Lecture 1) Market Order: Commerce and Exchange
What does it mean to get rich and how?
Answer: division of labour
Biography ofAdam Smith: Author of the wealth of nations. Scottish, came from a middle to upper class family. Went to
university at the age of 14 and learned from "Scottish enlightment". He was an professor of philosophy.
Agenda (Purpose of the book):
Title of the book: an inquiry into the nature and causes of the wealth of nations
What is the nature of wealth?
What does it mean to be rich? According to adam smith these are the reasons:
a) Having lots of money or stored treasure ex) who has the most pile of gold
b) Natural resources: soil, climate of a particular nation ex) Having Oil
c) Offers its people the most good things in life (gratification) GNPpercapita
Implication of wealth: you get rich if you can organize the activity of your population that allows their ability to
produce goods in an effective way.
Book: understanding social conditions that will enhance or block human productivity.
Nature applies a cause ex) if the nature of wealth is natural resources there must be a theory on how ex) what causes
Mercantilism is the theory for money: exporting is good and importing is bad -> exporting a big pile of corn for
lots of money vs giving money to import corn.
Conquest is a theory that applies to natural resources. Ex) us going intoAfghanistan
Improve national productivity for GNP -> two ways of doing this is by:
a) Universal: thinks that certain universal conditions, if they are applied improve productivity.
Answer: 1) DOL to improve workers social conditions for them to produce more (ex tools or
education). 2) Increase the workforce, go from 100 to 200 workers and ship to in some type of
production. - smith thinks the DOLis the most important.
b) Historical: is about the history of specific places and the history of adopting or not adopting
principles. Major types of historical conditions (what principles did the country focus on) 1)
develop agriculture vs. manufacture commerce. It is important to find out what a country does
first. He believes that developing agriculture is important principle 2) theory's that a leader of a
country believe in, if people believe in a bad theory about how to get rich, they will have a harder
time to get rich vs. having a good theory and having an easier time. Key word Nations: purpose of political is to enrich the nation.
Political economy: what kind of things should the government do to promote development in a country and
Answer: how do you get rich?
Causes of Wealth:
1. Division of Labour
What is it? Key thing is people specializing their work.
what are its forms? 1) employment: separate jobs 2) tasks: doing specialized tasks for one
production ex) to make a shirt- one person comes up with a slogan, one makes the shirt, one prints
the slogan. Theory
why increase productivity?
a. Improves people's dexterity - meaning skill. Being the best at printing shirts - they
are better and this means they can produce more. - better kills
b. Time saving: this means they are not going to be wasting time and can produce more
c. Technological innovation: (3 groups)
- workers: who focus on one specific task means they might find the perfect
machinery to perfect whatever task they specialize in ex) the best hammer
- machine makers or engineers: these are the guys who are hired to invent better
-scientist or philosophers: they are able to combine ideas and create new ideas for
people who are to busy. They think for them
What are its consequences?
a) Surplus value: you can produce alot more then what you need yourself. That means
your going to have extra. (having alots of boxes of pins or shirts) now you need to be
able to trade- which is linked to
b) Increase of Commerce: now you can trade with people
c) Increase connectivity: everybody is interconnected - through commerce, we are all
connected with everyone else
what are its causes? Why does the DOL occur in the first place
a) truck, barter and trade: it generates impersonal markets. You give me this and il give
you that. Ex)giving 2$ for a coffee - markets + self interest ----> specialization:
- make sure theres a market for the product (shirts) and with me being good at it ---> i
get a group of people who do different tasks to make that shirt
- it coordinates talents and activities - >
Question: what limits the extension of DOL: depending on how big the market is and how many people
buy it. The size of the market limits Ex) 10 people in the universe that he can trade with, 30% of pop like
his shirts (3). Because there are only three people to trade with, he doesn't have enough tools to
continue to make his shirts. (Expanding the size of the market is key)
2. Capital Accumulation: is connected with increasing the number of people that is engaged in productive
Stock: all the stuff you have - stock pile
Capital: subset of your stock, the stuff you dont have to consumer but to use to produce more stuff to sell.
Ex) 10 corns (stock), he needs 8 to survive so 2 is capital
Cause: more capital leads to more productive labour - meaning - that greater share of the population is
doing work that is productive vs. unproductive - productive labour is anything that adds value that produces
some sort of tangible outcome that can be traded for other things vs unproductive that does not do this.
Example of productive: traders, manufacturers - true source of the all the good things in life
Example of unproductive: medial servant, church people, philosophers, military, the king or sovereign
Capital generates useful employment: investing capital ex) corn from seed to more corn and corn - the more
capital you investment the more likey people will be doing things than consuming. More replacing capital is
more productive! Ex) 10 years of corn, eat 2 and then grow more. - keep replacing your capital and the
more richer country - take revenue and continue to invest and grow more and more of whatever you need. What causes all of that to happen or why do people replace start then consume it? People start saving, rather
then partying, you deny media gratification and you reinvest .
Answer: propensity to better ones condition! Everyone wants to improve themselves through morals,
religion, but one simple way is to get RICH! Lecture 2)
Recap: Humans tend to want to -> trade and to have a better life
Propensity to trade -> markets -> DOL --> Skilled Labour
-> National Wealth
-> Commercial Society
Propensity to better condition -> we have to save our money -> then reinvest our capita l -> accumulation -> putting a
higher % of productive workers
Commercial Society: in a commerical society, everyone must be merchant and be apart of the system
1) limits barter: no trading will happen unless both parties have an agreement on what each person wants
Ex) 2 cows and someone else 10 chickens. She hates cows, he asks to trade with her and she says no bu
she is interested in a car, this next girl has a car, so she accepts the cow and trades the cow for the car.
