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Adam Smith After two centuries, Adam Smith remains a towering figure in the history of economic thought. Known primarily for a single work, An Inquiry into the nature and causes of the Wealth of Nations (1776), the first comprehensive system of political economy, Smith is more properly regarded as a social philosopher whose economic writings constitute only the capstone to an overarching view of political and social evolution. If his masterwork is viewed in relation to his earlier lectures on moral philosophy and government, as well as to allusions in The Theory of Moral Sentiments (1759) to a work he hoped to write on the general principles of law and government, and of the different revolutions they have undergone in the different ages and periods of society, then The Wealth of Nations may be seen not merely as a treatise on economics but also as a partial exposition of a much larger scheme of historical evolution. Ironically, Adam Smiths great economic break-through is that no one should worry about the economy. The economy will take care of itself because it is driven by self-interest. Given that greed is a quality that drives just about everyone, this should not be a problem.
Society has needs and wants, so the public will always demand goods. It is up to producers to supply the public with these goods and services. The goods that are demanded will be produced more and other products will not. It is the economic variation to natural selection. Competition in the market place will drive down prices and raise quality and efficiency. There is no need for government regulations because the market will always correct itself, eventually.
The only elements needed are greedy profit driven producers and stupid people to buy their products. Adam Smith believed the economy would always adjust itself during an inflation or recession. During prosperity, consumers will have confidence in the economy and this will bring on inflation and cause prices to rise due to the increase in spending the demand in goods. When the prices rise too high, then consumers will stop buying the goods. Slowly the prices will fall as the demand decreases. When the prices drop to affordable levels, consumers will buy the goods again and the economy will be stable.
Unemployment will act much like the prices in the situation. Unemployment will be low while consumer confidence is high. Once the prices rise to an inflationary level, companies will lay off people in order to make up for the over production of the goods that are not being sold at the high prices. Once the prices stabilize, the companies will be looking to higher workers and increase production. Adam Smith believed that the government should only tax a necessary amount as not to create a deficit or surplus. The government should also spend only what it has.
This would reduce the worry of government deficits, which many are concerned. The government would not keep a surplus either, which would keep the money in pockets of the citizens and enable them to put the money back into the market by spending it. Adam Smith was in favor of a progressive tax that is each person gets taxed in proportion to their income. Smith also advocated a constant tax in which there were no tax cuts or hikes. That way the public would know how much they will have to spend and could balance their own budgets accordingly. With the invisible hand, as long as consumers keep buying goods the economy will stay in check.
Consumers will buy what they want at prices they feel are acceptable. Companies will produce these goods at the lowest possible price and in quantities based on public interest. According To Adam Smith, the economy does not have to be intervened in because it works on its own merits. It will always balance itself because the consumers will react accordingly in case of inflation or recession. As long as people are motivated by profits, the invisible hand will guide the economy. After all, people knew little about economics for centuries and they all survived.
In the twentieth century, the world had a new viewpoint on economic policies. These ideas were brought by John Maynard Keynes. His ideas were contradictory to those of Adam Smith. Keynesian thought was to change all this and provide a more accurate tool of analysis and theory of policy. The so-called Keynesian economics 1 ended up being a perfect fit for its time, for had Keynes postulations come earlier his theory would probably have been largely ignored. During earlier periods, classical economic thinking dominated the scene with its more laissez-faire policies.
While some intervention was seen as necessary, it was primarily held that the market will adjust itself. These orthodox economic thinkers were strong believers in the efficiency and equity of the market. In their opinion the best course of action was to let the market economy fix itself. Keynes was in favor of government intervention to keep the economy in check. The government can be used as a tool to prevent inflation and recessions from even occurring.
If the problem is stopped before it begins, then the invisible hand will not have the opportunity to correct itself. John Maynard Keynes used fiscal policy in order to protect against inflation and recession. Fiscal policy uses government spending and taxes to regulate consumer spending and demand. In case of an inflationary risk the government would raise taxes and limit the amount that consumers are able to spend. This would lower demand and drive down prices. During a recession the government would cut taxes to help ease the financial burden and encourage spending.
Monetary policy can also be used to balance the economy. Monetary policy controls the amount of money in the market based on bank interactions. The FED has many tools to control the money supply. The FED controls the reserve requirement, which is the percentage of money that banks must keep in reserve. If the requirement is high, then it limits the amount that banks can lend out. This reduces the amount of loans and decreases the amount of expensive purchases such as cars and houses.
Raising the requirement can fight against inflation and cause a tight money market. The FED can also adjust the discount rate to influence the economy. The discount rate is the interest rate that banks pay to borrow money from the federal reserve. If the FED raises the discount rate, then banks must also raise their interest rates as to not lose money on the loans they give out. High interest rates discourage borrowing much like the federal reserve requirement. The third monetary policy that the FED controls is open-market operations.
