Canada and the World
Current Events with a Canadian Perspective
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19 November 2010
Basic Economics Part Two
Adam Smith Defines Capitalism
Adam Smith saw himself as a philosopher but because
of his interest in the operations and principles
of the market he became known as an economist
Born in Scotland in 1723, Smith (below) explained his economic theory in The Wealth of Nations (1776), the first work to establish economics as a separate science.
The central idea in his book is that if individuals are left to pursue their own
economic interests without constraint, then everybody benefits. Except for limited
functions (defence, justice, certain public works), he believed that government should
keep out of the economic life of a nation.
That’s not to say that Smith had a high opinion of merchants and businessmen. “People of the same trade,” he wrote, “seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The Power of the Invisible Hand
But he did think that businessmen seeking their own interest are led “as if by an
invisible hand” to promote the well-
Competition in the marketplace, he reasoned, would lead businessmen to supply the goods consumers want, to produce them efficiently, and to charge only what they are worth.
That left monopoly, whether private or state-
Trying to control prices could dampen market reactions and perpetuate a shortage or surplus, Smith said.
He further argued that economic growth, which depends upon capital accumulation and an increased division of labour (the efficiency of specialization in business and occupation), would be promoted best by private rather than public efforts. People would save and invest for the future because of a natural tendency to better their own condition.
It’s all about Pins
In The Wealth of Nations, Adam Smith, explained his belief in specialization and division of labour by describing a small pin factory.
He said that one man working on his own could produce 20 pins a day when he had to
do each pin completely himself. But if each worker specialized in doing only one
part of each pin -
Each with their own specialty, the men could produce 4,800 pins a day, he said.
Adam Smith was a Free Trader
Not surprisingly, Adam Smith was very much against mercantilism, which restricted international trade in European countries during the 16th, 17th, and 18th centuries.
Mercantilists believe that one country’s gain is another’s loss. So, boosting their own nation’s wealth meant discouraging imports, through such measures as tariffs, and encouraging exports by having government subsidize local industries to dampen foreign competition.
Smith was all for free trade as a means of increasing the wealth of nations, believing that restrictions on trade diminished wealth.
Although Smith’s ideas have been modified over time, many sections of The Wealth of Nations, notably those relating to the sources of income (rent, wages, and profits) and the nature of capital, have continued to form the basis for theoretical study in the field of political economy.
The Wealth of Nations has also served, perhaps more than any other single work in its field, as a guide to the formulation of governmental economic policies.
Sources
Hazlitt, Henry. Economics in One Lesson,Three Rivers Press, 1988.
Henderson, David R, et al, Concise Encyclopedia of Economics.
McConnell, Campbell R, Brue, Stanley L. Economics, McGraw Hill
Samuelson, Paul. Economics, McGraw Hill, 1948.
Sloman, John. Essential of Economics, Prentice Hall, 1998
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SMITH’S
NARROW ESCAPE
Adam Smith’s “constitution during infancy was infirm and sickly, and required all the tender solicitude of his surviving parent. She was blamed for treating him with an unlimited indulgence; but it produced no unfavourable effects on his temper or his dispositions: and he enjoyed the rare satisfaction of being able to repay her affection, by every attention that filial gratitude could dictate, during the long period of sixty years.
“An accident which happened to him when he was about three years old, is of too interesting a nature to be omitted in the account of so valuable a life.
“He had been carried by his mother to Strathenry, on a visit to his uncle Mr. Douglas, and was one day amusing himself alone at the door of the house, when he was stolen by a party of that set of vagrants who are known in Scotland by the name of tinkers.
“Luckily, he was soon missed by his uncle, who, hearing that some vagrants had passed, pursued them, with what assistance he could find, till he overtook them in Leslie Wood; and was the happy instrument of preserving to the world a genius, which was destined, not only to extend the boundaries of science, but to enlighten and reform the commercial policy of Europe.”
Account of the Life and Writings of Adam Smith LL.D. by Dugald Stewart 1793.
From the Transactions of the Royal Society of Edinburgh. Read by Mr Stewart, January 21, and March 18, 1793.
“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.”
According to the law of supply and demand, when buyers don’t fall for prices, prices must fall for buyers.
Talk is cheap because the supply always exceeds the demand.