By Dave Smith, Senior Contributor, USADC.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. “ – Adam Smith (June 16, 1773 – July 17, 1790)
The world saw two revolutionary ideas explode on the scene in 1776. One was the declaration of a new type of government: a Constitutional Republic based on individual liberty and the premise that all men are created equal – a reaction to monarchy, privilege, and an outgrowth of the Enlightenment. The other was the expression of a new economic worldview: prosperity built on economic liberty and voluntary exchange, opposing the still-prevalent views of feudalism and mercantilism in favor of a new free-market approach.
In writing An Inquiry into the Nature and Causes of the Wealth of Nations (commonly known simply as Wealth of Nations) Scottish philosopher Adam Smith laid out the three fundamental aspects of economic prosperity: self-interest, division of labor, and freedom of trade. In explaining the importance of these three components in wealth creation, Smith disparaged commonly-held assumptions about production, money, protectionist tariffs, and central economic planning. He warned against monopolies and special interests (“factions”), wrote of the importance of intellectual property, and warned of debt-financed war.
In writing on self-interest, Smith explained how, even without central planning or control, people acting for themselves would “promote the public interest”. It was his description of an “invisible hand” guiding voluntary exchange that is still used in modern times to describe such workings. He created the famous example of the butcher, baker, and brewer all producing their goods for their own benefit, not that of the consumer; however, each one benefits more the better he is able to satisfy the demands of the customer. In the end, both the producer and the consumer benefit in a win-win transaction – the essence of what has come to be known as free market capitalism.
While warning that division of labor to an extreme could lead to mundane lives for workers, Smith nevertheless saw specialization as a fundamental engine of economic prosperity. By focusing on increasingly specialized tasks, workers develop greater skill (“dexterity”) and waste less time moving between jobs. The resulting productivity contributes to increased wealth.
Smith opposed the mercantilists of his time (like, for example, Alexander Hamilton) who decried free trade and sought to protect domestic goods and services from foreign competition through tariffs, seeing imports as harmful to the economy. Smith recognized that such tariffs help secure a “monopoly of the home market”, leading to a less efficient use of resources. Free trade, on the other hand, widens the market, allowing a greater extent of specialization that benefits consumers and contributes to wealth creation.
Adam Smith’s ideas not only influenced many of America’s Founding Fathers as they set up a largely free market economy in the fledgling United States, but his ideas still resonate in modern times. Advocates of protective tariffs, import quotas, and other trade restrictions use the same arguments debunked by Smith over two centuries ago, while the world’s most robust economies – the wealthiest of nations — are built on the foundation of his fundamental tenets.
Born in the same county as Davy Crockett in East Tennessee, Dave found his way to Texas where he works in the petrochemical industry. He’s written and spoken about politics on various media outlets including Fox, ABC, and Townhall. He is a graduate of Tennessee Tech with a degree in chemical engineering. Dave writes a popular feature at USDR called “Dave Smith Said That”. Follow Dave on Twitter: @semperlibertas.