Adam Smiths economic theories - Research Paper Example

?Adam Smith’s economic theories According to some ical economists the most important economic factors are capital accumulation and growth, and this concept has originated from Adam Smith’s Nature and Causes of the Wealth of Nations. In his book, Smith has argued that it is the interaction between various economic forces that is responsible for the dynamic progress of economic system in a nation. Smith has emphasized that a historical perspective is necessary to study the science of man and society, and only with this study it is possible to establish an efficient social science system. He has said that in any society it is the collective contribution of all individuals that lead to economic stability since it is the individuals who produce and sell goods according to their requirements as a society. He has named the controlling factor of this mechanism as the invisible hand. The principle rule of classic economics is that non-intervention of the government in the marketplace will give freedom to everyone to contribute towards economic growth by creating the required goods for the greatest number of people. Adam Smith Adam Smith was an eighteenth century Scottish philosopher who is known as the father of modern economics. He was baptized on June 5, 1723. He is well known for his two books: The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). He studied moral philosophy from the University of Glasgow under the renowned philosopher Francis Hutcheson. In 1740, he entered the Balliol College, Oxford after being awarded the Snell Exhibition (Biographiq, 3-4). In his second book Wealth of Nations, Smith has given a coherent description of the history of development of industry and commerce in Europe, and has voiced his opinion against the doctrine of government intervention in trade and commerce. He has also explained that a sustainable economy is possible by people’s effort to fulfill their self-interests through competition. Smith’s economic philosophy contributed towards “creating the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade, capitalism, and libertarianism.” (Biographiq, 3-4) Economic theories The invisible hand theory Smith has focused on people’s contribution towards production, and has argued that it is the annual labour which is the principle source to meet the demands of the consumers regarding all necessaries and conveniences of life. The produce of the labour is generally consistent with the immediate produce of the labour, or the commodities or services that are purchased with the produce from other nations. Therefore, the produce from labour or what is purchased with the produce can be more or less in proportion to the demand in the consumer market of a nation. This means that the nation is economically developed when there is better supply of necessaries and conveniences or is economically worse when there is insufficient supply of the same. Smith has argued that this proportion is determined by two factors – 1) skill and dexterity of labour and proper application of the skills, 2) proportion of labour employed to that of labour not employed in useful work. Smith has emphasized only on these two factors irrespective of the soil and climate of the nation (Smith[1], 8). According to Smith, it is the market conditions that are responsible for the production of right kind of goods and services. This is because the objective of the producers and manufactures is to make profits by supplying goods and services to the market. If there is no intervention by the government in the matters of trade, then the business environment of the nation will be free from government restrictions. This will lead to well-being of the public with increased competition between producers and manufacturers to produce goods and services as and when required by the public. This is the general picture of a free market economy. With growing competition between the producers, there will be struggle among them to produce quality goods at low costs to meet the demands of the markets and also to keep the price down at the lowest possible level, thus making low profit. If there will not be enough competition, then producers will be able to make maximum profit. This will encourage more firms to enter the industry which in turn will bring the prices down. In this way, the end result will be that the consumers will be benefited in the absence of government intervention (“The Theories of Adam Smith”). There are two requirements for this system to exist which is non intervention by the government in trade, and increased competition among the producers. Smith was aware of the negative outcomes of monopoly: “the monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.” (Smith[1], 56) Smith has believed that human beings act according to their passions and instincts “without any consideration of their tendency to those beneficent ends which the great Director of nature intended to produce by them.” (Smith[2], 69) Every individual should focus upon ensuring happiness and well-being of his family, friends and country. This is because, Smith believed that the responsibility of universal happiness of all intellectual beings on earth lies in the hands of God and man has no duty towards it (Harrison, 46). In every nation, the annual revenue is equal to the total value of the goods and services produced by the production industry. Smith has written that every individual strives to utilize his capital for the benefit of the domestic industry, and also to ensure that the produced goods are of high quality so that they are of greater value. Thus, he contributes towards greater national revenue annually. In general, a person does not consciously works towards satisfying the interests of the public nor does he know how to promote public interest. His goal is only to secure his own interests by preferring to benefit domestic industry to foreign industry. He contributes to producing goods and services of greatest value because he is focused on maximizing his own personal gain, and for this Smith said that a man is “led by an invisible hand to promote an end which was no part of his intention.” (Smith[1], 364) This invisible hand exists in absence of government intervention in order to control the demand and supply of the market. Theory of moral sentiments Adam Smith’s theory of moral sentiments has a real scientific significance. According to this theory, human beings’ morality reflects in their concepts and actions because they are by nature social creatures. The theory argues that it is social awareness rather than logic that decides the moral activities of individuals. It acknowledges that prudence and justice have basic rules that are required for a society to thrive, and also explains the actions that help them to flourish. Every individual is naturally inclined to take care of himself, and this is mere prudence. However, Smith also explained that human beings as social creatures are also gifted with a natural sympathy towards others which in the modern world is known as empathy. It is a natural characteristic of individuals to feel sympathetic when they see others suffering, although less strongly than they would feel when they are distressed themselves. During their entire lifetime from childhood to adulthood, people learn to judge how to express feelings towards others that will not overwhelm anyone. Thus, moral virtues are born from the social nature of individuals. Similar is the concept of justice. Although people are by nature self-interested, they have to learn the way to live in a society without doing anything that will harm others. This is an indispensable rule for survival of society. If people try to engage in excessive positive actions for doing good to others, then although it will be appreciated but such actions are not wanted because society wants justice. Smith has indicated that “the heart of every impartial spectator rejects all fellow-feeling with the selfishness of his motives, and he is the proper object of the highest disapprobation.” (Smith[2], 70). He has said that the ideal situation is when impartial people, whether real or imaginary, will feel empathetic towards the actives and motives of other people. For this, command over the self is required which is the real virtue. Smith has written that people who can feel the happiness and grief of other, are the ones who can maintain control over his own emotional upheavals or pitfalls. The man who displays high level of humanity can acquire intense self-command. However, it can happen that such self-command has not been his virtue always and he has acquired it in advanced age. He may not have faced the hardships and dangers of life, or jealousy of his peers. In later years of his life when something accidental happens that can have a great impact on him, and for this he may acquire the perfect self-command. In this case, Smith has written that “exercise and practice have been wanting; and without these no habit can ever be tolerably established.” (Smith[2], 134) Conclusion Adam Smith’s Wealth of Nations has described economic system as automatic, and when it does not face government intervention it can regulate itself. This phenomenon is known as the invisible hand regulation. Moreever, Smith has also indicated the vices of monopolies, taxations and how these can hinder the self-regulation process of the economic system. In his other book The Theory of Moral Sentiments, Smith has presented a contradictory view which is human morality depends on sympathy. He has stressed that when individual can feel the joy and sorrow of other people, only then can he have proper control over his own joy and sorrow. Works Cited Biographiq, Adam Smith: Life and Times of a Political Economist, Filiquarian Publishing, 2008 Harrison, Peter “Adam Smith and the History of the Invisible Hand”, Journal of the History of Ideas, 72.1 (2011) 29-49 Smith[1], Adam, An Inquiry into the Nature and Causes of The Wealth of Nations, 2005 from: http://www2.hn.psu.edu/faculty/jmanis/adam-smith/wealth-nations.pdf Smith[2], Adam, The Theory of Moral Sentiments: 6th ed, 1790, April 28, 2013 from: http://www.ibiblio.org/ml/libri/s/SmithA_MoralSentiments_p.pdf “The Theories of Adam Smith”, bized, n.d., April 27, 2013 from: http://www.bized.co.uk/virtual/economy/library/economists/smithth.htm Read More