Work30
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16.1AdamSmith1.pptx1650
1700
1750
1800
1850
1513: Machiavelli writes The Prince
1274: St. Thomas Aquinas finishes
the Summa Theologica
1651: Hobbes publishes Leviathan
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1689: Locke publishes Two Treatises of Government
1900
1762: Rousseau publishes The Social Contract
1776: Smith publishes The Wealth of Nations
Adam Smith (1723-1790)
Scottish economist and moral philosopher
Like Rousseau, he lives during the high tide of the Enlightenment
While thinkers like Locke and Rousseau are especially important for the political ideas of the Enlightenment, Smith is especially important for its economic ideas
The Wealth of Nations, his major work that we will see today, is still regarded as one of the founding works of the economic ideas of liberalism
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How are our contemporary economic ideas different from the ones we used to have in the past? How did people used to think about economic matters?
There’s a consensus that international trade is a good thing and that countries should not put barriers to trade
Individuals can accumulate large amounts of wealth
The disruptive effects of the market are not necessarily bad things
Pursuit of material wealth and of self-interest aren’t necessarily bad things
Governments should tax little and only when necessary
In Wealth of Nations, Smith looks at many economic concepts: rent, labor, wages, stocks…
We are only going to look at some aspects of it that will help us understand modern liberalism:
Why do we let individuals accumulate wealth?
Why do we want exchanges to be free and individuals to be left alone?
Why should the government not intervene in free exchanges?
Some historical context:
Smith lived in Britain at a time when industrialization was picking up, capitalism was starting to take shape, and commerce and wealth were growing noticeably
Nevertheless, the bulk of the economy was still agrarian and most people still lived in relatively isolated villages
The majority of the West and the world was still very underdeveloped and agricultural
The main (tacit?) economic view at the time was “mercantilism”
It was this received notion that, in order to be prosperous, a country had to accumulate as much gold and silver as possible
Mercantilists also thought that a country should import as little as possible and export as much as possible
In our previous class, we saw the difference between selfishness and enlightened self-interest
For Smith, Mandeville is wrong when he says that individuals are naturally selfish and that they only use the virtues with selfish aims in mind
Humans develop virtues and legal norms thanks to sympathy (the capacity to put oneself in someone else’s shoes and feel what they feel)
Smith doesn’t distinguish selfishness and enlightened self-interest in the way we’re doing here!
But this distinction helps explain why he thought that more commerce would make humans less selfish: commerce helps humans develop their sympathy and it forces them to put themselves in other peoples’ shoes
What does Smith say in the introduction? (314-315)
He says that, even though everyone works in underdeveloped countries, individuals are much poorer in these countries. In advanced countries, not everyone works but individuals enjoy greater standards of living.
It looks like the sheer quantity of workers isn’t what determines general abundance and the standards of living of a country
Smith’s theory goes against a lot of the commonsense of the day: wealth isn’t about the sheer amount of work, gold, or farmland. Imagine telling Smith’s contemporaries that leaving things alone increases wealth!
He argues that the reason behind the general abundance of these advanced countries is because they have adopted different policies than the underdeveloped ones
Ultimately, “different theories of political economy” are what heavily influence the direction of these policies
The full title Smith’s work is An Inquiry into the Nature and Causes of the Wealth of Nations
In “of the Division of Labor,” Smith says that, thanks to the fact that people subdivide their tasks (divide their labor), there is greater specialization and greater output of goods
For instance, in tribal societies, the hunter would hunt, skin, cut, and maybe even cook the animal
Over time, the hunter’s tasks have become divided:
The hunter hunts the animal, then passes it to the butcher who will do the skin and cut, then the cook will buy and cook the meat
Smith gives the example of a pin factory:
A single person can make ten pins in a day
But let’s say that we divide the different steps of making a pin (straightening the wire, cutting the wire, etc.)
Then we take ten persons and put one person in each step of making a pin
Ten persons are then able to make thousands of pins a day
Do you know more examples of division of labor? Think about some examples, not just in the production of goods, but also in the area of services, international trade, or even how institutions are organized.
Do you know more examples of division of labor? Think about some examples, not just in the production of goods, but also in the area of services, international trade, or even how institutions are organized.
Each part of complex goods (e.g., cars, computers) is made in different countries (e.g., US, China, Portugal, India…), not built all at once
In businesses, administrative tasks are delegated to a special administrative body (e.g., HR takes care of hiring and reviewing employees)
Jobs are increasingly about smaller and specialized things (we no longer have “programmers,” but programmers of something more specific)
What does it mean to say that the division of labor “creates more wealth”?
We can make more units of a product with the same amount of raw material and in a smaller amount of time
In other words, we can make a lot more things that will be more readily available to everyone else
For instance, meat is no longer a rare thing. We have plenty of it and we can sell it to those who don’t have it.
The division of labor enhances the efficiency of the production process
We can make more units of a product with the same amount of raw material and in a smaller amount of time
In other words, we can make a lot more things that will be more readily available to everyone else
For instance, meat is no longer a rare thing. We have plenty of it and we can sell it to those who don’t have it
Smith points three reasons why the division of labor generates many more goods:
It increases the dexterity and skill of each particular worker
It saves time because the worker no longer needs to pass from one task to another
It leads to the invention of new machines that further enhance efficiency
However, in order to develop new tools and machines, this system will always need more capital
Capital are the reserves of wealth and of tools/machines of a given society. They are the means of a society to create even more wealth.
It’s impossible to develop new machines/tools without some wealth in reserve (capital). Thanks to accumulated capital, a society has extra time and money to invent new tools and machines.
