The Wealth of Nations

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The Wealth of Nations is an essay on capitalism published in 1776 by Adam Smith.

Contents

Summary

In chapter one of the Wealth of Nations, Smith talks about the division of labor, the division of jobs in a certain sector that help to create an end product more efficiently. An example given to readers talks about the pin industry. A worker pulls out the wire, another straightens it, and another cuts, etc. This separation of jobs increases the yield of manufactured pins. Yet in some sectors, the boundaries between the different jobs are sometimes unclear. In the case of agriculture, the job of plowing, tilling, and sowing seeds are sometimes done by the same person, making the separation of jobs difficult to comprehend. Smith theorizes that this may be the reason why the improvement in productive powers does not always stay in pace with the manufacturing sector's improvement.

Smith also point out that the increase of the quantity of work by workers are determined by the worker's individual dexterity, saving time in between tasks and the different manufacturing jobs and processes, and the application of machinery to complete jobs quicker and more efficently.

In the second chapter, Smith talks of a worker's self love and how he wakes up and does his work in order to be attributed for his hard work.

Comparison to Modern Society

According to Smith, division of labor is when a final product is manufactured from a variety of inputs. Each input is separable and is added to the ongoing product by a person with a specialized skill set until the final product is created.

When the Berlin Wall fell down in 1989, it caused the world to accept democracy as the primary political system and capitalism as the primary economic system. As a result, trade restrictions have been reduced (China's Open Door policy, NAFTA, and others) and currencies have been combined (the main example would be the Euro). Hence, the concept has become pervasive in modern society.

An example is supply chaining. According to Thomas Friedman's book The World is Flat, supply-chaining is defined as a method of collaborating horizontally-among suppliers, retailers, and customers - to create value. An example of this would be Wal-Mart. In economic terms, Wall-Mart is a decreasing cost firm because it spreads its cots out to deliver products at wholesale prices. This example may stretch Smith's concept of the division of labor a little bit because it introduces the idea of trading goods and services for fiat money, but I will use it nonetheless. Wal-mart uses technology to determine when to deliver certain inventories of products to their stores (Smith believed that people could specialize in using technology to increase efficiency.) Wal-Mart also uses methods of horizontal collaboration with shipping companies to be sure that it can distribute its products in a low-cost, highly efficient way. Another example of a more globalized supply chain would be Dell computers. Dell uses multiple suppliers in many different places throughout the world. In other words, they divide their labor so that each factory can specialize in an individual area and deliver their specialized products to an area where the parts can be formed into an aggregate. The following epitomizes how important supply-chaining is implanted into firms in a global context, and how the division of labor concept correlates to today:

The Intel microprocessor of a Dell computer comes from either the Phillipines, Costa Rica, Malaysia, or China. The memory came from either a Korean company (Samsung), a Taiwanese-owned factory (Nanya), or a German-owned factory (Infineon). My graphics card was shipped from either a Taiwanese-owned factory in China (MSI) or a Chinese-run factory in China (Foxconn). The cooling fan came from a Taiwanese-owned factory in Shanghai (Quanta), or a Taiwanese-owned factory in Taiwan (Compal or Wistron). The keyboard came from either a Japanese-owned company in Tianjin, China (Alps), or a Taiwanese-owned factory in Shenzen, China (Sunrex). The LCD display was made in either South Korea (Samsung), Japan (Toshiba), or Taiwan. The wireless card came from either an American-owned factory in China (Agere) or Malaysia (Arrow). The modem was made by either a Taiwanese-owned company in China (Asustek or Liteon), or a Chinese-run company in China (Foxconn). The battery came from an American-owned factory in Malaysia, or a Japanese-owned factory in Mexico or China (Sanyo). The hard disk drive was made by an American-owned factory in Singapore (Seagate), or a Japanese-owned company in Thailand (Hitachi or Fujitsu). The CD/DVD drive came from a South Korean-owned company with factories in Indonesia and the Philippines (Samsung). The notebook carrying bag was made by an Irish-owned company in China (Tenba). The power adapter was made by either a Thai-owned factory in Thailand (Delta). The power cord was made by a British-owned factory in China. The removable memory stick was made by either an Israeli-owned company in Israel (M-System) or an American-owned company with a factory in Malaysia (Smart Modular).[1]

Other examples include: assembly lines (airplanes, cars, refrigerators, other electronics).

