Adam Smith Review

Humans have a unique propensity to truck

(paid in truck means to paid in kind- work at a surfboard shop, you get paid in surfboards), barter, and exchange

What does Smith see as the detrimental effects of duties and tariffs? Describe the kinds of tariffs Smith tolerated.

1. Equalize the tax burden on a particular domestic industry (the whole country depends on) by imposing a tariff on imports of that good 2. Protect a domestic industry essential to national defense national security matters more than national wealth

Describe Smith's understanding of economic progress over time

1. Primitive Stages 2. Pastoral Stage: Shepherding 3. Agrarian Stage: property in land, inheritance 4. Commercial Society

In what ways does Smith use the preconceptions of "self-interest" and the "propensity to truck, barter and exchange" in his analysis?

1. Self-interest/ sympathy 2. Rationality 3. Competition 4. Truck 5. Consumer

Key Principles of Human Nature

1. Sympathy The interest we have in others Our tendency to try and feel as others has we been in their place 2. We judge others on this basis, we behave according to what we feel will be acceptable 3. But sympathy can fall short of what is morally justified by mass misery

construction of essential public works

1. alluding to alleged market failure 2. goods that the market of its own would not provide enough of 3. not one market provider could charge enough who could provide a public work on their own such as ex: interstate highway would not get enough benefits in exchange for the cost of building

What does Smith mean by his claim that "the division of labor is limited by the extent of the market"? found it in reading

1. colonization 2. capital 3. Division of labor by towns, region 4. Widen market workers produce goods beyond their own consumption requires savings capital (savings) sustains them during the time-consuming production process needs to pay people wage

What are the three sources of the positive effects of the division of labor?

1. increase in the workman's skill and dexterity 2. saving of labor time 3. invention of machinery which facilitates labor

Why does Smith look so unfavorably on "exclusive privileges"? How does Smith view apprenticeship legislation?

1. opposition to exclusive privileges sell commodity at market price that exceeds the natural price 2. wants it open to competition the law should be objective and not support or favor one group over the other there should not be any added rules or bans, but instead a free market 3. if people want to start a corporations on either side (employees, or employers they should be able to) in the end it just hurts the consumer and raises prices on them

Role of Government

1. property thought of should serve three functions provision of law and order 2. national defense and security of the nation (defense > opulence) 3. construction of essential public works

Describe Smith's arguments regarding the virtues of a commercial republic

1. qualities of human nature--> stable and prosperous society 2. commerce --> non-violent factions, political stability 3. free trade--> prevent excessive disorder

What are the effects of the division of labor on a nation's output?

1. source of social improvement: productivity of labor 2. specialization 3. applicable for all human activity and settings 4. especially pronounced division of labor in commercial society 5. innovators

Smith as a Behavioral Economist

1. undoes homo economics a. rationality b. selfish utility maximizer 2. For Smith, the "others" are an essential part of what constitutes rational (or prudent) behavior

Altruism and Fairness

Altruism is a somewhat erratic force A more reliable force is played by fairness The impartial spectator

How does Smith's critique of the Mercantilist notion of wealth

Book IV critiques mostly mercantilism and some physiocracy Mercantilism involved mercantile interests restrictions on competition opposition to exclusive privileges sell commodity at market price that exceeds the natural price natural: basic costs of production market price should not be excessively over- excess profit Wheelmakers and coachmakers Pursuit of protectionist legislation

What is Smith's critique of the Mercantilist arguments about the balance of trade? How does foreign trade promote a greater division of labor?

Case for Free Trade each country should trade the goods produced at a lower cost for goods produced at a higher cost absolute advantage (not comparative advantage) absolute cost advantage may be gained over time through increased specialization → decreasing cost prudence for a nation free trade enhances the general economic welfare of both nations both have greater output problem with import restrictions they get in the way of the invisible hand

How does one reconcile Smith's views of human nature as presented in Moral Sentiments and The Wealth of Nations?

Doesn't contradict himself because he looks at role of self interest and sympathy for others

Pastoral Stage: Shepherding

Domestication of animals leads to accumulation more materials leads to surplus food, clothing, trade, division of labor compared- xenophon and plato: division of labor showed natural inequality Property accumulation leads to inequality need for formal rules (civil govt.) rudimentary division of labor specialization

How is the determination of value different in an advanced economy as compared to a primitive economy?

