taxpayers of about $124 billion, the colossal corporate scandals of Enron, Tyco International, Adelphia, Global Crossing, WorldCom and others, the dot.com bubble between 1995 and 2001 and the 1998 Long Term Capital Management (LTCM) hedge fund fiasco. Their argument is that the corporate world has been heading down a dangerous path for more than 20 years while governments, regulators and the society failed to put the necessary checks to stop the big disaster that was looming. In short they are saying that we are now facing the consequences of our actions.
Smiths contribution to the study of Economics lay primarily on his demonstration of the interdependence of the different segments of the economy and of the policies to be followed to promote the wealth of a nation. He advocated for competitive markets without government intervention on the assumption that natural process within the economy have the ability to resolve conflicts more effectively than any arrangements developed by man. From his book we get the following famous quote:
With competitive markets and an absence of government regulation, the resulting natural prices bring about an optimum allocation of resources in that consumers receive the goods they want at the lowest possible cost and maximum rates of growth are ensured (Smith, 2009, p.24)
Smith essentially was saying that self interest + free markets + deregulation results in prosperity for everyone. The global financial crisis has taught us otherwise. It has taught us that unrestrained capitalism that is obsessed with self-interest and is unconcerned about the long-run, can lead to monopoly, inequitable distribution of income, unemployment, and environmental disaster (Pitelis, 113).
However we cannot put the blame on Smith considering that he was speaking in the 18th century when the context of Economics had not yet experienced the industrial