The world came to know Adam Smith because of his work “An Inquiry into the Nature and Causes of the Wealth of Nations.” When we speak of Economics, Adam Smith is one of the key figures of the time. It is a great work. During those times, the book is a revolutionary one. It caused an upheaval to the upper class because it is mindful of the poor.
The book is about the wealth of nations and wealth, to Adam Smith, consists of the goods that all people of the society consume. (Heilbroner, 1986) But before Smith came with his ideas, there was first the concept of Physiocracy. He saw it as the nearest approximation to the truth that has yet been published upon the subject of political economy. The physiocrats believed that wealth came from production and not from the attainment of precious metals, which was adverse to mercantilist thought. They also believed that agriculture tended to produce wealth and that merchant and manufacturers did not. He did not embrace the idea of Physiocracy but Smith respected the ideas.
On “THE INVISIBLE HAND”
The Wealth of Nations explains that the free market, although it may appear that it is unrestrained, is actually guided to produce the right amount and a variety of goods by a so-called "invisible hand". Smith introduced the invisible hand doctrine, which held that as individuals pursued their own interest, they would be lead as if by an invisible hand to promote the good of the society. (Rollf 1989)
If we are to analyze the so called Invisible hand, we may notice that it is actually a guide for an individual to pursue self-interest. We may say that the invisible hand is in a way indirectly promoting the good of the society. A person would regard self interest as a factor in creating a good or in doing a service. In a free market when that person would try to keep prices low, would work hard to make a service good, and work hard because of a self interest while at the same time making an effort to create an array of goods and services.
According to Smith “‘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’” this is a clear statement of self interest. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. Each person serving his own ends is led, in Smith's famous phrase, "by an invisible hand" simultaneously to serve everyone else's ends as well. But it is self interest and that is the invisible hand that guides the workforce. And I quote “he intends only on his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” (Smith 1776)
On the “DIVISION OF LABOR”
Smith also believed that a division of labor would affect a great increase in production. He cited as an example are the pin workers. In his famous opening example,
“a workman in the ‘trifling’ manufacture of pins might at best make twenty pins a day if he had to do all the operations himself, whereas even an ‘indifferent’ factory where ten men worked, each on a different task, could produce 48,000 pins a day. Therefore the process in which labourers hire themselves to capitalists, who organize industry on the basis of the division of labour, makes everybody in a capitalist society richer than even the richest members of a non-capitalist traditional society.” (Smith 1776)
Considering the idea, we may say that his theory on the division of labor was quite vague during the time. But in the modern sense, he is correct. Division of labor would cause an increase in production. From there, competition would start. The proposition is to divide the labor to increase economic prosperity. From this Smith argues towards his general prescription in favor of capitalism, laissez-faire, and free trade. In economics, Smith gives the pioneering analysis of the structure of a functioning economy, and the benefits of the division of labor.
Division of labor is one important concept in Smith’s work. It is just how people can best apply their own labor, their own resource to earn the highest possible return. That it should always yield an equal rate of return. I would have to agree with Smith on his theory that the division of labor can increase the value of production and that there is a value arising from labor in the process of production. Specialization of labor yields total output because labor can become more skilled at a particular task. From this came the idea of differences in wage. That difference in work would mean difference in pay. But a statement in his book would definitely make us feel that it is not division of labor per se but helping each other. And I quote: “Man has almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only.” (Smith 1776)
On “LAISSEZ FAIRE” and “FREE Trade”
Smith did not coin the term laissez-faire but he did identify a general set of principles that brought clarity to what we call market transactions. But in his writing, he expounded on the idea of a limited government intervening with market. He opposed government intervention in the market. The wealth of a nation can be measured by the number and variety of consumable goods it can command. Free trade is essential for the maximum development of any nation. According to Smith, variety of goods can become possible when the government is not intervening with production. It is always the impulse of self-interest would bring about the public welfare. One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by what Smith refers to as the "invisible hand"—which is more of an economic law than a mysterious force.
