Economic Principles and Theories of Adam Smith: A Case for Free Markets and Capitalism Essay

September 21, 2021 by Essay Writer

Introduction

Over the years, history has recorded countless personalities whose contributions to economics, as a social science, remains significant even today. According to Button (2013), a significant number of such philosophers make up what is termed as classical economists in the society. Their opinions continue to shape contemporary world’s economic landscape. Their impact on the economy, even in death, is evidence of the influence they have in the world.

Examples of such persons include, among others, Adam Smith, Milton Friedman, Friedrich Hayek, and John Keynes. Each and every one of the mentioned economists has proposed several theories and principles whose relevance in economics cannot be ignored. The theories and principles remain their most significant contributions to the world today. A number of scholars have dedicated their lives to the study of these theories and principles.

The author of this paper acknowledges that the various scholars mentioned above have made important contributions in the world of economics. However, in this paper, the author will settle on one economist and analyze their contributions.

In the opinion of Worstall (2012), such elements as the workings of market systems are made possible by the contributions of economists, such as those mentioned above. The author intends to look at one economist from this group. The economist is Adam Smith. The author will examine his economic principles and the theories he has advanced.

The author seeks to determine the relevance of Adam Smith to the spectrum of economic thinking. As Mankiw (2011) puts it, every principle and theory in economics has a bearing on economic life, a bearing that should not be ignored. To this end, the author of this paper examines why contemporary economists regard the theories of Adam Smith as important.

However, the author notes that the contributions made by the other scholars are not irrelevant. It is just that the author feels Adam Smith’s theories and principles are more influential compared to the others. The author will examine the impacts of Adam Smith’s principles and theories on economics in general.

The author will try to imagine the plans that Adam Smith would have advanced to handle present day economic scenarios. For example, what would Adam Smith have advised the government to do to deal with the recent economic meltdown? In a bid to enhance the understanding of his contributions, the author will examine some current economic policies. The author will try to determine whether or not Adam Smith would have supported such policies.

Thesis Statement

The paper is guided by one major thesis statement. The statement is:

An analysis of theories and principles of Adam Smith reveals that he is still relevant to contemporary capitalism and the ethics of trade.

Adam Smith-Theories and Principles

Button (2013) provides a brief background on Adam Smith. Button (2013) says that this scholar is a Scottish-born philosopher who developed progressive thoughts at an early age in his life. Smith’s ability to speak his mind while at Oxford University enabled him to establish his position as a thinker and a philosopher.

Just like other scholars and philosophers, Smith was inspired by other people around him. He was greatly influenced by one of his teachers. The teacher’s name is Francis Hutcheson (Smith, 2012). The latter was instrumental in advancing the ‘moral sense theory’. It is perhaps as a result of this inspiration that Adam Smith wrote his phenomenal book, The Theory of Moral Sentiments.

At this stage, it is important to examine some of the theories that were advanced by this economist and philosopher. Button (2013) argues that wealth and value are some of the most fundamental drivers of the global economy.

Smith was one of the first economists whose opinions on the subject were regarded highly. According to Button (2013), Smith highlighted the similarities between supply-demand and “value”. The scholar found out that both variables were products of labor costs. Based on this principle, Smith developed the principle of division of labor (Smith, 2012).

Smith (2012) uses his book The Wealth of Nations to explain capitalism. The book focuses on capitalism in the world, especially after the declaration of independence in America. In addition to the principle of division of labor, Smith advanced other significant theories (Button, 2013). One of them is the principle of human nature. In his writings about Smith and the principle of human nature, Button (2013) states,

“human nature is guided by self interest. People seek naturally to increase their wealth, and engage in business for the purpose of maximizing utility. When people maximize their wealth by fair exchanges of value, argued Smith, the “invisible hand” of the free market produces economic benefits for everyone in society” (par. 3).

By advancing the principle of human nature, Smith attempts to portray capitalism in a positive light. He says that because it respects the parameters of fair exchange, capitalism is not as evil as many people would like to make it appear (Button, 2013). The same is made obvious through his opposition to mercantilism.

Mankiw (2011) suggests that mercantilism is an avenue through which a country accumulates monetary reserves. The accumulation is made possible by positive trade balances. In this regard, Smith (2012) argues that mercantilism regards wealth as fixed and finite. As a result of this, the system, according to Smith (2012), demands a country to hoard commodities. He is opposed to such retrogressive systems. He points out that the system acts as a barrier to international trade.

Another theory advanced by Adam Smith is the free market principle (Smith 2011). According to Button (2013), like his colleagues, Smith was of the opinion that governments should not interfere with the markets. In essence, the philosopher was of the opinion that a free market is the breeding ground for wealth creation. The reason for this is that “natural forces” are allowed to operate. The principle of a free market cannot be taken for granted in today’s world where capitalism reigns supreme.

Adam Smith, according to Button (2013), made major contributions to the concept of rent. The philosopher theorized that rent is a result of prevailing prices in any market system. Smith uses the example of a consumer who pays rent on a property they occupy to drive his point home. He theorizes that such a property is equated to the cost of all the goods and services that could possibly be produced from it. The ramifications of this theory cannot be underestimated given that it has a bearing on the property market.

Smith (2012) provides an interesting theory with the concept of “the invisible hand”. In his book The Wealth of Nations, the economist theorizes that man is ‘naturally wired’ to cater for their own interests. Consequently, it is human nature to seek the results of prosperity.

