Adam Smith

1
Adam Smith

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

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Introduction

• Recall Ethics, economics as part of a broader
  system of social science
• Theory of Moral Sentiments An exercise in
  moral, social philosophy
• Wealth of Nations Extends this to provide a
  working model for social interaction the
  System of Natural Liberty as a vehicle for
  directing our self-regarding propensities

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• A response to to the challenge directed toward
  Smiths moral theory Will the Impartial
  Spectator be sufficient to control the
  passions?
• Is the available information sufficient?
• Is that information really always interpreted
  impartially?

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• Our claim society needs institutional structure
• But TMS does not tell us where this comes from

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Links to Kuhn Smiths Disciplinary Matrix

• A systematic
• Exploration of the natural order underlying the
  social world
• Application of that understanding to social and
  economic issues
• A unified system of explanation
• A definitive technique of analysis

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• Provided economics (political economy) with its
  first generally accepted system of theories,
  concepts, analytic techniques its first
  disciplinary matrix
• Part of his general theory of society

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• That is he gave it
• An organized structure of assumptions
• A problem orientation
• A value system
• An analytic framework
• (later) a self-conscious intellectual community

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• Much popular appeal of this paradigm
• Relevance to immediate policy problems
• Population explosion concern for Poor Relief
  economic growth issue
• Corn Laws and commercial policy

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• Belief that political economy could provide
• A simple, effective method of analyzing these
  complex problems
• A reasoned approach to useful policy
  recommendations
• Ricardo, Malthus, others, as puzzle-solving
  doing normal science

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Fundamental Issue

• Under what conditions will society operate so as
  to maximize human happiness?
• TMS Human happiness promoted by obeying the
  moral virtues under the observation of the
  Impartial Spectator grounded in need for social
  approval

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• WN
• More explicit recognition of the problem of
  opportunistic behavior
• Implications for the kinds of reforms necessary
  to bring society closer to the system of natural
  order that would maximize happiness
• Note Smiths location in time and space

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• The machine metaphor under what conditions does
  it operate best?
• The importance of policy
• WN as probably the first unified socio-economic
  model

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The Major Themes

• Economic growth, development societys laws of
  motion
• Social coordination How does a society in which
  each individual follows own self-interest keep
  from falling apart?

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Economic Growth

• Whats the wealth of nations?
• Mercantilist presumption
• Smith Wealth, from weal, well-being
• Whats necessary for the good life?
• For whom?
• Growth measured in terms of output per person

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• Sources of productivity where does growth come
  from?
• Now Focus on
• Technology
• Capital per worker
• Institutions
• Incentives

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• Smith Source of productivity growth in
  specialization, division of labor
• The pin factory
• Why does this happen?
• Improved dexterity learning-by-doing
• Time saved moving from operation to operation
• Inventing labor-saving machines

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• Who benefits?
• Origin of division of labor? Propensity to
  truck, barter, and exchange . . .
• We need the cooperation of many others to
  survive do we get that cooperation by appealing
  to their benevolence?
• The social division of labor as important

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• What affects the degree of specialization? The
  importance of the extent of the market
• Examples

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The Importance of Money

• Specialization as implying exchange
• Barter, and the problem of transactions costs
• Commodity vs. fiat money
• The diamond/water paradox a scientific puzzle

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The Policy of Europe

• A first look at Smiths argument for the system
  of natural liberty
• A way for Smith to talk about the consequences of
  interference with free exchange
• Examples exclusive privileges restrictions on
  labor mobility the threat of monopoly

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The Importance of Capital Accumulation

• Smiths problem How do we support ourselves
  until we produce and sell our own output?
• In our language
• Capital stock as necessary for more division of
  labor
• Capital, thus, as a major source of productivity
  growth

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• Productive vs. unproductive labor Whats going
  on here?
• Distinction between output produced for
• Current consumption (consumer goods)
• Future consumption (capital goods)

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• How does society increase productive labor
  (capital accumulation)?
• Parsimony saving
• Link to TMS, and saving as a dimension of
  prudence/self-love

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• The importance of good public policy
• Smiths warnings against a large public sector
  why?
• The direction of spending matters Spending for
  luxury goods in a poor country as blocking
  economic development

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The System of Natural Liberty

• Book IV, and further discussion of mercantilist
  legislation
• The trade balance
• Do we need to worry about trade deficits?
• Are gains to one trading partner matched by
  losses to the other?

