Adam Smith and Capitalism

Adam Smith was a classical economist who is still viewed by the modern day economists as the founding father of various doctrines of economics. He believed that labour was a very vital factor of production and should be treated with a lot of significance. Adam Smith was the founding father of capitalism and he argued that specialization and division of labour played a major role in the various markets. This paper seeks to elaborate the views of Adam Smith with regard to capitalism and shows how his views relate to the modern day principles of economics.


The conventional developments of international associations have been greatly transformed by globalization; this has necessitated various countries to strive to be in a dominant position in the political environment. The main determinants of gaining political and economic dominance by these ambitious countries are social, political, and technological transformations that come about in the course of development. Capitalists hold the view that an economy should develop economically at a quicker growth rate. When this is achieved, the interactions between the state affairs and the market affairs will be very minimal. The ideologies of capitalism further states that the markets are very free and independent, thus, there is no need for the government to meddle in its affairs (Buchan 28).

Adam Smith, being an economist brought into being the classical economics, besides being the first ever economist to ever complete an elaborate presentation of the theory of political economy. Adam Smith believed that in order to quantify the economic worth of a state, then the contributions made by labour should be taken into account. Adam Smith shared the school of thought that the worth of a commodity is majorly dependent on its exchange value rather than on its usage value. Thus, the prevailing prices in the market ought to be in tune with the marked price of the commodities. This move is only possible when the state does not intervene or interfere with the trade policies that exist in the market. Initially the orthodox economists held conflicting views with regard to free trade policies, but later on, Adam Smith furthered this theory of free trade policy to justify the wealth of nations. Adam Smith then came up with a new economic model to forecast on the prosperity of the nations. He held the view that in the market place, everybody is mainly driven by his/her self interest. Adam Smith further argued that for a country to amass much wealth, then the market forces should be allowed to prevail rather than the state interfering with the activities of the market. It is therefore imperative for the governments to realize the potentials that they have with regard to preservation and improvement of their wealth rather than focus on measures that limit the people from amassing sufficient amount of wealth that could sustain them for a longer period of time .

Adam Smith is still considered as an honorable theorist who was a gifted witness and an efficient reader. He shared his understanding with regard to the changing dynamics of the societies and how the society has progressed from the earlier stages to the later stages. Adam Smith actually knew that for a society to develop there are various hurdles that have to be jumped over and at times it is not easy to jump over them. One outstanding element concerning the philosophies of Adam Smith is that he never gave a prediction on what the state of capitalism would be after his life time is over; instead, he left it for the future economists to decide. His ideologies were, therefore, with regard to the existing set ups of capitalism.

In his book, ‘ An Inquiry into the Nature and Causes of the Wealth of Nations’, Adam Smith shared the sentiments that in any given set up of market system and gauging individuals’ capabilities, the individuals will resort to specialization in their processes of production in order to maximize on the benefits and advantages that come by. This move is geared toward establishing an economy that has the primary objective of being productive and yielding fruits of labour, hence, multiplying the economy’s wealth. Adam Smith also shared the sentiments that the producers should not be given any protection at all as this will result to mediocre production and business practices. The producers will resort to withdrawing essential commodities in the market, thus resulting to increase in prices of the products in the market. He derived the notion of political economy from the idea that trading goods in the market will generate a motivation to satisfy the individual’s self interest.

Adam Smith further stated that in the process of trading a commodity in the market place, the trader will give more attention to whatever they are buying than to whatever they are selling or disposing away. If it were not for this reason, then the trader would rather retain the commodity than give it away. It is in line with this philosophy that Adam Smith introduced the perception of a mutually-beneficial trade, which embraces the idea that both parties gain when there is exchange of commodities in the market; the buyer gets the good of his/her choice and taste, while the sellers gets goods or cash that they deem to be comfortable with their arrangements (Skousen 46).

