Adam Smith economic thinking study

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economic thinkers Adam Smith (17231790)

Adam Smith was born in a small fishing village just outside of Edinburgh, Scotland, in 1723. At age 4, gypsies (called tinkers in Scotland) kidnapped Smith, but he was rescued through the efforts of his uncle. he began studying at Glasgow college when he was just 14 and later continued his studies at Oxford university. he returned to Glasgow at age 28 as a professor of philosophy and logic. (until the nineteenth century, economics was considered a branch of philosophy, thus Smith neither took nor taught a class in economics.) he later resigned that posi- tion to become the private tutor to the stepson of charles Townshend.

Although known for his intelligence, , and charitable spirit, Smith was not without his eccentricities. Notorious for his absent-minded- ness, there is a story about Smith taking a trip to a tanning factory and, while engaged in conversation with a friend, walking straight into a large tanning vat. Another tale features Smith walking 15 miles in his sleep, awakening from his sleepwalk to the ring- ing of church bells, and scurrying back home in his nightgown. Most astonishing and unfortunate, Smith, without explanation, had the majority of his unpub- lished writings destroyed before his death in1790.

Adam Smith is considered the founder of eco- nomics. he addressed problems of both economic theory and policy in his famous book, An Inquiry into the Nature and causes of the Wealth of Nations, published in 1776. The book was a success from the beginning, with its first edition selling out in just six months, and people have continued to read it for well over two centuries.

Smith believed that the wealth of a nation did not come from the accumulation of gold and silverthe prevailing thought of the day. Smith observed that people tend to pursue their own personal interests and that an invisible hand (the market) guides their self-interest, increasing social welfare and general economic well-being. Smiths most power-

ful and enduring contribution was this idea of an invisible hand of market incentives channeling individuals efforts and promoting social welfare.

Smith also showed that through division of labor and specialization of tasks, producers could increase their output markedly. While Smith did not invent the market, he demonstrated that free mar- kets, unfettered by monopoly and government regu- lation, and free trade were at the very foundation of the wealth of a nation. Many of Smiths insights are still central to economics today.

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Smith is buried in a small cemetery in Edinburgh, Scotland. The money left on the grave site is usually gone by morning; the homeless prey on the donations to use for food and spirits. Adam Smith is probably smiling somewhere. He had a reputation as a charitable mana scale much beyond what might have been expected from his fortunes.

8 PART 1 Introduction

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T O N E Y , A D R I A N N A 5 5 2 1 B U

Answers: 1. d 2. c 3. d 4. d

S E C T I O N Q U I Z

1. Which of the following would to an economist?

a. worker pursuing a higher-paying job and better working conditions

b. consumer seeking a higher level of satisfaction with her current income

c. Mother Teresa using her Nobel Prize money to care for the poor

d. all of the above

2. When economists assume that people act rationally, it means they

a. always on complete and accurate information.

b. make decisions that will not be regretted later.

c. do the best they can based on their values and information under current and future circumstances.

d. make decisions based solely on what is best for society.

e. commit no errors in judgment.

3. Rational self-interest can include

a. the welfare of our family.

b. our friends.

c. the poor people of the world.

d. all of the above.

4. Rational self-interest means

a. people never make mistakes.

b. that our concerns for others does not involve costs.

c. we are materialistic and selfish.

d. people make decisions with some desired outcome in mind.

1. What do economists mean by self-interest?

2. What does rational self-interest involve?

3. how are self-interest and selfishness different?

4. What is rational behavior?

Economic Theories A theory is an established explanation that accounts for known facts or phenomena. Specifically, economic theories are statements or propositions about patterns of human behavior that occur expectedly under certain circumstances. These theories help us sort out

theory statement or proposition used to explain and predict behavior in the real world

What are economic theories?

What can we expect from theories?

Why do we need to abstract?

What is a hypothesis?

What is empirical analysis?

What is the ceteris paribus assumption?

What are microeconomics and macroeconomics?

Economic Theory 1.3