The open-market is the buying the selling of government bonds. If the FED wants to create a tight money market, they can sell bonds to banks at discounted rates to encourage the sale. The bank gets the bond, while the reserve is given the money, which reduces the money that the bank has available to lend out. Keynes was in favor of taxing citizens based on the operations of the economy. In a time of prosperity when inflation is a risk, raise taxes. During times of recession, it is necessary to lower taxes to encourage production and growth.
Lowering taxes can cause a budget deficit, but Keynes would argue that deficits are vital and not an economic problem. It is better for the government to have a deficit and help the people prosper. The other alternative would be to have the government prosper and make society go into a deficit when they are forced to borrow money in order to survive. It is much better for the government to be in debt instead of its citizens. Keynes favored the use of government policies to influence spending. How much people spend would be based on the dealings of fiscal and monetary policies.
The FED can either encourage people to borrow and spend or save their money. During the twentieth century, America has followed Keyensian economics. This is evident in examining the power that the FED has not just over America, but the rest of the world as well since the Untied States is an economic super power. The chairman of the FED, Alan Greenspan is said by many, to be the most powerful man in the world. Keyensian economics is much more precise than Smiths classic economics. The nations economy is much too important to be left up to the invisible hand.
Policies are required to make sure that the country continues to prosper. Smith also noticed that self-interest lead to increased trade and bargaining. It is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of (Smith 111). It is this same trucking disposition which originally gives occasion to the division of labor (Smith 113).
When Smith speaks of the division of labor he refers to the specialization of workers into certain trades. This happens because an individual discovers talents that he possesses and may be advantageous for him to further develop in order to increase his wealth. People perhaps imagine that goods will make them happier and seek them for that reason, but they are deluded. Adam Smith for one thinks the delusion is a good thing because without it people would not work. This desire to acquire acts as a driving power to guide men to whatever work society is willing to pay for (Smith 77). So as you see, Adam Smith felt that the selfish motives of men are transmuted by interaction to yield the most unexpected of results: social harmony (Smith 140).
You may ask, What kind of cold-hearted man would promote selfishness as the only way to think and act? This leads to the next hypothesis. Smiths first book the Theory of Moral Sentiments was published just five years before he began writing his second, the Wealth of Nations which dealt with the pursuit of self-interest. Its hard to believe that Smith could have written the second book devoid of morality not too long after finishing a book with the word moral in the title. (web) The very first sentence of Moral Sentiments is as follows, How selfish man may be supposed, there are evidently some principles in his nature, which interest him in fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. (Smith 162) Smith realized that although man thought material wealth would bring him happiness it is through selfless acts of charity and kindness that one must truthfully receive enjoyment.
Smith had virtues in mind when he wrote of self-interest; he just chose not to focus on them for he already had in his first book. The third topic that I have pondered is whether Smith had given any thought as to what context his invisible-hand would apply to. Smith was an objective economist; he based his invisible-hand theory upon what he observed in the eighteenth-century economy. He did not believe that the new corporate systems or the attempts of workmen to form protective organizations would last. He felt that the marketplace would continue to only grow; remain free of any social disturbances. Today we function in a marketplace full of corporations, labor unions, and involved governments, barriers that upset Smiths free-flowing market.
Now some may disagree with what I say, which is perfectly reasonable, for this is only what I have gathered from my limited readings. This is only a taste, a theory upon one mans thoughts. If you further explore the reflections and writings of Adam Smith, it is evident that he was a genius or he and I are both fools. Adam Smith was known in his time as a philosopher but today he would be considered an economist. Smiths works changed economics forever. He spent much of his life attending school, teaching classes, or working on one of his books.
His two works were The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations, which is what he is most known for. Adam Smith was extremely important for economics. His book, An Inquiry into the Nature and Causes of the Wealth of Nations was a huge step forward in the field of economics. He spent most of his life studying either economics or some other field and it showed by his works. It should be said that the greatest economic thinker of our time was John Maynard Keynes. His economic postulates were of great importance to a world that was ravaged by depression, underemployment, and a lack of economic understanding for these events.
Bibliography 1. Joyce, Helen. Adam Smith and the Invisible Hand. Plus Magazine. Retrieved from the World Wide Web web Smith, Adam.
The Theory of Moral Sentiments. London: Pluto Press, 1986. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations.
New York: Random House, 1991. Griswold, Charles L. Adam Smith and the Virtues of Enlightenment. New York: Cambridge University Press, 1999
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