Adam Smith

1st summary The main focus of Adam Smith 's The Wealth of Nations lies in the concept of economic growth. Growth, according to Smith, is rooted in the increasing division of labor. This idea relates primarily to the specialization of the labor force, essentially the breaking down of large jobs into many tiny components. Under this regime each worker becomes an expert in one isolated area of production, thus increasing his efficiency. The fact that laborers do not have to switch tasks during the day further saves time and money. Of course, this is exactly what allowed Victorian factories to grow throughout the nineteenth century. Assembly line technology made it necessary for a worker to focus his or her attention on one small part of the production process. Surprisingly, Smith recognized the potential problems of this development. He pointed out that forcing individuals to perform mundane and repetitious tasks would lead to an ignorant, dissatisfied work force. For this reason he advanced the revolutionary belief that governments had an obligation to provide education to workers. This sprung from the hope that education could combat the deleterious effects of factory life. Division of labor also implies assigning each worker to the job that suits him best. Productive labor, to Smith, fulfills two important requirements. First, it must "lead to the production of tangible objects." Second, labor must "create a surplus" which can be reinvested into production. Another main concern for Smith involved tracing the roots of value. He identified two different kinds of value, "use value" and "exchange value." The concept of exchange value interested Smith considerably. The diamond-water paradox, in particular, proved puzzling to him: Why is it that diamonds, which have very little practical use, command a higher price than water which is indispensable to life? By discovering the true source of value Smith hoped to find a benchmark for measuring economic growth. Eventually Smith settled on labor as the source of value: The number of hours labor that a good can be exchanged for constitutes its inherent worth. (Note, this is not the same as saying that a good is worth the number of hours spent in its production.) The value of a good can also be referred to as the "natural price." The natural price need not function as the actual cost of a good in the marketplace. Competition, however, was expected to push the market price towards the natural price. 2nd Summary: http://www.gradesaver.com/the-wealth-of-nations/study-guide/section1/

BOOK I: Of the division of labor Adam Smith begins by stating that the greatest improvements in the productive power of labor lie in the division of labor. Even in the production of very simple products, division of labor always increases productivity exponentially. Smith offers three reasons for this increase in productivity. First, the division of labor creates specialized knowledge of a particular trade or task. This, in turn, makes the laborers engaged in this task more dexterous, and therefore more productive. Secondly, the division of labor saves the laborer time. In focusing on one task, rather than passing from one task to another, a process that requires him to use different tools and materials, he is able to maximize his time, thus increasing productivity. Finally, the amount of time spent by laborers on an isolated task leads to innovation in the methods and tools employed in the task, and therefore to technological innovation that ultimately makes that task easier. Therefore, increased division of the labor involved in the production of a particular product leads to increased productivity. By increasing productivity, the division of labor also increases the opulence of a particular society, increasing the standard of living even of the most poor. Division of labor also means that many people are involved in the production of each and every manufactured product. This is a testament to the interconnectedness not only of the laborers employed in manufacturing, but of all the branches of commerce. Of the principle which gives occasion to the division of labor Chapter Two describes the manner in which material exchange spreads the benefits of the division of labor throughout society. At the beginnings of a particular society, it may have been talent that decided which member carried out which task. Division of labor by skill set would have allowed for modest efficiencies and surpluses. These surpluses would have allowed one member of society to trade the fruits of his labor for other objects that were needed. In this way, instead of each man struggling to produce some of the things he needed, each man would specialize, producing an excess of one thing, and exchange to gain all or most of required. This would increase the well-being of each member of society that was engaged in such production and trade. The division of labor is not the result of oversight and regulation by an authority, but of human nature. Part of what makes us human, according to Smith, is our propensity to truck, barter, and exchange items. This propensity can be observed in any society, including the most primitive. It is, in turn, the assurance of being able to

trade what one produces with others that encourages the division of labor. When two parties enter into a trade with one another, both come away with something they were previously lacking. The division of labor will continue to be a powerful force so long as this condition is fulfilled. Adam Smith goes on to insist that it is not natural talent that determines the profession of most people, but habit, custom and education. In today's modern complex societies, people are most often employed in a certain way because they came to develop specialized knowledge of their role. This system of specialization and extensive education in particular subjects or trades would be impossible if human beings were not endowed with the propensity for trade. In the absence of this propensity, each person would be forced to acquire a wide variety of skills in order to sustain himself. Adam Smith uses this property to distinguish human beings from animals, who do not have the propensity for trade. That the division of labor is limited by the extent of the market It is the size of the market that regulates the extent of the division of labor that it can support. The larger the market, the greater the extent to which labor can be effectively divided. Because productivity increases with the division of labor, a large market is needed to consume the products that it gives rise to. In rural or sparsely populated areas, the market is too small to absorb the products arising from an extensive division of labor, and therefore the division of labor must be limited in such areas. Historically, improvements to art and industry are made only when there is an assurance of a large market that will be able to absorb the products of labor. This occurs either when the market grows, or when a certain settlement has easy transportation to other markets (such as river access). Money also serves to extend the market because it facilitates trade to such a significant extent. If it were not for a standardized, universally accepted currency, people would always have to search out trading partners that had to offer exactly what they themselves needed, and vice versa. It would rarely be the case that these offerings and requirements coincided, and therefore people would have less faith in the ability to efficiently replace the surplus they produced with the objects they needed, and would be discouraged from producing such a surplus in the first place. Analysis In the first three chapters of The Wealth of Nations , several of Smith's most important themes are already articulated. The first important theme is the benefit of the division of labor as a self-reinforcing phenomenon that spreads opulence to even the most poor. Because it enjoys such tremendous efficiencies, the division of labor produces a surplus that gives a greater amount of people access to products that would otherwise be unaffordable.

