Adam Smith's Ideology and the Evolution of Neo Liberalism

Born during the Industrial Revolution, Adam Smith's ideology is commonly known for its phrase, 'harmony of interest,' between the market and the individuals, whereby the 'invisible hand' of competition relays a self-centered behaviour into the cumulative social benefits. Smith existed at a time when the state-controlled every aspect of the economy from product prices to marketing structures. Therefore, his significant involvement to the liberal practice being his character as the champion of laissez-faire and the minimalist government. Rousseas (2015) argued that from the tenets of Adam Smith, neo-liberalist proponents have shared norms and opinions on the nature of humans, the role of the government and the society in general. A key argument in the ideology that was the economic relations between people is uniting and have the ability to pacify citizens. Adam Smith perceived a country’s economy as part of the civic realm, that aims at offering its citizens with a lot of revenue and adequate returns for the government to improve public facilities.

Smith perceived that a utopian civilization should be market-focused, which he assumed that were implied by three facets of production, which are capital, land and labour. From these aspects of production, the society developed three social strata, which are landowners, capital owners and labourers. Every stratum obtains returns from the market and are all autonomous from each other. The focal point that was passed in the 19th century, which did not exist was that everyone (in all classes) could gain from the market, unlike in the previous regimes where benefits were directed to one social stratum, who are the capital owners and landowners, while labourers did not benefit from the regime (mercantilism). From such a small insight, Adam Smith made it clear as early as in the 19th century that anything that limited the free-market should be eliminated (Clarke 2015, p. 251).

Division of labour; one of the most common concepts in Adam Smith’s book Wealth of Nations, was the division of labour, which is the differentiation of various sections of different processes of production in accordance to the ability of workers and their respective equipment. Smith perceived the benefits of the division of labour to be precise; it improved the process of production and led to more effective utilisation of resources as well as reducing the expenses incurred in production. Besides, Adam Smith believed that the division of labour improved the outcomes of workers and the quality of products produced by firms. The outcomes of labour division included an improvement in the ability of the worker, reduced time wastage on transferring production development, and the creation of machineries which help labourers and enabled one person to handle the duties of many individuals (Skousen 2015 p. 251). Through lessening the employee's share of the production progression to a single task, is likely to improve the employee's ability and performance. Since no employee desires to alternate duties, more time ought to be devoted to the course of production. The specialization of employees can help firms to utilize technology, therefore manufacturing more products resourcefully in comparison to the use of human labour, decreasing the sum of employees needed to produce quality goods and hence lessening the cost incurred in the production process. In the 19th-century factory owners adopted the principle of division of labour, for example, in the pin-making and dressmaking industries. Up to this day, the principle is still relevant to most manufacturers (Paganelli 2019). Even so, Adam Smith argued that the extent of the market confines the division of labour. For instance, if the market is not developed that a worker cannot trade their merchandises competently, the wage earner might run into losses and therefore will opt to work in an area outside their specialization for the sake of making profits. Smith stipulated that the division of labour can only happen where the population is bigger and is likely to generate enough demand for specialized services. Other political economists like Karl Marx disagreed with such principles. They contended that specialization is likely to lead to the estrangement of workforces since the duties assigned to workers will be repetitive and monotonous and eventually diminish human labour to the level of machines. Marx also added that the more a set of duties is specialized, the less training needed by employees during their job placements (Marx and Engels 2009). Therefore, an individual is likely to become less skilled as compared to when one performed a whole task. These principles revolutionized the management of human labour in the 19th century when human labour was becoming more prevalent due to industrialization.

