Adam Smith: Philosophy

Second to none but perhaps Karl Marx, Adam Smith was the philosopher who gave the first accurate picture of the workings of capitalism, the economic system which can be described as one run by the free market and competitive forces for selfish economic gain. Smith wrote one of the most compelling arguments for the end of government barriers against the economics of capital and competition, arguing a policy of government noninterference with trade and writing a compelling case for the future promise of free-market capitalism, a system of economics based on the control of production by forces of popular appeal and buying capacity in which the flow of revenue from such sale would be a cyclical process of profit and reinvestment (and that's just a really watered down definition of capitalism!). Although some of the altruistic forces Smith mentioned soon became problems to the extent that government intervention was the only way out, his philosophy is still very relevant today as the first comprehensive analysis of the most successful economic system up-to-date, affecting the writing of all economic thinkers following him, most notably Marx and other socialist intellectuals.

His philosophy, as described in his Wealth of Nations (1776), is fairly straightforward to understand, yet has very powerful analyses of the capitalitic system of even today. His first premise was that increase in economic growth would only occur with free trade, meaning the removal of all nationalistic and mercantilistic barriers. Government, according to Smith, would be necessary only for defense, internal security, lawmaking, and judicial ruling. Smaller government was better government economically, for less regulation would mean more trade. In addition, the state was a harmful part of the economy if involved in innovation and enterprise, for only private concerns and the competition between them could produce the best technological improvement. On issues of self-determination, Smith advocated the excercise of the people's will at the local level for greater roles in governing. To show his support for this, he unpopularly supported the American Colonies' War for Independence from Britain vehemently.

The capitalism Smith preached involves the free market, where the transaction of goods would be allowed without government controls. In the market, consumers (buyers) would have the choice to purchase among a variety of the same kind of goods sold by different sellers. The competition, or ongoing action to attract the buyers, among the sellers would fuel development and improvement in the selfish economic pursuit of attracting consumers, and earning the most profit (extra earnings off of a product). The laws of the market would be the laws of supply and demand, where the balance between the supply of goods and the demand of them therewith would determine the value and production of those goods, adjusting to social trends and consumer preferences. A shortage of a product in demand would therefore result in the rise of its price, which would cause more production of that product and increased entry of the labor force into that product's production. An oversupply of a product would lead to decreased capital (money available for investment) and labor supply in that area, leading to investment and labor flow towards an area of higher demand. Efficiency and the wise use of the labor market would result in lower prices. For example, if a safety pin factory had one worker making and assembling the whole pin, they would produce less pins per worker in comparison to a factory that has workers each making and assembling individual parts of the pin, thereby producing a much more expensive safety pin. In order to adjust to that, the former factory has to use the latter's more efficient technique or build on it to survive and prosper, or it will otherwise perish at the hand of the competition. Therefore, the selfish nature of the enterprises involved in production for the sake of profit will induce competition, lower prices, technological advancement, and a better lifestyle. In international trade, Smith argued for product specialization, or the production of one product solely in one general area where it is made the cheapest or most efficiently. Because different areas have different climates and social situations, different products would be optimally produced at certain areas of the world. This specialization of products would lead to international harmony with the increase in trade for different things.

Smith believed that this simple yet roundabout theory, driven by self-interest, would allow all to have more of everything. The motivation of self interest would fuel "the invisible hand" of the free market to produce freedom and abundance for all, humanity's "highest welfare." He accepted the "lesser evils" of excessive dependency to one country for a high-demand product found, let's say, nowhere else and such things as social instability as a result of frequent price fluctuation in basic necessities like food and fuel, simply dismissing them as "part of the system," per se. Smith neglected the obvious results of such a theory based on human selfishness, like child labor, worker abuse, environmental pollution, or international smuggling which have become major regulatory issues in our day. He also did not envision a world where tiny, resource-bare nations like Britain, The Netherlands, Taiwan or Japan could take over whole industries in one gulp or of the current "global economy," of intercompetition for the selling of every product made everywhere sold everywhere else.