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In the book, Wealth of Nations, Adam Smith believes the government should not control economic activity but should take more of a laissez-faire outlook. He believes that the economy can run by itself without external interference. The main concept that keeps the economy flowing is man’s natural ability to exchange and trade. This human instinct ultimately leads to a division of labor, a work force. Adam Smith describes the causes of increased productivity, value and price, wages, and rent, all of which determines the flow of the economy.
When asked how advancements in productivity occur, most people would say through technology and machinery. However, Adam Smith believes advancements are due to increased specialization of labor. People such as philosophers, scientists, and engineers are significant to this division of labor; they create theories, formulas, and models which allow technology to develop and progress. This, in return, allows the people as a community to evolve.
The foundation of this division of labor is man’s tendency to trade. Also, it is motivated by the human instinct to self-love and self-help. Contrary to popular believe, it is not based upon wisdom. “This division of labour… is not originally the effect of any human wisdom”. Smith believes that something most people ask themselves is “will I benefit from this?” However, he does not believe self-interest is a form of selfishness nor is it the pinnacle of the force behind human motivation. If he believed that, then all humans would be nothing more than parasitic savages only looking to help themselves. In addition to self-motivation is cooperation and barter amongst others. Smith brings up an example of this through the market system. “…by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where everyman man purchase whatever part of the produce of other men’s talents he has occasion for.” Essential what Smith is saying is that the market is a form of mutual aid and that it is a tool to share individual talents. This, in return, contributes to the division of labor.
In chapter three of book one, Smith describes geography and why it is an important factor in economic history. He stated that the standard of living is related to safe-water transporting. The standard of living depends on the productivity of labor. That is dependant on the specialization of labor; which depends on the extent of the market, which relies on safe water-transport.
The next topic Adam Smith deals with is value and price. Here he presents the theory of labor: the real value of a product traded is defined by the amount of labor needed to make the product. He goes on to describe the quantity of labor as time, difficulty, and skill needed to make the product. Smith states that commodities (gold and silver), in this case, is used to measure value but the actual value is measured by labor put into the product. However, not only labor, but also stock and land are needed for production. Since stock and land are added to the sources of production, value is then changed. Value is measured by how much labor can be bought with an item in addition to how much labor is required to produce and item.
In addition to value, Smith points out and describes two different forms of prices: market price and natural price. Market price is set by the fluctuating supply and demand and changes from day to day. Natural price is what the price would be at which supply and demand are at long term equilibrium.
Wages, as Smith brings up, is determined and used for man’s survival. “…there is however a certain rate blow which it seems impossible to reduce, for any considerable time, the ordinary wages of the lowest species of labor… and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.” If wages are too small, a man can not support his family and thus can not produce future common laborers. Additionally, Smith states that wages are highest during a progressive state in the economy and that a stationary state and regressive state are bad for laborers.
Furthermore, Smith comments on rent and how it pertains to the economy. First he starts out by identifying the three great orders of society: the landlords, laborers, and capitalists. Smith believes that capitalists are in a conspiracy against the landlords and laborers, and society as a whole. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices… Whenever the legislature attempts to regulate the differences between masters and their workmen, its counselors are always the masters.”
The purpose of Wealth of Nations is so that people can understand the fundamentals of economics according to Adam Smith. Smith realizes mercantilism is failing because society is not producing what people want. He defines and creates a better system, the market system. However, to whether or not it can be applied to today’s world is subjective. Many examples Smith gives are excellent according to his times. Nowadays, there is not butcher, baker, and brewer. Society has Boar’s Head, Dunkin Donuts, and Budweiser. It is a great classroom tool but his theories should be applied to today’s standards. America no longer runs on creating products, it provides services such as lawyers and doctors. America imports products from China, Japan, Korea, etc. where it is produced at a much lower cost compared to what it would cost America to create those products.
Adam Smith provides an intelligent alternative for government to control the economy, do not control it at all. Let the economy run its course and it will be successful because it is in the nature of man to create a positive economic scenario. Concepts such as causes of increased productivity, value and price, wages, and rent all determine the economic situation and must be judged by economic efficiency and justice. Smith presents the reader with solid examples in all subjects and proves that a laissez-faire concept of the economy is the most efficient way to control the economy.