Smith in turn urges us to recognise that real-world politics will always be too complex for any prepackaged ideology to cope with. What we need in our politicians is careful judgment and moral maturity, something that no ideology, nor any position on the political spectrum, holds a monopoly on. In the fraught times that we now occupy, it is hard to believe that the careful and responsible political judges that Smith envisaged have much chance of emerging.
Does anybody in Western politics currently measure up? Much more likely will be new men and women of system, with alternative abstract plans, seducing desperate electorates before attempting to impose their own forceful reforms, regardless of what the pieces on the chessboard happen to think or want.
Whether these reforms come from the Left or the Right might not, in the end, matter much. As Western economies continue to struggle, and politics becomes increasingly polarised, the results could yet be catastrophic. But if so, we should certainly not consign Smith to any parade of blame. On the contrary, he tried to warn us of the dangers that we face. It is time that we listened, a little more carefully, to what the real Adam Smith had to say.
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As Smith put it in The Theory of Moral Sentiments in one of his most evocative passages: [The man of system] seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.
If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful.
If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. Political philosophy Thinkers and theories Economic history. In , Smith moved to London. This war enabled Britain to seize all of French North America. Townshend wanted the American colonists to help pay down the war debt through such measures as a tax on tea. He also became acquainted with leading political figures such as Benjamin Franklin and Edmund Burke an important British political writer and leader.
The following year, Smith returned home to Scotland to finish his book, a task that took him nine more years. During this period, he visited London several times and witnessed debates in Parliament on the growing American resistance to British rule. This massive work of almost 1, pages was based on his exhaustive research and personal observations. Smith attacked government intervention in the economy and provided a blueprint for free markets and free trade.
These two principles eventually would become the hallmarks of modern capitalism. The first cotton-spinning factory had opened only a few years earlier. Increasingly, workers labored for pennies a day in factories and mines. Most employers believed that to get the poor classes to work, their wages had to be low, just enough to keep them from starving. Smith began his book with a radical definition of "national wealth.
Instead, Smith proposed that the wealth of a nation consisted of both farm output and manufactured goods along with the labor it took to produce them. To increase its wealth, Smith argued, a nation needed to expand its economic production. How could a nation do this? Smith thought the key was to encourage the division of labor.
Smith argued that workers could produce more if they specialized. He gave the example of a pin factory based on his real-life observations. One worker who did all the operations necessary to make a single pin, he said, could produce no more than 20 in one day. Ten workers could make pins this way. If, however, the 10 workers each specialized in one or two of the pin-making operations—from drawing the wire to putting the finished pin on a paper card—they would work more efficiently.
Smith estimated that these 10 workers could produce 4, pins per worker or 48, altogether in a day. Smith argued that if all production could be specialized like the pin factory, workers could produce more of everything. Because humans naturally trade with one another, Smith reasoned, those involved in making one product will exchange it or the wages they earn for the goods produced by other workers. Thus, Smith concluded, "a great plenty diffuses itself through all the different ranks of the society.
Smith did not just present a theory about increasing production and the wealth of a nation. He worked out exactly how this would occur by describing what he called the "free market mechanism.
Adam Smith described free markets as "an obvious and simple system of natural liberty. He saw, however, self-defeating forces at work, preventing the full operation of the free market and undermining the wealth of all nations. In the 18th century, European nations practiced an economic system known as "mercantilism. The mercantilist nations believed that the more gold and silver they acquired, the more wealth they possessed. Smith believed that this economic policy was foolish and actually limited the potential for "real wealth," which he defined as "the annual produce of the land and labor of the society.
European mercantilism depended on a web of laws, subsidies, special economic privileges, and government-licensed monopolies designed to benefit specific manufacturers and merchants.
This system, however, inflated prices, hindered economic growth, limited trade, and kept the masses of people impoverished. Smith argued that the free-market system along with free trade would produce true national wealth, benefiting all social classes, not just the privileged few. In a major section of The Wealth of Nations , Smith attacked mercantilist trade practices. He insisted that what enriched European nations was not importing gold and silver, but opening up new free-trade markets in the world.
This trade, he wrote, further stimulated the division of labor, expanded the production of trade goods, and increased "the real revenue and wealth" of all. Smith criticized how the British Parliament had passed laws that crippled free trade and hindered the expansion of national wealth. These laws imposed high import duties, gave subsidies to favored companies, and granted monopolies to powerful special interests like the East India Company. These laws harmed society by limiting competition and keeping prices high.
