Adam Smith by zhangyun

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									Adam Smith




 1723-1790
              Adam Smith
 Inaddition 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”
                  Tutoring
 His book on moral theology attracted the
  attention of Charles Townshend
 Notorious to Americans since, 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 (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, seemed very likely to become
      one of the greatest and most formidable that ever was in
      the world.”
   An admiration that is later also shared by Karl
    Marx
                    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
       A. Smith: First Classical
             Economist
 Comparison  with Shaskepere
 Very Careful Writer
  • The Theory of Moral Sentiments (London, A. Millar,
    Edinburgh, A. Kincaid & J. Bell, 1759) second edition, revised 1761,
    third edition, enlarged as The Theory of Moral Sentiments, To which is
    added A Dissertation on the Origin of Languages (London, A. Millar,
    Edinburgh, A. Kincaid, & A. Bell, 1767) fourth edition (London, W.
    Strahan, J. & F. Rivington, T. Longman and T. Cadell, Edinburgh, W.
    Creech, 1774) fifth edition 1781, sixth edition considerably enlarged
    and corrected, 2 volumes (London, A. Strahan & A. Cadell, Edinburgh,
    W. Creech & J. Bell, 1790).
             Published Works
    An Inquiry into the Nature and Causes of
    the Wealth of Nations, 2 volume (London,
    W. Strahan & T. Cadell, 1776) second
    edition, revised, 1778, third edition with
    "Additions and Corrections, 3 volumes
    (London, A. Strahan & T. Cadell, 1784),
    fourth addition (London, A. Strahan & T.
    Cadell, 1786), fifth edition, 1789
    (Philadelphia, Thomas Dobson, 1789
            MAIN INTEREST
 EconomicDevelopment and Policies to
 Promote Economic Growth
  • Assumption: An economy always employs its
    resources fully in production
  • Methodology: Deductive Theory and historical
    Description
  • Vision:

     – 1.   Interdependence of the segments of the economy

     – 2.   Policies to be followed to promote wealth of nation
                  Markets
 A.   Contextual Economic Policy
  • Arguments based on observation of historical
    and institutional circumstances
 B.Natural Order, Harmony, and Laissez
 Faire
  • Scientific Investigation can reveal (discover)
    factual cause and effect relationship
  • Human beings are rational, calculating and
    motivate by self interest
          Human Interest
Every   man…. Is first and principally
 recommended to his own care; 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)
                Human Interest
   …the desire of bettering our condition [is] a desire
    which, though generally calm and dispassionate,
    come with us from the womb, and never leaves us
    till we to to the grave. In the whole interval which
    separates those two moments, there is scarce
    perhaps a single instant in which any man is so
    perfectly and completely satisfied with his
    situation, as to be without wish of alteration or
    improvement of any kind (Wealth of Nations)
           Market (Cont.)
• 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
  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, wages and rents among economic
    sectors (landlords, capitalists, workers)
     The Working of Competitive
          Markets (cont.)
 In   other words, given competitive market &
    absence of government intervention,
    resulting natural prices bring about
    optimum allocation of resources because
    consumers receive goods they want at
    lowest prices and maximum rate of growth
    occurs
   THIS IS THE INVISIBLE HAND ANALOGY
     Exceptions to laissez faire
 protection of infant industries by tariffs
 provision of public goods (roads, schools,
  vital records, justice, national defense)
 ALSO, FREE ENTERPRISE SHOULD BE
  CHECKED AND NOT LET GO
  UNREGULATED:
 People  of the same trade seldom meet together,
  even for merriment and diversion, but the
  conversation ends in a conspiracy against the
  public, or in some contrivance to raise prices. It is
  impossible indeed to prevent such meetings, by
  any law which either could be executed, or would
  be consistent with liberty and justice. But though
  the law cannot hinder people of the same trade
  from sometimes assembling together, it ought to
  do nothing to facilitate such assemblies, much less
  to render them necessary. Wealth of Nations, Book 1,
  Chapter 10.
 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
    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, etc.)
 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
 An Inquiry into the Nature and
 Causes of the Wealth of Nations
 Book I: value theory, division of labor,
  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
        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
 Productivityof labor
 Proportion of laborers usefully and
  productively employed
 Summary
             Productivity of labor
   Depends on division of labor and specialization
   Pin factory example - increase from 20 to 4800 pins per
    worker per day when divided into 18 operations
   Social disadvantage - 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)
    Proportion of laborers usefully
     and productively employed
 Productive labor
   • employed in producing vendible commodities
 Unproductive labor
   • employed in producing service (normative
     judgment) - included sovereign, justice,
     military (i.e., less govt, the better for the
     economy implication: should lower taxes on
     capitalists so they can accumulate more capital
     to save and invest)
  Summary of the causes of the
      wealth of nations
 Accumulation   of capital is the bottom line
 Economic growth - 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 (cont)
 Requirements   for highest rate of growth:
  • free markets (no govt intervention)
  • private property
  • unequal distribution of income to allow
    accumulation of capital
           Meaning of Value
 Two   Values:
  • value in use - the utility of an object.
    Ambiguous, subjective measure
  • value in exchange - the purchasing power of an
    object. Objective measure of price expressed in
    the market.
 Diamond-Water      Paradox: Water has great
 utility but little exchange value; a diamond
 has little utility but great exchange value
    The word value, it is to be observed, has two different
    meanings, and sometimes expresses the utility of some
    particular object, and sometimes the power of purchasing
    other goods which the possession of that object conveys.
    The one may be called "value in use"; the other, "value in
    exchange." The things which have the greatest value in use
    have frequently little or no value in exchange; and, on the
    contrary, those which have the greatest value in exchange
    have frequently little or no value in use. 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.
                      Wages
 Smithput forth contradictory wage theories
 including:
  •   subsistence theory of wages
  •   productivity theory
  •   bargaining theory
  •   residual claimant theory
  •   wages fund theory
            Wage and Profit
 Issuesthat impact on “the inequalities of
  wages and profits arising from the nature of
  employments themselves”

