Adam Smith Study Guide

Adam Smith We began the second half of the quarter by considering Adam Smith. As we saw, Smith was an utilitarian and deist. He believed the universe is constructed by God to result in the greatest happiness possible. His conception, indeed, of the “invisible hand” was not the hand of the market, but the hand of God. If individuals pursue their own greatest happiness, they will promote the greatest happiness of all. However, Smith’s conception of self-interest was enlightened self-interest. It was not narrow, material, physical, or sensory self-interest. Rather, like other utilitarians, he emphasized individual goods of benevolence and intellectual satisfaction. He believed that government was a great impediment to human improvement in his time. Government prevented individuals from freely transacting with one another, taxed too much, and spent wastefully. By reducing the extent of government, he believed much good would ensue. Smith emphasized the division of labor. His celebrated example was of a pin factory, wherein individuals practicing the division of labor produced thousands of more pins (nails) a day than one individual attempting to perform all of the jobs entailed in that manufacture. Smith emphasized secular utility maximization. This is the idea that it’s good for individuals to have a higher standard of living in this life, apart from a future life. Moreover, he defined “The Wealth of Nations,” in the title of his most famous work, as the wealth of the individuals who comprise a nation. A nation’s wealth is not the wealth of the king, aristocracy, or clergy. It is the wealth of the people as a whole, and is comprised of real goods and services, not money. ADDITIONAL INFORMATION: Jeremy Bentham Bentham was the founder of utilitarianism. His celebrated line is, “It is the greatest happiness of the greatest number that is the measure of right and wrong.” His thought underlies much of contemporary economics, particularly the idea that utility can be measured and maximized. Fundamentally and crucially, individuals were considered to be equal by Bentham. One individual’s utility counted for no more or no less than any other individual. This idea, too, remains prominent in contemporary economics. The four “circumstances of value” that Bentham identified in pleasures and pains were: 1) Intensity, 2) Duration, 3) Propinquity (nearness), and 4) Probability. As discussed in class, a pleasure or pain, as it is experienced, was, for Bentham, ultimately comprised of the first two of these--intensity and duration. This conception of Bentham’s circumstances of value in pleasures and pains is consistent with John Stuart Mill’s conception of “quality” and “quantity” in pleasures and pains. ADDITIONAL INFORMATION: David Ricardo and Thomas Malthus As discussed in class, Ricardo was a close friend of James Mill, the father of John Stuart Mill. Ricardo introduced a more mathematical and abstract method to economics. He was apparently the first to use the words “supply” and “demand” as the determinants of value. Smith and previous economists were much more historical and verbal in their approach than Ricardo. Know Ricardo’s views on comparative advantage--that all nations will benefit from each nation specializing in production in areas in which it is relatively the most productive. Ricardo’s ideas on comparative advantage emerged from Smith’s views on the division of labor. With respect to Malthus, the discussion in class was relatively deprecatory of Malthus’s view that living standards would diminish because population increases geometrically or exponentially but food supplies increase only arithmetically. However, as noted in class, Malthus’s ideas influenced Charles Darwin, helping to suggest to him the idea of evolution. ADDITIONAL INFORMATION: Karl Marx We spent several classes discussing Karl Marx and The Communist Manifesto. Know the distinction drawn in class between Marx as an economic historian, where he was evaluated rather highly, and Marx as a technical economist and prophet of societal development, where he was evaluated rather lowly. Marx had great influence on economic and political organization, but this influence was, in my view, almost entirely malignant. He did not foresee the liberating influence of the growth of knowledge in technology, but instead concentrated on relationships of production. He thought society would become more and more unequal, and that the only way to achieve change was violent revolution. Neither of these predictions appears to be accurate. Know the 10 government measures that he thought would usually typify the transition from capitalism to communism (page 155 of the reader). ADDITIONAL INFORMATION: John Stuart Mill and Socialism We covered John Stuart Mill’s On Liberty and Utilitarianism in the first half of the quarter, anikd there won’t be any questions on them. Know Mill’s conception of private cooperative socialism, whereby working places would be owned by workers (not government) and in competition with one another. Also, Mill favored an increase in government responsibilities, but nowhere near as extensive as Marx. Marx and Mill were different responses to the Industrial Revolution, which as we noted in class was also the Urban Revolution. Individualism to Socialism We here covered three thinkers--Herbert Spencer, Thomas Hill Green, and Harold Laski-here. Spencer was the most individualist of the three, Green had an in-between position, and Laski was a democratic socialist. Be especially aware of Spencer’s individualism and Green’s communitarianism. ADDITIONAL INFORMATION: Edwin Cannan The last economist we considered was Edwin Cannan (1861-1935). Cannan was the last classical economist. His approach was verbal, non-mathematical, historical, tentative, catholic (general), relative, indeterminate, and focused on the long run. Know Cannan’s quote: “Purity in one mind breeds purity in 10,000 more.” ADDITIONAL INFORMATION: - Invisible Hand of God - Universe constructed by God to result in greatest happiness possible - - - - - Individual pursuit of happiness promotes greatest happiness of all Believed government was impediment to human improvement in his time - Prevented individuals from freely transacting with one another, taxed too much, and spent wastefully Enlightened self-interest - Not narrow/superficial/physical/sensory self-interest - Individual goods of benevolence and intellectual satisfaction above all Division of Labor - Pin factory example: thousands more pins created with division of labor than with one individual performing all tasks in manufacturing process Utilitarian - Secular utility maximization: good for individuals to have higher standard of living in this life, apart from a future life - “The Wealth of Nations”: defined as the wealth of the individuals who comprise a nation, comprised of real goods and services, not money Deist Jeremy Bentham (1748-1832) - Founder of Utilitarianism - “It is the greatest happiness of the greatest number that is the measure of right and wrong” - Ideas underlying contemporary economics: - utility can be measured and maximized - Individuals