Adam Smith: Father of Economics

Introduction

• Adam Smith: Scottish philosopher and author.
• Best known for "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776).
• Recognized as the father of economics.
• His work laid the foundation for modern economic principles and practices.

Context of Economic Theory

• Mercantilism: The predominant economic theory before Smith.
  • Believed in a zero-sum game: one nation's gain is another's loss.
  • Wealth equated to gold and land.
  • Dominated by farms as they were seen as the primary source of wealth.
• Industrial Revolution Context:
  • Growing shift towards manufacturing, questioning traditional views of wealth.

Key Contributions and Ideas

Critique of Mercantilism

• Smith argued mercantilism was outdated; wealth could grow through industry.
• Emphasized that production and manufacturing could create value like farming.

Factors of Production

• Introduced concept of "capital" alongside land and labor.
• Capital defined broadly: included tools, machinery, and knowledge.

Wealth of Nations

• Nations progress from agrarian to industrial and eventually to service economies.
• Highlighted the inefficiency of subjugating or invading nations for wealth.
• Advocated for internal development and industrialization.

Division of Labor and Trade

• Promoted specialization to increase efficiency and production.
• Example: Pin factory specialization.
• Trade as a mechanism to satisfy diverse needs and promote efficiency.
• Encouraged nations to specialize in their strengths and trade.

Invisible Hand of the Free Market

• Emphasized minimal government interference.
• Role of government: enforce laws and contracts, protect economic freedom.
• Markets naturally self-regulate via supply, demand, and trade.
• Compared capitalism to democracy (people's choice in products is like voting).

Legacy and Criticisms

• Foundation for capitalist economies.
• Smith assumed rational behavior in markets.
• Recognized limitations leading to the development of behavioral economics.

Conclusion

• Adam Smith’s ideas, while foundational, are not without faults.
• Upcoming exploration in the series: Behavioral Economics addressing irrational behaviors in economic systems.