Adam Smith and Our Market Economy, Essay Example

The famous philosopher Adam Smith was born in Kirkcaldy, which is a small village in Scotland. Raised by his widowed mother, Adam Smith entered the University of Glasgow and received a scholarship for education when he was only fourteen. Later on he went to Balliol College at Oxford, thus after he graduated he acquired an extensive knowledge of European literature along with abiding condescension for English schools. Adam Smith claimed that a successful economic system can be developed in a well-governed society, thus leading to the economic well-being. The rule of law in a line with private property rights ensure an infrastructure that allows and establishes the protection of people, thus securing their future investments, organization of constructive and functional projects, and the initiation of other costly endeavours .

The evolution of an efficacious commercial society can only be provided through the freedom to exchange affordable and secure property rights, thus ensuring an efficient cooperation in terms of creating and utilizing resources to fulfill one another’s wants and expectations in a way that provides economic growth and prevents property. Theories regarding our contemporary world only survive until a new adherence cracks the old beliefs, thus leading us to a new way of perception. Bounded in our current ways of observing the world we may find it hard to believe that what we think today might be the same as thinking that the world is obviously flat. Contemporary reputation of Adam Smith rests on his explanation regarding how economic well-being can be approached through rational self-inters in a free-market economy. Therefore, Smith wrote: “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him though he derives nothing from it except the pleasure of seeing it.” [1]

Contemporary market economy is all about competition, and Adam Smith was actually the one who revealed the theory of working of competitive markets, which can surely be applied towards current market economy. So, Adam Smith contributed to economic theory through his approach to competitive markets. Thus he could claim with very high accuracy that the mechanism in terms of the price coming from competition would, sooner or later, equal the total cost of production.  Adam Smith distinguished two types of prices in his analysis of price formation and resource allocation, thus using the ‘market prices’ for short-run prices and ‘natural prices’ for long-run prices. However, he predominantly considered the formation of natural prices, which are the long-run prices. He claimed that anybody who earns money by his own labor definitely benefits himself. However, he also benefits the society, for in order to gain income on his labor in a competitive market, he hereby has to ensure the production of something other in value. “By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” [2] Adam Smith perceived competition as fundamentally requiring a great number of sellers, freedom of interchange of resources among industries, along with a group of resource owners experienced on the account of profits, wages and rents in the market economy. Consequently, when these requirements are fulfilled, the self-interest of resource owners would lead to long-term natural prices, thus equalizing the rates of profits, rents, and wages amongst the different sectors of the economy. For instance, in case when the price of a final good appears to be higher than its long-term natural equivalent, it means that wages, profits, or rent must be moved higher than the natural level in this particular sector of the economy, thus adjusting the movement of resources until the natural price thrives. According to Adam Smith competitive markets and absence of government regulation natural prices result in an optimum allocation of resources in terms of customers receiving the goods they want at the lowest cost possible, thus ensuring the maximum growth rates. After establishing the authority of competitive markets Adam Smith effortlessly put up his case against government intervention and monopoly. “Monopoly, besides, is a great enemy to good management.” [3] He identified the attempt of businessmen to actually monopolize trade through joining forces. Even though he was not able to indicate the exact monopoly prices, he comprehended that monopolists would restrict output, thus extracting higher price. Also we have to consider that Smith’s support of laissez faire provides an assumption that competitive markets exist in our market economy. However, different groups in the economy have imitated Smith’s condemnation of government intervention to the country’s economy, while actually ignoring his claim that a laissez-faire policy presumes the existence of competitive markets in such case.

Adam Smith spoke against government intrusion in the economy, providing philosophical, economic, and political bases. He totally disagreed with any type of government interference, implying that in general any govern­ment intervention is undesirable, because it contravenes individuals’ natural rights and liberties. “As soon as government management begins it upsets the natural equilibrium of industrial relations, and each interference only requires further bureaucratic control until the end is the tyranny of the totalitarian state.” [4] Adam Smith examined the economic arguments against government intervention more comprehensively, thus reviewing lots of mercantilist regulations of domestic and foreign trade and proving that they resulted in less desirable allocation of resources than the one established by competitive market. He considered many of the mercantilist arguments that support government intervention to be actually self-serving, although aiming to promote the social good. However, not did the nation benefit from the regulation of domestic and foreign commerce, but the merchant. Even though it was not a completely theoretical argument, it still came from personal observation of the actual government operation. Adam Smith was putting into practice the art of economics, thus taking into consideration the policy of regulation in the context of the institutions. In any other situation, with essentially different governments, they could uphold the social good; however, they inevitably do more harm than benefit for now. In this extent, the foundations of contemporary public-choice theory go back to Adam Smith’s assessment of how merchants use government in order to enrich themselves. As you have already noticed, his ultimate achievement was his extensive overview and examination of market economy and its principle. He did make a great accomplishment in this matter, even though he did not solely shape his analytical tools. Adam Smith complemented his broad overview of market processes with explanatory and historical material, thus producing the work that could be read and understood by the educated people. Therefore, he was pretty capable of exerting an influence on economic policy and lending back-up to the progressively more favored view that the wealth of any country would be promoted by a laissez-faire policy followed by the government.

Smith’s works can be considered both an inquiry into the essence of economics and a guide for accomplishing the wealth of nations. He claimed that economic development was best nurtured in an environment of free competition that acted according to universal natural laws. Adam Smith is the author of the most systematic and comprehensive study of economics, and his economic thinking became the foundation for classical economics. It is somewhat complicated to defend the relevance of Adam Smith to contemporary economy, for most of his ideas have become so absorbed into our intellectual heritage that are no longer associated with this prominent person. Apart from being a great philosopher and economist Adam Smith was also an outstanding humanist, thus saying: “Man was made for action, and to promote by the exertion of his faculties such changes in the external circumstances both of himself and others, as may seem most favorable to the happiness of all.” [5]

Works Cited

Buchan, James. The Authentic Adam Smith: His Life and Ideas. W.W. Norton, 2006.

Smith, Adam. “An Inquiry Into the Nature and Causes of the Wealth of Nations.” Glasgow Edition of the Works and Correspondence of Adam Smith. Claredon Press, 1976.

Smith, Adam. “The Theory of Moral Sentiments.” The Glasgow Edition of the Works and Correspondence of Adam Smith. Claredon Press: 1976.

Smith, Adam. The Wealth of Nations. 3^rd ed. Prometheus Books, 1991.

Smith, Adam. Adam Smith: The Theory of Moral Sentiments. Cambridge University Press, 2005.

[1] Smith, Adam. “The Theory of Moral Sentiments.” The Glasgow Edition of the Works and Correspondence of Adam Smith. Claredon Press: 1976.

[2] Smith, Adam. An Inquiry Into the Nature and Causes of the Wealth of Nations. Glasgow Edition of the Works and Correspondence of Adam Smith. Claredon Press, 1976.

[3] Smith, Adam. The Wealth of Nations. 3^rd ed. Prometheus Books, 1991.

[4] Smith, Adam. The Wealth of Nations. 3^rd ed. Prometheus Books, 1991.

[5] Smith, Adam. Adam Smith: The Theory of Moral Sentiments. Cambridge University Press, 2005.