Adam smith and modern economics

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Information about Adam smith and modern economics

Published on March 3, 2014

Author: glennrivera520


Adam Smith Liberalism and modern economics

Related concepts to Adam Smith • • • • • • • • • • • See Encarta Encyclopedia Laissez-faire Free market economy Capitalism Economics Self-interest Individualism Classical economics Microeconomics – theory of firms Public goods – “lighthouse” Industrial revolution

• Youtube Video: Turning Points in History Industrial Revolution • Industrial Revolution Overview • /videos?view=0

Industrial Revolution • Historical Context: Industrial Revolution (1760-1840) in Britain • Industrial revolution is perhaps the most important part that has shaped the modern age • Discovery of the new world and antiquity helped create a more secular European civilization • The Protestant Reformation emphasized Individualism and that individuals should be free to play more of a role in controlling their earthly, as well as their eternal, destiny • In politics, change was represented by the English, American, and French revolutions

Mercantilism • Mercantilism – the economic outlook during the discovery of the New World • Under this system, the hoarding of gold and silver was the primary economic goal, colonies were extremely valuable, the import of finished goods (which had to be paid for in gold and silver) was undesirable, and the export of finished goods (for which gold and silver would be received) was highly desirable (balance of trade). • The government had a “big hand” on the political economic activities of the times • To facilitate these policies, nations adopted tariffs and bounties (subsidies to exports)

Economic freedom • Through the advent of the industrial revolution and protestantism, a greater appreciation for the individual (instead of the Church and the State) and this life (instead of the afterlife) had been attained • Slavery (at least of the Europeans) became illegal and economic advances had to be facilitated through technical advances. There was no industrial revolution in the ancient times because of the existence of slavery, which allowed the higher classes to have an affluent life-style without technical innovation • In a very real sense, machines are modern slaves – and machines (unlike slaves) can be made available to everyone, not just the rich • Wealth and its creation has, since then, been looked upon as great social and personal goals

Adam Smith • Considered to be the apostle of capitalism • He systematized, summed up and explained the political economic order that was emerging during the industrial revolution • The essential element in Smith’s philosophy is his concentration on the importance of a FREE MARKET in ensuring the HIGHEST QUALITY of goods at the LOWEST PRICES

Adam Smith on Human Nature • His assumptions about human nature are uncomplicated and representative of the British capitalist-utilitarian era • He believed that human beings are at root individualistic • The reference point is that of the sympathetic, impartial spectator • According to him, human beings are autonomous, independent entities who may interact either more or less successfully • Human life has no set, predetermined, or inescapable goal or purpose

Adam Smith on Human Nature • Humans will interact most successfully if they live in a society of economic freedom: individualistic philosophies tend to emphasize what people can do as individuals, not what they can do as groups • Smith prefer more economic questions like whether a person may trade, establish an enterprise, or enter an occupation

Adam Smith on Government • In his day, the major goal of social philosophers was to reduce the extent of government and custom in all areas • Government at that time produced much inefficiency and waste though poor taxation practices, misdirection of resources, and overregulation of the economy and society generally • Political liberty and economic laissez faire are thus related

Adam Smith on Government • Smith, like most Marxian analysts, holds that the economic structure of society will precede its political one • He states, “Commerce and manufactures gradually introduced order and good government • It is when individuals have something worth preserving that they will institute a political system that will protect it • The appropriate role for government is to provide a stable social framework within which “the uniform, constant, and uninterrupted effort of every man to better his condition” can be realized

Self-Interest and the Society • Individuals are largely, but not completely, motivated by self-interest. But because humans have within themselves a capacity for sympathy, they generally do not pillage at will. Nonetheless, humanity’s sympathetic capacities are limited, and are socially more useful in restraining wicked actions than in compelling virtuous ones • For this reason, Smith notes that society is more likely to condemn a malicious character than it is to castigate merely a non-praiseworthy one

Self-interest and the Society • Smith’s famous analogy for the thesis that people, if left alone, will produce not only their own greatest good, but the good of all, is “the invisible hand” (Example of the butcher and baker) • In The Wealth of Nations, Smith states that – in a free economic system – an individual is “led by an invisible hand to promote an end which was no part of his intention... By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it”

Self-interest and the Society • Because individuals constantly seek to better their condition, they will continually direct resources to higher and better uses, if they are allowed to do so. This will result not only in their personal advantage, but in the advantage of others • A free marlet enables individuals’ significant selfinterest to exercise itself within the limits established by a government that restrains people from performing positively bad actions

Self-interest and the Society • Smith famously states: “Man has almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them... It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their selflove”

