Summary of Adam Smith’s view in ‘The Wealth of Nations’
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Please write at undergraduate level.
Summarise Adam Smith’s views in The Wealth of Nations. Your discussion should include an account of the notion of the “invisible hand” and Smith’s view of the appropriate role of government. Your essay may also include a summary of the alternatives to the free market that were explored in the twentieth century, and some of the difficulties they encountered.
Please gather information from the following readings:
Notes on Smith
Extract from The Wealth of Nations
Notes on History of Economics
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SAMPLE ANSWER
Smith was one of the writers of the 20th century who were the pioneers in shedding light on how the economic system operates in wealth creation in any particular environment. By the 20th century, the three main options that were available to for a country to organize themselves were communism, the free market, and the mixed market economies (Smith, 2014). Among these options, the free market was the most prevalent system. However, the great depression of 1930s, the two world wars, and the vast gulf between the rich and the poor are some of the factors that made people lose faith in the free market system. However, China and Russia decided to embrace communism as opposed to the free market and mixed market system. The shortcoming of communism is that it becomes too complicated, since it becomes hard to be organized by the central authority when it grows large (Allen, 2011). However, mixed market economy becomes attractive from the sense that it can easily be organized by the central authority and there is no limit by which the market can grow. In addition, the free market system makes it possible to process large volumes of information that can effectively be used by the central authority to manage and grow their economy from all the sectors. According to Smith (2011), the mixed economy developed in Britain was problematic in the sense that people could not easily innovate and create wealth. Therefore, the living standards deteriorated and people began to protest and demonstrate against the government. Similarly, the mixed economy practiced in the United States became complex and costly to implement due to high taxation and slow means of operations. Due to complexity and problems that came with the mixed economy and communism, most countries were left with no option but to practice free market system. However, the free market system has been accused of widening the gap between the rich and the poor as is suspected to be one of the causes of the great depression and the First World War.
In his book The Wealth of Nations, Smith disputes the common belief that natural resources are the common factor responsible for creating the wealth of a country. Smith argues his case by purporting that not all nations with abundant natural resources are rich and not all countries that lack natural resources are poor. Therefore, natural resources by themselves do not create wealth and neither are they necessary for sustainable wealth creation. Since natural resources are not responsible for wealth creation in a country, Smith argues that trade is responsible for wealth creation. According to Smith (2014), trade is responsible for wealth creation through voluntary buying and selling between two parties. Through this exchange, both sides benefit in that their welfare is increased. What hold good at the level of individuals also holds good at the level of the companies since trade increases the welfare of both participants, whether they are individuals or entire nation.
With regards to the highly adopted free market system, Smith asserts that there exists an invisible hand that determines how it operates. According to Smith, this invisible and is perhaps the hand of God. The Godly invisible hand of the free market system automatically tunes people to operate with the benefit of others. The visible market in the free system may be misleading but it gives some insights on how the system operates. In this case, a trader will employ the most appropriate resources to produce the goods and services needed by their customers (Smith, 2014). Therefore, all businesses tend to produce high quality goods and services needed by their clients as they attempt to increase their sales. In return, the buyers will be able to receive high quality services at competitive prices. Consequently, people will tend to buy more of what they need, leading to wealth creation at the individual level and national level. The public will thus be able to receive high quality goods and services motivated by their own self-interest. According to Smith, free market support free choices that are supported by an invisible hand to bring about the use of resources and natural skills with the aim of supporting the whole community. Free market also enables people to work in an area of natural advantage by choosing what suits his lifestyle. Smith is of the view that the invisible hand of the free market ensures that resource and talents are utilized in a manner that brings maximum at the individual level and national level. These choices that are freely made at a personal level through the invisible hand maximize the use of human skills and natural resources.
In his book, The Wealth of Nations, Smith highlights the critical role played by the government in developing its economy. The statesman, through his authority, would give directions that should be followed as they employ the capital in producing various goods and services. The government, through its bureaucratic channels controls the millions of free players in the market. However, the government is not in a position to make millions of decisions that affect individual businesses in different parts of the country. In a situation whereby the government is allowed to make decisions for millions of ingle businesses, the decision making would be slow and the quality of goods will be reduced. According to Smith (2014), the government is in charge of gathering all the relevant information and issue instructions in accordance with the gathered information. The role of the government in this case is to provide an enabling environment for all individuals and company to carry out their mandate. However, Smith was very much concerned that a government endowed with so much private responsibility in a free market would be unrealistic. He argues that it would be dangerous to the citizens of a state to hand so much power to the government, as it would derail their effectiveness. In order to provide enabling environment in a free market, Smith believed that the government should protect the country from external attack, provide and enforce the legal framework, and provide the necessary infrastructure for businesses to occur. In providing the legal framework for businesses, the government ought to pass necessary legislation that protects businesses from exploitation and to punish the wrongdoers. Such a government is expected to supply a judicial system of courts, magistrates, and prisons. With respect infrastructure, the government should consider building roads, provide water, public lightning, drainage, among other public essentials that cannot be provided by individuals (Smith, 2013). These necessities enable businesses to run their operations smoothly and to make maximum profits with minimal distraction.
References
Allen, R. (2011). Global Economic History: A Very Short Introduction. Oxford University Press
Smith, A. (2014). The Wealth of Nations. Simon & Brown
Smith, A. (2013). An Inquiry into the Nature and Causes of the Wealth of Nations. Liberty Fund
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