In the
eighteenth century, European political theorists responded to the great changes through
which they were living. They built on the legacy of the Enlightenment's (the cold logic of
the Enlightenment) praise of the power of reason to define "how man should live"
in the wake of the American, Napoleonic, and Industrial Revolutions.
The rising middle and commercial classes found their interests and ideals best expressed in the doctrine of liberalism. Liberalism affirmed the dignity of the individual and the "pursuit of happiness" as an inherent right. The ideology's roots were set firmly in the eighteenth-century constitutionalism, laissez-faire economics, and representative government.
Liberals thought in terms of individuals who shared basic rights, were equal before the law, and used parliament to gain power and carry out gradual reform. In addition, liberals believed that individuals should use their power to ensure that each person would be given the maximum amount of freedom from the state or any other external authority. In economics, liberals believed in the fair competition among individuals responding to the laws of supply and demand with a minimum of governmental regulation or interference. Scottish economist Adam Smith (1723-1790) best expressed this view in his Wealth of Nations.
Adam Smith was born in Kirkcaldy, Scotland, on June 5, 1723. Between 1740 and 1746 he attended Oxford University. After leaving Oxford, he gave lectures on English Literature and Economics, and in 1751 became professor of logic, and in 1752 of moral philosophy, at the University of Glasgow.
Long before Adam Smith, political economy had been studied, but with the publication of the Wealth of Nations economics may be said to constitute a separate science for the first time. The book met with immediate success and in a few years had taken an authoritative place with both philosophers and men of affairs. In the following year Smith was appointed a Commissioner of Customs and moved to Edinburgh, Scotland, where he lived till his death on July 17, 1790.
The most notable feature of the teaching of the Wealth of Nations is the statement of the principle of natural liberty. Smith believed that "man's self-interest is God's providence" and held that if government abstained from interfering with free competition, industrial problems would work themselves out and the goal of efficiency would be reached. This same doctrine was applied to international relations and the argument for free trade.
The Wealth of Nations used relevant illustrations to provide some of the fundamental principles of the science of economics. Smith's achievement was to combine insight, information, and anecdote, and to express it in a consistent framework.
In The Wealth of Nations, Smith explained how the invisible hand of the marketplace will ensure an optimal economic outcome. Competition among producers is the key. It prevents greedy producers from raising their prices and excessively gouging their customers. If producers raise their prices too high, they create an opportunity for one or more among them to profit by charging less and thus selling more. In this way competition tames selfishness and regulates prices. At the same time it regulates quantities. If buyers want more bread and less wine, their demand enables bakers to charge more and requires vineyards to charge less. Profits in bread making would rise and profits in wine making would fall; labor and capital would move in favor of bread making, increasing the supply of bread.
Today, proponents of deregulated business often use Smith as the champion of self-interest. However, Smith saw no moral virtue in selfishness; on the contrary, he saw its dangers. His suspicions come through clearly in one of his best-known remarks: ``People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.''
Smith was convinced that the market would, when left alone, produce the goods that the public desired. Consequently, he saw little economic role for the government. He said that governments should confine themselves to three main tasks:
Each of these jobs arises because the market fails. In the first two cases, national defense and the administration of justice, the failure is known as the free-rider problem. When a service must be provided to everybody or not at all, people misrepresent what they are willing to pay for the service. They desire to consume the service while letting others pay for it, taking a free ride. As noted in Smith's third government service, the government should also provide roads, public education, and help for the destitute, areas in which the market 'fails' to perform adequately.
Smith warned against excessive government provisions, writing that every advantage granted by government to one part of the economy puts the rest at a disadvantage. Naturally, Smith favored free trade: ``By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be bought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?'' By encouraging competition, trade forces producers, which may have great power in the domestic market, to compete with foreign producers, thus lowering consumer prices.
Smith pointed out that trade restrictions and protectionist policies such as tariffs and quotas put a tax on other producers and on consumers at large. Protectionist "industrial policy" helps to sustain firms that cannot prosper by taxing or penalizing firms that can. In contrast, Smith considered the gains from trade. He saw it as a way of promoting efficiency, both because it fostered competition and because it provided opportunities to specialize and gain economies of scale. Specialization was a matter of comparative advantage: trade allows countries to produce and export what they are best at, and import the rest.
Copyright (C) 1999, Jay Kaplan
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Last updated January 15, 1999