Adam Smith, 1723 1790

Glasgow University
Student of Francis Hutcheson
Friendship with David Hume

Chair of Logic (1751),Moral Philosophy (1752)

Theory of Moral Sentiments, 1759

Tutor of Townsends stepson

Continental travel, 1764 1766
Acquaintance with French Physiocrats
Generous pension

Kirkcaldy, 1766 1776

The Wealth of Nations, 1776
Scotland Commissioner of Customs
Scottish Enlightenment

The Wisdom of Adam Smith

From The Theory of Moral Sentiments, 1759
How selfish soever man may be supposed, there are evidently
some principles in his nature, which interest him in the fortune of
others, and render their happiness necessary to him, though he
derives nothing from it except the pleasure of seeing it.
Lets edit the rest
It hurts to be the object of hatred and indignation; and there is
satisfaction in being beloved [and respected]. This is more
important to happiness than all the [material] advantage a person
expects to get from it.

Theory of Moral Sentiments

Because others sympathize more with our joy than with our
sorrow, we show off our riches and conceal our poverty it is
from this regard to the sentiments of mankind that we
pursue riches and avoid poverty.
We want to be respectable and respected To deserve, to
acquire, and to enjoy the respect and admiration of mankind,
are the great objects of ambition.
There are two different roads leading to the attainment of
this desire;
the one, by the study of wisdom and the practice of
virtue;

the other, by the acquisition of wealth and

greatness.

Saving hundreds of millions in China at the cost

of our little finger:
what is it which prompts the generous upon all
occasions and the mean upon many to sacrifice their
own interests to the greater interests of others,
counteracting the strongest impulses of selflove?. . . It is a stronger love, a more powerful
affection, the love of what is honorable and noble

An affection more powerful than self love!

Themes in An Inquiry into the Nature and

Causes of the Wealth of Nations, 1776
Division of labor

Self Interest and Cooperation in Markets

Role of government
Foreign trade
Labor theory of value
Theory of distribution
Accumulation and progress

Adam Smith Problems?

Inconsistency between Moral Sentiments and
Wealth of Nations
Skepticism of tradesmen
Important roles of government
Plagiarism

From An Inquiry Into the Nature and Causes of the Wealth of Nations

the division of labor is limited by the extent of the market

To take an example, the trade of the pin-maker; a workman not educated

to this business could scarce, perhaps, with his utmost industry, make one pin
in a day, and certainly could not make twenty. But in the way in which this
business is now carried on, not only the whole work is a peculiar trade, but it is
divided into a number of branches, of which the greater part are likewise
peculiar trades. One man draws out the wire, another straights it, a third cuts
it, a fourth points it, a fifth grinds it at the top for receiving the head; to make
the head requires two or three distinct operations; to put it on, is a peculiar
business, to whiten the pins is another; it is even a trade by itself to put them
into the paper; and the important business of making a pin is, in this manner,
divided into about eighteen distinct operations, which, in some manufactories,
are all performed by distinct handsI have seen a small manufactory of this
kind where ten men only were employed, and where some of them
consequently performed two or three distinct operations. But though they were
very poor, and therefore but indifferently accommodated with the necessary
machinery, they could, when they exerted themselves, make among them about
twelve pounds of pins in a day. There are in a pound upwards of four thousand
pins of a middling size. Those ten persons, therefore, could make among them
upwards of forty-eight thousand pins in a day. Each person, therefore, making
a tenth part of forty-eight thousand pins, might be considered as making four
thousand eight hundred pins in a day. But if they had all wrought separately
and independently, and without any of them having been educated to this
peculiar business, they certainly could not each of them have made twenty,
perhaps not one pin in a day

Economic Man: Self interest and exchange

This division of labor, from which so many advantages are derived, is
not originally the effect of any human wisdom, which foresees and
intends the general opulence to which it gives occasion. It is the
necessary consequence of a propensity in human nature to
truck, barter, and exchange one thing for another.
In civilized society [man] stands at all times in need of cooperation
and assistance of great multitudes, while his whole life is scarce
sufficient to gain the friendship of a few persons.... [M]an has almost
constant occasion for the help of his brethren, and it is in vain for him
to expect it from their benevolence only. He will be more likely to
prevail if he can interest their self-love...

