Adam Smith had many views that helped in making the world what it is today. I cant imagine what the world would be like if there werent thinkers like Adam Smith. Going to college would be pointless and trying to be something more than a cashier in a little store down the street would be pointless. What would we be working so hard for if we made the same amount of money as when we were sixteen working in that little store? He had many other views that were just as important but this was a big interest to me as probably to many others.
Smith believed that a nation’s wealth was not derived by how much they had in resources, or in exchangeable products, but rather by the labor that people put into making that product. “The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences which it annually consumes.” Smith stated that a nation could increase the efficiency of the potential of its people by increasing skill and proportion. Smith noted that the best way to increase the efficiency of labor is the division of labor. The division of labor is the central factor in Smiths theory of economic growth. Division of labor is the splitting of a large task into smaller tasks and then having one person is responsible for only one or two of the smaller tasks, which leads to an increase in productivity and stimulates the entire growth cycle, which increases the efficiency of the whole task.
The division of labor and the accumulation of capital are what Adam Smith believed to be the driving forces of economic growth in any nation. He found that when the division of labor had broken down the production into a series of simple operations it was more natural for tools and machinery to be invented that replace hand labor and made everything go faster. Then it increased worker productivity.
This increased productivity and combined with the growing production so it increased output. This made more resources available to society to enjoy higher standards of living standard of living and products were not as scarce as they once were. Then Smith noticed that there was a huge rise in the wealth of the nation.Adam Smith stated that what a product is worth depends on the amount of labor that must be used to make that product. He believed that the price of an object could be split into three parts: rent, wages and profit. The person producing the quantity must pay rent on the land he is using to produce the product.
Then to make the product someone must either do the labor or hire people to do the labor for him. If he hirers someone then he must pay them wages. Finally, the producer adds on a profit that will also be used to pay for the upkeep of equipment.Smith also believed that wages were very important and beneficial. The wage a laborer receives is the replacement for the profit he would gain by selling the product he produces.
The worker has the responsibility of procuring materials and equipment, and of having to try to market the product. Instead, he gains cash for his labor. Wages are affected by many factors. First, there needs to be a fair wage for the employees. The second is the difficulty and expense of learning the employment.
The third is the constancy of employment in them. The fourth is the amount of trust, which must be placed in the employees. Finally, the fifth is the probability of success in them.
Smith decided that wages must be at least enough for two people to live on, so that the workers can raise a family to keep the workforce going. The higher the wage is, the more likely a working family is to have more children, because children become a benefit. He believed that wages are people’s incentive to work harder. Everyone wants and needs cause them to work harder so that he can get paid better. This is to the benefit of both employer and employee, because the employer gains more products to sell and the employee gains a larger wage, giving him more money to put in his pocket or spend on his wants and needs.
Smith believed that the market system was more than capable of managing itself, and that no government intervention was ever required. He believed that the competition between different producers of a similar product would keep prices reasonable, and that the quality of a product would allow it to be sold at a slightly higher price than a similar product of lower quality. He stated that government interference in trade through taxing generally caused more problems for the consumers than they solved. This was because people have to then spend more money and maybe they are not making that extra money to spend on what they once were going to buy.
Smiths theory of economic growth can be formulated in a math equation. Where G equals the growth rate, K equals the ratio of productive to unproductive labor, P equals the productivity rate and W equals the real wage (G= KP W). From this equation it becomes clear that for growth to occur, both the product of the ratio of productive to unproductive as well as the productivity rate must increase more than the real wage. It would seem obvious that an easy way to do this would be to avoid any increase in the real wage. The math equation sometimes doesnt make much sense to figure out how to solve a problem but it does make sense because everything needs to be changing with the growth rate and productivity must go up to accomplish any goals to avoid a big increase in prices.Actually, I later found out this was not Adam Smiths view. He felt if an increase in capital enlarges the wages fund from which workers are paid and if the increase is greater than the increase in the number of laborers, than it is only natural for the real wage to increase.
In addition Smith was a believer in what modern economists call the efficiency wage theories. Which state that higher wages are it will rise the energy level of the workers and reduce employee being lazy on the job. In the equation above it is the product of K and P that is responsible for economic growth. It would appear then that K, the ratio of productive to unproductive labor, and P, the productivity rate are equally important factors in this equation. However, Adam Smith says that this is not so.
He states that the ratio of productive to unproductive labor does not change much over time. The productivity rate is therefore almost entirely accountable for changes in a nations economic well being. Adam Smith said that commerce in Great Britain, went from a system where the producers changed to adapt to what the consumers needed; to a system where the producers would try their hardest to corner the market, and leave the consumers with a mediocre product. In response to tightened importation laws, he wrote that a strong foreign trade system would be the only way to provide good products to the English public. Adam Smith was accurately seeing the future of the worlds commerce. He saw that as producers tried to make more and more money, they were forced to cut corners.
This, as a result, lead to products that were not as good as they should be. He knew that the way to improve product quality in Great Britain was to import goods from other counties.Adam Smith had many very important views. He had set ways that he thought things should have been and he spent his life explaining these views and trying to get others to see things as he did. Many people supported and accepted his views, while others completely disagreed with him. Whether or not you agree or disagree with his views, you have to admit that Adam Smith is very important even in the world today. I know I believe his way of thinking even though the mathematical equations started getting a little blurry to me.
Once put into words though Adam Smiths views are correct and I am glad they were said. Do you think everyone would be making the same amount of money regardless of there job if he did not get his thoughts out and in the open? I sure hope not, but who knows what would of happen if he didnt share his thoughts with the world.