Adam Smith expressed disbelief over the government intervening with production. But he mentioned in some parts that the government had a role to play. That is to enforce contracts and encourage new ideas. He even thought that government restrictions had always hindered industrial expansion. He attacked most forms of government interference in the economic process, including tariffs. This theory, referred to as laissez-faire, (A popular French phrase that means ‘let the people do as they choose), influenced government legislation later, especially during the nineteenth century. Smith criticized a number of practices that later became associated with laissez-faire capitalism, and as such are often wrongly associated with him. What he did was just to explain the causes of the slow production and of some government restrictions but these became the basis for some of our modern concepts of economics. What Smith is against is the meddling of the government with the market. Against restraints on imports and bounties on exports and against government law that shelter industry from free competition. (Heilbroner 1986)
On MERCANTILISM AND CAPITALISM
During his time, mercantilism was the prevailing economic system. (Although, I would say that it wasn’t a system by then). Smith was opposed to monopolies and the concepts of mercantilism in general. He opposed Mercantilism and that is maintaining a trade surplus to increase wealth. Mercantilism emphasized the maximizing of exports and the minimizing of imports. Smith believed that mercantilism benefits the wealthy and the politically powerful while it deprives the common people of the better quality and less expensive goods that would for them. There should be free trade. Adam Smith made mention of the flow of goods and services. I quote:
"Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society. (Smith 1776)
Smith also addressed some of the more important issues of his days. It is not just to explain he process of production or the division of labor and the wage difference, but also to point some of the pressing issues of British governance. The times were characterized by an increase in economic activity. Feudalism, with its economically, socially and politically self-sufficient manor was giving way to increasing trade. The mercantilist proceeded on the assumption that the total wealth of the world was fixed. During those times, the British crown was spending too much on its colonies even those that are not worth for keeping. He did at some point accepted government intervention in the economy that reduced poverty and government regulation in support of workers. He argued that the government should allow policies that will allow progress. In The Wealth of Nations Smith argues against the mercantilists that wealth is not mere pieces of metal: it is rather the ability to satisfy one's needs and desires.
III THE WEALTH OF NATIONS and some views.
Adam Smith wrote the book in many years. But he was writing about his age and his time. When he left the university in 1764 and became a tutor, his travels to France would have influenced him. England and France had just finished the Seven Years war. Paris, during those times, was torn between the great philosophies of the past and the new theories getting into the mainstream. France, by then was a great producer and exporter of corn and wine – an agricultural country – but the government had been trying to make the country an exporter of manufactured goods.
During the writing of the book, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the war. However, at the time of publication in 1776, not everybody was immediately convinced of the advantages of free trade: The British public and Parliament still clung to mercantilism for many years to come. In 1776, the very year the American Declaration of Independence indicated the political failure of the old colonial system, the policy of mercantilism came under fire from the side of economic theory. A systematic rebuttal of the workings of mercantilism was put forward by Adam Smith. It is important to note that during those times, the English and the Dutch were able to take powers. Those nations became wealthy because of production. From this, the government of France believed that it is high time for France to move forward and forget its agricultural phase and move on to becoming a manufacturing power. From these, the government imposed laws on foreign manufacturers and gave bounty to the domestic manufacturers.
Adam Smith made mention in his book of government restrain. He might have observed this in France where there are restraints upon commerce. This made him comment on the issue of taxation that made the people’s lives miserable and that would later usher in the French Revolution.
Adam Smith is indeed a genius for writing a book that his predecessors failed to do so. How he was able to predict some of the more important issues of our time is indeed marvelous. Smith was able to identify several characteristics of growing economies. One of which is the division of labor. The revolution in labor in the seventeenth and eighteenth centuries, in which tasks were divided among workers each doing a single task, produced a revolution in production and it indeed increased a hundredfold. It is the with this, I can say that human life is productive and that the increase of production will not only result in more wealth but greater meaning and value for human life. We can also made mention of government intervention in labor may sometimes caused its stifling. Human beings work for their own profit but regulations and monopolies discouraged production. Each individual in a society is free to choose how to expend their productive labor and their capital. This selfishness, though, would not result in social injustice because there will always be the "invisible hand" which will guide people into right action.
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Sources:
Rowen, H. (1964). From absolutism to revolution: 1648 – 1848.New York: Macmillan Company.
Retrieved September 20, 2009.
Retrieved September 20, 2009.
Adam Smith. www. Wikipedia.Retrieved October 1, 2009
Heilbroner, R. (1953) The worldly philosophers. USA
Smith, A. (1776) An inquiry in to the nature and causes of the wealth of nations. London
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