PROFESSOR:
Who is this man? How were
all these political leaders influenced by him? And how was the way the
world works today transformed by him? In 1776, Adam Smith, a Scottish
economist and philosopher, published a book called 'The Wealth of Nations'. Remarkably,
more than 200 years later, this book is still one of the biggest influences on
the way we do business today.
In his book, Smith came up
with three major, and very modern, ideas: the division of labor, self interest
and free trade. The first was the division of labor. To illustrate
this theory, he used the example of pin making. At the time, the process
of making pins involved one man or woman making each pin from start to finish. Smith
suggested instead that the labor be divided between five different people, each
of them completing one small part of the process.
With this division of labor,
Smith calculated that productivity could be increased by 240 times. Consequently,
the division of labor was a precursor to today's 'mass production' and assembly
lines, that are used in modern manufacturing worldwide. Smith's second
idea was the pursuit of self-interest. He believed that self-interest
could be a powerful economic force. To highlight this, he writes of a
butcher, a baker and a brewer.
Smith pointed out that each of these individuals were in business not to help each other, but
to help themselves. For example, the butcher sells his meat to the baker and thebrewer. He makes a profit, and therefore spends some of this money in the shops of thebaker and the brewer. It's as
if, although working for themselves, they're also benefitingthe society around them. Smith
believed that due in part to this 'self-interest', prices
would regulate themselves.
Look at it this way: if the
butcher overcharges the baker and the brewer, they won't come back to his shop,
so it's in his own self-interest to be honest and charge a fair price. Smith
likened this idea to an 'invisible hand' that controlled the market, so that
all producers would charge a fair price for their product. This led Smith
to his third main idea, that of free trade. Smith believed that a free
market, left alone by government, would benefit everyone. In other words,
it was when governments started making rules to control trade, that trade
suffered.
Critics of a free market,
however, argue that if people do business in a world with no rules, their
self-interest encourages them to act unwisely or dishonestly, and this can lead
to a market crash, such as that of 2008. One thing though, is clear. Since
its publication in 1776, Smith's 'The Wealth of Nations' has proved to be an
accurate prediction of the way we do business in the modern world.