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Adam Smith
Adam Smith (1723 – 1790)
1740 – 1746 - student at Oxford (1740-1746), fluent in French literature
1751 – 1765 - professor of Moral Philosophy, University of Glasgow
- close friend of David Hume
1759 – Theory of Moral Sentiments
- seems to contradict the later Wealth of Nations is arguing for benevolence as the
determinant of effective societies
1762 – 63 – Lectures on Jurisprudence
-> contains most of Smith’s WN views – e.g., division of labour, market and
natural prices, before his travels to France
1763 – 66 – traveled in France meeting Quesnay and Turgot
1776 – Wealth of Nations
We proceed first by reviewing the Wealth of Nations
Division of Labour
- "The annual labour of every nation is the fund which originally supplies it with all the
necessaries and conveniences of life ... either in the immediate produce of that labour,
or in what is purchased with that produce from other nations" [Intro, lvii]
-
"According therefore, as this produce, or what is purchased with it, bears a greater or
smaller proportion to the number of those who are to consume it, the nation will be
better or worse supplied" [Intro, lvii]
[Note that nation's welfare is measured per capita, not in the aggregate]
- "But this proportion must in every nation be regulated by two different circumstances;
first, by the skill, dexterity, and judgment with which its labour is generally applied;
and secondly, by the proportion between the number of those who are employed in
useful labour, and that of those who are not so employed." [Intro, lvii]
- "The greatest improvement in the productive powers of labour ... seem to have been
the effects of the division of labour." [ Book I, Ch.1, 3]
e.g. - pin factory
- 10 men cooperating in a factory by dividing the functions can make 48,000 pins a day
compared with 'scarce ... one a day' "wrought separately and independently" by a
workman not "educated to this particular business" (i.e., division of labour) [I,1,5]
- Smith cites this 'trifling example', because 'great manufactures' have different branches
not in one workhouse [I,1,4]
[-> includes social division of employment in division of labour along with
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Adam Smith
specialization within manufacture]
[-> may explain why he doesn't refer to the steam engine invented by his personal
friend James Watt in 1775 or the Compton's mule and Arkwright water frame
invented in the early 1880s in textile manufacture before the 1884 edition of WN]
- division of labour "occasions ... a proportionable increase of the productive powers of
labour" and "seems to have taken place in consequence of this advantage" [I,1,5]
- division of labour not as advanced in agriculture as in manufacture perhaps due to
seasonality
-> "cheapness and goodness of corn" similar between countries [I,1,6]
- 3 circumstances determine increased productivity due to division of labour [I,1,7]
1) "the increase of dexterity in every particular workman"
2) "saving of the time ... commonly lost in passing from one species of work to
another"
3) "invention of a great number of machines which facilitate and abridge labour"
- "It is the great multiplication of the productions of all the different arts, in consequence of
the division of labour, which occasions ... universal opulence”
- "The division of labour ... is a consequence of ... a certain propensity in human nature ...
to truck, barter, and exchange one thing for another." {I, II, 13]
not important whether "this propensity be one of the original principles in human
nature ... or the necessary consequence of the faculties of reason and speech ... It is
common to all men"
[Note disavowal of Greek grounding of division of labour in differences between human
natures. [I,II,15]]
- "the very different genius which appears to distinguish men of different professions
... is not ... so much the cause, as the effects of the division of labour" [I,II,15]
- division of labour is due to self-interest
- "The division of labour is limited by the extent of the market" [I,III,17]
- markets develop more near waterways due to cheaper transportation [I,III,18-19]
-> 'first improvements in art and industry'
- division of labour -> exchange dominates satisfying man's wants
-> everyman 'in some measure a merchant'
-> commercial society [I,III,22]
- money evolves as a medium of exchange
- development of metallic money as commodity by value (weight)
-> coinage to guarantee weight and fineness
Value
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Adam Smith
- two meanings - 'value in use'
- 'value in exchange'
- water/diamond paradox shows that use-value not related to exchange-value [I, IV,28]
Real and Nominal Price
- "The value of any commodity to the person who possesses it is ... the quantity of labour
which it enables him to purchase or command" [I,V,30]
- "The real price of every thing, what every thing really costs to the man who wants to
acquire it, is the toil and trouble of acquiring it ... [and in] exchange .. is the toil and
trouble which can save to himself"
"That money or those goods .. contain the value of a certain quantity of labour which
we exchange for what is supposed at the time to contain the value of an equal
quantity."
