What principles of political economy did Adam Smith set out in the 'Wealth of Nations'?
Adam Smith believed solely the market operates in accordance to the wishes and decisions of free individuals. Smith put forward the theory of the 'economic man', he used this notion to describe human beings as being essentially egotistical and bent on material acquisition. Smith set out in the 'Wealth of Nations' that there is a natural 'harmony of interest' between individuals in the market. In his famous notion of the 'invisible hand', in which the state should rather act as an arbitrator, he set out that the principle of meritocracy would allow the market to flourish and that by each individual pursuing their own interest, this would allow society to benefit as a whole. Capitalism, therefore, would flourish not through the government but rather through individual efforts. He saw that the best people to govern the market were individuals, as they each strive to become wealthy 'intending only his own gain'.
However, Smith believed that in order for this mechanism to work each individual much exchange what he owns or producers with others who need what he has to offer. In the 'Wealth of Nation' Adam Smith sought to reveal the nature and cause of a nation's prosperity, seeing the main case of this prosperity as a division of labour . As an individual, Smith claimed, would invest a resource such as land or labour, he would do so as to earn the highest possible return on it otherwise an instance of reallocation would occur. Smith used this theory to explain why wage rates would vary and his thought gave rise to the modern notion of human capital. He stated that wage rates would be higher for skills and trades that were more difficult to learn as there would be fewer people who would be willing to learn them.
Smith rejected the key tenants of mercantilist thought but many are misled in believing that Smith believed in that there was no role for government in economic...
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