Capitalism Notes - Mr. Manos

Adam Smith (1723 – 1790)
The Wealth of Nations 1776
How does a market society prevent self-interested, profit hungry individuals
from holding up their fellow citizens for ransom? How can a socially
workable arrangement arise from such a dangerously unsocial motivation as
self-betterment?
Competition – Central mechanism of a market system
Smith:
1. Natural Liberty founded on economic freedom would ultimately
benefit the general public
2. Each actor, buyer or seller, is forced to meet the prices offered by
competitors
3. The market will arrange for production of goods that society wants.
4. Market forces will come into play – more pots than pans
A. pot prices rice, pot profits rise
B. pan prices fall, pan profits fall
C. redistribution of resources
D. output of pots increases, pans decreases
E. this is what the public wants
F. Invisible Hand
What areas of economic life does the Invisible Hand not exert its influence at
all?
1. Traditions: non-market remuneration of tipping
2. Command:
A. biz: hiring & firing
B. gov’t: taxation
C. mkt: cannot provide certain public goods
a. national defense
b. public law & order
3. Ethics & Esthetics: profitable but harmful goods
Market is Self Regulating
• Force of competition drives prices, wages & profits
• Economic Freedom is the strictest economic regulator
• If gov’t or King runs economy, one can appeal to them for dispensation
• Can’t appeal to the market
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Laissez-faire
Opposed to Gov’t Intervention IF it interferes with competition & selfinterest
Smith: Growth of the market system causes nation’s wealth to increase
How could the system grow?
How do you enlarge sales before advertising as we know it?
Smith:
1. Improve productivity: increase the output of the work force
2. Improve the division of labor
How do we enhance the division of labor?
1. Organization is key
2. Machinery
3. The market system becomes an immense force for the accumulation
of capital, mainly in the form of machinery and equipment
4. But additional workers cause wages to rise
5. Wouldn’t profits be squeezed
6. Cost of labor would dry up funds for machinery
7. Increase in demand for labor = increase in supply
8. Wages only rise moderately
Attributes of the Economic System:
1. Society of competitive, profit seeking individuals can assure its
orderly material provisioning through the self-regulating market
mechanism
2. Such a society tends to accumulate capital and in doing so, enhances
its productivity and wealth
Market System assures both short term viability of self-regulating (pots &
pans) as well as long term viability of self-regulating its steady growth.
Market System not without problems, as we will see.
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