Friday, June 1, 2012

Adam Smith's Division of Labor


Essay 1 — Introduction to Adam Smith’s Legacy

Like Aristotle, Adam Smith (1723 – 1790) was a polymath (a learned man in many fields) who had an eagle-eye to see an interconnected world. Only a selected minority of talented individuals can probe the depths of the human condition and attain a global vision. Adam Smith was one.
Although today Adam Smith is recognized as the father of political economy, his legacy includes major works on rhetoric, logic, ethics, literature and criticism, astronomy, history, the law, theology and even poetry.
To Smith, labor was the discernible strand that made possible for common people to enjoy the necessities and conveniences produced by a nation. And within that strand, he saw that the division of labor was the direct cause of efficiency, and that when it was complemented by the accumulation of capital and machinery, opulence (or as we say today: prosperity) was the inevitable result.  
His economic analysis established the major factors of production: the landholder gets paid rent; the worker (laborer) gets paid his wages. And the producer —given his investment of capital (money, equipment, and facilities)— is entitled to the profits. Although some of the descriptive economic terms have evolved and others fallen into disuse, all contemporary textbooks in macro and microeconomics are but a revision of Adam Smith’s model—as brought to light in his landmark book The Wealth of Nations.
British economist, also a man of many talents, John Maynard Keynes once wrote:
Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
Keynes was correct in his assessment, for history has often proven that styles of governments —directed by practical men and madmen in authority— are but the extract of the ideas of a small band of dead economists, with much of these ideas contributed by Adam Smith.
Let’s name a few defunct economists: Adam Smith —the father of capitalism— gave us the invisible hand of competition and self-interest, laissez-faire, and the division of labor. Karl Marx (1818-1883), hated free markets, and believed in a system of communism in which government should own all the means of production. John Maynard Keynes (1883-1946) rescued capitalism by inventing fiscal and monetary policies (with democrats favoring the former and republicans the latter). Milton Friedman (1912-2006) and his Chicago School of Monetarists believed in the total power of the mighty dollar, and hated Keynes and his fiscal policy (deficit financing).
Go figure the reach of these defunct economists!
Even today are we slaves of these dead economists’ ideas, for their followers continue to perpetuate their teachings. Hard as I look for original thinkers, I fail to find them anywhere in the contemporary economic landscape. Larry Summers, Alan Greenspan, Ben Bernanke, Paul Krugman, and other minor economic luminaries are still distilling the teaching of the above mentioned old masters. And so are madmen in authority like Hugo Chavez and Fidel Castro.
Today the old band still plays, and old man Adam Smith still rules.
This Scottish moral philosopher and economist took ten years to write his magnum opusThe Wealth of Nations (1776). The textbook became not only the foundation of classical economic theory, but also the moral imperative for people’s liberty within the system of laissez-faire capitalism. 
Excerpted from my ebook Adam Smith's Division of Labor and Your Wealth.

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