Adam Smith – Wealth of Nations & Related Concepts

Vocabulary flashcards covering key terms, theories, and concepts from Adam Smith’s major works and economic thought.

The Theory of Moral Sentiments (1759)

Adam Smith’s first major book; explains moral judgments via sympathy and lays the ethical foundation for his later economics.

An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

Smith’s landmark treatise that founded classical economics and advocates free trade, limited government, and market competition.

Sympathy (Smithian)

The capacity to share and understand others’ feelings; central mechanism for moral judgment in Smith’s ethics.

Self-love

An individual’s natural concern for personal welfare; a driving force behind market activity in Smith’s system.

Propriety

The socially approved balance of emotions and actions that guides moral behavior, according to Smith.

Habit of Labor

Tendency of people to work diligently due to routine and social expectations, promoting productivity.

Propensity to Exchange

Human inclination to trade goods and services, forming the basis of markets in Smith’s analysis.

Invisible Hand

Metaphor for how individual self-interest unintentionally promotes the public good through market mechanisms.

Division of Labour

Separation of production tasks into specialized jobs, greatly increasing productivity (e.g., Smith’s pin factory).

Extent of the Market

The size of demand that limits how far labor can be divided and specialized.

Labour Content (Labour Theory of Value)

Early Smithian idea that a good’s value equals the labor time required to produce it in simple societies.

Command Over Labour

Later refinement measuring value by the amount of labor a good can purchase (wages, rent, profit).

Value in Use

Practical utility of a good (e.g., water’s usefulness though cheap).

Value in Exchange

Market purchasing power of a good (e.g., diamonds’ high trade value despite limited utility).

Natural Price

Long-run cost of production equal to wages + rent + profits; the equilibrium price toward which markets gravitate.

Market Price

Actual transaction price that fluctuates around the natural price because of short-term supply or demand shifts.

Equilibrium

State where supply equals demand and market price equals natural price, prefigured by Smith.

Wages

Payments to labor; must cover workers’ subsistence and vary with economic growth, job difficulty, and bargaining power.

Wage Fund

Capital set aside to pay labor; larger funds raise employment and wages.

Profits

Returns to capital owners; tend to fall as competition and capital accumulation increase but fund future investment.

Rents

Payments to landowners arising from high prices; influenced by land quality and population growth.

Gross Revenue

Total annual output of land and labor before deducting maintenance costs.

Net (Neat) Revenue

Surplus remaining after preserving capital; source of savings and investment.

Capital Accumulation

Growth of productive tools, machinery, and money; driven by savings and vital for long-term development.

Parsimony

Frugality that channels income into savings, thereby expanding capital; contrasted with prodigality.

Say’s Law (Smithian precursor)

Smith’s claim that all savings are ultimately spent as investment, preventing hoarding.

Mercantilism

Pre-Smithian system stressing bullion hoarding and trade regulation; criticized by Smith for restricting competition.

Laissez-Faire

Policy of minimal state interference, limiting government to defense, justice, and public works.

Natural Order

Smith’s ideal society operating under justice, liberty, and competition without artificial privileges.

Functional vs. Class Distribution

Smith’s analysis of income by social classes (laborers, capitalists, landlords) rather than abstract production inputs.

Index Number Problem

Difficulty of using labor as a value measure over time because wage and productivity changes distort comparisons.

Competition

Market force that drives efficiency, counters monopoly power, and aligns market price with natural price.