Wealth of Nation Study Questions.docx

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Dan Silver

WealthofNations:StudyQuestions Introduction (pp 1-5) According to Smith, in what does the wealth of a nation consist? What other alternatives to his answer are there? The wealth of nations is its per capita national product – the amount that the average person actually produces. What conditions regulate how productive a nation is? Explain in your own words. The productivity of a nation is regulated by:  The skill, efficacy and judgment by which productive labour is employed  The proportion of those who are employed in useful labour and those who are not employed in productive labour Which is more important for generating productivity: skillful labor, or more laborers? Why? What evidence does Smith provide? What is Smith’s guiding question in this book as a whole? How do the sub-topics he proposes – the division of labor, capital stock, the history of opulence, theories of political economy, and revenues/debts of the sovereign – seek to address that agenda? Smith’s guiding is: How does a nation as a whole become rich? (essentially about investigating the causes of the wealth of nations)  Includes the question of what is the nature of wealth as well as how does one become rich. Book I (pp 9-32): Slowly read the title of Book I. What are the central topics of this book? Title: Of the causes of improvements in the productive powers of labour and of the order according to which its produce is naturally distributed among different ranks of people This section centers on the Division of Labour and defines it, examines its forms, its relation to productivity as well as its consequences. It also touches upon its limits. Chapter 1: Of the division of Labour What is the division of labour (DOL)? How does it increase the productivity of labour? Explain in your own words Smith’s example of the pin factory. The division of labour refers to the specialization in task and profession. To elaborate, this includes the separation of employment and the separation of tasks. The separation of employment is dividing into different types of employment i.e. teachers, doctors, lawyers while the separation of tasks is dividing a job into various tasks. Take even the trifling manufacture of pin making, for example. Most of us would be hard pressed to make even one pin in a day, even if the metal were already mined and smelted for us. We could certainly not make twenty. And yet ten people in a pin factory can make 48,000 pins a day. That is because they each specialise in different parts of the operation. One draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds the top to receive the head. Making and applying the head require further specialist operations; whitening the pins and packaging them still more. Specialisation/ the division of labour has made the process thousands of times more productive. p. 12: Smith says that in some “arts and manufacture” the DOL cannot be instituted. Think of some examples. For instance in agriculture, or with spinner or welders for instance their tasks cannot be divided via the division of labor. The impossibility of entirely separating the various tasks applicable in agriculture is perhaps the reason what the improvement of the productive powers of labor, in this art, does not always keep pace with their improvement in manufactures. p. 14: why, more specifically, does the DOL increase productivity? Smith cites three reasons. What are they, how do they arise from the division of labour, and how do they increase productivity? The DOL increases productivity for several reasons. First is the increased skill which people gain when they do the same task over and over again. The rapidity with which skilled workers can do a task is sometimes amazing. Second, less time is wasted in moving from one task to the next. A weaver who cultivates a smallholding has to break off weaving, fetch the farming tools, and walk out to the field. It takes time for people to get in the right frame of mind when they turn from one task to another, and back again. The importance of such disruptions should not be underestimated. Third, specialization allows the use of dedicated machinery, which dramatically cuts the time and effort needed in manufactures. Often, workers themselves have invented labour saving devices, while other improvements have come from the machine-makers, who are now a specialist set of trades themselves. p. 16: how does the DOL lead to new technologies? When workers must focus on working specifically on a specific object, they are much more likely to discover easier and readier methods of constructing that object. Much of the innovations in machinery stems from workers, who were part of a simple operation, turned their focus to easier and readier methods of performing their work. On the other hand, the division of labour between jobs has also helped in the sense that engineers can focus their attention on improving machines. To elaborate, machine makers/industrial designer’s things of ways to make something that allows people to work more efficiently. Similarly, workers attempt to discover ways to do work with less effort. p. 18: how does the DOL apply in the case of science? In regards to technological innovation, science focuses on thinking, coming up with new ideas in order to help the industry p. 19: Smith describes the