The Economist’s Background

Adam Smith: Founder of Economics

Adam Smith was an eighteenth-century political scientist and economist. Adam's exact birth date is uncertain. He is widely regarded as the founder of economics. He was called Adam Smith after his father. His father worked as a secretary, but he died before the birth of his wife. Smith attended a local school until the age of fourteen when he was sent to Glasgow College. He excelled in mathematics in particular. Smith enrolled at Oxford University in 1740 and studied there for six years. He later returned to Kirkcaldy in 1746. In 1748, Adam began lecturing at Edinburgh University. Eventually, he migrated to Glasgow in 1751 where he graduated as a professor of logic. In addition, he qualified to be a professor of philosophy in 1752 (Gerdes 102).

Smith's Early Life and Education

Smith published the first book, The Theory of Moral Sentiments, in 1759. Nevertheless, he quit his job at Glasgow in 1764 in order to work as a traveling tutor to Charles Townsend’s son. This occurred during his tour of Europe. He toured Europe for a period of 3 years and then went back to Scotland in 1766. Adam Smith was registered as one of the members of the Royal Society of London in 1773 (Gerdes 105).

The Wealth of Nations

The second great book of Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, was produced in 1776. Smith made a strong argument in the second book about free trade between countries. According to his argument in the book, competition in the market economy is beneficial to the entire society due to the fact that every person seeks to benefit from it. Besides, he argued that the market might seem chaotic however it is really steered by the invisible hands. Smith was employed as one of the commissioners of customs in Edinburgh in 1778. He died on July 17, 1790. He did not marry and never had any child. Nevertheless, Smith remains as one of the greatest economists in the world (Gerdes 105).

Adam Smith’s School of Thought

Adam Smith as an economist belonged to the classical school of economic thought. According to the concept of Smith’s school of thought, it stated that different markets excel well when they operate on their own without a substantial amount of government’s interference. It is a concept that is mainly based on the strong belief that effectiveness of free markets usually contributes to the development of the economy. Markets need to be left to operate on their own due to the fact that the price techniques usually acts as a strong invisible hand in the allocation of resources in the appropriate areas of work (Phillipson 104).

Smith's Theory of Economic Development

The focus of Smith’s classical school of thought was to use production cost and scarcity to determine the value of a product. In addition, Smith presumed that the economy of any country would normally lead to the comprehensive use of the actual output through the technique of regular individual modification. It is commonly acknowledged that the period of the classical school of economic thought lasted up to 1870. According to Smith’s school of thought, he established that goods sold in the market had both exchange value and value in use; however, he was persuaded that the exchange value was the foundation for a systematic evaluation of the principles of the economy. As a result, Smith might have believed that wealth has a single meaning. He defined wealth as the total of all the values of exchange that is possessed by a country or a person (Phillipson 107).

Theories Created by Adam Smith

Adam Smith is viewed as the father of economics in the world. His popularity is not only based on the fact that he was prior in economics, however, he transformed economic planning through his great economic concepts. There were various economic theories that were created by Adam Smith. One of the theories of Adam Smith is the theory of economic development. According to this theory, he suggested natural law in the economic affairs. Smith supported the concept of independent and free action. For instance, in case an individual in an organization is left to examine his economic activities, then he will be able to optimize the levels of output. Smith believed that the freedom of action contributes positively to an individual’s effort as it leads to increased wealth and development (Ucak 663).

The Theory of Free Market

The concept of ‘laissez-faire’ demands that a government should not establish any form of restriction on an individual’s freedom. As a result, the theory is based on the pillars of wide market ability, the division of labor, and saving. According to the principle of “laissez-faire”, it enabled manufacturers to manufacture products according to their ability. Smith believed that creating a free economy can help them to develop due to the fact that any form of competition in the market plays an essential role in reducing the quantity of goods for savings. The concept of an invisible hand, recommended by Smith, refers to the trend of free markets regulating themselves through self-interest, demand and supply, and competition. He also created compensating wage differentials theory that is defined as undesirable or risky jobs appear to pay higher income in order to attract employees. The principles of laissez-faire such as reduction of government regulations and taxation in the market help to influence the demand and supply in the market. These concepts demonstrate that every individual assists in the creation of the best output of every individual in the market. The theories created by Adam Smith help to ensure that there is prosperity in the market. It articulates on the need for specialization and division of labor as they determine the extent of success in the market. Wealth is created by the increase in demand and supply in the market (Ucak 665).

Adam Smith's Contributions to Microeconomics

Adam Smith made great contributions to microeconomics. Contemporary microeconomics employs the use of mathematical models in order to illustrate the perfect behavior of individual manufacturers and consumers in the market. The theory of free market of Smith forms the foundation of contemporary microeconomics. Adam Smith created the theory of free market during the production of his great book An Inquiry into the Nature and Cause of the Wealth of Nations. He tried to explain about the value of free markets. According to him, he argued that free markets can help in the generation of new benefits and wealth to any society that outperforms any past economic system. Smith argued that individuals operating in a free market can undertake their individual interference without the fear of external factors (Brady 43).

Competition in the Market

In addition, the hunt of self-interest contributes to increased competition in the economy. Adam Smith made an argument that competition in the market occurs in every market in a particular economy. Competition occurs among prospective consumers in order to access goods and employment. It also occurs among producers so as to access markets and resources. Smith also argued that competition occurs between producers and consumers due to the distributions of returns obtained from different transactions (Brady 45).

Price Modification and Equilibrium

The individual price modification in the market is influenced by competition. For instance, in case the quantity of goods demanded in the market is higher than the quantity supplied, then the price of the goods in the market will independently increase. On the other hand, in case the quantity of goods supplied is higher than the quantity of goods demanded then the price in the market will definitely fall. Therefore, independent price modification is an essential process in a particular market technique. The independent adjustment of the price normally continues up to the point where the equilibrium is obtained. Equilibrium is obtained where the quantity of goods demanded is equal to the quantity of goods supplied at a particular price in the market. Adam Smith made a conclusion that when equilibrium occurs, then the market has accomplished certain beneficial results such as social optimality, efficiency, uniqueness, and consumer sovereignty. Due to the fact that Smith examined the different microeconomic principles, it is evident that he made a major contribution to micro-economics. He researched about the benefits of free markets and how it helped to generate increased income and attract more prospective customers into the market (Brady 61).

Work Cited

Brady, Michael Emmett. On Adam Smith's Major, Original Contributions to Economic Theory and Decision Making. SSRN Electronic Journal, 2014, Elsevier BV, doi:10.2139/ssrn.2447270.

Gerdes, William D. Adam Smith and the Great Deceleration in the U.S. Economy. The American Economist, vol 58, no. 2, 2013, pp. 102-110. SAGE Publications, doi:10.1177/056943451305800203.

Phillipson, Nicholas. Making Adam Smith. The Economist, 2017, http://www.economist.com/node/16740415.

Ucak, Ayhan. Adam Smith: The Inspirer of Modern Growth Theories. Procedia - Social and Behavioral Sciences, vol 195, 2015, pp. 663-672. Elsevier BV, doi:10.1016/j.sbspro.2015.06.258.