What is
Economics?
Part 2
Adam Smith (1723-1790)


His book called “The Wealth of Nations”
dealt with the basic problem of how
social order and human progress can be
possible in a society where individuals
follow their own self-interests.
Smith argued that this individualism led to
order and progress.
or
 Smith,
Adam (1723-1790), is generally
regarded as the founder of modern
economics. His major book was The
Wealth of Nations (full title: An Inquiry into
the Nature and Causes of the Wealth of
Nations). Published in 1776, it was the first
complete work on political economy. The
book discusses the relationship between
freedom and order, analyzes economic
processes, and attacks the British
mercantile system’s limits on free trade
 The
book dealt with the basic problem of
how social order and human progress
can be possible in a society where
individuals follow their own self-interests.
Smith argued that this individualism led to
order and progress. To make money,
people produce things that other people
are willing to buy
 Buyers
spend money for those things that
they need or want most. When buyers
and sellers meet in the market, if
competition is allowed to work, a pattern
develops that results in social harmony.
Smith said that all this would happen
without any conscious control or
direction, “as if by an invisible hand

To make money, people produce things
that other people are willing to buy.
Buyers spend money for those things that
they need or want most. When buyers
and sellers meet in the market, if
competition is allowed to work, a pattern
develops that results in social harmony.

Smith said that all this would happen
without any conscious control or
direction, “as if by an invisible hand.”
 Smith
believed that the value of goods
was determined primarily by the cost of
production—that is, the cost of labor,
land, and capital. He identified
specialization, or division of labor, as the
basic factor in creating wealth.
Specialization means that different
workers concentrate on the specific jobs
they are best fitted to perform
 Smith
said that wages depended on the
productivity and basic needs of workers,
and rent on the productivity of land.
Profits, he said, were the difference
between selling prices and the cost of
labor and rent. Smith said profits would be
used to expand production, thus creating
more jobs.
 Smith
believed that free trade and a selfregulating economy would result in social
progress. He criticized tariffs and other
limits on individual freedom in trade. He
preached that government need only
preserve law and order, enforce justice,
defend the nation, and provide for a few
basic services that could not be met
through the market.
 His
argument for a “hands off”
government policy toward business,
along with his analysis of economic
forces, formed the basic ideas of
economic liberalism.



Smith believed that free trade and a selfregulating economy would result in social
progress. He criticized tariffs and other limits
on individual freedom in trade.
He preached that government need only
preserve law and order, enforce justice,
defend the nation, and provide for a few
basic services that could not be met through
the market.
His argument for a “hands off” government
policy toward business, along with his
analysis of economic forces, formed the
basic ideas of economic liberalism.
A
tax imposed on imported goods and
services. Tariffs are used to restrict trade,
as they increase the price of imported
goods and services, making them more
expensive to consumers.
 Economic liberalism is the ideological
belief in organizing the economy on
individualist lines, meaning that the
greatest possible number
of economic decisions are made by
individuals and not by collective
institutions or organizations.
Thomas Malthus
 An
(1766-1834)
English clergyman and economist that
first introduced the idea of diminishing
returns.
 This theories were loosely based on
Darwin’s theory of Natural Selection.
 Malthus
wrote “Essay on the Principle of
Population”. His main idea in this book is
that population tends to increase more
rapidly than food supplies.
 He
believed that wars and disease would
have to kill off the extra population, unless
people limited the number of their
children.
 He
also suggested that we didn’t help the
needy; an idea that seems to contradict
his occupation as clergyman.
Malthus, Thomas Robert (1766-1834), was an English
economist. He is best known for his Essay on the Principle
of Population (1798). His main idea in this book is that
population tends to increase more rapidly than food
supplies. He believed that wars and disease would have
to kill off the extra population, unless people limited the
number of their children
 Malthus's
Essay suggested to Charles
Darwin the relationship between progress
and natural selection. This was a basic
idea in Darwin's theory of evolution.
Malthus's prediction failed to come true in
the 1800's. Improved methods of
agriculture provided enough food for
most people. But rapid population growth
in the 1900's, especially in
underdeveloped countries, led to
renewed interest in Malthus's theories
 Many
conservationists warn that food
production cannot keep pace with
population indefinitely. But others
disagree, claiming that food production
technology continues to improve.
 Malthus
was born on Feb. 17, 1766, in
Surrey. He decided to be a clergyman
and graduated from Cambridge
University. About 1796, he took a parish in
Surrey. He became a professor of history
and political economy in the college of
the East India Company in 1805 and held
this post until his death on Dec. 23, 1834
Economic Systems
 Making
decisions about how to make
economic choices has two basic
approaches: the Free-Market approach
and the Command Approach.
 Free-Market: decisions based on private
ownership of property and resources.
 Command: situation where resources,
including land, labour, and capital, are
jointly or publically owned.
Class Assignment – 50 marks
 Read
Pages 21 in the text book. Submit to me
a one page position paper(typed) on what
you think would be the best approach to
resource ownership…free-market approach
vs command approach. Be sure to consider
opportunity cost theory as well. Be sure to
give reasons and examples to support your
position. Due tomorrow.
Economic
Systems
 In
Canada, we have a combination
(Mixed Economy) of a Free Market and a
Command Approach as many of our
resources are privately owned while some
resources(parks, CBC, govt offices…) are
publically owned.
 Countries such as China, North Korea, and
Cuba are examples of Command
Economies.
 Free
market refers to an economy where
the government imposes few or no
restrictions and regulations on buyers and
sellers. In a free market, participants
determine what products are produced,
how, when and where they are made, to
whom they are offered, and at what
price—all based on supply and demand.
A purely free market does not exist—
because all countries choose to impose
some level of central decisions and
regulations
A
command economy is one where the
government controls the economy,
acting as the central planner, dictating
production quotas and distribution levels,
and setting prices. Command economies
traditionally have been inferior to free
market economies in their ability to
allocate goods and services efficiently.
 This
inefficiency creates shortages and
wasteful surpluses. The problem is caused
by the inability of the government central
planners to accurately predict consumer
demand preferences. This inefficiency has
caused a number of governments with
command economies to shift to a more
market-based economy. (ie China)


