Adam Smith (1723-1790) in his quest to unearth how the economy works is habitually regarded as the forefather of modern economics (Buchan, 2006, p. 2). He did so by stating the law of demand and is notably known for his major works, namely, The Theory of Moral Sentiments and An Inquiry into the Cause’s Wealth of Nations (Cockfield et al., 2007, p. 4). This essay will assess the contribution of Adam Smith to economics. In particular, among other things that the essay will focus on is Smith’s writing on economic man, the role of demand and supply, self-interest, the market mechanism, the division of labor and specialization, international trade, the payment of taxes, private property, and the role of government. Furthermore, the paper will offer own perception on whether Smith’s ideas are still suitable in exploring economic matters.
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The critics of John Stuart Mill’s political economy coined the word homoeconomy, also referred to as economic human in the late 19th century (Zabieglik, 2002, pp. 123-130). The notion was cultivated by utilitarian thinkers, including Adam Smith and David Ricardo, and explains man as rational, and intends to achieve the highest level of satisfaction, given available information about possible choices and opportunities, but with self-denial and the application of little amount of labor (Coase, 1976, pp. 529–546). Generally, most economists, particularly those who are in consensus with the theory of rational choice, although it remains contentious, accept this supposition.
According to the studies, homoeconomics turned out to be well known thanks to Adam Smith. According to Smith, human beings may be motivated by self-interest or egoism, although this self-interest functioned mechanically to generate the overall good or an identity of interests (Coase, 1976, pp.529–546). Besides, Smith was concerned with the economic, the public, and the world in general, where he perceived the intention of persons in their gains, barely ever considering the good in other people. However, the mostsignificant thing encompassed the fact that nature had affected most things to such a degree that in spite of the intents to get involved in the disagreement, persons unavoidably worked for the interest of the public by amplifying the annual revenues of the whole society to the highest capacity. Certainly, this was the doctrine of pre-established or natural harmony, which apparently was not a subject to human reason or contrivance. General wealth arose from the division of labor and specialization with man’s intentions of personal gains; however, the person was guided by an invisible hand to enhance ends that were more beneficial and general (Smith, 1986, pp.119). Smith shared the aspect of natural harmony; whereby the notion of self-interest automatically became public benefit. This, according to Smith, implies that even though the nature of man may not be particularly admirable, it may contribute to a valuable social outcome (Coase, 1976, pp.529–546).
Apparently, all societies significantly make economic choices regarding what is produced, how the commodities are produced, and who consumes those goods. However, according to Smith, the market does this role through the functioning of demand and supply. In a competitive market where the society has no power to set or sway the prices, the prices of goods are determined by the market, which, in turn, determines what is manufactured and who might be in a position of buying such merchandises (Buchan, 2006, p.24).
Smith places his perceptions of free market in his book Wealth of Nations and analyzes the conditions that caused the industrial revolution. Some of the questions featured in this book encompass: why some individuals in specific countries earn more compared to others and why wages in particular countries rise persistently compared to others (Smith, 1986, pp.119). According to Smith, when forces of supply and demand in a free market control various factors such as prices of goods and services, the government should have a defined and limited role in the community, including the administration of the public goods and jusstice, law and order, and the provision of national defense amongst others (Buchan, 2006, p.26).
As opposed to modern economic approaches linked to capital investment process, Adam Smith advocated for the division of labor and specialization as these are the two important aspects in the economy. Division of labor is in such a way that the production process is subdivided into a number of stages or compartments, each with specific roles and bearing different amounts of profit for comparative advantage to be realized in the trade actions of a country (Smith, 1986, pp.119). Specialization can, therefore, be termed as the focus of an organization on the technical process of production in an economy whose level determines the profit margin that the country achieves in its pursuit of absolute advantage (Smith, 1986, pp.119).
On international trade, Smith put forth that countries should only produce and trade those commodities in which they have acquired or have got naturally an absolute advantage and import those products from which they have a comparative advantage (Buchan, 2006, pp. 32-41). According to Smith, rent that comes from the ownership of private property is a residual, which is in surplus after profits and wages have been paid. He puts forth that wages should be lessened to subsistence degree but, on the other hand, profits rate will gradually be reduced by the competition to low levels in order to make them uniform in all industries (Buchan, 2006, p. 52). This implies that individuals who earn rent from private properties would, in turn, gain from this development.
Apparently, Smith’s ideas are still very useful in analyzing economic issues. Most of his ideas, as explained above, are still employed by most countries. For instance, the role of government in offering law and order, defense and public goods, the role of demand and supply in determining the prices of goods and services. Furthermore, his ideas on division of labor and specialization as factors of increasing productivity in the production are also employed.