Free Market

Written by Jonathan on January 28th, 2009

Adam Smith refers to labor as the real value of all commodities and money as representing their nominal value. Out of the “three or four” factors of production it is labor the one that represents the real value of everything. The division of labor allows individuals to specialize and perform those activities which one is more efficient at. After specialization (division of labor) as one produces more and more goods that surplus is naturally exchanged for other goods which we may lack.

Such exchange of one’s  goods for somebody else’s’, the demand and supply of goods (valued in real terms as labor) is the “invisible hand”, which allows people acting in their own self- interest, and maximizing their own satisfaction from the goods he is able to purchase, that generates a well-being to society as whole perhaps greater than his own.

Also, as Smith mentions the intervention of the government in the economical affairs of a country either by imposing tariffs, quotas, duties, etc., as opposed to the principles of mercantilism prevents free-trade and thus the  market from achieving a state of equilibrium and thus reduces the well-being of society. Although Smith advocated for a significant reduction of government in the affairs of a country in favor of the forces of the market he was by no means promoting a state of anarchy but to a “natural system” in which to allocate resources the most efficient way possible.

 

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