Adam Smith - The Wealth of Nations

Doloeras, Ivan Pyotr; Facun, Mark Allen

I. Classical Political Economy

What is political economy?
- Political economy is a social science that studies production, distribution, and their
relationship with the law and the government
- Study of relationship between politics and economics

What is classical political economy?

- Self-regulating democracies and capitalistic market developments form the basis for
classical economics. Before the rise of classical economics, most national economies
followed a top-down, command-and-control, monarchic government policy system.
Many of the most famous classical thinkers, including Smith and Turgot, developed their
theories as alternatives to the protectionist and inflationary policies of mercantilist
Europe. Classical economics became closely associated with economic, and later
political, freedom.
- Concerned with wealth creation given the changes in the production process.

II. Human nature

How does the nature of human beings shape society’s economic structure?
- Humans are, by nature, self-interested but have the capacity for sympathy.
- Self-interest acts as the driving power to guide men to whatever work society is willing to
pay for. In his desire to achieve his own ends, he must appeal to the self-love of others
and not only in their sympathy
- “It is not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner, but to the regard of their own self interest.”
- An individual is led by the “invisible hand” which leads to satisfy the interest of all
others
- People, if left alone, will produce not only their own greatest good, but for the
good of all, is “the invisible hand.”
- “By pursuing his own interest, he frequently promotes that of the society more
effectively than when he really intends to promote it.”
- However, man does not consciously intend to contribute to the benefit of the society at
large.

III. Theory of Division of Labor

What is the division of labor theory?
- Since it is in people’s nature to engage in reciprocity, exchange/commerce occurs;
commerce encourages division of labor which results in specialization.
- Division of Labor is the separation of work processes or tasks to different people to
improve efficiency.
- “The division of labour is limited by the extent of the market”
 - To specialize, there must be an assurance that all the surplus a laborer can
produce, can be sold.
- If the market is very small, how could one dedicate his all to one employment for
want of the power to exchange all that surplus part of the produce of his own
labor, which is over, and above for his own consumption.
- Qualifications for division of labor to work
- lead to the production of tangible objects.
- create a surplus" which can be reinvested into production.
- Infrastructure encourages specialization.
- It provides an avenue to have an exchange with another group of people.
- This is the reason why specialization is more developed in large town/ urban areas than in
a dispersed area. Similarly, there is a greater degree of specialization in trading with
foreign countries.

IV. Factors contributing to affluence or increase of the wealth of nations

What are Smith’s views on value, production, distribution, and economic growth

- Wealth
- Primarily associated with the production and accumulation of material goods and
resources.
- He rejected the old mercantilist definition of acquiring gold and silver. Nor did he
fully accept the Physiocrat view that wealth consisted solely of the produce of a
nation’s farms. Instead, Smith proposed that the wealth of a nation consisted of
both farm output and manufactured goods along with the labor it took to produce
them.
- Labor Productivity
- Specialization raises labor productivity.
- The worker becomes more dexterous as he repetitively does the same
work.
- There is a time being saved from transitioning to another task.
- Since there is a fine line between tasks, and the tasks have been
simplified, machineries are easily implemented.
- Note: division of labor is beyond the factory setting. There is
specialization in society in general.
- Accumulation of investment capital
- Investment capital is to be used on employing people productively
- The per capita growth is proportional to the working population.
- It is promoted by parsimony (saving).
- It is impaired by the following:
- prodigality- wasteful consumption; lack of fiscal discipline of
government
- misconduct- bad investment decisions
- Prodigality and misconduct diminishes the capital which can be used for
productive labor. Hence, it also diminishes the labor of the whole country.
 - This is why Smith is highly critical of extravagant courts and large bureaucracies
and great fleets and armies being maintained.

V. Labor theory of value and Laws of the market

What is the theory of value? What are the “laws of the market” and how does it affect prices of
goods?

Value
- Talks about value in use and value in exchange.
- Value in use is the utility that a service or good possesses.
- Value in exchange determines how much of one good can be traded for another.
- Things which have the greatest value in use have frequently little or no value in
exchange; and on the contrary, those which have the greatest value in exchange have
frequently little or no value in use.
- The core of Smith's argument was that both the direction of specialization in society and
the allocation of capital was best left to private initiative.
- Labor Theory of Value (LTV)- price of a good is made up of the sum of the wages,
rents and profits.
- Natural Price- the price that covers the natural levels of wages, rents and profits.
- Market Price - price that is sold to market, regulated by the proportion between the
quantity brought to the market and the demand.
- It is in the interest of everyone involved in the market that the quantity of a good should
meet the demand. If not, the laws of the market would apply.

