AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS by Adam Smith (Chapters I-VIII Summary) Submitted to: Sir Lemuel P. Del Rosario Submitted by: Rian Karlo Z. Punzalan Section:2B-G2 CHAPTER I THE DIVISION OF LABOUR. When a work is broken down into much smaller work and distributed into individuals that specialize in that work, we can achieve maximum productivity. For example the work of making a computer program can be divided up into these assignments. 1. The main programmer handles the Coding. 2. A debugger scans for errors and bugs within the program. . The designer designs the interface of the program. By using this example we can show how productivity works, because if all of those tasks will be given to one person only, the productivity will suffer thus it takes too much time to complete the program, unlike when it is divided into smaller tasks. The fruits of division of labor: It decreases the effort of every workman to produce a product. It also saves time because the work is passed down from one division into another. Single Purpose machines can be used to perform a specific task in a work division.
Knowledge is also divided into workmen, the ways and techniques for increased productivity that are specifically designed for their divisions. They don’t need to know all the process of production but only to focus on their division. And when that knowledge is gathered, it will represent the whole manufacturing process itself. It is proven that Increased Productivity may result into a Wealthy Society. Because Division of Labor leads to High Productivity, which means more excess products that is beyond what the society needs and then opens the opportunity of Trading.
Trading = Wealth. The Division of Labor was already in our civilization from the most ancient times, one example is the building of Pyramids in Egypt. One slave could not achieve such success alone, thus Division of Labor comes in action. It is applied from the biggest manufacturing company to the basic household chores. Maximum productivity can be achieved through The Division of Labor. CHAPTER II THE PRINCIPLE WHICH GIVES OCCASION TO THE DIVISION OF LABOUR Adam Smith states that division of labor results increased productivity.
This principle states how does division of labor came into reality. Division of labor came to as a move of man’s disposition to trade Since he can trade for goods, a man doesn’t need to make everything he needs. Thus, there is an emergence of a division of labor. Because a man can trade for many goods, he realized that he didn’t need to make those goods anymore and buying them would be hassle free. Thus the division of labor aroused. He developed a specialty for the goods he produces, which results into product excess(more than he needs). These goods can be traded for the goods he needs.
He then realized that he is does not specialize on every part of production, so he hires a worker to specialize on that particular work. His decision resulted into more wealth, from there we can conclude that the desire to trade more and the ability to do it produces the division of labor. CHAPTER III THE DIVISION OF LABOUR IS LIMITED BY THE EXTENT OF THE MARKET The presence of trading gives opportunity to the division of labor. The length of the division of labor is limited by the extent of trade which means it is limited by the extent of the market.
Because Smaller market means that an individual must do many tasks because there insufficient people he can trade with to get the goods he wants or needs. In our old times in the Philippines, every farmer must be a harvester, planter and other work. There are not enough people to keep, a farmer occupied full-time. So, there are few farmers. The family of the farmer lives far from a market. So the farmer does its own farming, which reinforces the inability to specialize in their work because very few will enter farming due to lack of traders to trade with.
BUT, if there are many people who own farm fields are in need of a farmer then there will be a lot of farmers. Likely a farmer will live nearby, so a person will hire the farmer to do all the work rather than doing it themselves. This reinforces the ability of the farmers to specialize in their work. Sufficient business>Sufficient workers>close distance with both parties>People utilizes the Farmers’ specialty in farming. There are some works that are only available in large cities.
Example, In a big city a construction worker can specialize to a specific work, he only does the welding of metals, while others do the cutting of metals, carrying the cement bags and etc. A construction worker in a province would do almost all tasks related to construction – welding, placing the foundation, roofing, and finishing. I was able to reconnect this to the computer Game I was playing, Assassin’s Creed. In that game I own a community where my workers produce Goods like timber, and different animal pelts and skins and even meat.
By means of water-carriage a more wide market is opened to my community than what land-carriage alone can afford. Throughout history the seacoast cities have developed much faster than inland cities. CHAPTER IV THE ORIGIN AND USE OF MONEY From chapter I-III the division of labor has become established, A cloth maker will not be able to produce his own food if he is consistently occupied working with his time. Forces him to trade with the farmer who produces crops and foods for his own and for trade, so the society develops into a trading society. But what if the farmer does not need cloth but the cloth maker needs food?
He would not get the food, unless he had something else that he could offer that nobody would refuse. In old times, goods like animals, sugar, shells, and sea creatures were used as a general currency, but minerals was marked to be the most successful currency, as they were hard and durable, and could be divided up into small pieces to buy a small quantity of goods, unlike animals. You CANNOT divide an animal and expect it to be alive for trade. A lot of different metals have been widely used for money from iron, copper, silver, and gold, but they were not always in form of coins.
The Romans for a while used unstamped bars of copper for currency, which lead to a problem with verification of amounts, and eventually governments commissioned means to verify the weight and purity of the metals, and stamp them into coins that signified that they were true(in the Bible it was Caesar’s head stamped on the coin), but did not signify the weight. This still proved to be difficult, and eventually the metal was stamped on both sides and sometimes even the edges, and was made into coins like what we have now. When the coins were first developed, they represented the country of the metal that coins were mined.
