Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 – – – – – 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? – – – – 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 • • • • 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 • • • • 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 – – – – 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: • • • • Age Fortune Birth Personal qualifications – Stages of society • • • • 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 • • • • 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?