1723, Born in Kirkcaldy, north of the Firth of Forth

1723, Born in Kirkcaldy, north of the Firth of Forth

• 1723, Born in Kirkcaldy, north of the Firth of Forth

• father-solicitor, comptroller of customs

• mother-respected and wealthy family

• 1737, begins study of moral philosophy at Glasgow

• 1740-46 at Oxford under scholarship; classics and foreign language

• 1748-51, private lecturer in Edinburgh

1751, Professor of Logic, University of Glasgow

• 1751, Professor of Logic, University of Glasgow

• 1754, Professor of Moral Philosophy, University of Glasgow

• Lectures in rhetoric, literature (belle-lettres), ethics, jurisprudence, moral philosophy and economy

• 1759, The Theory of Moral Sentiments

• 1764, resigns professorship to tutor young Duke of Buccleuch and brother on tour of France

1765, while bored in Toulouse, begins “writing a book”

• 1765, while bored in Toulouse, begins “writing a book”

• Visits Voltaire in Geneva

• Visits Paris (Hume, Quesnay, Turgot)

• 1766, retreats to Kirkcaldy upon life pension provided by Duke of Buccleuch

• 1772, moves to London, admitted to Royal Society

• 1776, The Wealth of Nations

1778, accepts appointment as a Commissioner of Customs in Scotland, trebling his income

• 1778, accepts appointment as a Commissioner of Customs in Scotland, trebling his income

• 1787, elected rector of University of Glasgow

• Died 1790 - 16 volumes of unpublished papers burned at his command

• 1795, post-humously published Essays on Philosophical Subjects

• 1895, student notes from lectures on jurisprudence discovered

• 1958, student notes from lectures on belles lettres and rhetoric discovered

What makes it possible for men to live in society?

• What makes it possible for men to live in society?

• How is it that man’s hedonism comes to be restrained, preventing the injury of one another and fostering the benefits of civil society?

Smith’s first book and the foundation of his fame during his lifetime

• Smith’s first book and the foundation of his fame during his lifetime

• An exposition of a general system of morals in an attempt to answer the question of his research program: What makes it possible for men to live in society?

The Argument

• The Argument

• we seek the approbation of our fellows in society

• we know what will receive approval by others by our ability to sympathize with our fellows

• sympathy is simply an ability to imagine behavior from the viewpoint of an impartial spectator

but sympathy is insufficient in specific cases, because we can not take an unbiased view of our personal actions

• but sympathy is insufficient in specific cases, because we can not take an unbiased view of our personal actions

• therefore moral rules - generalizations of actions approved or disapproved of - become necessary

• sometimes moral rules are insufficient, and positive laws are required

Based on student lecture notes discovered in 1895

• Based on student lecture notes discovered in 1895

• Presents aspects taking up where the argument of The Theory of Moral Sentiments leaves off, in a presentation of a theory of jurisprudence

The Wealth of Nations can also be considered as a continuation of The Theory of Moral Sentiments, in so far as it is a description of the commercial society (noted in Moral Sentiments), bounded by law, within which utility, rather than affection, binds one with another in civil society

• The Wealth of Nations can also be considered as a continuation of The Theory of Moral Sentiments, in so far as it is a description of the commercial society (noted in Moral Sentiments), bounded by law, within which utility, rather than affection, binds one with another in civil society

An Inquiry into the Nature and Causes of the Wealth of Nations

• An Inquiry into the Nature and Causes of the Wealth of Nations

• continuation of Smith’s research program
• rebuttal to James Steuart
• continuation of British economics influenced by French and Scottish enlightenments
• summation of political economy for interested lay reader

Analytical Economics

• Analytical Economics

• Economic Growth
• Production and Capital Accumulation
• Value and Distribution

• Polemics and Philosophy

• Anti-Mercantilism
• Defense of “Natural Liberty”
• Outline for functions of Liberal Government

Book I - “Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People”

• Book I - “Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People”

• Book II - “Of the Nature, Accumulation, and Employment of Stock”

Book III - “Of the different Progress of Opulence in different Nations”

• Book III - “Of the different Progress of Opulence in different Nations”

• Book IV - “Of Systems of political Œconomy”

• Book V - “Of the Revenue of the Sovereign or Commonwealth”

Focus: Allocation of resources in a growing economy

• Focus: Allocation of resources in a growing economy

• Growth rate of economy depends upon division of labor
• increases dexterity
• saves time
• leads to invention of machines
• Division of Labor depends upon
• extent of market
• self-interest (propensity to truck…)
• existence of and increases in stock (=tools and provisions for workers)

Once division of labor established, men live by exchange

• Once division of labor established, men live by exchange

• Problems of barter exchange lead to natural development of monetary commodity

• monetary commercial society is exchange society - what are rules of exchange?

• Diamond-Water Paradox stated (but no solution!)

• compare with Lectures on Jurisprudence
• Value in use v. Value in exchange

Real price

• Real price

• “the real price of every thing…is the toil and trouble of acquiring it.”
• labor-cost theory of value
• “the value of any commodity…is equal to the quantity of labour which it enables him to purchase or command.”
• labor-command theory of value
• “Labour…is the real measure of the exchangeable value of all commodities.”

