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Adam Smith: The other side of Communism?

Who is Adam Smith?

He is known as the Father of Economics / Capitalism. Also known for his book Wealth of Nations as the bible of Capitalism.

Key Ideas:

Importance of Free Markets

Smith stated it was best to minimize the role of government intervention and taxation in free markets. He considered the government responsible for breaking up naturally-occurring monopolies, enforcing contracts and patent law, encouraging innovation, providing public works such as roads and bridges, educating the middle classes, defense and to provide and institutional framework that promotes free and fair competition. In a free market:

  • Every individual works in self-interest.
  • Every seller wants to sell as high as possible.
  • Every buyer wants to buy as cheap as possible.
  • This encourages competition among sellers to sell the cheapest among all sellers so that buyers would want their product.
  • This results in an equilibrium in supply and demand.
  • There is an emergent unintended consequence of every individual’s self interested behavior.
  • Scarce resources get allocated properly with some sort of an Invisible Hand.
  • Proper allocation of resources means that all suppliers don’t waste scarce resources by producing goods that no one is willing to buy.
  • Instead, working in their self-interest to maximize their wealth, they produce goods that have the most demand and they can produce cheaply.
  • Smith argues that it is best for sellers to act in their self interest rather than for charity.

Division of Labour

Smith argued that division of labour and specialization encouraged prosperity. The process of manufacturing goods can be divided into simpler tasks. Each individual cannot do all tasks perfectly however an individual can specialize and focus on becoming an expert in a handful of tasks based on his skills. This increases productivity.

Gross Domestic Product

Smith argued that the wealth of a nation should be evaluated on the basis of their levels of production and commerce. This laid down the foundations for using the GDP as a metric for measuring a nation’s prosperity. Smith stated that it was benefitial for every country to take part in free trade since this further encourages division of labour at a global scale since countries can now specialize.

References:

  1. Econ Interest.com
  2. bbc
  3. investopedia
  4. uk essays

Working Notes/ Scratchwork:

Ideas influential:

  • writing during the industrial revolution
  • society changing rapidly (1770s)
  • very critical of the status quo and role of govt in economy (did not like regulation)
  • First scientific economist(?)
  • last economist philosopher
  • part of scottish enlightenment
  • gave birth to social science along with other scottish ppl. Works:
  • Theory of moral sentiments:
    • 1759, very influential book
    • invited to france based on this strong work.
    • focused on moral psychology
    • how do people make judgements over day to day dealings.
    • bottom up approach.
  • Wealth of Nations:
    • feudalism is dying.
    • people are doing trade and manufacture.
    • how to deal with trade and manufacture?
    • status quo:
      • individuals work for the government
      • the government monitors / regulates all you do.
    • opposing theory from france
      • let things sort themselves out
      • it must be natural
      • agriculture is the main part of economics.
      • Adam smith likes the freedom element of this
      • Adam smith disagreed with agriculture being the centre.
      • Smith considered trade and manufacture to be the centre.
    • A commercial society is when every man is a merchant
      • Inorder to explain how this sort of society functions:
      • do not focus on the moral part of people doing it for the greater good of others or charity.
      • it is infact because they are working in their own self interests.
      • this order that arises from people working in their self interest
      • this network of self interest and interdependence is Invisible Hand
      • Not the first idea of this kind: Fable of the bees
      • This sort of self interested society works only if the initial conditions are not corrupt.
      • David hume? also part of scottish enlightenment.
    • Adam smith was not the father of modern day cut throat capitalism(?) The Invisible Hand:
  • unintended consequences.
  • selfish and self interested is not the same (?)
  • Smith and Hugn : Good government is a condition for the invisible hand to actually work.
  • Smith himself also gives examples of malignant outcomes of the invisible hand.

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