Bartering and Trade

When Smith lived, he correlated his division of labor concept more about bartering physical property and/or practical things such as the manufacturing of wool coats, pins, and engines. Later in his book, Smith stated that countries tend to produce the goods and services in which they had absolute advantage, or the goods and services which each country could produce the cheapest. This ideology was expanded upon by David Ricardo in his economic theory of comparative advantage. Ricardo defined comparative advantage to be the ability for one country to specialize in the area where that country has the least disadvantage is most beneficial for trade.[2] The concept of comparative advantage later merged with John Stuart Mill's theory of imports/exports.[3]

In the modern economic context, Smith's insight on bartering and his explanation is incomplete. Trade has developed into an integrated system filled with both physical property and nonphysical property. The degree to which one appraises or assigns worth has become a standard measurement of trade. A branch of economics has become devoted to such a nonphysical type of property called "utility," or satisfaction.In other words, to what do we assign worth. We trade money for pleasure, but how do we define utility? Is there a way to mathematically quantify or provide a means to measure utility? This concept is still a subject of intense research.

Another type of nonphysical property that Smith could not explain with his theory is intellectual property. Modern society has intellectual property laws -copyrights, trademarks, and/or patents- to protect duplication of a person's invention or idea.

Criticisms

Although there are advantages to the idea (Smith lists 2 main benefits- namely increasing worker dexterity/specialization, lessening the amount of time taken to manufacture a product), there are some slight drawbacks to the idea. Smith believed in little or no economic regulation, a concept later introduced in his book known as "laissez faire." He believed that the division of labor concept, applied to the global economy, would work by a so-called "invisible hand" and create benefits for everyone. In Chapter 2 of the first part of the Wealth of Nations, he said "universal opulence extends itself to the lower ranks of the people." This logic consists of a view whereby everyone benefits from an unrestricted economy; however, there actually are some limitations to that view.

First, in a capitalist system, labor tends to be hierarchical. Business executives and CEOs are at the top of the hierarchy and day laborers tend to be at the bottom of the hierarchy. Classes are stratified by income. With this idea, to what degree does capitalism exploit labor? It seems as if an elite group of people control the demand for worker specialization, and workers adapt to that demand accordingly (they go to where the jobs are). Hence, a better way to expand Smith's theory would be to allow for worker specialization to correlate to the demand for goods or services. There seems to be less economic equality than he suggests. Those at the top reap the benefits whereas those at the bottom suffer poor working conditions and economic hardship. "Universal opulence" does not extend itself to "the lower ranks of the people," but rather enriches peoples' lives through different gradients in the form of a hierarchy.

Secondly, Smith emphasizes that the positive that comes out of Division of Labor is the quantity of products that are produced. He states that, “The division of labor […] occasions, in every art, a proportionable increase in the productive powers of labor.” Today, quantity is not the only aspect that is seen as important. Instead, competition is so great in modern times that the quality of the product is more important than ever. When labor is divided, lots of trust is put into other players (i.e. suppliers) to produce a product that meets strict standards and specifications. In many cases, for example, instead of companies using suppliers to help develop certain parts, companies decide to produce their parts in-house to better regulate the quality. This is why BMW utilizes its own engines and transmissions and why Rolls Royce has its own bull farm to obtain leather.

Thirdly, the boom-bust cycle is also used by many to criticize the capitalistic system. This is evident both in the past few years as the responses of the political powers that be have evolved in response to the latest recession. However, criticisms of capitalism based, at least in part, on the boom-bust cycle can be seen at least as far back as the early Communist movement in Europe [4]. During the boom parts of the cycle, capitalism is generally defended and upheld since the majority of people see an increase in their real wealth. However, during recessions and depressions, ideas supporting the common social welfare and the greater good are generally held in more esteem than those that support the capitalist system currently in vogue across most of the world.

Appearances in Class Readings and Tropes

The Stone Canal

Many of the characters on New Mars, especially Tamara and her friends in Circle Square, operate in a market based, social darwinist system. One major allusion to Smith's work in The Stone Canal is the "Invisible Hand Legal System" [5] in Circle Square. This is an obvious allusion to Smith's "Invisible Hand" that runs market systems.

Furthermore, the society on New Mars is seen as Anarcho-Capitalist with the capitalist portion strongly taking after the ideals of Smith's capitalism

Accelerando

Accelerando mentions that both Capitalism and Communism were destroyed by the advent of "Economics 2.0" a "bunch of superior deterministic resource allocation algorithms"(page 266) [6]

References

  1. Friedman, T. L. (2005). The world is flat: A brief history of the twenty-first century. New York: Farrar, Straus and Giroux. Piece taken from Google Books
  2. Library of Economics and Liberty: Comparative Advantage
  3. Economic Theories: J. S. Mill Internationl Trade Theory
  4. Marx, Karl. (1848). Manifesto of the Communist Party. London.
  5. Macleod, Ken. (1996). The Stone Canal. New York: Tom Doherty Associates, LLC
  6. Stross, Charles. (2005) Accelerando. Ace Books
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