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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