Adam Smith Division Of Labor Essay Outline

Free Adam Smith Essay

What do you consider to be Adam Smith’s legacy to the economics discipline?

Introduction

Adam Smith more popularly knows as the father of Economics wrote The Wealth of Nations, which is believed to have laid the foundation of economic thought and led to emergence of various schools of economic thought. Smith was a lecturer at the University of Glasgow where his concern was morality and ethics. Smith’s writings were considered revolutionary in those times. It would be fair to say that his views not only had an impact on the Europeans but also on those who mapped out the structure of the US government. According to John Farmer,

Adam Smith stimulates insights about the relationship between economic and political concerns. Adam Smith and his legacy provide the conceptual space within which governmental and societal organization and management are now viewed and understood.”[1]

The above clearly proves that Smith left a legacy and had an impact on the discipline of economics even though his intentions were not to create a ripple effect. It has been argued that Smith did not aim to write just on economics, in fact, his writings focused around morality and economics. Amongst many things, Smith advocated that free exchange and competitive markets would harness self-interest as a creative force. Directed by the ‘invisible hand’ of market prices, individuals pursuing their own interests would be encouraged to produce the goods and supply of the resources that others value cost highly relative to cost. Smith’s concept of invisible hand led to emergence of new classical economists who supported the classical view and opposed Keynesian view on the subject that market forces do not automatically adjust and the economy does not automatically come back to full equilibrium levels. He argued that the wealth of a nation did not lie in gold and silver, but rather in the goods and services produced and consumed by people. According to Smith, co-ordination, order and efficiency would result in the planning and direction of central authority.[2]

This paper will provide a critical analysis of Smith’s explanation of various economic concepts. It will also provide the arguments put forward by other economists who believe that Adam Smith has left a legacy for economics discipline. A few key concepts will be discussed in the following paragraphs to highlight Smithian view and how his views have evolved in the present day economic sense.

Smith on Division of Labour

Smith noted that specialisation and division of labour permitted far more output. To explain his point further, Smith took the example of a factory producing pins. Smith believed that when each worker specialised in productive function, ten workers were able to produce 48,000 pins per day, or 4,800 pins per worker. Without specialisation and division of labour, Smith doubted that an individual worker could produce even 20 pins per day. In the present day scenario it can be seen that division of labour and specialisation has had a positive impact enabling productivity to increase. As it is already known, that there are several reasons why division of labour leads to enormous gains in output per worker. Firstly, specialisation permits individuals to take advantage of their existing abilities and skills. Division of labour lets organisations adopt complex, large-scale production techniques unthinkable for an individual household. The consequence of the above would be that the society would benefit from higher productivity and better organisational performance leading to making a higher level of profit.

Invisible Hand

Many economists believe that Adam Smith’s main contribution has been the principle of invisible hand. Adam Smith emphasised that personal self-interest when directed by market prices is a powerful force promoting economic progress. Using terminology employed by Smith, economists refer to the tendency of competitive markets to direct the actions of self-interested individuals and bring them into harmony with the general welfare as the invisible hand principle. Smith’s major point was that market prices are able to harness self-interest and put it to work for the benefit of the society. This view was further supported by the Classics however opposed by Keynes, which seemed to explain recession and the economy during Great Depression, therefore adding credibility to his views.

James Tobin (1990) argued that the principle of invisible hand is the most important legacy of Adam Smith to macroeconomics. He believes that it is particularly important, as it has served as the ultimate inspiration for New Classical Macroeconomics and for Real Business Cycle theory.

According to Tobin, Smith’s Wealth of Nations did not contain a huge chunk of macroeconomics; in particular, he argues that very little was discussed about short-run fluctuations in economic activity. It is argued that that while Smith emphasised stock as circulating capital, he assumed a one period-lag between inputs of labour and materials and outputs of saleable goods. This assumption enabled Smith to speak of profits on stock interchangeably as mark ups and as rates of return over time.

