Transcript Adam Smith - Baylor University

Adam Smith
An Inquiry Into the Nature and
Causes of the Wealth of Nations
Introduction
• Recall: Ethics, economics as part of a
broader system of social science
– Theory of Moral Sentiments: An exercise in
moral, social philosophy
– Wealth of Nations: Extends this to provide a
working model for social interaction: the
“System of Natural Liberty” as a vehicle for
directing our self-regarding propensities
– A response to to the challenge directed toward
Smith’s moral theory: Will the Impartial
Spectator be sufficient to control “the
passions”?
• Is the available information sufficient?
• Is that information really always interpreted
impartially?
• Our claim: society needs institutional
structure
• But TMS does not tell us where this comes
from
Links to Kuhn: Smith’s
Disciplinary Matrix
• A systematic
– Exploration of the natural order underlying the
social world
– Application of that understanding to social and
economic issues
• A unified system of explanation
• A definitive technique of analysis
• Provided economics (political economy)
with its first generally accepted system of
theories, concepts, analytic techniques: its
first disciplinary matrix
• Part of his general theory of society
• That is: he gave it
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An organized structure of assumptions
A problem orientation
A value system
An analytic framework
(later) a self-conscious intellectual community
• Much popular appeal of this paradigm
– Relevance to immediate policy problems
• Population explosion; concern for Poor Relief;
economic growth issue
• Corn Laws; and commercial policy
– Belief that political economy could provide
• A simple, effective method of analyzing these
complex problems
• A reasoned approach to useful policy
recommendations
– Ricardo, Malthus, others, as puzzle-solving:
doing normal science
Fundamental Issue
• Under what conditions will society operate
so as to maximize human happiness?
• TMS: Human happiness promoted by
obeying the moral virtues under the
observation of the Impartial Spectator;
grounded in need for social approval
• WN:
– More explicit recognition of the problem of
opportunistic behavior
– Implications for the kinds of reforms necessary
to bring society closer to the system of natural
order that would maximize happiness
– Note Smith’s location in time and space
• The machine metaphor: under what
conditions does it operate best?
• The importance of policy
• WN as probably the first unified socioeconomic model
The Major Themes
• Economic growth, development: society’s
laws of motion
• Social coordination: How does a society in
which each individual follows own selfinterest keep from falling apart?
Economic Growth
• What’s the “wealth” of nations?
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Mercantilist presumption
Smith: “Wealth”, from “weal”, well-being
What’s necessary for the “good life”?
For whom?
• Growth measured in terms of output per
person
• Sources of productivity: where does growth
come from?
– Now: Focus on
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Technology
Capital per worker
Institutions
Incentives
• Smith: Source of productivity growth in
specialization, division of labor
– The pin factory
– Why does this happen?
• Improved dexterity: learning-by-doing
• Time saved moving from operation to operation
• Inventing labor-saving machines
• Who benefits?
• Origin of division of labor? “Propensity to
truck, barter, and exchange . . .”
• We need the cooperation of many others to
survive; do we get that cooperation by
appealing to their benevolence?
• The social division of labor as important
• What affects the degree of specialization?
The importance of the extent of the market
• Examples
The Importance of Money
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Specialization as implying exchange
Barter, and the problem of transactions costs
Commodity vs. fiat money
The diamond/water paradox: a scientific
puzzle
The Policy of Europe
• A first look at Smith’s argument for the
“system of natural liberty”
• A way for Smith to talk about the
consequences of interference with free
exchange
• Examples: exclusive privileges; restrictions
on labor mobility; the threat of monopoly
The Importance of Capital
Accumulation
• Smith’s problem: How do we support
ourselves until we produce and sell our own
output?
• In our language:
– Capital stock as necessary for more division of
labor
– Capital, thus, as a major source of productivity
growth
• Productive vs. unproductive labor: What’s
going on here?
• Distinction between output produced for
– Current consumption (consumer goods)
– Future consumption (capital goods)
• How does society increase productive labor
(capital accumulation)?
– Parsimony: saving
– Link to TMS, and saving as a dimension of
prudence/self-love
• The importance of good public policy
– Smith’s warnings against a large public sector:
why?
