Adam Smith

Definition

Adam Smith was an 18th-century Scottish economist and philosopher who is considered the father of modern economics. He is best known for his influential work 'An Inquiry into the Nature and Causes of the Wealth of Nations,' which laid the foundation for the neoclassical perspective on economic policy.

5 Must Know Facts For Your Next Test

1. Adam Smith's 'An Inquiry into the Nature and Causes of the Wealth of Nations' is considered the foundational text of modern economics.
2. Smith's concept of the 'invisible hand' argues that in a free market, individuals pursuing their own self-interest will ultimately promote the best interests of society as a whole.
3. Smith advocated for a laissez-faire approach to economic policy, where the government should have minimal intervention in the free market.
4. Smith's theory of the division of labor suggests that specialization and the division of tasks can lead to increased productivity and efficiency in an economy.
5. Smith's ideas on the free market and limited government intervention laid the groundwork for the neoclassical perspective on economic policy.

Review Questions

• Explain how Adam Smith's concept of the 'invisible hand' relates to the neoclassical perspective on economic policy.
  • Adam Smith's concept of the 'invisible hand' is a central tenet of the neoclassical perspective on economic policy. The idea that individuals pursuing their own self-interest in a free market will ultimately promote the best interests of society as a whole aligns with the neoclassical view that the government should have minimal intervention in the economy. This laissez-faire approach allows the free market to self-regulate through the forces of supply and demand, which the neoclassical perspective sees as the most efficient way to allocate resources and maximize societal welfare.
• Describe how Adam Smith's theory of the division of labor relates to the policy implications of the neoclassical perspective.
  • Adam Smith's theory of the division of labor, which suggests that specialization and the division of tasks can lead to increased productivity and efficiency in an economy, is closely tied to the neoclassical perspective on economic policy. The neoclassical view emphasizes the importance of market forces and the efficient allocation of resources, which can be achieved through the division of labor and the specialization of tasks. This aligns with the neoclassical perspective that the government should have a limited role in the economy, as the free market is seen as the most effective mechanism for promoting economic growth and prosperity.
• Evaluate how Adam Smith's ideas on the free market and limited government intervention have influenced the neoclassical perspective on economic policy.
  • Adam Smith's ideas on the free market and limited government intervention have had a profound influence on the neoclassical perspective on economic policy. Smith's advocacy for a laissez-faire approach, where the government should have minimal intervention in the economy, is a core tenet of the neoclassical view. The neoclassical perspective holds that the free market, guided by the 'invisible hand' of individual self-interest, is the most efficient mechanism for allocating resources and promoting economic growth. This aligns with Smith's belief that the government should play a limited role in the economy, allowing the free market to self-regulate. The neoclassical perspective's emphasis on the efficient allocation of resources and the maximization of societal welfare through market forces can be traced back to the foundational ideas put forth by Adam Smith in his seminal work, 'An Inquiry into the Nature and Causes of the Wealth of Nations.'

Related terms

Invisible Hand: The concept introduced by Adam Smith that describes how, in a free market economy, the pursuit of individual self-interest can lead to the maximization of societal welfare, without any centralized coordination or planning.

Laissez-Faire: The economic policy of minimal government intervention and regulation, advocated by Adam Smith and other classical economists, which allows the free market to self-regulate through the forces of supply and demand.

Division of Labor: The concept developed by Adam Smith that describes how the specialization of tasks and the division of labor can increase productivity and efficiency in an economy.