Lecture 12: Adam Smith and The Wealth of Nations

What causes prices to change? Why is the pricing like that? He was the origin of our knowledge to classical economics.

A little bit of context…

  • Changes in the economic system

    • From traditional markets

      • Jobs passed from father to children

      • Domination of guilds to protect their own interests

      • Feudalism

        • a medieval system where a monarch or nobles granted land (a "fief") to lesser nobles in exchange for military service and loyalty.

    • To mercantilism

      • The accumulation of gold and silver of a particular country. They were hesitant to trade because it means that you’re losing the precious metals that you have in exchange for buying essential goods.

  • What brought upon the shift towards mercantilism?

    • Colonialism —> immigration

    • Discovery of the new world

    • New world and mercantilism

  • Smith’s criticism of mercantilism

    • For him, no amount of gold and silver determines the pricing

Adam Smith (1723-1790)

  • Born in Scotland

  • Educated in Glasgow and Oxford

  • Became a professor of logic and moral philosophy at University of Glasgow

  • Eventually became a rector of the University of Edinburgh

  • Published The Wealth of Nations in 1776

Human Nature

  • Selfish and self-interested

    • A person knows what is better for himself / herself

  • Natural for man to bettering relations

    • He understands that you cannot get what you need if you don’t have the skills for it. So, it is natural for humans to better relations

    • Once selfish ang tao, it was in his best interest for him to foster relationship, friendship, and not be violent because he cannot obtain what we want

  • “It is not from the benevolence of the butcher, the brewer of the baker, that we expect our dinner but from their regard to their own interest”

Division of Labor

  • When you specialize on something, that increases the attention and you being efficient in that area. And you strengthen the ability to make small improvements in technology.

  • But this is not the effect of wisdom. The reason you are specializing and division of labor and you produce all these things is because you need to barter, to track, and to exchange one thing or another.

  • The division of labor is not a product of their goodness. It’s a product that they want sell, barter, and exchange. Essentially, they want your money

Economic Value

  • Value in use - to express the utility of an object

  • Value in exchange- power to purchase

    • Ex: water has a lot of utility but it is common, so its pricing is cheap

  • Questions on value

    • “What defines the value of a thing?”

    • “What is more valuable?”

    • “What are the circumstances that define the behavior of the prices?”

  • Labor as the real measure of valuable exchange for all commodities

    • You have more expensive, let’s say diamonds, because it requires a lot of labor for you to get it.

Government’s role

For Smith, no government should be involved when it comes to the affairs of the market, unlike, neoliberals who push regulation and privatization. For Smith, government still has a role and the first is defense.

  • Defense

    • There are things that you’re supposed to outsource but under a neoliberal framework, even the idea of defense is being outsourced.

    • For Smith, he says “While there are things that you’re supposed to live at the hands of the market, there are things that the state must be able to produce or to do.”

  • Administration of justice

    • Court systems and implementation of laws should not be left to the hands of private individuals but must be administered by the state for obvious reasons

    • If there’s a breach of contract, you need to litigate that

  • Public institutions and public works

    • At the time, there are no big enterprises that can handle constructions. So, you leave it to the government.

Taxation

  • Contribute based on their respective abilities

    • If you can pay more, then you should.

  • Certainty

    • You will not very taxes just because you want it. This is sometimes the cause of revolutions in Europe.

    • It should be convenient to pay.

  • Contrived as both to take out and to keep out of pockets of the people as little as possible.

While Smith is an advocate of individual actions, it doesn’t mean that there are things that you should leave with the individuals.