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Adam Smith is usually considered as the father of political economy, which deals with production studies and their relationships with the law and governance, and the allotment of national income and wealth. In addition, Adam Smith is perceived to be the pioneer of contemporary economics and capitalism, as evident in his works. In his writings, Adam Smith explored the roles that rational self-interest and competition play in fostering economic prosperity (Gavin 105). According to Smith’s resource allocation theory, individuals having resources will use them profitably if there is competition, which in turn results in the same rate of return in equilibrium for all resource uses. Adam Smith’s ideas are still relevant and useful in the analysis of contemporary economic issues. In light of this view, this paper discusses his writings on the economic man (homo economicus), self-interest, the role of supply and demand, the market mechanism, and specialization, the division of labor, the payment of taxes, international trade, private property and the role of government.
In The Theory of Moral Sentiments (1792), Adam Smith perceives the economic man as being rational and having minimal self-interest, and having the capacity of making subjective judgments determined by their ends. The standard economic theory posits that the fundamental attributes of an agent include rationality and self-interest. As a result, the economic man is notable through rational choice and goals that base on self-interest. Smith assumed that self-interest functioned involuntarily to result in an identity of interest that depicted the general good. Adam Smith laid much emphasis on economic world and the larger public, and concluded that people target for their own gain and rarely for the good of others (Smith 45). Despite self-interest objectives, nature turns the individual intentions in such a manner that the self-interested individuals work for the interest of the public, resulting to an increase in the annual income of the society to its maximum capacity. Smith held the view that there is automatic transformation of self-interest into public benefit.
In relation to the role of demand and supply, Adam Smith argues in The Wealth of Nations that free market economies exhibit more productivity compared to non-free markets. Adam Smith held the view that the supply price is most fixed; although its merit varies depending on scarcity, this concept resulted in the development of law of demand. The supply and demand mechanism is a depiction of the natural outcomes associated with economic consequences. This economic model ensures that the market outcomes are extremely efficient, characterized with optimal satisfaction of the society at a minimal cost. The supply and demand mechanism can be used as an explanation as to why economists are always in favor of market outcomes and never wish to meddle with the prices. For example, establishing the minimum wage or interfering with trade only serves to go against the spirit of the market mechanism, which can result in inefficient market outcomes (Gavin 125).
The Wealth of Nations offers a comprehensive discussion of the concept of specialization using division of labour, which involved the splitting of tasks into smaller components for different people. For division of labour and specialization to be effective, Smith argues that labor must result in the development of tangible products. In addition, labor should create a surplus so that it can be invested back into production. Adam Smith advocated for division of labor and specialization as a strategy for improving productivity. In The Wealth of Nations Smith advocated for an unregulated international trade, which he argued to be beneficial to all the trading parties. This is because a country could trade in goods that it produces at a relatively lower cost for the goods that the same country produces at a higher cost; this view is evident in modern economic theories as the concept of absolute advantage for international trade. Government interference in both domestic and international trade can result in inefficient outcomes; the government has to exercise limited authority in the economy and is only supposed to enforce private property rights, ensure justice and guard the country from aggression (Smith 78).
In conclusion, Adam Smith economic theories are typified in the present day economic climate as evident in unrestricted trade, minimal government involvement and the supply and demand mechanism. Presently, The Wealth of Nations is appraised as the theoretical framework for the free market concept that limits government involvement, extreme levels of taxation and the redistribution of wealth.
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