-> everyone has to want the same thing.
2) so what is MONEY!: commodity that everyone will take and accept. This makes trading much easier. Money is an
3) Why do we have money, metal:
a) Money lasts
b) Divisible: you can break it up ex) gold or have 5 dollar bills, 10, 20 etc
4) Use value vs Exchange value Consequences: it sets up a distinction between use value and exchange value.
a) use value: the value things have when you use them - eating the cow -> fill yourself up
b) exchange value: not using it but trading it for things you want -> trade for car, shoes, ball w.e
consequences by mark: the idea that the things we have and the relationships we have with others ->
means your going to have alot of things that you may not want or like. Your treating things in a split way
between do i want these things or do i want them for other purposes.
ex) friendship between use value or exchange
ex) education: we are learning and we get a job
What is market?
Principles of market order
1. Natural price - how much it cost to bring it into the market itself ex) wages, the rent you pay, the profits you
took out to pay yourself ex) auto glass -> includes how much you have to pay for others to work for you and
how much rent you have to pay
2. the market price: is at whatever you want to sell it at. Both natural and market price does not have to be the
same. -> if it increases, more people will go into the business
-> pg 82
Both about the relationship between people and how they behave regarding the prices
1. Law of supply: there is a direct relationship, between the price of a good and the amount of it that is offered
for sale. Higher the price the more willing people to sell things
2. Law of demand: there is an inverse relationship; between the price of a good and the amount of it buyers
are willing to purchase it. Higher the price, the less people are going to buy and vice versa (buying or not)
How do these regulate exchange?
-> prices send signals and people respond and peoples activities can be linked together -> make more money in once place ex) china vs canada.
What is needed for the market system to work?
1. liberty of motion: got to be able to move around and get to these places that prices are higher and a good
2. freedom to change jobs: there cannot be a restriction for people to get into a business of their choice
3. need to have good information: gives you info about where you sell your goods at a price above the natural
price but if your information is bad it is not going to work.Adjusting according to the info on the price
ways to block good info :
1) conceal high profits: don't tell anyone
2) trade secrets: having an advantage over competitors and you don't tell them. Doing something in a
4) Monopolies; if there is one company and selling it at a high price creates competition to try to
bring it down a low price ex) insurance - > two big companies have a set on prices
5) Certification: going to school to become a teacher and this means your certified to be able to
teacher, keeps people out of the job force.
Problem with too hight prices: development in areas making large profits at a certain time increases dramatically,
whereas development in other subjects are lacking.
Produce of labour used to pay for wages, rent and proft
1) Original State: where wages, rents or profits dont exist. No one owned land. Before anyone had a whole bunch of
stuff to give -> everything was yours and no need to pay your boss or land lord.
a) Wages: money given to worker by person with capital
b) Rent: money needed to pay for land use
c) Profit: Surplus of money minus the wages and rent Original source of:
Rent: private property
Profits: capital accumulation
Wages- selling labour
Rent -> Landlords
Wages -> Workers
Basic Interest of:
1) Landlords: ; collect rent, use the land in the most productive way ex) if alot of people wnat to come their,
live their, and there intrest is increasing wealth and productivitly accross society and they do not know this
and believe their aline with the owners. Does it alline with a common good. YES.
2) Owners: higher profits and lower wages: does it aline with the good of society, NO. Ex) if i owned a sugar
company -> i want lots of profits and sel it at a high price. Do the owners knwo thier interest YES
3) Workers: higher wages, does it alline with the common good of society, YES.Are workers able to do this...
Commerical Society is marked by basic conflict between owners and employers.:
1) owners can out last workers. They can continue to eat their capital and will likely win over workers.
2) owners easily combine -> owners can come together and discusses what is in their best interest *pg 95 wages of
labour -> as a result, they set up situations that benefits them and
3) workers combine with difficulty -> they have to work all the time unlike the owners. Its harder for workers to
get together and start to figure out what to do to better their situation collectively
Smith: pg 110: reasons for why higher wages are better for society
1) Equality: they should have fair share of what they worked for
2) Growth: when families make more money their children tend to live longer. This means population, increases
and as a result, there is greater productivity
3) Industriousness: people with higher wages tend to work harder What explains wage differences in workers? Why do some get paid more?
1) Natural -> agreeable -> you get paid more for doing jobs that are disagreeable ex) working in coal mines
(lung cancer) 75
2) Education creates unequal pay- > were considered as an expensive machine -> more education -> higher
wages -> use more of them ex) doctor
4) Trust: if the job requires a lot of trust, doctor, banker, paying top dollar for someone to invest your money
or cut you open
5) Probability of success: ex) musician moving to new york -> lower wages because a lot of people go there
for the opportunity unless you make it big.
Under what conditions can these counter balanced?
1) long established trades -> ex) tech stuff once started in the 90s because no one had these skills, it was a new trade
but now, its a normal trade
2) normal condition -> people just move into whatever industrial or trade where they can get the best wages ex)
normal condition going to work for ipod and leaving the cd factory.
3) Hobbies create inequality: defect wages -:> jobs and only had strictly the one job, and if nobody enjoy music,
musicans wages would be lower.
Artificial causes and inequalities:
1) restricting competition ex) extensive licensees -> only these group of people can drive a taxi car around,
this brings high wages because so many are allowed
2) free education:
3) mobility restrictions: older workers in older jobs, lack skills for new demand