Economics

Teacher: Gawron

Group Members: Katie McWilliams, Alexandra Slender, Lisa Higashiuetoko, Colleen McCormack

Period: 6/7

 

 

 

Introduction

 

Adam Smith was a pioneering political economist and one of the major contributors and key figures in the creation of the modern perception of a free market economy. Smith's contribution to society was shown through several of his well-known works, which helped in creating the current regulations of economics based upon his ideas of free trade, capitalism, and libertarianism. Unfortuneatly, the exact date of Smith's birth is unspecified however, his baptism was held on June 5, 1723; the baptism was held roughly six months prior to the death of his father - a controller of the customs at Kirkcaldy, Fife, Scotland. At a mere age of fifteen, Smith was off to success as he entered Glasgow University. Later in 1740, he entered Balliol College in Oxford and left in 1746. It was at this time when Smith first developed the economic philosophy of "the obvious and simple system of natural liberty" which was later expressed in his two most famous, and pivotal works to the study of economics:An Inquiry into the Nature and The Wealth of Nations.

 

Case Study

 

 

 

 

Pros and Cons

 

Pro Stance

 

Adam Smith’s ideologies were based upon his own beliefs that would pave the roadways for economies later to be established and shown in present day markets. With being closely related, the ideas of capitalism are comparable to Adam Smith’s interests for acquiring the greatest potential in an economy in regarding the self-interest of others: "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." With his ideals, it recognizes the fact that most people act in ways to benefit their own self and interests.

 

This idea is expressed in The Wealth of Nations, Book II Chapter III:

 

"The uniform, constant and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor."

 

In a free market economy, self-derived interest encourages individual initiatives in choosing what is to be produced and consumed. For instance, if there is little or no demand for a certain product, the item will fail to be produced, resulting in less waste of labor and material. Because people have the ability to choose what to buy, where to buy, and how much to buy, only the businessman can provide for better services and products to the customer in order to successfully remain a business.

 

Smith states this idea in The Wealth of Nations, Book IV Chapter VIII, "Consumpution is the sole and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer." Because of the concept of consumption in a free market and its significance to the economy, we clearly can see how such inspiration is a key factor in determining the price of goods and hence, motivates people to work towards obtaining financial freedom. The ideas of Adam Smith can be argued as the “better fit” for achieving a successful economy, as it is the more customary economic system for people of the current industrial community wishing to achieve individually through the support of his own human rights, such as the freedom of speech.

 

Another one of the main focused ideas of Adam Smith is in the concept of economic growth, which is rooted through what is known as the division of labor. This idea primarily centers on the notion of specialization of the labor force by breaking down a large task between several separate jobs, or components. Under this organization, workers become proficient in the area of production and therefore increase efficiency for the whole by saving time and money. Smith was able to see the potential issues that could arise from this proposal. He realized that by forcing individuals to perform repetitious tasks would result in a displeased work environment. With this, he advanced the idea that the government was responsible for providing education to his workers.

 

This idea is expressed in Smith’s The Wealth of Nations, Book I, Chapter I:

 

“The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.”

 

If done correctly, the idea of division of labor would lead to a successful production and surplus. Quoted by Smith himself in The Wealth of Nations, Book I, Chapter VI:

 

“A gardener, who cultivates his own garden with his own hands, united in his own person the three different characters, of landlord, farmer, and labourer. His produce, therefore, should pay him the rent of the first, the profit of the second, and the wages of the third.”

 

 

As applied today:

 

Dating back to the publication of Adam Smith’s The Wealth of Nations in 1776, Smith’s economic theories accentuate the lessons in establishments which primarily focus on protecting one’s individual liberties. This is for the purpose of pursuing one’s own economic and self interests which ultimately result in greater prosperity for society as a whole. Modern economic scholars are rediscovering the power of these establishments which can provide for better economic success as a whole in long-term standards. Therefore, these techniques, although new, principally reiterate those basic ideas of Adam Smith. The following graph shows the accomplishment in present-day countries -  the usage of Adam Smith’s idea of economic freedom:

 

 

 

The philosophy of supply and demand is one of the most influential guiding forced in economic theory today. Adam Smith’s emphasis on the freedom of individual choice on what to produce and/or purchase goods as explained in the development of the supply and demand theory depicted below. It is the most effect way of determining what good/ services should be supplied and for what cost.

