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Adam Smith

1st summaryThe main focus ofAdam Smith 's The Wealth of Nations lies in the conceptof economic growth. Growth, according to Smith, is rooted in the increasingdivision of labor. This idea relates primarily to the specialization of thelabor force, essentially the breaking down of large jobs into many tinycomponents. Under this regime each worker becomes an expert in oneisolated area of production, thus increasing his efficiency. The fact thatlaborers do not have to switch tasks during the day further saves time andmoney. Of course, this is exactly what allowed Victorian factories to growthroughout the nineteenth century. Assembly line technology made itnecessary for a worker to focus his or her attention on one small part of theproduction process. Surprisingly, Smith recognized the potential problemsof this development. He pointed out that forcing individuals to performmundane and repetitious tasks would lead to an ignorant, dissatisfied workforce. For this reason he advanced the revolutionary belief thatgovernments had an obligation to provide education to workers. Thissprung from the hope that education could combat the deleterious effectsof factory life. Division of labor also implies assigning each worker to the

job that suits him best. Productive labor, to Smith, fulfills two importantrequirements. First, it must "lead to the production of tangible objects."Second, labor must "create a surplus" which can be reinvested intoproduction.Another main concern for Smith involved tracing the roots of value. Heidentified two different kinds of value, "use value" and "exchange value."

The concept of exchange value interested Smith considerably. Thediamond-water paradox, in particular, proved puzzling to him: Why is it thatdiamonds, which have very little practical use, command a higher pricethan water which is indispensable to life? By discovering the true source ofvalue Smith hoped to find a benchmark for measuring economic growth.Eventually Smith settled on labor as the source of value: The number ofhours labor that a good can be exchanged for constitutes its inherentworth. (Note, this is not the same as saying that a good is worth thenumber 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 asthe actual cost of a good in the marketplace. Competition, however, wasexpected to push the market price towards the natural price.

2nd Summary:http://www.gradesaver.com/the-wealth-of-nations/study-guide/section1/

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BOOK I: Of the division of laborAdam Smith begins by stating that the greatest improvements in theproductive power of labor lie in the division of labor. Even in the productionof very simple products, division of labor always increases productivityexponentially. Smith offers three reasons for this increase in productivity.

First, the division of labor creates specialized knowledge of a particulartrade or task. This, in turn, makes the laborers engaged in this task moredexterous, and therefore more productive. Secondly, the division of laborsaves the laborer time. In focusing on one task, rather than passing fromone task to another, a process that requires him to use different tools andmaterials, he is able to maximize his time, thus increasing productivity.Finally, the amount of time spent by laborers on an isolated task leads toinnovation in the methods and tools employed in the task, and therefore totechnological 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 opulenceof a particular society, increasing the standard of living even of the mostpoor. Division of labor also means that many people are involved in theproduction of each and every manufactured product. This is a testament tothe interconnectedness not only of the laborers employed inmanufacturing, 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 aparticular society, it may have been talent that decided which membercarried out which task. Division of labor by skill set would have allowed formodest efficiencies and surpluses. These surpluses would have allowedone member of society to trade the fruits of his labor for other objects thatwere needed. In this way, instead of each man struggling to produce someof the things he needed, each man would specialize, producing an excessof one thing, and exchange to gain all or most of required. This wouldincrease the well-being of each member of society that was engaged insuch production and trade.

The division of labor is not the result of oversight and regulation by anauthority, but of human nature. Part of what makes us human, according toSmith, is our propensity to truck, barter, and exchange items. Thispropensity can be observed in any society,including the most primitive. It is, in turn, the assurance of being able to

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trade what one produces with others that encourages the division of labor.When two parties enter into a trade with one another, both come awaywith something they were previously lacking. The division of labor willcontinue 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'smodern complex societies, people are most often employed in a certainway because they came to develop specialized knowledge of their role.

