Smith's Wealth of Nations
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Adam Smith's Wealth of Nations establishes that the division of labor increases aggregate wealth through market efficiency, and this insight—combined with his scientific approach to society—makes him the founder of modern social science and the theoretical basis for liberal economic policy.
- Division of labor increases productivity because it makes labor more efficient; productivity is limited only by market extent
- Free markets without governmental interference (laissez-faire policy) create natural equilibrium that maximizes wealth and human felicity
- Smith applies scientific method to society just as Newton did to physics, establishing mathematical social science as a discipline
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The invisible hand and the concept of natural equilibrium are very important to Smith, though the particular famous formulation appears quite late in the book and is not actually a central focus; the key idea is that free, rationally self-interested people will maximize productivity and output.
“it's a famous line from adam smith it doesn't seem to be a matter of great concern this issue of the invisible hand the idea behind it the idea that there's a natural equilibrium in society is very important to smith the particular formulation of the invisible hand which seems to be a great favorite of economists appears very late in the book it's not a real central portion of it the key idea is that there's a natural equilibrium between supply and demand and that free unrestricted rational rationally self-interested people will maximize their productivity maximize their output”
Historical data from human societies serves the same foundational role in enlightened social science that laboratory data serves in modern natural science—both provide empirical grounding for theoretical frameworks.
“the history of human societies relates to the enlightened scientific approach to society that's characteristic of the enlightenment in the same way that the data that we get from laboratories relates to the actual scientific work done by a physicist in other words the data that one gets from a laboratory and the data that one derives from the history of human beings have analogous foundational roles in both modern natural science and in modern enlightened social science”
Child labor emerges in industrial society for the same reason women enter the workforce: when muscle power is not required, capitalists rationally seek to hire children at minimal wages, transforming family structure and childhood itself.
“one extrapolation from that will be the advent of things like child labor when muscle power is no longer a question again not only will women brought directly into the industrial workforce so will children what this means is a change in family life it means a change in the structure of society at its very at its most basic level”
Smith offers a root and branch critique of mercantilism—the dominant economic and political ideology of mid-18th century England—based on his theoretical insights about division of labor, capital, and markets.
“he offers a root and branch critique of mercantilism mercantilism was the dominant economic and political ideology of mid 18th century england and adam smith has gone beyond mercantilist theories of economy and society and offers on the basis of his for the first book of wealth of nations a general and profound criticism”
Smith comes remarkably close to formulating a conception of society divided into antagonistic classes as a consequence of the division of labor—over 200 years before Marx—despite having limited historical data about actual industrial society.
“adam smith comes very close to formulating a conception of society divided into classes as a consequence of the division of labor which is a remarkable insight when you stop and consider the fact that the wealth of nations is written in 1776 you stop and think about the fact that it's over 200 years old that he didn't have much of a chance to see the consequences of the division of labor he saw some of it but he never saw industrial society full-blown”
Critics who claim that Smith believes all people are always rational utility maximizers and purely selfish have misread him; Smith actually believes in moral sentiments like benevolence and sympathy, as shown in his other work, The Theory of Moral Sentiments.
“if you've ever read his book called the theory of moral sentiments you will find that in fact adam smith has close intellectual and actual close personal associations with david hume smith's moral theory is often criticized because some people only read the wealth of nations it's a very unfair extrapolation smith does not believe that all people all the time are rational utility maximizers”
Homo economicus is a reasonable abstraction that gives a practical way of describing and predicting market behavior, just as the ideal gas law (which never actually describes real gases) gives a reasonable way of predicting gas behavior within certain parameters.
“what smith thinks is something like this that homo economicus is a reasonable abstraction which gives us a good way of practically describing and predicting the behavior of markets in other words think about something like the ideal gas law which relates the pressure and volume and temperature of gases now it turns out that when we go into a laboratory we never have ideal gases in front of us so they always turn out to be real gases i mean remarkable as that may seem the ideal gas law will offer us a reasonable expectation about the about the behavior of gases”
By showing us how to maximize public wealth, Smith demonstrates 'halfway through the problem of scarcity' which has bedeviled economics, public policy, and political science since the beginning—a tremendous achievement that still leaves the distribution problem unsolved.
“by showing us how to maximize public wealth or the wealth of a society he's shown us halfway through the problem of scarcity which is bedeviled economics and bedeviled public policy and the devil political science since the very beginning he deals with the problem of production shows us how to produce more”
Adam Smith applies the scientific method—particularly the approach that proved successful in physics through Bacon, Galileo, and Newton—to the systematic study of society and economics.
