adam smith's contributions to economics
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of competition, supply and demand, and self-interest. Smith is also known for his theory of compensating wage differentials, meaning that dangerous or undesirable jobs tend to pay higher wages to attract workers to these positions, but he is most famous for his 1776 book: "An Inquiry into the Nature and Causes of the Wealth of Nations." Read on to learn about how this Scottish philosopher argued against mercantilism to become the father of modern free trade and the creator of the concept now known as GDP.
Early Life
The recorded history of Smith's life begins on June 5, 1723, at his baptism in Scotland; however, his exact birthdate is undocumented. Smith attended the University of Glasgow at age 14, later attending the prestigious Balliol College at Oxford University. He spent years teaching and tutoring, publishing some of his lectures in his 1759 book, "The Theory of Moral Sentiments." The material was well-received and laid the foundation for the publication of "An Inquiry Into the Nature and Causes of the Wealth of Nations," (1776), which would ultimately cement his place in history.
The Theory of Moral Sentiments
Smith is most famous for his 1776-piece, "The Wealth of Nations," but his first major treatise, "The Theory of Moral Sentiments," released in 1759 created many ideas still practiced today.
Some may be surprised to learn that in this book, Smith, notoriously known as the “Father of Capitalism,” discusses charity and human ethics extensively in this first book. While much of the philosophy behind Smith's work is based on self-interest and maximizing return, "The Theory of Moral Sentiments," was a treatise about how human communication relies on sympathy. The book extensively explored ideas such as morality and human sympathy. In the book, Smith argued that people are self-interested but naturally like to help others.
While this may seem to be at odds with his economic views of individuals working to better themselves with no regard for the common good, the idea of an invisible hand that helps everyone through the labor of self-centered individuals offsets
Early Life
The recorded history of Smith's life begins on June 5, 1723, at his baptism in Scotland; however, his exact birthdate is undocumented. Smith attended the University of Glasgow at age 14, later attending the prestigious Balliol College at Oxford University. He spent years teaching and tutoring, publishing some of his lectures in his 1759 book, "The Theory of Moral Sentiments." The material was well-received and laid the foundation for the publication of "An Inquiry Into the Nature and Causes of the Wealth of Nations," (1776), which would ultimately cement his place in history.
The Theory of Moral Sentiments
Smith is most famous for his 1776-piece, "The Wealth of Nations," but his first major treatise, "The Theory of Moral Sentiments," released in 1759 created many ideas still practiced today.
Some may be surprised to learn that in this book, Smith, notoriously known as the “Father of Capitalism,” discusses charity and human ethics extensively in this first book. While much of the philosophy behind Smith's work is based on self-interest and maximizing return, "The Theory of Moral Sentiments," was a treatise about how human communication relies on sympathy. The book extensively explored ideas such as morality and human sympathy. In the book, Smith argued that people are self-interested but naturally like to help others.
While this may seem to be at odds with his economic views of individuals working to better themselves with no regard for the common good, the idea of an invisible hand that helps everyone through the labor of self-centered individuals offsets
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Adam Smith's chief contribution was to build a coherent and logical theory of how the economy works. The elements of Smith's theory were mostly already available in the writings of earlier writers. However, in these writings good ideas coexisted alongside numerous other useless theories. Somebody had to figure out which theories were useful and which were useless and combine the useful theories into a consistent and persuasive overall theory that we can reliably use to think about society. This is what Smith did. For this he is called the father of economics.
His two main works are: The Theory of Moral Sentiments and An Inquiry Into the Nature and Causes of the Wealth of Nations.
Theory of Moral Sentiments. This work was an argument against the views of writers such as Hobbes and Rousseau who argued that the pursuit of self-interest, an important human instinct, inevitably leads to a cruel and nightmarish society. Smith argued that as people are able to imagine what others are going through, they are able to empathize with the sufferings of others. When the experiences of others are felt as our own experience, our instinctive pursuit of self-interest can lead us to pursue the interests of those others. So, it is perfectly consistent to believe that human beings pursue self-interest and are generous towards others.
Sometimes our passions cause us to do bad things. And our instinctive tendency to defend ourselves even when we do bad things leads to a bias that prevents us from seeing that we did something wrong. This problem is partially corrected by the wide acceptance of moral rules in a society. When the moral rules are clear cut, a misdeed may so clearly violate a moral rule that it might be impossible even for the perpetrator to deny the misdeed.
