Adam Smith and Classical Economic Liberalism

Adam Smith (1723-1790) and Classical Economic Liberalism The spread of industrialization was helped by the ideas of Enlightenment thinkers influencing the political, economical, and social structure of society. One very influential thinker was Adam Smith.He theorized about classical liberalism and economics.

 

 

 

Adam Smith disagreed with the economic practices of mercantilism. In his book, The Wealth of Nations (1776), Smith promoted capitalism because he believed in economic freedoms based on individualism. His belief was that, if entrepreneurs (or business owners) were free to determine what was to be produced and were able to profit from these business ventures, these entrepreneurs would then pay the employees a fair salary. A win-win situation.

Smith believed that governments should not control how producers and consumers bought or sold products in the market. Instead, Smith said the market should be laissez-faire or without government intervention:

  • Let entrepreneurs determine the supply of goods based on demand from consumers.

  • Let competition and supply and demand determine the prices of goods and services.

  • The common good will be taken care of if the economy is left in the hands the producers and consumers.

Examine the following chart illustrating the basic differences between mercantilism and Adam Smith's classical economic liberalism or capitalism:
Mercantilism Economic System
  • Government Intervention: Government has a large role in regulating business.
  • Business and the Market: In the system of monopolies, a few large businesses, government-created or approved, control the market.
  • Wealth: Government and a few favored businessmen in society control wealth.
Capitalist Economic System
  • Government Intervention: Government has little or no role in regulating business.
  • Business and the Market: In the system of competition, many businesses, both large and small, compete in the market with no government regulations.
  • Wealth: The distribution of wealth occurs among many people in society with government control.

Adam Smith believed that by limiting government intervention and using laissez-faire economics, the perfect economy could be constructed.

Laissez-faire capitalism is a classical liberal economic system based on the ideas of Adam Smith. It is a form of capitalism based on the idea that the government does not get involved in economic decisions and does little to protect workers. There is no government intervention in a laissez-faire capitalist economy.

Read "Adam Smith and The Wealth of Nations" and "Capitalism and Liberalism" on pages 103-105 of your textbook,Understandings of Ideologies. These pages will further your understanding of the concept of the development of classical liberalism.

You should make notes, either on paper or on your computer, about what you have read. You may want to read the tutorial How to Make Notes. When you are finished the tutorial, return here to continue this unit.

Some basic principles of classic economic liberalism

or, consider the following Adam Smith economic recipe


Classical liberalism economic system is based on the individual.





  • Limited resources (means of production) of land, labour, and capital should be owned or controlled by individuals.

  • The economic questions of what, how, and for whom to produce will be answered by the interaction of consumers and producers in the market.

  • The government should have no control over ownership of anything in the market.

  • The common good will benefit through the economic values of individual economic freedom, competition, self-interest, and private property.