“science and that scientific approaches to the study of society are central to smith's concern he's in the tradition of enlightened social thought enlightened political thought and he wants to adapt the scientific method that's been so successful in physics”
Smith recognizes that the development of industrial economy means the stratification of society based on wealth and type of work, creating distinct classes with conflicting interests—a proto-Marxian insight.
“smith sees that the development of an industrial economy means the stratification of society based upon people's wealth and based upon the kind of work that they do and it also means that society is going to fragment into classes and that there must inevitably some degree of antagonism in the interests of these classes”
Smith does not believe that anyone is actually like homo economicus; only romantic novelists and the author Charles Dickens (in Scrooge) believed in such creatures—Smith sees homo economicus as a useful abstract model, not reality.
“adam smith as i said doesn't believe that this is really what anybody is like the only people who believe that people are like that are people are romantic novelists if any of you have read uh hard times by uh charles dickens think of mr bounderby that's homo economicus that's a caricature of adam smith's rational utility maximizer think of but it's still mr scrooge from a christmas carol humbug that's homo economicus adam smith doesn't believe that there's anyone really like that”
In pre-industrial societies, there is a clear division between men's labor (quarrying, tree-cutting, muscle-intensive work) and women's labor; in industrial societies, as machines replace muscle power, this division dissolves and women enter the industrial workforce.
“in an ancient or archaic economic system where most of the power or most of the force where most of the energy for human activity for human labor comes from muscles there's going to be a clear division between men's labor and women's labor if the society depends upon quarrying stone by hand for example the chances are that men are going to take that sort of a job there will be a very clear distinction in other words prior to the age of machines between men's labor and women's labor on the other hand after the advent of mass production after the advent of the division of labor as the age of machines starts to get a certain momentum to it we're going to find that muscle power becomes less and less significant”
Industrial society creates enormous hardship for the first few generations of workers while producing unprecedented wealth and changing social structure irreversibly and permanently.
“the advantages of it are clear it creates enormous wealth the disadvantages are that it creates a good an enormous amount of hardship not just a good deal an enormous amount of hardship in the people that actually have to deal with the first few generations of this and in addition it creates changes in the structure of society that are irreversible and permanent”
One of the permanent and important changes introduced by industrialization and the machine age is a change in family life and the status of women, driven by the fact that machines replace muscle power as the primary productive force.
“one of the permanent and important changes that's going to be introduced into society as a consequence of the division of labor will be the advent of the machine age and one of the consequences of that will be a change in family life a change in the structure of society and particularly a change in the status of women”
Smith had a somewhat rosy picture of the political and social consequences of economic changes because he was writing in the 1750s-1770s and lacked access to the wealth of historical data about hardships that 19th-20th century critics could document.
“if he has a somewhat rosy picture of the political and social consequences of these economic changes it comes from the simple fact that he's in a historical moment in which case it's in which it's not entirely possible to find out the really unpleasant and the really and the great the really unpleasant consequences the great hardships that come along with the division of labor”
Smith develops a theory of prices, a theory of capital accumulation, a general economic history of the West, a critique of mercantilism, and an analysis of public spending and revenue—making him directly applicable to immediate political concerns in ways that 17th-century or earlier social thought was not.
“not only does he come up with a theory of prices not only does he come up with a theory of capital accumulation not only does he offer us a general economic history of the west but in the second book adam smith goes beyond that he takes the theoretical gains that he's made and he applies them to contemporary political and economic issues”
Smith analyzes public spending and taxation, asking what sense different expenditures make, what justifies them, and what optimal mix of spending would create maximum human felicity—applying his economic principles to government finance.
“he analyzes the revenue and the expenditure of the sovereign which is to say he analyzes public spending and public revenue taxation and spending by the government and he asks what sense different kinds of expenditures make in what respects they can be justified and what the optimal mix of expenditures would be in order to create the maximum felicity”
Smith saw some of the consequences of industrialization and was aware of major structural changes ahead, even if he lacked the detailed historical evidence that 19th-20th century observers could document.
