Transcript Adam Smith - Dublin City University

Adam Smith
Adam Smith
• Adam Smith (1723 - 90)
• 1759 - "The Theory of Moral Sentiments"
• 1776 - "An Inquiry into the Nature and
Causes of the Wealth of Nations”
• First systematic attempt to describe of the
political economy of the world.
• Stresses the economic liberty of the
individual
Adam Smith
• Centrepiece - analysis of "the invisible
hand," the mechanism by which the
economic activities of profit- seeking
individuals result in the greatest good
for society as a whole.
Adam Smith
• “Every individual is continually exerting himself
to find out the most advantageous employment
for whatever capital he can command. It is his
own advantage, indeed, and not that of the
society which he has in view. But the study of
his own advantage naturally, or rather
necessarily leads him to prefer that
employment which is most advantageous to the
society.”
• (Book 4, Chapter 2, Wealth of Nations)
The operation of the Free
Market Economy
• "The statesman who should attempt to direct people
in what manner they ought to employ their capitals,
would not only load himself with a most unnecessary
attention, but assume an authority which could safely
be trusted, not only to no single person, but to no
council or senate whatever, and which would
nowhere be so dangerous as in the hands of a man
who had folly and presumption enough to fancy
himself fit to
exercise it."
• Adam Smith, The Wealth of Nations
The operation of the Free
Market Economy
• Market allocates resources by the free
interplay of demand and supply: goods
are only produced if they are thought to
be profitable
• In this context, it is inefficient for the
state to take an active economic role.
The operation of the Free
Market Economy
• Market price of a given commodity is
the result of:
• a combination of:
• amount of that commodity available for
sale and
• the level of demand of those willing to
pay the "natural price" of the commodity
The operation of the Free
Market Economy
• Notion of the invisible hand at the root
of the 19th C. argument for laissez-faire
• Political Corollary: state is absolved
from any responsibility for directing the
economic affairs of private individuals
The operation of the Free
Market Economy
• Government intervention in human
affairs is generally harmful.
• Exceptions: “those exertions of the
natural liberty of a few individuals which
might endanger the security of the
whole society are, and ought to be,
restrained by the laws of all
governments.”
The operation of the Free
Market Economy
• Smith's argument that the economy was
a self-regulating mechanism made it
possible to conceptualise the economy
as something distinct from political
power
• Undermines “mercantilism”.
The Division of Labour
• Two aspects:
• a) the division of labour between
different trades
• b) the division of labour within the
manufacture of a single good.
The Division of Labour
• Increased output through:
• a) increased dexterity thru repetition of
simple tasks
• b) saving of time lost in passing from
one task to another
• c) invention of specialised machines
encouraged by division of work
The Division of Labour
• Caveat:
• Extent of division of labour limited by
extent of the market.
• Thus - Smith’s argued for the
opening/freeing up of markets on both a
regional and international scale
Self-interest
• Smith's thinking was based in a fundamental
belief in an inherent naturally occurring order.
• Human behaviour is driven by six elements:
• a) self-love,
• b) sympathy
• c) the desire to be free
• d) a sense of propriety
• e) a habit of labour and
• f) the propensity to trade.
Self-interest
• Self-interest the key driver.
• In pursuing his own advantage each
individual was "lead by an invisible hand
to promote an end which was no part of
his intention".
• How does individual pursuit of
personal goals lead to a common
good?
Self-interest
• Short Answer: An individual is part of
society and as such his/her search for
profits can only lead along paths
ordained by the natural social order.
Self-interest
• Long Answer: Division of labour makes
individuals dependent on the labour of others.
• But “others” will not provide help out of
sympathy. Therefore it must result from their
self-love.
• Exchange or trade makes possible the desire to
"satiate" self-love on the part of two parties to a
transaction: trade facilitates a mutually
beneficial transaction.
Smith’s market model in
brief
• 1) It fixes a price
• 2) it encourages producers to reduce
their costs
• 3) it has allocated resources
• Land, labour and capital go where the
profit indicators in the market are
signalling.