be called "value in use". and sometimes the power of purchasing other goods which the possession of that object conveys. Nothing is more useful than water: but it will purchase scarce anything. the other. and sometimes expresses the utility of some particular object. scarce anything can be had in exchange for it. "value in exchange. The word value." The things which have the greatest value in use have frequently little or no value in exchange. has scarce any value in use. on the contrary. those which have the greatest value in exchange have frequently little or no value in use.

Wages  Smith put forth contradictory wage theories including: • • • • • subsistence theory of wages productivity theory bargaining theory residual claimant theory wages fund theory .

 1.Wage and Profit  Issues that impact on “the inequalities of wages and profits arising from the nature of employments themselves” the wages of labour vary with the ease or hardship. the honourableness or dishonourableness of the employment. .the cleanliness or dirtiness.

the cleanliness or dirtiness. the honourableness or dishonourableness of the employment. the wages of labour vary with the ease or hardship. a journeyman tailor earns less than a journeyman weaver. His work is not always easier.Wage and Profit  1. take the year round. • Thus in most places. A journeyman weaver earns less than a journeyman smith. . His work is much easier. but it is much cleanlier.

in proportion to the quantity of work done. that of public executioner.Wage and Profit  1. . is.better paid than any common trade whatever. but it is in most places more profitable than the greater part of common trades. Continuation • The trade of a butcher is a brutal and an odious business. The most detestable of all employments.

the extraordinary work to be performed by it before it is worn out. • When any expensive machine is erected.Wage and Profit  Secondly. it must be expected. will replace the capital laid out upon it. the wages of labour vary with the easiness and cheapness. . may be compared to one of those expensive machines. A man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill. with at least the ordinary profits. or the difficulty and expense of learning the business.

. of painters and sculptors.Wage and Profit  2. of lawyers and physicians. Continuation • Education in the ingenious arts and in the liberal professions is still more tedious and expensive. The pecuniary recompense. ought to be much more liberal. and it is so accordingly. therefore.

but make him some compensation for those anxious and desponding moments which the thought of so precarious a situation must sometimes occasion. • A mason or bricklayer.Wage and Profit  Thirdly. therefore. in consequence. must not only maintain him while he is idle. to be frequently without any. He is liable. the wages of labour in different occupations vary with the constancy or inconstancy of employment. while he is employed. and his employment at all other times depends upon the occasional calls of his customers. What he earns. on the contrary. can work neither in hard frost nor in foul weather. .

. it sometimes raises the wages of the most common labour above those of the most skilful artificers.Wage and Profit  3. Continuation • When the inconstancy of employment is combined with the hardship. disagreeableness and dirtiness of the work.

but of much superior ingenuity. . • The wages of goldsmiths and jewellers are everywhere superior to those of many other workmen. the wages of labour vary accordingly to the small or great trust which must be reposed in the workmen. on account of the precious materials with which they are intrusted. not only of equal.Wage and Profit  Fourthly.

The long time and the great expense which must be laid out in their education.Wage and Profit  4. .necessarily enhance still further the price of their labour. Continuation • We trust our health to the physician: our fortune and sometimes our life and reputation to the lawyer and attorney. when combined with this circumstance. Such confidence could not safely be reposed in people of a very mean or low condition. therefore. as may give them that rank in the society which so important a trust requires. Their reward must be such.

success is almost certain. • The probability that any particular person shall ever be qualified for the employment to which he is educated is very different in different occupations. there is little doubt of his learning to make a pair of shoes. In the greater part of mechanic trades. the wages of labour in different employments vary according to the probability or improbability of success in them. it is at least twenty to one if ever he makes such proficiency as will enable him to live by the business. . but send him to study the law. Put your son apprentice to a shoemaker.Wage and Profit  Fifthly. but very uncertain in the liberal professions.

of lawyers and physicians ought to be much more liberal: and it is so accordingly.Wage and Profit  Wages vary in inverse proportion to the agreeableness of the employment. is tedious and expensive. The pecuniary recompense. “education in the ingenious arts and in the liberal professions. therefore….” .

the store of goods (capital) previously produced (food.Wages Fund Doctrine  Assumes there is a fixed capital fund for payment of wages • wages fund . etc.) for the use of workers during the production period (time from start to finished product) • Source of wages fund is the savings or failure to consume of the capitalists • Wage rate = wages fund/labor force • Smith suggested that a)  wages   population   labor force   wages (anticipated Malthus’ population theory) . clothing. housing.

Property in Landowner’s hands Property of Capital .Development of Society and Property Rights  Period  Hunting  Pastoral  Agricultural  Commercial Property Rights No Property Rights Some Private Property (society hierarchy) Feudal.

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