Adam Smith philosophy is based off of the fact that each person works to benefit their own self interest and everyone has the ability to choose what deals they will or will not make. The supply and demand curve demonstrates how these conflicting interests interact to determine the appropriate quantity to supply and price to be paid.

 

 

 

 

 

Con Stance

 

 

 

 

Although Smith’s intentions were seemingly not to create a specific economic system, there exists many disadvantages and flaws in his philosophies. The chances of his philosophies taking place according to the way he envisioned them are unlikely in that human behavior is unpredictable except for the fact that it primarily always involves self-interest. For example, in the mid 1900s, there were monopolies in certain industries such as steel. Established in hope of self-prosperity, these monopolies created a lack in competition; therefore, allowing the owners to regulate the industry however they pleased. As a result, the well-being of the people, that Smith considered a priority, was neglected.

 

 

In addition to monopolistic industries being established, there are many opportunities for chaos and disruption in the economy as well. The principle of laissez-faire and the invisible hand are beneficial in concept; however, in reality, the chances of such a system running smoothly are slim. These concepts basically involve no government intervention. This is most likely because of the time that Smith had wrote his philosophies: shortly subsequent to Great Britain’s abuse of the colonies. He feared governmental abuse; however, this fear blinded Smith from the fact that governmental intervention can be beneficial and is ultimately necessary in an economy to ensure stability. The individual, who Smith believed possesses the ability to regulate the economy, cannot be trusted because of the potential chaos that can occur from human flaw.

 

While Smith’s ideas are advantageous in principle, a pragmatic view must be taken, which will show that his ideas are ultimately far-fetched. As time elapses, it unfolds flaws within Smith's economic principles. Rougly one hundred years after The Wealth of Nations was written, the Industrial Revolution occurred in the United States.  While many advantageous advancements were made, division of labour was nearly wiped out with the production and use of factories.  The powerful bussinessmen of the time focused on the self-interest portion of Smith's philosophy rather than the division of labour aspect.  And with their focus on the self-interest aspect, it was solely their own and not their workers who made up the majority of the population.  The abuse of the average man in this time up until labor laws were created decades later shows a major hole in Smith's philosophy.  Self-interest must be present, but it must be self-interest of the public not of the powerful economic figures.  While Smith was not alive during the Industrial Revolution, it is said that his ideas and philosophies are part of the foundation for the revolution as a whole.  His intent was not to create power hungry and selfish machine-like men, and while he is not fully responsible for their actions, his philopsophy was a contribution.

 

 

 

 

 

 

 

The following clip from A Beautiful Mind shows the con stance of Adam Smith's ideas:

 

“Adam Smith said the best result comes from everyone in the group doing what's best for himself, right? Adam Smith was wrong!”

 

 

 

In A Beautiful Mind protagonist, Nash has a significant moment as he challenges the basic ideas of Adam Smith. He sits at the bar, spending time with four of his male friends, seeing five likely candidates for having “some fun.” Out of the five women, a beautiful blonde prominently stands out in comparison to all of the other women. Nash realizes that if all five of them approach the blonde, in result, she will feel troubled and chose none of them. As a result, her four other lady friends will turn away from them because no one likes being second best. Unfortunately with this tactic, no one will be able to have any “fun.” Although, if the men are able to somehow modify their competitive instincts and cooperate in establishing some understanding about who should get whom, then all five men could be “winners” tonight!