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 self-love, and never talk to them of
our own necessities but of their advantages...
[Value] is adjusted... by the higgling and bargaining of the
market, according to that sort of rough equality which, though not
exact, is sufficient for carrying on the business of common life.

Evils of monopoly
Monopoly...is a great enemy to good management.
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[T]he law ought to do nothing to facilitate
such assemblies; much less to render them necessary.

As soon as the land of any country has all become private property the
landlords, like other men, love to reap where they never sowed and demand
a rent even for its natural produce.

Virtues of competition

In every profession, effort is always in proportion to necessity... [W]here

competition is free, the rivalry of competitors, who are all trying to jostle one
another out of employment, obliges each to work with a certain degree of
exactness...
The natural price, or the price of free competition ... is the lowest which
can be taken, not on every occasion, but for any considerable time ...[It] is
the lowest price which sellers can commonly afford to take and stay in
business.

The Role of Government and Laissez Faire

According to the system of natural liberty, the sovereign has only three duties
to attend to ... first, the duty of protecting the society from the violence and
invasion of other independent societies; secondly, the duty of protecting, so
far as possible, every member of the society from the injustice or oppression
of every other member of it, or the duty of establishing an exact
administration of justice, and thirdly, the duty of erecting and maintaining
certain public works and certain public institutions, which it can never be
for the interest of any individual, or small number of individuals, to erect and
maintain...
Great nations are never impoverished by private, though they sometimes are
by public prodigality and misconduct [A]lmost the whole public revenue
is in most countries employed in maintaining unproductive hands...

Every individual... neither intends to promote the public

interest nor knows how much he is promoting it...[B]y
directing [his] industry in such a manner as its produce
may be of the greatest value, he intends only his own gain,
and he is in this led by an invisible hand to promote
an end which was no part of his intention.
Social Physics: Newton in the Economic Universe

The Role of Government and Laissez Faire

protecting society from invasion
administration of justice
public works and public institutions

Every individual... neither intends to

promote the public interest nor knows how
much he is promoting it...[B]y directing [his]
industry in such a manner as its produce
may be of the greatest value, he intends
only his own gain, and he is in this led by
an invisible hand to promote an end which
was no part of his intention.
Social Physics: Newton in the Economic Universe

Free trade

never make at home what it costs more to make than to buy... If a

foreign country can supply a commodity cheaper than we can make it,
buy from them with goods where we have an advantage.
By means of glasses, hotbeds, and hotwalls, very good grapes can be
raised in Scotland, and very good wine can be made of them at about thirty
times the expense for which at least equally good can be brought from
foreign countries. Would it be a reasonable law to prohibit the importation
of all foreign wines, merely to encourage the making of claret and
burgundy in Scotland?

A great empire [America] has been established for the sole purpose
of raising up a nation of customers who are obliged to buy from our
shops and producers all the goods we can supply. For the sake of
that little enhancement of price which this monopoly might afford
our producers, the home-consumers have been burdened with the
whole expense of maintaining and defending that empireThe
interest on the debt incurred is not only greater than the whole
extraordinary profit made by the monopoly of the colony trade, but
greater than the whole value of that trade...

Smiths Theory of Value

Value in use Value in exchange
Water diamond paradox
Consumer surplus to our rescue

Labor Theory of Value

Labor cost theory / Labor command theory
The real price of every thing, what every thing really costs to the man who
wants to acquire it, is the toil and trouble of acquiring it What is bought
with money or with goods is purchased by labor, as much as what we
acquire by the toil of our own body. That money or those goods indeed save
us this toil. They contain the value of a certain quantity of labor which we
exchange for what is supposed at the time to contain the value of an equal
quantity. Labor was the first price, the original purchase-money that was
paid for all things and its value to those who want to exchange it for
some new productions is precisely equal to the quantity of labor which it can
enable them to purchase or command.

