A prevailing idea through this section is that of Natural Rates. The idea that while outside forces, a drought in a major agricultural area, a new business approach, may force prices to change for a time they will all eventually find their way back to the Natural level.
Smith talks of the “invisible hand” or “self-interest” as one of the guiding factors that causes this phenomenon of Natural level to happen. That through competition, caused by self-interest, these prices will find their way to the most natural level despite outside circumstances.
Smith also held his “greatest scorn” for the involvement in outside forces such as the government. He believed that the involvement of the government and it’s forcing upon the system its regulations took away from the ability of natural rates. That such regulation was more harmful then was ever helpful.
A for Elgin.
ReplyDeleteSmith's breakdown of income into rent, wages, and profits is still roughly what we do with the income approach to GDP. The proportions turn out to be a critical stylized fact that growth models explain.
On pg. 43, Warsh also asserts that what set Smith apart from other early thinkers about the economy is his recognition that there may be negative feedback: that being too far away from some central value pulls you back towards that central value. This comes up in this class when we talk about approximating the propagation mechanism with an autoregression.