This system of specialization and extensive education in particular subjectsor trades would be impossible if human beings were not endowed with thepropensity for trade. In the absence of this propensity, each person wouldbe 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 laborthat it can support. The larger the market, the greater the extent to whichlabor can be effectively divided. Because productivity increases with thedivision of labor, a large market is needed to consume the products that itgives rise to. In rural or sparsely populated areas, the market is too smallto absorb the products arising from an extensive division of labor, andtherefore the division of labor must be limited in such areas. Historically,improvements to art and industry are made only when there is anassurance of a large market that will be able to absorb the products oflabor. 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 sucha significant extent. If it were not for a standardized, universally acceptedcurrency, people would always have to search out trading partners thathad to offer exactly what they themselves needed, and vice versa. It wouldrarely be the case that these offerings and requirements coincided, andtherefore people would have less faith in the ability to efficiently replacethe surplus they produced with the objects they needed, and would bediscouraged from producing such a surplus in the first place.Analysis

In the first three chapters ofThe Wealth of Nations , several of Smith'smost important themes are already articulated. The first important themeis the benefit of the division of labor as a self-reinforcing phenomenon thatspreads opulence to even the most poor. Because it enjoys suchtremendous efficiencies, the division of labor produces a surplusthat gives a greater amount of people access to products that wouldotherwise be unaffordable.

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Another important concept that Smith begins to develop already is the ideathat trade is natural, and part of human nature. He uses historicalexamples to show that trade was an important part of society even inprimitive times. Making the point that trade is natural and integral tohuman nature allows Smith to make another important pointnamely that,

when two people decide to enter into a trade, they benefit mutually fromits conclusion. Later in the work, this idea will be very important whenSmith criticizes mercantilism.Also implied in the second chapter is the idea that people are motivatedprimarily by their own self-interest. Self-interest, for Smith, does not havemany of the negative connotations that it does today. Instead, Smithmeans to make the point that it is entirely natural, appropriate, and indeednecessary for society that each person look after his own welfare, and notput the burden of his maintenance upon others. It is this propensity thatallows 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 newhistorical era. He is writing at the very dawn of the Industrial Age, whichwas characterized by a mass migration to urban centers and a generalpopulation boom. Smith's work both predicts and explains these dualphenomena. The population boom and the urban migration ultimately ledto a more extensive complexity and development of markets, which, inturn, led to further expansion.Of the origin and the use of moneyOnce the division of labor has been accomplished, one man's labor

supplies only a fraction of his wants and needs, and it is only throughexchange that he can hope to attain them. Adam Smith goes on tospeculate how the exchange must have occurred in primitive society, andargues that early trade must have been very clumsy. If bartering isconducted with perishable, non-divisible goods, it is rendered difficult, andmany exchanges are simply impractical. It was these concerns, Smithposits, that led to the desire for a common currency. Metal lent itself to thebeing used as a currency because it is non-perishable, easily divisible, andcompact. The text goes on to describe the various metals that were usedthroughout history as currency. After metal became the principle currency,

coinage developed, in order to better ensure accuracy and purity inexchange.Of the real and nominal price of commodities, or of their price in labor, andthat price in moneyIn this chapter, Adam Smith explains that the source of value of allcommodities derives not from their money price, but from the amount oflabor required to purchase them.

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He is led to his point by considerations of seemingly nonsensical pricingdifferences. A diamond, for instance, is extremely expensive, butunnecessary for life. Water, on the other hand, is very inexpensive or evenfree of cost, but is absolutely essential to to preservation of life. Smithexplains 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 avariety of reasons, the amount of labor required to purchase it remainsconstant. The wealth of a particular individual is therefore determined bythe quantity of labor that he can command. If labor is the ultimatedeterminant of value, then the question arises of how to ascertain aproportion between two different quantities of labor, especially if they arefundamentally different.Smith resolves the problem of accounting for different kinds of labor by re-introducing the concept of money. Because of the difficulties of equating

various kinds of labor, commodities are more often exchanged for othercommodities than for labor. It is convenient to estimate the value of onecommodity by its exchangeable value, and therefore by its money price.He explains that, though money in the form of precious metals issufficiently well-suited to serve as the measure of the exchangeability ofcommodities, it is imperfect because of the fluctuations in the value ofthese metals. However, though the money price of a commodity maychange over time as a metal becomes more or less scarce, the price of aparticular commodity will rise or fall to reflect its real value, which remainsunchanged so long as the factors directly concerned with its production

remain unchanged.Of the component part of the price of commoditiesSmith argues that the price of any commodity is complex, reflecting threedifferent components. These components consist in the rent of thelandlord, the wages and maintenance of laborers or animals used toproduce the profit, and the profit made by the farmer or entrepreneur. Thefact that the price of all commodities contains these three componentsmay 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 laborand profit for different sectors. If the price of a commodity is sufficient tocover the rent, wages, and profit of stock associated with its production, itis said to be sold for its natural price.Additionally, there is the market price of a commodity, which reflects notthe cost of the rent, wages, and labor associated with it, but the demandthat exists for the commodity. If demand exceeds supply, the market price

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rises above the natural price. The upper limit of the market price is thendetermined by the greatness of the deficiency of the commodity inquestion, and the wealth of those who are competing topurchase it. If the quantity of a commodity exceeds demand, then the priceof 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 ofsociety are prompted to act in a way that brings the price into line with itsnatural price (either by devoting more resources to the production of aparticular commodity and thereby increasing its quantity, or by divertingresources elsewhere).Smith goes on to detail that there are certain methods whereby themanufacturers of a particular commodity seek to raise the market price.