Another important concept that Smith begins to develop already is the idea that trade is natural, and part of human nature. He uses historical examples to show that trade was an important part of society even in primitive times. Making the point that trade is natural and integral to human nature allows Smith to make another important pointnamely that, when two people decide to enter into a trade, they benefit mutually from its conclusion. Later in the work, this idea will be very important when Smith criticizes mercantilism. Also implied in the second chapter is the idea that people are motivated primarily by their own self-interest. Self-interest, for Smith, does not have many of the negative connotations that it does today. Instead, Smith means to make the point that it is entirely natural, appropriate, and indeed necessary for society that each person look after his own welfare, and not put the burden of his maintenance upon others. It is this propensity that allows human economies, left largely to themselves, to thrive as if it were in their very nature to do so. Finally, the third chapter shows readers that Smith is writing for a new historical era. He is writing at the very dawn of the Industrial Age, which was characterized by a mass migration to urban centers and a general population boom. Smith's work both predicts and explains these dual phenomena. The population boom and the urban migration ultimately led to a more extensive complexity and development of markets, which, in turn, led to further expansion. Of the origin and the use of money Once the division of labor has been accomplished, one man's labor supplies only a fraction of his wants and needs, and it is only through exchange that he can hope to attain them. Adam Smith goes on to speculate how the exchange must have occurred in primitive society, and argues that early trade must have been very clumsy. If bartering is conducted with perishable, non-divisible goods, it is rendered difficult, and many exchanges are simply impractical. It was these concerns, Smith posits, that led to the desire for a common currency. Metal lent itself to the being used as a currency because it is non-perishable, easily divisible, and compact. The text goes on to describe the various metals that were used throughout history as currency. After metal became the principle currency, coinage developed, in order to better ensure accuracy and purity in exchange. Of the real and nominal price of commodities, or of their price in labor, and that price in money In this chapter, Adam Smith explains that the source of value of all commodities derives not from their money price, but from the amount of labor required to purchase them.

He is led to his point by considerations of seemingly nonsensical pricing differences. A diamond, for instance, is extremely expensive, but unnecessary for life. Water, on the other hand, is very inexpensive or even free of cost, but is absolutely essential to to preservation of life. Smith explains the difference between these prices by looking at the differing amounts of labor that was required to bring those products to market. While the money price of a particular commodity may fluctuate for a variety of reasons, the amount of labor required to purchase it remains constant. The wealth of a particular individual is therefore determined by the quantity of labor that he can command. If labor is the ultimate determinant of value, then the question arises of how to ascertain a proportion between two different quantities of labor, especially if they are fundamentally different. Smith resolves the problem of accounting for different kinds of labor by reintroducing the concept of money. Because of the difficulties of equating various kinds of labor, commodities are more often exchanged for other commodities than for labor. It is convenient to estimate the value of one commodity by its exchangeable value, and therefore by its money price. He explains that, though money in the form of precious metals is sufficiently well-suited to serve as the measure of the exchangeability of commodities, it is imperfect because of the fluctuations in the value of these metals. However, though the money price of a commodity may change over time as a metal becomes more or less scarce, the price of a particular commodity will rise or fall to reflect its real value, which remains unchanged so long as the factors directly concerned with its production remain unchanged. Of the component part of the price of commodities Smith argues that the price of any commodity is complex, reflecting three different components. These components consist in the rent of the landlord, the wages and maintenance of laborers or animals used to produce the profit, and the profit made by the farmer or entrepreneur. The fact that the price of all commodities contains these three components may be obscured by the fact that in many cases, the roles of laborer, farmer or entrepreneur, and landlord are united in one person. Of the natural and market price of commodities In every society, there is a naturally regulated average rate of both labor and profit for different sectors. If the price of a commodity is sufficient to cover the rent, wages, and profit of stock associated with its production, it is said to be sold for its natural price. Additionally, there is the market price of a commodity, which reflects not the cost of the rent, wages, and labor associated with it, but the demand that exists for the commodity. If demand exceeds supply, the market price

