Economics without the Boring Bits by Tejvan Pettinger

Author:Tejvan Pettinger [Pettinger, Tejvan]
Language: eng
Format: epub
Publisher: Welbeck Publishing Group Limited
Published: 0101-01-01T00:00:00+00:00

ADAM SMITH

For good reason Adam Smith is considered the father of economics. In The Wealth of Nations (1776), written at the dawn of the Industrial Revolution, he laid a framework for classical economics, which has endured to this day. The Wealth of Nations helped to introduce and explain many key concepts in economics, such as the division of labour, free markets, productivity, wage differentials, the invisible hand and free trade. Many of these concepts we now take for granted but, at the time, they represented a revolution in economic thinking. They helped to shift economies away from mercantilism and ushered in a new free-market, laissez-faire approach.

Perhaps the most fundamental contribution Adam Smith made was that relating to free markets. In The Wealth of Nations, he explained how individuals pursuing their own self-interest could, through the workings of the free market, create a beneficial outcome for everyone in society. He used the now famous example of a butcher, brewer and baker motivated by self-interest: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”5

Smith also referred to the invisible hand. He did so on only three occasions but has become synonymous with it. The invisible hand, said Smith, is the way that individuals seeking their own personal welfare have an unexpected benefit to the rest of society – “led by an invisible hand to promote an end which was no part of his intention.”6 The importance of this concept is that it has become the philosophic basis for laissez-faire economics and minimal state intervention. Economists and politicians who are inclined to support limited government intervention and free markets, refer to Adam Smith in support of policies from the trickle-down effect to laissez-faire capitalism.

However, while Smith definitely expanded on the benefits of free markets and was sceptical of government intervention, his economic thought was not simplistic. He first rose to prominence through a work on moral philosophy, The Theory of Moral Sentiments (1759). In it, Smith concentrates on how individuals are motivated not just by self-interest but also by a wider sympathy for his fellow men. To Smith, this sympathy and concern for others was as important as the motivation of self-interest. Some commentators have seen a conflict between Smith’s view of sympathy and the importance of self-interest. But, even in The Wealth of Nations, we see a much more nuanced view of self-interest depending on circumstances.

Also, although Smith was sceptical of government intervention in the economy, he could also see many cases where it was necessary. This included the regulation of monopoly power. Smith was well aware of how firms could gain monopoly power and then use this to exploit customers with higher prices. In effect, Smith was saying that the invisible hand may not always be there to create benefits for society, and was advocating not so much free markets as free competition. Strong competitive pressures are important for regulating self-interest.

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