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Chapter 2 seventeenth centuries, had encouraged governments to intervene in economic life in an attempt to encourage the export of goods and restrict imports. Smith’s economic writings were designed to attack mercantilism, arguing instead for the principle that the economy works best when it is left alone by government.
KEY FIGURE
ADAM SMITH (1723–90) A Scottish economist and philosopher, Smith is usually seen as the founder of the ‘dismal science’. In The Theory of Moral Sentiments (1759), he developed a theory of motivation that tried to reconcile human self-interestedness with unregulated social order. Smith’s most famous work, The Wealth of Nations (1776), was the first systematic attempt to explain the workings of the economy in market terms. Although he is sometimes portrayed as a free-market theorist, Smith was nevertheless aware of the limitations of laissez-faire .
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Smith thought of the economy as a market , indeed as a series of interrelated markets. He believed that the market operates according to the wishes and decisions of free individuals. Freedom within the market means freedom of choice: the ability of the businesses to choose what goods to make, the ability of workers to choose an employer, and the ability of consumers to choose what goods or services to buy. Relationships within such a market – between employers and employees, and between buyers and sellers – are therefore voluntary and contractual, made by self-interested individuals for whom pleasure is equated with the acquisition and consumption of wealth. Economic theory therefore drew on utilitarianism, in constructing the idea of ‘economic man’, the notion that human beings are essentially egoistical and bent on material acquisition.
The attraction of classical economics was that, while each individual is materially self-interested, the economy itself is thought to operate according to a set of impersonal pressures – market forces – that tend naturally to promote economic prosperity and well-being. For instance, no single producer can set the price of a commodity – prices are set by the market, by the number of goods offered for sale and the number of consumers who are willing to buy. These are the forces of supply and demand. The market is a self-regulating mechanism; it needs no guidance from outside. The market should be ‘free’ from government interference because it is managed by what Smith referred to as an ‘invisible hand’.This idea of a self-regulatingmarket reflects the liberal belief in a naturally existing harmony among the conflicting interests within society. Smith ([1776] 1976) expressed the economic version of this idea as: It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interests. Such thinking was further developed by David Ricardo and the so-called ‘Manchester liberals’, Richard Cobden (1804–65) and John Bright (1811– 89). Their ideas are often referred to as commercial liberalism . The key theme within commercial liberalism is a belief in the virtues of free trade .
Mercantilism: A school of economic thought that emphasizes the state’s role in managing international trade and delivering prosperity. Market: A system of commercial exchange between buyers and sellers, controlled by impersonal economic forces: ‘market forces’. Commercial liberalism: A form of liberalism that emphasizes the economic and international benefits of free trade, leading to mutual benefit and general prosperity, as well as peace among states. Free trade: A system of trade between states not restricted by tariffs or other forms of protectionism.
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