Essay on Analysis of Wealth of Nations by Adam Smith
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Analysis of Wealth of Nations by Adam Smith
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.
The reasons for writing a book such as Adam Smith's The Wealth of Nations are many, and Smith seems to have had several in mind. His study traces the stages in the development of the modern economic system in an attempt to explain it, maps out the origins of money, and finally tackles the issues facing the mercantile system which controlled the society he lived in. In the process, he provides an exposition for his vision of a laissez faire economy, that is, capitalism as we now know it.…show more content…
Looking at his own society's economic system, Smith explores the division of labour, the role it has to play in industrialization, and its general impact upon the wealth of the state.
Smith regards the division of labour and the resultant specialization as the key to increasing the productivity of labour, rather than the increase in mechanization since the
Industrial Revolution began, as many would argue. Naturally, a highly specialized economic unit would be dependent upon interaction with other, similarly specialized units, and Smith illustrates that a system of fair and accessible trade is necessary for an efficient use of labour.
The much quoted example of the pin maker is used to demonstrate Smith's point about the division of labour. Despite its questionable accuracy, this example does much to illustrate the plight of labour under a system of increasing specialization. That is to say, it shows the boredom and melancholia which can be associated with repetitious and laborious work. For Smith, however, any such problem is amply compensated for by the relative prosperity of a society based upon specialized markets and trades. For instance,
Adam Smith seems to argue that freedom promotes order. How is this to be understood? How does he construct his argument?
Adam Smith writes that individual freedom promotes social order. When people are free to make their own financial and business decisions, they generally choose what is of the greatest benefit to them. These decisions balance one another, distributing goods and services in the most efficient way possible, which creates social order.
What are the benefits of specialization and the division of labor?
The division of labor creates an enormous increase in output and occasions technological specialization, which further increases productivity. The enormous supply which results from the division of labor drives down the cost of goods. A society in which the division of labor is highly developed also involves more of its members in production, giving more people access to wages. These two factors make more goods available to more people, and ensure that more people will be able to afford them. This leads to what Adam Smith calls “universal opulence.”
What kind of society does Adam Smith's observations most correspond to? A rural society, a small society, a large and diverse society?
Adam Smith makes the point that the division of labor, which is the starting point for his entire work and all the observations that follow, is to be observed even in quite primitive societies. However, he also writes that the division of labor flourishes best when the market is very large, and that the industry of the city is reinforced by that of the country. For him, then, his observations are most true of a large, complex society composed of both rural and urban areas, where technological innovation is appreciated and practiced.
How does Adam Smith account for value? What constitutes value?
In accounting for the particular value of various products, Smith argues that the value of a particular product reflects the labor that is invested in it. In an open exchange, one would not purchase a good that one could create oneself with less effort. However, Smith also recognizes that not all labor is equal. One process of production might require more ingenuity, education, attention, or training and experience than another. These inconsistencies are compensated by price. While this is the basis of Smith's understanding of value, he also develops his understanding to include issues of supply and demand, which further inform and complicate his idea of labor as the seat of value.
How are wages determined, and limited, according to Smith?
Wages are the result of an implicit negotiation between employers and the stock they employ (or masters, as Smith terms them), and laborers. The greater the stock in a society, the more competition there is between masters for labor, and wages are therefore increased. When stock is scarce and labor abounds, wages are driven down. Wages are also influenced by the nature of the work: its agreeableness, the difficulty and expense of education necessary to practice it, the likelihood of one being successful at it, its constancy, and the amount of trust placed in the practitioners of a certain trade. Finally, wages also depend on the economic growth of a society. Wages will always be low in a society where there is zero growth.
According to Smith, four kinds of people make up society: productive laborers, unproductive laborers, landowners, and merchants or farmers who possess stock. How do these four groups relate to one another? Which group is primary? Which groups, if any, are superfluous?
Merchants or farmers who possess stock are in a position to provide the capital necessary to begin or maintain a business. Productive laborers engage with capital in order to produce commodities. Laborers work upon land (whether in a factory or on plot of rural land), and the rent of the land they work upon is paid by a portion of the revenue that their products gain. With the other parts of this revenue, the wages of the laborers are paid and capital is replaced. Profits may be re-invested. Unproductive laborers are supported by the efforts of productive laborers, and from the surplus revenue gained from their labor--i.e., the revenue that is not devoted to paying wages, rent, or replacing capital. Unproductive laborers may be menial servants, or they may be lawyers, judges, politicians, etc., paid with money that is left over after the costs of production have been replaced.
What is the role of money for Adam Smith?
Money is a tool of exchange, which facilitates commerce. Wealth is determined and stored in what money purchases, not money itself. The amount of money circulating in a particular society is also no measure of the wealth of a society, because the same amount of money can constitute the income of several people, as it changes hands. That said, money that is not being used as a tool of commerce, but is lying around, is wasted. Since money always makes money, or capital represented by money can always be used in raising more capital and thereby increasing productivity, money always presents the opportunity to increase wealth.
What is the role of government according to Smith? To what extent should it regulate the markets? Who should it aim to protect in forming its economic policy?
For Smith, government should work on protecting the rules of the marketplace, while leaving the market to itself. That means that the government should protect property and make sure that the rules of law and justice are ensured (so that parties honor their contracts). Finally, governments should be responsible for defense of the society. Indeed, security is one of the most important preconditions of free and fair exchange. Adam Smith also recognizes that commerce depends on infrastructure. Some public works, he observes, could never repay their costs and therefore would never be undertaken by private entities. In these cases, governments may make themselves responsible for undertaking them. Education, Smith argues, is rather like infrastructure in that it is necessary for commerce to thrive. He touches on the fact that education also increases the quality of life, which increases security and productivity of laborers. While the state should not undertake the entire expense of education, it should certainly subsidize it.
How is wealth created, and how is prosperity maintained?
Wealth is created by means of the revenue that can be saved, revenue over and above the amount necessary to replace the cost of production. Since real wealth does not consist in money but in goods, wealth can only be real insofar as it is exchangeable for such goods. Wealth in its money form, though it may have a high exchange value, is too precarious to be considered real wealth for Smith. Prosperity in a particular society is maintained through growth. In a society where wages are stagnant, and the division of labor does not expand to meet a growing market, there is bound to be great misery and desperation. The quality of life must be on the rise in order for a society to maintain its prosperity, for stagnation results in a depreciation of the quality of life for those at the very bottom.
Why is Adam Smith opposed to a system of government that would oppress its laborers by enslaving them or levying high taxes upon them?
Smith's criticisms of these systems of government is based not on moral grounds, but on economic ones. Smith argues that not allowing a laborer to enjoy the fruits of his labor makes him disinclined to work, since it disrupts a natural incentive system. When laborers are disinclined to work, and can only be motivated to work through threats and violence, they are far less productive. Systems of government that oppress their laborers make the economic system less productive and efficient, lowering the quality of life for the entire society.