Notesale: Turn your study into money

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Adam Smith Notes
Adam Smith believed that society is comprised of 3 parts:
- State (the state has the power of coercion to make people pay taxes, follow the law and
fight in wars)
- Market (everyone has self-interest such as workers wanting the highest price for their
labour and firms the best price)
- Civil society (when people are connected by benevolence such as family, church, tennis clubs
and friends)

The free market is a System of Natural Liberty
- The way that society would behave if left to itself (Natural)
- You are leaving it to itself (Liberty)
- produces order and harmony (System)
Without direction, society appears to produce what we want as if guided by an invisible hand
...

This can be demonstrated in the shoe and gloves analogy:
Equilibrium is restored in the gloves and shoes analogy by the following:


Demand for gloves increases and so the price for gloves increases which leads to higher profits
for firms producing gloves
...




This will lead to there being an increase in the supply of gloves and so the price for gloves will
then fall



This causes a drop in profits and so will lead to a drop in output and lead to equilibrium being
restored as wages and demand for labour falls

Labour and Capital is being transferred from shoes to gloves as gloves are now more profitable
...
The Invisible Hand (how firms make what society wants)
2
...
How wages are equalised (assuming they are of the same skill level)
4
...
e
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If it didn't, and say 1 deer was equal to 3 beavers, then no beaver would be hunted as
people will all hunt deer
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In a modern and more advanced economy this doesn't work however, as Smith said that not all costs
are labour costs
...

Smith stated that the cost of production of labour (the cost of raising a family) was what determined
wages
If the cost is high, then the birth rate would fall and as such there would be less labour, so the supply
of labour falls and the price of labour rises (wages rise)
Smith however distinguished between wages:
Market Wage - current wage rate which depends on the current demand for labour
Natural Wage - determined by the cost of production of labour
It takes a long time for market wage to be pulled back to natural wage (takes years for adjustment as
children don't go to work so there is a time delay and the labour market is not affected for a while)
In a growing economy, demand for labour is high and so the market wage continuously exceeds the
natural wage (Market wage > Natural wage)
...

Division of Labour
Division of labour increases production by:



Workers save time by not having to pass from task to task
Specialise according to ability (naturally better)





Increase ability as practise makes perfect
Incentive to innovate as it is what you do the most
Quicker training times

If the market is too small (rural Scotland for example) then there can't be specialisation
There are costs to the division of labour including:








Boredom, leading to less productivity
People limit themselves to just one task
People become deskilled
Loss of judgement
It 'confines the views of men' to give their entire attention to 'the 17th part of a pin or the
80th part of a button'
'gross ignorance and stupidity'
Workers incapable of 'conversation','sentiment','judgement' or 'courage'

Smith stated that to amend for this workers should be given education
The determinants of Economic Growth
1
...

3
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Extension of the division of labour
Amount of saving (Smith believed that we have a natural tendency to save rather than spend)
Tax burden (if there are large taxes we have less motivation to earn and save)
Impediments to system of natural liberty, namely Laws restricting mobility of labour, Legal
monopolies and Restraints on free trade

Smith was against all monopolies and collusion, believing they would only result in increased prices
and a 'conspiracy against the public'
Legal monopolies were worse however, as there was no chance of competition
...

B
...

D
...

E
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He said there is a 'Great deal of ruin in a
nation'
Alongside defence, Smith believed that the state had two other essential roles:



Provision of Justice
Provision of public works

The Provision of Justice
The provision of justice involves protecting every member of society from injustice and attack from
every other member
...

This wasn't needed that much in hunter society as there was little property, so little theft and
violence, meaning no need for state justice
...

Smith said that you get a class suitable to give justice
...
The rich also get the status and can look after
themselves in the role
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Fines and bribes are used to pay the judge for their service
...
Smith said that judges should be paid well (out of taxes) to ensure that they do not need
bribes and so will be fair and just
...
For example people joining the army
overestimate the chance of promotion and underestimate the chance of death
...

Ambition is essential for progress as it encourages risk taking and investment/innovation
...
The best way to serve self-interest is to serve the interest of others

2
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The profit motive is an incentive to do good even when not trying to
4
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This was/is contentious then/now e
...
Robert & Edward Skidelsky How
Much is Enough? (2012): “The present system relies on motives of greed and acquisitiveness
which are morally repugnant”
Smith and Civil Society
Benevolence stems from sympathy


“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
...
That we often derive
sorrow from the sorrow of others, is a matter of fact too obvious to require any
instances to prove it ; for this sentiment, like all the other original passions of human
nature, is by no means confined to the virtuous and human, though they perhaps may
feel it with the most exquisite sensibility
...
” -- Theory of Moral
Sentiments, part 1, section 1, chapter 1

Some benevolence comes from self-interest as we want praise or to avoid blame
...
People will be more affected by this than the earthquake
...
He would, I imagine, first of all express very strongly his sorrow for the
misfortune of that unhappy people, he would make many melancholy reflections upon
the precariousness of human life, and the vanity of all the labours of man, which could
thus be annihilated in a moment
...
And when all this fine philosophy was over, when all these humane sentiments
had been once fairly expressed, he would pursue his business or his pleasure, take his
repose or his diversion, with the same ease and tranquillity as if no such accident had
happened
...
If he was to lose his little finger tomorrow, he would not sleep
to-night ; but, provided he never saw them, he will snore with the most profound
security over the ruin of a hundred millions of his brethren, and the destruction of that
immense multitude seems plainly an object less interesting to him than this paltry
misfortune of his own
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People will give up their finger because of the public reaction if they didn’t
...
It is a stronger power, a more
forcible motive, which exerts itself upon such occasions
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” Theory of Moral Sentiments, part 3, chapter 3

Adam Smith Problem - in the Theory of Moral Sentiments benevolence is the primary force in the
Wealth of Nations self-interest is the primary force
However, benevolence is largely self-interest and they operate in different spheres
Benevolence works at close range (more benevolent to family and friends than strangers)
A society of pure benevolence wouldn't work, but neither would a society of pure self-interest (there
would not be enough education etc
...
(such as the 'Big Society' in 2010)
John Gary argued that civil society was weakened by the political left (compulsory taxation has
pushed out benevolence as people feel that by paying their taxes that they have done enough to
help others) and by the right (market forces have destroyed communities)



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