ADAM SMITH AND THE NATURE AND CAUSES OF THE WEALTH OF NATIONS

What is the main goal of The Wealth of Nations (WoN)?

The main goal of WoN is to identify the long-term forces governing "the nature and causes of the wealth of nations," defined as the annual labour of a nation which supplies it with the necessities and conveniences of life.

What is the goal of Book I of The Wealth of Nations?

The goal of Book I is to investigate the causes of improvement in the productive powers of labour and how its produce is distributed among different ranks in society.

Q: How does the inclination to trade relate to the emergence of the division of labour?

A: The inclination to trade, barter, and purchase creates the conditions for specialisation, which leads to the division of labour. People notice their advantages in specific tasks and begin to specialise.

Q: What does Smith mean by the division of labour being a "spontaneous order"?

A: The division of labour arises naturally from people's actions, not from human design. It is a gradual consequence of the human tendency to trade and exchange goods.

Q: What is the self-reinforcing process described by Smith?

A: Smith's self-reinforcing process is as follows:
(i) People engage in trade due to self-interest.
(ii) This leads to specialisation, increasing production.
(iii) Increased production lowers prices, stimulating demand.
(iv) Greater demand allows for further specialisation, continuing the cycle of productivity growth.

Q: What is Smith's theory of value in the long-run?

A: In the long-run, Smith holds a cost-of-production theory of value, where natural prices are determined by production costs, while short-run prices are influenced by demand.

Q: How does competition lead to maximizing national output according to Smith?

A: By pursuing their self-interest, individuals indirectly promote the public interest, increasing national output and revenue through competition.

Q: What role does the 'invisible hand' play in Smith's theory?

A: The 'invisible hand' refers to the unintended outcomes of individuals pursuing their self-interest, which can often promote the public interest in ways that they did not intend.

Q: What is the importance of 'liberty' in Smith's competition?

A: Liberty is crucial because it allows individuals to freely move capital and labor between different activities, promoting competition and efficient resource allocation.

Q: How does Smith view monopolies?

A: Smith criticizes monopolies and the monopolizing spirit of merchants, believing they harm the public interest by restricting competition and raising prices.

Q: What role does government play in Smith's economic system?

A: Smith believes the government should create an institutional framework that encourages competition and protects private property, ensuring the harmony between private and public interests.

Q: What system does Smith argue for regarding trade?

A: Smith argues against restrictions on trade, such as protectionist policies, policies hindering labour mobility, and monopolistic policies, advocating for a system of natural liberty where individuals are free to pursue their interests.

Q: Why does Smith argue government is needed to enforce laws?

A: Government is necessary to enforce laws that protect property against theft and fraud, and to enforce contracts, which encourages investment and economic development.

Q: What does Smith say about the relationship between private self-interest and public good?

A: Smith believes that private self-interest can promote public good under the right institutional arrangements, such as protecting private property, enforcing contracts, and encouraging competition.

Q: What are public goods according to Smith?

A: Public goods are services or infrastructure that it is not profitable for individuals or small groups to provide, but are beneficial for society as a whole. The government should provide them.

Q: How does the division of labour affect workers, according to Smith?

A: The division of labour narrows workers' experiences, making them mentally and socially less capable, which harms their ability to engage in rational conversation, defend the country, or pursue other occupations.

Q: What does Smith propose for funding public education?

A: Smith suggests that public funds should partly support teachers' wages, while the rest should come from fees paid by parents. This ensures teachers have an incentive to work hard and provide quality education.

Q: What is the rationale behind making teachers' pay depend on fees?

A: Smith argues that when teachers' earnings are linked to their performance (through fees), they have an incentive to teach well and work hard, as competition for their services ensures quality.

Q: What is the primary goal of Adam Smith's Theory of Moral Sentiments (TMS)?

A: The goal is to explain the moral judgments people actually make, focusing on the principles that guide human sentiment and sympathy, rather than a perfect moral code.

Q: What does Smith say about the relationship between sympathy and moral judgment?

A: Sympathy involves detachment, where the spectator evaluates the PPC's emotions objectively. Sympathy does not imply agreement with the PPC's feelings but helps the spectator assess their appropriateness.

Q: What motivates people to reduce differences in sentiment, according to Smith?

A: People are motivated to bring their emotions closer to the PPC's response in order to create harmony, since mismatched sentiments cause discomfort.

Q: What does Smith say about the natural inclination for people to care about their own happiness?

A: While people naturally prioritize their own happiness, they must temper their self-love to align with the standards of the impartial spectator, ensuring their actions are just and not excessive.

Q: According to Smith, how does the impartial spectator influence behavior in society?

A: The impartial spectator helps people understand the importance of balancing self-interest with concern for others, promoting behaviors that are acceptable to society and discouraging selfish or unjust actions.

Q: How does Smith describe the relationship between sympathy and human nature?

A: Sympathy allows humans to feel for others and restrain their selfish desires, contributing to a harmonious society where individuals' actions are in accordance with justice and propriety.

Q: How does Smith view benevolence and self-interest in human behavior?

A: While people are naturally more concerned with their own well-being, Smith believes that humans also possess an innate concern for others' happiness, which is necessary for social harmony.

Q: Why does Smith argue that people's benevolence is limited?

A: People can only feel genuine sympathy for a small number of people due to limited knowledge, making self-interest a more effective motivator in many cases.

Q: How does division of labour impact society?

A: It leads to an increase in output, resulting in higher living standards for most people, with universal opulence extending to the lowest ranks of society.