“adam smith didn't see the whole of these changes he saw parts of them he saw the effect of the division of labor on the individual laborer he talks about the downside of it offers a few kind of inadequate remedies like an increase in education but he is well aware that the division of labor and the development of modern economy means fundamental permanent and enormous changes in the structure of society”
Two types of impediments prevent the extension of markets and thus increased division of labor and economic wealth: natural causes (space and time, limits on transportation and communication) and conventional causes (governmental interference, monopolies, protective tariffs).
“it turns out there are two kinds of things that prevent the extension of markets and thus the increased division of labor and thus the increase of human wealth what impedes the division of labor and the development of the market are natural causes and conventional causes natural causes are essentially space and time”
The Wealth of Nations is one of the great epoch-making works in the history of social science and represents the high point of Enlightenment social scientific thought.
“it's one of the great epoch making works in the history of social science it's usually thought of as the high point in the social scientific thought of the enlightenment”
Smith shows us halfway through the labyrinth of economic and political problems; even with this incomplete achievement, his work is worth serious consideration as a foundational economic text.
“if adam smith is sho only shown us halfway through the labyrinth that by itself is an enormous achievement and even though economics with some justification is called the dismal science this book is worth your reading and worth your serious consideration”
Industrial society and technological advancement were implicit and embryonic in the development of modern natural science; the age of machines is necessarily built into the scientific revolution and the development of Newtonian mechanics.
“once the scientific revolution had begun when bacon and galileo and eventually newton formulate a new conception of nature it's only going to be a matter of time before someone takes it into their head to apply this conception of nature to manipulate the world around them in other words in the scientific revolution itself the age of machines the age of the industrial revolution is inside the development of modern natural science as a sort of embryo it's implicit in the rise and development of newtonian mechanics”
The division of labor is limited by the extent of the market; you can only divide labor for producing commodities if there is an actual market for those commodities, making market size the critical constraint on economic development.
“the division of labor is limited by the extent of the market in other words you will have a division of labor for the production of shoes or clothing or food or what have you insofar as you're able to get a market for the things you produce the division of labor entails the idea of mass production the division of labor involves the creation of enormous amounts of commodities and there's only an economic rationale in the creation of enormous vast volumes of a commodity if there's somebody that wants it”
Governmental interference—such as monopolies and protective tariffs—artificially limits markets and therefore artificially limits the division of labor, aggregate wealth production, and human happiness, making such interference counterproductive.
“there's a second and perhaps more sinister source in the limitation of markets and that's governmental interference adam smith argues that all unnecessary interference in the free economic activity of self-interested individuals limits the division of labor because it limits the markets for the things produced by the division of labor so what adam smith would mean by that is things like monopolies and protective tariffs and all other impediments to the extension of the market artificially limit the market thus artificially limit the division of labor thus artificially limit the amount of wealth that the society produces”
The division of labor undermines craftsmanship and reduces worker skill; as a result, skilled pin-makers' guilds collapse after the introduction of factory production, throwing former craftsmen into the labor market and creating technological unemployment.
“the division of labor has bad consequences first of all for the people that are actually doing this it means a reduction in the level of skill craftsmanship is going to be undermined by the division of labor it's only a few years after the opening of his hypothetical pin factory that all the hypothetical pin makers guilds are going to fold up shop because it's going to be no call for handmade pins anymore what that means is that there'll be a whole set of former pin makers who are going to be thrown upon the labor market”
As industrialization proceeds, capitalists recognize that hiring women for work previously done by men is economically rational, particularly because they can often pay women less, creating competitive advantage and making female labor a significant economic trend.
“it necessarily occurs to some entrepreneur that it would be possible to hire women to do the jobs that had previously been done by men and since their rational utility maximizers they may even be willing to pay women or able to pay women less than they pay men and of course that's going to give them a competitive advantage and of course that's going to become a very important trend in the structure of society”
If people are rational utility maximizers, the interests of factory owners and wage laborers are fundamentally opposed: employers seek to minimize wages to maximize profits, while workers seek higher wages, creating structural class conflict.
“if we assume that people are rational utility maximizers that they are what we might call homo economicus the interests of people who own factories and who employ labor are different from the interests of the laborer adam smith says that there's a sort of implicit collusion between what he calls the masters what means by that is the employers in society that those who own what marx will later call the means of production those who hire wage laborers have an implicit interest in making sure that the wages of labor are kept to the absolute minimum because they're trying to maximize the amount of profit”
Smith's goal is to eliminate all political or conventional impediments to the development of society's productive capacity to its maximum, thereby maximizing human felicity—a practical political objective grounded in economic theory.