are equals - Four “Circumstances of Value” in pleasures and pains (comprised of 1. and 2.) - 1. Intensity (J.S. Mill’s “Quality”) - 2. Duration (J.S. Mill’s “Quantity”) - 3. Certainty or Uncertainty - 4. Propinquity (Nearness) or Remoteness David Ricardo (1772-1823) and Thomas Malthus (1766-1834) David Ricardo - Introduced mathematical and abstract method of economics - First to use words “supply” and “demand” as determinants of value - Comparative Advantage - All nations will benefit from each nation specializing in production in areas in which it is relatively the most productive - Emerged from Smith’s views on the division of labor Thomas Malthus - Thought living standards would diminish because population increases exponentially while food supplies increase only arithmetically (shown now to be not true) - Ideas influenced Charles Darwin and his theory of evolution - Darwin inspired by Malthus’s idea of natural, eternal struggle. - Surmised that only the strongest of the overpopulated population would survive, leading to some of his theories. Karl Marx (1818-1883) - The Communist Manifesto - 10 government measures that would typify the transition from capitalism to communism - 1. Abolition of private property in land and application of all rents of land to public purpose - No more private property, all property is now owned by the government to be redistributed when necessary - 2. A heavy progressive or graduated income tax - Tax the rich more than the poor to even out wealth - 3. Abolition of all rights of inheritance - When a person dies, their possessions go to the government to be redistributed instead of being passed down to family members - 4. Confiscation of the property of all emigrants (leaving country) and rebels - Gov. takes belongings of those leaving country or standing against it and its communist ideals, and redistributes them - 5. Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly - There is to be one bank controlled by the government, who is the singular producer in the banking industry - 6. Centralization of the means of communication and transportation in the hands of the state - The gov. controls all forms of interaction conducted by citizens within the country, as well as the means by which they travel from place to place (i.e. one government-run mailing company, one government-run railroad company) - 7. Extension of factories and instruments of production owned by the state; the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan - Increase in government-run factories and the ensurance of all land being used to its potential. Farm good land, build factories on bad land. - 8. Equal obligation of all to work. Establishment of Industrial armies, especially for agriculture - Everyone must work, creation of huge labor force for factories and farms - 9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country by a more equitable distribution of the population over the country - Rearrangement of people, factories, and farms so there is more equal concentration of all across the country - 10. Free education for all children in government schools. Abolition of children’s factory labor in its present form. Combination of education with industrial production, etc. etc. - - No more child labor, children should attend school to prepare for their futures Marx evaluated highly as economic historian, poorly as a technical economist and prophet of societal development - Did not foresee liberating influence of growth of knowledge in technology, too focused on relationships of production - Thought society would become more and more unequal - Only way to achieve change is through violent revolution - Neither predictions seem accurate John Stuart Mill and Socialism (1806-1873) - Private cooperative socialism - Workplaces owned by workers (not gov.) and in competition with one another - Rejected centralist models of socialism on the grounds that they lead to huge concentration of power that compromises freedom - Promotion of the economic citizenship of workers and their participation in productive processes and voluntary associations - No rental income on land or property - No wage labor rather get a share of the income they generate - Production ran by cooperative groups of workers - Labor hiring capital rather than capital hiring labor - Favored increase in gov. responsibilities, but not as extensive as Marx - Marx vs Mill responses to Industrial Revolution (Urban Revolution) - Mills more libertarian in his cooperative socialism - Marx very communist, completely favoring domination of the state Individualism to Socialism Herbert Spencer, Thomas Hill Green, Harold Laski - Herbert Spencer - Most individualist of three - Individualism: - Human progress involves the freedom and action of individual persons acting in autonomous individual capacities - Well-being flourishes in moral societies where equal freedom is the ultimate principle of justice - Government’s only legitimate function is to protect individual’s rights to liberty and freedom. - Sole purpose of the state is to protect citizens against external and internal aggression - Individuals seek pleasures and happiness naturally therefore: - Social improvement depends on ethical improvement in individuals - Thomas Hill Green - In-between position - - Was a liberal Communitarianism - Argued that individual freedom for the pursuit of happiness had to be aligned with and be restricted by the public good - Criticized empiricist and utilitarian laissez faire economic policy. Believed greatest number of people should have equal opportunity without discrimination. - Government must represent the general will - State could intervene to prevent the freedom of some citizens being curtailed by others, and to prevent all citizens from becoming enslaved to destructive influences (e.g. alcoholism) - Similar to Spencer in that he believed minimalist state is justified in that it maximizes the freedom of the individual. But saw the good of the community as a whole as not necessarily being maximized solely through the maximization of individual freedoms because of inter-relations between fellow citizens. Harold Laski - Democratic socialist - Believed the economy and government should be run to meet public needs not for the profits of a few. - Argued state should not be considered supreme because people could and should have loyalties to local organizations. - Believed in planned economy based on public ownership of the means of production - Marxist Be especially aware of Spencer’s individualism and Green’s communitarianism. Edwin Cannan (1861-1935) - Last classical economist - Verbal, non-mathematical, historial, tentative, catholic, relative, indeterminate, and focused on the long run - “Purity in one mind breeds purity in 10,000 more” - No man can do more than live nobly, decently, and in accordance with the truth as he knows it. No man stands along as nothing in this world stands alone, not even the mind of a man. Purity in one mind breeds purity in 10,000 more - Not sure if this is relevant but is part of a quote from a book i found online with relation to the “purity in one mind” quote -