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according to Smith, what determines if a person is rich or poor?
depends on the amount of labor they can purchase from other people through goods and services
real price
the amount of labor that we do to acquire something
real value reflects the value of labor in a set _______ and ______
time, place
labor is not a good estimate of value so we estimate the value of things with
money
why can money never be an accurate measure of the value of other commodities?
it fluctuates in value (inflation/deflation)
real value of labor
the quantity of stuff you can purchase with labor
nominal value of labor
the amount of money you get for your labor
market
a place where buyers and sellers exchange goods and services with the use of money as a medium of exchange
prior to 1776, what is forging the global system of food production, consumption and trade?
the New World colonies and plantations
circa 1776, ______ ______ are deepening coal mines and powering industries
steam engines
circa 1776, agricultural improvement is
raising yields and transforming relations of production
circa 1776, _______ are privatizing land tenure and ejecting commoners from estates
enclosures
what was the economic motivation behind enclosure?
increased yield and economic profit, removal of peasants means profit does not have to be shared
what emerged to explain market society prior to modern economics?
political economy
physiocrat
people, largely economists, who believed that agriculture was the source of all wealth and that value comes from the land
all other goods in society are derivatives from the land
what are characteristics of a market-society?
waged labor, you don’t produce what you consume, sale of labor for a wage
how does our moral sentiments develop according to Smith?
our moral sentiments develop overtime as people interact with one another
what does Smith say morality is?
our ability to put ourselves in someone else’s shoes
people act within generally accepted morals
how do market societies interfere with morality?
in markets, producers are often farther away and unknown to the buyer which makes it harder to sympathize with them
however, markets create interdependence and can expand the community we sympathize with
what do people believe the ethics of Wealth of Nations is?
the basis of right and rational action is acting through self-interest
true or false: Smith agrees with physiocrats
false
late 1700s, what was prevalent that hadn’t previously existed?
widespread poverty, food shortages, vagrancy & pauperism, riots, fear of revolution
the division of labor
the practice of breaking down a complex production process into smaller, specialized tasks assigned to individual workers which increases productivity and efficiency
what did Smith observe in the pin factory?
with the division of labor the men could make 4,800 pins per person each day, much more than if each person were tasked with creating a pin individually
why does the division of labor increase productivity/efficiency?
increases dexterity as people get better at their tasks
time saving by not switching tasks (efficiency of motion)
alienation of the workplace
can produce more per unit of labor (economies of scale)
mechanization- division of tasks make mechanization easier
economies of scale
the cost advantages obtained due to the scale of operation, with the cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output
true or false: Smith was part of the aristocracy
false
what causes the division of labor?
the human propensity to truck, barter, and exchange means that people’s inclination to trade drives the specialization of tasks
Smith says that the division of labor leads to the
generalized use of money
what does Smith believe about value?
value has intrinsic worth that is determined by the labor required to produce goods and services
the exchange of a good for money implies
equivalence in value between the two
use value
the usefulness and utility of a good
exchange value
the worth of a good in the market
nominal price
the market price
social labor
makes all of our labor common and is made real by prices
labor theory of value
the value of a good is primarily determined by the amount of labor required to produce it
the more labor required to product something, the higher its inherent value in the market
exchange value is a function of
time
gains in efficiency relative to other goods does what to real prices?
decreases them (amount of labor required decreases)
if a farmer’s supply increases, what happens to their purchasing power?
decreases in the rest of the economy
what determines the price of something in a market?
supply and demand
how is labor measured?
measured in terms of time (days and hours)
labor is the ______ ______ whereas money is the _____ _______
real price, nominal price
what happens to purchasing power when efficiency increases leading to more output (say of carrots to buy a suit) ?
if efficiency increases and more carrots can be produced at the same level of labor, purchasing power decreases because each carrot is worth less and therefore it would take more carrots to buy a suit
accumulation of stock
the process of increasing the stock of physical capital in an economy, which can enhance productivity and economic growth
private ownership of the means of production (amassing means of production and producing more from it)
with the accumulation of stock, the means of production become
private property
appropriation of land
making land into private property
in the original state, everyone owns
their labor and output
with the accumulation of stock what happens between laborer, landlord, and capitalist?
the capitalist splits off as a separate class and they own the means of production
with the appropriation of land following the accumulation of stock , what happens between the laborer, landlord, and capitalist?
the landlord splits off, and there are three classes- landlords, capitalists, and laborers
what are the three sources of revenue?
land- rent
labor- wages
capital- profit
natural price
“ordinary or average” rate of wages, profits, and rent
labor is a _______
commodity
invisible hand cycle
when the population increases, there is an increased labor supply, this leads to decreased wages and higher profits, this leads to increased accumulation and investment (reinvestment), which leads to increased demand for labor which increases wages and prosperity, this can lead to population growth
invisible hand
equilibrating force, when people act in their self-interest it brings about the greatest outcomes in a market
_________ drives the invisible hand
competition
competition cycle
firm Y discovers/invents a more efficient way to produce X, Y gains a competitive advantage, profits increase from Y, Y accumulates and reinvests or they lower their prices, competing producers of X lose market share, competitors adopt the new methods or go out of business, entire industry attains new level of efficiency, profits equalize and prices stabilize at new level