vast number of different people and industries that go into dressing an average worker. Look at what you are wearing, and try to make a list of where all your stuff comes from and how it gets to you. Wool Sweater Eyeglasses Sweats Bra Underwear Chapter 2 p. 22: What does it mean to say that the DOL does not arise from “the effect of any human wisdom”? Explain in your own words what Smith means by the “propensity to truck, barter, and trade”? The “effect of any human wisdom” refers to the type of wisdom that foresees and intends that general opulence to which it gives occasion. In other words, the DOL was not devised through foresight or on purpose but rather as a result of the propensity to truck, barter and trade. This Is essentially the natural tendency for human beings to exchange with one another and is connected to humans capacity to reason/talk to each other. There are many ways to get others to do what you want, but trade is uniquely human; getting into perspective of another. p. 23: Why is benevolence and friendship not enough to gain the assistance and co-operation we need in commercial societies? In a civilized society, people constantly need the help and assistance of multitudes of people. However, no one has the time or resources to build a friendship with each person in order to secure their help but rather transactions are based on self-interest, ways of getting things that don’t depend on personal favor but base trade on each other’s self–interest. p. 24: Why does nobody really choose to depend on the benevolence of fellow-citizens to satisfy their needs? Because nobody but a beggar chooses to depend chiefly on the benevolence of fellow citizens to satisfy their needs although when considered, even beggars must barter and trade for what they need. For instance, trading the money they receive for food and clothing. In essence, in trade, we address ourselves not to the humanity of those we trade with but rather to their self-love. We never talk to them of our own necessities but of their own advantage. How does the propensity to trade plus self-interest lead to the DOL? Why, once the DOL exists, do people begin to “apply themselves to a particular occupation?” The gains from exchange, and our natural willingness to do it, stimulate the division of labour. It is worth us building up a surplus of what we personally make well in order to have something to trade with other people. For instance, for an arrow maker, they specialize at making arrows allowing them to make more arrows than they have the need for. This gives them something to exchange with others thus making it beneficial to focus on efficient specialist production and get other things they need via exchange. Consequently, everyone ends up with a mix of things they want, all of which are expertly and efficiently produced. p. 25: How does the DOL create, not by nature, but “from habit, custom, and education” more unique, individuated persons? Why do commercial societies tend to be more individualistic, and persons in less commercial societies more similar to one another? Smith uses the example of a street porter and a philosopher to illustrate this concept. He notes that when they both came into the world, they were probably very much alike throughout childhood. However, when they came to be employed in very different occupations their differences begin to grow until the philosopher, out of vanity, claims that there was never a similarity between the two. p. 26: how does the propensity to exchange coordinate human talent? It encourages us to specialize. Chapter 3 p. 27: how does the extent of the market limit the division of labor? The division of labor is limited to the scale of the market. So for instance if the market is too small, no one has the encouragement to dedicate himself entirely to one employment for the purpose of exchanging all of his surplus product. I.e. 2 people with which he can trade. Similarly, in small villages each person must take on multiple roles as a direct result of the limited market. For instance, a farmer must act as butcher, brewer and baker for his own family. The extent of the market is limited by how big the market is, how many people there are to buy the products p. 30: Why are the first civilized nations typically located near seacoasts or navigable rivers? When located near sea coasts/river, these nations allow for the market to develop as it opens the market to the produce of every sort of labor. To elaborate, nations located inland have no other market for their goods other than the country that surrounds them. However, nations located in these strategic areas are able to make significant improvement throughout their lands. Egypt for instance was the first to make significant improvement in agriculture and manufacturing as their strategic locations allowed for communication via ships between all considerable villages and even farm houses and the country. Book II, Intro p. 349: what does Smith mean by stock? Why does the division of labor make stock necessary? Why must the accumulation of stock precede the division of labor? Smith uses the word stock instead of capital which he defines as fixed and circulating capital as well as materials being used in the process of manufacture including finished goods that are still unsold and goods being held for later consumption. The DOL makes stock necessary as you cannot specialize