Adam Smith And Classical Economics Essay, Research Paper

Adam Smith grew up in Scotland, which is home to David Hume, who is perhaps one of England s greatest philosophers. Smith had a good childhood, he was raised with some money at hand, but he was certainly not rich. As far as his family goes, his father was a lawyer and held a public office in Scotland and his mother was a member of the Scottish Gentry. There is no doubt that Smith began his political thinking through his mother. In his first book, the Theory of Moral Sentiments, he talked about the economy of his time. The market or economy consisted of small businesses started by individuals motivated by their self-interests. Self-interests do not necessarily always mean increasing one s wealth measured in dollars and cents. It is a fact that individuals seek many goals, not just increased wealth. Therefore, the self-interest of the individual involves at the minimum goals relating to prestige, friendship, love, power, helping others, and many other things. In a successful market, the competition between businesses would create enough goods for everyone. Supply and demand for desired goods would determine which businesses would be successful. It would also determine the price of the goods. This is how the market worked at Smith s time. However, the flaws with this theory are apparent in the examination of modern society.The second book that Adam Smith wrote was titled An Inquiry into the causes and Nature of the Wealth of Nations. It is believed to be a guide to the formulation of most governmental economic policies today. Its main thesis is that capital is best employed for the production and distribution of wealth with the government interfering as little as possible. Throughout this book, Smith stated his main theory. This theory was later known as economic liberalism. Smith believed in the term laissez-faire, which is French for hands off. Smith believed that there should not be any government intervention with the people except for only three cases. The only circumstances where the government should be able to intervene are with defense, justice, and certain public works. In Smith’s view, the production and exchange of goods can be stimulated, and a rise in the general standard of living attained, only through private industrial and commercial businessmen, with a minimum of government control. He believed any further government intervention would affect the major aspects of a market economy such as competition.Smith believed that human progress could only be possible in a society where everybody follows his or her own self-interests. Smith s argument was that this individualism would lead to more order and progress within the community. In order to make money, people will produce things that they know other people want, or need. When the consumer, (the buyer) and the seller meet in the market, a pattern of production develops that result in social harmony. Therefore, through self-interest the producer is motivated to produce that which society wants. Thus the consumer rules the market and not the producer.

One of Smiths most popular and well-known theories was that of the invisible hand. This theory dealt with the competition in the marketplace. Smith stated that this competitiveness between the businesses, together with the free market system would act as an invisible hand that would guide resources to their most positive and productive use. Smith believed that under competitive conditions, every person in the market place acting under their ideas and self interests, along with very little government intervention would lead to the greatest economic structures, and would bring about the greatest good for society as a whole.The Wealth of Nations talked about his two theories. The first was the Law of Accumulation or the gathering of wealth by the owners of businesses. During Smith s time the object of the great majority of the rising capitalists was first, last, and always to accumulate their savings. In the accumulation of capital Smith saw a vast benefit to society. For capital, if put to use in machinery, provided just that wonderful division of labor which multiplies man s productive energy. The second was the Law of Population, which stated that the higher the wages, the more workers there would be and vise versa.

Smith looked at the market as a chain. The free market kept the chain unbroken. At first, both labor and capital in all areas of the market was equal. There were enough of all the goods that were demanded by the population. The market also made sure that the prices of the goods covered the cost of production. From the starting point, society began accumulating wealth, and this resulted in more services for production and labor. This accumulation would also raise wages because the capitalists would need more workers to help out at the new factories. As the wages continued to rise, the factories would eventually not be able to make a profit out of their accumulation. Higher wages however were very good for the workmen because they would take home more money to their families. This was an era when many children died, and the extra money helped to keep them healthy and grow into working adults. As a result, the supply of workmen increased. As this population grew, the competition among workmen would push wages down. Accumulation would then have room to continue, and this chain would begin again.Adam Smith s laws of the market are basically simple. They tell us that the outcome of a certain kind of a behavior in a certain social framework will bring about perfectly definite and foreseeable results.

Specifically they show us how the drive of individual self-interest in an environment of similarly motivated individuals will result in competition. Furthermore they demonstrate how competition will result in the provision of those goods that society wants, in the quantities that society desires, and that society wants, in the quantities that society is prepared to pay. Adam Smith died in 1790. His theories continue to be widely read. Karl Marks even followed his teachings. He was the first person to really understand and describe how a free market functioned. He educated England and Western Europe in the importance of a free market and how the market kept society together.