Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

Adam Smith His work An Inquiry into the Nature and Causes of the Wealth of Nations (1776) is considered by critics as a ‘declaration of economic independence’ (from monopolies and protectionism) parallel to Jefferson’s declaration of political independence. N.P.

Adam Smith A. Smith strongly believed that the wealth of a nation stemmed from the work of its population and it respected two principles only: -individual self-interest (which will bring benefit for all) -supply and demand: the demand on the market should rule both the goods supplied and the prices. N.P.

Adam Smith A. Smith was convinced that: in order for wealth to develop there should be as little interference by the state as possible (laissez-faire). Adam Smith was the first major theorist to develop the basic theory of welfare economics, i.e. that the invisible hand of competition automatically transforms self- interest into the common good. N.P.

Adam Smith Eliminating restrictions on prices, labour and trade meant that universal prosperity could be improved through lower prices, higher wages and better products. This model would result in “universal opulence which extends itself to the lowest ranks of the people”. N.P.

Adam Smith vs Marxist theories This theory was strongly criticised by Marxist economists, convinced as they were that self-interest would give rise to: - anarchy and crisis - competition, which would destroy the workers, rendering them worse off than in the system based on the public ownership of property. N.P.

More Hints at Economic Theories Joseph Schumpeter ( ): Austrian economist 1911: Theory of Economic Development 1911: Professorship in Economics, University of Graz 1919: Minister of Finance : University of Bonn 1932: he migrated to the USA 1942: Capitalism, Socialism and Democracy 1948: President of the American Economic Association : Harvard N.P.

J. Schumpeter Capitalism, Socialism and Democracy (1942) “Can Capitalism survive? No,I don’t think so” Contrary to Marx – who thought that capitalism would be destroyed by its own enemy (the proletariat) – Schumpeter believed that capitalism would be destroyed by its own successes. (Can you explain why?) N.P.

J. Schumpeter Capitalism, Socialism and Democracy (1942) is not only a prognosis of the failure of capitalism. It is also a defence of capitalism because it sparks entrepreneurship. He distinguished inventions from the entrepreneur’s innovations. N.P.

J. Schumpeter Schumpeter pointed out that entrepreneurs innovate by introducing - new means of production - new products - new forms of organization N.P.

J. Schumpeter Innovation by the entrepreneur leads to creative destruction, as innovations cause old inventories, ideas, technologies, skills and equipment to become obsolete. The question is not ‘how capitalism administers existing structures […] but how it creates and destroys them.’ N.P. Creative destruction causes continual progress and improves the standars of living for everyone.

John Kenneth Galbraith ( ) Proponent of American liberalism and progressivism. 1952: American Capitalism 1958:The Affluent Society 1967: The New Industrial State N.P.

J.K. Galbraith He believed that economic activity was a complex product of the cultural and political milieu in which it occurs. In American Capitalism (1952) he outlined how American economy in the future would be managed by big business, big labour and an activist government. N.P.

J.K. Galbraith He also criticised the assumption that continually increasing material production is a sign of economic and social health. In The Affluent Society he argues that: as society becomes relatively more affluent, private business must ‘create’ consumer’s wants through advertising, and while this generates artificial affluence (through the production of commercial goods and services) the public sector becomes neglected. N.P.

J.K. Galbraith (For example, while many Americans were able to purchase luxury items, their parks were polluted and their children attended poorly maintained schools). He argues that markets alone will underprovide for many public goods, whereas private goods are typically ‘overprovided’ due to the process of advertising, thus creating an artificial demand above the individual’s basic needs. N.P.

J.K. Galbraith For further reflections: N.P. Galbraith proposes a greater use of ‘consumption taxes’, considered as more efficient than other forms of taxation. Galbraith’s major proposal was a program he called ‘investment in men’, a large- scale-publicly-funded education program aimed at empowering ordinary citizens..