“he likes the idea of developing the productive capacity of society to their maximum possible capacity and he wants to eliminate all political or conventional impediments to those and the way to do that is by criticizing the structure of political and economic policy”
Smith's critique of mercantilism is devastating both in his own time and since, because it grounds the critique in economic logic (that artificial impediments limit wealth) rather than abstract principles, making it practically compelling.
“and the strength of his argument lies in the fact that it gets to the bottom line instead of praising a minimal government and because it leads to human liberty and that's what human felicity is he says that it leads to more of everything and that means we can consume more and that's at least a part of human happiness”
Smith believes that social cohesion, human benevolence, and concern for others transcending mere selfishness derive from a common sentiment—particularly sympathy—which is why people give charity without coercion.
“he believes that social cohesion that human benevolence that concern for other people that transcends the merely selfish is all derived from a common set of sentiments particularly in this case the sentiment of sympathy we feel bad when other people get hurt that's or we feel bad when other people are in pain that's why we give charity without being coerced to do so”
Smith's achievement in founding economics as a discipline has been incalculable; his influence extends to both Marx and 19th-20th century critics of capitalism and to those attempting to rescue capitalism through social safety nets and welfare states.
“adam smith's achievement in founding this discipline is enormous and his influence has been incalculable he's influenced certainly marx and all the 19th and 20th century critics of capitalism he has influenced those who would try and rescue capitalism it's from itself by constructing a kind of social safety net by constructing the welfare state of all the english social scientist adam smith was the greatest and most important”
Smith's achievement is 'primitive' in some respects with broad generalizations and over-simplifications, yet it remains unarguable; he founded mathematical social science and connected theory of society to theory of natural science.
“it's primitive in some respects it has crewed over generalizations but his achievement is unarguable adam smith founded mathematical social science he connects our theory of society to our theory of natural science”
Smith shows us how to rationally construct public policy so as to optimize the wealth of society and maximize human felicity—demonstrating the application of economic reasoning to governance.
“what he does is show us a way of racks of rationally constructing public policy so as to optimize the wealth of society and thus to maximize human felicity”
Smith has shown us only a necessary but not sufficient condition for human happiness by showing us how to maximize wealth; maximum wealth is necessary for but not equivalent to human felicity.
“if he has only shown us and i think this is true by by showing us the way to maximize wealth i think he's only shown us a necessary but not sufficient condition for human happiness but this achievement alone is enormous”
19th and 20th century socialists (utopian and Marxian) move from Smith's focus on production to concern with distribution, asking how unprecedented wealth should be distributed to maximize human felicity—addressing the second half of the scarcity problem.
“it will take the sociological and political critics of capitalism in the 19th century to address a new and perhaps more significant problem the pro they'll in the 19th century critics of capitalism will move from the consideration of production to the consideration of distribution adam smith has shown us how to maximize the production of wealth later critics in the utopian socialist and marxian socialist tradition will show us how to become concerned with making sure that this unprecedented wealth that this enormous production is distributed in such a way as maximizes human felicity”
The division of labor increases the productivity of labor, which in turn increases the aggregate wealth of society, because dividing labor makes people work both hard and smart, and working smart makes them productive.
“adam smith presents his most important discovery which is that the division of labor increases the productivity of labor what this means is that the division of labor increases the aggregate wealth of society when labor is divided we find that people are working both hard and they're also working smart and working smart makes them productive”
The only way to create more wealth is by increasing the division of labor, and the only way to increase the division of labor is by increasing the size of the market—creating a feedback loop where market expansion is essential to economic growth.
“now we have a further problem the only way that we can create more wealth is by increasing the division of labor and the only way we can increase the division of labor is by increasing the size of the market”
In Smith's pin factory, five to ten unskilled laborers performing specialized repetitive tasks (drawing wire, attaching heads, sharpening, packaging, quality checking) produce vastly more pins than ten skilled craftsmen, demonstrating that efficiency gains come from task specialization not worker skill.
“what we'll do is we'll get five or six or ten unskilled laborers we'll pay them a more or less minimal daily wage and we'll give them one task to do again and again and again and again it'll be a small task like say drawing out the wire for the pins or putting a head on the pins or sharpening the pins or putting the pins into boxes or quality checking the pins”
Smith's great contribution to social science is implicitly laying the foundations for the modern liberal state by criticizing government interference and demonstrating that minimal government produces the most wealth and human happiness.