To this end, Smith (2012) argues that market agents should conduct their affairs without interference. He calls for the abolishment of monopolies. It is this free-market that the philosopher equates to the invisible hand. According to him, this “invisible hand” is the avenue through which persons can tap into the pool of wealth and enjoy their participation in the market.

Relevance of Smith’s Theories and their Impacts on the World Economy

It is foolhardy to ignore the contributions made by the scholar and philosopher to the world economy. According to Groenewald (2012), one cannot fully define economics without taking into account the contributions made by Adam Smith. In essence, Smith is not only relevant to economics, but also to modern capitalism. His assertions of a free market system earned him the title of the patriarch of “laissez faire” economics (Groenewald, 2012). It is the title that many scholars in the economics field associate him with.

Smith (2012) looks at wealth from the perspective of four parameters. First, he acknowledges that the relevance of wealth comes from its importance in the matrix of capitalism. Therefore, the production of wealth, its distribution, exchange, and consumption are critical elements that help explain the driving force behind capitalism.

According to Smith (2012), the wealth of a nation is a combination of the commodities it produces and the labor involved in the said production. Given the relevance of his theories on wealth, Smith’s influence is largely felt in the advancement of modern capitalism. He is one of the scholars mentioned a lot in capitalist literature.

Mankiw (2011) regards capitalism as an economic environment. The author affirms that such an environment is comprised of the proprietors and the workforce involved in production. Capitalism is characterized by private ownership. It is the owners of production who control production itself and the profits made.

Production in a capitalist society relies heavily on the concepts proposed by Adam Smith. It is noted that the mechanisms operating in a free market determine the prices of commodities exchanged. Consequently, Smith’s theory of a free market acts as the backbone of capitalism.

The definition of economics, as aforementioned, is incomplete without taking into account the theories associated with Adam Smith (Groenewald, 2012). Therefore, in the absence of his book, The Wealth of Nations, the definition of economics will not make as much sense as it does today.

Smith (2012) defines economics with the help of the theories he advances in this book. He defines it as a holistic study of the wealth of a country or a nation. Groenewald (2012) suggests that the simplest way to define economics is by looking at the title of his book, The Wealth of Nations. From such a perspective, it is evident that Smith and his theories are relevant in defining what economics is all about.

A given parameter has positive or negative impacts on a given subject. The impacts depend on one’s perspective. Adam Smith has made major contributions towards the appreciation of the market systems in present day world economies (Worstall, 2012).

Countries that interfere with the markets are characterized by slow and minimal economic growth, making the free market theory an important aspect of the market economy. In a comparative analysis of the Japanese and the Soviet economies, Worstall (2012) cites Paul Kruggman, who says that,

“How, then, have today’s advanced nations been able to achieve sustained growth in per capita income over the past 150 years? The answer is that technological advances have led to a continual increase in total factor productivity, a continual rise in national income for each unit of input. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent (….).

But what they actually found was that Soviet growth was based on rapid–growth in inputs–end of story. The rate of efficiency growth was not only unspectacular, it was well below the rates achieved in Western economies. Indeed, by some estimates, it was virtually nonexistent” (Worstall, 2012, par. 2).

Worstall (2012) is convinced that the market system is an important system for guaranteed economic growth. The free market, as proposed by Smith, allows for the growth of international trade. When a government interferes with the markets, it inhibits not only trade, but also economic growth. Given that we live in the era of globalization, states should take advantage of the huge markets to increase their wealth.

What if Adam Smith was Alive?

As already indicated in this paper, the importance of Smith’s theories cannot be downplayed. However, one wonders how Smith’s economic plan would look like if he were alive today. Worstall (2012) helps us understand that the global economy is in a mess. The mess is credited to the many plans that are clearly not working as envisaged.

After looking at the theories advanced by Adam Smith, this author opines that the philosopher would insist on his principles if he were alive today. From his principles of ethical morality (Smith, 2011) to his free trade policies (Smith, 2012), the scholar would have developed a plan to help the business environment accommodate the much needed reforms.

Remember that capitalism relies on the owners of a business and the workforce needed to produce the commodities of the said business (Mankiw, 2013). There is no denying the fact that it is the owner who controls production and the profits generated from that production. However, current policies have seen countries shift their production overseas due to low labor costs in the foreign markets. What these companies do not realize is that Smith (2011) looked at profits and wages from a similar perspective.

The current practice where companies (particularly in Asia) offer cheap and sometimes controversial labor should be discouraged. If it were up to Smith to streamline such policies today, companies in America and Europe would not move to “cheap labor” countries just like that.

The wage given to a laborer should benefit them the same way that profit benefits the worker (Button, 2013). Smith theorized the same in a bid to ensure that trade becomes a fair practice. Similarly, his opinions on issues touching on rent would significantly change and improve the real estate sector that is in dire need of reforms.

In conclusion, Adam Smith remains a major pillar in economics. It is a fact that capitalism is here to stay. As such, industry players should take into account some of the policies proposed by Adam Smith. If possible, the players should improve the policies to ensure that wealth remains within the nations.

References

Button, A. (2013). Theories of classical economists. Web.

Groenewald, W. (2012). Adam Smith’s definition of economics. Web.

Mankiw, G. N. (2011). Principles of economics (6th ed.). Michigan: Cengage Learning.

Smith, A. (2011). The theory of moral sentiments. Seattle: Gutenberg Publishers.

Smith, A. (2012). The wealth of nations. London: Simon & Brown.

Worstall, T. (2012). The importance of a market economy. Web.

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