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• Why see restraints on trade?
• Contemporary versions
• The basic idea The competitive market as
  reconciling private, social interests the social
  mechanism for regulating the economy
• Imposes orderly rules of behavior on economic
  agents

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• Thus The Invisible Hand
• As working automatically to coordinate peoples
  individual decisions
• As working best with minimum interference
• Potential problems
• Desire to monopolize
• Tendency for protectionism
• Grounded in self-interest?

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• Wheres government in all this? To provide
• Legal system Administer justice
• Anti-monopoly protection
• Military security
• Provide certain public works

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In the End The Central Theme of the Invisible
Hand

• Under certain social arrangements private and
  social interests can be harmonized
• Market forces assure a social result that is
  independent of individual intentions
• Self-interest works for general welfare only
  under appropriate set of rules

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• Does a market economy guarantee the best of all
  possible worlds? Is Dr. Smith really Dr.
  Pangloss in disguise?
• Is government without fault? The incentives
  facing politicians, bureaucrats

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The Evolution of Social Institutions

• Unresolved issue Where do social institutions
  (including government) come from? Why are they
  necessary?
• TMS, and their necessity but not how they come
  to be
• WN, and a story about their origin (Books III and
  V) a philosophical history

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• How does human society begin? The propensity to
  . . . truck, barter, and exchange . . .
• Necessity of defining, monitoring, enforcing
  property rights
• Security, order as necessary for society and
  social order requires system of law

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• So how do institutions evolve?
• Brief definition Institutions as rules
  (explicit or implicit)
• Origin with the evolution of property
• Sources of authority
• Age
• Fortune
• Birth
• Personal qualifications

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• Stages of society
• Subsistence (hunting, fishing)
• Pasturage
• Agriculture
• Commercial
• Evolution of differences in property ownership
  and associated evolution of property rights
• Importance of preconditions for growth

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• Why does Smith do this? To show how changes in
  the nature of the economy are reflected in
  institutional changes

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• The basic argument
• Humans are self-regarding is all spheres of
  society
• Helps us understand the pursuit of wealth,
  security
• Economic development creates different stages of
  society, each with its own characteristic
  institutional structure

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• Two case studies
• Western Europe after the fall of Rome
• The manor as the basic unit of society
• Disorder conflict
• Provided security
• Mutual claims, lords and serf
• Changes in system of property rights entail
  primogeniture
• Limited growth possibilities

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• Emergence of a market economy
• Links, town and country
• Political alliances, monarchs and towns
• Role of foreign trade
• Decline in lords feudal power
• Conversion of feudal obligations into cash
• Dissipation of fortunes buying goods and
  services
• So Commerce brought about what feudal violence
  could not a decreased power for nobles

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In the End . . .

• Whenever a person seeks to serve his own ends,
  he invariably serves the ends of society
• Did Smith provide a solution to this problem?
  Did he suggest the conditions (social
  arrangements) under which this can happen?

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• Self-interest makes the market system go
• But benevolence (a moral sentiment) makes the
  market system possible
• Social institutions important in harnessing,
  channeling, pecuniary motives
• A set of policy prescriptions grounded in
• The existing institutional structure
• His analysis

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• Is the free-market economy the best of all
  possible worlds? Is Dr. Smith really Dr.
  Pangloss in disguise?

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• Another issue Is market society (capitalism)
  civilizing or self-destructive? Whats the
  effect of capitalism on the social and moral
  order?

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• The Doux-Commerce hypothesis Favorable
  effects of capitalism
• Limitations on the powers of monarchs
• A moralizing agent people are useful to each
  other
• Smith, and frugality, integrity, industriousness
• The influence of continuing relationships

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• The Self-Destruction hypothesis Capitalism as
  undermining the moral foundations on which any
  society must rest
• Influence of the Industrial Revolution
• Emphasis on individual advantage atomism as
  corrosive of social cohesion
• Rationalism undermines religious belief
• Commercial spirit replaces higher values

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• Can both be held at the same time?
• Is there an inevitable outcome for capitalism?