“adam smith's big contribution to the history of social science and to history of political science is that by criticizing the way in which governments interfere with the economy and by criticizing both the expenditures and the taxation policies of the government he is implicitly laying the foundations for the modern liberal state”
Henry Ford's decision to pay workers $5 per hour was based on the understanding that workers would use higher wages to buy Model T automobiles—exemplifying the logic of mass consumption and proving radical thinking capitalists understood what Smith could not theorize.
“some radical thinking capitalists like say henry ford at the beginning of the 20th century when he wants to offer his workers five dollars an hour is actually thinking through a fallacy in adam smith's argument he henry ford wants to pay his workers five dollars an hour because he thinks they're gonna go out and buy model t's and in fact he was right”
Adam Smith's famous pin factory example contrasts rational factory production with artisanal craftsmanship: a skilled craftsman making pins individually produces very few high-quality pins slowly and expensively, while a factory using divided labor produces vastly more pins efficiently despite workers being less skilled.
“he compares rational fact rational production essentially in a factory where labor has been divided up so that minimal small tasks are done repeatedly by one person and he compares that to the artisanal craftsman-like production of pins back oh in the year 500 perhaps if you wanted pins in london you had to go out one assumes to the family pin maker or to the master pin maker actually had studied pin making all his life and a craftsman who makes pins makes doubtless very good pins a very high quality precisely the pins you might have ordered but he makes them very slowly and relatively inefficiently”
Mass production inherently entails mass consumption; once a society produces unprecedented volumes of goods, saturating foreign markets becomes inevitable, forcing producers to develop home-market consumption to unload products.
“the division of labor entails the idea of mass production what i want to suggest as a sort of extrapolation from this is that mass production entails the idea of mass consumption what are we going to do with all this stuff we produce if we start a toaster factory and start producing toasters in an unprecedentedly efficient fashion well we can send some of them to china some of them to india some of them to south america and trade them for whatever we want from those countries but economists have an idea called declining marginal utility after a while we saturate the market for toasters and they don't want them anymore”
Smith's inferences from observed facts about employer coordination and government connection go beyond the evidence and assume these are natural and intrinsic to industrial society, when in fact they change as economic conditions evolve.
“the inferences that he draws from these facts go beyond the evidence he assumes that this is natural and intrinsic to industrial society and it turns out not to be”
A rational factory owner seeking to maximize profit would prefer to pay his own workers subsistence wages while competitors pay higher wages, allowing his workers to buy competitors' products rather than his own—a self-defeating strategy that reveals the long-term logic of higher wages.
“as an individual entrepreneur as an individual capitalist i'd like to make sure that i get to pay my labors an absolute minimum wage i don't want to give them any extra wages because i'm not interested in subsidizing their lifestyle i'm just interested in making sure they show up for work what i would like to see instead is my laborers paid a subsistence wage or close to a subsistence wage and i would also like to see all the other capitalists in my society pay a real living wage i like to see them get kind of open-handed and liberal because if that were to happen that would mean that all these proletarians that are being hired by all these other capitalists now have a few extra dollars in their pocket and they can buy my toasters”
As the level of worker skill declines due to mass production and division of labor, total output grows paradoxically because efficiency gains from task specialization and production methods far exceed losses from reduced craftsmanship.
“when we divide labor we increase efficiency the aggregate production of 10 unskilled laborers producing pins through the division of labor will be far greater than the aggregate production of 10 craftsmen who are making the pins from the very beginning to the very finished product so what this means is that paradoxically as the level of skill in our workers declines in the case of mass production in the case of the division of labor our total output grows”
The connection between gender equality and advanced industrial society is not accidental; the parts of the world with the greatest gender equality are precisely those with the greatest division of labor and technology extension, because industrialization necessarily transforms family structure and gender relations.
“i think it's not an accident today that the places the parts of the world where women have developed their greatest drive towards equality and rights are those countries that have the greatest degree of the division of labor where technology is extended the furthest i don't think that's an accidental connection i think that industrial society and the division of labor necessarily change social uh the structure of society and they change family life in ways that are irreversible that can never be gotten away from”
Homo economicus is an idealized model of the rational utility-maximizing individual: one who buys cheap, sells dear, works minimally for maximum goods, lives to consume, has no concern for others, and operates entirely from calculated hedonism.