 

In this scene, Nash disputes Adam Smith’s self-interest, “me-first” philosophy. Nash formally shows how even without a government to set rules, a small number of business rivals could reach a stable solution that would benefit each. This doesn’t completely disprove the free-market economic regulations of Adam Smith, but extend them. Nash’s theory properly opposes Adam Smith’s view that the greater social good is best achieved through unfettered selfishness and greed, but through means of cooperation.

 

 

Summary

 

 

• Smith was a philosopher before his time; he created new ideas that have played out as history progresses.
• His intentions were not to create an economic system, but in his quest for the well-being of the average person - he did just that.  In his philosophy, the term capitalism was not used, but that was ultimately what his ideas led to because of the faith Smith placed in individual competitors.
• Smith's advanced thinkings are illustrated in his most famous work, "The Wealth of Nations," in which his three main components of economy are displayed: the division of labour, the pursuit of self-interest, and freedom of trade.
• His philosophies led to the expansion of economy by motivating workers in every industry to better their product in quality by ultimately creating a healthy competitive nature within the market.
• However, Smith placed all his faith in the individual competitors, leaving room for error and chaos as a result of no government intervention.
• As history elapsed, Smith's philosophies played out to be both beneficial and harmful; overall, the addition of his advanced thought progressed the economy of his time as well as possessed an influence over various other economies for the past 200 years.

 

 

Student Stances

 

Alexandra's Response:

 

I clearly understand the tactics of Adam Smith and consider him as one of the most noteworthy and significant economists. His philosophies regarding the division of labor, the pursuit of self-interest, and freedom of trade are all strong contributions towards a successful economy. The idea of self-interest is excellent; self-interest absolutely pursues and encourages individual initiative. A businessman wants his earnings, so he will reach out to identify what costumers want and greatly consider them in providing the best in order to remain a successful business. Another concept I agree with is the division of labor. It is definitely one of the most vital contributions I would like to note on, as Smith clearly shows how essential this idea is to a flourishing economy. By breaking down a large task between separate components of work evidently demonstrates an increase in proficiency, while saving valuable time and money. Under this regime, he suggests the importance of providing happiness to each worker in letting him or her have input in which task they might carry out most professionally. I believe that this idea here would most definitely increase production, as well as surplus.

 

>>To concur with Katie’s response, as one can see there was a lack of “division of labor” within the Wiki assignment. As it would be most successful with the separation of tasks, there was a lack of contribution from each member. As a result, the assignment may either predispose towards a successful grade, or fall to a dropping mark. Fortunately through self-interest, some members of the group were driven through motivation by efforts for receiving a high evaluation. Here shown, expresses the positive effect of self-interest for some members, and the increase in individual initiative in order to meet ends and aim for a solid grade.

 

As much as I agree with the notions concerning the division of labor, I do oppose with his idea of self-interest to an extent. I understand the importance of doing well for one’s self, as well as the importance of taking forceful action towards those things we wish to have in order to better ourselves. The parts in which I do not agree with, deal with only doing well for one’s self, even in the presence of a group in which you are involved within. In that case, I believe that the “me-first” philosophy should change within setting from “me-first” to “us-first.” When in a group, I think it is important to carry out action that would best support the entirety of the group, even by means of sacrifice. This idea is shown in the posted movie clip from A Beautiful Mind as Nash references to the importance of cooperation in means of attaining a stable solution for the group, benefiting all members. I feel that in a way Smith alludes to this idea without directly making note of the concept. In studying the concept of the division of labor, it would almost make sense for him to apply this general idea to the workings of a group. If Smith believes in the idea of “self-interest” then it must coincide with a similar idea for a group. When working in a group, there is no “self”, but “selves.” The division of labor breaks these “selves” into components, but still remains part of the greater whole – the group, itself. Therefore, when merging the two concepts together – “self-interest” and the construction of a group under the division of labor – the design of the whole would be equivalent to assembling a group together with equal distribution of parts and equal interest, which I fully accept. As the old saying goes, “the whole is greater than the sum of the parts.”

 

Nonetheless, I believe Adam Smith’s contribution to the economic community is remarkable. Strong enough, yet smart at the same time.

