Indeed, in reading Smith's book one cannot but be impressed at how someone
writing well over two hundred years ago could have understood the basics of
modern economics. Yet, although he proposes an unregulated free-enterprise
economy, it is clear that he understands how defects can arise in such a
system. He is clearly aware that individuals and firms will collude to make
excess returns via monopoly by reducing supplies of goods to the market
and via trade unionism whereby labour is priced above what a free market will
pay for it. Smith also understood that people will maximize their self-interest
by lobbying government to arrange for tariffs and other policies that divert
wealth to them from the rest of the community. People maximize their
self-interest politically as well as in the free market. It is these
politically-directed forms of policy interventions that Smith clearly
opposed, although policy interventions that remove the effects of monopoly
would be required for a proper functioning free market.
At the time of Smith's writing the production of goods and services
in most countries had, for some years,
been operating via a free enterprise system. Engels and Marx analysed this
system in their Communist Manifesto. They conclude that
this capitalist system had been very effective in bringing about economic
growth through the advance of technological discoveries and organizational
improvements, making the world much better off than it would otherwise have
been. Yet they noted that in this system a substantial fraction of working
individuals find themselves treated simply as objects and personally
ignored. They predicted that this group, which they defined as the
proletariat, would eventually rise up and seize control of the economy
from the profit-making managerial group which they defined as the bourgeoise.
The latter group were living off the return to capital which they maximized
by exploiting the proletariat. Marx and Engels recommended that the
system be fixed by having the government seize the entire stock of industrial
capital, making private ownership of it illegal.
Morally, it is easy to see where Marx and Engels were coming from. Modern
Christianity teaches us (as do other religions as well) to treat other
people as human-beings and not as objects--to love thy neighbor as thyself.
It is easy in modern society to treat others as something to be bought, sold,
or manipulated rather than as caring people like we visualize ourselves. Doing God's
will by coming together in a communal group in which each of us acts in the
interests of the group rather than ourself makes obvious sense.
The problem is that peoples' natural instincts cause them to behave in their
own interest and to invent emotionally rational bases for such behaviour.
The only way to get them to behave in the public rather than their own
interest is to make it in their own immediate self-interest to do so. The
government directed and managed system envisioned by Marx and Engels removes
all links between private self-interest and the public interest with the
result that their system will not produce anywhere near the national wealth
that can be achieved with private-enterprise. Nor will the underlying
morality be better.
It would seem that the best result could be obtained by a properly regulated
free enterprise system. For that to be achieved, the political system must
be such as to produce the optimal set of regulations. This leads to an
analysis of the underlying basis for such a system. The first issue is the
origin of and nature of the state.
It's test time again. Construct your own answers before looking
at the ones given.
Adam Smith in An Inquiry into the Nature and Causes of the Wealth of
Nations is frequently credited with having discovered the basis of
modern economics. This is the fact that individuals, being self-interested,
will arrange for the production of some or more of any good for which the
public is willing to pay in excess of the cost of production. As a result
everything that people
want gets produced while things they don't want never appear.