Adam Smith is seen as the founding father of capitalism, yet he never used the term capitalism more often (Buchholz 68). Instead Adam Smith held the view that capitalism can be perceived as the system of natural liberty. According to Adam Smith, capital meant the advancements made upon the stock of goods or profits in order to realize much more gains. Thus, in any given political set up, capital advancement is the main basis of generating and pumping in more money or assets into the economy, hence, capital advancement automatically becomes the primary objective of any economy. There is a major variation with regard to Adam Smith’s view of capitalism and the modern day economists’ views of the same. According to Adam Smith, value is perceived as to be an essential creation of labour and is driven within the labour theory of value. The modern day economists, however, hold conflicting views regarding the same. Various scholars attribute Adam Smith’s school of thought to be leaning toward communism as he was known for his quote that challenged the rich people in the society to throw into the society a contribution that is more than the proportion of their total revenue.

Capitalism and the Wealth of Nations

Interestingly, during the time of Adam Smith, the theories presented by him were neither famous nor recognized as practical or making sense; but in the modern day economists recognize and respect the arguments and suggestions held by Adam Smith. The current developments in the world of political economics are justifications that Adam Smith’s arguments really held water. Today’s markets and business worlds are based upon the fundamentals cores of capitalism, for instance, lately, all over the world, there have been many countries seeking to form regional economic unions. In addition, many governments have liberalized their markets and privatized the state owned properties. In describing how different individuals behave in the economy, Adam Smith has developed a systematic breakdown. He postulates these individuals to symbolize the business agents or business association within a domestic framework; however, Adam Smith has postulated these individuals to symbolize the countries with regard to the international trade framework. This therefore suggests that whenever any individual business agent is addressing his/her self interest or whenever any country is addressing matters pertaining to national interest, they become exposed to the various setbacks on the road to economic empowerment. This dispels out the notion that the political supremacy of any country or its foreign policies is linked with the guiding principles of the business entities found within the states.

The recent surge of multinational companies all over the world also signifies the validity of Adam Smith’s suggestions with regard to capitalism. The developed countries always establish their multinational companies in developing countries with the aim of marshalling up their natural, human, and economic resources so as to help them in development. Actually, the idea of multinational companies has raised concerns by various states throughout the world. They perceive it to be an act of modern day slavery or neocolonialism. The multinational companies themselves have brought about various short comings; most notably, they have succeeded in broadening up the gap amid the rich and the poor rather than connecting the gap. This, therefore, proves the notion of Adam Smith that a country can be richer on condition that the government does not get in the way of the economic and business policies and specialization and division of labour is practiced in the various markets (Skousen 130). 

Adam Smith categorized the functions of the government into three functions. The first function is to provide security to the citizens against any aggressions from external forces. The second function of the state is to make laws and legislations to govern the behaviours of the people within the country so as to work accordingly toward the realization of development goals. The third function is to provide public goods and services to the citizens during times when they are faced with shortages (Smith 268). In as much as Adam Smith has done a good job to contribute to the fields of economics, various critics have not held their voices with respect to opposition to capitalism because capitalism limits the functions of the government in the economy. Interestingly many countries all over the world are embracing the ideology of capitalism despite its criticism. The ideology of capitalism has found its way deep down into the economies of nations who have been known to adopt the ideology of communism. An example is China which is well known for its doctrines of communism in terms of politics since it has started to adopt various ideologies of capitalism. Presently, China’s market has tremendously enlarged throughout the world to overtake the world’s market, thus, sending warning signals to the other superpowers of the economic world. Today’s society is not regarded as just a mere triumph of the efforts of mankind, but rather, the society is perceived as a living organism that is capable of telling about its own life history and period of origin. Many studies have revealed that the system of perfect liberty that was introduced by Adam Smith has been very instrumental in shaping up the modern day dimensions of the economics and business world.

