Adam Smith: The Nature and Causes of the Wealth of Nations

Inquiries into the Nature and Causes of the Wealth of Nations (1776) appeared at the dawn of the industrial revolution. This is the founding work of political economy which theorizes regulation by the market. Adam Smith was Professor of Philosophy at the University of Glasgow and Commissioner of Customs in Edinburgh at the end of his career. In his book, Smith believes that:

“The annual labor of a nation is the primitive fund which furnishes for its annual consumption all the necessaries and conveniences of life; and these things are always either the immediate product of this work, or purchased from other nations with this product. »

The increase in wealth results from the progress of the division of labor. He analyzes the work in a pin factory and finds that the division of labor leads to a significant improvement in productivity, thanks in particular to the specialization of the workers:

“Let us take an example in a manufacture of the smallest importance, but where the division of labor has often been noticed: a manufacture of pins […] One worker draws the thread from the spool, another straightens it, a third cuts the upright, a fourth blunts, a fifth is used to blunt the end which is to receive the head. This head is itself the object of two or three separate operations: hitting it is a particular task; bleaching the pins is another; it is even a distinct and separate trade to prick the papers and to drive the pins into them; finally, the important work of making a pin is divided into eighteen distinct operations or thereabouts, which in some factories are performed by as many different hands, though in others the same workman performs two or three. »

Productivity increases through the saving of time, the increased skill of workers, and the invention and use of machines.

All goods produced must be exchanged on the market. Companies seek to make the best use of their capital to satisfy their personal interest: profit. The invisible hand assures

the harmony of the interests of individuals and therefore leads to general well-being. The state does not have to intervene in the market:

“In directing his industry so that his product may be of the greatest possible value, the individual thinks only of his own gain; in this, as in many other cases, he is led as if by an invisible hand to fulfill an end which in no way enters into his intentions. And, it is not always the worst thing for society, that this end is not part of its intentions. By seeking only his personal interest, the individual often works more effectively for the interest of society than if he really intended to work for it. […] It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but rather from the care they take in seeking their own interest. We do not defer to their humanity, but to their selfishness. »

Private interest leads the owners of capital to prefer the employment most favorable to national industry because it is also the most profitable for them. Self-interest and selfishness work for the common good and bring society to prosperity. This is the meaning of the invisible hand of competition.

The State must assume the sovereign functions (police, justice, army) and beyond the expenses of general interest related to the instruction of the people or the financing of the infrastructure. The state must frame the system of freedoms. He is the guarantor of the happiness of society, must uphold justice in the face of the selfishness of individuals.

Smith makes the essential distinction between use value and exchange value:

“It should be observed that the word value has two different meanings; sometimes it signifies the usefulness of a particular object, and sometimes it signifies the power which the possession of this object gives of purchasing other commodities. One may call one value in use and the other value in exchange.

Things which have the greatest value in use often have little or no value in exchange; and on the contrary, those which have the greatest value in exchange often have little or no value in use. There is nothing more useful than water, but with it you can hardly buy anything. A diamond, on the contrary, has almost no value in use, but it will frequently be found to be exchanged for a very large quantity of other commodities. »

The use value is related to the utility felt by individuals, while the exchange value indicates the relative value of the different goods in the exchange. Smith raises the paradox of value but then focuses on the value of exchange which responds to the natural inclination of men to exchange to satisfy their needs.

The exchange value of a commodity is equal to the amount of labor that the good can command. Ricardo rejects this theory of commanded labor in favor of a theory of labor embodied in the good, that is to say the labor necessary to produce the commodity.

For him, the value of a good depends on the work that is directly and indirectly incorporated into it. Indirect labor corresponds to that which had to be used to produce machines (this is fixed capital), to obtain food and raw materials (this is circulating capital).

The rarity of certain goods intervenes in the determination of their value, as Ricardo will explain later. The two sources of value are scarcity and the amount of labor required. Goods whose value is determined by rarity represent a small part of goods: paintings, books…

For authors of the French school, such as Turgot, Condillac and Say, value depends on the utility accorded to the commodity. As Say says, “this faculty that certain things have of being able to satisfy the various needs of men, let me call it utility”.

Smith distinguishes the natural price from the market price, but eventually the market price tends towards the natural price. The natural price of a good is equal to the sum of wages, profits (income linked to the advance of capital) and rents (land rental) that must be paid.

On the market there is a confrontation between an offer which proposes the natural price and a demand which is ready to buy at this price. If the demand is insufficient, the suppliers will have to lower the price to sell everything: this is the market price. They will look for markets where demand is abundant. Thus, market prices will approach natural prices. We need free competition.

The classics separate the real economy and the monetary economy (dichotomous approach).

Among the classics, relative prices depend on the relative costs in hours of labor or the relative utility of the different goods. Money is therefore neutral. It is a means of circulating wealth but which does not affect economic magnitudes (aggregates and relative prices). It is not considered a store of value. It only allows values to circulate and to measure.

In the long term, the profit tends to fall due to the abundance of capital which is more and more difficult to invest. Foreign trade will offer new outlets. Under the pressure of competition, each country has an interest in specializing in the production of goods for which it has an absolute advantage, i.e. goods which require less capital and less labor than at home. foreign.

“If a foreign country can furnish us with a commodity cheaper than we are in a condition to produce it ourselves, it is much better that we buy it from him with some part of the product of our own industry, employed in the kind in which we have some advantage. »

Smith constructs his theory against mercantilists who advocate gold hoarding to emphasize the reciprocal benefits of trade.

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