Unit 2; Adam Smith

Where was Adam Smith born?

Kirkcaldy, County Fife, Scotland

When was Adam Smith born?

June 1723

Early challenges in Adam Smith’s life

• Speech impediment

• Absentminded

• Kidnapped by gypsies (uncle tracked them down and saved him)

• Father died before he was born

Adam Smith in Oxford

• uncle got him into Oxford 1740 (before it was prestigous)

  • lectures were really long debates

  • basically taught himself through the books in the library

Adam Smith at Glasgow

• used to be a student at Glasgow (before Oxford)

• Beloved professor of Logic (1751) and Moral Philosophy

• offered Chair of Logic at the University and Chair of Moral Philosophy

• rose to be the Dean

• Published his most famous work, “The Theory of Moral Sentiments” in 1759 while working there

Adam Smith later occupation

• left Glasgow to be a tutor and traveling companion to Henry Scott, a duke, recruited by his stepfather

Adam Smith theories

• Theory of Value

• Market mechanism

• Atomistic Competition

• Law of Accumulation

• Law of Population

Adam Smith’s Theory of Value

• labor, not nature, is the source of value

  • historical context: grew up in a country that thrived on trade rather than agriculture

• we should be able to measure value and it should stay consistent

• cost of production + reasonable profit margin = price of products (margin is dictated by the economy)

• published The Wealth of Nations In 1776

  • argues free markets, free trade, and the division of labor

  • individual self-interest and an “invisible hand” (little to no government intervention) leads to economic prosperity

How was Adam Smith publicly received?

He was very famous and accredited. Students traveled from Russia to experience his lectures. He was known to be passionate about his intellectual ideas.

Adam Smith’s market mechanism

• the basis is self-interest + competition

• the drive of self-interest (business owners wanting to maximize profit from Year 1 —> Year 2) is the driving force of the economy and will lead to competition

• competition is the regulator of the economy and will create reasonably priced supply for the demand because everyone is trying to outcompete each other and can’t get customers if their prices are the highest—> atomistic competition

  • self-regulates the economy because if there is too much competition in one industry, you move to another one ”the invisible hand”

  • requires ‘transparency of the market,’ knowing exactly what everyone in the market is pricing which is impossible

• if consumers want more of a certain product to be produced, they can just but more of their money into the businesses that produce that product and production will increase as demand does

  • at first, this would increase the prices of gloves because demand > supply but as trend are recognized, more people will try to get hired by glove-making companies and supply = demand so prices go back down

Set Backs

• assumes Homo economicus, which means that everyone is rational in their economic decisions and would always make the cheapest option which is not true

• assumes products are homogeneous, that all products are the same quality

• assumes perfect mobility of capital meaning that people can move from one industry to the next easily which is not true because of licensing and capital you have already invested into the business

Atomistic competition

• large number of small businesses so no single entity has the power to influence the market price

• no monopolies

The Division of Labor

• men produce more under one roof and by dividing the steps to making a product vs. one man making all the products/men who work on different elements of the product in varying environments

• Adam Smith is one of the first to put the division of labor into writing

The Economy of Motion

• all business owners want to increase their profit from one year to the next

• only way to increase profit is to produce more

• to produce more, you have to hire more workers

• hiring more workers requires that you pay them

• so you end up making less money because know you have to pay for more labor

• Smith’s solution is the Law of Population

Smith’s Law of Population

As wages increase, workers increase their economic situation and start having more babies. This makes the population increases which produces more workers nationally and the wages go back down.

Smoth’s idea of Government in the economy

• thought that government in the economy messes with the self-regulating atomistic system

• the least government the best

• but he accepted government intervention for general welfare

  • protect society against other dangerous societies

  • provide an administration of justice for all citizens

  • public institutions and public works like roads, education, and scientific research

• against government in the market mechanism

• against restraints of imports and bounties on exports

• in favor of consumer, not worker or business owner (stricken by the greed of the bourgeoisie)

Smith’s Law of Accumulation

• saving profits to reinvesting them into productive capital (tools, machinery, training) drives economic growth

  • increases the division of labor

  • cycle of more wealth, higher wages, and improved living standards

Smith’s model vs. Great Britain in 1776

• despite Smith’s model Great Britain in 1776 had strict control over colonial trade

  • colonies could only trade within Britain

• bans in manufacturing to prevent competition and ensure raw materials went to Britain

• tariffs and bounties to favor domestic (British) industries and enrich the nation

• Smith said Britain’s model only benefitted merchants but harmed consumers and overall growth

• sam this model as a violation of natural rights, using your labor and capital as you please

• new that Britain would not give up the colonies easy and a revolution (the American Revolution) would have to take place