According to Tobin, Adam Smith’s specific macroeconomic ideas are not an important part of his legacy to modern ‘new classical’. The Invisible hand is their true inspiration. They reject the Keynesian dichotomy and expect competitive markets to transmute self-interest into public interest in macroeconomic as well as microeconomic outcomes.

Adam Smith on Competition

According to Smith, with the existence of competition in the economy, even self-interested individuals would tend to promote the general welfare. Conversely, when competition is weakened, business firms have more leeway to raise prices and pursue their own objectives and less incentive to innovate and develop better ways of doing things. Gwartney (2000) in support of the above argument stated that competition is a disciplinary force for both buyers and sellers. In a competitive environment, producers must provide goods at a low cost and serve the interests of consumers since they will have to woo them away from other suppliers. He further argued that this process leads to improvement in both products and production methods, while directing resources towards projects where they are able to produce more value. The above also leads to the conclusion that monopoly was not seen as a necessarily positive force.

In Smith’s own words,

“Monopolists, by keeping the market constantly under stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist of wages and profit, greatly above the natural rate”[3]

Thus, the above re-establishes the fact that Smith’s considered monopoly as a necessary evil. Looking at the economies and world around us, it can be seen that countries promote competition for the reasons that resources are limited and it would eventually in the best interest of the society to maximise utilisation of resources. European Union and forming alliances between member countries, goes to prove that countries have realised the benefits of working together to move towards economic development and growth, which can be made possible by encouraging competition.

Adam Smith on Gains from Specialisation and Trade

If a foreign country can supply us with a commodity cheaper than we ourselves can make it, [we had] better buy it of them with some part of our own industry, employed in a way in which we have some advantage”[4]

The above relates to what the law of comparative advantage, which explains why a group of individuals, regions, or nations can gain specialisation and exchange. As it has been seen that specialisation in the area of one’s comparative advantage minimises the cost of production and leads to maximum joint output. Evidence suggests that international trade leads to mutual gains because it allows the residents of each country to specialise more fully in production of those things that they do best and import goods when foreigners are willing to supply them at lower cost than domestic producers.

In his writings Smith also highlighted the paradox that water, which is necessary for life, sells so cheaply while diamonds have a far greater price. This was explained y the theory of marginal analysis; according to which the total value of the good includes consumer surplus; thus total value could be quite large even though the price is low, which reflects marginal value is low. This provided a vital explanation for why market prices have little to do with the total contribution that a good makes to the welfare of the users. In other words it can be said that it is possible for something to have a large total value but a very small marginal value and vice versa.

Smith regarded saving as a constraint on growth. In agreement with Smith’s belief, [5]Tobin comments,

“He [Smith] correctly saw holdings of gold and silver as diversions of stock from productive employment, and therefore he welcomed prudent substitution of paper money for these precious metals”

Smith’s further contribution to the field of economics was his belief in the purchasing power parity for tradable goods, even in the short run. After two decades this led to the emergence of theory relating to balance of payments, which has contributed in understanding globalisation and international trade in a present day context

Amongst many opinions expressed on Smith’ contribution to economics, David Farmer argues that Smith’s writings have not only focused on the principles of invisible hand, but it has also examined the fundamental forces that underlie economic development. Thus, Smith’s contribution also lies in laying the foundation to understand economic growth and development.

Farmer believed that Smith was more of a philosopher than an economist. Being classed as the founder of political economy he saw politics and economics as dimensions of a larger philosophy. For Smith, a value-free economics was only part of the story, he wanted to write on three main aspects namely, ethics, economics and government. According to Farmer, Smith wanted a government that was capable of coping with the capitalists’ ability to challenge government to private interests, however.  He recognised the importance of the government. He also favoured the governmental provision of public goods, like bridges and canals. Farmer further stated that that Smith was in favour of governmental action not only in situations of market failure but also for specific policy purposes. Thus, according to Farmer, Smith supported government intervention.

Thus it can be said Smith’s work has proved to be a legacy not only for the economics discipline, but it has also permeated disciplines like public administration theory and practice and it can be recognised by considering the central role accorded to efficiency, a central concept in economic theory.