“homo economicus is our ideal utility maximizing man he buys cheap he sells deer he works a minimum amount so he can get a maximum amount of goods he lives to consume he has no feeling for other people he only has a closely considered hedonism with regard to all his activities everything ultimately is a question of pleasure and pain for homo economicus”
Smith's ethical theory is derived from emotions rather than reason and has no rational foundation; ethics emerges from sentiment (particularly sympathy), not from logical argument—a position influenced by David Hume.
“like hume he thinks that uh ethical theory is derived from our emotions that it has no rational foundation that we're going to try and develop when we deal with kant tomorrow and that it's this feeling of sympathy or benevolence towards other people that makes moral activity possible”
In mid-18th century England, wealth had grown to unprecedented proportions, creating concern and amazement about its sources and how to generate more of it—which is the central mystery that Wealth of Nations addresses.
“in the middle of the 18th century wealth in england had grown to unprecedented proportions and it was a matter of both concern and amazement to contemporary englishmen where this wealth had come from and how they could get more of it”
Natural barriers to market extension—primarily distance and the costs of transportation and communication—limit the division of labor; however, improving transportation (turning rivers into canals, forests into roads) reduces these barriers and thereby increases markets, division of labor, and aggregate wealth.
“it's hard to divide or it's hard to create a market for pins produced in england among say the australians because australia is a long way from england and in order to have a market for english pins we have to factor in all the labor that's involved in taking pins from england to australia so space and time the limitations on our transportation and the limitations on our communication form a sort of natural barrier to the extension of the market and these natural barriers to the extension of the market limit the degree to which we can divide labor as transportation improves and rivers are turned into canals or forests are turned into roads the result is an increasing market”
Artisanal production is intrinsically inefficient compared to rational factory production using divided labor; the mode of production matters more than individual skill for overall output.
“the idea that the craftsman-like or the artisanal mode of production is intrinsically inefficient is central to smith but it's only inefficient compared to something that works better and what works better in this case is the pin factory or the rational systematic production of pins that comes to us through the division of labor”
The society that developed Boyle's Law of gases would necessarily develop Watt's steam engine, and the society that developed the steam engine would necessarily develop industrial manufacturing—because technological innovation follows logically from scientific discovery.
“it should come as no surprise that the society that develops boyle's law of gases a few generations later develops watts steam engine and should come as no surprise when we further find out that the same society that developed watts steam engine is going to be the same society that in a few generations after that will develop what william blake called the dark satanic mills of the industrial revolution”
Smith is a very important social scientist because he can directly and obviously apply his new economic theory to immediate practical questions of politics and economy—a capacity that was absent in 17th-century and earlier social thought.
“he is a very important social scientist because he can directly take his new economic theory and apply it to the immediate practical questions of politics and economy this is a quantum leap in the development of social science there is really nothing in the 17th century and earlier centuries which is as directly and obviously applicable to immediate political concerns”
The shift from artisanal to mass production involves significant social consequences beyond mere efficiency gains; Smith is aware of these consequences even if he cannot fully document them due to limited historical data from the early industrial period.
“in addition to the fact that the change from artisanal production to production through the division of labor involves certain social consequences which adam smith is very well aware of many of the critics of adam smith while accepting the fact that the division of labor does in fact increase productivity and is a very efficient way of producing things accused smith of neglecting the social and political consequences of the division of labor and i think that's basically false i think that smith is well aware”
There is a fallacy in Smith's argument that all employers are intrinsically in collusion to minimize wages: while this may be true initially and for the first generations of the industrial revolution, as markets become saturated and productive capacity grows, profit maximization may require paying higher wages to expand home market consumption.
“having said those good things about them i think there are some problems with this idea of intrinsic collusion and the problem stem not so much from adam smith because of the fact that he has a very limited base of historical data to work with but ask yourself is it really true that all the employers of labor are interested in making sure that wages are kept to an absolute to a minimal level i mean subsistence or a very little bit above subsistence i think that in the long run that's probably false”
Smith's claim that capitalists are intrinsically in collusion to suppress wages is therefore false in the long run: while wage suppression may maximize short-term profits in early industrialization, as markets saturate and productive capacity grows, capitalists have incentives to pay living wages to expand home-market consumption.
