Question 1
Explain in your own words Adam Smith's Classical Liberal Economics concepts of free
trade, free markets, "the invisible hand" at the market place, the laws of supply and
demand and the proper role of government in the market/economy.
Free Trade:
From what we have explored in the lectures, he advocated for the elimination of
trade barriers and protectionist measures, such as tariffs. He posited that by embracing free trade,
nations could specialize in industries where they possessed a comparative advantage, thereby
fostering heightened production efficiency and bolstering aggregate economic prosperity.
Free Markets:
He contended that markets should remain devoid of governmental interference
and monopolistic influences. In such laissez-faire markets, price mechanisms are dictated by the
interplay of supply and demand, thus ensuring optimal resource allocation and market efficiency.
The Concept of the Invisible Hand:
From what we have explored in the lectures, Smith
introduced the concept of the "invisible hand" to elucidate the self-regulatory dynamics inherent
in market systems. He postulated that individuals, motivated by rational self-interest in the
pursuit of pecuniary gain, inadvertently act as agents of societal welfare, as though guided by an
intangible, imperceptible force.
Laws of Supply and Demand:
From what we have explored in the lectures, Smith
acknowledged that pricing dynamics within unhampered markets are contingent upon the
interrelation between supply and demand forces. This inherent self-adjusting mechanism serves
to maintain market equilibrium.
Government's Appropriate Role in the Economy:
From what we have explored in the
lectures, Smith preferred a restricted governmental role in economic affairs, encompassing the
enforcement of contractual obligations, safeguarding property rights, and the maintenance of
critical public infrastructure.
b. Why was this Classical Free Trade theory (Smith, 1776)
considered revolutionary at the
time it was adopted in the context of
the practice of "Mercantilism"? Explain this in its
historical context.
From what I understood from the lectures, the Classical Free Trade theory put forth by
Adam Smith was deemed revolutionary in the historical context of the prevailing practice of
Mercantilism. To comprehend the significance of this shift, it is imperative to consider the
historical backdrop. Mercantilism, as elucidated in the lectures, was the dominant economic
paradigm of the time. Under Mercantilism, nations pursued policies that aimed at accumulating
precious metals, primarily gold and silver.
Smith argued that nations should specialize in the production of goods in which they held a
comparative advantage, and this specialization would lead to increased productivity and overall
wealth. Moreover, he introduced the concept of the "invisible hand," suggesting that individuals,
driven by self-interest in the pursuit of profit, inadvertently contributed to the well-being of
society as a whole.
