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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 13
Smith gives examples of the benefits of division of labour and free trade – the pin-maker and the manufacturer of coats
A pin-maker, working alone, could probably make about one pin per day; and certainly could not make more than 20
o
But
the division of labour radically changes this
: “One man draws out the wire, another straights it, a third cuts
it, a fourth points it….” And so on.
o
All in all, pin-making consists of about 18 disnct operaons – by having one person aend to each of these 18
operaons, producvity is increased enormously. According to Smith, a pin factory with 10 men can make
about 4,800 pins per person per day.
o
But the division of labour does not on its own produce wealth;
free trade is also necessary
: 4,800 pins are not
much use unless you can trade them for beef or beer or bread or whatever else you want.
Therefore, you need both division of labour and free trade
Moreover, he says that free trade should not be limited to towns or districts or even countries.
Rather, free trade should be worldwide. For this reason, Smith was opposed to all barriers to trade,
such as, in parcular,
customs dues
Manufacturer of coats
o
There are various people in various parts of the world who contributes to the making of a coat – shepherds,
wool sorters, wool combers, dyers, spinners, weavers, merchants, sailors etc.
This example also illustrates the working of the invisible hand and the invisibility of it because none of
the people involved in making the coat knew more than one or two of the others, and most of them
had no idea the wool was going to end up in an overcoat. For example, all the shepherd knew was
that someone was prepared to pay him for his wool
o
So
the market is much beer at transming informaon of these kinds
than any central planner could possibly
be
Markets effecvely transmit informaon without anyone being in possession of all of the informaon
being transmied
Smith was keenly aware of the problems industrializaon can cause:
o
“The man whose whole life is spent in performing a few simple operaons … generally becomes as stupid and
ignorant as it is possible for a human creature to become.”
o
At the me Smith was wring (the late 18
th
century), the Industrial Revoluon was just geng going, which is
why he used the making of pins and overcoats as examples. Large scale industrializaon was a thing of the
future, as were the various social and economic problems that went with it
CONCLUSION ON SMITH’S BASIC ECONOMIC THEORY
Smith’s basic economics tends to lead to the view that markets are good –
markets produce opmal allocaon of
economic resources and therefore maximize collecve human wellbeing
o
Therefore,
as much as possible should be leſt to the market; the role of government should be as small as
possible; and therefore
taxes should be as light as possible
However, Smith acknowledges that there is some role for the government because of “market failures”
o
There are some commodies that markets are unable to produce – the government should produce these
o
Examples:
Streetlights
No one has worked out how streetlighng can be supplied by the market
It requires some government to construct the streetlighng – it needs revenue to pay for
this, which it gets from tax
Naonal defence
Even if everyone desires for there to be naonal defence, no one has worked out how
naonal defence can be produced by the operaon of the market
Therefore, we need the government to organise the army and pay the soldiers – to do that,
we need a tax system
Healthcare, educaon etc.
Some people do not regard these as market failures because it is not obvious that the market
will fail to provide for these
For example, it is possible for the government to cease to pay for educaon and let students
pay for the whole of the cost – but there are consequences like huge amounts of student
debt, less people being financially able to be students
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