Adam Smith (1723-1790) is arguably one of the most influential political economists in modern history. He lived through the Scottish Enlightenment where he was accorded a unique opportunity to share his political, economic and moral philosophy. During this period, Smith also embarked on a scholarly quest with the intention of introducing his works and theories. Today he is remembered for authoring An Inquiry into the Nature and Causes of the Wealth of Nations (1776), an in-depth investigation of modern economic systems and their influence on societies. Smith is also credited with developing the contemporary concept of division of labor, the classical free market economic theory the rationale behind improving economic prosperity. It is, therefore, fundamental to evaluate Smith’s contribution to economics and perspective on the proper role of government.
Adam Smith, a very influential eighteenth-century political economist, wrote, “By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it” (cited in Stiglitz & Rosengard, 2015, p. 62). Considering the quotation, in 1,250
What Smith Meant by the “invisible hand” and it functions?
Adam Smith is recognized for introducing the so-called “invisible hand” concept. The idea first appeared in his magnum opus, The Wealth of Nations, to refer to the unintentional social benefits of using a free market economy. It is also grounded on the notion that individual’s actions based self-interests may, inadvertently, result in a myriad of social advantages for society as a whole. Smith’s proposition had direct links to aspects of production and the use of labor within the domestic industry to bolster economic success. Trade and market are thought to be mutually exclusive (Galbraith, 2017). Their interaction, thus, results in effects that are socially desirable to a particular nation as outlined in the neoclassical school of economic thought. Smith was particularly critical of government interference and regulation within the economy. He suggested a free-market as a measure to counter any unforeseen circumstances which may eventually result in a financial recession. Smith was also of the opinion that government intervention and regulation were unnecessary. It was for this very reason that he believed that society would benefit more in an environment where government was at the periphery and allowed individuals to actively participate in a free economy. Although done with noble intentions, government regulation was ineffective and harmful to society. Smith’s concept of the invisible hand made it possible for consumers to engage in the free purchase of goods while producers were also expected to sell their wares freely (Rothschild, 2013). Prices within the market will then be adjusted systematically to suit the needs of the general population. In nations where the government did not interfere in the market, production was done efficiently and in a manner that attracted investors and maximized their returns. It also created conditions where utility could be maximized by society. Thus, the collective desires of society interact freely to accomplish production, an inflow of capital and ready availability of goods and services.
How Smith’s work is a Reaction to Mercantilism, which Dominated the Seventeenth and Eighteenth centuries. As a point of departure, define mercantilism.
Smith’s work is also widely regarded as reaction to mercantilism which had dominated the world market during the seventeenth and eighteenth centuries. Mercantilism espouses economic nationalism with the primary goal of ultimately forming a strong and wealthy state. Smith’s work was a reaction to this idea of political economy that was applied by major European powers at the time (Berry et al., 2013, p. 45). Countries would amass wealth by limiting imports from other nations while encouraging exports. The basis of this idea lay in that nations wanted to secure their wealth through the introduction of gold and silver while creating employment opportunities for locals. Smith openly criticized the mercantile system for its failure to introduce cumulative gains for consumers while serving the interests of wealthy merchants. It also consolidated regional powers, leading to economic competitions which eventually resulted in imperialism and colonialism. Military skirmishes between nation-states were also common during the era of mercantilism in Europe.
Nation states were hell-bent on implementing expansionist policies to make sure that they could support their large standing militaries and dominate their contemporaries. Mercantile classes also influenced governments to fashion economic policies which would benefit them and their enterprises. Smith critiqued this consequential relationship since it introduced an imbalance where policies were specifically introduced to shield merchants from foreign competition. Mercantile policies also involved capital from governments and a direct involvement in the creation of monopolies. The imposition of quotas and tariffs also benefitted the local industry by reducing competition. Furthermore, Adam Smith was critical of mercantilism for it measured the wealth of a nation based on its treasury. To him, nations were better off focusing on improving trade since it had direct benefits to all parties involved. The collusion between government and industry prevalent during this period was also dangerous since it reduced efficiency with no social benefit.
Did 19th-century thinkers agree with Smith. How did, for instance, Karl Marx view the doctrine of laissez-faire? What were the inevitable consequences of such an economic system?
Although Smith’s ideas were widely accepted during the 19th century, he was criticized by leading thinkers such as Karl Marx. The bone of contention lay in Smith’s proposition that, in an ideal state, individuals would strive to maximize societal improvement. Consumers will, thus, be driven by a products benefit to society when making purchases (McLean, 2006). In an ideal society, producers would sell items for a price closer to their overall cost of production. A lack demand or surplus would result in limited government role within the entire economic system. Karl Marx was critical of this approach and suggested capitalistic tendencies of this fashion would eventually result in the exploitation of workers.
The system would also benefit the rich while disadvantaging the poor and segmented individuals in society. Marx further believed that the value of good service is directly attributed to the labor force behind its production. Contrary to Smith’s idea of society, Marx posited that only two classes exist- the bourgeoisie and the proletariat. He believed capitalism did not offer a chance for transformation and societal improvement, which is why individuals would remain in their respective classes. Smith was also trusted in capitalism as the ideal economic system for any society. Marx was against this idea since the lasses-faire doctrine would encourage individualistic tendencies and ultimately lead to social injustice.
Discuss the influences of Smith and his critics, like Marx, reflected in the mixed economy of the United States today.
Smith had a massive influence, typically reflected in the mixed economy presently adopted by the United States. He introduced the free market philosophy which underscored the importance of minimizing government regulation and intervention. In the United States, the government now limits its involvement and the application intervention policies to steer economic progress (Skousen, 2015, p. 34).
The idea of the invisible hand is also applied by the United States by avoid influencing the forces of supply and demand. Additionally, Smith’s ideas resulted in the large-scale adoption of the assembly-line production method in the United States. It resulted in the division of labor and overall effectiveness at the workplace. The United States also refers to the gross domestic product (GNP), a metric introduced by Smith, which has revolutionized importing and exporting.