Revolution of Economic Thought: The Wealth of Nations by Adam Smith

1. HISTORY OFECONOMIC THOUGHT DR. PETROS KOSMAS LECTURER, CASA COLLEGE ACADEMIC YEAR 2010 - 2011 LECTURE 4 ECON-220

2. An Inquiry into the Nature and Causes of The Wealth of NationsBy Adam Smith 1723-1790 “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes…” ECON-220

3. According to The Wealth of Nations Wealth isnota fixed quantity- wealth is a function of productivity and therefore of people, and of the incentives which encourage them. ECON-220

4. The Wealth of NationsDivision of Labor • Nations have become wealthy, because labour has become more productive. • Labour is more productive because it is more specialized; tasks have been divided and subdivided until anyone can easily learn to do any job and do it well. ECON-220

5. The Wealth of NationsDivision of Labor • The division of labor saves time that is lost “in passing from one species of work to another.” • The division of labour leads to invention, and it makes it easier for a worker to learn and become skilled at the job. ECON-220

6. The Wealth of NationsMarket and Capital Stock • The extent of the division of labour is limited by the extent of the market. • The more people there are involved in mutual exchange, the more specialized each can be. ECON-220

7. The Wealth of NationsMarket and Capital Stock The accumulation of capital (stock) is also relevant - “Labour can be more and more subdivided in proportion only as stock is previously more and more accumulated”. ECON-220

8. The Wealth of Nations L i b e r a l i s m Laissez Faire • Term is French in origin— “let people do as they please”. • Economic policy stemmed from the French economic philosophers of the Enlightenment. ECON-220

9. The Wealth of Nations L i b e r a l i s m Some Enlightened Philosophers argued: against government intervention in the economy and the use of placing heavy tariffs on foreign goods. that government regulations only interfered with production and wealth. if government allowed free trade, the economy would prosper. ECON-220

10. The Wealth of Nations L i b e r a l i s m Laissez Faire: • A system of natural liberty: a nation’s wealth is increased by whatever industry is most profitable, i.e. whatever industry produces the greatest surplus, available to support further division of labour. • “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way…” ECON-220

11. The Wealth of Nations L i b e r a l i s m Laissez Faire: Therefore, the government should not try to direct industry into export industry, or into agriculture, or in any particular direction. ECON-220

12. The Wealth of Nations L i b e r a l i s m Laissez Faire: The idea that the government should not interfere with or regulate industries and business. An economic policy of letting owners and business set working condition without interference. This policy favors a free market unregulated by the government. ECON-220

13. The Wealth of Nations L i b e r a l i s m Laissez Faire: What are the advantages / disadvantages of a laissez-faire economy? ECON-220

14. Adam Smith’sarguments His arguments rested on what he called the Three Natural Laws of Economics: 1.Law of self interest —>People work for their own good. 2. Law of competition —> Competition forces people to make a better product. ECON-220

15. Adam Smith’sarguments Three Natural Laws of Economics: 3. Law of supply & demand —> Enough goods would be produced at the lowest possible price to meet the demand in a market economy ECON-220

16. Adam Smith’sarguments Three Natural Laws of Economics: 3. Law of supply & demand —> Enough goods would be produced at the lowest possible price to meet the demand in a market economy ECON-220

17. According toAdam Smith • Self-interestis an unchangeable part of human nature, so it is wise to let personal incentives build a richer economy. • Strong government was a great necessity, particularly tocreateandenforcelawsand toensure justice. ECON-220

18. According toAdam Smith • Self-interestis an unchangeable part of human nature, so it is wise to let personal incentives build a richer economy. • Strong government was a great necessity, particularly tocreateandenforcelawsand toensure justice. ECON-220

19. According toAdam Smith Governmentand thepeopleshould do what it does best: businessmenshould not control the justice system; governmentshould not try to run businesses. ECON-220

20. According toAdam Smith “The sovereign has only three duties: first… protecting the society from violence and invasion. secondly… protecting every member of the society from the injustice or oppression of every other member. ECON-220

21. According toAdam Smith “The sovereign has only three duties: thirdly… erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals…” ECON-220

22. According toAdam Smith “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” ECON-220

23. According toAdam Smith According to Adam Smith (1723-1790) in an Inquiry into the Nature and Causes of The Wealth of Nations, wealthis a function of productivity and therefore of people, and of the incentives which encourage them. ECON-220

24. According toAdam Smith “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” ECON-220

25. Adam Smith (1723-1790) Professor at the University of Glasgow, Scotland Defended the idea of a free economy and free markets in his book, The Wealth of Nations (1776): Economic liberty = economic progress Believed the government should not interfere with the economy ECON-220 Adam Smith (1723-1790)