Capitalism has come a long road before becoming the dominant social order on the planet. Adam Smith was one of the first economists to fully describe the benefits that free market capitalism can bring. Moreover, he was the first to systematically analyze the main economic categories such as wages, labor, profit, rent, population, demand, and supply. His work Wealth of Nations was groundbreaking, and he is considered one of the fathers of capitalism not without a reason. In this work, I will show that Adam Smith succeeds in his criticism of mercantilism and governmental market regulations and proves that free markets and self-interest are much more effective for the growth of the economy.
The work of Adam Smith is groundbreaking in many aspects, however, he is regarded as a "revolutionary" because of his opposition to the dominant economic doctrine of his time – mercantilism. It consisted in the notion that if a man is considered rich when he possesses large amounts of gold and silver, then accordingly a country is considered rich when it has large amounts of gold and silver under its commandment, and the more the better. In the eighteenth century most European countries employed the policy which aimed at amassing gold and silver by exporting more than importing. This was attained by imposing taxes and tariffs on foreign goods and freeing market for the domestic industry.
Adam Smith noted that such approach is not as effective as it was regarded. He made up several arguments which undermined the use of such policies. The first argument he introduces consists in proving that there should be no special reason for amassing gold and silver because they hold no special value in comparison to other goods. Adam Smith asserts that all arguments in favor of augmenting the quantity of gold and silver in the country fall short to the free market and that gold and silver should be given no higher priority than any other good. He states that in the state of free trade when all goods and products can be freely exchanged on one another, the trade is aimed at acquiring goods which are present in deficiency in exchange for giving up those which are present in surplus. In this light, he presents an example: if a country does not have own wineries and wants to buy wine, then there will appear some other country which will be able to sell its wine for a considerable price. The same happens when a country does not have its gold or silver mines, it can purchase them from another country for a negotiable price. And given that as any other goods, precious metals can be bought and sold for some price; they can be freely exchanged for other commodities which are in scarce. This means that gold and silver have no greater value than any other good.
The second argument proves that free markets are much more efficient in promoting economic growth. Adam Smith states that governmental regulations aimed at setting monopoly of the domestic industry at best are useless and at worst are harmful. If the domestic industry is strong enough to offer the goods at a lower price than the foreign industry, then the regulations are meaningless. However, if the foreign industry can produce the same goods cheaper than the domestic industry, then the regulations setting tariffs for foreign produce are harmful to the domestic industry. Adam Smith asserts that "it is a maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy" (170). When the scale of this maxim is increased to the size of the economy of the whole country, it becomes evident that it is better to buy some good from the cheaper supply of foreign industry and use the produce of domestic industry in the way in which it is advantageous. The detrimental effects of regulations also become apparent in the case of policy changes. If the market suddenly becomes free for cheap foreign produce, then the domestic business owners will suffer substantial losses as they will not be able to completely withdraw their funds when they are unable to compete with more efficient industry.
The argument about self-interest being an effective driving force of the economy is by far among the most famous Smith's arguments. He starts by asserting that humans as any other animals never had benevolence for the happiness of others as a dominant incentive of their actions. In contrary, people's actions were always motivated by self-love and gain for self. It is in pursuit of personal gain that trade was invented. One can obtain pearls by exchanging berries for them if he has enough berries and the one who has pearls wants them. In case of this bargain, the participants are motivated by their desires to get what they need and by this, they help each other. If this situation is extended to the case of industry, the economy of the whole country benefits from individuals pursuing their interests. When a craftsman wants to obtain more profit, he seeks for ways to increase the quality of his goods and decrease their production price. As he competes with other craftsmen in the market by perfecting his produce, he develops technology and strengthens the domestic industry as he pursuits his personal interests.
Adam Smith was indeed a brilliant economist. Having proven that free market capitalism is more efficient than mercantilism, he opened the door for further development of the world economy and the social order we live in. Moreover, his idea of the pursuit of the personal interests being beneficial for all has become central in many social order theories, ethical, and philosophical doctrines.
References
Smith, Adam. "Wealth Of Nations". The Human Record: Sources Of Global History Volume Ll. Alfred J. Andrea and James H. Overfield. 7th ed. Cengage Learning, 2012. 168-171. Print.
