Adam Smith's Ideals in The Wealth of Nations

Since the beginning of time, mankind has always employed a system of trade among each other, in order to acquire materials, services, or goods. Many systems of trade exist today, aging from the historic barter system, in which goods and/or services are directly exchange for other goods and/or services, to the more recent fiat money system, in which currency is the median of exchange for goods and/or services. Economics, or the “science of choice,” was a field of interest to only a select few until around the eighteenth century. One Englishman would forever advance the world to a higher plateau of economic thinking with the emergence of the first true economic book An Inquiry into the Nature and Causes of the Wealth of Nations, or The Wealth of Nations — Adam Smith.

Since Smith’s publication in 1776, many individuals all around the globe started studying this natural phenomenon of economics and the theories of free markets and the mighty “invisible hand.” The year 1936 also marked another breakthrough in economic thinking with another Englishman by the name of John Maynard Keynes. In his publication The General Theory of Employment, Interest, and Money, Keynes argued that free markets and the “invisible hand” were not the solutions to the economic dilemmas, but rather the problems. Instead Keynes argued for government intervention in the economy to help rising and failing nations. Since Keynes’s publication, many economists have adopted the Keynesian theory and use it to form and shape modern macroeconomics.

Despite the rise of popularity in the idea of government-regulated markets among economists, the ideals of Adam Smith did not fade away, but rather branched off into what is known as the Austrian School of Economics. Friedrich August von Hayek served as the leading advocate of this new economic philosophy in the early 1940s and gained popularity in the early 1970s. Using the classical and neoclassical economic theories of Smith, Hayek modernized Smith’s ideas in order to show that markets and nations perform best when government intervention is limited. Since then, people from all sides of the economic and political spectrum have debated with each other on how much government intervention in an economy can help or destroy a nation.

Many economists who have read and analyzed Smith’s The Wealth of Nations believe that the Austrian School of Economics approaches economic theory in two different styles: a classical message and a neoclassical message. Classical economics is the approach in which value, distribution, and growth of goods are the main concerns of economic policy. Neoclassical economics focuses on the supply and demand models in order to best represent the most effective determination of prices, output, and distribution of income among the citizens. Smith addresses the classical approach in the very beginning of The Wealth of Nations. Smith instructs the audience that the “Wealth of Nations” can be constructed in two ways. First, by enhancing markets to intensify the distribution of labor, the labor force of a nation will become more productive; and second, a nation needs to produce more goods and services by the means of the labor force, instead of being unproductive (Smith 1-19). Smith’s neoclassical approach is the theory of the “invisible hand” of the market. This theory implies that the market itself possesses a self-regulating nature and should be “left alone.” From this implication, economists are presented with “laissez-faire” economic philosophy, which comes from the French meaning, “to leave alone.” Laissez-faire economic philosophy states that if the system of the market is riddled with government intervention, then the market and the “wealth of that nation” will suffer dearly (Smith 400).

To continue the ideas of Smith, Hayek draws concern in his publication The Road to Serfdom (1943) to the “danger of tyranny that inevitably results from government control of economic decision-making through central planning” (“Friedrich A. Hayek: A Centenary Appreciation”). While holding to the foundations of the classical approach to economics, Hayek continues to express the neoclassical approach from a limited government perspective. Hayek viewed centralized planning as inherently undemocratic because it required the will of a small minority to be imposed upon the mass majority of a nation (Hayek 77). Hayek thought that this elite decision-making machine would ultimately destroy the Rule of Law and individual freedoms (Hayek 80-96). Instead of being a centralized decision-maker, Hayek stated that the role of government should be to only place regulations on unfair market players, to prevent fraud in the markets, and also to create a safety net in case of a total economic meltdown (Hayek 43-45). Hayek consequently concludes, “in no system that could be rationally defended would the state just do nothing” (Hayek 45).

Many economists would argue that the Austrian School of Economics is not a practical theory in reality of constantly changing economies. Those economists not agreeing with the “limited government” methods of economics would side with Keynesian theory. Keynes introduced to the world when markets were failing and the threat of a Second World War was gaining momentum a new approach to economics—Keynesianism. Keynesianism sets up three economic pillars a nation must possess in order to progress: the federal government must move away from laissez-faire economic philosophy, the federal government should play an active role in managing the national economy, and the federal government must act to stimulate demand and maintain a high employment rate. The way the federal government should accomplish these three points, suggested by Keynes, was by manipulating interest rates to manage money, raise or lower taxes, and engage in federal spending (Keynes 19, 305). Through his “general theory,” Keynes believed that the government should be the ones who aid the failing economy, instead of waiting for the markets to heal themselves. Keynesianism tries to help and regenerate the short-run of an economy, rather than the Austrian School of Economics approach to help and stabilize the long-run. Given the time context of the introduction of Keynesianism, this new economic way of thinking skyrocketed in order to get the nations out of national “depressions.” Since the end of the Great Depression, Keynesianism still remains as the main foundation of modern macroeconomics to many economists.

In current times, many people still debate how much government intervention should be allowed into a nation’s economy. Corresponding to the political spectrum of America, most people who support that government intervention serves an essential part of maintaining America’s democratic standards and helps regulate the powers a certain individual can possess would reside on the left-wing side. On the right-wing side, most of the individuals would argue that the government should only protect the citizens by granting and protecting individual rights, allowing a competitive capitalistic free market system, and providing a strong national defense. Both sides clash heads time and time again because each side how their own perspective of how to preserve capitalism in the nation. Many people associate Keynesianism with “socialistic capitalism,” due to the government stepping into the markets. Also, many opponents of Keynesianism argue that free markets were not the cause to the recent recession in 2008, but rather government regulations upset the optimistic nature of the markets (“Why Free Markets Should Not Be Blamed for the Current Recession”). However, Keynesian policies are more common than one would think. The raising and lowering of taxes and federal spending are tools of Keynesian policy in order to regulate markets. Austrian School of Economics is still evident in most economies today, due to the presence of free markets and unregulated decision-making. Both economic philosophies still are very strong in the markets and are interconnecting platforms for many economists’ decision-making processes.

On the capitalist spectrum, one must ask how much government intervention is needed in order to help a nation, rather than to destroy it. Economists, politicians, and even normal day citizens fall somewhere on that spectrum, whether the landing place be left, right, or in between. Both economic theories possess their own different aspects in order to attract more people in appreciating the capitalism system. In the end, both sides of the capitalism spectrum can be thanked for providing the opportunity to take advantage of the skill of trade that was neglected prior to their times.