Income Distribution 1. profits as a return on capital advanced and compensation for bearing risks in any particular market, competition reduces profits 2. wages in a primitive society are determined by productivity labor theory of value only for a primitive society (vs commercial or public) advanced society: employer

Is Smith an advocate of laissez-faire? Describe his understanding of the proper role of the State in relation to markets. Discuss examples of government intervention into the market place which Smith favored.

Not a full laissez-faire supporter he thought banks needed to be regulated so that they had a lot of capital tolerated some govt. regulation Smith as commissioner of customs worked as a govt regulator opposed to monopoly in any form

In what ways is the market an ingenious mechanism?

The market is self regulating. Classic supply and demand shifts.

Chinese earthquake and the finger

You'll lose sleep if you got your own finger cut off, but not if a tsunami wiped out an entire village There is a limit to sympathy

approbation

act to impress others vanity to show off Pride, vanity are channeled by the market into socially useful purpose

natural price

basic costs of production

invention of machinery which facilitates labor

by doing same task over and over again, a worker is able to figure out how to be most efficient this is controversial - is this actually stifle a person's mental capabilities Smith wants to remedy this with public education

Competition restrains and directs self-interest

charge reasonable price, and produce with reasonable quality

End of production is serving the consumer

consumer driven society less interested on distribution of income

saving of labor time

don't have to change uniform, location

true of all human activity and settings

factory, non profits, church, hospital

innovators

gains and benefits of outputs and innovation James Watt rotary steam engine Joseph Black advanced use of chemicals in scientific and industrial revolution

specialization

gains of doing one task and gaining skills

increase in the workman's skill and dexterity

going from one task to another (flexible)

Vices

if you rely too much on the division of labor you stunt growth rely too much on doing the same activity, you need education greater reliance on economic liberty led Smith to be a modest optimist regarding Britain's prospect for continuing economic growth

Agrarian Stage

increased specialization usufruct: given to landlords feudal society agricultural surplus growth of towns widens the markets guilds, crafts, greater benefits of division of labor erosion of the traditional ties of the manor

What role does population play in Smith's analysis?

labor when the market is flooded with workers, pay will be less to accommodate workers greater demand in labor greater pay greater amount of kids downward push on wages

Distinguish between market price, natural price and monopoly price. Is Smith's natural price determined by supply, demand, or both? Explain.

market price: actual price determined by short-run changes in supply and demand shortage: market price > natural price market attracts land and capital surplus: market price < natural price land and capital exit monopoly price: the highest price that can be obtained by the seller happens when there are exclusive privileges and restriction of competition natural: sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market

Commercial Society

much more extensive division of labor, the exchange economy contract society Rome, 18th century Britain had some aspects of commercial society Roman law: just price, trade

Primitive Stages

no rights to property recognized

source of social improvement is the productivity of labor

output per a person per an hour pin factory

What is the principle which gives rise to the division of labor?

principle- people's different strengths and skills

Wheelmakers and coachmakers

restrict competition by lobbying Wheelmakers petition the British parliament to restrict coachmakers coachmaker could not legally make wheels for their coach a wheelmaker however could produce coaches to put on top of their four wheels

What role does profit play in Smith's work? Why do long-run profits tend to decrease?

reward for entrepreneurship long-run price: will enable producer to pay average rates of rent, wages, and profit overtime profit will decrease because they are paying out to their employees

market price

should not be excessively over- excess profit

What is an efficiency wage? What role do these wages play in Smith's theory of economic development?

some workers are paid above the market wage, training has given them human capital way to retain workers and avoid turnover ex: special knowledge inventory, accounting, coding low wages are a symptom of a stationary of contacting economy wages fail to increase, so demand growth leads to higher wages

true human nature

sympathy driving force of good deed self interest does not equate selfishness self interest broadly conceived

human rationality

the desire to better own condition

homo-economicus

the economic man- driven only by narrow self interest

What conditions are necessary for wages to rise (in a secular sense) above the level of subsistence?

wages will rise above the level of subsistence when the economy is growing and expanding more product, more money those with skills will be paid more- worker retention

Big picture for Adam Smith

what drives the creation of the wealth of a nation Smith is always concerned about protecting and benefiting consumer

self-interest and sympathy unify society

you can only charge as high as to not lose out to competition