Adam Smith

Development of Laissez-Faire

Capitalism

Adam Smith---Scottish Economist

• The Wealth of Nations• Five book series• Sought to reveal the nature

and cause of a nation’s prosperity

• Inquiry into the science of economics and a policy guide for nations

• Covered specialization of labor, statistics on herring catch, stamp duties, and coined money by Romans

Laissez-Faire Capitalism

• It is a French phrase that literally means hands-off.

• It states that the government should not be involved in the economy. It should let the natural laws of capitalism work. This is the way the economy works best.

• Dominant form of capitalism through the end of the Industrial Revolution.

Role of Government

• Government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas.

• Government should provide public works like roads and bridges that would not be worthwhile for individuals to provide.

• But the users should pay to use the public works like road tolls.

• Did support retaliatory tariffs.

Smith’s Definition of Wealth

• Consists of the goods which all people of society consume

• Rejected the traditional views of wealth as gold, treasures, kingly hoards

• Rejected the restrictions of merchants, farmers, and guilds

• “We are in the modern world where the flow of goods and services consumed by everyone constitute the ultimate aim and end of economic life.”

Law of Self-Interest

• People are motivated by greed.

• Because they want money and power, they will work hard to earn it.

• This is what motivates people to start new businesses and why people work at their jobs.

• It stimulates a strong work ethic, an entrepreneurial spirit, and competition.

Smith’s Definition of Wealth

• Consists of the goods which all people of society consume

• Rejected the traditional views of wealth as gold, treasures, kingly hoards

• Rejected the restrictions of merchants, farmers, and guilds

• “We are in the modern world where the flow of goods and services consumed by everyone constitute the ultimate aim and end of economic life.”

Law of Self-Interest and Charity

• Charity cannot alone provide the essentials for living.• Self-Interest is the remedy for Charity’s shortcomings.• “It is not from the benevolence of the butcher, the brewer, or the

baker, that we can expect our dinner, but from their regard to their own interest.”

• Someone earning money by his own labor benefits himself.• He also benefits society, because to earn income on his labor in a

competitive market, he must produce something others value.• “By directing that industry in such a manner as its produce may be

of 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 has no part of his intention.”

Law of Supply and Demand

• When there is a limited supply of a product, and there is a growing demand, the price of the product will increase.

• When there is a large supply of a product, and there is a decreasing or little demand, the price of the product will go down.

• This results in a fair pricing system.

Law of Competition

• This applies the idea of survival of the fittest to the business world.

• A number of businesses will compete in the same field to offer the best product for the best price.

• It is known that not all will succeed.• Those that succeed should.• The consumer benefits because the consumer

gets a quality product for a fair price.

Division of Labor• Main cause of prosperity was increasing the division of

labor• Smith gave the example of pins.• 10 workers could produce 48,000 pins per day if each of

18 specialized tasks were assigned to particular workers.• Average productivity is 4, 800 pins per worker per day• If no division of labor, a worker would be lucky to

produce even ONE pin per day.• Individuals should invest in land or labor to earn the

highest possible return

Wage Rates

• Wage rates would be higher for trades that were more difficult to learn, because people would not be willing to learn them if they were not compensated by a higher wage.

• Gave rise to the modern concept of Human Capital.• Wage rates would also be higher for those engaged in

dirty or unsafe occupations like coal mining, butchering, and hangmen,

• Work is compensated by differences in pay.

Views on American Colonies

• Great Britain does not benefit from the American colonies due to the cost of keeping them.

• Opposed mercantilism, because it prevented new markets from opening.

View on Education

• Vouchers and school choice programs are actually based on Smith’s views.

• “Were the students upon such charitable foundations left free to choose what college they liked best, such liberty might contribute to excite some emulation among different colleges. A regulation, on the contrary, which prohibited even the independent members of every particular college from leaving it, and going to any other, without leave first asked and obtained of that which they meant to abandon, would tend very much to extinguish that emulation.

• This came from Smith’s Oxford days where he complained that his professors had “given up altogether even the pretense of teaching.”