In a tribe, in order to have time to invent the bow, you need some extra food in reserve. In a commercial society, you need an investment in order to finance a potential technological innovation.
The term capitalism comes from the notion that it’s a system that accumulates capital
Smith doesn’t use the term “capitalism” – but now you know where the term comes from
Why does Smith think that his insight into division of labor is such a big deal?
If we design public policies that foster the division of labor, we will be able to create general abundance of goods for everyone (especially the poorest individuals)
In his writings, Adam Smith is always especially worried about the poorest (and he was very critical of wealthy merchants and manufacturers who he saw as rent-seekers)
What does he say in “Of the Principle which gives occasion to the Division of Labor”? Where does the division of labor come from?
He says that the division of labor happens because human beings have a natural “propensity to truck, barter, and exchange one thing for another” (317)
To get what they want, individuals specialize in the creation of a specific good and/or service
I am a hunter and I see that the butcher needs meat. I will therefore hunt and receive money for my effort.
When we exchange something with someone, we make a mental operation where we think: how can I satisfy that person’s self-interest while satisfying my own self-interest?
I am a hunter and I see that the butcher needs meat. I will therefore hunt and receive money for my effort.
I put my talents (e.g., strength, intelligence, dexterity) at the service of other peoples’ needs
In other words, exchange comes from enlightened self-interest
Exchange and commerce emerge because we put ourselves into one another’s shoes
The division of labor comes from sympathy. Exchange would be impossible if we were all purely selfish creatures.
Animals do not have division of labor: they always aim at their own direct satisfaction
Exchange does not come from “how can I get as much as possible from this deal?” but from “how can I make both of our interests best coincide?”
Smith wanted the government to meddle as little as possible in individual exchanges. Why?
Because uncoordinated, spontaneous, and private exchanges is what creates general wealth and abundance
“This division of labor (…) is not originally the effect of any human wisdom which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature (…) to truck, barter, and exchange one thing for another.” (p. 300)
In Smith’s time, there were several roadblocks to economic activity, e.g., small taxes that were levied by local powers, trade guilds and monopolies, policies that protected national industries
Individuals naturally specialize and create more goods because they are always looking for what needs are unmet and have to be satisfied
When someone is looking for a job, for instance, or when an investor is looking for an investment
What is the “system of natural liberty”? (p. 327)
In a “system of natural liberty,” we let people exchange and serve one another’s needs as they see fit. The division of labor will then increase and so will the general abundance of goods.
We saw earlier that the division of labor works because it reduces time-waste, increases each individual’s skills, but also because it enables the creation of new tools and machines
The hunter will develop a bow, the lumberjack develops the sawmill…
The system of natural liberty is always developing new tools and machines to make things more efficient
Finally, thanks to its material abundance, this system will reduce poverty, and create more economic inequality between rich and poor
Today, we often see this as a terrible thing but, for Smith, this is actually great news
Smith is saying that people that the relative inequality between rich and poor will increase, but that the level of absolute poverty will reduce
From one perspective, the rich becomes richer but, from another, the poor becomes less poor
Remember: Smith lives in a time where the vast majority of the world lives in relative subsistence and in isolated villages
Smith is a child of the Enlightenment: the point of the system of natural liberty and of commerce is not to help the rich, but to help the poor and the worse-off.
He is proposing a radically new system: the majority of humanity lived of agriculture and in autonomous villages but, in this new system, Individuals and nations will become radically interconnected
As the division of labor deepens, individuals will come closer and closer together, each taking care of increasingly smaller tasks
For Smith and many of the 19th century liberals, commerce was a way to civilize human beings and make wars more costly and difficult. It would be the transition from barbarism to civilization.
Smith didn’t believe commerce could abolish wars, only reduce it, but some liberals thought that the effects of commerce would really make war impossible
For the liberals, pre-commercial individuals lived in subsistence and could only think about their next meal. War was a short-term way to get what you wanted.
Thanks to trade and enlightened self-interest, individuals become increasingly civilized as they think more of their interests in terms of the interests of the others. Individuals are increasingly rational.
We can see why classical liberals like Smith are sometimes said to be “optimists.” But Smith saw some of the potential problems of the commercial system…
Smith is a central figure of liberalism’s idea of limited government, especially in the economy
Smith did not believe that the government should do nothing, but he did believe that it should do relatively little
There are three duties of the sovereign (pp. 309-315)
“The duty of protecting the society from the violence and invasion of other independent societies”
“the duty of protecting (…) every member of the society from the injustice or oppression of every other member of it”
“the duty of erecting and maintaining certain public works and certain public institutions”
The point of the system of natural liberty is to help the poorest and the worse-off. It brings abundance and enlightenment to the masses. Therefore, the government should try to make that system works as best as possible.
Naturally, this means protecting the individuals from (external and internal) harm and injustice
Furthermore, it should build bridges, roads, and all sorts of infrastructures that will help with commercial exchanges
So far so good: Smith’s government is very small and it helps people with their exchanges
But Smith realizes that, because of the division of labor, people will become increasingly narrow-minded and “stupid”:
“The man whose whole life is spent in performing a few simple operations (…) has no occasion to exert his understanding (…). He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.”
The division of labor creates people that will think more and more in terms of the one tiny task that they have to perform
People will paradoxically become less enlightened as their view of things becomes increasingly narrow
Therefore, Smith says, the government must also promote education for young people and adults
Further, it must also promote the arts and sciences
Conclusion
Society as a decentralized network of individuals
The government should not try to control private property and exchanges
“Enlightened” self-interest as an engine of progress
Accumulating wealth isn’t necessarily a bad thing
Promotion of free trade and international trade
Limited government
World history as progress and increasing rationality
