The Nature and Causes of the Wealth of Nations - Essay Example

? The Nature and Causes of the Wealth of Nations The Nature and Causes of the Wealth of Nations Adam Smith is considered to be the father of modern economics. He contributed extensively towards the shaping of the overall foundation of economics by writing some works. “The Nature and Causes of the Wealth of Nations” is admitted to be the most significant contribution to the field of classical economics. “The Wealth of Nations” is viewed as a magnum opus in the field of economics and moral philosophy. The book discusses some of the most important ideas pertaining to the free market, the division of labour, and how the forces of supply and demand actually work in the free market. One of the essential ideas in “The Wealth of Nations” is the division of labour. According to Smith, the division of labour occurs due to the increase in production rather than any other factor. The division of labour, however, can only be beneficial if a nation has more industry in place. The book argues that agriculture does not produce a larger division of labour as compared to industry. According to Smith, the division of labor arises not from the innate wisdom of the masses, but due to a human tendency to barter. Smith, therefore, argues that the reasons for the specialization are due to the differences in natural talent rather than any other factor. The book also discusses the limitations of the division of labour and indicates that the division of labour is actually limited by the extent of the market. The overall limited opportunities in the market actually result into the lack of labour specialization. If a market can be expanded, the specialization of labour can further occur, and the society can benefit from more skilled workers. In 1778, Smith was appointed the Commissioner to the Customs. This experience sharpened his understanding of trading and of the manner how exchange actually took place between two parties. He designed and developed policies and methods to curb smuggling so that overall revenues could be increased. He remained single during his entire life and died in Edinburgh on July 19, 1790 (Smith, 1761 a). He was a ruthless advocate of individualism, and his interests ranged from natural theology, ethics, and jurisprudence, to economics, which may explain the cause as to why he wrote “The Theory of Moral Sentiments” (Smith, 1761 a). He denied self-love as a principle which could never be virtuous. He thought that sympathy and self-interest were complementary. He once expressed that it was not from the benevolence of the butcher, the brewer, or the baker, that a worker could expect dinner, however, in fact, each agent worked in their own self-interest (Smith, 1761 a). He also discussed the concept of money and how various commodities were used as money. He reviewed the origins of money and how different nations actually used it in order to create a medium for exchange. He also speculated how metals were used as money and how nations actually invented new methods of developing money with the purpose of creating an exchange value. Further, he also discussed nominal prices for commodities as well as prices for labour. He also outlined how prices were actually determined and what were some of their components. Smith was in favour of labour and indicated that labour was the means by which an individual earned wages in a competitive market; a labourer must produce something others valued to earn (Smith, 1761 a). “The Wealth of Nations” reveals that nature and causes of the nation’s prosperity come from the increasing of the labour division to systematize its production (Smith, 1761 a). Smith professed that individual would invest resources, e.g. land and labour, to earn the highest possible return of investment, but it must yield to the equal rate of return (Smith, 1977 b). For classical economists this was the core of Smith’s proposition of economic theory. Smith advocated equality of returns to explain the differences of salaries based on the knowledge, skills, expertise, and skills of workers (Smith, 1761 a). Those difficult jobs to do would be a bit higher in compensation – and this explicated the notion of human capital. Hence, the differences of the nature of work are compensated differently (Smith, 1761 a). “The Wealth of Nations” discusses the high cost of British imperialism and substantially the relation of supply and demand (Smith, 1761 a). Smith observed that economic inequities were caused by monopoly that burdened consumers maintaining and defending that empire (Smith, 1761 a). Smith opposed mercantilism because it artificially kept a trade surplus using the erroneous belief that such actions increased wealth (Smith, 1761 a). Although trade opens up new markets for surplus of goods and offers an access to commodities from abroad at a lower cost, the comparative advantage of the products from outside will weaken the price of the goods from within (Smith, 1761 a). Akin to most modern believers in free markets, Smith believed that the government should enforce contracts, grant patents, and copyrights to motivate inventions and new ideas (Smith, 1761 a). He argued that government should provide public works and social services (Smith, 1761 a). However, he wanted users of such public works to pay in proportion to their use (Smith, 1761 a). Smith was also able to reveal how the wages were determined and how the competition in the labour market actually determined the wages of the labour. Smith became the father of economics (Smith, 1761 a). According to the classic standard theory of growth, he posits that capitalists can choose to do some specializations in the process of production and labour division to upscale market targets (Colander, 2001; Wolff, 1987) driven by laws of supply and demand. Supply creates its own demand since people endeavour to work and produce goods, because they need some other goods (Colander, 2001, p. 182) or that they demand products of commensurate values. Specialization in manufacturing became Smith’s economic thrust in the target market to accumulate more investment capital and to reinvigorate employment (Colander, 2001). This, however, necessitate policies supportive of savings and an investment population control; an increased level of education amongst human capital; establishments of institutions that are promoting technological innovation; an exercise of patents on property rights; strengthening of financial institutions; conducting of more research and studies; and policies that engender openness to trade. Smith’s ideas remained alive in the development of economic liberalization and in advancing market’s comparative advantage for an exponential growth. The neoclassical model theorist preferred to view openness and strategic growth by determining the relations of labour over time, capital invested, output produced and the return of investment. These factors were considered to be five sources of growth (Prescott, 1986; Arrow, Karlin & Suppes, 1959; Colander, 2001). Capital investment is used to finance market developments and infrastructural capitals that are utilized to increase and hasten production (Prescott, 1986). Such uses are dependent on social and human capital. The latter, being the force behind production, includes knowledge, experiences, and skills while social capital refers to governmental institutions, legal system and the fabric of social cohesion (Prescott, 1986). Meanwhile, resources are natural reserves which can be a subject of economic activity. In some developing nations, resource extractions are done by mining ores, minerals, fuels, and oils (Prescott, 1986). Other resources include those that are maximized in agro-industrial development. Human capital, as skilled labour forces, is also amongst the resources of a nation as its labour capital (Hickman, 1987; Hickman & Coen, 1976). Smith also discusses how the society actually progresses and what the actual reasons for achieving the economic prosperity as well as growth are. “The Wealth of Nations” outlines how the political economy of any nation can be shaped and what some of the factors are which can actually help it to progress in a right direction. He signifies the importance of urbanization as well as suggests how the agricultural sector should not be relied upon as means of achieving economic progress in the society. “The Wealth of Nations” also suggests how to strengthen the domestic industry and put restraints on the imports in order to ensure that capital grows domestically, and domestic industries are strengthened first in order to create a strong economic base of the country. The growth-compatible institutions were perceived as essential to capacitate and motivate people to devote their time and efforts to positive economic development to leverage and enjoy the targeted outcome (Hickman, 1987). This supports corporate’s purpose in business transactions and mercantile operations that are designed for profits. Technological development became indispensable for market’s supply and demand relations too, and turned out to be an instrument for human resources in advancing their production (Wolff, 1987). On the other hand, it also rendered other workers were unnecessary in the production process as technology replaced manual processing (Wolff, 1987). With the influx of information technology and knowledge management became essential in operations, in tracking sales of goods, and in business relations (Wolff, 1987). It has also become effective in trading relations. Smith thoughts remain operational in this century, but require labour to cope with technological advancement to keep in pace with the trends of production. References Arrow, K., Karlin, S., & Suppes, P. (1959). Investment and technical progress in mathematical methods in the social sciences. Stanford: Stanford University Press. Colander, D. (2011). Macroeconomics. University of Phoenix. New York, NY: McGrawl-Hill Irwin Companies, Inc. Hickman, B. (1987). Real wages, aggregate demand, and unemployment.  European Economic Review, 31, 1531-1560. Hickman, B. & Coen, R. (1976). An annual growth model of the U.S. economy. Amsterdam: North-Holland. Prescott, E. (1986). Theory ahead of business cycle measurement. Carnegie-Rochester Conference Series on Public Policy, 25 (1), 11–44. Smith, A.  (1761 a). The theory of moral sentiments. London: A. Miller. Smith, A. (1977 b). An inquiry into the nature and causes of the wealth of nations. Chicago: the University of Chicago Press. Wolff, E. (1987). Capital formation and long-term productivity growth: A comparison of seven countries. Economic research reports. New York, NY: New York University. Read More