Adam Smith believed that free markets and limited government intervention were ideal for economic growth. He argued that when individuals freely pursue their own self-interest in a free market system, it leads to the greatest benefit for society through mechanisms like specialization and the division of labor. While self-interest motivates individuals, Smith believed the invisible hand of the market harmonizes individual interests for the good of all. Government should primarily provide security, justice, and public works to enable a free market but otherwise not interfere.

1. Adam Smith
Liberalism and modern economics

2. Related concepts to Adam Smith
•
•
•
•
•
•
•
•
•
•
•
See Encarta Encyclopedia
Laissez-faire
Free market economy
Capitalism
Economics
Self-interest
Individualism
Classical economics
Microeconomics – theory of firms
Public goods – “lighthouse”
Industrial revolution

3. • Youtube Video: Turning Points in History Industrial Revolution
• Industrial Revolution Overview
• http://www.youtube.com/user/SlimaksClass
/videos?view=0

4. Industrial Revolution
• Historical Context: Industrial Revolution (1760-1840) in
Britain
• Industrial revolution is perhaps the most important
part that has shaped the modern age
• Discovery of the new world and antiquity helped create
a more secular European civilization
• The Protestant Reformation emphasized Individualism
and that individuals should be free to play more of a
role in controlling their earthly, as well as their eternal,
destiny
• In politics, change was represented by the English,
American, and French revolutions

5. Mercantilism
• Mercantilism – the economic outlook during the
discovery of the New World
• Under this system, the hoarding of gold and silver was
the primary economic goal, colonies were extremely
valuable, the import of finished goods (which had to be
paid for in gold and silver) was undesirable, and the
export of finished goods (for which gold and silver
would be received) was highly desirable (balance of
trade).
• The government had a “big hand” on the political
economic activities of the times
• To facilitate these policies, nations adopted tariffs and
bounties (subsidies to exports)

6. Economic freedom
• Through the advent of the industrial revolution and
protestantism, a greater appreciation for the individual
(instead of the Church and the State) and this life (instead
of the afterlife) had been attained
• Slavery (at least of the Europeans) became illegal and
economic advances had to be facilitated through technical
advances. There was no industrial revolution in the ancient
times because of the existence of slavery, which allowed
the higher classes to have an affluent life-style without
technical innovation
• In a very real sense, machines are modern slaves – and
machines (unlike slaves) can be made available to
everyone, not just the rich
• Wealth and its creation has, since then, been looked upon
as great social and personal goals

7. Adam Smith
• Considered to be the apostle of capitalism
• He systematized, summed up and explained
the political economic order that was
emerging during the industrial revolution
• The essential element in Smith’s philosophy is
his concentration on the importance of a FREE
MARKET in ensuring the HIGHEST QUALITY of
goods at the LOWEST PRICES

8. Adam Smith on Human Nature
• His assumptions about human nature are
uncomplicated and representative of the British
capitalist-utilitarian era
• He believed that human beings are at root
individualistic
• The reference point is that of the
sympathetic, impartial spectator
• According to him, human beings are
autonomous, independent entities who may interact
either more or less successfully
• Human life has no set, predetermined, or inescapable
goal or purpose

9. Adam Smith on Human Nature
• Humans will interact most successfully if they
live in a society of economic freedom:
individualistic philosophies tend to emphasize
what people can do as individuals, not what
they can do as groups
• Smith prefer more economic questions like
whether a person may trade, establish an
enterprise, or enter an occupation

10. Adam Smith on Government
• In his day, the major goal of social philosophers
was to reduce the extent of government and
custom in all areas
• Government at that time produced much
inefficiency and waste though poor taxation
practices, misdirection of resources, and overregulation of the economy and society generally
• Political liberty and economic laissez faire are
thus related

11. Adam Smith on Government
• Smith, like most Marxian analysts, holds that the
economic structure of society will precede its political
one
• He states, “Commerce and manufactures gradually
introduced order and good government
• It is when individuals have something worth preserving
that they will institute a political system that will
protect it
• The appropriate role for government is to provide a
stable social framework within which “the uniform,
constant, and uninterrupted effort of every man to
better his condition” can be realized

12. Self-Interest and the Society
• Individuals are largely, but not completely,
motivated by self-interest. But because humans
have within themselves a capacity for sympathy,
they generally do not pillage at will. Nonetheless,
humanity’s sympathetic capacities are limited,
and are socially more useful in restraining wicked
actions than in compelling virtuous ones
• For this reason, Smith notes that society is more
likely to condemn a malicious character than it is
to castigate merely a non-praiseworthy one

13. Self-interest and the Society
• Smith’s famous analogy for the thesis that
people, if left alone, will produce not only their
own greatest good, but the good of all, is “the
invisible hand” (Example of the butcher and
baker)
• In The Wealth of Nations, Smith states that – in a
free economic system – an individual is “led by an
invisible hand to promote an end which was no
part of his intention... By pursuing his own
interest, he frequently promotes that of the
society more effectually than when he really
intends to promote it”

14. Self-interest and the Society
• Because individuals constantly seek to better
their condition, they will continually direct
resources to higher and better uses, if they are
allowed to do so. This will result not only in their
personal advantage, but in the advantage of
others
• A free marlet enables individuals’ significant selfinterest to exercise itself within the limits
established by a government that restrains
people from performing positively bad actions