 

 

 

Katie's Response:

 

Adam Smith was truly a man ahead of his time; his ideas were completely new as well as revolutionary.  While this is true, it is also true that Smith did not take note of human flaw.  He lived in a time that which the government was not trusted; therefore he placed too much trust in the individual.  Smith did not realize that these distrusted governments were run by men, men that are not too different from the men running businesses.  Yet, he did successfully and efficiently organize his three main focuses, making it easy for the common man to understand which was his main purpose. 

           

In a perfect world, Smith’s philosophy would run without interruption or error; however, this is not the case at all.  People’s selfish nature taints his ideologies with greed.  The economy is like a playground that is a safe place when the children play nicely with one another; however, as soon as one child wants a specific swing, another wants his own and so on.  When everything is open and friendly, the economy runs smoothly; yet, when greed, an inevitable factor of human character, comes into play, things quickly go downhill. The self-interest portion of his philosophy is where this concept would have its effect.  I agree with Ally's opinion that the well-being of others must be taken into consideration, even if it results in sacrifice.  Part of life, including business matters, involves doing some actions that you may not want to; however, when it is for the good of the whole, these actions are necessary and should be carried out. This greed can have the same effect that a diametrical emotion can: negligence. When a specific part of the economy is neglected, it brings potential failure for the remaining parts.  For example, the division of labor is only efficient when the respective portions do their part, like this project in which all group members should do their part, but a couple did not.  However, it is possible for the other parts to compensate for the negligence and bring success, illustrated through efforts in this project. 

           

Regardless of the holes in his economic philosophy, Smith ultimately advanced the United States while it was in a vulnerable state.  The power of his ideas is illustrated through the fact that they circulated throughout the world where many countries follow his principle concepts, whether they are aware of it or not.  “You make the cars, I’ll sell the cars,” a Japanese businessman may say referring to the Honda dealership with the underlying concept of division of labor.  “Let me add this feature to my product,” an entrepreneur in Canada may say in hope to provide a higher competition for his neighbor, his own “self-interest” in mind.  “My company will give you our Colombian gourmet coffee in exchange for your fresh Floridian oranges,” a manufacturer in Colombia may say, exercising freedom of trade.  The varying bussinessmen from around the world all seek to profit from their endeavors; what they do not realize is they are taking part in Adam Smith's ideologies.  His three main components all tie into one another, and although flaws can occur, Smith's ideas were profound and very hopeful for future economies. 

           

Every aspect of life has its positives and negatives, its disadvantages and advantages; the economy is no exception.  It is a complicated matter and perfection is seemingly impossible to achieve within it.  However, Smith has contributed to it, good with bad, profitable with mildly harmful.  Regardless of what his ideas led to, Smith's main purpose was to benefit the majority of people.  This is shown through Heilbroner's quote in his work, Worldly Philosophers, "... it is not his aim to espouse the interests of any class. He is concerned with promoting the wealth of the entire nation. And wealth, to Adam Smith, consists of the goods which all the people of society consume; note all - this is a democratic, and hence radical, philosophy of wealth. Gone is the notion of gold, treasures, kingly hoards; gone the prerogatives of merchants or farmers or working guilds. We are in the modern world where the flow of goods and services consumed by everyone constitutes the ultimate aim and end of economic life."  Overall, his ideologies have been more of a contribution than a setback, shaping history and opening new doors for the future.

 

 

 

Colleen's Response:

 

While many may feel that Mr. Smith’s ideas and philosophy he outlined in “The Wealth of Nations” were new or innovative, I would argue that they were in fact in-depth observations of core economic factors that controlled the economies dating back to ancient civilizations. Mr. Smith’s genius was his ability to identify and articulate these basic forces and the role they play in today’s economies.

The forces he depicted in “The Wealth of Nations” were as followed. Human being’s inherit instinct to act in ones self interest, the efficiency in the model of division of labor, the equalizing effect of freedom of trade and role of supply and demand to identify the desire and fix value to goods and services. These factors working in concert with each other constitute a significant force which guides any economy. This “invisible hand” best ensures that the correct products are being made in the most efficient manner and business is conducted in a fairest way possible.