There are certain rules that holds the value of money, but before the rules can be understood, it is necessary to understand value of it. We must understand the value of use, which is something that is valuable in daily use, and the value of exchange, which is what is the range of goods that can be purchased by it. The rules that holds it are: how resources acquire a monetary value; what is the structure of different parts of those goods and services; and how that monetary price reacts with the market. CHAPTER V THE REAL AND NOMINAL PRICE OF COMMODITIES, OR OF THEIR PRICE IN LABOUR, AND THEIR PRICE IN MONEY
Adam Smith begins this chapter by pointing out the source of a commodity’s value. Each of us are rich or poor according to the level in which we can afford to enjoy the essential wants and created wants of human life. But when the Division of Labor was established, a very small part of these with which a man’s own work can be attained by him. He must acquire help from the work of other people, and he must be labeled rich or poor depending on the quantity of that workforce which he can command, or which he can afford to buy.
The value of any commodity, the person who possesses it(does not to use or consume it himself, exchange it for other commodities) = to the amount of labor which it grants him power to purchase or command. Labor was established as the real measure of the exchangeable value of all commodities. The real price of everything, the main costs to the man who wants to buy it, is the effort, labor and all the work of acquiring it. A. K. A the labor theory of value, a feature that defines the classical political economy.
Smith then distinguishes between the nominal value of a commodity (in monetary value) and its real value in the labor required to purchase it. According to Adam Smith, while the nominal value of a commodity is subject to change, this does not change its real value, because the amount of labor required to produce it and place it to the market remains the same. As we discussed in our previous class discussions. we already stated example that when the trouble or effort in creating the goods increases, the value of that particular product also increases, Diamonds are the product we used as an example.
CHAPTER VI OF THE COMPONENT PART OF THE PRICE OF COMMODITIES Smith argues that the price of any product reflects wages, rent of land and “profit of stock,” which compensates the capitalist for risking his resources. CHAPTER VII THE NATURAL AND MARKET PRICE OF COMMODITIES “When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay… cannot be supplied with the quantity which they want… Some of them will be willing to give more. A competition will begin among them, and the market price will rise…
When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages, and profit which must be paid in order to bring it thither… The market price will sink… ” As we discussed in the Law of Supply and Demand, Adam Smith states in this Chapter, when demand exceeds supply, the price goes up. When the supply exceeds demand, the price goes down. He stated the different ways that people can take to generate a larger profit than normal.
Some of those are finding a product that few other have that allows for a high profit(like the so-called Moon Field trip), and being able to keep that secret; Finding a way to produce a unique commodity (an Inventor who discovers a unique machine).. He also states that a monopoly is the same as the inventor trades his machine’s blueprint, and can thus lead to high profitability for a long time by keeping the supply below the effectual demand. A monopoly occurring either to an individual or to a company has the same effect as a secret in trade or manufactures.
By keeping the market constantly low on stock, by never fully satisfying the demand, sell their products above normal price. The price of monopoly is upon every instance the highest which can be acquired. The normal price is the lowest which can be taken, not upon every occasion, indeed, but for almost any time. The peak of which everything can be squeezed out of the buyers, or which, it is supposed, they are willing to give: the other is the lowest which the sellers can afford to take, and at the same time keep their business on track. CHAPTER VIII THE WAGES OF LABOUR
In this section, Smith describes how the wages of labour are dictated primarily by the competition among labourers and masters. When labourers bid against one another for limited opportunities for employment, the wages of labour collectively fall, whereas when employers compete against one another for limited supplies of labour, the wages of labour collectively rise. However, this process of competition is often circumvented by combinations among laborers and among masters. When labourers combine and no longer bid against one another, their wages rise, whereas when masters combine, wages fall.
In Smith’s day, it should be noted, organized labour was dealt with very harshly by the law. In societies where the amount of labour is in abundance to the amount of revenue which may be used to pay for waged labour, the competition among workers is greater than the competition among masters, and wages fall; inversely, where excess revenue is in abundance, the wages of labour rise. Smith argues that, therefore, the wages of labour only rise as a result of greater revenue disposed to pay for labour. Labour s the same as any other commodity in this respect thought Smith, “the demand for men, like that for any other commodity, necessarily regulates the production of men; quickens it when it goes on too slowly, and stops it when it advances too fast. It is this demand which regulates and determines the state of propagation in all the different countries of the world, in North America, in Europe, and in China; which renders it rapidly progressive in the first, slow and gradual in the second, and altogether stationary in the last. However, the amount of revenue must be increasing constantly in proportion to the amount of labour in order for wages to remain high. Smith illustrates this by juxtaposing England with the North American colonies. In England, there is certainly a greater amount of revenue than in the colonies; however, the wages of labour are lower, because more workers would flock to new employment opportunities to which the large amount of revenue gives occasion, eventually competing against each other as much as they did before.
By contrast, as capital continues to be introduced to the colonial economies at least at the same rate that population increases to “fill out” this excess capital, the wages of labour there are kept much higher than in England. Smith was highly concerned about the problems of poverty. He writes, “poverty, though it does not prevent the generation, is extremely unfavourable to the rearing of children… It is not uncommon… n the Highlands of Scotland for a mother who has borne twenty children not to have two alive… In some places one half the children born die before they are four years of age; in many places before they are seven; and in almost all places before they are nine or ten. This great mortality, however, will every where be found chiefly among the children of the common people, who cannot afford to tend them with the same care as those of better station. the only way to decide whether a man is rich or poor only depends on the amount of labour he is able to afford to purchase. “Labour is the real exchange for commodities” Smith also describes the relation of cheap years and the production of manufactures versus the production in dear years. He argues that while some examples such as the linen production in France shows a correlation, another example in Scotland shows the opposite. He concludes that there are too many variables to make any statement about this.