15. Self-interest and the Society
• Smith famously states: “Man has almost constant
occasion for the help of his brethren, and it is
vain for him to expect it from their benevolence
only. He will be more likely to prevail if he can
interest their self-love in his favor, and show
them that it is for their own advantage to do for
him what he requires of them... 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. We address
ourselves, not to their humanity but to their selflove”

16. Free Markets and the Wealth of
Nations
• Free markets allow all individuals in an economy to
improve their conditions: this collective improvement
by individuals equals national improvement – the
wealth of nations
• In its emphasis on the wealth of a nation being nothing
other than the wealth of the members who make up
the nation, Smith’s philosophy is individualistic. It
furthers political theories that emphasize the
individual, and proclaims the worth of each individual.
Although in a very different way, Smith, like Marx, finds
men and women’s purpose in work

17. Division of Labor and the Wealth of
Nations
• The great advantage of free domestic and foreign markets
is that they expand individuals’ abilities to specialize, and it
is through SPECIALIZATION that the wealth of persons and
nations really increases
• Among Smith’s most important concepts, following his
emphasis on the importance of free markets, is that as a
productive enterprise becomes more complex, it generally
can produce far more output (Example: the pinmaker)
• The DIVISION OF LABOR is a fundamental component of
economic growth to Smith, and it is this division which –
more than any other single factor – allows the wealth of
nations and persons to develop
• In a primitive state of society, an individual’s productive
capabilities are extremely limited – to what a person can
only directly produce

18. The Division of Labor and the Wealth
of Nations
• The division of labor requires, further, a free market in
order to be most effective. Where there is a closed market
(either at home or abroad), or monopolies or guilds control
productive practices, inefficiencies can result, and often do
• Individuals’ self-love will lead them to use the system for
their personal advantage to the detriment of all, if the
system allows them to
• A free market in labor and capital always directs resources
to be used exclusively by those who manage them
optimally and provides the rewards necessary to encourage
innovation and technical advance. Inefficient practices and
producers will lose work. If this means that some producers
go out of business or some workers must shift occupations,
“the interest of the producer ought to be attended to only
so far as it may be necessary for promoting that of the
consumer”

19. Labor as the Source of Value
• Following Locke, Smith sees labor as the ultimate
source for all value: “Labor... is the real measure
of the exchangeable value of all commodities.”
(Except in the case of goods that are naturally
scarce like diamonds)
• Smith considers that wages of labor to vary based
on five components: 1) the agreeableness of the
employment, 2) the difficulty in learning it, 3) the
constancy of the employment, 4) the amount of
trust required by it, and 5) the probability of
success in it

20. Production through free trade
• Anything that restricts individuals’ abilities to
conduct transactions of all sorts is a hindrance
to production. If apprenticeship laws and
customs restrict the number of producers in
an economic endeavor, then this is a
restriction on the market. Similarly, if trade
between nations is curtailed, then
specialization will not occur to the extent that
it otherwise would, resulting in inefficiency

21. Production through free trade
• Smith’s great target of opposition was mercantilism.
This precapitalist phase of economic development saw
rivalry between nations – fostered by discovery and
colonization of the New World – as inerradicable.
Rivalry was both on a territorial and commercial basis.
Each nation considered its own interest, in a balance of
trade condition, to be possession of as much gold and
silver as possible
• Smith’s appraisal of mercantilism was that “the interest
of the consumer is almost continually sacrificed to that
of the producers”

22. Production through free trade
• Smith was emphatically opposed to any restraints on
foreign trade that were the result of mercantilism. He
considered this to result in both a nation – and its
competitor – being worse off
• Wherever the market is restricted, there is not the
same possibility for specialization, and this is what
allows maximum economic production (Example: Twonation economy of cars and food)
• Smith sees a natural harmony of interests that results
when freedom is society’s governing principle. This
implies, broadly speaking, a pacific policy in foreign
relations, as well as domestic policies of economic noninteference and political liberty

23. Production through free trade
• Smith opposed restrictions on trade (like tariffs) within
nations and between them. He was, however, no defender
of what would later be called “big business.” Along these
lines, he wrote, “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”
• His solution to monopolies fostered by government was
freer exchange through diminished government
• In general, people will benefit more from a general
principle of non-interference by government than from a
principle that allows interference, because there is no
telling what the interference will be or whom it will benefit

24. Adam Smith on Justice
• Like Hume, Smith grounds justice in property:
“Commerce and manufactures can seldom
flourish long in any state which does not enjoy
a regular administration of justice, in which
people do not feel themselves secure in the
possession of their property, in which the faith
of contracts is not supported by law, and in
which the authority of the state is not
supposed to be regularly employed in
enforcing the payment of debts

25. Government’s Role
• Smith was not completely opposed to
government, though he saw a limited role for it.
• The three functions that he allowed government
are: 1) national defense; 2) administration of an
impartial system of justice; and 3) facilitation of
certain public works and institutions that are
beneficial to society (particularly in furthering
commerce), but whose nature does not lend
themselves to being performed by individuals

26. Government’s Role
• Concerning the non-defense and non-judicial
functions of the government, Smith saw these
as essentially two:
1) Public works such as bridges, roads, and
canals that are (or were) too expensive for
individuals to construct
2) Some support for education for education
would ward off some of the negative side
effects of modernization

27. Government’s Role
• On taxation, Smith propounds four principles:
1. Taxation should be proportionate to income;
2. Its amount should be certain for the payer
(and not arbitrary);
3. Its payment should be at a time when it is
convenient for the payer; and
4. It should be of a nature that is uncostly to
administrate