Capitulo IV. Adam Smith.

Pablo and Esteban's Journey

The transcript introduces Pablo and Esteban, detailing their daily routines, work endeavors, and collaborative project to create a home computer.

Pablo's Daily Routine

• Pablo rises early each morning for a half-hour run before commuting an hour to work.

Esteban's Work and Studies

• Esteban works as a taxi driver, making numerous stops and maneuvers throughout his day.

• Despite his taxing job, Esteban studies engineering in the evenings alongside Pablo.

Collaborative Project

• On weekends, Pablo and Esteban gather in a small workshop at Esteban's house to unleash their creativity.

• They embark on creating a homemade computer by assembling components and testing connections diligently.

• Their innovative computer language development garners attention from friends, leading to initial orders.

Adam Smith: The Father of Economics

This segment delves into the life and contributions of Adam Smith, emphasizing his philosophical roots and seminal economic works.

Early Life of Adam Smith

• Adam Smith is born in Kirkcaldy in 1723 and gains recognition with his ethical treatise "The Theory of Moral Sentiments" at age 36.

Evolution into Economics

• Inspired by the burgeoning industrial revolution in Glasgow, Smith embarks on understanding economic phenomena scientifically.

• His seminal work "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776) lays the foundation for modern economics by systematizing capitalist principles.

Transition from Feudalism to Capitalism

This section explores the transition from feudalism to capitalism through historical contexts and economic transformations.

Feudal Economy Dynamics

• In feudal societies, production primarily occurs within self-sustaining manors with limited market interactions for surplus goods exchange.

Emergence of Capitalism

• The shift towards capitalism unfolds gradually between the 16th century and the Industrial Revolution period in England.

Impact on Social Structures

• Capitalism disrupts entrenched feudal customs over time, eroding religious controls while expanding market activities.

The Impact of Division of Labor and Adam Smith's Theories

This section discusses the gradual adoption of specialization among independent artisans, focusing on a carpenter who transitions from making various furniture to exclusively crafting chairs. It delves into how this shift transforms societal roles, introducing the concept of the new industrial capitalist who profits from production rather than trade.

The Wealth Increase Due to Division of Labor

• Specialization leads to increased wealth and productivity in society through three main factors: enhanced worker skills, reduced transition times between tasks, and innovation in tools for faster and easier work.

• Adam Smith values industrial activities over agricultural work due to the limited subdivisions possible in farming tasks throughout the year.

Understanding Capitalism Through Laws and Progress

• Despite appearing chaotic, capitalism operates under a set of laws ensuring economic and social progress while fostering individual freedoms.

• The system's functioning is governed by eternal economic laws akin to those governing celestial bodies' movements.

Implementing Adam Smith's Theories in Entrepreneurship

This segment follows Pablo and Esteban as they establish a small factory for home PCs based on funding from Pablo's uncle. They recruit friends for the project, organize tasks efficiently, meet deadlines successfully, leading to rapid sales growth necessitating expansion.

Applying Adam Smith's Principles in Business

• Organizing production stages efficiently like software development, component soldering, assembly, testing, and packaging ensures timely completion.

• As their business grows, Pablo and Esteban consider incorporating more workers organized into departments for smoother operations.

Productive vs. Unproductive Work According to Adam Smith

• Smith distinguishes between productive (laborers, traders, industrial capitalists) and unproductive work (government officials, military personnel), emphasizing industrial production as crucial for societal progress.

The Nature of Exchange According to Adam Smith

This part explores how human inclination towards buying and selling drives economic growth according to Adam Smith. It delves into the natural propensity for exchange inherent in individuals that fuels wealth accumulation within societies.

Human Propensity Towards Exchange

• Smith introduces the concept of "natural propensity" towards exchange ingrained in human nature as fundamental as eating or drinking.

• A developed market encourages individuals to engage fully in production activities with confidence in exchanging surplus goods for necessities.

Role of Self-interest and Invisible Hand in Economic Growth

• In a capitalist society guided by self-interest rather than benevolence or altruism, individuals pursuing personal gain inadvertently contribute to overall societal wealth growth.

Understanding Value and Price in Economics

In this section, the discussion revolves around the concepts of value and price in economics, as explained by Smith. The distinction between value of use and value of exchange is highlighted, along with the role of labor in determining prices.

Value of Use vs. Value of Exchange

• Goods have both a value of use and a value of exchange.

• The value of exchange is not determined by the utility or value of use but by the amount of labor involved in production.

• In primitive societies, the quantity of labor used in production governs exchanges.

Labor Theory and Class Structure

• Smith introduces the labor theory of value but later moves away from it.

• Society comprises workers, capitalists, and landowners who own factors like labor, capital, and land respectively.

Production Costs and Market Prices

• Smith discusses that prices result from adding wages, profits, and rent paid to those involved in production.

• There are natural levels for wages, profits, and rent which determine market prices.

Market Dynamics: Supply and Demand

This part delves into market dynamics focusing on supply-demand interactions influencing market prices.

Market Price Determinants

• Market price depends on quantities offered (supply) versus quantities demanded (demand).

• Scarcity can lead to higher market prices due to competition among buyers.

Equilibrium Price

• When supply exceeds demand, market prices fall below natural levels; when demand surpasses supply, prices rise above natural levels.

Impact on Workers and Capitalists

Here we explore how division of labor affects workers' intellectual development while also touching upon conflicts between workers' interests for higher wages versus capitalists' aim for lower costs.

Division of Labor Effects

• Division of labor negatively impacts worker development due to monotonous tasks.

Worker-Capitalist Conflicts

• Conflicting interests exist between workers seeking high wages and capitalists aiming for low costs.

Smith's Advocacy for Capitalism

Adam Smith's support for capitalism is discussed along with his belief in individual pursuit leading to societal progress.

Capitalism Endorsement

• Smith defends capitalism as essential for societal advancement through individual profit-seeking activities.

Free Market Recommendations

Mercado's Book Insights

In this section, the discussion revolves around the insights presented in Mercado's book regarding capitalism and its underlying laws that drive societal development.

Mercado's View on Capitalism

• Mercado, as discussed in his book, argues that despite appearing chaotic and disorganized, capitalism operates based on laws that ensure societal progress.

Prosperity of PC Industry

This part highlights the thriving nature of the home PC industry worldwide and the rapid growth of entrepreneurship by Pablo and Esteban.

Growth of Home PC Industry

• The home PC industry is prospering globally.

• Pablo and Esteban's entrepreneurial venture is expanding rapidly with reinvestment of profits into their factory.

Community Benefits from Entrepreneurship

This segment discusses how entrepreneurship not only benefits individuals but also contributes to community growth and welfare.

Community Development through Entrepreneurship

• The local community experiences growth in industries surrounding the factory due to entrepreneurship.