Introduction
This paper discusses Adam Smith’s theories on economics, which for a long time have remained a starting point for a discussion on economic development. Both nations and individuals rely on some of Adam’s economic tenets in formulating economic policies. Leaders of movements that shaped the development of modern capitalism also relied on Smiths’ theories.
It is clear that some of his ideas have not survived the test of time, but those he brought out in the “wealth of nations” had a great influence on the formulation of modern economic theory. He defended free-market policies, emphasizing that this opens up markets to competitions which facilitate economic development. Adam is credited with having given the theoretical threshold or ideas that augmented the industrial revolution.
Smith points out that the greatest asset a nation should rely on for development is labor and not money. He also indicates that competition, which is an outcome of specialization and division of labor, improves productivity and innovation. Specialization and division of labor, promulgated in his works, later became central pillars of the industrial revolution. Market forces influence producers to provide the market with the right products. Producers want their products to fetch a profit and be the most preferred in the market.
As a result, they come up with strategies to develop and produce the best products that would be preferred thus fetching more in terms of profits and customer appreciation. In Adam Smith’s view, the government need not intervene in bringing down the prices to a level that consumers can afford. Rather the situation should be left to market forces. As companies try to outsell one another; prices of their produces are reduced to the minimum as the sales are increased.
Adam Smith on Moral Judgment
In his view, we must all be involved in the critical decision-making process and not take the position of an impartial spectator (Cockfield & Firth, 2007, p. 71). Smith critically analyzed passion, instincts, and sentiments of human beings and their effects on the economy. Smith argued that human moral empathy is a complex matter that describes a person’s ability to sympathize with and feel for others in a given situation. He points out that only human beings have moral judgment since the process requires imagination.
The human empathy becomes activated when one observes others and imagines himself or herself in a similar shoe. By evaluating how we would react in such a position, we begin making moral judgments (Cockfield & Firth, 2007, p. 72). Moral judgment in human beings is thought to develop with time as one develops through life.
Smith looks at the rules of moral judgment as related to the laws of deity. He believed that fellow human beings help act as a mirror in which we are able to view our actions as well as the actions of others. Human beings have instincts that derive pleasure from approval by fellow human beings. Human standards and classes are developed in accordance with Smiths’ moral judgment theory.
Moral judgment according to Smith plays a significant role in defining public opinion even on matters of economic development. Human beings feel elevated by praise from fellow humans for their actions. In his theory on moral judgment, Smith points out three main important pillars on which moral judgment is supported. The three main points i.e. socialization, spectatorship and sympathy guide the progressive evolution of human beings.
Smith emphasized that citizens have to take an active role in the development of the economy. Statesmen and legislators ought to take even a much critical role in this issue. His ideas have played a critical role in shaping political philosophies on the economy. Legislators and statesmen are entrusted with the role of managing and distributing state resources to their citizens.
They have to carry out this process in a manner that ensures equity in the distribution of resources across regions. Moral judgment is important in the process of making such decisions; corruption has been a major cause of underdevelopment in most economies around the world.
Economic Development without a Central Planner
There seems to be a very close relation between ‘the blind watch marker’ and Smiths’ ‘invisible hand’ (Field, 2004, p. 304). The ‘blind watch marker’ is a revelation of the designs that man has come up within the process of his biological evolution.
In the same vein, the ‘invisible hand’ discusses the development of economic activities without a central planner (Field, 2004, p. 305). Human beings put a lot of effort into advancing their self-interests; these efforts form a platform for the development of social and economic organizations. The ‘invisible hand’ by Smith explains how social organizations influence the economic world.
Smith alludes that man has a natural propensity to trade or exchange goods and services. This process has been applied and propagated since the early days of hunting and gathering to the present days in which man uses a defined medium of commodity exchange. The ‘blind watch marker’ defines the growth and development of technology resulting from the pressures experienced in the earlier days.
The willingness of man to replicate behavior is pointed out as a motivation to the inheritance of values from generation to another (DuPlessis, 1997, p10). Whenever the environmental conditions change, man is forced to change his behavior to adapt to the environment as it is.
Market expansions and increase in labor division are dependent factors of economic development, according to Smith. Smith points out that human beings tend to specialize in what they can excel in or deliver more conveniently. Division of labor results in enhanced productivity and innovation.
Smith believes that governments and local authorities’ involvement in trade regulation procedures through tariffs, levies and monopolies undermines the effective utilization of resources (DuPlessis, 1997, p. 7). Competition and freedom of private initiative are key to high economic development in a nation. The notion of free trade in the current global market economy has been a point of concern by both developing and developed nations.
Individual Pursuit for Wealth and Nation Development
Higher competition increases the profit that the companies make from their business and attracts more companies to the business. Entry to the business by other firms increases the competition further, reducing the price of the commodities even further.
The battles for business against stiff competition from other companies ensure that the consumer ends up as a beneficiary from the price reduction. His emphasis is on freedom of private initiatives as long as the initiatives are bound within the laws of justice. This approach, in the long run, enables individuals to make a personal contribution that is significant to the national good.
Developed nations push for the free flow of trade across various country boundaries without barriers. On the other hand, developing nations point out the unbalanced competition by companies from developed nations. Policy makers in developing nations feel companies in developed nations have the technology and many other advantages to out-compete small companies in developed nations.
Allowing free trade in this case, therefore, amounts to lopsided development in which only the developed nations benefit as the developing nations remain underdeveloped. Every individual selfishly pursues his or her selfish interests in accumulating wealth (Zhang, 2000, p. 3). This process leads to the growth of wealth in the nation, which, to a large scale is looked to as a positive effort to develop the nation.
Smith’s economic theories form a basic foundation on which other scholars developed economic theories. Zhang (2000, p. 3) points out that scholars such as Ricardo, Marx, and Marshall relied heavily on the opinions of Smith in formulating their theories. His theories still continue to be a source of modern ideas in formulating economic policies in nations.
Conclusion
Adam Smith’s contributions to ideas that have shaped the development of the economy can not go unnoticed. He is widely recognized for his contribution to the evolution of capitalist systems. Smith considers labor as the highest and the greatest asset that a nation has for its economic development. Nations should promote freedom of private initiatives and avoid intervention in the trade processes.
Governments should not seek protectionist policies but rather leave market forces to determine progress. Producers always strive to make a profit. If any of them produce similar products, each of them will struggle to outsell each other. In this process, the firms strive to produce better products for the consumer.
Smith points out that man has a natural tendency to exchange goods and services with one another. In achieving the best out of this, there is a need to specialize in what they can do better or produce more efficiently. Specialization and division of labor lead to enhanced productivity and innovation, all aimed at achieving high profits. All these ideas are central in Smiths’ theories and have played a big role in the formulation of other economic theories.
References List
Cockfield, G., Firth, A., & Laurent, J. (2007). New Perspectives on Adam Smith are The Theory of Moral Sentiments. Northampton: Edward Elgar Publishing Ltd.
DuPlessis, R. S. (2004). Transitions to Capitalism in Early Modern Europe. Cambridge: Cambridge University Press.
Field, A. J. (2004). Altruistically Inclined? The Behavioral Sciences, Evolutionary Theory, and the Origins of Reciprocity. Michigan: Michigan University Press.
Zhang, W. (2000). On Adam Smith and Confucius: The Theory of Moral Sentiments and the Analects. New York: Nova Science Publishers Inc.