• Nominal price

• money price

In early society, before accumulation of stock and appropriation of land, the whole produce belongs to labor

• In early society, before accumulation of stock and appropriation of land, the whole produce belongs to labor

• Accumulation of stock leads to wage payment, and profits for those that “hazard” their stock by supplying tools and payments to workers

• Private property leads to third payment- rent to the landlord

• what is economic function?

• Labor measures the value of labor, the value of rent, the value of profit (labor measures price)

Natural price

• Natural price

• equal sum of the natural rates of wages, profit and rent
• (labor-command v. labor-cost theory)

• Market price

• relation between supply and “effectual demand”

• Relationship between Market Price and Natural Price regulates product and resource allocations

• if Market Price > Natural Price, then at least one of components of natural price must be above natural rate (wage, profit) - probably not rent…

Wages depend upon change in stock; being high when stock is increasing

• Wages depend upon change in stock; being high when stock is increasing

• High real wages lead to increases in population

• Money wages regulated by demand for labor and price of “necessaries and conveniences of life”

• Profits fall with increase of stock (via competition)

• Wages and Profits inversely related

• Wages across occupations vary due to costs; Profits across industries vary due to certainty

Rent is produce above that necessary to pay ordinary profits

• Rent is produce above that necessary to pay ordinary profits

• The rent of land is “naturally a monopoly price…not at all proportioned to what the landlord may have laid out upon the improvement of the land”

• “Every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord…”

A stock of goods is necessary to supply labor tools and goods sufficient to maintain laborers while they toil

• A stock of goods is necessary to supply labor tools and goods sufficient to maintain laborers while they toil

• Saving is source of capital (both circulating and fixed)

• Money is a part, but small part, of the capital of a country but is not any of the nation’s revenue (only goods)

The volume of trade determines the quantity of money in society

• The volume of trade determines the quantity of money in society

• Banknotes enable country to convert dead stock into active and productive stock

• Value of paper money is regulated by value of specie which is determined by the labor costs of production

Productive v. Unproductive labor

• Productive v. Unproductive labor

• productive labor creates goods
• unproductive labor creates services

• Rate of accumulation

• productive labor and saving
• prodigal spending destroys capital

• Saving is consumed as regularly as consumption

• Argument in favor of maximum interest legislation to divert loanable funds away from profligates and speculators

A review of rise and progress of industry and wealth

• A review of rise and progress of industry and wealth

• Smith, however, is generally oblivious to the important economic events surrounding him

• iron works, Watt’s inventions
• canal boom, cotton textiles
• potteries, new methods of beer-making

“Political œconomy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state…with a revenue sufficient for the public services.”

• “Political œconomy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state…with a revenue sufficient for the public services.”

Identification of bullionism with “Mercantile system”

• Identification of bullionism with “Mercantile system”

• Argument against export subsidies, import restraints, monopoly grants

• Argument for free trade (without use of division of labor) on basis that consumption, not production, is end of all industry and commerce

Overlooks contributions of manufacturing and commerce to revenue of nation

• Overlooks contributions of manufacturing and commerce to revenue of nation

• Despite errors, physiocracy has made valuable contributions in its opposition to the mercantile system and position in favor of commercial liberty and free trade

Duties of Sovereign

• Duties of Sovereign

• defense from invasion
• protecting each member from injustice of oppression by others in society
• erecting and maintaining public works that are not profitable for individuals to carry out
• roads, canals, bridges, harbors
• primary education
• navigation acts
• post office
• government coinage

Contribute in proportion to ability, that is in proportion to revenue they enjoy from protection of state

• Contribute in proportion to ability, that is in proportion to revenue they enjoy from protection of state

• ability-to-pay v. benefits

• certainty

• convenience of payment

• economy in collection

Dugald Stewart (1753-1828)

• Dugald Stewart (1753-1828)

• Professor of Mathematics and Moral Philosophy, University of Edinburgh
• successor to Adam Ferguson in Chair of Moral Philosophy
• attracts wide range of students, including Walter Scott, James Mill, and J.R. McCulloch
• from 1800, lectures on political economy as a separate class
• Elements of the Philosophy of the Human Mind (1792-1827)
• Outlines of Moral Philosophy (1793)
• Life and Writings of Adam Smith (1793)

Social Impact

• Social Impact

• vagueness led to several interpretations
• Arguably the father of “socialism,” “Georgism,” as well as “British classical economics”
• first or second in impact on policy

• Impact on Development of Economics

• standard of reference
• loss of earlier contributions

• Originality

• original not true, true not original
• deterioration from late Spanish scholastics, Cantillon, Turgot, even Smith’s own earlier writings

Smith’s “Calvinism” (Rothbard on Smith)

• Smith’s “Calvinism” (Rothbard on Smith)

• favors productive v. unproductive labor
• favors capital v. consumer durables
• favors saving over luxury
• criticized high profits and luxury spending
• emphasis on labor value
• favored taxation of luxury consumption, distilleries, and retail liquor sales
• favored usury laws to reallocate funds into “most productive” hands and away from “prodigals” and “projectors”

• The Smithian Diversion?

The (Utilitarians) Ricardians

• The (Utilitarians) Ricardians

• Jeremy Bentham
• David Ricardo
• James Mill and John Stuart Mill

• The British Anti-Ricardians

• Thomas Malthus
• Nassau Senior
• The Dublin School

• The Manchester School

• Richard Cobden
• John Bright