US1: Adam Smith: The Father of Economics
How did Smith feel that natural or invisible forces would affect a free market?
natural forces would guide an economy to be successful.
What do command economies often cause?
shortages, lack of choices for the buyer, and poor quality goods
What is laissez-faire?
the belief that economics and businesses function best when there is no interference by the government
What is mercantilism?
a controlled economic system where a nation's government controlled some of the economy though regulations and taxes.
What did these moral principles lead to?
a division of labor
What did Smith argue in his book?
a free market economy was key to making a nation wealthy and would also benefit society the most
How should natural forces (the invisible hand) affect prices of goods and choice?
a lack of competition and government control of goods would lead to higher prices
Why are prices high under mercantilism?
because there is no competition and government controls the supply of most of the goods which led to higher prices and a lack of access for these goods
What occurred in the U.S. when there was a true free market system?
business caused a lot of pollution, workers were exploited, and many monopolies took control by charging higher prices for the goods.
What is Adam Smith considered the father of?
economics
Why did Adam Smith not like mercantilism?
he felt it didn't benefit society or create a wealthy nation
What are natural laws?
moral principles that theorists believe guide human behavior
What was Smith's belief about an "invisiible hand"?
the idea that, in a free market, there are unseen natural market forces that guide an economy to be successful. Because of this, there is no need for the government to interfere in the economy.
Why should prices be fair under a free market system?
the seller will end up getting the price he wants, and the buyer will get the goods he wants as a price he is willing to pay
What is the division of labor?
the specialization of the labor force, where jobs are broken down into smaller, more specialized jobs
What main role did Adam Smith believe government should have?
to protect people's property and to provide a military to protect the nation.
Why did the monarchs use mercantilism?
to strengthen their power and make them and their friends rich
What book did Adam Smith publish in 1776?
"Wealth of Nations"
What three moral principles did Smith believed motivated humans?
1. self-interest and competition would lead to fair prices and more choices for goods; 2. prices would be fair because supply and demand would find their natural equilibrium; 3. Smith believed the seller will end up getting the price and the buyer will get the goods at the desired price.