Free Markets and the Wealth of Nations • Free markets allow all individuals in an economy to improve their conditions: this collective improvement by individuals equals national improvement – the wealth of nations • In its emphasis on the wealth of a nation being nothing other than the wealth of the members who make up the nation, Smith’s philosophy is individualistic. It furthers political theories that emphasize the individual, and proclaims the worth of each individual. Although in a very different way, Smith, like Marx, finds men and women’s purpose in work

Division of Labor and the Wealth of Nations • The great advantage of free domestic and foreign markets is that they expand individuals’ abilities to specialize, and it is through SPECIALIZATION that the wealth of persons and nations really increases • Among Smith’s most important concepts, following his emphasis on the importance of free markets, is that as a productive enterprise becomes more complex, it generally can produce far more output (Example: the pinmaker) • The DIVISION OF LABOR is a fundamental component of economic growth to Smith, and it is this division which – more than any other single factor – allows the wealth of nations and persons to develop • In a primitive state of society, an individual’s productive capabilities are extremely limited – to what a person can only directly produce

The Division of Labor and the Wealth of Nations • The division of labor requires, further, a free market in order to be most effective. Where there is a closed market (either at home or abroad), or monopolies or guilds control productive practices, inefficiencies can result, and often do • Individuals’ self-love will lead them to use the system for their personal advantage to the detriment of all, if the system allows them to • A free market in labor and capital always directs resources to be used exclusively by those who manage them optimally and provides the rewards necessary to encourage innovation and technical advance. Inefficient practices and producers will lose work. If this means that some producers go out of business or some workers must shift occupations, “the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer”

Labor as the Source of Value • Following Locke, Smith sees labor as the ultimate source for all value: “Labor... is the real measure of the exchangeable value of all commodities.” (Except in the case of goods that are naturally scarce like diamonds) • Smith considers that wages of labor to vary based on five components: 1) the agreeableness of the employment, 2) the difficulty in learning it, 3) the constancy of the employment, 4) the amount of trust required by it, and 5) the probability of success in it

Production through free trade • Anything that restricts individuals’ abilities to conduct transactions of all sorts is a hindrance to production. If apprenticeship laws and customs restrict the number of producers in an economic endeavor, then this is a restriction on the market. Similarly, if trade between nations is curtailed, then specialization will not occur to the extent that it otherwise would, resulting in inefficiency

Production through free trade • Smith’s great target of opposition was mercantilism. This precapitalist phase of economic development saw rivalry between nations – fostered by discovery and colonization of the New World – as inerradicable. Rivalry was both on a territorial and commercial basis. Each nation considered its own interest, in a balance of trade condition, to be possession of as much gold and silver as possible • Smith’s appraisal of mercantilism was that “the interest of the consumer is almost continually sacrificed to that of the producers”

Production through free trade • Smith was emphatically opposed to any restraints on foreign trade that were the result of mercantilism. He considered this to result in both a nation – and its competitor – being worse off • Wherever the market is restricted, there is not the same possibility for specialization, and this is what allows maximum economic production (Example: Twonation economy of cars and food) • Smith sees a natural harmony of interests that results when freedom is society’s governing principle. This implies, broadly speaking, a pacific policy in foreign relations, as well as domestic policies of economic noninteference and political liberty

Production through free trade • Smith opposed restrictions on trade (like tariffs) within nations and between them. He was, however, no defender of what would later be called “big business.” Along these lines, he wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” • His solution to monopolies fostered by government was freer exchange through diminished government • In general, people will benefit more from a general principle of non-interference by government than from a principle that allows interference, because there is no telling what the interference will be or whom it will benefit

Adam Smith on Justice • Like Hume, Smith grounds justice in property: “Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts

Government’s Role • Smith was not completely opposed to government, though he saw a limited role for it. • The three functions that he allowed government are: 1) national defense; 2) administration of an impartial system of justice; and 3) facilitation of certain public works and institutions that are beneficial to society (particularly in furthering commerce), but whose nature does not lend themselves to being performed by individuals

Government’s Role • Concerning the non-defense and non-judicial functions of the government, Smith saw these as essentially two: 1) Public works such as bridges, roads, and canals that are (or were) too expensive for individuals to construct 2) Some support for education for education would ward off some of the negative side effects of modernization

Government’s Role • On taxation, Smith propounds four principles: 1. Taxation should be proportionate to income; 2. Its amount should be certain for the payer (and not arbitrary); 3. Its payment should be at a time when it is convenient for the payer; and 4. It should be of a nature that is uncostly to administrate

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