 Although
no county on the planet adopts
either approach exclusively, they will usually
have a mix of both approaches.
 Countries that lean toward the Free-Market
approach are called capitalist.
 Countries that favor the Command
approach are know as socialist or
communist countries.
Traditional Economies
 Traditional
economies focus on being self
sufficient with extra goods or services
often traded for outside resources.
 This
type of economy is found in static
societies that focus on survival and not
economic prosperity.
 Goods
are traded without a monetary
exchange in what is know as a barter
system.
Traditional Economies
 The
Maasai of the African Savannah
 The Lapps of the Scandinavian Tundra
 The Senoi of Malayasia
 Other
groups are the Mongols of the Gobi
Desert, the Bedouin of the Sahara, the
Bushmen of the Kalahari, the Waura and
Yanomami of the Amazon, the Mbuti of
the African rain forest, the Negrito of
Malaysia and other indigenous groups
Command Economy
 In
a pure command economy all
production decisions are made by a
central authority of political leaders.
 These leaders decide on what, how and
for whom to produce goods based on the
interests of the state.
 Individuals are obligated to serve the
state.
 In turn the state is responsible for providing
for the needs of the citizen/workers.
 Individuals
in Command Economies are
rewarded or punished based on how they
contribute. Modest wages are set and
jobs are given out to meet the needs of
the state.
 Consumer goods are hard to find as most
production centers around providing
capital goods(airplanes, machinery,
computers, buildings…).
The Free Market Economy
 In
a pure market economy activities are
created and controlled by many
individuals that make decisions based out
of self-interests.
 Goods and services are controlled by
what consumers demand and prices are
determined by what gives the highest
profit margin.
 Free
Market economies look to reduce
costs and maximize profit which can
encourage innovations but can also
result in failed businesses.
 Free
markets favor the wealthy as they
can afford better products and services
and are therefore more influential on
economic decision making.
Consider this:
 Suppose,
for instance, that we were
time travelers called on to act as
consultants to a nation emerging from
a history of tradition-bound
organization.

We could imagine the leaders of such a nation
saying, “We have always known a highly traditionbound way of life. Our men hunt and our women
gather fruits. We are prepared, if necessary, to force
many of our men to work on community projects for
our collective development. Tell us, wise time
traveler, is there any other way we can organize our
society so that it will function successfully?”
Scenario
 If
you were to sit and watch two young
children trying to decide how to trade
hockey cards.
 How do you think it would play out? What
would the conversation sound like?
Why We Study Economics
 Many
(although not all) of the problems we
encounter in the world today have to do with
the workings or mis-workings of the market
system, and precisely because our modernday problems often arise from the operations
of the market, we study economics itself to
better grasp how to deal with our ever
changing societies.