Some Notes on Adam Smith

Transcription

1 Some Notes on Adam Smith The Wealth of Nations Jerry Muller, a renown scholar of market institutions, claims that Adam Smith published the most important book ever written about capitalism and its moral ramifications. The book was titled An Inquiry into the Nature and Causes of the Wealth of Nations and was published in For an excellent short summary of TWN and its importance in the literature of capitalism see Muller (2002). The book provided an analysis of market processes motivated by self-interest. The purpose of the book was to influence politicians to legislate better institutions i.e., ones that promote the common good. He demonstrates and argues that the public interest is best 1

2 served by allowing individuals to pursue their own happiness in ways of their own choosing. 0.1 Life and Times Act of Union (1707) brought Scotland into economic union with England. Scotland, especially the lowlands, began to prosper and develop relatively quickly due to free trade brought about by the Act. Smith was born in Kirkcaldy, Scotland in Kirkcaldy is a small town about 20 miles northeast of Edinburgh on the east coast of Scotland. At 14, Smith was sent off to the University of Glasgow to study. An outstanding student, he won a scholarship to Oxford where he spent 6 years. By 1748 (age 26) he was already making a name for himself, delivering a series of lectures in Edinburgh. Based on these he was offered a professorship at the University of Glasgow (age 28) where he assumed a chair in logic and rhetoric and later moral philosophy. The Theory of Moral Sentiments (1759) culminated in man as self-interested and self-commanded. Individual freedom, according to Smith, was rooted in self-reliance, the ability of an individual to pursue his self-interest while commanding himself based on the princi- 2

3 ples of natural law. (Wikipedia) How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it. Opening paragraph of TMS. So for Smith, self-interest does not exclusively pertain to economic self-interest. Nor does it preclude charitable acts, or other selfless acts of kindness. The idea that the pursuit of self-interest was sufficient for a good is absurd. He merely argued that to rely on benevolence of others is folly since those feelings only extend to a close circle of family and friends and even in these situations is not a reliable way to expand social cooperation necessary to support improved living conditions for the average Joe. 3

4 He was lured away from the University to serve as a tutor for offspring of a wealthy patron. These were good gigs in the day because the patron usually offered a pension once service was done. Eventually, Smith returned to Scotland as Commissioner of Customs. This job offered enough freedom for him to continue to write and lecture. Wealth of Nations (1776) was published during this time. Between the pension, his salary and royalties from his books, he managed to live modestly but comfortably. Died in 1790 (age 67). A market economy accomplishes two things. According to Smith, the market economy (commercial society) accomplished two things: 1. Improves living standards of rich and poor. Universal opulence. 2. Improves the character of market participants. Market arrangements require us to serve others we do not know or especially care for since it is in our own interests to provide what others want. promotes cooperative modes of behavior 4

5 makes people gentler and more self-controlled more likely to subordinate asocial behavior to the needs of others Most merchants, workers, employers, etc. could ill-afford to be like Seinfeld s famous Soup Nazi. 5

6 Economic Growth 18th century Britain produced prodigious economic growth. England surpassed Holland as the world s center of trade and wealth. The poor were now able to purchase goods that were formerly considered luxuries (and which were still luxuries elsewhere on the continent of Europe). Britain enjoyed remarkable improvements in living standards of all classes of society. This was what some have called the beginning of the commercial revolution. Much of this was due to relatively free trade of goods and services within the country which expanded thanks to the Act of Union. As an island nation, Britain relied heavily on trade to obtain goods and raw materials for manufacture. In older systems of economic regulation prices were set by guilds, wage rates by justices of the peace. This gave way to prices and wages set by individuals who come to a mutual agreement. Trade, being voluntary, makes both parties better off. Market activity led to the production of goods for sale in markets, not just for personal consumption. This led to increased specialization in labor, higher productivity, and considerable increases in income and wealth. An important purpose of Smith s work was to argue that free trade internationally confers similar benefits on nations. Wealth 6

7 of nations grows with free trade among them. At the time, there was considerable opposition to free international trade as trade was seen as a zero-sum gain. Smith referred to this as the mercantile system of trade and it was very restrictive in purpose and practice. Source of this miracle? 1. differences in preferences trade in existing goods creates wealth 2. differences in talent, training, skill differences in opportunity costs creates opportunities to create wealth 3. greater use of knowledge in society specialization leads to more knowledge, more production, lower prices, greater well-being Woolen Coat The woollen coat, for example, which covers the daylabourer, as coarse and rough as it may appear, is the produce of the joint labour of a multitude of workmen. The shepherd, the sorter of the wool, the woolcomber or carder, the dyer, the scribbler, the spin- 7

8 ner, the weaver, the fuller, the dresser, with many others, must all join their different arts to complete even this homely production... [L]et us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them.... [W]ithout the assistance and co-operation of many thousands, the very meanest person in a civilised country could not be provided, even according to what we very falsely imagine, the easy and simple manner in which is commonly accommodated.(smith, 1904, I.1.11) Cooperation through Exchange Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an 8

9 animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilized society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need 9

10 of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. The charity of welldisposed people, indeed, supplies him with the whole fund of his subsistence. But though this principle ultimately provides him with all the necessaries of life which he has occasion for, it neither does nor can provide him with them as he has occasion for them. The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. With the money which one man gives him he purchases food. The old cloaths which another bestows upon him he exchanges for other old cloaths which suit him better, or for lodging, or for food, or for money, with which he can buy either food, cloaths, or lodging, as he has occasion. (Smith, 1904, I.2.2) 10

11 Bibliography Cowen, Tyler and Alex Tabarrok (2011), Modern Principles of Economics, 2nd edn, Worth, New York. Federal Deposit Insurance Corporation (1998), Managing the Crisis: The FDIC and RTC Experience, chapter Penn Square Bank, N.A., pp Federal Reserve Bank of St. Louis (2013), Federal reserve economic data, Hayek, Friedrich A. (1945), The use of knowledge in society, American Economics Review 35, URL: Intellectual Takeout (2013), Free market capitalism vs. crony capitalism, Jalil, Andrew (2012), A new history of banking panics in the united states, : Construction and implications, pdf. 11

12 Muller, Jerry Z. (2002), The Mind and the Market: Capitalism in Western Thought, Anchor Books, New York. Orlik, Tom (2013), How China lost its mojo: One town s story, Wall Street Journal September 17, A1. Smith, Adam (1904), An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Cannan edn, Library of Economics and Liberty, Taylor, John B. and Akila Weerapana (2012), Principles of Economics, 7th edn, South-Western, Cengage Learning, Mason, Ohio. Transparency International (2013), Faqs on corruption, on corruption/2/. Weidner, Justin and John C. Williams (2011), What is the new normal unemployment rate?, FRBSF Economic Letter URL: 12