Adam Smith

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					The Evolution of the
Modern Capitalist System
Adam Smith   (1723-1790)
        • Studied at the University of
          Glosgow at the age of 14 and
          spent 6 years at Oxford
        • Appointed to the chair of logic
          in 1751 at the University of
          Glasgow, Scotland.
        • In 1752 he transferred to the
          chair of philosophy.
        • On his travels to France, he
          was influenced by the writings
          of French Economists.
        • 1776  The Theory of Moral
          Sentiments and an Inquiry Into
          the Nature of Causes of the
          Wealth of Nations was
             – A vehement attack of the
               mercantilist system.
The Wealth of Nations   (1776)
The Scottish Enlightenment
   philosophical and intellectual movement of 17th and
     18th centuries, circa 1688-1789. Characterized by
   promotion of rationality, and rejection of old political,
      economic, and social order. Not revolutionary,
                  however, but reformist.
  Scottish Enlightenment (1688-1789)
3 main features:
1) anti-clericist and anti-feudalist. Anti-clericist, not
    atheism, but rejection of authority of church and
    embracing of ‘new science’ (Ideas and Technology);
2) notion of progress, advancement, dynamic view of
    history, moving forward for the Nation;
3) individual self-definition, self-realization.
• Also in Scotland, Enlightenment tied to reform of
    universities and education.

• Benjamin Franklin, one of the Founding Fathers of
  the United States.
• Francis Huthcheson, one of the founding Fathers
  of the Scottish Enlightenment.
• Jean D'Alembert, was a French
  mathematician, mechanician, inventor,
  writer, physicist, philosopher, and music theorist.
• André Morellet, was a French Economist, diplomat
  and writer.
• François Quesnay, the head of the Physiocratic
              Adam Smith’s Attack on Mercantilism
• He was making a political argument, NOT an
  economic one.
    – Part of the argument was for new economic policy, but..
    – An essential part of the argument was for new social and
      political arrangements.

• He argued that the basic unit for social analysis should
  be the nation, not the state.
• He was against the belief that trade was a zero-sum
    – It was a positive-sum game.
    – Both nations gained.

Mercantilism- The theory and system of political economy prevailing in Europe after
the decline of feudalism, based on national policies of accumulating bullion,
establishing colonies and a merchant marine, and developing industry and mining to
attain a favorable balance of trade.

Capitalism is a free market economic system in which the means
of production are privately owned and operated for profit. In
which economic intervention and regulation by the state is limited
to tax collection, and enforcement of private ownership and
contracts. It is the opposite of a controlled market, in which the
state directly regulates how goods, services and labor may be
used, priced, or distributed.
      Basic Capitalist Principles
1. Goods and services are produced for profitable

2. Human labor power is a commodity for

                    Goods & Service

                   Consumer Spending
   Businesses                          Households

                 Labor & Investments
   Basic Capitalist Principles
3. The “Invisible Hand” of the market
    – Problem  How do we survive in a world
      where we must depend on many others, but
      where humans are by nature self-interested
    – Solution  the free market, while appearing
      chaotic and unrestrained, is actually guided to
      produce the right amount and variety of goods by a
      “invisible hand.”
    – Therefore, the basic
      market mechanism is
    Basic Capitalist Principles
4. Individuals seeking success are driven by self-
   interest  Profit Motive
5. The Law of Supply and Demand
     – Individuals who are free to pursue their
       self-interest will produce goods and services that
       others want, at prices others will be
                      willing to pay.
    Basic Capitalist Principles
6. Law of Competition
     – The competitive market system compels
       producers to be increasingly efficient, and to
       respond to the desires of consumers.

7. A social division of labor will maximize the
   satisfaction of individual wants and needs, given
   scarce resources.

8. Government should interfere minimally with the
   free and efficient workings of the market
     – Laissez faire *“Let’s go! Lets act for ourselves!.”+
There, there it is again—the invisible hand
 of the marketplace giving us the finger.
On the division of labour
      It is the great multiplication of the productions
  of all the different arts, in consequence of the
  division of labour, which occasions, in a well-
  governed society, that universal opulence which
  extends itself to the lowest ranks of the people.-The
  Wealth Of Nations, Book I, Chapter I, p. 22,
  para. 10.
On competition…
     In general, if any branch of trade, or any
 division of labour, be advantageous to the public,
 the freer and more general the competition, it will
 always be the more so.-The Wealth Of Nations,
 Book II, Chapter II, p.329, para. 106.
On government…
       It is the highest impertinence and presumption… in kings
 and ministers, to pretend to watch over the economy of private
 people, and to restrain their expense... They are themselves
 always, and without any exception, the greatest spendthrifts in
 the society. Let them look well after their own expense, and
 they may safely trust private people with theirs. If their own
 extravagance does not ruin the state, that of their subjects
 never will.-The Wealth Of Nations, Book II, Chapter
 III, p.346, para. 36.
On import controls
      As a rich man is likely to be a better customer to the
 industrious people in his neighbourhood than a poor, so is
 likewise a rich nation. [Trade restrictions,] by aiming at
 the impoverishment of all our neighbours, tend to render
 that very commerce insignificant and contemptible.-The
 Wealth Of Nations, Book IV, Chapter III, Part II,
 p.495, para. c11.
human empathy
       How selfish soever man may be supposed, there are
  evidently some principles in his nature, which interest him
  in the fortune of others, and render their happiness
  necessary to him, though he derives nothing from it, except
  the pleasure of seeing it.-The Theory Of Moral
  Sentiments, Part I, Section I, Chapter I, p. 9,
invisible hand…
       [The rich] consume little more than the poor, and in spite of
 their natural selfishness and rapacity…they divide with the poor
 the produce of all their improvements. They are led by an invisible
 hand to make nearly the same distribution of the necessaries of
 life, which would have been made, had the earth been divided into
 equal portions among all its inhabitants, and thus without
 intending it, without knowing it, advance the interest of the
 society, and afford means to the multiplication of the species.

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