I remember when I first read Smith's account of the size of markets and how it relates to the cost of transportation. Zzzzzzzz
Yet, every time I revisit that section, it becomes more interesting. For instance, Jared Diamond in his book "Guns, Germs, and Steel" attributes a great importance to the size of a population. If you look at it, though, he never really defines what a relevant population is, except to say that populations are historically defined by serious natural borders like mountains, deserts, and oceans. That is, the boundaries of a population are where transportation costs become too high. Diamond's account of population fundamentally depends upon the Smithian analysis of the size of the market.
I have also recently wondered why businesses do not attain some size, or market share, that is in reasonable equilibrium and stop there. Why always talk of growth? Then it hit me. The greater the extent of the market - the greater the extent of the division of labor. Smith's argument applies to individual businesses as well. A small hospital serving a small town will have a few generalist physicians. A large hospital serving a large population will have those plus many specialists the small town/market could not support. Grow the market and you can increase the division of labor within the firm to, hopefully, yield even greater returns.
Just a thought.
BK
Showing posts with label Adam Smith. Show all posts
Showing posts with label Adam Smith. Show all posts
Wednesday, September 30, 2009
Tuesday, September 29, 2009
Smith and Markets
In the first three chapters Smith talks about the division of labor, why we trade and the extent of markets. This entire discussion assumes we know what a market is and that one is in place. Smith does not tell us, though, what a market is. This is why we have read Hobbes, Locke, and Hume.
From these readings we can plausibly construe a market as a place where:
1) There are enforced property rights. This enforcement comes from both other individuals and the state.
2) Enforced contracts. This enforcement comes from both other individuals and the state.
3) Trading, where what is traded is not simply a good or service, but the rights to these goods and services. These rights are protected in 1 and 2 above.
4) Some claim to the protection of life and limb. We find this mainly in Locke and Hobbes. It would do us little good to have a market where people could not steal from us, but could kill us then take the "ownerless" goods.
At the very minimum, then, a business must work within the framework of 1-4. This does not tell us everything a business is, but it does establish a fundamental framework. Anything that violates any one or more of 1-4 above is not business.
BK
From these readings we can plausibly construe a market as a place where:
1) There are enforced property rights. This enforcement comes from both other individuals and the state.
2) Enforced contracts. This enforcement comes from both other individuals and the state.
3) Trading, where what is traded is not simply a good or service, but the rights to these goods and services. These rights are protected in 1 and 2 above.
4) Some claim to the protection of life and limb. We find this mainly in Locke and Hobbes. It would do us little good to have a market where people could not steal from us, but could kill us then take the "ownerless" goods.
At the very minimum, then, a business must work within the framework of 1-4. This does not tell us everything a business is, but it does establish a fundamental framework. Anything that violates any one or more of 1-4 above is not business.
BK
Thursday, September 24, 2009
Smith, Malthus, Marx
Smith, Malthus, and Marx.
While these three individuals come to some very different conclusions, it is worth noticing the similarities in their arguments. The common thread that can fray shows us how close these arguments really are and perhaps why debate around them becomes so heated.
The first chapter of your reading on Smith concerns the division of labor and the “opulence” that results from the division of labor. The second chapter concerns the principle behind the division of labor. The third on the relationship between the division of labor and size of the market. Chapter IV is about money which sets the stage for Chapter 5 where Smith argues that real value resides in labor.
Malthus agrees with the notion that value resides in labor, but vehemently disagrees with Smith on the notion that the division of labor makes everyone better off. In fact, Malthus does not believe it ever could make everyone better off. Remember Smith argues in Chapter 1 section 4 that agriculture does not benefit as much from the division of labor as manufacturing. Malthus completes the argument. If manufacturing is more productive it will initially provide returns that support an ever increasing population. It will do, and must do, this more quickly than agriculture can keep up. That is, manufacturing will continue to give more workers the opportunity to procreate. Given their natural desire to procreate, or perform actions that result in procreation, the number of workers will eventually outstrip the ability of agriculture to feed them. When this happens either famine, disease, or both will wipe out a number of workers. This kills so many that the surviving workers are now easily supported by existing agriculture leading to the exact same cycle again.
Malthus agrees with Smith on the productivity of land, the short term results of the division of labor, and the ultimate value of any commodity.
Marx, likewise, utilizes Smith’s labor theory of value. The first page of our reading on the manifesto exactly acknowledges Smith’s point about the division of labor and markets. In these opening pages Marx is arguing that because of the explosive growth in markets, especially with the discovery of America, there was a corresponding explosion in the division of labor. Unlike Smith who see this as a good thing, though, Marx sees it as perhaps better than feudalism, but worse than what the proletariat deserve.
BK
While these three individuals come to some very different conclusions, it is worth noticing the similarities in their arguments. The common thread that can fray shows us how close these arguments really are and perhaps why debate around them becomes so heated.
The first chapter of your reading on Smith concerns the division of labor and the “opulence” that results from the division of labor. The second chapter concerns the principle behind the division of labor. The third on the relationship between the division of labor and size of the market. Chapter IV is about money which sets the stage for Chapter 5 where Smith argues that real value resides in labor.
Malthus agrees with the notion that value resides in labor, but vehemently disagrees with Smith on the notion that the division of labor makes everyone better off. In fact, Malthus does not believe it ever could make everyone better off. Remember Smith argues in Chapter 1 section 4 that agriculture does not benefit as much from the division of labor as manufacturing. Malthus completes the argument. If manufacturing is more productive it will initially provide returns that support an ever increasing population. It will do, and must do, this more quickly than agriculture can keep up. That is, manufacturing will continue to give more workers the opportunity to procreate. Given their natural desire to procreate, or perform actions that result in procreation, the number of workers will eventually outstrip the ability of agriculture to feed them. When this happens either famine, disease, or both will wipe out a number of workers. This kills so many that the surviving workers are now easily supported by existing agriculture leading to the exact same cycle again.
Malthus agrees with Smith on the productivity of land, the short term results of the division of labor, and the ultimate value of any commodity.
Marx, likewise, utilizes Smith’s labor theory of value. The first page of our reading on the manifesto exactly acknowledges Smith’s point about the division of labor and markets. In these opening pages Marx is arguing that because of the explosive growth in markets, especially with the discovery of America, there was a corresponding explosion in the division of labor. Unlike Smith who see this as a good thing, though, Marx sees it as perhaps better than feudalism, but worse than what the proletariat deserve.
BK
Monday, September 14, 2009
Malthus and Smith
I have posted week 5 readings on Adam Smith and Thomas Malthus.
The reason I have chosen these two is that, presently, the world seems to be either Smithian or Malthusian in their outlook on business.
The Smithians (If I may) roughly believe that the division of labor and trade make us all better off.
The Malthusians roughly believe that competitive forces in the market actually makes us all worse off.
I believe this division is much deeper, and more accurate, than talking about Socialists and Capitalists. Examining these earlier documents gives us a good deal of insight into modern discussions of sustainability.
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