Chapter 10: Efficiency and Markets: Adam Smith

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