‘Economy’ is assumed to be a part of natural phenomenon, something that was given to human creatures completely predefined. This means that we do not classify the existence of economy as modern. However, it is essential to note that the word ‘economy’ itself came into being in the late 20th century when neo-liberalism started in the 1970’s. Economy is a modern concept, just like progress. It is ironical that we categorize economic development as ‘progress’ and countries or nations spend a lifetime thriving to achieve this progress through advancements in their economy.
It is reasonable to believe that exchange of goods and services has been a part of society since forever because one person can certainly not produce and consume every item. For this reason, the barter system came into being where people exchanged goods and services frequently. For instance, exchange of apples for bananas. This system was successful and widely used until the concept of money emerged. Money got more popularity because of its portability, value, and durability. Overtime, the barter system completely ended and power of money took over. This requested the beginning of market where producers and consumers can come together to sell/buy goods and services. Thus, it was in the 18th century when the consumer society emerged and people started to acknowledge the existence of ‘market’.
Idea of market, defined by various scholars, circulated worldwide. During this very period, Adam Smith expressed his ideas through a book named ‘Wealth of Nations’ published in 1776. This book brought a lot of popularity to Adam Smith who was also titled as the ‘Father of Economics’. Adam Smith introduced the components of free market, self-interest, and division of labor as the domain for economy. He also gave the theory of ‘invisible hand’, which formed an entire market structure. His ideas created a capitalist society later on, which is one of the most significant reasons as to why his importance has grown over time.
Adam Smith introduced the idea of free market for all the economies concerned. He suggested that a market should operate without any kind of government intervention. To be more precise, he wanted the government to understand that politics and economy have different implications and one should not intervene with the other. As per the theory of invisible hand, he suggested that the market forces readjust themselves to form equilibrium. Demand is the willingness and ability of consumers to pay for a certain good or service while supply is the willingness and ability of producers to produce a good or service at a specific amount. Demand has an inverse relationship with price, as when the price increases, demand falls. On the other hand, supply has a positive relationship with price where an increase in price will cause an increase in supply. The point where supply and demand meets is known as the equilibrium. Smith argued that these market forces are designed in a way that they can readjust themselves in case of any difference to reach a new equilibrium. He deemed state intervention as ‘unnecessary and inefficient’ (Brown, 1992).
The concept of self-interest is equally important as it recognizes the human cognition and molds the market accordingly. Adam Smith argued that people are rational human beings and they always act in favor of their self-interest, regardless of its effect on others. In Wealth of Nations, Adam Smith says, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest” (Smith, 1776). This means that Smith expected every consumer and producer to behave in accordance to their benefit rather than as a favor on others. For instance, consumer will only buy the product when its utility is greater than the price and a producer will only produce if there is some profit attached to the production. Moreover, due to a visible trend, it can be concluded that people want to have positional goods that will bring them some kind of status position or status in a society since many people will be unable to buy those goods. Smith links this to the moral philosophy and claims that people do not strive for position, or they do not spend a lot to get a sense of achievement, they want acceptance by the society and they only care about what people think of them. In ‘Theory of Moral Sentiments’, another book of Adam Smith published in 1759, argues, “To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease, or the pleasure that interests us” (Smith, 1759).
Lastly, Smith proposed the idea of division of labor and specialization. He claimed that in order to increase productivity, labors should specialize in what they are best at, and then repeat that task in order to do it perfectly and speedily. In his book, Smith has portrayed this with the example of production of a product as tiny as a pin. He broke down its manufacture in 18 different stages, which increased the production to forty-eight pins a day from twenty pins a day. Smith claims that division of labor has numerous benefits for the society. Firstly, it increases the output and efficiency of the workers. Secondly, due to the reduction in cost, a variety of goods and services become available for people to maximize their utility and choose accordingly. “A consequence of this worldwide division of labor is that even a common artificer or day-laborer in a civilized and thriving country has access to wide range of commodities that represent the labor inputs of many thousands of other workers” (Brown, 1992).
Although Smith introduced the components of free market, self-interest, and division of labor for an economy to function properly; these elements also faced criticism. The concept of free market was questioned based on the requirement of public goods. Government involvement becomes necessary in the case of provision of public and merit goods. For instance, market would prefer to sell cigarettes because of their profitable nature, but government puts a restriction on its excessive production because of the negative externality. The element of self-interest is questionable because of its selfish motive. Behaving in a certain rational way for economy might lead to distortion of an economy as a whole. This self-interest serves, as a justification for the parallel economy where people transact according to their benefit since all the care about is their self-interest. Lastly, the idea of division of labor was even criticized by Adam Smith himself. He critiqued that specializing might increase the output but the performance of monotonous task by workers lead to a decrease in motivation. Workers get tired of executing the repetitive job as they are expected to behave like a machine. Moreover, division of labor is dependent on the size of market and the scale of production. For instance, a factory worker might go through division of labor but a butcher, owning a small shop, might have to complete all the tasks himself.
To conclude, the model proposed by Smith is unrealistic for modern day world. The ideas given by Adam Smith are still used and evaluated in the economy. These concepts helped in shaping the market as a capitalist one where people only consume or produce to maximize their profit. Although the ideas presented by Smith were before the capitalist model came into existence but the notions of capitalist market stand by the influence of Adam Smith. This is why Porter refers to Adam Smith as ‘that high priest of capitalism’ (Porter, 1990). Similarly, an authority on Adam Smith writes, ”The Wealth of Nations’ was adopted as an ideology of early liberal capitalism and its popularity may have been due as much to the way in which it accorded with the economic and political prejudices of the emergent bourgeoisie as to its intrinsic merits as a scholarly works’ (Campbell, 1971).
- Brown, V. (1992). The emergence of economy. In S. Hall, & B. Gieben (Eds.). Formations of Modernity (pp. 128-174). Oxford and Cambridge, Great Britain: Redwood Books.
- Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: Cadell, T. & Strahan W.