The division of labor is determined by the extent of the market. This creates the possibility of an ever expanding economy. For example, if the extent of the market increases-perhaps because of an expansion of trade within the country or with another country-there will be greater division of labor, which will lead to improvements in the level of technology, which will lead to greater national income, which will lead to another increase in the extent of the market, which will lead to another increase in the division of labor, which will lead to another increase in the level of technology, and so on and on. However, Adam Smith felt that a scenario in which this growth gradually peters out (with each round of increases being smaller than those of the preceding round) was more likely. Earlier writers had argued that the growth of an economy depended heavily on the luxury spending by the rich; the poor consumed just the bare necessities and, therefore, more would not be produced unless the rich would buy the extra output. Smith argued that this idea was false. If the rich saved any money they would lend it to businessmen (to earn interest). The businessmen would borrow the money and spend it on capital equipment. Therefore, all income would be spent and all production would be purchased. There was no need to encourage luxury spending. In fact, the more the rich saved the greater would be the level of investment by businesses and the faster would be the rate of growth.
For primitive economies sustained by hunting and fishing, Smith's theory of value was a form of the Labor Theory of Value, which was adopted by all Classical economists such as Smith, Malthus and Ricardo. But when analyzing the industrialized economy of contemporary Great Britain, Smith thought of the 'natural price' (or, long run price) of a product as the cost of all resources used in production and did not seek to reduce the different resources into one resource the way Cantillon had done. (Cantillon's Land Theory of Value had lost favor by then. Ricardo realized, however, that neither labor nor anything else could provide an invariant measure of value.) From today's point of view this theory, which denies the influence of demand and identifies production cost as the only influence on prices, has some validity in the long run but is not useful for short run analysis.
Smith's theory of wages was a form of the Iron Law of Wages which held that wages are by and large equal to the subsistence level of wages. (If wages exceed the level that is just enough to keep the worker and his dependents alive, there will be an increase in population that will drive wages down to the subsistence level. If wages fall below what the workers need to stay alive, population will fall and wages will rise to the subsistence level.) This meant that any increase in total output went not to the workers but to capitalists who would save and invest in machinery that would make possible further division of labor and technological progress.
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His two main works are: The Theory of Moral Sentiments and An Inquiry Into the Nature and Causes of the Wealth of Nations.
Theory of Moral Sentiments. This work was an argument against the views of writers such as Hobbes and Rousseau who argued that the pursuit of self-interest, an important human instinct, inevitably leads to a cruel and nightmarish society. Smith argued that as people are able to imagine what others are going through, they are able to empathize with the sufferings of others. When the experiences of others are felt as our own experience, our instinctive pursuit of self-interest can lead us to pursue the interests of those others. So, it is perfectly consistent to believe that human beings pursue self-interest and are generous towards others.
Sometimes our passions cause us to do bad things. And our instinctive tendency to defend ourselves even when we do bad things leads to a bias that prevents us from seeing that we did something wrong. This problem is partially corrected by the wide acceptance of moral rules in a society. When the moral rules are clear cut, a misdeed may so clearly violate a moral rule that it might be impossible even for the perpetrator to deny the misdeed.
The division of labor is determined by the extent of the market. This creates the possibility of an ever expanding economy. For example, if the extent of the market increases-perhaps because of an expansion of trade within the country or with another country-there will be greater division of labor, which will lead to improvements in the level of technology, which will lead to greater national income, which will lead to another increase in the extent of the market, which will lead to another increase in the division of labor, which will lead to another increase in the level of technology, and so on and on. However, Adam Smith felt that a scenario in which this growth gradually peters out (with each round of increases being smaller than those of the preceding round) was more likely. Earlier writers had argued that the growth of an economy depended heavily on the luxury spending by the rich; the poor consumed just the bare necessities and, therefore, more would not be produced unless the rich would buy the extra output. Smith argued that this idea was false. If the rich saved any money they would lend it to businessmen (to earn interest). The businessmen would borrow the money and spend it on capital equipment. Therefore, all income would be spent and all production would be purchased. There was no need to encourage luxury spending. In fact, the more the rich saved the greater would be the level of investment by businesses and the faster would be the rate of growth.
For primitive economies sustained by hunting and fishing, Smith's theory of value was a form of the Labor Theory of Value, which was adopted by all Classical economists such as Smith, Malthus and Ricardo. But when analyzing the industrialized economy of contemporary Great Britain, Smith thought of the 'natural price' (or, long run price) of a product as the cost of all resources used in production and did not seek to reduce the different resources into one resource the way Cantillon had done. (Cantillon's Land Theory of Value had lost favor by then. Ricardo realized, however, that neither labor nor anything else could provide an invariant measure of value.) From today's point of view this theory, which denies the influence of demand and identifies production cost as the only influence on prices, has some validity in the long run but is not useful for short run analysis.
Smith's theory of wages was a form of the Iron Law of Wages which held that wages are by and large equal to the subsistence level of wages. (If wages exceed the level that is just enough to keep the worker and his dependents alive, there will be an increase in population that will drive wages down to the subsistence level. If wages fall below what the workers need to stay alive, population will fall and wages will rise to the subsistence level.) This meant that any increase in total output went not to the workers but to capitalists who would save and invest in machinery that would make possible further division of labor and technological progress.
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