Adam Smith “The Wealth of Nations”

His Times Born in 1723, in Scotland Born in 1723, in Scotland The Industrial Revolution was just beginning The Industrial Revolution was just beginning Fortunes were being made by the factory owners, but there was much poverty as well Fortunes were being made by the factory owners, but there was much poverty as well A common sentiment at the time was that the new free market economy was creating only hardship. A common sentiment at the time was that the new free market economy was creating only hardship.

“The Wealth of Nations” Published in 1776 Published in 1776 Created the study of “political economy” Created the study of “political economy” Main idea: a free market system, in which there was no government interference, would create a strong national economy and at the same time be the best way to make ordinary citizens’ lives better. Main idea: a free market system, in which there was no government interference, would create a strong national economy and at the same time be the best way to make ordinary citizens’ lives better.

“The Invisible Hand” Self interest and the “invisible hand” of competition would lead producers to allocate resources in the most productive and efficient manner, in order to meet the demand of consumers. Self interest and the “invisible hand” of competition would lead producers to allocate resources in the most productive and efficient manner, in order to meet the demand of consumers. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Specialization Division of labor (specialization) increases production greatly. Division of labor (specialization) increases production greatly. “Each individual becomes more expert in his own peculiar branch, more work is done upon the whole, and the quantity of science is considerably increased by it.”

The Public Good The free market system helps promote the society’s overall welfare by providing goods and services consumers want at affordable prices, and jobs they need. The free market system helps promote the society’s overall welfare by providing goods and services consumers want at affordable prices, and jobs they need. “By pursuing his own interest [the businessman] frequently promotes that of the society more effectually than when he really intends to promote it.”

Free Trade International trade helps a country capitalize on its strengths and allocate its resources most efficiently. International trade helps a country capitalize on its strengths and allocate its resources most efficiently. “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”

Relevance in the Current Economy By far, the most successful countries in the world have followed Adam Smith’s ideas to some extent. By far, the most successful countries in the world have followed Adam Smith’s ideas to some extent. Many countries that were once command economies (USSR, China) have become, or are becoming capitalist, after discovering that the command theory did not work. Many countries that were once command economies (USSR, China) have become, or are becoming capitalist, after discovering that the command theory did not work. His ideas on international trade are more important than ever, and will become increasingly important in years to come. His ideas on international trade are more important than ever, and will become increasingly important in years to come.

But… The theory of free markets and the reality are not always the same The theory of free markets and the reality are not always the same Adequate and accurate information (e.g., where to buy?, advertising) Adequate and accurate information (e.g., where to buy?, advertising) Unethical/undesirable competition (e.g., price-fixing, monopolies / utilities) Unethical/undesirable competition (e.g., price-fixing, monopolies / utilities) Difficulty in apportioning costs to individuals for some products (national defense, infrastructure) Difficulty in apportioning costs to individuals for some products (national defense, infrastructure)

The Answer? Most economies that have successfully increased the well-being of their citizens have done so using a combination of free- market and command theories. Most economies that have successfully increased the well-being of their citizens have done so using a combination of free- market and command theories. i.e., capitalism works, but it needs rules and laws to govern it, and a mechanism (government) to fill in the gaps. i.e., capitalism works, but it needs rules and laws to govern it, and a mechanism (government) to fill in the gaps.