HoPe notes: June 5 II

Adam Smith, Medema
* Book 1: theoretical framework
** Everything hangs on the division of labor, which underpins his entire system, it is what produces surpluses and it is the engine of economic growth. It is also the opening sentence of the book. Comes from three things: (1) dexterity, (2) time savings from switching, and (3) invention of machinery. Division of labor also stimulates the development of (3). 
** Medema: not a labor theory of value, but a labor commanded theory of value: how much units of labor can society could buy at a given point in time. How to measure the value of what is produced in society. In modern language, natural price is the LR equilibrium price, and the market price is the current price at any given point of time which is the product of supply and demand at a point. 'prices will converge to the natural price', it is a tendency view of the world and the forces that are taking us there are competitive ones. Recognizes impediments to realization of natural prices: in modern language; market failures. Most (all?) come down to a type of monopoly, also mentions asymmetric information. 
** Profits: makes possible the division of labor. He posits that posit falls as the economy grows: as the economy grows, this increases entry which depresses profits. Has a part on wage and profit distribution which is basically a theory of compensating differentials, which has stood the test of time relatively well, we basically still have this same theory.
* Book 2: theoretical framework
** From the perspective of modern economics, the part on productive and unproductive labor has missed the mark. Basically saw wealth as 'stuff' and any labor that does not result in the production of stuff diminishes the wealth of a nation.
** He was in favor interest rate limits, to deter speculation. This is another inconsistency in the book, compared to the idea that resources flow to their highest value uses. Contradicts the quote in book 4 about following one's own advantage will necessarily lead him to prefer that employment which is most advantageous to society. 
** Competition for him mostly is about rivalry.
* Book 3: economic history
** They skipped this
* Book 4: a critique of mercantilism
** First describes the basic tenants of the system, before describing it policy prescriptions. Then, moves on to critique it.
** At the end, discusses physiocracy. His language is less strong, but he doesn't affirm it too strongly, as it doesn't fit quite into his system. He explains why it is wrong: (1) in physiocracy manufacturing is zero surplus, in his theory is there is a possibility for negative surplus: unproductive labor, but this is not tied to the manufacturing sector, (2) manufacturing allows for greater division of labor than agriculture, and (3) manufacturing is productive also as export because you can get highly valued goods back for it. Notes that physiocracy was 'the nearest approximation of truth' so far because (1) they saw wealth as 'stuff', and (2) had a role for perfectly liberty as a goal for them (which is debatable).
** Policy prescriptions: remove policies that restrict people freedom to follow their own interests. 
* Book 5: the role of the government
** Role of the state: (1) national defense, (2) administration of justice system - private property, and (3) provision of public works - incl education to combat the mind numbing effects of repetitive labor tasks. Note: this is not treatise on what the state ought to do. This is a book about 'economic growth', Medema interprets these policy prescriptions as going toward that goal of increasing the wealth of the nation. There might be other policies to achieve other goals. 
*There is both conflict and harmony views of the world. He's a system builder. 
Roughly, WoN can be seen as a treatise on economic growth. Medema: books 1 and 2 can be seen as a foundational theoretical system for the attack on mercantilism in book 4. He tries to make a system in the beginning that readers will agree with, to convince them of the critique of mercantilism in book 4. 
Smith's system works more in a competitive, long-run abstraction. They arguments don't work as well in the short-run.
First graphical representation of supply and demand was 19th century, in Marshall's Principles (in a footnote), although the language of supply and demand is very much in AS.
Medema: Smith thinks about surplus as producing more than one can consumes, not in the modern sense. 
Market failure first used by Francis Bator.
Invisible hand has two other mentions in his work: once in the ToMS related to luxury, and once in his lectures on astronomy.