Adam Smith and the Present World Economy - Literature review Example

Adam Smith: The Relevance of “Smithian Theory” in our Present World Economy Introduction During the Scottish enlightenment, the birth of classical economics marked the revolutionary attempt to identify the underlying principles on how society interacts based on the platform of market economy and dynamics of economic growth. It is always a challenge for the society to explain how the society behaves despite of the complex relationship between commonality of human experience and distinctness of every human being. In this era, several great minds rise up to address the challenge. One of them is the famously known “Father of Modern Economics” – Adam Smith. Adam Smith has convincingly laid the foundation on how market economy behaves based on the optimum benefits that the society requires. Advancing the interest of any class is not the heart of his idea, but the promotion and management of wealth of an entire nation. The radical principle that he consistently upholds boils down to a free market economy where everyone has the chance to participate without strict government interventions. His approach in creating new economic policy was definitely democratic and novel at his time. But is it still relevant in our world today? The world economy is definitely changing through time. The key factors that encompass the study of economics keep changing with circumstances. However, it is important for us to look back and appreciate the pillars where our world economy stands today. This paper aims to examine the extent of its Adam Smith’s philosophy on the economy. Furthermore, it will also try to present the relevance of “Smithian Theory” on the prevailing economic plans and policies that govern our economy today. The Economic Theories of Adam Smith Arguably, the most renowned work of Adam Smith is the writing of the book entitled, “An Inquiry into the Nature and Causes of the Wealth of Nations” or famously known as “The Wealth of Nations”. On a perspective of economic affairs, individuals in society have the tendency to act on self-interest (Smith, 2005). This drives the production of goods and services as what society dictates. The mechanism on self interest is presented as the “invisible hand” that thrives in the concept of laissez-faire (free market) government which is the key doctrine of classical political economics. In his book, he attempted to decry the impact of mercantile interests that reigns on the government and large corporations at that time (Tame, 1998). The free-market ideology is finally introduced which limits the influence of government to impose regulations on products. Essentially, the free or open market allows everyone to function without government intervention with the opportunity for the market to produce goods that will be optimal for economic growth and society as a whole. The minimalist role of government paves the way for capitalism. Private players have the ability to produce in a society on its own accord. Of course, it follows that an invisible hand of pricing mechanism coordinates supply and demand in the market which will satisfy the best interest of the society. Aligned in this concept, the basic role of the government is to implement reasonable taxes to maintain peace and justice within the market (Scott, 2006). To delve further into Smith’s book, significant pointers can be considered on the dynamics of labor market, accumulation of wealth as well corporate globalization with focus on productivity development (Smith, 2005). The Significance and Impacts of Smith’s Theory The world is already well-versed with the free market economy that most countries are involved at present. This type of economy that rest in the heart of Adam Smith’s principles has recognizably expanded individual choices through mutually beneficial exchange – market freedom (Zupan, 2011). The laissez-faire principle ultimately promotes economic freedom as well as the state’s freedom of expression. One of its greatest advantages is giving the people the power of choice. The philosophy of capitalism that Smith is promoting goes along with the concept of liberal economy. In Capitalism and Freedom (1962), Milton Friedman argued that economic freedom is a precondition for political freedom. A nation where the means of production is under government control will be detrimental to the economy. In addition, the inability of the individuals with the state to economically sustain themselves and their points of view depicts a nation without freedom of expression. In the free market economy, continuous and repeated interactions between market players are catered in the world today. Amongst other types of economic system, this is viewed to be superior at promoting integrity and cooperative behavior that can be projected into a prosperous economy. The key to this continuous exchange of interaction is on the idea of private property rights. The enhanced interaction between economic players and well defined property rights promote a quality economic environment that can literally increase income and effectively conserve natural resources (Anderson, 2004). This way, our economy has found a way to peacefully arbitrate between competing uses and scarcity of resources. Another key feature of Smith’s theory is that market forces always dictate what needs to be produced. Competition always brings out the best production technology made available for the consumer’s needs. There are limitations on the goods and services that a free market economy can offer. The disparity always exists in favor for those who have more money in society. However, the relevance of Smith’s Theory must be