Differences between a programmed economy and a market economy

About Adam Smith 

Adam Smith was a Scottish political economist, lecturer, and essayist, best known for his works The Wealth of Nations and The Theory of Morals.

Smith is best known for his contributions to political economy and moral philosophy, but his work covers a wide range of topics from astronomy to the etymology of language. Smith first came to prominence with his "The Theory of Moral Sentiments", which emphasized the important role of empathy in moral decision-making.

Adam Smith's contribution to economics 

Smith made four unique contributions: 

The first contribution was the explicit recognition that probabilities cannot be calculated accurately using precise single-digit answers, that probabilities are uncertain and/or imprecise, that mathematical laws of computation cannot be applied to real-world decision-making in general, and that Smith rejected any approach to decision-making based on fairness or sporting judgment.

Secondly, Smith was the first to explicitly recognize that decision-making in the real world is highly uncertain, not based on a mathematical notion of risk based on known probabilities and outcomes, which led Jeremy Bentham to develop the "Logically Modelled Expected Value" and "Expected Value of Benefits" calculations, an economic calculus for modeling probability.

Thirdly, Smith was the first to realize that when the probability is greater than zero, retaliatory tariffs can force a country that has imposed tariffs on another country to reverse the decision and that in tariff disputes between countries, a variety of strategies are possible, including war, threats, negotiation, truce and retaliation, i.e. attention-seeking strategies.

Fourthly, Smith understands that the greatest threat to economic prosperity comes from speculators, profiteers, and reckless adventurers, such as speculators who succeed in obtaining bank loans in an attempt to repeatedly profit from their debts, leading to the loss and damage of bank deposits, and causing a recession or depression, and although the probability is greater than 0, retaliatory tariffs may force the country that imposed the tariffs on the other country to reverse the decision, in the event of disputes over tariffs between the parties, a range of strategies are possible, including war, threats, negotiation, mediation, and retaliation, with an "eye for an eye" strategy. [1]

Why Adam Smith is important for the Industrial Revolution

Adam Smith is sometimes referred to as an influential figure in the Industrial Revolution, which is usually described as having begun in 1760. The Industrial Revolution began in England in 1860 and saw technological advances change the way people lived and worked.

This is also the decade in which Smith wrote The Wealth of Nations, and the timing suggests that Smith wrote his book at the very beginning of industrialization, which may be why The Wealth of Nations makes little reference to the tectonic changes that began around it.

Before the Industrial Revolution, most people lived and worked on farms. Most of the products people used were handmade by skilled craftsmen. These craftsmen often belonged to workshops that controlled the production and sale of products.

Smith criticized the monopolistic power of the federal system and the protectionist policies of government control of trade, believing that allowing the people to decide for themselves how to use their money, land, tools, and labor would bring the greatest benefit to the nation, and he argued in his work that allowing the people to pursue their own self-interest would lead to the best regulatory system.

During the Industrial Revolution, production was centralized using machines and steam power, allowing factories to produce goods faster and cheaper than people, and a large part of the population moved from cottage industries to the new factories in cities.

When Smith wrote about the theoretical advantages of the division of labor (where people specialize in certain tasks) and the ability of the free market to run the economy (rather than the state), his ideas were already at work in real life.

It is not clear how Smith's ideas influenced, observed, or predicted changes in the world in the 19th century, but his work coincided with the growth of the capitalist system he described, and the following decades are full of examples of countries embracing the free-market and laissez-faire policies advocated by Smith. 

The main purpose of Adam Smith's Wealth of Nations is to

The main purpose of Adam Smith's The Wealth of Nations is to improve understanding of political economy (the role of government in economic policy) and to encourage governments to adopt a free-market approach to production and trade.

At the time the book was written, the world was largely pre-industrial, ruled by colonial empires, the working class was dependent on a system of skilled trades and apprenticeships run by a network of trade unions, and in many places, kings and queens still ruled the land and valued the power of their people in gold and silver.

Smith explores the natural motives and inclinations of people and finds that their primary motive is self-interest and they use their resources for things that are most beneficial to them. He argues that all trade is mutually beneficial. If the other person is not better off from the exchange, they simply will not trade, so Smith points out that all voluntary trade increases welfare and therefore regulating trade is unnecessary and may even be counterproductive.

Smith shows that government policies that prevent trade reduce the wealth a country can create (this idea applies not only to the trade policies of England and France but also to the monopoly power of trade unions).

Smith wrote his book to prove that controls on free trade were unjustified and undesirable, and to show that each member of society pursues his own interests and accepts the natural competition that is inherent in human nature.

The forces of competition control all activities and ensure that everyone gets their just deserts - workers their wages, landlords their rents, capitalists their profits, and so on. According to Smith, the best system ensures that resources are exchanged in a way that maximizes their distribution.