Adam Smiths not only had faith in the individual but I believe he rightfully based his entire philosophy on all people’s freedom to choose, be it what to produce or purchase. Many people use the word greed with a negative connotation but this so called “greed” is one of the most important forces that propel the economy. It is because of the inherit competitive nature of a capitalist economy that the individual business man must continually strive to improve the quality of his product and/or service.  He knows that there is always another competitor waiting in the wings ready and willing to take his market share.

There have been concerns that lack of government intervention will lead to misconduct among the business community. I believe that Mr. Smith identifies this possibilities and correct asserts that the core properties of his economic philosophy will curtail any such abuses because consumers are free to choose what to buy and from whom to buy it from and as I stated above there is always someone waiting to step in and provide that service.

I am not a absolute believer in the laissez fair approach when considering the role of government. There is a legitimate role for government in participating and monitoring the economy. But these activities should be limited to areas where there no economic incentives to control behavior. This would include items such as building roads or bridges or concerns regarding determents to the environmental.

In my opinion I believe that history supports me when I say that Smiths economic philosophy has been and continues to be the most effective. I would site as an example the former Soviet Union. Its economics philosophy was one of a centrally planed economy as apposed to a free market economy. As we all know the inability of this model to effectively sustain its people lead to it’s ultimate down fall, thus now know as the “former” Soviet Union. Another less known example would be Zimbabwe. Under a free market economy it was known as the “bread basket” of Africa supplying not only sufficient food for its own country but most of the surrounding nations. After a overthrow of the government, the new government confiscated and nationalized all farming; it has lead to reduction in agricultural production making it unable to feed its own people.

 

Lisa's Response:

 

Adam Smith's wealth of nation created a foundation for today's mixed economy, making it the most ideal and most successful so far. He gave way for economies to expand by allowing workers to create a better product.Also, he believedc that the invisible hand of the market would correct the market in times of crisis In all this he left room for competition,without the need for government intervention. 

Works Cited

 

1. Nardinelli, Clark.  "Industrial Revolution and the Standard of Living."  The Library of Economics and Liberty.  13 Dec 2007.  <http://www.econlib.org/library/Enc/IndustrialRevolutionandtheStandardofLiving.html>

 

2. "Adam Smith." Wikipedia, The Free Encyclopedia. 13 Dec 2007, 16:38 UTC. Wikimedia Foundation, Inc. 13 Dec 2007 <http://en.wikipedia.org/w/index.php?title=Adam_Smith&oldid=177680844>.

 

3. Falkner, Robert. "Biography of Smith." Liberal Democrat History Group. 13 Dec 2007.  <http://www.liberalhistory.org.uk/item_single.php?item_id=37&item=biography>

 

4. "Adam Smith." Compton's Interactive Encyclopedia.  27 Nov 1995.  Softkeys International Inc.

 

5. "The Wealth of Nations." Encarta Encyclopedia.  2 Apr 2000.  Microsoft Corporation.

 

6. Fleischman, Stephen.  "So Much for the Invisible Hand."  Commondreams.org Newscenter. 7 Dec 2005.  <http://www.commondreams.org/views05/1207-28.htm>

 

7. Landry, Peter.  "Adam Smith" Blupete Biographies.  16 Mar 2004.  <http://www.blupete.com/Literature/Biographies/Philosophy/Smith.htm#TOC>

 

8. Heilbroner, Robert.  The Essential Adam Smith.  Copyright 1986.  Maple-Vail Book Publishing&Co. Norton & Company Inc.

 

 

 

 

Web Resources for Further Reading

 

http://www.victorianweb.org/economics/division.html

 

http://victorianweb.org/economics/laissez.html

 

For The Wealth of Nations in its entirety:

 

http://www.readprint.com/work-1384/Adam-Smith