What Contribution Did Adam Smi Essay, Research Paper

Topic: What contribution did Adam Smith and John M. Keynes make to the study of economics?

Adam Smith was the founder of economics, as we know it today. His thoughts have shaped modern ideas about the market economy and the role of the state in relation to it. Smith laid the intellectual framework that explained the free market (which still holds true today) and laissez-faire. Both are connected with the underlying theme of economic growth. Smith’s analysis is not confined to showing the interrelation between the different elements of a continually maintained system. It also explains how the system can generate the continual accumulation of wealth. And since, according to Smith, this process is most successful when left to the play of natural forces, his analysis leads him to urge governments to let well alone.

Laissez-faire government believes commerce and trade should be permitted to operate free of controls of any kind; there should be no tariffs or other barriers. The direct translation from the French language is leave alone to do , which is self-explanatory.

He is most often recognized for the expression “the invisible hand,” which he used to demonstrate how self-interest guides the most efficient use of resources in a nation’s economy, with public welfare coming as a by-product. And what drives this flow of goods and services? I quote Adam Smith from his book The Wealth of Nations :

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.

It simply encourages businesses to provide what consumers want and at the same time it discourages government involvement. He believed that the only responsibilities of the government should be to define property rights, set up honest courts, impose minor taxes and subsides to compensate for well defined and narrowly specified market failures . To underscore his laissez-faire convictions, Smith argued that state and personal efforts, to promote social good are ineffectual compared to unbridled market forces.

Adam Smith explained that a monopoly charges any price that it chooses, robs consumers and makes countries less efficient and poorer. Competition, he said, means that businesses try to charge the lowest price possible, so consumers get maximum value for money. If they can buy more, they support more jobs in the economy and the country grows richer. Without the police stopping competition, he said, monopolies cannot survive for long. Around the world today, government monopolies and other bad practices are under major assault from Adam Smith’s ideas.

Adam Smith believed that strong government was a great necessity, particularly to create and enforce laws and to ensure justice. He believed in a democratic partnership between government and the people, but knew that each should do what it does best – businessmen should not control the justice system, nor should government try to run businesses. Thus he was the real father of privatisation and other 20th century reforms based on market economics under rule of law.

The heart of Keynesian economics consists of an analysis of the determinants of effective demand. If one ignores foreign trade, effective demand consists essentially of three spending streams: consumption expenditures, investment expenditures, and government expenditures, each of which is independently determined.

John M. Keynes attempted to show that the level of effective demand so determined may well exceed or fall short of the physical capacity to produce goods and services: that there is no automatic tendency to produce at a level that results in the full employment of all available men and machines. This fundamental implication of the theory came as something of a shock to exponents of the traditional economics who had been inclined to take refuge in the assumption that economic system tend automatically to full employment.

He argued that it was demand that created supply. If aggregate demand rose, firms would respond to the extra demand by producing more and employing more people. But a fall in demand would lead to less output and rising unemployment. His central point was that an unregulated market economy could not ensure sufficient demand. He therefore rejected the Adam Smith/classical economics belief, which held out the promise of material progress in a laissez-faire environment. Keynes was convinced that market-based economies do not produce full employment automatically. He argued that there would be unemployment and depression from time to time in the absence of corrective government policies. In his view, government action was essential to stabilize an unstable economy. It was necessary for the government to intervene, to ‘fine-tune’ the economy by running demand-management polices; these were to counter current trends in the trade cycle – to speed up activity when there is too little, to slow it down when there is an excess. He believed that Governments should abandon laissez-faire and instead they should intervene to control aggregate demand. This might well mean running a budget deficit: in other words, the government spending more than it receives in taxes.

By keeping his attention focused on macroeconomic aggregates, like total consumption and total investment, and by a deliberate simplification of the relations between these economic variables, Keynes achieved a powerful model that could be applied to a wide range of practical problems. His system subsequently underwent considerable refinement, some have said that Keynes himself would hardly have recognized it, and became thoroughly assimilated into the body of received doctrine.

Keynes specifically rejected the need for public or government ownership of the means of production. He was concerned with the aggregate outcomes in the economy. He therefore did not direct his attention in The General Theory to the issues of what should be produced and how.

He was critical of the inequalities in income and wealth but argued that some inequality is necessary to provide incentive to entrepreneurs to undertake investment. There are valuable human activities, which require the motive of moneymaking and the environment of private wealth-ownership for their full fruition.

In conclusion Adam Smith made as much sense in the 18th Century as he does today. It was Smith the Father of Economics, who presented economics as a discipline all its own. He knew the producer and consumer are the vital elements of the economy, seeing the consumer as more important as they presented the need and controls the prices by deciding how much he or she is willing to spend. For people who believe in free markets, property rights, and individual enterprise, Smith laid the framework three centuries prior. John M. Keynes on they other hand criticised the works of Smith. He believed that with output and prices constant, and there is no surplus in supply then they would be no deficit. Yes his ideas were seen as radical at the time but all he wanted to do was to make sure that people had enough money to invest and help the economy along. Even if this was true the monetarists argued that the analysis was fundamentally flawed and instead returned to the classical analysis. Keynes turned his thoughts to the design of international financial institutions calculated to limit the spread of depression. At the Bretton Woods Conference in 1944 he played a prominent part. But the institutions that resulted from the conference, the International Monetary Fund and the World Bank–two agencies that survive into the 1980s–bear much stronger marks of the orthodox theories of the United States Treasury of that time than of Keynes’s thinking.