Conclusion

From the preceding paragraphs it can be said that Smith’s contribution to the economics discipline is invaluable. While it can be argued that Smith might not have had a deep insight into the various aspects of economics, however, the points he raised in Wealth of Nations led to various schools of thought to come with arguments and counter arguments. Thus it can be said that Smith cannot be considered to have all the answers for all the economic problems, but Smith has contributed by making economic writers think and re-think and in many cases modify theories and explanations ad helped economics discipline to explore various facets. Smith’s contribution can never be quantified; it would be suffice to say that he laid down the foundation of economics. Various concepts and ideas that he had discussed in Wealth of Nations like competition, specialisation and division of labour, automatic adjustment of market forces have been key in understanding the principles of macroeconomics. In summary it can be said that Smith has left behind a legacy laying down foundations for further research in economics.

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BIBLIOGRAPHY

  1. Baiman, R.P., Boushey, H. and Saunders, D., Political Economy and Contemporary Capitalism: Radical Perspectives on Economic Theory and Policy, (2001), M.E.Sharpe
  1. Dow, S.C., The Legacy of Adam Smith: Foundations in Economic Thought for Policy Making in Scotland,(2003), Scotecon
  1. Fry.M., Adam Smith’s Legacy: His Place in the Development of Modern Economics,(1992),Routledge, an imprint of Taylor & Francis Books Ltd
  1. Gwartney, James D., Stroup, Richard L., and Sobel, Russell S., Economics Private and Public Choice, (2000), Ninth Edition, The Dryden Press.
  1. Werhane, P., Adam Smith’s legacy for ethics and economics (Research papers in management studies),(1993), Judge Institute of Management Studies.

Journals and Articles

  1. Farmer, D.J., Contemporary Conceptual Space: Reading Adam Smith, 1997Journal of Management History 3 (3), pp246-255
  1. James Tobin, The Invisible and in Modern Macroeconomics, For Adam Smith Bicentenary, 1990. Cowles Foundation Discussion paper 966.
  1. West, Edwin G., Economic Progress, Morality and Civic Virtue: The Legacy of Adam Smith, 1994

Footnotes

[1] Farmer, D.J., Contemporary Conceptual Space: Reading Adam Smith, Journal of Management History 3 (3), pp 246-255

[2] Gwartney, James D., Economics Public and Private Choice, 9th edition (2000), The Dryden Press, p-11

[3] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776; Cannan’s ed. Chicago: University of Chicago Press, 1976), p.69

[4] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776; Cannan’s ed., Chicago: University of Chicago Press, 1976), pp 478-479

[5] James Tobin, The Invisible and in Modern Macroeconomics, For Adam Smith Bicentenary, 1990. Cowles Foundation Discussion paper 966.

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Adam Smith 1723–1790

Scottish economist, philosopher, nonfiction writer, and essayist.

Often referred to as the founder of the science of political economy, Smith is best known as the author of An Inquiry into the Nature and Causes of the Wealth of Nations (1776), which is generally recognized as the first comprehensive and systematic examination of the economic forces in Europe that gave birth to capitalism in the eighteenth century. Combining theoretical analysis with policy recommendations, The Wealth of Nations is partly a history of European economics and partly a description of the state of manufacture and trade in Smith's day. Explaining in detail the reasons for the breakdown of feudal Europe and the growth of the newly emerging world of industry, Smith offered suggestions for achieving rapid economic development in contemporary circumstances. His advocacy of freedom from government restriction of the economic process—what has since become known as the laissez-faire doctrine—appealed to the individualistic consciousness of Europe's rising capitalist class, and their enthusiasm for Smith's policy proposals in The Wealth of Nations greatly contributed to the book's enormous impact on Western economic thought and institutions. Smith was also known among his contemporaries as a prominent moral philosopher. His study of ethics, particularly as revealed in The Theory of Moral Sentiments (1759), helped to define the meaning and attributes of moral behavior in an age when traditional religious teachings were being replaced by secular values. Like The Wealth of Nations, The Theory of Moral Sentiments has been widely praised for its insight into the psychology of human behavior and its expression of leading intellectual currents of Smith's day.

