SOCB42H3 – Lecture 2
Propensity to Trade --> Markets -> “Division of Labour” --> Skilled Labour +
Propensity to Better Condition --> Saving --> “Capital Accumulation” --> Higher Proportion of Productive
= both Create National Wealth --> all that together Creates Commercial Society
All you had to assume was both these 2 natural tendencies are innate in humans
There is logic to these tendencies; these propensities are universal
This is a simple model creating a complex theory
Basic feature of our society is that everybody is a merchant or traders whether or not we like
If we couldn’t exchange, we wouldn’t be able to move on. Basic structure is making and exchanging
Why does money exist?
1) Limits of barter
It’s very restrictive and doesn’t allow society to develop very much.
2) Money is the answer; money is whatever everybody wants.
There is a rational reconstruction of money. It’s anything that everybody accepts. It could be any
physical aspect (for example, salt, cigarettes. It’s an abstract concept/principle)
3) A) something that lasts b) if it is divisible
Most cultures have started using metals as a representation of money. Paper money is better
4) Use value vs. exchange value
Value is to be observed and has two different meanings. One is value in use and other in exchange.
Great value has little value in exchange and vice versa. Value is using it for you and exchange is trading
Money tends to expand the application of this. What can I trade this for? Things in our lives have a split
existence; use value and exchange value. Think more in more of these terms. This difference creates the possibility of the market price of something is very different from its use value. It creates a system of
gravitational force; rules that regulates the markets (market order)
How do products get distributed in society?
Natural Price – however much it costs to bring something to the market to sell (includes wages, rents,
and normal profit)
Market Price – however much you actually sell something for. This often is different from the natural
price; the difference, adjusts their behaviour the market price with the natural price
Like Newton, Smith found the universal law of gravitation. These 2 basic laws lead to the Law of Supply
and Law of Demand
Law of demand – there is an inverse relationship between price of good and the amount of it buyers
willing to purchase; higher the price, less likely buyer will buy the good
Law of supply – there is a direct relationship between the price of the good and the amount of it offered
for sale; higher the price, the more likely the seller will sell that thing
Effectual Demand – not only do you want something, you have the money to pay for it
If demand is higher than supply, market price is going to rise. Is supply exceeds demands, market price
If market price rises, more and more people will go in that market and opposite can happen.
Markets create order and regularity to all these activities if nothing gets in the way. Sometimes these
systems aren’t working
This is what you need for it to work well
1) Liberty of motion
Have to be able to move to those different places to seek out the most profitable returns
2) Liberty to change jobs
3) Good information
Price; change response of behaviour to it.
These are the freedoms that allow markets to actually work. There are some conditions that block these
freedoms 1) Ceiling high profits
2) Trade secrets
When the prices are out of wack/too high, you have people encouraged to go into other endeavors
because it is easy money and there other talents are not developed
Getting all these factors together help regulates the markets
This is an enduring construct; allows us to explain human behaviour with a few concepts
Distribution of Wealth
How does the product of all our work gets distributed to people at different levels? Smith is concerned
with wages. Why do some people make more than others?
Original State – world of none of these distinctions (wages, profits, and rent) exist. State before anybody
owned any land, state before anyone accumulated a stockpile of anything that gives them