Adam Smith
Biography
Adam Smith ( 1723 – 1790) was a highly influential Scottish political economist and moral philosopher, who had a significant impact on the development of modern economics. He also had a crucial role in the emergence of the Scottish Enlightenment, Smith was a strong advocate for free markets, division of labor, and was against government interference in the economic process, which, in his opinion restricted industrial expansion. His most important works are The Theory of Moral Sentiments (1759), The Wealth of Nations (1776), and Essays on Philosophical Subjects (published posthumously in 1795). [More on Adam Smith] [12].
Adam Smith's contribution to the notion of spontaneous order
Adam Smith was one of the first to recognize the importance the market has in regulating people's behavior, without requiring the concious intervention of those involved. Adam Smith viewed the market as a spontaneous order by arguing that individuals are guided by an “invisible hand” mechanism in their pursuits for achieving self-interested outcomes. In [The Wealth of Nations] [11]. Smith argues that a social order can only be maintained by letting natural forces operate freely.
The invisible hand mechanism argues that members of a society do not coordinate their actions towards achieving a pre-specified outcome. Their actions are not intended towards promoting public interest and their behavior is not guided by an explicit agreement. As people are self-interested, they will act in such a way so that they can achieve the greatest gains for themselves. However, the results of their spontaneously coordinated actions will translate into the achievement of an effective aggregate outcome, which seems to be the product of an omniscient mind. Smith argues that the outcomes achieved by people pursuing their own self-interests are actually significantly more effective then those achieved by legislators trying to promote the interests of the society [11]. Smith argues that centralized legislators cannot possess the knowledge those "on the spot" have, and which they maximize in their pursuits to better themselves. In Smith's opinion, interventions in the market are inefficient as regulation of commerce cannot increase output in an industry beyond what its capital can maintain, but only divert it into a direction it otherwise might not have taken [5]. Despite arguing for no government intervention in the market, Smith considers that governments are needed in helping institutions adjust to new economic circumstances, providing public education, and providing justice and security for the people [6].
Smith argues that it is the price mechanism which regulates the market as it guides the production of the right amounts demanded by consumers. He considers that consumers keep prices for products within a close range from the costs of production. As demand for a product rises, current producers gain substantial profits. However, this will result in new producers selling the same product entering the market, which will increase competition and decrease the price of the product. Market prices thus reveal the demand consumers have for a certain product. As consumers induce producers to provide them with the products they want, they direct investments to the most profitable industries, which raises the well being of all the players in the market [10]. Thus, although people are inherit selfish and greedy, competition in the free market leads to the society as a whole benefiting from their self-interested behavior.
Further proof of Smith's support of the notion of spontaneous order comes from the fact that he argues that the division on labor is not "the effect of any human wisdom which foresees and intends the general opulence to which it gives occasion" (8). Rather, the division of labor arose through a spontaneous, unplanned process, which was found to bring greater economic benefits for the market players. While advocating market freedom, Smith does not consider that a legal order can be achieved only through natural processes. Rather, he considers that a common law based on “natural reason” and not on the reasoning of legislators needs to be established. However, he believes that the division of labor is not fully benign, as mechanisms for the division of labor result in workers being unable to enjoy natural liberty, as their repetitive work causes them not to develop their intellect (21).
General Overview | Major Contributors | Game Theory Models | Objections/Arguments | Sources
