Adam Smith - Theories

Adam Smith argues that it was market forces that ensured the production of the right goods and services. This would happen because producers would want to make profits by providing them. Without government intervention, thus forming a laissez-faire environment, public well-being would increase from competition organising production to suit the public.

This was the basis of the free market economy. Competition would mean producers trying to outsell each other and this would bring prices down to their lowest possible levels (making minimal profit). If there was not enough competition, this would mean that producers would make more profit. This would soon attract more firms to join this industry, bringing prices down. All this would end up benefiting the consumer without any necessary intervention.

This system had 2 requirements, however. One was that the market needed to be free of government intervention, and the other was that there had to be competition. Smith recognised immediately the danger of monopoly:

"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate."

These are concepts that are so fundamental that they are still present in nearly all economics courses (something to look forward to if you haven't done it already!).

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