Adam Smith’s Market Economy

The former Scottish professor of philosophy at the University of

Glasgow published a monumental book entitled An Inquiry into the Na-

ture and Causes of the Wealth of Nations. Usually known simply as The

Wealth of Nations, it is an eloquent statement expounding a doctrine of

economic freedom.

The book earned Smith the epithet “the founder of economics” be-

cause it was the first complete and systematic study of the subject. Smith

argued that individuals know best what is good for them. If unrestricted

by government controls or private monopolies, people will be motivated

by the quest for profit to turn out the goods and services that society

wants, people (businesses) will be led as though by an “invisible hand”

to attain the greatest economic good for society. In other words, if each

person (or business) is free to work at maximizing his or her economic

rewards, the economy will prosper. Consequently, through free trade and

free markets, self-interest will be harnessed to the common good.

Adam Smith’s theory that the government should not interfere with

business is known as laissez-faire capitalism. This French term came

about when a French businessman responded laissez nous faire (“leave

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us alone”) after being asked how government could help business. This

principle of pure capitalism as Smith saw it has been modified within

most modern economies

Through his approach to economic questions and his organization

of the science, Smith cast a mold for the main body of nineteenth-

century economic thought. His views on public policy, which became

the semiofficial doctrine of the British government, left their imprint

on parliamentary debates and governmental reports. For these reasons,

and because of his enormous influence upon succeeding generations of

scholars, Smith’s unique position in the history of economic thought is

forever ensured.

Reading The Wealth of Nations today, one can see why the influence

of this book reached out beyond the borders of economics. Like the Bi-

ble, Smith’s treatise contains familiar concepts and well-worn truths on

almost every page. As a result, “the shy and absent-minded scholar,”

as Smith was affectionately called, became the apostle of classical eco-

nomic liberalism—meaning laissez-faire in his time. Today we tend to

refer to such ideas as “conservatism.”

Smith’s version of the economic system as a naturally self-organizing

and self-adjusting “social mechanism” – known as classical economic

doctrine was never confirmed by factual evidence, as Newton’s laws

of motion were; all the same, classical doctrine dominated economic

thinking and national economic policy in all advanced economies for

the next 150 years, and it plays its role in many countries to this day.

Text 4

Read the text. Be ready to answer the following questions: 1. What is demand? 2. What

is supply? 3. What does the demand (supply) curve represent? 4. What does the inter-

section of the industry supply and demand curves establish?

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