until you have a stockpile of capital. In other words, a weaver for instance needs materials, tools and other aspects of his livelihood to sustain until that time that he can begin to sell his works. p. 351: why does Smith discuss stock? How does it relate to the overall agenda of WN? He endeavors to explain stock in order to build an understanding of one of the most crucial aspects of a commercial society as the DOL is dependent on the accumulation of stock. Book II, ch. 3 p. 422-423: what is the difference between productive and unproductive labor? What are some examples of unproductive labor? Productive labour is any job that works to add value to an item which can then be sold at a profit. It produces something marketable that lasts for some time afterwards. Unproductive labour – such as the labour of a menial servant – does not add value to anything. It is consumed immediately, and leaves nothing marketable behind. p. 423-242: what does Smith mean by capital? Capital is the subset of stock in other words the stuff you do have to consume but can use to build needed materials. Stock is on the other hand all the stuff you already have. p. 426: what is the difference, for Smith, between productive labor and honourable and useful” labor? p. 428: why do rich countries tend to devote more of their annual produce to replacing capital than to profits? What makes one country idle and another industrious? Rich countries tend to devote more of their annual produce to replacing capital than to profits because this encourages the maintenance of productive labor. In fact, future income depends on the extent of a nation’s capital which can only be accumulated by saving. The proportion between replacement of capital or profits determines the character of the inhabitants. We are more industrious than our forefathers, because, in the present times, the funds destined for the maintenance of industry are much greater in proportion to those which are likely to be employed in the maintenance of idleness, than they were two or three centuries ago. p. 430: why does a great lord moving into a hard-working village tend to make the residents lazy? Because they become dependent on the lord’s revenue p. 431: what is parsimony? How does it lead to the increase of capital? Parsimony refers to the extreme unwillingness to spend money or to use resources. Parsimony increases the fund which is destined for the maintenance of productive hands and tends to increase the number of those hands whose labour adds to the value of the subject upon which it is bestowed. Parsimony, and not industry, is the immediate cause of the increase of capital. Industry, indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not save and store up, the capital would never be the greater. p. 433: how do “prodigals” tend to “impoverish the country.” Prodigality is the trait of spending extravagantly. If a country consumes our current revenues on unproductive hands thus eating into their capital for the purpose of current consumption, they will be lead to ruin. p. 438: why does increasing the wealth of a nation require increasing its capital? The total national product which is a representation of the wealth of a nation can grow only through a growth in the number of productive workers, or through a rise in their productivity. Productivity can be increased only through better management of labour and capital resources, or through the use of more or better machines and equipment – each of which usually requires new capital investment. Money and Markets Book I, ch. 4 p. 33: what is a commercial society? What does it mean for “every man to be a merchant”? A commercial society is a society that has large amounts of capital and the division of labour is highly advanced. In a commercial society everyone must become a merchant because if you do not exchange, you cannot live or survive. p. 33-34: what is the origin of money? How do difficulties in barter lead to money? What is money? Money comes from the need to find a medium of exchange, a third commodity that most people would be happy to trade for their own product and could then trade with others. p. 35: why do precious metals make good monetary instruments? Precious metals make good monetary instruments because they are durable, can be divided without loss into smaller amounts and then reassembled into larger amounts according to need. p. 41: what is the new question Smith begins to ask here? What is it that determines the rate at which different products are exchanged? The real measure of the exchangeable value of all commodities is the labour put into their production. The reason why we put effort into creating the product we sell is precisely to spare ourselves the effort of creating the things we buy. When we trade, what we are buying is the labour of others. Ultimately, wealth is not money – it is the amount of other people’s labour that we can command, or purchase. p. 41: what is the difference between “value in use” and “value in exchange”? The word value has two meanings – one is value in use, the other is value in exchange. Water is extremely useful, but has almost no exchange value, while a diamond is largely useless but has enormous exchange value. Book I, ch. 7 p. 78: what does Smith mean by the “natural” rates of wages, profit, and rent? What is “natural price”? According to Smith, in every society there is an ordinary