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Transcript of Adam Smith
Adam Smith lived from 1723-1790, witnessing the American and the Industrial Revolution.
Ongoing Progress and Prosperity
By looking back at Britain's economy over the previous 100 years, Smith outlined that these 3 factors were essential.
Adam Smith believed that human beings are driven by the desire to help themselves, especially in the economy.
Advances in Economic Thought
Smith had two major ideas that would impact modern economic systems.
Mercantilism- system based on the state's control of economic production and trade
Governments adopted a protectionist policy and imposed tariffs on imported goods
Trade between nations fall as a result of these taxes
Smith witnessed an economy break free of mercantilism with the American Revolution
Smith also witnessed a dramatic change in the means of production with the Industrial Revolution
An idea that each individuals strongest drive is to better his or her own condition.
Father of Capitalism and Modern Economics
Smith outlined 3 reasons why and economy
could continue growth and prosperity
Profit motive provides stimulus for economic growth and prosperity
In order for this to work, the desire for profit must not overwhelm a producer's sense of obligation to society
Self-interest and competition work together to advance the common good
Government regulation is not necessary to control the economy because of what Smith calls "the invisible hand"
1. division of labour
2. law of accumulation
3. law of population
The Invisible Hand
1. Division of Labour
2. Law of Accumulation
The invisible hand refers to natural control in an economic system
For example, if a fisherman raises the price of a tuna, consumers would find another fisherman to buy from at a lower price.
The fisherman would suffer the economic consequences of raising his price.
Even if all the fisherman in an area raised their prices, tuna would be imported from a different area while at the same time local salmon fisherman will see the value in tuna and become tuna fisherman.
The natural law of economics drives the prices back down
This theory was that people who invest a percentage of their profit in new capital equipment increase the economy's stock of capital goods, this way ensuring future prosperity and growth
By investing in factories and machines, investors will eventually earn greater profits while also helping the society as a whole
Application to Today
The idea of self-interest is relevant in free market economies today.
3. Law of Population
Smith believed that if there is accumulation of capital by investors, it will require more workers to operate equipment, leading to higher wages, which in turn will lead to better living conditions, and increase population
with an increase in population, there will be a larger labour force which allows competition for employees, thus causing wages to remain the same.
Self-interest drives free market economies as producers are forced to compete for greater profits
This competition benefits the producer and also the consumer as they pay a lower price
Self-interest and the "invisible hand" are key to making present day free market economies successful
Application to Today
Scottish philosopher and a pioneer of the political economy
The father of modern economics and founder of capitalism
Attended the University of Glasgow at age 14, Oxford University at age 17
Became a professor of logic before being promoted to professor of moral philosophy
The Wealth of Nations
is recognized as the foundation of modern economic theory
Moved to Paris and met with the leaders of a new school of an economic thought called the
the specialization of workers in a complex production process, leading to greater efficiency
this increase in levels of production created more money for investors and more goods for workers
Smith's three reasons for economic growth and increasing prosperity are still relevant today.
The division of labour, law of accumulation, and law of population are found in modern economies
Smith set up a model for economies to use as a template in order for economic success
In order for an economy to thrive, they must follow Smith's model
Physiocrats believed that natural laws not only governed the physical world but also governed human nature
Therefore, natural laws governed the social, economic and political world
Thus, artificial laws would be ineffective in trying to control the economy
this doctrine of non-interference became known as
In english, this means "leave to do" or "let it be"
signifies matters can work themselves out naturally