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The Founder of Modern Economics
“Smith”
Course Assignment
Course Title: Microeconomics
Course Code: ECO 1132
Section: 09(I)
Submitted To:
Sibat Masood
Lecturer
Depertment of Business Studies,
Southeast University .
Submitted By
Date of Submission: 26 December 2017.
Name ID Section
Rahul Roy 2017010000146 09(I)
Mohin uddin 2017010000302 09(I)
Anika Suhana 2015210000174 09(I)
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Acknowledgement
At first, we would like to express our deepest gratitude to ourrespected course instructor Sibat
Masood for giving the opportunity to work on such an important and essential project. This
project has been a landmark in our study so far. It is a result of dedicated effort of our course
instructor. This project would not have been possible without the kind support and help of many
individuals. We would like to extend our sincere thanks to all of them. We would also like to
thank some of our course members who helped our this report with their suggestions and inputs.
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Letter Of Transmittal
December 26th, 2017
Sibat Masood ,
Lecturer, School of Business Studies,
Southeast University.
Sub: Submission of Report The Founder of Modern Economics “Smith”.
.
Madam,
We, hereby submit our report on The Founder of Modern Economics “Smith”.
We believe the knowledge and information acquired during the assignment will be extremely
helpful in our future professional and academic life. We will be grateful if you accept the
assignment.
Obediently,
On behalf of the group.
Rahul Roy,
Sign: ……………………………………..
Date:………………………………………
ID: 2017010000146, batch : 45st
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The Industrial Revolution
Description: The Industrial Revolution was a period of major industrialization that took place
during the late 1700s and early 1800s. The Industrial Revolution began in Great Britain and
quickly spread throughout the world; the American Industrial Revolution, commonly referred to
as the second Industrial Revolution, started sometime between 1820 and 1870. This time period
saw the mechanization of agriculture and textile manufacturing and a revolution in power,
including steam ships and railroads that effected social, cultural and economic conditions.
BREAKING DOWN 'Industrial Revolution'
Although the Industrial Revolution occurred approximately 200 years ago, it is a period in time
that left a profound impact on how people lived and the way businesses operated. Arguably,
factory systems developed during the Industrial Revolution are responsible for the creation of
capitalism and the modern cities of today. Production efficiency improved during the Industrial
Revolution with inventions such as the steam engine, which dramatically reduced the time it took
to manufacture products. More efficient production subsequently reduced prices for products,
primarily due to lower labor costs. Cheaper steel prices encouraged the development of
infrastructure such as railroads and bridges during the American Industrial Revolution.
Increased Employment and Innovation
The Industrial Revolution created an increase in employment opportunities. As factories became
more prolific, managers and employees were required to operate them; this had a flow-on effect
of new and innovative products emerging. Increased innovation led to higher levels of
motivation and education that resulted in several ground-breaking inventions that are still used
today such as the telephone, X-ray, light bulb, calculator and anesthesia. The Industrial
Revolution improved people’s lives. Due to Industrial Revolution advancements, there were
improvements in nutrition, health care and education.
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Pitfalls of the Industrial Revolution
Several major pitfalls developed as the Industrial Revolution progressed. There was a reduction
in agriculture as people were abandoning their farms to work in city factories where they could
earn a higher income. This led to a shortage a food produced on farms. Increased pollution was a
pitfall of the Industrial Revolution. Before the sharp increase in factory numbers, there was a
limited amount of pollution generated in the world as production was predominantly manual.
The Industrial Revolution provided an incentive to increase profits, and as a result, working
conditions in factories deteriorated. Long hours, inadequate remuneration and minimal breaks
became the norm. This subsequently led to health issues for many factory workers. Labor
movements in the United States developed momentum from the late 19th century in response to
poor working conditions that developed during the Industrial Revolution.
The Division of Labour
Meaning of Division of Labour: Division of Labour means that the main process of production
is split up into many simple parts and each part is taken by different workers who are specialized
in the production of that specific part.