or average rate in every different employment of labour and stock that can be called the natural rates of wages, profit and rent at the time and place in which they commonly prevail. When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price. Natural price = the costs of bringing something to the market to sell at a price that is equal to the cost of production p. 79: Smith says that profit is included in the natural price of a commodity. Why? Where does surplus profit come from? Smith says that profit is included in the natural price of a commodity because when bringing a commodity to the market, the owner must advance the wages of his workers and himself. He must get this money back from the goods sold. So, although this price leaves him a profit is not always the lowest, it is probably the lowest at which he can afford to sell in order to stay in the business. p.79: what is market price? Market price = the actual price at which you sell a commodity p. 80: what is effectual demand? How does low supply lead to higher effectual demand and higher prices? How does high supply lead to lower effectual demand and lower prices? Effectual demand is the quantity of the product that sellers bring to market and the size of the demand from potential buyers. When supply falls short of demand, there is competition between buyers, and the price is bid up. If a town is blockaded, for example, the prices of essential goods rise enormously. By contrast, when there is a glut and supply exceeds demand, sellers have to drop their price – particularly if the product is perishable, like fruit, and cannot be brought back to market later. When supply and demand match exactly, however, the natural and market price are equal, and the market exactly clears. p. 82: why do prices “gravitate” to the natural price? If a market is overstocked and prices are below the cost of production, landlords will withdraw their land, employers their stock, and workers their labour, rather than suffer continued losses in this line of production. So the quantity supplied will fall, and market prices will be bid up again to the natural price, at which the market is cleared. If, by contrast, a market is understocked and prices are high, producers will commit more resources to this profitable line of production. So the quantity supplied will rise, and market prices will be bid down again to the natural, market-clearing price. p. 82: how do markets coordinate behavior? The market is therefore self-regulating. Prices are always gravitating towards the cost of production under competition, and producers are always aiming to supply the amount of their product that exactly matches customers’ demand. p. 84-87: what are some obstacles to commodities selling at their natural prices? What are the consequences of this happening? The obstacles include the following: When demand increases and the market price of a commodity rises above its cost of production, suppliers try to conceal the fact that they are making extraordinary profits. They do not want to alert their competitors. So prices may remain high for a while. Manufacturing secrets that reduce costs if production can be kept secret for a significant amount of time. A supplier who is granted a monopoly can keep prices up simply by restricting supply. Laws that limit apprenticeships, or restrict the number of people who can enter a trade, enable particular professions to keep their prices high. As a result of such accidents, natural causes, and regulations, the market price of a product may remain above the production cost for some time. But it cannot long remain below it. In that case, suppliers would simply withdraw, rather than face continued losses. p. 88: how do apprenticeships lower wages in some circumstances? What are those circumstances? Interpret the sentence, “as in the one case they exclude many people from his employment, so in the other they exclude him from many employments.” Apply this idea to the contemporary situation of the autoworker or radiologist. Apprenticeships lower wages Book I, ch. 8 p. 92-93. Smith imagines a world in which workers received all of what they produce. Why does he think that in this world, though in reality wages would rise and prices fall, in appearance prices might rise? p. 93: what institution separates workers from their products? Why do workers need to work for other people? What deductions of their proceeds does this engender? The world of manufacturing separates workers from their products. The masters supply the materials and machines which the workers use in order to create a particular product because they are unable to purchase the supplies in order to be independent. A part of these profits is given to the worker but their product as well as a larger portion of the profits are kept by the master. The deduction of their proceeds comes from the following:  His rent  His maintenance p. 94: what tend to be the divergent interests of workers and owners? Who tends to get the upper hand in negotiations? Why? Workers are interested in increasing their wages while owners focus on lowering wages whenever possible. However, owners tend to get the upper hand because they are fewer in number and can thus combine much more easily and can easily outlast workers in a strike as they have a larger stockpile of capital. Workers on the other hand must work all the time thus making it next