Introduce Adam Smith and his concept of what determines the wealth of nations ? Introduce the Theory of Growth: o 1) Increases in labour and capital productivity are driven by the greater division of labour (specialization)

Introduce Adam Smith and his concept of what determines the wealth of nations
? Introduce the Theory of Growth:
o 1) Increases in labour and capital productivity are driven by the greater division of labour (specialization)

o 2) Greater division of labour is brought about by capital accumulation and larger markets
Division of Labour and Economic Growth
? Increases in labour and capital productivity are driven by the division of labour (specialization)
? Explain the Pin Factory example
? Increases productivity through:
o 1) Reduction in time switching from 1 job to another
o 2) Workers get better at what they do when they do the same function all day (Dexterity and education)
o 3) Breaking jobs up into functions allows people to invent machines to replicate these functions
Trade Makes the Division of Labour Possible
? Power of exchange makes the division of labour possible
? ??it is the power of exchanging that gives occasion to the division of labour? (Smith, Wealth of Nations I.3.1)
o Shoe maker will not specialize in making shoes unless he can trade the product of his labour (shoes) for all the other goods (shelter, clothes, food) that he needs
? In order to increase division of labour further, you need to determine ways to extend exchange (trade) even further
The Impact of Larger Markets on Trade and the Division of Labour
? Larger Markets: ?The division of labour is limited by the extent of the market?
o Larger markets increase the incentive to specialize
o ?When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment? (Smith, Wealth of Nations I.3.1)
? Ex: In a small town you don?t get much specialization while in larger markets there is lots of specialization
? Small town there won?t be an ear, nose, and throat specialist because there aren?t enough other people who need those services to justify someone specializing in that field
? Don?t get specialization and don?t get improvement in that field
o Larger markets increase the incentive to invest in machines (New technologies)
? New technology increases productivity

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o Discuss the determinants of larger markets:
? Trust and good government
? People won?t trade with one another if they don?t trust with another
o Big cultural factor which can underlie trade
o Talks more about this in ?The Theory of Moral Sentiments?
? Refer to Singh note
? Best government is that which performs only those minimum functions which individuals cannot
? Free trade
? Free trade and the unrestricted movement of capital allows capital to move into areas of the world where it can earn a higher rate of return
? ?The most advantageous method in which a landed nation can raise up artificers, manufacturers, and merchants of its own is to grant the most prefect freedom of trade to the artificers, manufacturers, and merchants of all other nations.? (Smith, Wealth of Nations IV.9.51)
o This is obviously because the more freedom, the more the division of labour can take place
o International specialization allows a greater division of labour
o Greater incentives to invest in R&D
o More learning from doing
o Greater improvement from productivity, lowering costs, greater wealth, etc
? Geography, Trade, and Civilization
? ??as by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve?? (Smith, Wealth of Nations, 1.3.3)
o Says civilization begins on sea costs and navigable rivers
o Much cheaper to carry goods along water than along land
? Therefore, along sea coasts, we have larger markets which means more division of labour, which means greater incentives to invest in R&D, more learning from doing, greater improvements from productivity, lowering costs, greater wealth, etc
? Get more trade
? This kind of explains why largest civilizations are near coasts
? Growth much slower to occur near countries surrounded by land
? Natural Liberty
? System of natural liberty: Leave people alone to make their own decisions
? Liberty allows for self-interests

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