Biographical Information

Smith was born in the seaport town of Kirkcaldy, Scotland. His father, a customs official, died shortly before his birth, and he was raised by his mother, with whom he enjoyed a close relationship until her death in 1784 at the age of ninety. When he was fourteen, Smith entered the University of Glasgow, where he became a favorite pupil of Francis Hutcheson, whose teaching of moral philosophy greatly influenced Smith's thought throughout his career. In his lectures on moral philosophy, Hutcheson emphasized themes that later

became prominent in Smith's writing: the notion that moral and aesthetic judgments are based on feelings, not reason; faith in the fundamental value and divine origin of an ethical law of nature; and the recognition of benevolence and justice as important human virtues. Smith left the University of Glasgow in 1740 and enrolled at Oxford, where he remained for seven years, pursuing a course of study that was largely self-directed. He moved to Edinburgh in 1748 at the suggestion of Lord Henry Home of Kames, who had invited him to deliver a series of public lectures there on rhetoric and belles lettres. It is believed that Smith repeated or revised many of these lectures, which encompass aesthetic subjects as well as history, jurisprudence, government, and science, during his subsequent teaching career at the University of Glasgow, first as a professor of logic in 1751 and later as a professor of moral philosophy from 1752 to 1764. Since Smith ordered his literary executors to burn his manuscripts, only a portion of these lectures are extant; some are printed in Essays on Philosophical Subjects (1795), and others, dating from 1762–63, appear in Lectures on Justice, Police, Revenue and Arms (1896; also referred to as Lectures on Jurisprudence) and Lectures on Rhetoric and Belles Lettres (1963). As Chair of Moral Philosophy at the University of Glasgow, Smith not only taught ethics, but also carefully considered the social aspects of the subjects of government and law. His study of jurisprudence led him to conclude that economic liberty was a fundamental human right, a theme he was to expand upon in The Wealth of Nations. Smith's first book, The Theory of Moral Sentiments, was drawn from his lectures at the University of Glasgow dealing properly with ethics. A critical and popular success that also elicited the admiration of Smith's peers, among them the philosophers David Hume and Edmund Burke, the work so impressed the politician Charles Townsend that he offered Smith the position of tutor to his stepson, Henry Scott, the Duke of Buccleuch. Smith accepted the assignment, resigning from his professorship in 1764, and accompanied the Duke on a two-year visit to France and Switzerland. Upon his return to Scotland, Smith settled in Kirkcaldy, where he spent the next ten years working on The Wealth of Nations. The immediate success of this book derived in large part from the popularity of its policy recommendations, which favored the rising capitalist class in Europe, and a variety of governments sought Smith's economic advice. During the remaining years of his life, Smith enjoyed recognition as a prominent economist and man of letters. He hosted regular Sunday dinners attended by important writers and other distinguished guests and devoted careful attention to his duties as commissioner of customs for Scotland, an appointment he received in 1778. He died in 1790, three years after his election to the office of Rector of Glasgow University.

