Comparative Political Economics: Adam Smith
Comparative Political Economics: Adam Smith
The realm of economics is so complex to the extent of forcing economists to make hold of other factors in the economy in order to explain things easily - Comparative Political Economics: Adam Smith introduction. There have been a lot of models that were develop to aid each and everyone of us to understand how our systems works, how prices is being affected by the demand and supply and even on how gender affects the poverty level in a certain locality. These are just a few things that economics has been tackling for many years since its advent.
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There have been two period in the life span of economics and they are the classical and neoclassical economics. The former is regarded most of the economists as the “modern school of economic thought”. This is the period that was lead by Adam Smith with its book, The Wealth of Nations, who said to be the one who established some of the major foundations of economic models and principles that we are using nowadays. On the other hand, the neoclassical economics can be traced its roots from early 19th century and regarded as the “marginalist school of thought”. Basically, neoclassical economics originated in classical economics. But let us not dwell much on discussing the connections of the two economic periods. There is this very interesting person in the economic world that I wanted to discuss- Adam Smith and his connection to the idea of a free market system. Moreover, I would also discuss the role of the government to the economy and to talk about the extent of the influence that the government could impose to maintain economic efficiency based from the concept of free market system and the application of the ideas of Smith to modern capitalist market economy.
Free market system is a condition in the economy wherein all of the economic factors are being set by the buyers and sellers like price, supply and demand of the goods. There is no government intervention in this type of market condition. When we speak of government intervention, it pertains to the policies of the government that influences the activities and equilibrium of the market. An example of which are subsidies, floor price and price ceiling etc. the logic behind this kind of market system is that the economy has its own mechanism of “healing” any market problems or put back once again the economy into equilibrium state through the collaboration of sellers and buyers. The said above mechanism is tagged as the invisible hand. Invisible hand is a market force that put back all the things into its equilibrium condition after having distortions from other market entities (Joyce 1). The logic of Adam Smith here is that consumers and producers unknowingly help the restoration of the economy by fulfilling their own “selfish reasons”. Like for instance, there is a shortage of goods in the economy, sine the producers wants to earn more money they will supply the goods in the market thus helping the economy to move on its equilibrium state since shortage now will be eliminated and prices will now start to go down on the level which producers and consumers are willing to have a transaction. The reason of Adam Smith why he does not want the government to intervene in various economic activities is due to the fact that they only impose market inefficiencies like for instance protectionism. Protectionism promotes inequality in the competition arena of the economy. Through protectionism infant industries starts to experience hard times of earning high profits since they cannot compete head on to those businesses who were granted by the government some protection policy. Protectionism give only those protected companies to abuse the economy by charging high prices and produces low quality products since there is no longer a threat for their existence. At the end of the day, it is the consumers that are being perished by the intervention of the government. Moreover, the government sometimes spends some money from their intervention in the market which is not good especially if the government is experiencing other problems that need financial aspects for them to be solved. Instead, according to Adam Smith, the government should only focus on providing only public goods like military services, education and medical services to the state and on making policies that would guide the country in maintaining the peace and order situation of the country.
The idea of Adam Smith of a free market system can also be regarded as “pro-capitalism” since it do not want any government interventions and wanted to let the private businesses to do the job of restoring the economy. Capitalism refers to an economic system wherein most of the producers in the economy are private entities. Private businesses are being considered as more efficient as compared to the government since they produce high quality products to attract more customers. Whereas the government would just provide goods and not giving priority the quality of the goods since they are under budget constraint. Moreover, the idea of having no government intervention in the market would give the private firms to have more business opportunities that they cannot have if there is a government intervention, like for example the establishment of financial institutions e.g. banks.
Based from the past experiences that we have from the private and government activities, I could say that there is a need for the government to intervene in the economy but for a certain degree only. It is up to the government to determine to extent of their intervention could be. As of what we are using today, government intervenes in the economy every now and then to help the economy restore itself faster and to protect the interest of the consumers from possible market power abuse of the private firms (Rutherford 658). There are times wherein their capitalist’s motives exceed the limitation and start to impose negative effects on the welfare of the consumers, like setting their prices higher without any valid reason or monopolies that provide low quality products to the consumers.
Joyce, Helen. “Adam Smith and the invisible hand.” March 2001. Plus Magazine. 17 October 2007 <http://plus.maths.org/issue14/features/smith/>.
Rutherford, Donald. “Classical Economics: The Critical Reviews 1802-1815.” Routledge Taylor and Francis Group, 1996.