Adam Smith authored the groundbreaking economic and political treatise “The Wealth of Nations,” which heralded the inception of free market economics and signaled the decline of mercantilism, the prevailing economic system at that time. Published on March 9, 1776, “An Inquiry into the Nature and Causes of the Wealth of Nations“, commonly known as “The Wealth of Nations“, challenged the mercantilist belief that global wealth was finite and fixed. Mercantilism advocated for stockpiling gold and shielding markets from competition through tariffs, resulting in limited international trade due to frequent trade wars and tariffs.
Smith challenged the mercantilist ideology that dominated the global economy during his era. Mercantilism posited that global wealth was finite and unchanging. According to this view, nations could only increase their prosperity by accumulating gold and shielding their markets from competition through tariffs. In that period, countries aimed to sell their goods to others while refraining from purchasing goods from their trading partners. This approach severely restricted international trade, leading to frequent trade wars and tariff disputes.
Central to Smith’s theory was the concept of the “invisible hand,” which posited that individuals acting in their own best interests would naturally lead to prosperity. He argued that free markets would ensure optimal economic production without much government intervention, other than to support this invisible hand. Smith believed that individuals should be free to produce and trade goods in a competitive market, leading to better functioning global markets. He maintained that universal prosperity could be achieved with enlightened self-interest, a free market economy with a strong currency, and limited government intervention.
Smith promoted the idea that countries could achieve universal prosperity through three key elements: enlightened self-interest, a free market economy with a strong currency, and limited government intervention. He believed that individuals should pursue their self-interest through hard work and frugality, viewing enlightened self-interest as a natural characteristic of most people.
To illustrate his point, Smith used the famous example of a butcher supplying meat. The butcher’s motivation was to sell quality meat not out of goodwill, but to profit. By selling low-quality meat, the butcher would lose customers and profits. Therefore, the butcher’s best interests aligned with offering quality meat to customers at a fair price, resulting in mutual benefit from each transaction. Smith argued that long-term thinking would deter most businesses from cheating their clientele, with government-enforced laws and penalties serving as a deterrent for those who might be tempted to do so.
This principle of self-interest extended to trade as well. Smith posited that individuals who saved would invest for better returns, providing industry with the necessary capital to increase machinery and promote business innovation. This, in turn, would boost returns on invested money and lead to an overall increase in living standards.
For a free market economy to function effectively, Smith emphasized the need for a strong currency. He advocated for a national currency backed by precious metals to prevent the country from devaluing its money through wasteful spending and wars. Building on this limitation on spending, Smith proposed further recommendations for free market governance, including maintaining low taxes and repealing tariffs to foster free trade across international borders. He demonstrated that these tariffs were detrimental to ordinary citizens’ lives by raising prices and hindering trade and industry’s efforts overseas.
Finally, Smith’s vision of limited government intervention should confine to their roles to providing universal education, ensuring national defense, developing infrastructure, and enforcing law and justice. Governments are to intervene only when people pursued short-term interests or committed crimes. Smith argued that larger government merely extracted money from ordinary citizens.
