Meaning of economics by Adam Smith

June 17, 2016
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"I am a beau in nothing but my books." -Adam Smith

Adam Smith was an 18th-century Scottish economist often considered to be one of the fathers of modern economics, discussing the role of the free market. His 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations contains several important ideas that continue to be relevant in contemporary politics and social science, such as the "invisible hand."

The invisible hand

Smith coined the term "invisible hand" in Wealth of Nations, though its current usage has expanded far beyond Smith's original meaning. In its broader meaning, the invisible hand is thought to "guide" markets, allocating resources in a most efficient and optimal manner. However, Smith himself only used the term once in the book in reference to the effect of international trade on domestic trade, specifically between Britain and North American colonies. He argued against the idea that liberalized international trade would destroy the English economy, writing that a "home bias" among English investors would prevent this.

Adam Smith: Trickle-downer?

Smith is often invoked by conservatives and supply-side economics advocates (Alan Greenspan, adoring Smith's "clarity to the seeming chaos of market transactions, " is the most infamous) despite the fact that Smith's actual beliefs are considerably more moderate than they are often portrayed. One of Smith's more famous quotes is:

“”People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Amartya Sen, in an article for the Financial Times, notes "It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed." In addition, Smith supported the government intervening for the purposes of universal education or poverty relief, something agreed upon more by the center-left than conservatives.

Wealth of Nations should also be understood in the context of Smith's Theory of Moral Sentiments, which provided an overarching description of his moral system. Moral Sentiments argues that two of the most important guiding factors in human life are sympathy and conscience (which he referred to as "the impartial spectator") and generally explores many philosophical themes outside of economics proper.

It has also been pointed out that Smith basically supported some form of progressive taxation, writing in The Wealth of Nations:

“”The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

External links

  1. Gavin Kennedy. Adam Smith and the Invisible Hand: From Metaphor to Myth. Econ Journal Watch, 6(2): May 2009, pp. 239-263
  2. Adam Smith is not the antidote to Thomas Piketty,
Adam Smith, Book 5, Ch. 1, pt. 2, Expense of Justice
Adam Smith, Book 5, Ch. 1, pt. 2, Expense of Justice
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Adam Smith, Book 1, Ch. 6, Component Parts of Price
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