- "But though labour be the real measure of the exchangeable value of all commodities,
it is not by which their value is commonly estimated [due to differences in hardship or
ingenuity]" but the market creates a 'sort of rough equality' in the measure of different
types of labour. [I,V, 32"
- development of money leads to estimation by money not labour quantity.
- e.g., change in prices due to change in gold and silver in 16c due to "less labour to
bring those metals from the mine to the market"
- "Equal quantities of labour , at all times and places, may be said to be of equal value to
the labourer. ... Labour alone, therefore, never varying in its own value, is alone the
ultimate and real standard by which the value of all commodities can at all times and
places be estimated and compared. It is their real price; money is their nominal price
only." [I,V, 33}
- value of labour appears to vary to the purchaser because the quantity of goods
purchasing labour varies, not labour itself.
- Labour's "real price may be said to consist in the quantity of the necessaries and
conveniences of life, which are given for it; its nominal price, in the quantity of
money."
- corn wages are more stable than money wages but corn wages will vary because the
"subsistence of the labourer, or the real price of labour" depends on the growth rate of
the economy. (I,V, 35)
- corn wages, however, vary more in a year than money wages (36)
- since merchants profit from nominal price regardless of the real price, little wonder that
nominal price more attended to than real price (I,V,38)
Ch. VI
Components Parts of Price
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47 "In that early and rude state of society, which precedes both the accumulation of stock
and the appropriation of land, the proportion between the quantities of labour
necessary for acquiring different objects seems to the only circumstance which can
afford any rule for exchanging them for one another."
- twice as much labour to kill a beaver as a deer
=> one beaver should exchange for two deer.
- allowance being made for 'superior hardship' and for 'uncommon dexterity and
ingenuity'
"In this state of things, the whole produce of labour belongs to the labourer and
quantity of labour .. is the only circumstance which can regulate the quantity of labour
which it ought commonly to purchase, command, or exchange for."
48 When accumulated stock is used to provide labourers with materials and subsistence,
"something must be given for the undertaker of the work who hazards his stock"
- [seems to imply a separate value generation but]
"The value which the workmen add to the materials, therefore, resolves itself ... into
two parts, of which one pays their wages, the other the profits of their employers"
- profits are not merely "wages of inspection"
49 "the owner of this capital, though he is thus discharged from all labour, still expects
that his profits should bear a regular proportion to this capital"
- quantity of labour is not the only circumstance regulating exchange when there is
capital. That due for profits of stock "which advanced the wages and furnished the
materials of that labour" is part of value.
"As soon as the land of any country has all become private property, the landlords ... love
to reap where they never sowed, and demand a rent even for its natural produce."
[the fact that the landlord reaps what was not sowed does not necessarily mean that
labour produces the value. Before landlords, labour paid nothing for the bounty of
land but must do so when land is privately owned. The bounty of land provides the
value and the labourer and landlord appropriate it]
50 "The real value of all the different component parts of price ... is measured by the
quantity of labour which they can, each of them, purchase or command"
- "In every society, the price of every commodity finally resolves itself into some one or
other, or all of those three components"
- depreciation resolves itself into these there parts.
52 "The whole of what is annually either collects or produced by the labour of every
society ... is distributed among some of its different members. Wages, profit, and rent,
are the three original sources of all revenue as well as of all exchange value."
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- "interest ... is the compensation which the borrower pays to the lender, for the profit
which he has an opportunity of making by the use of the money. ... the interest on
money is always a derivative revenue".
Chapter VII Of the Natural and Market Price of Commodities
55 - in every society there is an average wage and profit "in every different employment of
labour and stock", and rent which are regulated partly "by the general circumstances
of the society" [especially growth rate] and "partly by the particular nature of each
employment" and "the natural or improved fertility of the land"
- "These ordinary or average rates may be called the natural rates of wages, profits, and
rent, at the time and place in which they commonly prevail".
- a commodity's natural price is that sufficient to pay the natural rates of rent, wages, and
profit for the factor inputs. "The commodity is then sold for precisely what it is worth,
or for what it really cost the person who brings it to market"
56 "The actual price at which any commodity is commonly sold is called its market price"
- market price is "regulated by the proportion which is actually brought to market,
and the demand of those who are willing to pay the natural price of the commodity"
- effectual demand is "sufficient to effectuate the bringing of the commodity to
market"
- "It is different from the absolute demand. A very poor man may be said in some
sense to have a demand for a coach and six ... but his demand is not an effectual
demand"
- deviations between market price and natural price or between quantity supplied and
effectual demand will cause 'competition' to raise or lower market price
- note elasticity "market price will rise more or less above the natural price, according
as either the greatness of f the deficiency, or the wealth and wanton luxury of the
competitors, happen to animate more or less the eagerness of the competition."