These methods may include procuring trade secrets that lower the cost ofproduction, or controlling the supply of a particular commodity by creatinga monopoly.

3rd summary: http://michaelatate.com/AdamSmith/b1c3.htmChapter I OF THE DIVISION OF LABORVocabulary for this chapter: Opulence - a wealth or abundance.Chapter Summary: Smith begins his book by stating that the division oflabor has resulted in the greatest improvements in industry. He notes thatwhile 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 sewingpin manufacturer. He notes that while any of the individuals in the plantmight be able to make perhaps one pin in a day by themselves, ten ofthem if they divide up the labor, they can make thousands in a day. Hethen 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 themagnitude of the pins. Smith's example of this is the farmer, and how thetasks of plowing the field and reaping the harvest can not be dividedbecause they are seasonal in nature. Using this he notes that because

agricultural labor can not be vastly more productive with the division oflabor, corn in undeveloped countries is almost the same price as those indevelopedcountries, while manufactured good are much cheaper in the developed.Smith states that there are three main contributors to why the division oflabor works as well as it does. The first is that when people spend theirentire lives doing one specific focused task, they become very good at it,

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and can complete that particular task faster then anybody who tries tomaster other skills as well. The second is the loss in time of switchingtasks. This does not just mean the time it takes to drop a hammer and pickup a screwdriver, but also the mental adjustment that has to take place inorder 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 ofdoing that task. Smith states that whenever he walks into a factory, he isconstantly shown contraptions developed by workers to save time andlabor. As a small addition, Smith also states that the division of labor inphilosophy and science will yield more efficient methods of doing things.He then makes a note that in a well off society, when more people haveproduced more goods, they will as a whole be a richer society. He thenconcludes this chapter by speaking about how much labor and industrymust be employed to furnish a worker with a simple woolen coat, and howeven 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 DIVISIONOF LABOUR

Vocabulary for this chapter Benevolence - An inclination to performkind, charitable acts. Occasion - A need created by a particularcircumstance Propensity - An innate inclination; a tendency. Sagacity - Thequality of being discerning, sound in judgment, and farsighted; wisdom.

Chapter summaryThis chapter opens with the argument that theDivision of Labour is not the consequence of somebodies wisdom, butresults in the propensity of humans to to exchange goods. Smith finds noevidence of any animals in nature (except for humans) where any barteringgoes on. Rather animals if they want something must beg to both humansand other animals if they want something that somebody else has. (That oroutright take it). The difference between humans and animals is thatanimals can existindependently in the wild, while humans need assistance from others, but

can not expect this assistance out of good will alone. He then states thatwe do not get meat from a Butcher because we need the meat, butbecause the butcher is looking out for his own self-interest and wants whatwe have in return. In a hunter-gather society, a man may find that he isadept at making bows and arrows, and finds he can trade these items toanother hunter for meat. Soon this man realizes he can get more meat bytrading bows and arrows then if he went hunting, and thus division of labor

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is founded out of self-interest. From that the rest of the society begins todivide themselves up into varying professions based on what each is goodat. This chapter is concluded with the remarks that while animals mighthave differing talents, those differing talents are of no use to the otheranimals. 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 OFTHE MARKET

Chapter SummaryDivision of labor can only take place where there is a large population, thatwill generate enough of a demand for specialized services. Some serviceswill only be able to find constant employment in towns. And those that livein remote villages and in the highlands of Scotland, can not rely on

specialized services, and thus must learn to provide for themselves. Inthose areas even common trades will seldom find a market for even a daysworth of their work. Coastal areas, and cities on rivers have been thefastest to develop, as their goods can be very cheaply transported acrosswater versus land. Thus while cities on water will develop, those landlockedwill be stifled, as land transportation is vastly more expensive the seatransportation. And since land locked areas are limited in their potential forwealth by the neighboring land, those with navigation available are not solimited. This is probably why the ancient civilizations formed aroundtheMediterranean, 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 donot flow into a usable ocean or through another country) seem to be stuckin a barbarous state.