The Scottish Philosopher Adam Smith, who is often described as the the father of economics, published An Inquiry into the the Nature and Causes of the Wealth of Nations in 1776 – a date that coincides with the Declaration of American Independence.
Among the many ideas that Smith put forward, there are three that best describe his philosophy. They concern (1) The Nature of Wealth, (2) The Necessity of Free Markets, and (3) Specialization and the Division of Labor.
Wealth
Moving away from the Mercantilist definition of wealth as the amount of gold accumulated by a nation, Adam Smith defined wealth as the production of goods and services in a nation that sought to improve the lives of the general population. Our current economic measure of GDP (gross domestic product) would fall under Smith’s definition (although some may argue whether some of the goods produced actually improve the lives of the population).
Self Interest and Free Markets
Smith believed that we are social beings that enjoy social interactions and typically care about our neighbors. However, Smith contended that ultimately we would always look out for ourselves and our families. He also believed we should be free to choose and compete in the work we do, rather than be born into certain professions. This personal self interest, freedom to choose and competition would result in the better workers being able to sell more of their goods and services. He contended that Market institutions consisting of individual participants seeking their own self interest are therefore best for producing wealth (Capitalism was not a word used yet, but this was what Smith was describing). However Smith recognized that the free market system has flaws and should be protected from unfair competition. Smith also recognized that while some inequality was necessary in a market system, the government’s role was to ensure fair competition and protect the market against monopolies and unfair commercial practices.
One important point that is often forgotten when Adam Smith’s philosophy on personal freedom is quoted, is his stipulation that freedom of action should be carried out within the laws of justice. The following are his own words from “The Wealth of Nation.” “Any man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interests in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.”
The Division of Labor & Specialization
The third idea that Smith put forward was that of the Division of Labor and Specialization. Quite simply this was to break down a task into its connected components and to have different people specialize in each function. The example given is the production of pins. If four people worked independently to produce pins, they would do all the tasks themselves, from (1) straitening the wire, to (2) cutting the wires to pin size, (3) sharpening the pins and (4) dulling the heads. They would each produce a certain amount of pins. However if each of the four specialized in one of the tasks – i.e. one just straightened the wire, one cut the wire, one sharpened the ends and one dulled the heads – they would be able to produce much more pins than if they worked independently. Specialization also allowed workers to get better and faster at what they did, thus improving productivity. This idea was an important innovation at the time that Smith wrote the Wealth of Nations as it was written at the beginning of the Industrial Revolution.
Smith defined what wealth was (the production of goods and services to benefit the population) and identified the drivers of wealth (individual self-concern working in free markets; and specialization and the division of labor). He laid the foundations of a free market economy which is still practiced today.
In my opinion, Adam Smith had a lot right except for one important point (which he briefly acknowledged in paragraph 5 above). Unfortunately self interest is a double edged sword. While it encourages free enterprise, it can also stifle it. If left unchecked by government and appropriate regulations, self interest can lead to the many ills that has impacted and will continue to impact unbridled Capitalism. Some of these are the consolidation of self interest among certain constituencies (the problem of being beholden to political lobby contributions); the growing remuneration gap between labor and management; and, the growing uneven distribution of income.
Educhirp 