The laws of the market that are stipulated by Adam Smith suggest that any particular result that has been instigated by any form of behaviour has the ability to swing the dimensions of the economy in any way. Similarly, an individual’s self interest will yield results that create competition for resources within the economy. Competition is actually vital since it will help the state to decide on the emergency needs that are needed by the members of the society, quantities needed, and the price that the people are prepared to commit to the needs. Self interest is something that ought to be controlled as it can drive power hungry or profit hungry individuals to take advantage of the situation at the expense of the other members of the society; thus, competition proves to be the referee in the field for the competitors who are driven by their huge self interests. It is the interactions of these competing self interests in the market place that bring about the state of social harmony in the society (Buchan 72).

In today’s world, the laws of demand and supply that prevail in the markets create competition in the market which further results in determining the prices of the commodities in the market. The laws of demand and supply further ensure that the producers meet the needs of the society by acting rationally and on time. For instance, incase consumers decide that they want more pens than rulers, as expected, the players in the market will shift their attentions to procuring more pens than rulers, the ruler business will be stagnant as the pen business blossoms. This will further result into the prices of pens going up and the prices of rulers going down. With the rise in the prices of pens, comes the increase in profits for the pens; the reverse happens in the rulers market. From here the element of self interest will come to take part in in the market with the aim of restoring the imbalance. As a result, workers who are attached to the rulers market will go out of business because of the new tight economic conditions in the rulers market; on the other hand, the workers who are attached to the pens market will be expanding their businesses at this time. The final result will be that the pens market will flourish while the rulers market will deteriorate. Thus, by this, the society will shift the distribution of its resources with regard to the changed dimensions with regard to consumption in the two markets.

The modern day production methods are very different from the recent production methods during Adam Smith’s time. A lot of things have changed and production has become more and more complex. To exemplify, during the 18th century, the companies employed about 10 employees, but the modern day companies employ more than 10,000 employees. However, the most common core element in these companies was the concept of specialization and division of labour. The economic instruments in the markets propel a society toward taking full advantage to increase the wealth and riches. These economic instruments motivate the people to conceive the idea of innovating or inventing ideas that are perceived to be beneficial to the society as a whole (Buchan 147).

Adam Smith recognized that governments are negligent, squanderers, and fruitless. It is in line with this, that various modern day economists have found a very strong reason to oppose any actions by the government that are deemed to interfere with the liberalization of the markets. Instead, the government should provide the needs of the society by maintaining security of the people, mobilizing resources for development of these societies, and ensuring that the rule of law prevails within the society by enacting legislations and punishing offenders accordingly. Thus, it is the duty of the state to provide public goods to the people. The construction of roads or bridges cannot be left in the hands of money hungry individuals as they will be misdirected by their self interests.

The government can interfere with the affairs of the market in various ways. For instance, it can decide to restrict and control importation and exportation of essential goods and services. It can also pass legislations that interfere with the concept of competition in the markets. In addition, the government can alter the fiscal policies that deal with its expenditure and revenue. When the government launches any of those actions, the market will highly be shocked or destabilized. The government can only interfere with the market if it is really necessary to do so, for the purpose of the wealth of the nation.


Capitalism is still perceived as to be the structure of economics that safeguards the sovereignty of individuals and at the same time elevates their levels of living.  Thus, for capitalism to be popular in a society, the policy makers should restrict the state to offer the least interference possible in the affairs of the market. The countries in the West are still characterized by wide range of inequalities between the rich and the poor because of the fact that many people still profit from the political processes that prevail in these countries. Capitalism leads to the elevation of an individual’s self interest high above his/her interests as a major producer in the society. As opposed to capitalism, socialism necessitates the state to give first priority to the interests of the producers before paying much attention to the interests of the consumers. Capitalism and communism are two conflicting ideologies but in the modern world today, a country like China has managed to balance the ideologies to work hand in hand in the political process. Initially, Adam Smith had encountered several criticisms from the different avenues of both classical economists and modern day economists, but lately it has been proved that the arguments and assertions of Adam Smith do really make sense. Inequality is a social evil, but it still finds its way in capitalist economies. There is a wide gap that really exists between the rich and the poor because of the fact that some people benefit heavily from the government’s actions while others continue to be looked down upon by the others. Inequality fosters competition which later on brings up the sense of innovation or inventing new ideas.

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