• The direction of spending matters:
Spending for luxury goods in a poor country
as blocking economic development
The System of Natural Liberty
• Book IV, and further discussion of
mercantilist legislation
• The trade balance:
– Do we need to worry about trade deficits?
– Are gains to one trading partner matched by
losses to the other?
– Why see restraints on trade?
– Contemporary versions
• The basic idea: The competitive market as
reconciling private, social interests; the
social mechanism for regulating the
economy
• Imposes orderly rules of behavior on
economic agents
• Thus: The “Invisible Hand”
– As working automatically to coordinate
people’s individual decisions
– As working best with minimum interference
• Potential problems:
– Desire to monopolize
– Tendency for protectionism
– Grounded in self-interest?
• Where’s government in all this? To provide
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Legal system: Administer justice
Anti-monopoly protection
Military security
Provide certain public works
In the End: The Central Theme
of the Invisible Hand
• Under certain social arrangements private
and social interests can be harmonized
• Market forces assure a social result that is
independent of individual intentions
• Self-interest works for general welfare only
under appropriate set of rules
• Does a market economy guarantee the “best
of all possible worlds”? Is Dr. Smith really
Dr. Pangloss in disguise?
• Is government without fault? The
incentives facing politicians, bureaucrats
The Evolution of Social
Institutions
• Unresolved issue: Where do social
institutions (including government) come
from? Why are they necessary?
– TMS, and their necessity; but not how they
come to be
– WN, and a story about their origin (Books III
and V): a “philosophical history”
• How does human society begin? The
propensity to “ . . . truck, barter, and
exchange . . . “
• Necessity of defining, monitoring,
enforcing property rights
• Security, order as necessary for society; and
social order requires system of law
• So: how do institutions evolve?
– Brief definition: Institutions as rules (explicit;
or implicit)
– Origin with the evolution of property
– Sources of authority:
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Age
Fortune
Birth
Personal qualifications
– Stages of society
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Subsistence (hunting, fishing)
Pasturage
Agriculture
Commercial
– Evolution of differences in property ownership;
and associated evolution of property rights
– Importance of preconditions for growth
• Why does Smith do this? To show how
changes in the nature of the economy are
reflected in institutional changes
– The basic argument:
• Humans are self-regarding is all spheres of society
• Helps us understand the pursuit of wealth, security
• Economic development creates different stages of
society, each with its own characteristic institutional
structure
• Two case studies:
– Western Europe after the fall of Rome
• The manor as the basic unit of society
– Disorder; conflict
– Provided security
– Mutual claims, lords and serf
• Changes in system of property rights: entail;
primogeniture
• Limited growth possibilities
• Emergence of a market economy
– Links, town and country
– Political alliances, monarchs and towns
– Role of foreign trade
– Decline in lords’ feudal power
• Conversion of feudal obligations into cash
• Dissipation of fortunes: buying goods and services
• So: Commerce brought about what feudal violence
could not: a decreased power for nobles
In the End . . .
• “Whenever a person seeks to serve his own
ends, he invariably serves the ends of
society”
• Did Smith provide a solution to this
problem? Did he suggest the conditions
(social arrangements) under which this can
happen?
• Self-interest makes the market system go
• But benevolence (a moral sentiment) makes
the market system possible
• Social institutions important in harnessing,
channeling, pecuniary motives
• A set of policy prescriptions grounded in
– The existing institutional structure
– His analysis
• Is the free-market economy the “best of all
possible worlds”? Is Dr. Smith really Dr.
Pangloss in disguise?
• Another issue: Is market society
(capitalism) civilizing or self-destructive?
What’s the effect of capitalism on the social
and moral order?
– The “Doux-Commerce” hypothesis: Favorable
effects of capitalism
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Limitations on the powers of monarchs
A moralizing agent: people are useful to each other
Smith, and frugality, integrity, industriousness
The influence of continuing relationships
– The “Self-Destruction” hypothesis: Capitalism
as undermining the moral foundations on which
any society must rest
• Influence of the Industrial Revolution
• Emphasis on individual advantage: atomism as
corrosive of social cohesion
• Rationalism undermines religious belief
• “Commercial spirit” replaces “higher values”
– Can both be held at the same time?
– Is there an inevitable outcome for capitalism?