4.2 Capitalism/Free Market: A Model for Economic Decision Making

Adam Smith lived in Scotland from 1723 to 1790. He liked to think about and contemplate his world and the changes that were occurring as political and economic power shifted into new hands.

New ways of thinking were changing how people saw their world. Exploratory thinkers, such as Sir Isaac Newton, had developed the concept of a universe governed by natural laws which guided the actions of objects throughout the universe. Another philosopher, Jean-Jacques Rousseau, expanded on this idea by questioning the nature of the relationship between people and their rulers. He felt that the modern state as it was then structured (with kings and nobility) impeded the natural growth of humans. Smith, Newton, Rousseau, and others created a new way of thinking about relationships both in the natural world and in human relationships. This became known as The Age of Enlightenment.

In Adam Smith's time, some people thought only the king could determine right and wrong through laws because, after all, the king received his power to rule through his direct connection with God. God spoke to the people through their king or queen. Some questioned this idea. They were "learned" individuals, men who had gone to university. They thought right and wrong could be determined through reasoning, just like math.

Adam Smith challenged both the divine right of kings to be absolute rulers and the right of certain "learned" individuals to make decisions. He believed that every one of us has an inborn knowledge of right and wrong. No one has to tell us what to do. We all have our own sense of what is good. We can make up our own minds about what we should do and who we should do it with. This was an exciting idea for people who lived under the dictatorship of a king whose opinions were considered to be more important than those of people in positions of learning. You can imagine how people felt when they were told their opinions were as likely to be right as those who held higher positions in society.

Our style of government, our economy, and our society were very much influenced by what Adam Smith wrote in his books: The Theory of Moral Sentiments, where he discussed the nature of morality, and even more importantly, in The Wealth of Nations, which became the foundation of modern economics. In this extension of his earlier book, he laid out his economic principles that said not only are ordinary people best able to make up their own minds about right and wrong, but, if they are allowed to do that, everyone will benefit. Everyone will become wealthier. He stated that the government had no role in the operation of the economy. The invisible hand, represented by individual self-interest, he believed, would effectively control economic matters. Therefore, he stated governments should adopt a laissez-faire or hands-off approach to involvement with the economy.

A free market economy relies on the supremacy of individualism where individuals must be free to act upon their individual rights to satisfy their wants and needs. As a result, in a pure market economy, the government would not be involved with regulating the economy in any way.

The invisible hand explains how our economy works today, in Alberta, in Canada, in most of the world. Today, in contemporary society in the developed world, we value the freedom of the individual when it comes to buying and selling goods, services, and information. This system is capitalism, and it is the dominant economic system in the world today. Economic globalization works because of the capitalist system. Adam Smith's "invisible hand" means the marketplace monitors itself. The invisible hand determines what will be sold and for how much.