“adam smith is wrong when he makes the argument that capitalists are intrinsically in collusion initially they surely are and probably for the first few generations of the industrial revolution it became quite clear to them that maintaining a clamp on the wages of labor would maximize their profit but as markets become saturated as the machine age continues on as industrial society becomes more and more and more productive as what marx calls the forces of production are brought to a higher and higher level of perfection we have to find some place to unload this stuff so the consumer society is built right into this”
Industrial society and the division of labor necessarily change social structure and family life in ways that are irreversible and permanent—changes that cannot be undone or escaped.
“industrial society and the division of labor necessarily change social uh the structure of society and they change family life in ways that are irreversible that can never be gotten away from”
While homo economicus and rational utility maximization never perfectly describe actual humans, the assumption that people will be rational utility-maximizers in aggregate does allow accurate predictions and analysis of market behavior within certain parameters.
“homo economicus as an idealization of the rational utility maximizing individual allows us to make accurate within certain parameters and reasonably coherent predictions and analysis of the behavior of free markets so while we never encounter ideal gases the ideal gas law gives us a way of manipulating and predicting the behavior of gases while we never encounter homo economicus unless we read a christmas carol and meet mr scrooge it the assumption that people will be rational utility maximizing individuals when placed over aggregate social behavior does give us a rough and ready way of predicting and estimating and calculating human behavior”
Employers have implicit or explicit collusion to keep wages low: the small number of employers means they know each other, have good government connections, marry into the same families, socialize in the same circles—making coordination on wage suppression easier than for the numerous dispersed workers.
“the number of employers is always much smaller than the number of employees and as a matter of practical sociological fact the class of employers generally know each other they generally have good connections to the government they often marry into the same families and get and hang and uh socialize in the same circles for all these reasons it's much easier for there to be a sort of combination in restraint of trade or if not in restraint of trade certainly in restraint of wages by those who employ labor”
One downside of the division of labor is that it makes laborers 'stupid'—not genetically or intrinsically, but through the repetitive operation of simple tasks that reduces them to the level of machines, denies them outside stimulation, and prevents development of other elements of their personality.
“one of the the downsides of the division of labor one of the really unpleasant consequences is that it makes laborers as he put it stupid for one of a better word now he doesn't mean stupid in the sense that they're intrinsically unable to do arithmetic it's not that they have some genetic malfunction which prevents their brain from working but rather the repeated operation doing the same simple tasks reduces them in marxist terms anyway to almost the level of a machine they don't get much outside stimulation they don't get much of a chance to develop the other elements in their personality”
Mass production systems create a self-sustaining mechanism: they displace artisanal workers into unemployment, creating a ready supply of cheap labor available when new technologies and factories emerge, which then creates more displacement and labor supply—a cycle that perpetuates industrialization.
“the economy when it's organized around mass production when it's organized around the division of labor is also going to have the consequence of being a sort of self-sustaining mechanism by creating unemployment by create by undermining the artisanal production of commodities it's going to make sure that there's a already source of labor already in the cities ready to go to the next job that comes available when the next guy thinks up a new machine to make shoes or to make clothing or to make food”
Smith assumes a rough correlation between the amount of wealth available to people and human felicity; therefore, since free markets maximize wealth production, governments should leave markets alone to achieve the optimal outcome—the principle of laissez-faire.
“thus counterproductively decrease the amount of human happiness because smith assumes that there's some rough correlation between the amount of wealth available to people and human felicity if we think that human beings will be made happiest and will be best off in a condition where they get the maximum result of their labor by laboring in the most efficient fashion that it makes sense to make sure that the division of labor is carried out to its maximum possible”
If governments follow a laissez-faire economic policy, the consequence will be a natural equilibrium that optimizes the production of goods and services—this is the principle of the invisible hand.
“if the governments follow what is called a laissez-faire economic policy the consequence will be a natural equilibrium which optimizes the production of goods and services this is called the invisible hand”
Smith argues that minimal government is justified not merely as a moral principle but as economic fact: minimal government produces the most wealth, which produces the most human happiness, because people are unhappy when poor.
“he says not only is it a general moral maxim that he who governs best governs least because freedom is a good thing he says let's get to the bottom line he who governs best governs least because it produces the most wealth and that produces the most happiness nobody is happy when they're poor or okay very few saintly types might be”
The practical test of any scientific theory is the degree to which it allows accurate rational expectations and rational plans; by this standard, Smith's achievement is enormous because economics has become the most successful of the social sciences.