Description: Division of labour is the term first used in Adam Smith’s the Wealth of Nations to
describe the separation of manufacturing process into distinct and simple operations which are
then delegated to specific hands or machines to perform. Smith thought that the quality and
quantity of work carried out by a workforce organized along the division of labour principle was
so superior compared to work done by non-divided labour that he said:
“The greatest improvement in the productive powers of labour, and the greater part of the skill,
dexterity, and judgment with which it is anywhere directed, seem to have been the effects of
division of labour.
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Five Types of Division of Labour:
(a) Division into trades and professions (e.g., division of social work into four groups for four
castes as in the ancient Hindu Society or shoe making by shoe-makers, furniture making by
carpenters, etc.)
(b) Division of labour into complete processes (e.g., spinning of cotton by spinners, weaving of
threads by weavers)
(c) Division of labour into incomplete processes specialization of labour in a modern factory in
working a process which remains incomplete — turning of screws constantly by a labour, or
making a part of shoe laces, etc.)
(d) Territorial division of labour or localization of industry (e.g., concen-tration of jute mills in
West Bengal, Cotton textiles mills in Maharashtra and Gujarat, etc.)
(e) International division of labour. Nowadays, we also find that coun-tries specialize. Different
countries specialize in the production of different commodities in which they enjoy certain
advantages. And international trade is based on international division of labour and
specialization.
Some advantages of division of labour:
1. Increase in output
2. Increase in productivity
3. Increase in skill and dexterity
4. Time saving
5. More use of machinery
6. Cheaper goods and higher wages
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There are also some disadvantages of division of labour:
1. Monotony and boredom
2. Loss of craftsmanship
3. Danger of unemployment
4. Interdependence
5. Cooperation among labour
6. Continuity in production
7. Extent of the market
8. Sectionalism
9. Dislocation of production
10. Loss of motivation
11. Disadvantages to consumers
12. Physical limitations Exchange
13. Lack of transport facility
14. Consumer preference
15. Service
Invisible Hand
Definition: The unobservable market force that helps the demand and supply of goods in a free
market to reach equilibrium automatically is the invisible hand.
Description: The phrase invisible hand was introduced by Adam Smith in his book The Wealth
of Nations. He assumed that an economy can work well in a free market scenario where
everyone will work for his/her own interest.
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He explained that an economy will comparatively work and function well if the government will
leave people alone to buy and sell freely among themselves. He suggested that if people were
allowed to trade freely, self interested traders present in the market would compete with each
other, leading markets towards the positive output with the help of an invisible hand.
In a free market scenario where there are no regulations or restrictions imposed by the
government, if someone charges less, the customer will buy from him. Therefore, you have to
lower your price or offer something better than your competitor. Whenever enough people
demand something, it will be supplied by the market and everyone will be happy. The seller end
up getting the price and the buyer will get better goods at the desired price.
The principle of Laissez fair
Economics is a broad social science that studies factors that drive the supply and demand of
limited resources. Economic resources are commonly defined as land, labor and capital. Two
basic types of economies exist: command and free market. Command economies usually have a
central authority responsible for allocating and distributing economic resources. Free market
economies represent a laissez-faire system, in which individuals and businesses are free to
allocate economic resources according to their needs and wants.
History
Laissez-faire is a French term commonly defined as “let do,” although other definitions include
“let it be” or “leave it alone.” Adam Smith, author of “The Theory of Moral Sentiments” and
“The Wealth of Nations,” often is called the father of modern economics. Smith believed in a
strong laissez-faire economic system in which individuals could make decisions based on their
own self interests. Smith also was a proponent of economic theories regarding free trade and
capitalism.
