Adam Smith

"As soon as one looked away from the elegant lives of the leisure classes, society presented itself as a brute struggle for existence in its meanest form" (Heilbroner, 43). In this 18^th century English chaos, there was one man who was an optimist and saw "order, design, and purpose" (43). It was none other than the greatest philosopher and economist of all times, Adam Smith. An economist and a philosopher, Adam Smith was born in 1723, in the town of Kirkcaldy, County Fife, Scotland. At the age of about fifteen, Smith proceeded to Glasgow University, studying moral philosophy under Francis Hutcheson. In 1740, he entered Balliol College, Oxford, but as Robert Heilbroner wrote, "& Oxford was not then the citadel of learning& Most of the public professors had long ago given up even a pretense of teaching" (46), and he relinquished his exhibition in 1746. In 1752, Smith was offered the Chair of Logic at the University of Glasgow, and shortly thereafter, he was given the Chair of Moral Philosophy (46).

While professor of moral philosophy at the University of Glasgow, he wrote his "Theory of Moral Sentiments" (1759), that attracted international interest. According to Heilbroner, "The Theory was an inquiry into the origin of moral approbation and disapproval" (47). The theory dealt with the problem of how can self-interests be transcended to make moral judgements. According to Smith, "& the answer lay in our ability to put ourselves in the position of a third person, an impartial observer, and in this way to form a sympathetic notion of the objective merits of a case" (47). He believed that the essence of moral sensibility was that which came about through sympathy, but sympathy as an impartial and well-informed spectator.

In the 1760s he started writing his masterpiece, "An Inquiry into the Nature and Causes of the Wealth of Nations" published in 1776. Smith postulated the theory of the division of labor and emphasized that value arises from the labor used in production. In his book, Smith has created the subject of political economy and developed it into an autonomous systematic discipline. In his praise for the book, Heilbroner wrote, "The argument is so full of detail and observation that one constantly has to chip away the ornamentation to find the steel structure that holds it together underneath" (52). Smith is concerned with promoting the wealth of the entire nation and not just a part of it. He believed that in a "laissez faire" economy the impulse of self-interest would bring about the public welfare. According to Heilbroner, "To see that labor, not nature, was the source of "value" was one of Smith's greatest insights" (49).

In his "Wealth of Nations", Adam Smith attacks mercantilism. His answer to this came about in his "Laws of the Market". His "Laws of Market" show us how self-interest and competition have the power of holding the society and keeping it alive. "Self-interest acts as a driving power to guide men to whatever work society is willing to pay for" (55). Self-interest drives men to action, as in maximizing their profits. At the same time, competition places limits upon self-interest. The competitor seeing his greedy neighbor might lower his prices by a small margin, and the greedy capitalist would loose its clients. In this way, the market acts as its own guardian.

According to Heilbroner, "The nature of the market has changed vastly since the eighteenth century" (58-59). Heilbroner goes on to explain that now the market mechanism is characterized by its enormous number of participants and government intervention. Unlike in Smith's time, the government "sets the market rather than abide by it" (59). Laws of Market still play a major role in the market but it only describes a minute part of the behavior. In contrast to the small-scale industry at the time of Adam Smith, now England had huge factories. Though in his times, Smith did not have these enormous factories, he envisioned that the society was improving because of the "tremendous gain in productivity which sprang from the minute division and specialization of labor" (61). Smith believes that there are two laws that drive the society to this multiplication of wealth and riches - The Law of Accumulation and The Law of Population. The Law of Accumulation is the motivation to save, not just for the sake of savings but for a reason. "For capital - if put to use in machinery - provided just that wonderful division of labor which multiplies man's productive energy" (64). However, there might be a point where no further accumulation is possible. To overcome this problem, Smith came up with the Law of Population, that stated - "& laborers, like any other commodity, could be produced according to the demand. If wages were high, the number of workpeople would multiply; if wages fell, the numbers of the working class would decrease" (65).

Adam Smith believes in laissez faire, but he also believes in least government. He is against restraints on imports, exports, and other government imposed laws that shelter industry from competition.

As Heilbroner wrote, "& Smith did not "discover" the market; others had preceded him in pointing out how the interaction of self-interest and competition brought about the provision of society. But Smith was the first to understand the full philosophy of action that such conception demanded& " (72). Smith believed that the market is capable of governing itself due to the forces of self-interest and competition.

To us it might seem a trivial operation, but where Adam Smith came from, it was not. Today's markets are huge, unlike the ones that existed in Smith's times. However, underneath all these complex operations lie the basic principles first observed by Smith - self-interest and competition.

It is the instinct of a businessman that forces him to increase the prices as much as he can to maximize his profits. If it was a monopoly, probably the businessman would be successful in doing so, but we live in a democratic world, with a competitive market. The competitors are always looking for a way to cut through the market and increase their clients. This is where competition plays its role. In order to cut through the market, another businessman would decrease his prices by a slight margin, to attract the clients of other businessmen. This is not just a straightforward process. It is a process cycle. When one gains by decreasing the prices, there might be other businessmen who would like to do the same. This cycle continues until a point is reached when no further reduction of prices is possible keeping in mind the self-interest of the client and the businessman himself.

"The market is not something that we can choose to have or not to have, it exists and will exist no matter the political regime, and no matter the number of coercive laws, we would like to pass" (Leslie, Cliff. Internet). Smith believed in laissez faire, because he believed that the contradicting factors of self-interest and competition are capable of running the market smoothly without outside interference.

Government control is like having a monopoly controlled by the government itself. Adam Smith explained that a monopoly charges any price that it chooses, robs consumers and makes countries less efficient and poorer. Competition means that businesses try to charge the lowest price possible, so consumers get maximum value for money. The most powerful incentive is self-interest. People will work harder and more efficiently if they can keep much of what they earn, so governments that grow too greedy discourage people from creating wealth. However, when people work for themselves, everyone still benefits because of greater productivity - through the generation of more jobs, less expensive products and more wealth in the economy. Self-interest, he explained, is an unchangeable part of human nature, so it is wise to let personal incentives build a richer economy. Thus, the processed of competition and self-interest both work together for the betterment of the economy of the entire nation, and not just a small part of it.