Such measures, Smith wrote, were "extorted from our legislature" and "written in blood" since they served the interest of only a small class of privileged manufacturers and merchants. Smith reserved his greatest criticism for the British colonial empire. He concluded it was "hurtful to the general interest of society.
Smith opposed mercantilist policies that required Americans to export certain products like fur pelts only to England. The Americans also had to ship their exports on British ships. Regulations prohibited transporting woolen products from one colony to another.
Laws made it illegal for Americans to operate steel-making furnaces. However, in contrast, macroeconomic forces—supply and demand, buying and selling, profit and loss occur voluntarily until government policy inhibits or overrides them. In this sense, it is more accurate to suggest that government affects the invisible hand, not the other way around. However, it is the absence of market mechanisms that frustrates government planning.
Some economists refer to this as the economic calculation problem. When people and businesses individually make decisions based on their willingness to pay money for a good or service, that information is captured dynamically in the price mechanism.
This, in turn, allocates resources automatically toward the most valued ends. When governments interfere with this process, unwanted shortages and surpluses tend to occur. Consider the massive gas shortages in the United States during the s. The Nixon and Ford administrations responded by introducing price controls to limit the cost of gasoline to American consumers. The goal was to make cheap gas available to the public.
Instead, gas stations had no incentive to stay open for more than a few hours. Oil companies had no incentive to increase production domestically. Consumers had every incentive to buy more gasoline than they needed. Large-scale shortages and gas lines resulted. Those gas lines disappeared almost immediately after controls were eliminated and prices were allowed to rise.
While it is tempting to say the invisible hand limits government, that wouldn't necessarily be correct. Rather, the forces that guide voluntary economic activity toward large societal benefit are the same forces that limit the effectiveness of government intervention. Boiling the principles Smith expressed regarding the invisible hand and other concepts down to essentials, Smith believed a nation needed the following three elements to bring about universal prosperity.
Smith wanted people to practice thrift , hard work, and enlightened self-interest. He thought the practice of enlightened self-interest was natural for the majority of people. In his famous example, a butcher does not supply meat based on good-hearted intentions, but because he profits by selling meat.
If the meat he sells is poor, he will not have repeat customers and, thus, no profit. Therefore, it's in the butcher's interest to sell good meat at a price that customers are willing to pay, so that both parties benefit in every transaction. Smith believed the ability to think long-term would curb most businesses from abusing customers. When that wasn't enough, he looked to the government to enforce laws.
Extending upon self-interest in trade, Smith saw thrift and savings as important virtues, especially when savings were used to invest. Through investment, the industry would have the capital to buy more labor-saving machinery and encourage innovation. This technological leap forward would increase returns on invested capital and raise the overall standard of living. Smith saw the responsibilities of the government as being limited to the defense of the nation, universal education, public works infrastructure such as roads and bridges , the enforcement of legal rights property rights and contracts , and the punishment of crime.
The government would step in when people acted on their short-term interests and would make and enforce laws against robbery, fraud, and other similar crimes. He cautioned against larger, bureaucratic governments, writing, "there is no art which one government sooner learns of another, than that of draining money from the pockets of the people.
His focus on universal education was to counteract the negative and dulling effects of the division of labor that was a necessary part of industrialization. The third element Smith proposed was a solid currency twinned with free-market principles.
By backing currency with hard metals, Smith hoped to curtail the government's ability to depreciate currency by circulating more of it to pay for wars or other wasteful expenditures. With hard currency acting as a check on spending, Smith wanted the government to follow free-market principles by keeping taxes low and allowing free trade across borders by eliminating tariffs.
He pointed out that tariffs and other taxes only succeeded in making life more expensive for the people while also stifling industry and trade abroad. To drive home the damaging nature of tariffs, Smith used the example of making wine in Scotland.
He pointed out that good grapes could be grown in Scotland in hothouses, but the extra costs of heating would make Scottish wine 30 times more expensive than French wines. Far better, he reasoned, would be to trade something Scotland had an abundance of such as wool, in return for French wine. In other words, because France has a competitive advantage in producing wine, tariffs aimed to create and protect a domestic wine industry would just waste resources and cost the public money.
It lacks proper explanations for pricing or a theory of value and Smith failed to see the importance of the entrepreneur in breaking up inefficiencies and creating new markets.
Both the opponents of and believers in Adam Smith's free-market capitalism have added to the framework set up in "The Wealth of Nations. Marginal utility , comparative advantage , entrepreneurship, the time-preference theory of interest, monetary theory , and many other pieces have been added to the whole since There is still work to be done as the size and interconnectedness of the world's economies bring up new and unexpected challenges to free-market capitalism.
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