Adam Smith
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Views of Adam Smith
Adam Smith had many views that helped in making the world what it is today. I cant imagine what the world would be like if there werent thinkers like Adam Smith. Our career as Pharmacists is a great example of this. What would we be working so hard for if we made the same amount of money as a trash man? He had many other views that were just as important.
Adam Smith believed that a nations wealth was not derived by how much they had in resources, or in an exchangeable commodity, but rather by the labor that its residents produce. “The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences which it annually consumes.” (Wealth of Nations, p. 1) He stated that a nation could increase the efficiency of the potential of its people by increasing these two aspects of the work force: (a) Skill, dexterity, and judgement with which labor is applied, and (b) Proportion of those employed in useful labor to those not so employed.
For the first aspect, Smith noted that the best way to increase the efficiency of labor is the division of labor. The division of labor is the central factor in Smiths theory of economic growth. Division of labor is the splitting of a large task into smaller tasks and then having one person be responsible for only one or two of the smaller tasks, which leads to an increase in productivity and stimulates the entire growth cycle, which increases the efficiency of the whole task.
The division of labor and the accumulation of capital are what Adam Smith believed to be the driving forces of economic growth in any nation. He found that when the division of labor had broken down the production of almost any commodity into a series of simple operations it was more natural for tools and machinery to be invented that replace hand labor and expedite the entire production process, thereby increasing worker productivity. This increased productivity, combined with the growing capital stock to increase national output, enables a society to enjoy higher levels of consumption, resulting in a genuine rise in the “wealth of the nation” according to Smith.
Adam Smith stated that the value of all things is based on the amount of labor that must be produced to gain it. He believed that the price of an object could be split into three parts: rent, labor (wages), and profit. The person producing the quantity must pay rent on the land he is using to produce the commodity. To produce the quantity, he must either himself labor or hire people to do the labor for him, and pay them wages. Finally, the producer adds on a profit that will also be used to pay for the upkeep of equipment. Originally, the laborer received the full value of the price. However, this state could not last because of the appropriation of land and the accumulation of stock.
He believed that wages were very important and beneficial. The wage a laborer receives is the replacement for the profit he would gain by selling the product he produces. In this manner, the laborer is spared the responsibility of procuring materials and equipment, and of having to try to market the product. Instead, he gains cash for his labor. Wages are affected by many factors. The first is the agreeableness of the employments themselves. The second is the difficulty and expense of learning the employment. The third is the constancy of employment in them. The fourth is the amount of trust, which must be placed in the employees. Finally, the fifth is the probability of success in them.
Smith decided that wages must be at least enough for two people to live on, so that the workers can raise a family to keep the workforce going. The higher the wage is, the more likely a working family is to have more children, because children become a benefit. He believed that wages are peoples incentive to work harder, since a mans self-love will cause him to work harder so that he can get paid better. This is to the benefit of both employer and employee, because the employer gains more products to sell and the employee gains a larger wage, giving him more purchasing power.
Smith believed that the market system was more than capable of managing itself, and that no government intervention was ever required. He believed that the competition between different producers of a similar product would keep prices reasonable, and that the quality of a product would allow it to be sold at a slightly higher price than a similar product of lower quality. He stated that government interference in trade through taxing generally caused more problems for the consumers than they solved.
Smiths theory of economic growth can be formulated in a simple algebraic equation. Where G equals the growth rate, K equals the ratio of productive to unproductive labor, P equals