Labor and the Economy: Adam Smith had it Figured Out
May 14, 2006
People at work... this is what brings vibrancy to our economy. Nearly 143.7 million people are employed in America today. Clearly, they are the driving force in our national economic scene. They are the doers, workers and earners who provide the goods and services which are so much in demand. There is an energy and zest in America's work force and it reflects well in the total economic picture. It is their continuing energy and ingenuity in productivity and cost cutting which brings vibrancy and stability to the economic life in America today and into the corporate wellbeing, which is so endemic in American life.
The employment numbers for the first quarter of 2006 are strong. The economy added 211,000 job in March, and 138,000 new jobs in April, led by a rare spurt of 19,000 new manufacturing hires, and more solid gains in construction, finance, health care, professional and technical work. Wage growth surged by 0.5 percent, for a 3.8 percent gain in the last year--the largest since August 2001. The unemployment rate for the 1st quarter of 2006 is 4.7 percent, the lowest in eighteen quarters. "The low unemployment rate of 4.7 percent suggests we have a very strong labor demand, and strong labor demand usually is followed by wage increases," said Edward P. Lazear chairman of the White House Council of Economic Advisers.
Larry Kudlow, a noted columnist, said it well. Kudlow stated "Corporate profits are the mother's milk of business." Rising profits lead to business expansion, and falling profits lead to business recession. And right now, as Kudlow said, "profits are flowing in and behind the profits recovery, there are two key factors: cost cutting and productivity." The importance of accumulating corporate profits are usually underestimated. And, as Kudlow said, "when corporate profits increase, sizable job expansion follows, and firms have spare cash to replace, modernize and update production facilities." These are positive indicators within our national economy.
Your columnists have been reviewing these economic trends for some time. In our review, we have examined several of the underpinnings to the economic structure and particularly as it relates to the American economic system. Without doubt, one of the chief underpinnings and the corner stone within our structure is found in the work supplied by Adam Smith.
Adam Smith, born in Scotland in 1723, is one who is considered the father of modern economics. He probably, as none other, shaped philosophical economic theory, particularly of that in America. He left an enduring mark on our thought, economy, and politics, which remain strong and vital to this day.
Smith is famous for his theory that nations attain wealth and function best where and when individuals are completely free to use their skills and capital (money and properly) in their own self-interest and at their own discretion. He emphasized that prices and wages will automatically reach optimal level when such freedom is allowed to have full course, which he refers to as "guided by an invisible hand." As Smith saw it, the invisible hand suggests that "every individual, labors to render the annual revenue of the society. And so, that by pursing one's interest one frequently promotes that of the society."
Dr. Abraham Maslow coined the term "self-actualization" as the pinnacle in the hierarchy of human needs. Maslow summed up this concept as: "A musician must make music, an artist must paint, a poet must write, if one is to be at peace with one's self." It refers to one's desire for fulfillment; namely, to achieve all that one is capable of achieving. Clearly, it would appear that Adam Smith discovered self-actualization as a vital human need and built that concept into his economic theory.
It is a known fact... and one that Adam Smith discovered...namely, that jobs that require special training, will result in fewer people making that investment and, therefore eventual higher wages. This explains possibly why physicians are paid more then most bus drivers. He also taught that odious or unpleasant jobs would result in higher wages and we see that in effect today.
Further, when new products are invented, prices will initially be high until others see the profits potential and enter the market; the results then usually will be that prices will go down. We see this today in the field of electronics. Smith was opposed to the falsely high pricing products by monopolies.
Adam Smith spoke for democracy with his ideas that self-interest and self-actualization works to the benefit of society as a whole. As he saw it, each person ought to be free to pursue their ambitions, and such freedom will benefit everyone with new markets, better products, and opportunities for greater stabilized financial security. In short most of these ideas, which are empirically so much a part of our economic life today, stem from Adam Smith's view and to him we are indebted. And that is how we see it FROM OUR PERSPECTIVE.