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Facts
A laissez-faire economy seeks to limit the amount of government intervention in a nation’s
economy. Adam Smith wrote about a concept he called “the invisible hand.” Rather than
requiring governments to move or allocate resources according to economic needs, the invisible
hand was seen when individuals made their own economic decisions. The invisible hand moves
goods through a nation’s economy when suppliers take natural resources and produce consumer
goods. Once consumers purchase these goods, companies will continue producing them as long
as it remains profitable.
Features
Comparative advantage is another unique feature of laissez-faire economics. Countries often
have the ability to produce an item better or more efficiently than another. Additionally,countries
may have more natural resources to produce consumer goods. A comparative advantage in
laissez-faire economics allows countries to engage in a free market, where they can buy or sell
goods without fear of government intervention. The efficient use of economic resources ensures
that countries can make significant gains for their domestic and international economies.
Expert Insight
The Austrian school of economic theory relies heavily on the concept of laissez-faire economics.
Carl Menger, Ludwig Von Mises, Murray Rothbard and Friedrich Hayek are just a few of the
most noted Austrian school economists. These individuals have developed theories relating to
monetary policy, entrepreneurship, supply and demand, price controls, and individuals. Rather
than supporting the economic fallacy of engaging only in short-term economics, the Austrian
school of economic theory relates more to long-term economic principles free from government
intervention.
Misconceptions
A laissez-faire economic policy does not promote a free-for-all society, in which individuals can
abuse fellow citizens to gain an economic advantage. Laissez-faire economics relies heavily on
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the protection of private property and allowing individuals to operate without duress or pressure
from the government or other individuals. Court systems or other well-served judicial laws aid
laissez-faire economic policies, since individuals are free to keep their wealth gained in this
economic environment.
Relevance for Today
Over past few years, due to the economic crisis, the western capitalist system has come under a
protracted and brutal attack in public debates on a grand scale. Suffering caused by the recent
economic crisis has led scholars to believe that it is important for the overall health and survival
of capitalism to review the model of the capitalist economy and its miraculous powers
intended by its original author. Otherwise capitalism will be discredited or destroyed by internal
failures or external pressures. According to Lewis (1977), Adam Smith enjoys a unique position
in economic thought. Being a moral philosopher, he was a part of an intellectual structure, based
on a broader moral foundation of natural rights. However, the main thrust in economic thought
hasdivorced Smith’s analysis of the free market from its moral foundation. Lewis argued that
although Smith advocated the removal Filosofía de la Economía, 2014, Vol. 3, pp. 71-8577of
market restriction, increased productivity and growth, he had a broader and more subtle purpose
of the market system in mind.Smith saw the market as crucial mechanism to save civil society
through the way in which it forced men to recognize natural rights. That there has been little
concern
with these normative and political aspects of Smith’s basic economic concepts has a far reaching
effect on economic theory and policy. According to Lewis (1977
Sen (2010) has also argued that, though not so widely acknowledged, the relevance of Smith’s
ideas in the theory of moral sentiments is far reaching and has insights to offer to the world
today. Smith’s analysis is, in fact, deeply relevant today in understanding what has just happened
in the financial world. Smith did not take the market mechanism and profit motive
as sole performer of excellence in the market exchange. Along with the self-motivated behavior
of individuals at the moment of market exchange, Smith was also concerned with the other wider
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moral motivations for economic activities. In his theory of moral sentiments Smith discussed
more refined motivation other than just the pursuit of one’s own gain or even prudence. Smith
argues that,
Smith believed society can benefit through the pursuit of enlightened self-interest. Smith
proposed a very democratic notion of the purpose of the market. He believed that capitalism will
favor consumers rather than producers. He also conceived capitalism as a system that
will promote the wealth of society without jeopardizing the interest of society at large and it will
bring discipline, moderation and order throughout society. He believed that every individual in a
society has a strong desire for approval from his fellow beings and this desire is a leverage of
control that guides fundamentally self-interested individuals toward sympathy and benevolence
in a well-functioning society (Henry Jackson Initiative, 2012). However, virtues of capitalism,
advocated by the father of capitalism, could not be fully materialized in the modern capitalist
system and capitalism has been exposed to erious challenges in the modern world.