Major Works

Smith's reputation as a writer rests on his success in formulating systems in the realm of the social sciences to explain human behavior. In The Theory of Moral Sentiments, Smith examined the nature and origin of ethical judgments, and in his masterpiece, The Wealth of Nations, he explored the motivations of economic actors operating in a free market. Smith's system of moral philosophy, as outlined the The Theory of Moral Sentiments, is founded on the sentiment of sympathy, which, Smith maintained, forms the basis for humankind's judgments about both the propriety and merit of people's actions and feelings. According to Smith, it is sympathy, in the sense of imagining oneself in another person's situation, that shapes our judgments about whether another person's actions and feelings are right or wrong, deserving of praise or blame. As Smith points out, in order to form sound judgments about the conduct of others, individuals must be able to make judgments about their own behavior that are free of self-interest. In what is considered the most original aspect of Smith's ethical theory, he argued that the only way to avoid self-deception in our assessments of ourselves is to view our own actions through the eyes of an "ideal impartial spectator," a person possessed of perfect virtue who knows all the relevant facts but is not personally involved and who adheres to a set of general rules about what is considered socially appropiate behavior. In Smith's system, these general rules derive from accepted social virtues, such as benevolence and justice; sympathy, a natural human phenomenon, is the ultimate source of virtuous sentiments. While The Theory of Moral Sentiments deals with humankind's struggle to achieve happiness on a moral level, The Wealth of Nations concerns humankind's material welfare. Smith's primary objective in The Wealth of Nations was to define the ways and means of producing national wealth and to outline the conditions for rapid economic development in terms of national income. He rejected the mercantilist theory that money, in the form of gold and silver, is wealth, maintaining instead that wealth is measured in terms of consumer goods. Smith emphasized that the greatest amount of trade will take place among countries that possess surplus stocks of consumer goods, or the raw materials necessary to produce them, and he argued that the best way to maximize a country's capital accumulation is to increase productivity through a division of labor whereby individual workers are assigned specialized functions in the manufacture of a particular product. It follows from Smith's analysis that producers, in an effort to ensure that all of their material wants will be supplied, will concentrate on the manufacture of goods for which there is the greatest demand. Thus, Smith views self-interest as the primary motivation of economic agents in a capitalist society. He writes, "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 self-interest." Smith adds, however, that economic actors, through no design of their own, actually help to promote the general welfare by producing and selling the goods that satisfy the greatest needs of the people: the capitalist "intends only his own gain" but is "led by an invisible hand to promote an end which was no part of his intention." In Smith's view, then, there exits a natural order in the universe whereby individual selfishness adds up to the maximum social good. He therefore concluded that government attempts to disrupt this natural order in the form of restrictions on free trade should be abolished. One of the major themes of The Wealth of Nations—and the one that most appealed to the capitalist class that was coming to power in Europe at the time of the book's publication—is economic liberalism and the need to remove the government controls on individual economic agents that had survived from feudal and mercantilist times.

Critical Reception

Smith is widely viewed as the philosopher of the capitalist revolution for his achievement in The Wealth of Nations. Scholars generally agree that Smith's genius lie in his ability to bring together into a coherent whole a vast range of topics that had been treated in the economic literature of his day and to fashion a system that explained the forces that were then at work forging a new economic order in Europe. Among Smith's contemporary audience, The Wealth of Nations was more applauded for its practical recommendations than for its analytic aspects. The acceptance of Smith's policy proposals by Europe's rising capitalist class helped to put in place economic practices and institutions that still survive and that continue to be associated with Smith's name. From a modern standpoint, however, Smith's lasting legacy is his economic analysis, which has been the subject of a vast amount of literature written by both professional and academic economists all over the world. In addition to discussing specific aspects of Smith's theory, most notably his ideas concerning the division of labor and the proper role of government in a free market economy, scholars have studied the philosophical foundations of his thought. Another prominent topic in the literature on Smith is the relationship between The Wealth of Nations and The Theory of Moral Sentiments. While it is almost unanimously agreed that both works attest to Smith's keen understanding of human psychology, critics have debated whether Smith's moral outlook has any bearing on his economic analysis. While some critics have argued that the concept of sympathy in The Theory of Moral Sentiments is in direct conflict with the idea of self-interest in The Wealth of Nations, others have found that Smith's notions of justice and benevolence as formulated in the earlier work are the key to an understanding of Smith's economic analysis. The ongoing controversy over whether Smith's moral and economic systems can be reconciled has not detracted from the critical stature of either The Wealth of Nations or The Theory of Moral Sentiments. The Theory of Moral Sentiments, like The Wealth of Nations, continues to be analyzed by critics on its own merits, for its theory and methodology as well as for the light it sheds on the Scottish philosophical tradition. Smith's fame, however, rests almost entirely on The Wealth of Nations. The economic system Smith developed in this work became the model for capitalist societies all over the globe, and today Smith is ranked with Thomas Robert Malthus, David Ricardo, John Stuart Mill, and Karl Marx among the world's greatest classical economists.

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