“what it shows is that human beings never perfectly realize any kind of ideal but then again nothing in nature does it's the degree to which this allows us to make rational expectations and rational plans that's the ultimate practical test of this or any scientific theory and by that smith's achievement is enormous certainly i think today economics is the most successful of the social sciences it is the one most susceptible to mathematical formalization”
Economics has the greatest predictive power among social sciences in terms of generality and profundity of results, making it the most successful social science discipline.
“certainly i think today economics is the most successful of the social sciences it is the one most susceptible to mathematical formalization which is one of the the litmus tests of a highly developed science as well in addition uh economics is also the one which has the greatest predictive power sociology in certain cases may have a similarly accurate predictive power but economics in terms of the generality and the profundity of its results has certainly been the most successful of social sciences”
The consumer society of the 20th century is embryonically present within industrial capitalism itself; built within the logic of mass production is the requirement for mass consumption, which necessitates higher wages—a logic Smith could not appreciate due to historical limitations.
“built within the industrial revolution is the idea of mass production and built within the idea of mass production is the idea of mass consumption the consumer society of the 20th century is here in embryo adam smith was not at a historical moment where he could appreciate that fact”
If workers never get education or a chance to cultivate other elements of their mind and soul, the repetitive nature of factory work—especially if begun in early childhood—will make them dull and create yearning for stimulation, generating social consequences and social problems.
“if you do this for long enough particularly if you do this from a very early age if one never gets a chance to get an education or cultivate the other elements in in your soul or in your mind it is likely to make you if not stupid at least rather dull at least to create a new yearning for some sort of stimulation outside of that which will create all kinds of social consequences and all kinds of social problems later on”
Smith derives from Locke ideas like the labor theory of value and a minimalist approach to government—the principle that 'he who governs best governs least'—and provides solid economic reasons (not merely moral ones) for believing this principle.
“he who he derives from lock ideas like the labor theory of value like a minimalist approach to government which says that he who governs best governs least and he gives us good solid economic reasons to believe that true”
If we judge scientific theories by their application in practice and pragmatic significance, the fact that the rest of the world is scurrying to create market economies implicitly votes with its feet and testifies to the strength of Smith's economic ideas.
“if the standard by which we're going to judge a scientific theory is its application in practice if we're going to judge a scientific theory by its utility by its pragmatic significance then it seems to me that the fact that the rest of the world that hasn't had a market economy prior to the post-world war ii age that the rest of the world since it's scurrying to create a market economy is implicitly voting with its feet and giving testimony to the strength of this set of ideas”
The proof of Smith's theoretical framework lies in practice: all non-market economies in the last 10-20 years have 'thrown in the towel,' with nearly all adopting market economies, demonstrating the practical success of Smith's system.
“the proof is in the pudding all the non-market economies in the last 10 years have thrown in the towel and given up the ghost or almost all of them we still the people's republic of china and a few command economies but for the most part in the last 10 or 15 or 20 years in the post-war age all alternatives to market economies have pretty much packed it in”
The homo economicus idea, despite considerable criticism, still offers a rough and ready way of making expectations and analyzing how people actually behave on free markets—its utility is proven in practice.
“this homo economicus idea however much criticism it has got still offers us a rough and ready expectation way of making expectations and making an analysis of the way people really do behave in an economically on a free market”
The Wealth of Nations is extremely well-constructed and carefully presented with logical structure, comparable to the philosophical rigor of Hobbes's Leviathan, though unlike Montesquieu's Spirit of the Laws.
“unlike something like say montesquieu's spirit of the laws it's extremely well constructed extremely well thought out it reminds one almost of thomas hobbes leviathan in the sense that it's very nicely structured very carefully concerned with presenting the argument in a logical way”
The Wealth of Nations is organized into two major parts: Book 1 covers three core themes (division of labor, capital accumulation, and economic history), while Book 2 covers two additional extrapolations and applications of these themes.
“there are two books two basic chunks of the wealth of nations and the first book covers three themes the second book covers two additional extrapolations from those themes”
The final section of Book 1 includes a general economic history of the West from ancient times through Smith's contemporary period, which represents an intellectual tour de force connecting theory to historical data.
“he finishes up that third book of the wealth of nations with a general economic history of the west since ancient times right up to the time that he was writing which is an amazing intellectual tour de force”
Capital accumulation—the process of how capital is created and where it originates—is a central issue in economic theory and is addressed as a major theme in Book 1 of Wealth of Nations.
“in the first book of the wealth of nations smith talks about the process of capital accumulation what capital is and where it comes from another central issue in economic theory”