Therefore it is worthwhile to re-examine Smith’s model of the capitalist economy in order to
generate the highest long term returns from the capitalist system. According to Evensky (2011),
one of the more subtle points made by Smith that has been widely missed by many advocates of
the modern capitalist system while celebrating his vision of the free market,
is that self-interest can be a source of magical transformation, which drives each individual to
better his condition, only in a situation where trust prevails under conditions of perfect liberty. In
the monopolized markets entrepreneurs limit their productivity voluntarily in order to create
artificial stock shortages in the market. This situation demands for some corrective
mechanism for the efficient functioning of the market (Salvadori and Signorino, 2013). Thus, in
Smith’s analysis, the establishmentof a system of positive laws and the institutions to implement
these laws along with the individual ethics provide a potentially constructive solution for
establishing trust. This brings trust as an important driving force motivating the self-
interested actors in the hope of bettering their condition, to the center of debate (Evensky, 2011)
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Adam Smith and the Ethics of Capitalism
TMS (1759) and WN (1776) are thought by many scholarsto be incompatible, since the former
deals with the moral sentiments, whereas the latter presents a picture of an individual driven
purely by his self-interest. However, this tension can be easily resolved when we appreciate the
differing but not necessarily competing purposes of these classical works: one has to do with the
science of human conduct, the other with the science of wealth creation. The impulse of self-
interest is not in itself immoral, but rather, when it is translated into the highly commen dable
virtue of prudence, it brings good for society as well. Smith wanted to construct a
system in which he attempted to show that commerce is consistent with morality and both these
attributes of economizing and moralizing are natural to man (Barry, 1990).
Smith presented a system of naturalistic ethics in which each part is connected to the whole
through a complex chain of reasoning. Every individual has a perception of right and wrong that
sometimes can be tainted by excessive self-love. However, in a moral equilibration potentially
harmful self-love is checked against the less self-interested standards by an impartial spectator.
Thus, Smith had a foundation for ethical judgments which was independent of utility. His moral
foundation is grounded in the community, which provides a meaningful conception of morality
to the individual. This ethical foundation also bears relevance for individual conduct in the
commercial order. According to Barry (1990)
Apart from utilitarian considerations, capitalism seems to be characterised by the natural fact that
people are constantly engaged in the struggle to better themselves; and their actions in this regard
will meet with the approval of others (and the spectator) as long as they do not involve a breach
of a rule of justice. Of course, the approval of others may not always be a consequence of an
exercise of unadulterated self–interest in the conventional capitalistic sense; indeed the desire to
be well–thought of may well promote other–regarding virtues.
Smith was convinced on utilitarian grounds that government regulation cannot improve morality
or economics. In many parts of his analysis Smith regarded capitalism as a morally
sparsedoctrine having no place for the non–obligatory virtues of benevolence and charity.
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It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,
but from their regardto their own interest. We address ourselves not to their humanitybut to their
self–love.
He was always a realist about human nature. He was convinced that benevolence was only
possible in very small, face–to–face relationships. Non cooperative self-interest and other
regarding sympathy are the major pillars of Smith’s model of market economy in impersonal and
personal exchange respectively (Smith, 1998). Therefore, in market relationships, where we are
often dealing with strangers, only self–interest can motivate people to produce a general
beneficial outcome since the satisfaction of personal desire depends upon the capacity to satisfy
the desires of others. The most relevant moral virtues for commercial society are justice, honesty,
reliability and frugality, which are essential features of the market system.For Smith, a greater
penetration of society by business attitudes would on the whole lead to a rise in moral standards,
because without the expectation that agreements will be honored, property respected and
individual integrity respected, the capitalist system cannot flourish. Thus, rules of justice need to
be enforced in commercial societies.
