Tuesday, March 29, 2016

Economics of Adam Smith

 Foundations of Economics  and Welfare theories
Adam Smith is said to be the founder  and father of Economics.His maincontribution to the world literature was in the sphre of  Ethics.  His first book was on Morality  ( ! ) , The  Theory of Moral Sentiments  , published in 1759. Though it was on Ethics, the thoughts expressed in the book  developed in his major contribution “ The Wealth of Nations
     He  went to France for  pleasure  in 1760 and met one Francois  Quesney  His meeting with this author influenced Smith greatly and this resulted into his propounding the theory of  Free Enterprise , Laissez- Faire , this meant that  all economic system and social order are governed by Natural  Law.
     He went on thinking on economic forces for 12 years and ultimately came one most influential book “ An Enquiry  into the Nature and Causes of  the Wealth of Nations “ .This book created great edifice of the Capitalism and Liberalism . Smith advocated the theory of Free Trade, competitive markets and division of labour.He dividing  the process of  manufacturing in several tasks  results into increase d efficiency and production  because each worker is specializing in one skill. The manufacturing process involves right from procurement of raw material to putting the RM  into machines . I had visited a Mill several years ago where my elder brother was working, and saw  that the bales of cotton was put in one big machine, the bales were converted into thick thick cotton sticks, these cotton sticks were put in another machine which converted them into thick threds, these thick threads were put in another machine which produces  thin threads , these threads were again put in another machine which produced even thinner thread, these threads were rolled on bobbins, these bobbins were again put on  a big machine where several layers of bobbins were placed which gave particular uniform thinness to the thread. These bobbins were put in a big bag, which were collected by some workers to be transported to the department of weaving , where cloth was produced  ! From cotton bales to cloth , a chain of stages and workers were employed and at every stage , the workers were specializing in their job ! The workers worked very fast and their efficiency greater and production also greater !
      This Specialisation  increases the ability of the worker for getting goods on exchange basis the goods he cannot procure, if he was working alone at home  , finishing several stages of manufacture himself. This was the example of a Free Market enterprise, where the Capitalist had invested his money, procured land and managers , he also engaged salesmen to get orders for his final production, he engaged workers to work on several machines he had purchased for manufacture of cloth, sarees and textiles. He was driven by self-interest, he was not a philanthropist that employed starving labourers ,He wanted to produce the things demanded by the consumers at the most competitive prices and make profits.’But in doing so, he was also  led by an invisible hand  to promote an end  which was no part of his intention ‘. It was consumers’ interests and goods for the society at large.This is a self regulating system  and it leads to  optimal allocation of society’s scares resources.
               Earlier a nation’s wealth was measured in terms of a country’s gold reserves,and viewed international trade as simply depleting them . Smith differed with this system and said, ‘  a country’s

wealth is  determined by its  1. Supply of Capital  2. The goods and  equipment used to  produce things 3. And is 3 increased by Free Trade.A country that produces  the goods it can grow  and manufacture  most efficiently, and imports the rest , can give its own consumers  a greater freedom of choice, thus increasing the national standard of living  Smith’s trade theories put an end to the mercantile  theory .
                 What is this mercantile theory  ?
In the 17th and 18th centuries, European nations aimed at increasing their wealth  and power by  ensuring a favourable balance of  trade. What is this FBT ? Suppose England exported goods worth    Strlg  200 to France, and imported goods worth 150  Sterlings, then its balance of trade with France can be said to be favorable to it by 50 sterlings. Now national Wealth was measured by the amount of  gold and silver in the Govt. treasury, and power was judged by the armed forces the treasury could support.  So, merchants and statesmen    promoted politics of  exporting more goods and importing lesser and lesser goods in the belief that importing goods would diminish national wealth. Exports were subsidized and imports taxed by the Govt. This resulted into greater control of the economy by the Govts,
       Mercantilism was  practiced by all greater European Imperial powers including  England, Portugal, Spain and France.  They became exploiter States as they had to establish colonies to procure raw material and labour at minimal cost  This way they established colonial rules in Africa, East Indies, America and India.   The raw material was brought to these mother countries, processed , finished goods produced and exported to the colonies at exorbitant rates. This again created another cycle of poverty and closure of domestic small home-factories .
               They competed among themselves and closed doors for the imports from European countries. See this example.  Britain passed Navigation  Laws of 1650s which restricted the entry of froreign ships to its ports and gave Britain a near monopoly over the trade with its colonies.   In 1660s, the French Finance Minister Jean-Baptiste  Colbert  , overhauled the French economy  in terms of mercantilist lines, establishing protective taxes ( suppose they wanted to ban import of Spanish flesh , they forced a tax of @00 Franks, which discouraged the Spanish exporters to export flesh to France as it became uneconomical ).      
                   This protectionism is resurfacing again in the world  in different forms.  

   

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