Most economists still argue on what Adam Smith meant by the “invisible hand,” however a common perception has been that this is a metaphor that described a guide on how resources ought to be allocated in a free-market. In this case, a free-market implied to a market that is free from any interventions from the government, and therefore the value of goods and service are dependent on the interaction between the demand and supply. Smith assumed that all actors, consumers and vendors acted in their self-interests. Smith retained that because of the absenteeism of government involvement, consumers are always at liberty to select their preferred seller and at the same time sellers are at liberty to choose the good they want to stock and their respective prices (Minowitz 2016, p. 241). Hence the phrase, “willing buyer, willing seller.” Adam Smith stated that this framework would benefit the public since consumers who are guided by their self-interests will buy goods from the cheapest seller. In turn, firms would compete against the other so that they can have as many customers as possible to maximize their revenues. Such a competitive environment will lead to firms producing quality products at a lower price to gain buyers. Firms with inefficient modes of production will have no otherwise but to shut down due to the competition in the market.

Smith argued that because of competition and the liberty presented by the free-market, it is the best means to assign resources, and the people who are focused in maximizing their utility will ultimately improve the overall social utility. The typical example of a free market is the American economy. A prevailing misconception has been that Adam Smith championed against government intervention in the economy. However, neo-liberalists confirm that Smith advocated for lesser state intervention and that is to facilitate the market by protecting the market against those who wanted to disrupt the cycle, preserve the rule of law, maintain infrastructure, and create a conducive environment for competition (Rasmussen 2016, p. 345). Thus, in the real sense, no free-market can exist successfully without the slightest government intervention.

Critics of neoliberalism have argued that a free market cannot perform efficiently when externalities exist; these are the activities of one person that can create a spiral effect on others, which that particular person does not pay for. Hence the market prices are not always the real reflection of the cost to society. Karl Marx stated that the owners of production do not want labour and instead exploit workers (Stiglitz 2004). He added that in the long run, the capitalist would accumulate more profits and exploit workers more.

It is clear that the contributions of Adam Smith had a huge impact, especially in the 19th century, when the industrial revolution was at its peak, and the only way this trend could have been sustained is through a liberal market. Smith outlined the fundamentals of underlying liberal economies which is a free market, among other theories that have been used in the current market. The ideologies of Smith were later adopted and improved by various neo-liberalists such as Friedrich Hayek and Milton Friedman. The same theory was also adopted by different regimes such as in the USA during the reign of Ronald Regan, and in the United Kingdom, during the reign of Margret Thatcher. The theory has been applied in various situations and at the same time has helped in solving various economic problems, especially during an economic recession. The presence of critics such as Karl Marx has also helped in identifying the gaps and assumptions made by Adam Smith; these gaps include the notion of externalities in a market and the presence of asymmetric information. Even so, between the 18th and the 19th century, the theories of Adam Smith were perceived to be revolutionary and helped in changing the political and economic systems in Britain from mercantilism to liberalism. The same arguments also dictated various economic partners during the industrial revolution. From the principles of a free market, Britain was able to immerse wealth, which helped the country to emerge as one of the most powerful and influential countries in the world, both economically, politically and socially. Thus, one can conclude that the contribution of Adam Smith was not only felt in the 19th century, but has prevailed up to the current market, where concepts such as division of labour, the law of demand and supply, and free-market still mater to most governments and are applied in most markets.

References

Clarke, C., 2015. Ethics and economic governance: Using Adam Smith to understand the global financial crisis. Routledge.

Marx, K. and Engels, F., 2009. The economic and philosophic manuscripts of 1844 and the Communist manifesto. Prometheus Books.

Minowitz, P., 2016. Adam smith’s invisible hands. Constitutionalism, Executive Power, and the Spirit of Moderation: Murray P. Dry and the Nexus of Liberal Education and Politics, p.241.

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Paganelli, M.P., 2019. Adam Smith and the Origins of Political Economy. Social Philosophy & Policy Forthcoming.

Rasmussen, D.C., 2016. Adam Smith on what is wrong with economic inequality. American Political Science Review, 110(2), pp.342-352.

Rousseas, S., 2015. The political economy of Reaganomics: a critique. Routledge.

Skousen, M., 2015. The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes: Adam Smith, Karl Marx, and John Maynard Keynes. Routledge.

Stiglitz, J.E., 2004. The roaring nineties: A new history of the world's most prosperous decade. WW Norton & Company.