Supply & Demand - Faculty.utep.edu

TIlt Father of CL.lssical.....conOlnlCS:Adam nith(l7~3-17~!})Take a look at a Scottish pennyand you'll be surprised by whatyou see. The person pictured wasnot a political or military fLgure,but an economist: Adam Smith.It is a fItting tribute to a man whocontributed so much to economics.HJS LIfESmith was born in Kirkcaldy,Scotland. After graduating fromGlasgow University, he traveledto England and enrolled at OxfordUniversity. Six years later, Smithreturned to Scotland to lectureat Edinburgh University and athis alma mater, where he wasimmensely popular with his students.Smith became a tutor to ayoung duke, and traveled throughoutEurope.HIS IDEASSmith met and exchanged ideaswith French writer Voltaire,Benjamin Franklin, and the Frencheconomist Qlesnay. His travelshelped him formulate the ideas putforth in Tbe Wealth qfNations (1776).In Tbe Wealth ofNations, Smithobserved that labor becomes moreproductive as each worker becomesmore skilled at a single job. He saidthat new machinery and the divisionof labor and specializationwould lead to an increase in productionand greater "wealth of nations."Smith also put forth what was thena radical new idea: that the wealthof a nation should be defined as thesum of its labor-produced goods,not by who owned those goods.Smith's most influential contribution,however, concerned competitionin the marketplace. Everyindividual, Smith wrote, "intendsonly his own gain, and he is in this... led by an invisible hand....By pursuing his own interest he frequentlypromotes that of the society...."Smith argued that a freemarket isn't chaotic, but that competitionacts as an "invisible hand"that guides resources to their mostproductive uses. A truly free,competitive market-operating witha minimum of government intervention-wouldbring about thegreatest good for society as a whole.The English aristocracy ridiculedThe Wealth ofNations. Business people,however, were delighted tohave a moral justifIcation for theirgrowing wealth and power. Soon,Smith's doctrine of laissez/aire(French, "let it be"), meaning minimalgovernment intervention ineconomic affairs, became the economicwatchword in Europe, and istoday the economic watchword ofmuch of the world.Examining the Profile1. Summarizing Ideas SummarizeSmith's contribution to economicthought.2. Synthesizing Information Explainhow Smith's Ideas are eVident in theworkings of the American economy. l­18 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS