Adam Smith on Economic Systems

Okay hi there, welcome to a short video where we'll spend a few minutes looking at the ideas of the classical economist Adam Smith, his views on economic systems. We start at the Royal Mile in Edinburgh where there is a monument erected to the memory and the achievements of Adam Smith, one of the great sons of Scotland. Adam Smith wrote extensively in the 18th century, his seminal work is perhaps The Wealth of Nations published in 1776 and Smith undoubtedly deserves a place amongst the great economists. Many of the ideas that Smith wrote about still underpin, still support how we think about the economy today and also the the impact of government economic policies. So Adam Smith wrote The Wealth of Nations in the late 18th century and in the book he wrote about the invisible hand of resource allocation and the role of self-interest, in other words it was an early reference to the operation of free market economic systems, the invisible hand, the decentralised invisible hand working through the price mechanism, through the forces of supply and demand. I would be slightly careful with the phrase self-interest, that can be often read in a simplistic way as referring only to people operating in an utterly selfish way without regard to others and that's not what Adam Smith is really talking about. It's perfectly possible for people to recognise and then operate in a collective self-interest, recognising for example that the existential environmental threats we face affect us all and require a strong degree of collective action. But so Smith was writing about the invisible hand, essentially he was a free market economist, a liberal economist, at the same time however Adam Smith warned that we should be wary, we should be concerned about businesses that become too large, in other words businesses that achieve too much monopoly power, market power in their sector because they have then the ability to raise price which can impact on consumer welfare. I raise a question here what might Adam Smith make of the giant GAFAN digital platforms, Google, Apple, Facebook, Amazon, Netflix, what would he make of those huge digital platform businesses today? Adam Smith recognised that the government should keep at least one eye open on the activities of businesses with market power. He believed it was dangerous for super large businesses to influence politics and government legislation. Adam Smith wasn't actually the sort of pure unfettered laissez-faire economist that is often painted to be and his name has been taken as a kind of starting point for just pure free market thinking. He was very focused on the ways in which the government should provide some things to help a market economy work better including for example the right and the ability to tax. Smith recognised that in a free market economy there would be some inequality, some people would be rich particularly those people who owned property, the owners of the key factors of production land and labour and capital and there would be far fewer of those people than people who were just labourers reliant on wage labour for their income. He said that one of the key roles of government would be to maintain law and order because the many poor would want to take over the property of the rich. Now Adam Smith yes a supporter of free market liberalism free trade for example. Smith believed in free markets the function of the market mechanism but Adam Smith was not repeat not for completely free unfettered markets with no government intervention. Other key roles for the state identified by Smith included the crucial importance of protecting property rights, the issuing of patents and copyrights to help protect inventions by people, providing national defence a pure public good, regulating the banking sector to maintain sound money, building key infrastructure providing those kind of pure public goods that the free market wouldn't necessarily provide on their own without some form of government intervention. Adam Smith is regarded as the founder of the free market economic system despite recognising the force some government intervention. Now if you want to find out more about the life the times the works of Adam Smith then we recommend highly a book on The Great Economists by Dr Linda Yueh from Oxford University. There's a chapter on Adam Smith which is absolutely superb and well worth a read. There we go a few minutes there on Adam Smith on economic systems.