examined based on today’s context. There might be significant changes in our world economy that Smith’s theory doesn’t necessarily provide a good impact anymore. Just like Dagupta (1998) said that “institutions of our own era are substantially different from those prevailing at the time The Wealth of Nations was published”. Smithian Theory in the Current World Economy The free market economy is still the dominant force in the world market today. It will always be an integral part of every economic activity. Yet, even the countries like USA and in Europe, a perfect free market economy doesn’t exist in reality. With the pressing issues of financial crisis and recessions, the free market is one of the factors that carry the burden to explain what really happened. The evolution of the economy makes Smith’s economic freedom much less being effective today. The weakness of this concept already exists since the birth of its definition way back to Smith. Ultimately, there is no way to separate the government from the market. The very least participation of the government is on the provision of currency for the market. Indirect involvement through transportation, infrastructures, defense and education greatly helps the market economy. Without government interventions, the likelihood that monopolies will take over the “free market” is highly possible (Bechtold, 2011). Maybe, the seemingly faltering free market can point its fingers to the lack or poor economic planning of most countries. If only Adam Smith is alive today, he would definitely make strategic improvements in his free market ideology. Instead of a single “invisible hand” that will drive the players in a market economy, a second “visible hand” is necessary as what Scott (2006) suggests. The former will take care of pricing mechanism based on laws of demand and supply, while the latter will explicitly manage the economy through legislature and bureaucracy. The government will always have to intervene in a direct or indirect manner. Most of the times, government must act as regulators only unless national monopoly is required as an emergency reason for state. Direct interventions can lead to corruption and distortion of market frameworks (Scott, 2006). However, policy must be created as an open book to everyone, especially the economic players in the free market. This includes the identification of various economic actors and recognition of different market frameworks within the free market system. However, economic policies must not be treated like rigid science. It must always consider the dynamics laid on the foundation of human behavior and economic growth. There are some current policies that Smith may want to disagree upon the exploitation of some institution when it comes to free market. In the ASEAN Free Trade Area (AFTA), the dynamics of trading can be highly observable. However, its backbone which is the Common Effective Preferential Tariff (CEPT) Scheme has proven to deal major drawbacks especially in its member countries. The trade policy caught most of ASEAN countries off-guard. The domestic production of these countries can’t compete with forces in the world market and in effect industries started to deteriorate because of almost 100% tariff implementation. This must be tackled by policy support and government intervention. Anti-dumping responses will definitely be effective through sanctions or countervailing measures. Conclusion Our world economy has greatly benefited from great minds of the past like Adam Smith. His undeniable contribution to society has propelled economic activities into an accelerated pace. We must give him due credit because of the economic freedom that laid the foundation of all types of market economy today. However, his theory of a free market economy doesn’t perfectly exist, much in our present age. The market forces are not the sole determinant of economic growth and productivity. We must be reminded that the government and its agents are still the one who generate and in the end implement policy and interventions that guide production and trade. It is necessary for free trade policies accommodate countervailing measures to dampen its effects especially on tariffs. But to sum it all, Smith is right all these time. Human behavior greatly influences economic growth. This is definitely relevant to this day where humans remain at the core of economic activity regardless of how it is organized—whether through free markets or central planning (Smith, 2006). References Anderson, T.L. (2004). “Markets and the Environment: Friends or Foes?” Case Western Reserve Law Review 55 (1): 81–91. Bechtold, J. (2011). Problems with free market ideology. OpEdNews.com. Retrieved from: http://www.opednews.com/articles/Problems-with-Free-Market-by-Joe-Bechtold-081030-929.html Dasgupta, P. (1998). Facts and Fictions in Economics: Modern Economics and its Critics. Cambridge University Press 2002: UK. Friedman, M. (1962). Capitalism and Freedom. Chicago: University of Chicago Press. Scott, B.R. (2006). The political economy of capitalism. A drafted working paper. Retrieved from: http://www.hbs.edu/research/pdf/07-037.pdf. Smith, A. (2005). An inquiry into the nature and causes of the wealth of nations. A Penn State electronic classics series publication. The Pennsylvania State University. Retrieved from: http://i-ahrens.de/schule/bvw/Wealth-Nations.pdf Tame, C.R. (1998). Against the new mercantilism: The relevance of Adam Smith. Libertarian Alliance. London: Easterbrooke Press. Retrieved from: http://libertarian.co.uk/ lapubs/lapam/lapam001.pdf. Zupan, M. (2011). The virtues of free markets. Cato Institute. Cato Journal, Vol. 31 (2). Pp. 171-198. Read More