Smiths Labor Theory of Value

At all times and places that is dear which it is difficult to come at, or which it
costs much labor to acquire; and that cheap which is to be had easily, or
with very little labor. Labor alone, therefore, never varying in its own
value, is alone the ultimate and real standard by which the value of all
commodities can at all times and places be estimated and compared. It
is their real price; money is their nominal price only.
Smiths theory of money: just a convenience
Gold and silvers values depend on the toil and trouble (labor) of
mining them.

Deer and beavers: 2 Deer = 1 Beaver

In that early and rude state of society which precedes both the accumulation
of stock and the appropriation of land, the proportion between the quantities
of labor necessary for acquiring different objects seems to be the only
circumstance which can afford any rule for exchanging them for one
another. If among a nation of hunters, for example, it usually costs twice
the labor to kill a beaver which it does to kill a deer, one beaver should
naturally exchange for or be worth two deer.
No return to capital?
Later, once land is appropriated, what about rent?

Smiths Theory of Distribution

the three great social classes

Labor wage
Capital profit
Landlord rent

But if all value comes from labor, wherefrom come profit & rent?
Rent makes the first deduction from the produce of labor employed upon
the land and the produce of almost all other labor is liable to the like
deduction of profit.
Exploitation? Smith doesnt go there

Profit rate: a multiple of the interest rate on money

wherever a great deal can be made by the use of money, a great deal
will be given for the use of it The progress of interest therefore may
lead us to form some notion of the progress of profit.

Net Profit = Gross Profit Interest

{Both interest and profit fluctuate with investment opportunities}
Rent: High and low wages and profits are causes of high or low prices;
high or low rent is the effect of it (high or low prices).

Progress Increased Demand Higher Prices Higher Rent

Accumulation, Wages, and Profits

(Accumulation: Saving and Investment by Capitalists)
Accumulation

Wage fund

Wage
(Iron Law of Wages)

Population

Productivity

Profit

Smiths Theory of Progress

The division of labor is limited by the extent of the market
What extends the market and increases division of labor?
Spatial factors:
Urbanization agglomeration economies
Location on seashores and rivers
Improvements in transportation
Colonial settlement imperialism
Foreign trade
Free competition
Increased domestic income
Higher wage
Increased population
Extent of the market Division of Labor Productivity Output
Income
Price

Smiths Spiral of Growth

National Wealth II
National Wealth I
Employment with increased
Division of Labor

Opportunity for division

of labor

Increased Labor Supply

(Reduced Mortality)

Profit Expectations

Demand for Investment

Higher Wage
Increased interest rate
Increased Demand for
Labor

Increased Saving

Accumulation

More Adam Smith Problems

Division of labor Alienation
The man whose whole life is spent in performing a few
simple operations has no occasion to exert his
understanding or to exercise his invention [He] becomes
as stupid and ignorant as it is possible for a human creature
to become. His dexterity at his own trade [is] acquired at
the expense of his intellectual, social, and martial virtues.
It is otherwise in the barbarous societies every man is a
warrior.

Division of labor = Increasing Returns Monopoly

Industrial Age concentration
Globalization and information age Agglomeration
and networking, not concentration
Microsoft?
Google?

 Spiraling progress or stationary state?

It is in the progressive state, while society is advancing
toward further acquisition, rather than when it has acquired
its full complement of riches, that the condition of the great
body of people seems to be happiest and most comfortable.
It is hard in the stationary state and miserable in the
declining state.
that full complement of riches which the nature of its soil
and climate and its situation with respect to other countries
allows it to acquire.
In a country fully peopled in proportion to what either its
territory could maintain or its stock employ In a country
fully stocked in proportion to all the business it had to
transact the competition would be great and the ordinary
profit as low as possible.
An extinguished Sun in the very long-run
But until then, Smith prophesies progress:
Dont worry! Be happy!

Adam Smith: A Summation

Moral sentiments a first principle.
Market coordination of self interested individuals
Economic man led by an invisible hand
Competition Efficiency and Equity
Guard against monopoly

Laissez faire!
Restricted government trumps government restrictions

Labor theory of value

Progress through specialization and exchange
The division of labor is limited by the extent of the market .
Spiraling progress
Stagnation and decline in the distant future