Adam Smith - Wealth of Nations

2 Assumptions by Smith

1. Man is found in the social state 2. Man will be found within a particular type of social structure whenever the exchange economy prevails. This social order becomes possible by virtue of the restraints that people impose upon themselves.

4 Major Topics

1. Specialization 2. Division of Labor 3. The Invisible Hand 4. Laissez Faire

Smith focused on the ___ economy

Capitalistic. Smith began by analyzing individual problems such as determinants of price or distribution before going on to demonstrate their mutual connection and thus the interdependence of all economic phenomena.

Price Theory Contributions

What does the economic need before it can be in balance? Equilibrium must be obtained where the good is sold at its natural price and paid at its natural rate.

Adam Smith Wrote...

The Theory of Moral Sentiments 1759, an Inquiry into the Nature and Causes of the Wealth of Nations (1776), which was the first modern work of economics.

Laissez-Faire

The government keeps its hands off and does not interfere with what people are producing or consuming. Does not interfere with any automatic processes of the Market economy.

Important of Economic Forces

1. Man is an active being, disposed to improve the material conditions of his life. 2. Four stages of economic growth. Hunting, Pasturage, Farming, and Commerce. 3. These 4 stages lead to four recognizably different types of social structure.

Natural Law of Economic Behavior

Any method other than laissez-faire would thwart the natural laws of economics. Smith did not invent these laws, they were already in place. he simply brought light to them. He gave the world the first systematic explanation of how the market process works. Of ho individuals, working for their own greatest benefit, will automatically bring the greatest benefit to all of society (invisible hand).

Commerce Stage

Basically, 2 sector economy between those who manufacture and those engaged in agriculture. Use of money. Society divided into three great constituent orders. Landlords, capitalists and wage labor.

Major Contribution:

Division of Labour

The use of Money is based on...

Labor is the real measure of the exchangeable value of all commodities. Marx said value = labor, period.

Hunting Stage

Lowest and rudest stage of society. Men survive through gathering the spontaneous fruits of the soil. No private property. No distinction of birth.

What should government do? should not do?

Maintain law and order, protect the rights of private property, regulate the monetary system, and undertake the few necessary public projects. The government should not spend society's resources for things the people would not want to spend their own money to pay for.

Pasturage Stage

Men acquire the means of subsistence through the domestication of animals. Larger groupings. No fixed habitation, but live in tents and can move from place to place. First stage that inequality becomes relevant. Ambition to be rich, hatred for the poor. Civil Government. Birthright is important.

Trading...

Nations should determine their opportunity costs, and specialize in what they do best and trade with others for those things that they do not do efficiently. These 4 major topics, and opportunity cost became the basis of classical economics.

Adam Smith's Background

Scottish Moral Philosopher. Considered the father of modern economics.

Invisible Hand

Self-interested producers benefit society at large by improving the materials of production and quality of products. Anyone in the market would be automatically tricked into serving the best interests of the society. By conserving resources and by producing the right numbers of the right kinds of goods.

Farming-Agrarian Stage

Settled abode, rather than nomadic existence. Tillage is the dominant form of activity, while land becomes the major form of property. Emphasis on paternity and law of primogeniture. 1. Because land held power, those in power would have to create a military to protect themselves from their neighbors. 2. No means of expending their wealth save in the form of servants. 3. Those who lacked land could only acquire it through service, meaning those with land had a multitude of servants. Some manufacturing in this period.

Government...

Should be closely restricted, because the automatic natural laws of the market process could direct things so well. People left alone would generate their maximum income, and a nation's wealth and well-being would be maximized.