Adam Smith, chapter two...

Published works
Adam Smith published a large body of works throughout his life, some of which have shaped the field of economics. Smith's first book, The Theory of Moral Sentiments was written in 1759. It provided the ethical, philosophical, psychological and methodological underpinnings to Smith's later works, including An Inquiry Into the Nature and Causes of the Wealth of Nations (1776), A Treatise on Public Opulence (1764) (first published in 1937), Essays on Philosophical Subjects (1795), Lectures on Justice, Police, Revenue, and Arms (1763) (first published in 1896), and Lectures on Rhetoric and Belles Lettres.
The Theory of Moral Sentiments (1759)
Main article: The Theory of Moral Sentiments
In 1759, Smith published his first work, The Theory of Moral Sentiments. He continued to revise the work throughout his life, making extensive revisions to the final (6th) edition shortly before his death in 1790. Although The Wealth of Nations is widely regarded as Smith's most influential work, it has been reported that Smith himself "always considered his Theory of Moral Sentiments a much superior work to his Wealth of Nations". P. J. O'Rourke, author of the commentary On The Wealth of Nations (2007), has agreed, calling Theory of Moral Sentiments "the better book". It was in this work that Smith first referred to the "invisible hand" to describe the apparent benefits to society of people behaving in their own interests.
In The Theory of Moral Sentiments, Smith critically examined the moral thinking of the time and suggested that conscience arises from social relationships. His aim in the work is to explain the source of mankind's ability to form moral judgements, in spite of man's natural inclinations toward self-interest. Smith proposes a theory of sympathy in which the act of observing others makes people aware of themselves and the morality of their own behavior. Haakonssen writes that in Smith's theory, "Society is ... the mirror in which one catches sight of oneself, morally speaking."
In part because Theory of Moral Sentiments emphasizes sympathy for others while Wealth of Nations famously emphasizes the role of self interest, some scholars have perceived a conflict between these works. As one economic historian observed: "Many writers, including the present author at an early stage of his study of Smith, have found these two works in some measure basically inconsistent." But in recent years most scholars of Adam Smith's work have argued that no contradiction exists. In Theory of Moral Sentiments, Smith develops a theory of psychology in which individuals find it in their self-interest to develop sympathy as they seek approval of the "impartial spectator". The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.

The Wealth of Nations (1776)
An often-quoted passage from The Wealth of Nations is:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium.
Smith also believed that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day.
Other works
Shortly before his death, Smith had nearly all his manuscripts destroyed. In his last years, he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects, a history of astronomy down to Smith's own era, plus some thoughts on ancient physics and metaphysics, probably contain parts of what would have been the latter treatise. Lectures on Jurisprudence were notes taken from Smith's early lectures, plus an early draft of The Wealth of Nations, published as part of the 1976 Glasgow Edition of the works and correspondence of Adam Smith.
Other works, including some published posthumously, include Lectures on Justice, Police, Revenue, and Arms (1763) (first published in 1896); A Treatise on Public Opulence (1764) (first published in 1937); and Essays on Philosophical Subject (1795).

Legacy
The Wealth of Nations, one of the earliest attempts to study the rise of industry and commercial development in Europe, was a precursor to the modern academic discipline of economics. In this and other works, Smith expounded how rational self-interest and competition can lead to economic prosperity and well-being. It also provided one of the best-known intellectual rationales for free trade and capitalism, greatly influencing the writings of later economists. Smith was ranked #30 in Michael H. Hart's list of the most influential figures in history, and he is often cited as the father of modern economics.
George Stigler attributes to Smith the central proposition of mainstream economic theory, namely that an individual will invest a resource, for example, land or labour, so as to earn the highest possible return on it. Consequently, all uses of the resource should yield a risk-adjusted equal rate of return; otherwise resource reallocation would result.
Classical economists presented variations on Smith, termed the 'labour theory of value', later Marxian economics descends from classical economics also using Smith's labor theories in part. The first volume of Karl Marx's major work, Capital, was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital. The labour theory of value held that the value of a thing was determined by the labor that went into its production. This contrasts with the modern understanding of mainstream economics, that the value of a thing is determined by what one is willing to give up to obtain the thing. It is a paradox that Smith is often cited not only as the conceptual builder of free markets in capitalism but also as a main contributor to communist theory, via his influence on Marx.

A body of theory later termed 'neoclassical economics' or 'marginalism' formed from about 1870 to 1910. The term 'economics' was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for 'econonic science' and a substitute for the earlier, broader term 'political economy' used by Smith. This corresponded to the influence on the subject of mathematical methods used in the natural sciences. Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value of which Smith was most famously identified with in classical economics, in favor of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.

As a symbol of free market economics
Adam Smith's Spinning Top, sculpture by American artist James Sanborn at Cleveland State University
Smith has been celebrated by advocates of free market policies as the founder of free market economics, a view reflected in the naming of bodies such as the Adam Smith Institute, Adam Smith Society and the Australian Adam Smith Club, and in terms such as the Adam Smith necktie.
However, other writers have argued that Smith's support for laissez-faire has been overstated. Herbert Stein wrote that the people who "wear an Adam Smith necktie" do it to "make a statement of their devotion to the idea of free markets and limited government", and that this misrepresents Smith's ideas. Stein writes that Smith "was not pure or doctrinaire about this idea. He viewed government intervention in the market with great skepticism ... yet he was prepared to accept or propose qualifications to that policy in the specific cases where he judged that their net effect would be beneficial and would not undermine the basically free character of the system. He did not wear the Adam Smith necktie." In Stein's reading, The Wealth of Nations could justify the Food and Drug Administration, The Consumer Product Safety Commission, mandatory employer health benefits, environmentalism, and "discriminatory taxation to deter improper or luxurious behavior".
Similarly, Vivienne Brown stated in The Economic Journal that in the 20th century United States, Reaganomics supporters, The Wall Street Journal, and other similar sources have spread among the general public a partial and misleading vision of Adam Smith, portraying him as an "extreme dogmatic defender of laissez-faire capitalism and supply-side economics". Noam Chomsky has argued that several aspects of Smith's thought have been misrepresented and falsified by contemporary ideology, including Smith’s reasons for supporting markets and Smith’s views on corporations. Chomsky argues that Smith supported markets in the belief that they would lead to equality. Economic historians such as Jacob Viner regard Smith as a strong advocate of free markets and limited government (what Smith called "natural liberty") but not as a dogmatic supporter of laissez-faire.

Source : wikipedia

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