Adam Smith

Lecture 3

Who was Adam Smith, and why is he relevant?

He was a Scottish philosopher, authro of the Wealth of Nations.

He is relevant because his theory of the market as an organizaing force in society underpin neoclassical economics (this means that he believes the maret is the best means to organize society). Furthermore, his belief in self-interest and the desire to accumulate more is a principle for capitalism. His concept of growth, market equilibrion and rationality are central to free market economies.

Explain the concept of the invisible hand.

People create a demand, which others meet because of self interest, but as a result people are benefited. In other words, the market is a force that can ensure self-interest that is beneficial to society.

What was Smith’s outlook on the market?

Smith had an optimistic outlook on the market and economy, especially due to the invisible hand.

What is Smith’s point of view on division of labour?

Smith argued that the division of labour increased the aggregate wealth of society. It makes labour more productive and efficient and it can grow if markets can grow.

What is the limit on the division of labour?

It is political and natural.

Political: government interference, monopolicies or protectionism.

Natural: space and time → new markets need to be found as well as new resources.

What are the downsides of division of labour that Smith pinpoints?

Boredom, lack of training, and gender divide.

What did Smith believe about capital accumulation?

He believed in capital accumulation on the basis that it could be reinvested and lead to general wealth creation.

What was Smith’s point of view regarding rent?

He was against it. Rent for him meant the rent of land or natural resources for money. He considered this as unproductive and not valuable to society.

What did Smith believe regarding tax implementation?

He was in favour of imposing tax on ren in order to ensure its productivity.

What was Smith’s view on monopolies?

He believed that the market should be seen in the context of his opposition to monopolies in the form of guilds or exclusive agencies. He believed that monopolies were a distrotion of the market and that it was detrimental.

Explain Smith’s discontent with the East India Company.

He criticized the rule of this mercantile organization in India. He argued that their governance was irresponsible, and that their involvement in government affairs would be detrimental to their commercial ability. Therefore, he saw this as an example of a monopoly that should be broken up.

Explain Smith’s opinion about the role of the government.

Smith believed in the laissez faire market (let it be), however he also believed in some forms of intervention. For example a government should provide external protection such as security and the rule of law. They should also provide infrastructure, public works and education (funded by the state).

What are some critiques on Smith and his views?

He based his analysis on a period that was pre-industrial, therefore his notion of market forces may have made more sense in this time.

Is Smith considered to be right or left?

Right.

What are the two problems that Adam Smith discovered in market-based societies?

1. There are fluctiations. These fluctuations can be both positive and negative. Positive because it shows the power of the market when the economy keeps rising, but negative when the economy keeps failing.

2. It changed and transformed social relations. Before there were personal relationships, even if they were hierarchical, but in a capitalist economy this doesn’t happen. They are strictly labour relationships.

Explain the Law of Accumulation.

The accumulation of capital put to use in machinery.

Accumulation of capital (collection/adding up) is one of the principal ways to look at modern economy → more machinery to be able to produce more (because of the self-interest) → more demand for workers → higher wages → more workers want to join the line of business → competition in the job market → lower wages → more wealth accumulation, etc.

Explain the law of population.

The demand for men regulates the production of men. This means that if wages are high, the number of the workforce will multiply. If wages are low, the workforce will descrease.

• Higher wages also influences the number of children who would grow to working age.

How does Smith believed that value is created?

He believed that labour is the source of value, not nature. He also made an emphasis on the productivity that arises from the division of labour.

Briefly explain the context of the world that Adam Smith lived in.

It was a preindustrial, capitalist society. Business was competitive and prices did rise and all with deman. The changes in prices affected output and occupation.