rises above the natural price. The upper limit of the market price is then determined by the greatness of the deficiency of the commodity in question, and the wealth of those who are competing to purchase it. If the quantity of a commodity exceeds demand, then the price of the commodity will fall. When a dearth or an excess of a commodity in relation to demand continues for an extended period of time, members of society are prompted to act in a way that brings the price into line with its natural price (either by devoting more resources to the production of a particular commodity and thereby increasing its quantity, or by diverting resources elsewhere). Smith goes on to detail that there are certain methods whereby the manufacturers of a particular commodity seek to raise the market price. These methods may include procuring trade secrets that lower the cost of production, or controlling the supply of a particular commodity by creating a monopoly. 3rd summary: http://michaelatate.com/AdamSmith/b1c3.htm Chapter I OF THE DIVISION OF LABOR Vocabulary for this chapter: Opulence - a wealth or abundance. Chapter Summary: Smith begins his book by stating that the division of labor has resulted in the greatest improvements in industry. He notes that while division of labor can be see in most industries, it is much more noticeable in the big ones. He then goes on to use the example of a sewing pin manufacturer. He notes that while any of the individuals in the plant might be able to make perhaps one pin in a day by themselves, ten of them if they divide up the labor, they can make thousands in a day. He then notes that in any industry where division of labor can take place, gains in proportion to that of the pin manufacturer are seen: however; there are some industries where division of labor is just not possible in the magnitude of the pins. Smith's example of this is the farmer, and how the tasks of plowing the field and reaping the harvest can not be divided because they are seasonal in nature. Using this he notes that because agricultural labor can not be vastly more productive with the division of labor, corn in undeveloped countries is almost the same price as those in developed countries, while manufactured good are much cheaper in the developed. Smith states that there are three main contributors to why the division of labor works as well as it does. The first is that when people spend their entire lives doing one specific focused task, they become very good at it,

and can complete that particular task faster then anybody who tries to master other skills as well. The second is the loss in time of switching tasks. This does not just mean the time it takes to drop a hammer and pick up a screwdriver, but also the mental adjustment that has to take place in order to be working 100% at that task. The third is when people are focused on a simple task, they are more apt to discover a better way of doing that task. Smith states that whenever he walks into a factory, he is constantly shown contraptions developed by workers to save time and labor. As a small addition, Smith also states that the division of labor in philosophy and science will yield more efficient methods of doing things. He then makes a note that in a well off society, when more people have produced more goods, they will as a whole be a richer society. He then concludes this chapter by speaking about how much labor and industry must be employed to furnish a worker with a simple woolen coat, and how even though this is a simple dress, it is really almost as complicated as a prince's coat. Chapter II OF THE PRINCIPLE WHICH GIVES OCCASION TO THE DIVISION OF LABOUR Vocabulary for this chapter Benevolence - An inclination to perform kind, charitable acts. Occasion - A need created by a particular circumstance Propensity - An innate inclination; a tendency. Sagacity - The quality of being discerning, sound in judgment, and farsighted; wisdom. Chapter summary This chapter opens with the argument that the Division of Labour is not the consequence of somebodies wisdom, but results in the propensity of humans to to exchange goods. Smith finds no evidence of any animals in nature (except for humans) where any bartering goes on. Rather animals if they want something must beg to both humans and other animals if they want something that somebody else has. (That or outright take it). The difference between humans and animals is that animals can exist independently in the wild, while humans need assistance from others, but can not expect this assistance out of good will alone. He then states that we do not get meat from a Butcher because we need the meat, but because the butcher is looking out for his own self-interest and wants what we have in return. In a hunter-gather society, a man may find that he is adept at making bows and arrows, and finds he can trade these items to another hunter for meat. Soon this man realizes he can get more meat by trading bows and arrows then if he went hunting, and thus division of labor

is founded out of self-interest. From that the rest of the society begins to divide themselves up into varying professions based on what each is good at. This chapter is concluded with the remarks that while animals might have differing talents, those differing talents are of no use to the other animals. With humans however, those with vastly different talents are very useful to each other. Chapter III THAT THE DIVISION OF LABOUR IS LIMITED BY THE EXTENT OF THE MARKET Chapter Summary Division of labor can only take place where there is a large population, that will generate enough of a demand for specialized services. Some services will only be able to find constant employment in towns. And those that live in remote villages and in the highlands of Scotland, can not rely on specialized services, and thus must learn to provide for themselves. In those areas even common trades will seldom find a market for even a days worth of their work. Coastal areas, and cities on rivers have been the fastest to develop, as their goods can be very cheaply transported across water versus land. Thus while cities on water will develop, those landlocked will be stifled, as land transportation is vastly more expensive the sea transportation. And since land locked areas are limited in their potential for wealth by the neighboring land, those with navigation available are not so limited. This is probably why the ancient civilizations formed around theMediterranean, with it's easy navigation they could grow fast. This is especially true of countries that had great inland navigation, such as Egypt, China, and India. While countries that are landlocked (or with rivers that do not flow into a usable ocean or through another country) seem to be stuck in a barbarous state.