to impossible to get together to better their situation. Any assemblies they may be able to organize are often seen as violating the law as owners have more power. p. 95: why do we not typically hear about owners’ unions? While we almost never hear of collaboration between owners it most certainly does occur most often behind closed doors. It remains unspoken of as it seen as not only usual but considered to be the natural way of things allowing owners to keep wages at a minimum. p. 96: what is the minimum wage owners can pay workers? Why? The bare minimum an owner can pay workers is the amount that will allow them to survive. However to ensure that their workers survive past the first generation owners must include an amount that will be enough to sustain him as well as his family. p. 97: what circumstances tend to raise wages above that rate? Wages tend to rise above the absolute rate if the following occurs:  If there is a scarcity of workers, owners must bid against one another in order to get workers  If the owner sees a significant surplus in revenue p. 98-101: what generates increasing demand for wage labor? Why does this increase, but not absolute size, of national wealth raise wages? The demand for those who live by wages, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. The increase of revenue and stock is the increase of national wealth. The demand for wage labour, therefore, naturally increases with the increase of national wealth, and cannot possibly increase without it. It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. p. 110-115: why are high wages good for society? High wages are good for society for several reasons:  Equity is good for a society as no society can flourish if most of the population is poor  Growth increases prosperity and wages  It increase an average person’s industriousness since when more people can earn higher wages, they work harder in ensuring it p. 112: how does “the demand for men regulate the production of men.” In societies where the amount of labour is in abundance to the amount of revenue which may be used to pay for waged labour, the competition among workers is greater than the competition among masters, and wages fall; inversely, where excess revenue is in abundance, the wages of labour rise. Smith argues that, therefore, the wages of labour only rise as a result of greater revenue disposed to pay for labour. Labour is thus the same as any other commodity in this respect in which demand regulates the amount of work available. p. 114: why is “the progressive state of society” best for “the great body of people.” It is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is, in reality, the cheerful and the hearty state to all the different orders of the society; the stationary is dull; the declining melancholy. p. 116: why do owners and landlords like economic downturns? Workers are more humble and dependent upon owners during an economic downturn. Workers are eager to work and at lower wages. Book I, ch. 10 p. 138: why do markets tend to equilibrium in “perfect liberty”? The question of the chapter is: why do markets deviate from this equlibrium? Where does inequality come from? p. 139-151: What are the five factors of inequality that Smith lists? How does each one lead to inequality? 1. Agreeableness: jobs that are harder have higher wages for those who have to do it 2. Education: The more you have, the more you get paid 3. Constancy: temporary or seasonal jobs pay more as it pays for uncertainty and covers costs for off season 4. Trust: people who perform jobs that demand trust get paid more 5. Probability of success: a job that is less likely to succeed pays more to those who do succeed such as lawyers p. 158-161: what three factors tend to produce equality? How does each one lead to equality? 1. Long established trades: differentially high wages will be reduced, i.e. when tech industry was first established wages were high but are now lower 2. Normal conditions: people move into whatever jobs pay better and take steps to move into best paying jobs i.e. moving from CD to Ipod manufacturing 3. Lack of hobbies: hobbies can bring down wages as people taking up profession as hobby are willing to perform for less wages p. 164-166: what three types of policies tend to generate inequality? How do they do so? 1. Restricting competition: restrictive licensing makes wages higher, 2. Free education: priesthood, you can get a free and easy education but the wages are artificially low 3. Mobility restrictions: create inequalities because it prevents workers from moving from one profession to another, can’t switch jobs p. 179: how does subsidizing trades generate inequality? By subsidizing trades, society sees an influx of workers into that particular profession. As a result, wages decline and become unequal. p. 185-186: how do restrictions on the mobility of labor generate inequality? Book I, ch. 11 p. 335-336: how does increasing productivity of labor increase rents, even when it reduces price of manufactured goods? Who is Smith’s audience here? Why does he care about what landlords think? Hint: landlords were traditionally aristocrats! Increasing productivity results in higher wages and profits thus allowing landlords to increase the rents that their workers pay. Essentially rents are as high as the workers can afford to pay. p. 336: what are the three basic, original orders of society? 1. Those who live by rent 2. Those who live by wages 3. Those who live by profit p. 337: why do landlords’ interests tend to align with the general interest of society? What factors tend to block landlords’ from recognizing the general interest of society? Whatever is good for society tends to be good for the interests of landlords. The fact that their income derives from ownership and the lack of application of physical or mental effort leaves landlords too idle and ignorant to recognize the general interest of society. p. 337: how are workers’ interests connected to the general interest of society? What factors tend to block workers’ from recognizing the connection between their interests and the general interest? Workers duffer significantly when a society declines and benefit when society prospers. However, as a result of their lack of both education as well as access to information, they are incapable of understanding the correlation with society’s interests and have no time or energy to care about public policy. p. 338: why do the interests of employers tend to oppose the general interests of society? Why do merchants and manufacturers tend to have better plans about how to pursue their interests than landlords and workers do? Employer’s interest tend to oppose the general interests of society as they gather their profits when the economy flourishes and are solely interested in widening the market and reducing the competition. Because planning and management are fundamental to their business, they have the knowledge, contacts and mental insight to promote measures that they know will benefit them. This however comes at the expense of the public. p. 339: why does Smith think that any policy proposals that come from business people should not be trusted at face value? Public policies from business people should be given the utmost scrutiny because it comes from a group whose interest do not coincide with those of the public. Book III, ch. 1: On the Natural Progress of Opulence p. 481: what does opulence mean? What does it mean for opulence to have a “natural” progress? What would an “unnatural” or “artificial” progress be? Opulence refers to wealth and abundance and in this instance how extensive the market is in different nations. According to the natural course of things the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce.” This sequence leads to growth and therefore opulence. Natural progress of opulence is from agriculture to manufacturing to commerce or in other words from farmers to manufacturers then merchant An unnatural progress would be taxes. What kind of commerce goes on between town and country? How is it mutually beneficial to each? The country supplies the town with the means of subsistence and the materials of manufacture. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. Its mutually beneficial because in return the country receives a much greater quantity of manufactured goods with much less labor than if they had attempted to do it on their own. p. 482: Why must the country be cultivated before towns can increase? It is only from the surplus from the country that a town can in fact function and focus on manufacturing. The town is dependent upon the surplus that the country produces for survival. In essence, the development of a town is dependent upon the productivity of the farmers. p. 483: Why does Smith believe that people naturally prefer farming to manufacturing and trading? Do you agree? Smith believes that people naturally prefer farming to manufacturing and trading because in the country you are own master which is human nature and attractive to everybody. In addition, Smith believes that agriculture has both stability and independence. I personally do not agree with Smith on this point for several reasons. p. 484: What is the “natural course of things” (bottom of page)? How have “human institutions” disturbed that? In the natural course of things, the progressive wealth and increase of towns in every political society is significant and in proportion to the improvement and cultivation of the cultivation of the country. However as a result of human institution, towns have increased beyond what the improvement and cultivation of territory in which they are situated can support to such an extent that the territory is completely cultivated and improved. p. 485: Why is manufacturing more secure than foreign investment? Under what conditions is foreign trade an advantage? p. 486: What is “the natural course of things”? Why do nations naturally develop from agriculture, to manufacturing, to foreign trading? According to the natural course of things the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and, last of all, to foreign commerce. Some of their lands must have been cultivated before any considerable towns could be established, and some sort of coarse industry of the manufacturing kind must have been carried on in those towns, before they could well think of employing themselves in foreign commerce. p. 487: In what way has this natural course been “inverted” in Europe, according to Smith? What forced European nations into this inversion? They began at international trade before moving on to manufacturing and then improving the country side. The manners and customs which the nature of Europe’s original government introd
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