Adam Smith and the Free Market

Abstract

In this chapter I show Adam Smith’s great admiration for the new free market economy that is exemplified by his report on the enormous productivity of the pin-factory. Smith attributes this great productivity to the division of labor which allows workers to specialize and which encourages them, out of self-interest, to look for machines to help in their work. On the demand side, the new economy relies on the human tendency to barter where self-interest replaces friendship as the means to get what one wants. This tendency to barter entices the system to produce what people want at the cheapest possible price. This is, according to Smith, the presence of a kind of “invisible hand.” It is not the result of a (government) plan. Next, I show that Smith, provides an argument that the help of the government is needed in the case of the provision of roads thereby prefiguring the modern concept of public goods. I show how Smith anticipates the modern concept of merit good in his discussion of education, monopolies and the need of governmental control of banking. Smith even discusses the danger of lobbying to influence the regulatory power of the state.