Laws of Market
- Price is self-balancing;
- If market price is below natural price, productivity will decrease; hence, the
product supply will also decrease and the market price would then increase back
to the natural price due to lack of supply.
- If market price is above natural price, productivity will increase causing the
product supply to increase as well; hence, market price will go down to the
natural price due to oversupply.
- This is all assuming a free market.
- For the laws of market to work:
- Self-interest
- Free market
- This shows that even people acting on self-interest could coordinate their actions and
create an order. Even if the prices lack or exceed the natural price, the equilibrium is
reached through the actions of the producers and consumers.

VI. Monopoly
- Monopolists, by keeping the supply below the demand can keep the market price, well
above the natural price
- Price of monopoly is highest
 - Price of free competition is lowest
- Market price can persist longer above the natural price than it can below it.

VII. Laissez-faire and Role of Government

- Market with Government
- Government attempts to direct specialization and investment have caused more
harm than good (mercantile system). This led to discriminating against foreign
goods and creating a monopoly.
- Great nations were never impoverished by private prodigality and misconduct,
although they are sometimes Impoverished by public prodigality and misconduct
- Kings and ministers are the greatest spendthrifts in the society.
- How can they actually know what it is people really need?

- Free Markets
- The intent is privately selfish and autonomous but those who are involved are
collectively wise and organized.
- Each laborer intends their own gain and security; however, each was able to
contribute to the annual revenue of the society as great as it can be. (invisible
hand).
- Hence, the government must have a “hands-off policy” when it comes to the
market. This is the concept of intervention in the operation of the market
Laissez-Faire (economy with little to no government control; at least in the
context of the free market).
- Laissez-Faire advocates free trade and market competition.

- Minimalist state- state is to be confined to its three indispensable roles:

1. Defense from Aggression - duty of protecting the society from violence and
invasion of another of other independent states
2. Justice - Duty of protecting every member of society from the Justice or
oppression of every other member of it. Duty of establishing an exact
administration of justice
3. Public works- duty of erecting and maintaining certain public works in certain
public infrastructure, which it can never be in the interest of any individual or
small number of individuals to erect and maintain
- State as a support to the free market by providing the bare essentials.
- After executing the roles above, the following maxims for taxes must be followed in
general:
- Contribution is proportional to revenue
- Amount is certain and not arbitrary
- Levied at time, or in a manner most convenient to the contributor
- Contrived to cost as little as possible, what makes it costly?
- When there are many officers required to levy taxation
- May obstruct industry
- Penalties should be greater than price of giving into temptation
 - Constant visits from collectors may cause unnecessary trouble, vexation
or oppression
- If followed, the natural order of things is achieved. That is: Every man, as long as he
does not violate the laws of justice, is left perfectly free to pursue his own interest and to
bring both his industry and capital into competition with those of any other man, or order
of men.

VIII. Fourth Industrial Revolution

The fourth industrial revolution, also labeled Industry 4.0, was beget with emergent and
disruptive intelligence and information technologies. These new technologies are enabling
ever-higher levels of production efficiencies. They also have the potential to dramatically
influence social and environmental sustainable development.

On Division of Labor
- Some specializations can now be done by AI: Writing, Art, Programming
- IoT allows for better division of labor
- Development of better software and hardware allows for better specialization.

On Value and Laws of Market

- Blockchain follows the self-balancing nature of the market.
- Introduces the digital market
- The share of labor and land in the natural price has decreased due to technologies that
enable access to the digital market.
- Market has expanded significantly.

References
[1] Ebenstein and Ebenstein. “Great Political Thinkers: Plato to the Present.” Fifth Edition.
[2] ILC Diliman. “Classical Liberal Political Economy Part 2.” [Video]. Available
https://ilc.upd.edu.ph/videopage/classical-liberal-political-economy-part-2-99/
[3] CFI Team. “Political Economy.” [Online]. Available
https://corporatefinanceinstitute.com/resources/economics/political-economy/#:~:text=Political%
20economy%20is%20a%20social,and%20implementation%20of%20public%20policy.
[4] Young J. “Classical Economics.” [Online]. Available
https://www.investopedia.com/terms/c/classicaleconomics.asp
[5] Chunguang Bai, Patrick Dallasega, Guido Orzes, Joseph Sarkis, Industry 4.0 technologies assessment:
A sustainability perspective, International Journal of Production Economics, Volume 229, 2020,
107776, ISSN 0925-5273, https://doi.org/10.1016/j.ijpe.2020.107776.