Saturday, October 6, 2012

History Paper on the Economic Theories of Adam Smith

History Qtr 1 Week 6 Paper

            Adam Smith was a Scottish philosopher who, like many philosophers before him, noticed how philosophical concepts worked with the study of economics. He defined new theories to promote a healthier, more stable market environment, including the theories of division of labor, the role of money, natural price, market price, labor as every man’s property, and the invisible hand. These theories are still mandatory reading for students of economics today.
            First, Adam Smith came up with the theory of division of labor when he observed that when one person was assigned to manufacture a pin entirely by himself, it took him a great deal of time and effort. But when ten people were each given the job of completing a single step in the manufacturing process of a pin, they could all work very quickly and complete very many pins in a single day. By dividing up the labor to produce goods, people could work more harmoniously and efficiently.
            Second, Smith regarded labor very highly, and considered money to merely be a physical representation of the labor of a particular person. Since each kind of labor was worth a different amount according to difficulty and importance, it would be difficult to actually trade labor for labor. For instance, if a man plowed a field for a baker, it would take a lot of loaves of bread for the baker to match the worth of the plowman’s labor. Smith’s theory on the role of money was that it stood in as a dividable, physical representation of each person’s labor. Thus, every market transaction is really an exchange of labor between sellers and buyers.
            Third, Smith developed a theory about the natural price of everything, based on the average income of members in a community, and average wage for rent and goods. The natural price is in essence the ‘perfect price’; the price at which the buyers would purchase as much of the product as could possibly be supplied. When something is being sold at its natural price, the market is in perfect balance; there is no surplus and no shortage, and the demand and supply are even with each other. Hand in hand with Smith’s theory of the natural price is the theory of the actual price or market price. The market price is often above or below the natural price, because it constantly adjusts to the market conditions. If there is a great demand for pins but very few pins in supply, the price of pins rises above the natural price. If there is very little demand for pins, there becomes a surplus of pins, and the price drops below the natural price.
            Fourth, continuing with his great appreciation for labor, Smith invented the theory that every man’s labor is his property. When a man labors to produce a vegetable garden, that labor, and everything that labor brings about, belongs entirely to him. He is not required to share it with anyone. However, since a vegetable garden might produce more than one man and his family could ever eat, and people need more than just vegetables to live, the man can exchange his property (the fruit of his labor) with someone else’s labor to satisfy both of them.
            And finally, Adam Smith believed in a governing force over markets that he called an ‘invisible hand’. While Smith was alive from 1723 till 1790, the prevalent economic system in Europe was that of mercantilism, which meant the government had full control over the economy, and restricted import while pushing export.  Smith saw that free markets naturally settled into the best, most productive prices, imports, and exports. He called this process the Invisible Hand; man’s natural tendency in a market is to freely and fairly exchange labor, and when men are allowed to interact freely in a market, supply and demand even out and there is far more harmony than the discordant and ineffective system of mercantilism.

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