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Adam Smith Influence On Economic Theory

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Why is the work of Adam Smith considered so crucial in the development of economic thought?

Adam Smith is widely regarded as the father of economics as a social science, and is perhaps best known for his work The Wealth of Nations. Throughout this work Smith states and informs towards his belief that society is not at its most productive when ruled over by rules and limitations with regards to trade, and that in order for markets to maximise prosperity, a free trade environment should be made accessible. In this essay I intend to asses the way in which many of Smiths theories taken directly form his works can be applied to past and current situations, first from an economic then social, and then a political point of view. I will also outline some of Smiths major theories on market determining factors, such as supply and demand, and the labour theory of value, with focus on how these theories can be applied to current day situations, demonstrating the strength of his works.

I believe it is first important to mention that Smith was raised in a market environment in which Mercantilism was regarded as the most positive policy with which to increase a countries wealth. This theory is based upon the idea that a countries assets are a measure of its prosperity as a nation, and so therefore was often implemented using such policies as high rates of exports, and low rates of imports. In order to ensure this low rate of imports tariffs were often imposed on goods entering the country.

Adam Smith was one of the first men to voice his opinions on this mercantile system, stating that the policies were flawed, and that assets and wealth were not good measures of a countries prosperity, and that in fact nations should strive to increase productivity using policies within a free market environment. One such suggested policy was that the division of labour, when used effectively, could maximise production without increasing the workforce. This division of labour theory stated that a workforce, when broken down and assigned separate tasks within production, could become specialised increasing production and often quality of goods. Smith also argued that this specialisation would increase the ratio of productive workers against unproductive workers, lowering costs of production as a whole. This theory has been crucial in the development of economic thought in that it has been followed closely and been adopted by many large firms within industries, and proven successful in lowering costs and increasing production.

From an economic point of view Smiths theories on the division of labour have been used to good effect within markets. As a general consensus, the division and specialisation of labour means that everything becomes cheaper than it was under mercantilism. If tariffs are imposed upon imports, part of this tariff will be passed on to the consumer upon purchase of the good. This means that a higher price is demanded by the supplier. Under the free market situation, and with division of labour forces being imposed, the same good can be produced at a much cheaper price, and so therefore can be purchased by the consumer much cheaper. Smith stated that with specialisation comes an increase in �skill, dexterity and judgement’ within the workforce. This in turn will lead to cheaper production costs, and even further cuts in price for the consumer. This theory has been so crucial in economic development as it has enabled whole firms to increase productivity, and efficiency, whilst not increasing costs of production, or supply of labour. Without Smiths work, this theory may not have been presented or taken as seriously as it has been.

From a social point of view, I believe Smiths concept of an вЂ?invisible hand’ to be a crucial step in economic development under capitalism. This concept states that in order to best benefit his community within a free market environment, an individual must rely heavily upon self interest. Smith recognised that in doing this, however selfish it seems, the individual will, as a result, benefit the community as a whole. The вЂ?invisible hand’ would have such an effect if every individual acts in order to maximise their own prosperity, the prosperity of the community will, in turn, be maximised and become more efficient. “This effect is very well exemplified in modern day terms by using a supermarket queuing system as an example. Each customer getting in line selfishly chooses to maximize his own interest, that is to check out in the shortest time, regardless of the other customers. Their utility maximizing choice is to get in queue in the shortest line; this means that eventually customers queue up in lines all of the same length. Therefore even without the slightest direction and by following only their selfishness, the lines are all of the same length, which is clearly the most efficient disposition.” This theory has been crucial in the development of economic thought in that it is a statement which reflected society in Smiths day, and is still so widely applicable in modern day society.

From a political point of view, Smith wrote that Government intervention should be kept to a minimum within society. From a mercantilist point of view this was a terrible suggestion, however Smith argued that government intervention in markets will cause a limitation in productivity, and therefore not maximise efficiency. However if left alone as discussed in the previous paragraph, each party will seek to maximise its own prosperity within the given constraints, in turn maximising the efficiency and prosperity as a whole.

Also Smith felt Mercantilism was a threat on societies movement towards democracy, as government intervention into trade created a class system within business which was not consistent with the aims of democracy.

Smith transferred his strong beliefs about the negativity of mercantilism as a political tool in his works, which were received with great support. For this reason Smith can be credited with at least some of the responsibility for helping the economy move from a situation in which government were controlling trade from an export import point of view. The policies at the time were geared at creating a positive Balance of Payments, and the tariffs on imports played a big part in maintaining this positivity. Smith argued that without these tariffs, competition would increase, driving market prices down, benefiting consumers. This would also cause firms to find new ways in which to become more efficient, so as to have the ability to keep in line with the new lower market prices of goods.

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