Adam Smith

Interpretative and Explanatory Account

From the extract, according to Adam Smith, the well-being of a society is determined by how well the society’s production capacity is managed. Smith believed that humans, by design, promote public interests through their daily economic choices, even though they may not realize it. The production capacity of a nation should be managed such that the contribution of the individual citizen can be measured. This is the per capita national product (Butler, 2011: 18). Therefore, the per capita national product level is influenced by the percentage of the large population engaged in production and efficiency realized in the production process. Individuals must participate in the production of ‘necessaries and conveniences,’ either directly or indirectly, by producing the products or services or offering labour. When an economy is producing optimally, the wage rate gets better, and wealth trickles down to society’s members.

The production system of a nation should be organized and governed so that individual citizens can exploit their full potential in production. The government should also provide a production environment that accommodates innovation and efficient production approaches such as innovation and division of labour. With the right tools and advanced technology, producers can exercise labour division and realize full potential, sometimes exceeding the individual expectations (Grieve, 1983:109). Division of labour enhances the productivity of labour and, consequently, per capita income. Division of labour helps split labour into specialized tasks, encouraging specialist employment (Smith, 1977).

According to Smith, labour division significantly contributes to enhancing the nation’s productivity and wealth creation in three different aspects. The division of labour promotes the application of the skills as every worker specialized in a single production line. Second, time is saved, which otherwise could have been lost, moving from one responsibility to another. Then there is the application of machines that balances with specialized labour. From the viewpoint, one can also argue that labour division reduces the time needed for capital formation, making uninterrupted roundabout production practical. A roundabout production is defined as the production with capital-using technology (Boucoyannis, 2013:1052). In the Wealth of Nations, Smith advances the argument that increased labour division is the most prominent explanation for developed nations’ high income-levels. In specific, the economic growth to be constructed as the growth per income to be re-conceptualized in two fundamental facets. The first factor is labour productivity, and the second one, the fraction of productive to unproductive labour (Boucoyannis, 2013: 1058). The labour productivity, the most significant factor of the two relied primarily on the division of labour to achieve improved the workforce’s dexterity, saves the workers’ time, and placed the workers in the position of inventing machines to simplify their job.

According to Butler (2011), labour is the real measure of a product’s exchangeable value. Wealth is the amount of labour one can command or purchase. The real wealth exchanged during the trade is labour. The main reason why wealth is measured in terms of money is that money is more comfortable to measure. To get the best out of labour, division of labour is applied. Division of labour brings specialization while specialization brings economic efficiency. Specialization enhances skills to handle specific tasks, hence making an individual able to handle tasks effectively and efficiently (Kozlowski & Ilgen, 2006). Additionally, specialization enhances the application of machinery and can significantly reduce production time. The application of dedicated specialized machines leads to mass production and, in turn, economies of scale (Reich, 2010: 35).

The supply of labour is influenced by the size of the population and the specialized skills presented in the population. An economy that aspires to grow sustainably must guarantee sustainable and specialized labour.  If there is adequate labour in the economy, specialization should be encouraged to enhance efficiency. In addition to speed and cost reduction, labour division is associated with enhanced loyalty to the organization as workers are encouraged to concentrate on their work.

From the extract, specialization enhances exchange, individuals producing the best quality of what they are good at and exchanging for what the need and do not have, yet produces elsewhere by someone best at it. Instead of producing everything he/she needs, it is better to produce what you are specialized at and exchange it for other products or money. Exchange of a product for money is preferred since money is regarded as wealth. While the best way to create wealth from money is preventing money from leaking out of the economy, foreign exchange is of mutual benefit and should be encouraged ( Butler, 2011:78). Foreign exchange helps in the consumption of surplus produced in an economy, encouraging local producers to produce efficiently and on a large scale.

Sustainable exchange through trade builds a commercial society with sustained production. Sustainable trade, in effect, leads to a sustained exchange of goods with and between economies. Sustainable trade enhances the flow of money in the economy through wages or profits, encouraging capital accumulation. Accumulation of capital enhances extensive and specialized production since organizations can afford more specialized machinery. More specialized production and mass production lead to economies of scale, bringing more financial benefits into the economy.

For a nation to effectively build sustainable wealth, the government has to play its role effectively. “The government should limit itself to the administration of justice, enforcement of private property rights, defense against aggression, and supply of goods and services that the private sector may not provide.” (Reich, 2010: 14). The safer and orderly the economy is, the more productive it is. The government can influence the nation’s economic activities by injecting the right amount of government spending into the economy. Government expenditure influences the social welfare of the nation.  The government should strive to make a fair production environment where all individuals are subjected to similar fair exchange opportunities. This can be done by implementing growth-enhancing policies, proper taxation, and incentives (Grieve, 1983).

For an economy to suitably build wealth, it must have adequate production capacity. The production capacity is determined by how much a nation has in terms of accumulation capital available for investment and re-investment and division of labour to achieve specialization. Production should be expanded to all sectors of the economy and spread to the lowest society’s ranks. When production is spread to the lowest levels of society, primary producers are able to concentrate more efficient production using machinery. Leading producers can focus on exchanging the products, mainly surplus to external markets as exports, bringing foreign exchange ( Butler, 2011). When leading producers focus on large scale production, mainly for commercial purposes, the nation can build more wealth through foreign exchange (Grieve, 1983). The more the economy accumulates wealth, the more it can sustain investment, and the wealthier it becomes.

References

Boucoyannis, D., 2013. The equalizing hand: Why Adam Smith thought the market should produce wealth without steep inequality. Perspectives on Politics, pp.1051-1070.

Butler, E. (2011). The Condensed Wealth of Nations and the Incredibly Condensed Theory of Moral Sentiments. UK: ASI (Research) Ltd.

Grieve, R. H. (1983). Adam Smith’s ‘Wealth of Nations’: the Legacy of a Great Scottish Economist. Oxford: Oxford Press.

Kozlowski, S., & Ilgen, D. (2006). Enhancing the Effectiveness of Work Groups and Teams. Psychological Science In The Public Interest, 7(3), 77-124. https://doi.org/10.1111/j.1529-1006.2006.00030.x

Reich, R. (2010). Adam Smith and the Role of Government. Economic Forecast.

Smith, A. (1977). An Inquiry into the Nature and Causes of the Wealth of Nations, Volume II. Methuen: Edwin Cannan