57 [similar elasticity for sellers]
- equilibrium "The quantity of every commodity brought to market naturally suites
itself to the effectual demand"
- deviations of market price from natural price mean that one or all of wages, profit,
and rents do not receive their natural rates, engendering movement of factors towards
or away from this industry.
58 "The natural price, therefore, is .. the central price to which the prices of all
commodities are continually gravitating."
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59 "The price of [some] commodities varies only with the variations in demand". The
price of others vary with variations in demand and variations in "the quantity of what
is brought to market in order to supply that demand".
60 accidents can keep market price above natural price for some period, e.g., natural
causes which hinder supply, monopoly
61 "The price of monopoly is upon every occasion the highest which can be got. The
natural price, or the price of free competition, on the contrary, is the lowest which can
be taken ... for any considerable time together"
62 "The natural price itself varies with the natural rate of each of its component parts, of
wages, profit, and rent, and in every society this rate varies according to their
circumstances, according to their riches or poverty, their advancing , stationary, or
declining condition."
Ch. VIII
Of the Wages of Labour
65 "this original state of things, in which the labourer enjoyed the whole produce of his
own labour, could not last beyond the first introduction of the appropriation of land
and the accumulation of stock."
65 "rent makes the first deduction form the produce of the labour which is employed
upon land"
"profit makes a second deduction form the produce of the labour which is employed
upon land"
profit is the share of the produce of labour for advancing subsistence and raw
materials.
66 common wages of labour adversarially determined by masters and workers
- masters "have the advantage in the dispute"
- laws do not prevent their combinations
- masters, fewer in number, can combine more easily
"masters are always and everywhere in a sort of tacit, but constant and uniform
combination"
- masters can hold out longer in disputes
67 - masters cannot reduce wages below subsistence necessary to raise a family because
68 "otherwise... the race of such workmen could not last beyond the first generation."
- demand for labour can raise wages above subsistence
69 demand for labour depends on the funds destined for payment of wages
- "It is not the actual greatness of national wealth, but its continual increase, which
occasions arise in the wages of labour" e.g., England, North America, `China
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74 Wages in Britain are above that necessary to bring up a family
1) summer wages are higher than winter wages even though cost greater in the winter
[demand determines wages]
2) money wages do not fluctuate with price of provisions year to year
[wages must be higher than necessary therefore]
3) money wages vary more from place to place than provisions
[lowest money wages must mean subsistence -> higher > subsistence]
4) money wages frequently varies opposite to price of provisions.
- grain was dearer in the past when money wages were lower
79-80 discusses large number of births but low population growth among the immizerated
-> 'liberal reward for labour' will decrease number of children.
81 slaves are more expensive than free workers who manage themselves.
"The liberal reward of labour ... is the effect of increasing wealth {demand for labour}
[and] .. the cause of increasing population"
"The liberal reward of labour, as it encourages the propagation, so it increase the
industry of the common people." `
82-83 high prices of provisions diminish wages by diminishing capital stock for labour
- low prices of provisions increase wages by increasing capital stock for labour
85 "The money price of labour is necessarily regulated by two circumstances; the demand
for labour, and the price of the necessaries and conveniences of life"
"It is because the demand of labour increase in years of sudden and extraordinary
plenty, and diminishes in those of sudden and extraordinary scarcity, that the money
price of labour sometimes rises in the one, and sinks in the other"
86 "The increase in wages necessarily increases the price of many commodities" and
diminishes consumption but the cause of this increase, the increase of stock, tends to
increase productive powers and thus decrease the price of many commodities
chapter IX Of the profits of stock
87 "The increase of stock, which raises wages, tends to lower profit ... due to mutual
competition"
- later (336) he says intensity of competition due to increasing difficulty of finding "a
profitable method of employing any new capital"
- shows falling rate of profit by fall in rate of interest from 10% maximum under usury
laws of Henry VIII to less than 5% today.
95 "In a country fully stocked in proportion to all the business it had to transact .. the
competition would everywhere be great and consequently the ordinary profit as low as
possible"
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Adam Smith
96 "What is gross profit comprehends frequently, not only this surplus but what is
retained for compensating extraordinary losses. The interest which the borrower can
afford to pay is in proportion to the clear profit only"
97 "The highest ordinary rate of profit ... eats up the whole of ... rent ... and ... pay[s]
labour the lowest rate at which labour can any-where be paid, the bare subsistence of
the labourer".
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