 1.  the wages of labour vary with the ease
  or hardship,the cleanliness or dirtiness, the
  honourableness or dishonourableness of the
  employment.
                Wage and Profit
   1. the wages of labour vary with the ease or
    hardship,the cleanliness or dirtiness, the
    honourableness or dishonourableness of the
    employment.
    • Thus in most places, take the year round, a journeyman
      tailor earns less than a journeyman weaver. His work is
      much easier. A journeyman weaver earns less than a
      journeyman smith. His work is not always easier, but it
      is much cleanlier.
            Wage and Profit
 1.   Continuation
  • The trade of a butcher is a brutal and an odious
    business; but it is in most places more
    profitable than the greater part of common
    trades. The most detestable of all employments,
    that of public executioner, is, in proportion to
    the quantity of work done,better paid than any
    common trade whatever.
                Wage and Profit
   Secondly, the wages of labour vary with the
    easiness and cheapness, or the difficulty and
    expense of learning the business.
    • When any expensive machine is erected, the
      extraordinary work to be performed by it before it is
      worn out, it must be expected, will replace the capital
      laid out upon it, with at least the ordinary profits. A
      man educated at the expense of much labour and time
      to any of those employments which require
      extraordinary dexterity and skill, may be compared to
      one of those expensive machines.
            Wage and Profit
 2.   Continuation
  • Education in the ingenious arts and in the
    liberal professions is still more tedious and
    expensive. The pecuniary recompense,
    therefore, of painters and sculptors, of lawyers
    and physicians, ought to be much more liberal;
    and it is so accordingly.
               Wage and Profit
   Thirdly, the wages of labour in different
    occupations vary with the constancy or
    inconstancy of employment.
    • A mason or bricklayer, on the contrary, can work
      neither in hard frost nor in foul weather, and his
      employment at all other times depends upon the
      occasional calls of his customers. He is liable, in
      consequence, to be frequently without any. What he
      earns, therefore, while he is employed, must not only
      maintain him while he is idle, but make him some
      compensation for those anxious and desponding
      moments which the thought of so precarious a situation
      must sometimes occasion.
            Wage and Profit
 3.   Continuation
  • When the inconstancy of employment is
    combined with the hardship, disagreeableness
    and dirtiness of the work, it sometimes raises
    the wages of the most common labour above
    those of the most skilful artificers.
          Wage and Profit
 Fourthly,the wages of labour vary
  accordingly to the small or great trust which
  must be reposed in the workmen.
  • The wages of goldsmiths and jewellers are
    everywhere superior to those of many other
    workmen, not only of equal, but of much
    superior ingenuity, on account of the precious
    materials with which they are intrusted.
               Wage and Profit
   4. Continuation
    • We trust our health to the physician: our
       fortune and sometimes our life and reputation
       to the lawyer and attorney. Such confidence
       could not safely be reposed in people of a very
       mean or low condition. Their reward must be
       such, therefore, as may give them that rank in
       the society which so important a trust requires.
       The long time and the great expense which
       must be laid out in their education, when
       combined with this circumstance,necessarily
       enhance still further the price of their labour.
                Wage and Profit
   Fifthly, the wages of labour in different
    employments vary according to the probability or
    improbability of success in them.
    • The probability that any particular person shall ever be
      qualified for the employment to which he is educated is
      very different in different occupations. In the greater
      part of mechanic trades, success is almost certain; but
      very uncertain in the liberal professions. Put your son
      apprentice to a shoemaker, there is little doubt of his
      learning to make a pair of shoes; but send him to study
      the law, it is at least twenty to one if ever he makes
      such proficiency as will enable him to live by the
      business.
          Wage and Profit
 Wages  vary in inverse proportion to the
 agreeableness of the employment.
 “education in the ingenious arts and in the
 liberal professions, is tedious and
 expensive. The pecuniary recompense,
 therefore….of lawyers and physicians ought
 to be much more liberal: and it is so
 accordingly.”
                    Wages Fund Doctrine
   Assumes there is a fixed capital fund for payment of wages
     • wages fund - the store of goods (capital) previously
       produced (food, clothing, housing, 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)
     Development of Society and
          Property Rights
 Period           Property Rights
 Hunting          No Property Rights
 Pastoral         Some Private Property
                   (society hierarchy)
   Agricultural   Feudal, Property in
                   Landowner’s hands
   Commercial     Property of Capital

								
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