Adam Smith

Background Physiocrat: – One who searches for natural laws that govern the economy; part of the Enlightenment

Laissez-faire: Government should leave the economy alone – No regulations – No protection for workers – No control of prices – No control of wages The guide for the economy is self-interest (one might call it greed). Self-interest will ultimately make it better for everyone. The economy will be guided by an Invisible Hand (market forces).

Role of Government Protect the citizens from foreign invasion. Protect the citizens from internal enemies. Help build infrastructure (roads, canals, bridges).

Law of Supply and Demand Supply: the amount of items at a given price available for sell. Demand: the number of items at a given price that consumers wish to purchase. Law of Supply & Demand: If the demand for an item grows beyond its supply, more producers will enter that market to increase the supply until the market achieves equilibrium. If the demand for a specific item lessens, producers will leave the market and put their resources into more profitable items.

Law of Competition Competition is good. Competition keeps prices low. If you cannot produce an item that is competitive in the market, you will go out of business. If you go out of business your resources will be put to use in a more productive way and you will find another place in market.

What is the down side of Free Enterprise Capitalism? The individual is on his own; every man for himself. If you do not have marketable skills or control of needed resources, you may easily get left behind and never be able to live beyond subsistence in this economic system.

(Subsistence living: keeping a roof over your head and food on the table, struggling to save enough money so that the unexpected - illness, disaster, cut- backs - do not leave you in a precarious economic position; and having enough to keep you satisfied and comfortable but not enough to get far ahead.)

How would Adam Smith view the American economic system today? Keeping Smith’s theories in mind, what would he approve of and what would he disapprove of in our system?