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Saturday, April 15, 2017

Adam Smith's system of economics


Photo source: Wikimedia Commons, Scottish National Gallery


Adam Smith (1723-1790) is regarded as the father or economics and best known for publishing The Wealth of Nations in 1776. Economic journalist David Warsh said,


"[The Wealth of Nations] possesses epic sweep - 950 pages - and yet, if you make allowances for a certain stateliness of language, it reads as much like a present - day business magazine as like an eighteenth century treatise on political economy... The book contains not a single chart, few enough numbers and no diagrams, but so penetrating was its reasoning that it launched a science." (The Knowledge and Wealth of Nations, 2006)


The rest of this post is some quotes from Smith.


What is political economy?


"Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign." (The Wealth of Nations, 1776)


Critique of mathematical economics


"I have no great faith in political arithmetic, and I mean not to warrant the exactness of either of these computations." (The Wealth of Nations, 1776)


The invisible hand


"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only 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." (The Wealth of Nations, 1776)


"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. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages." (The Wealth of Nations, 1776)


"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 his 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." (The Wealth of Nations, 1776)


Division of labor


"The greatest improvement in the productive powers of labour, and the greatest part of skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour." (The Wealth of Nations, 1776)


"This great increase of the quantity of work which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many." (The Wealth of Nations, 1776)


Theory of price


"The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities." (The Wealth of Nations, 1776)


"The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of the employer upon the whole stock of materials and wages which he advanced." (The Wealth of Nations, 1776)


"It is the natural effect of improvement, however, to diminish gradually the real price of almost all manufactures." (The Wealth of Nations, 1776)


Capital theory


"A great stock, though with small profits, generally increases faster than a small stock with great profits. Money, says the proverb, makes money. When you have a little, it is often easier to get more. The great difficulty is to get that little." (The Wealth of Nations, 1776)


"No fixed capital can yield any revenue but by means of a circulating capital." (The Wealth of Nations, 1776)


Competition and monopolies


"The establishment of any new manufacture, of any new branch of commerce, or any new practice in agriculture, is always a speculation, from which the projector promises himself extraordinary profits. These profits sometimes are very great, and sometimes, more frequently, perhaps, they are quite otherwise; but in general they bear no regular proportion to those of other older trades in the neighbourhood. If the project succeeds, they are commonly at first very high. When the trade or practice becomes thoroughly established and well known, the competition reduces them to the level of other trades." (The Wealth of Nations, 1776)


"The real and effectual discipline which is exercised over a workman is that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence." (The Wealth of Nations, 1776)


"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary." (The Wealth of Nations, 1776)


"To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation." (The Wealth of Nations, 1776)


"To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should never be established in it." (The Wealth of Nations, 1776)


"Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system." (The Wealth of Nations, 1776)


Government regulation


"Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from these rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it." (The Wealth of Nations, 1776)


"The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." (The Wealth of Nations, 1776)


"He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it." (Theory of Moral Sentiments, 1759)


Poverty reduction


"No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged." (The Wealth of Nations, 1776)


"Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people." (The Wealth of Nations, 1776)


"For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of education." (The Wealth of Nations, 1776)


"It appears, accordingly, from the experience of all ages and nations, I believe, that the work done by freemen comes cheaper in the end than that performed by slaves." (The Wealth of Nations, 1776)


Support for private property


"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce." (The Wealth of Nations, 1776)


"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all." (The Wealth of Nations, 1776)


Government debt and taxes


"When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretend payment." (The Wealth of Nations, 1776)


"The tax which each individual is bound to pay ought to be certain, and not arbitrary." (The Wealth of Nations, 1776)


"It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." (The Wealth of Nations, 1776)


Gross national product


"The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes." (The Wealth of Nations, 1776)


"The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive powers of those labourers who had before been employed." (The Wealth of Nations, 1776)


International trade


"The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began.. and which should naturally have proved as advantageous to the new, as it certainly did to the old continent." (The Wealth of Nations, 1776)


Support for infrastructure


"Good roads, canals, and navigable rivers, by diminishing the expense of carriage, put the remote parts of the country more nearly upon a level with those of the neighbourhood of the town. They are upon that the greatest of all improvements." (The Wealth of Nations, 1776)


Human nature


"We are delighted to find a person who values us as we value ourselves, and distinguishes us from the rest of mankind, with an attention not unlike that with which we distinguish ourselves." (Theory of Moral Sentiments, 1759)


"Society and conversation, therefore, are the most powerful remedies for restoring the mind to its tranquility." (Theory of Moral Sentiments, 1759)


"How selfish however man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it." (Theory of Moral Sentiments, 1759)


"Hatred and anger are the greatest poison to the happiness of a good mind." (Theory of Moral Sentiments, 1759)


"The violence and injustice of the rulers of mankind is Huan ancient evil, for which, I am afraid, the nature of human affairs can scarce admit a remedy." (The Wealth of Nations, 1776)


"The man within immediately calls to us, that we value ourselves too much and other people too little, and that, by doing so, we render ourselves the proper object of the contempt and indignation of our brethren." (Theory of Moral Sentiments, 1759)