Q: What is the primary reason people engage in trade according to Smith?

A: People trade to appeal to others' self-interest, offering them something that benefits them, as opposed to relying on altruism or benevolence

Q: Why is appealing to self-interest crucial in an economy with a division of labour?

A: As the division of labour becomes more complex, relationships become more impersonal and anonymous, making it impossible to rely on altruism. Therefore, people must appeal to self-interest.

Q: What does Smith say about the expectation of benevolence in trade?

A: Smith argues that we do not expect our dinner from the benevolence of the butcher, brewer, or baker, but from their self-interest. People act based on their own benefit, not out of humanity.

Q: How does the act of trading surplus goods encourage specialisation?

A: When individuals realise they can obtain more goods by trading surplus products (like bows and arrows for venison), they decide to specialise in tasks where they are more efficient.

Q: How does the size of the market limit the extent of the division of labour?

A: The division of labour is limited by the size of the market. A small market doesn't allow for full specialisation since there is insufficient demand for all the surplus products people can produce.

Q: How does improved transport influence the division of labour?

A: Improved transport expands markets, allowing for more extensive trade, which enables further specialisation, productivity growth, and price reductions.

Q: What does Smith mean by "universal opulence"?

A: Universal opulence refers to widespread wealth across society, made possible by the division of labour, which creates more goods, reduces prices, and allows people to specialise, benefiting everyone in society.

Q: What are the two different meanings of the word "value" according to Smith?

A: Value in use (the utility of an object) and value in exchange (the power to purchase other goods).

Q: What is "use value"?

A: The total utility a person acquires from a good.

Q: What is "exchange value"?

A: The price of the good; the power of the good to purchase other goods.

Q: How does Smith define the 'natural price' of a good?

A: The minimum price at which a good must be sold for the owners of the factors of production to earn enough to keep producing it.

Q: What is the "market price" of a good?

A: The price at which a commodity is commonly sold, which can be above, below, or equal to the natural price.

Q: How does competition influence market prices?

A: If demand exceeds supply, market prices rise due to competition among buyers; if supply exceeds demand, market prices fall due to competition among suppliers.

Q: In the long-run, how does market price relate to natural price?

A: In the long-run, market price gravitates towards the natural price, with competition ensuring prices move towards this central value.

Q: What does Smith mean by the "nominal price" of a good?

A: The nominal price is the money price of a good, expressed in terms of currency like gold or silver coins.

Q: How does Smith measure the "real value" of a good?

A: The real value of a good is measured by the quantity of labor required to produce it.

Q: What is the 'labor theory of value'?

A: The value of a commodity is determined by the amount of labor required to produce it.

Q: What are the three duties of government according to Smith's system of natural liberty?

A: 1. Protect society from violence and invasion.
2. Protect members from injustice or oppression (administration of justice).
3. Erect and maintain public works and institutions that individuals or small groups can't afford.

Q: What example does Smith give of government intervention in public goods?

A: Smith mentions the state provision of education, especially elementary schooling, to counter the negative effects of the division of labour on workers' intellectual and social capabilities.

Q: Why does Smith argue the government should provide elementary education?

A: To prevent the mental stagnation caused by the division of labour, and to ensure that workers are educated enough to participate in society and defend the country.

Q: How does Smith define sympathy in TMS?

A: Sympathy is an imaginative process where one person imagines themselves in another's circumstances and considers how they would feel in response to that situation.

Q: What is the "person principally concerned" (PPC) in Smith's theory of sympathy?

A: The PPC is the person whose emotions and sentiments are being evaluated and sympathized with by the spectator.

Q: What happens when a spectator's feelings align with the PPC's emotions?

A: If the spectator feels the same way as the PPC, they approve of the PPC's sentiment as just and proper.

Q: How do people adjust their feelings in Smith's theory of sympathy?

A: Both the PPC and the spectator try to moderate their emotions so that they align with each other, striving to reach a mutual understanding or "concord."

Q: What is the role of the impartial spectator in moral judgment?

A: The impartial spectator is imagined when no other person is present, and their perspective helps an individual evaluate their own behavior and emotions to ensure they are appropriate.

Q: How does the impartial spectator help people moderate their self-interest?

A: By considering how an impartial spectator would judge one's behavior, people are encouraged to act in ways that are acceptable to others, thus moderating excessive self-interest.

Q: According to Smith, what is the principal cause of increasing productivity and economic growth?

A: The principal cause is the division of labour, or the specialisation of tasks within a business.

Q: How does Smith illustrate the effects of division of labour in his pin factory example?

A: In a pin factory, the task of making pins is divided into 18 distinct operations performed by different people, allowing a workforce of 10 to produce over 48,000 pins a day, compared to much less if done independently.

Q: What are the three main reasons division of labour increases productivity?

A: 1. Improved dexterity of workers.
2. Saving time as workers don't have to switch tasks.
3. Encouragement of invention of labour-abridging machinery.

Q: How does the division of labour affect people's reliance on others?

A: People become more dependent on others to obtain most of what they need, as illustrated by the example of a common day-labourer's woollen coat, which involves the joint labour of many workers from various sectors.

Q: How does Smith describe the complexity of producing even simple goods?

A: Smith describes the variety of labour required to produce even simple items, such as the woollen coat of a day-labourer, involving shepherds, weavers, dyers, merchants, and many others.

Q: What conclusion does Smith draw about division of labour and dependency?

A: Smith concludes that without the cooperation of many, even the simplest accommodations in a civilized society would not be possible, making people more dependent on others.