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Lecture 07 by IvanMishev


Economic History

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									           Adam Smith and the formation of classical economics

        Adam Smith was the founder of the classical school of economics. He
was born Kircaldy and lived 1723-1790. He studied at Glasgow University
1737-1740, and in Oxford 1740-1746. He began to deliver lectures on literature
at Edinburg in 1748, became a professor of logic in Glasgow in 1751 and was
transferred to the chair of moral philosophy in 1752. The theory of moral
sentiments was published in 1759 and his lectures on jurisprudence at
Glasgow are available, having compiled from notes of his students. He
resigned his chair in 1763 and stayed in France for three years: 1763-1766 as a
traveling tutor to the Duke Buccleuc. The wealth of nation was begun in
France, when he met and was influenced by the French physiocrates and was
published in 1776. Smith died in 1790.
        The theory of moral sentiment is a book on ethics, but it is the
foundation of Smith’s system of moral sciences, including political economy.
Smith’s ethical theory was greatly influenced by the theories of Stoics and
David Hume. Morality is explained by the existence of sympathy to others of
self-interested man. Came drawn analogy between the principle of gravity,
which governs the mutual relationship among things in Newtonian
Mechanics, and that of moral sentiments, which regulates the social
relationship among self-interested man. As in the case of gravity the effect of
sentiments depends on distance. Smith’s theory of political economy is
already developed in his lectures of jurisprudence. He insisted that division of
labor is necessary to increase national wealth and that exchange and the
system of prices are necessary as the division of labor develops.

                               “The wealth of a nation”
          “Inquiry into the nature and the causes of the wealth of a nation”
        The book starts with the declaration that wealth exists not in the form
of gold and silver, but in the form of labor products, i.e. the famous opening
sentence in the introduction and plan of the work: “the annual labor of every
nation is the found, which originally supplies it with all the necessities and
conveniences of life, which it annually consumes and which consist always
either in the immediate production of that labor, or in what is purchased with
that production from other nations.” The supply per hat of this necessities
and conveniences of life must in every nation be regulated by two different
circumstances. First by the skill, dexterity and judgment applied and secondly
by the proportion between the numbers of those, who are employed in useful
labor and those who are not. The concept of “division of labor”, one of the
greatest contributions made by the “Wealth of nation” to economic science, is
concerned with these first circumstances, i.e. the productivity of labor. Second
circumstance has much to do with the accumulation of capital trough the
distinction of useful labor and productive labor.
        The “Wealth of nation” consists of 5 books
       1- The causes of improvement in the productive powers of labor and
           the order, according to which the production is naturally
           distributed among different ranks of the people
       2- The nature, accumulation and employment of stock
       3- Different progress of opulence in different nations
       4- Systems of political economy
       5- The revenue of the sovereign common wealth
       Book one begins with an explanation of the term “division of labor”:
the greatest improvement in the productive powers of labor and the greater
part of the skill, dexterity and judgment, with which it is anywhere directed
or applied, seem to have been the effects of division of labor.” Book one starts
with the famous exposition of the division of labor in the production of pins
and nails. In chapter three it is insisted that the division of labor is limited by
the extent of the market. Chapter 4 discusses the origin and use of money,
since people have to exchange their products as the division of labor
established and a commodity is chosen as money to avoid the inconvenience
of barter trade. Smith describes the gains from specialization and division of
labor in a pin factory: “one man draws the wire sets, another straightens is, a
third cuts it, a forth sharpens it, a fifth grinds it at the top, perceiving the
head. To make the head 2 or 3 distinct operations are required. To put the
head on is a peculiar business. To whiten the pin is another. And the
important job of making a pin is in this matter divided into about 18 distant
operations, which in some factories are all preformed by differed hands,
though man may sometimes perform 2 or 3 of them. I have seen a small
factory of this kind, where 10 men only were employed, and they made 4800
pins in a day. But if all of them were working independently, without having
been educated to this peculiar business, they certainly could not have made
20, or perhaps not even 1 pin a day.” Smith concluded that there are 3
advantages to the division of labor, each leading to greater economic wealth.
               1) An increase in skill and dexterity of every worker
               2) Saving time
               3) The invention of machinery
       The last advantage results from narrow focus of the individual
attention on a particular object, occasioned by the division of labor.

                                 Theory of value
        The exchange of commodities is necessary for the development of the
division of labor. It is important to see what determines the ratio of exchange,
i.e. the price of commodities. Chapter six discusses the components o the
price of commodities. It insists on the relevance of the embodied labor theory
of value. “In that early and rude state of society, which presides both the
accumulation of stock and the appropriation of land” by using the famous
example beaver and dear. This is Smith’s first theory of labor. The second is
the command labor theory of demand: “It was not by gold or my silver, but
by labor that all the wealth of the world was regionally purchased, and its
value to those, who posses it and want to exchange it for some new
productions is precisely equal to the quantity of labor which it can enable the
owner to purchase or command” although it may be interesting as measure of
economic welfare, this is concerned not with determining the price, but rather
with the measure of value.

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