Christopher Boyd

Is Adam Smith rolling over in his grave?

Microeconomics T/TR 2:00-3:15

Adam Smith is considered to be the “Father” of modern economics and talks about some of his

theories including the loopholes in those theories application’s into everyday life. The passage

begins by stating that some of Adam Smith’s most renowned theories are related to his

overlaying notion of his invented “invisible hand”. Unfortunately, for Adam Smith his idea of

the invisible hand guiding everyone towards their personal improvement would guide society to

its united improvement assumed that the society was operating in a perfect competition, which

has realistically never taken place anywhere in the world. Where you can find examples of

perfect competition in portions of markets all over the globe it is nearly impossible to find

complete markets of perfect competition.

Adams Smith’s idea of the invisible hand is developed in assumption that everyone in the

system is playing by the rules, it doesn’t include the people who get their hands dirty who need

be smacked on the back of the wrists.

The passage goes on to talk about what markets are more realistically like instead of the

perfect competition utopia. The three types of prioritization of societies that the passage talks

about are productive efficiency, allocative efficiency, distributive efficiency. The productive

efficiency prioritization is when a society tries to lower the average costs of producing their

goods. The allocative efficiency prioritization is when a society produces something until it is no

longer beneficial to produce more of the product. Distributive efficiency is when a society

prioritizes goods going to the people that can benefit from them the most.

Adam Smith believed that perfect competition would self correct itself because if

someone got greedy and charged too much than someone else would simply come in and
undercut their price and so on until the product was no longer profitable and the market shifted to

a substitute.

Unfortunately, there have been many examples that people and corporations do not want

to play by the rules and that their greed finds loopholes and ways in which they can control the

markets. Corporations such as Enron, ImClone, and Tyco amongst others have proven that

simply an invisible hand can not be the only force of keeping greedy people in check and

balancing out the battlefield. The terrible atrocities of insider trading and monopolies can not be

left unpunished but must be regulated by a governmental force.

Richard Lipsey and Kelvin Lancaster have taken Adam Smith’s theory and developed on

it to say that when an externality that does not agree with perfect competition arises that it can be

more beneficial to the market for an outside source (such as the government) to intervene and

correct those externalities rather than taking the hands off approach and letting the invisible hand

attempt to correct something it wasn’t built to accommodate.

Adam Smith believed the opposite of this because he believed that naturally markets

would overcome these immoral behaviors because it was a system based on trading and in

trading you are always prompted to give more because the more you give the more in return you

recieve. However , these predictions that the market would fix itself also had the prerequisites of

a fair and shared moral code by all people operating in that market.

The passage then goes on to talk about some of those morals Adam Smith believed

people would be operating within such as Utilitarianism, ethical egoism, the common good,

virtue, rights, kantianism, justice, role models, the newspaper test. Some of which have been

adopted to better fit the modern profile and relate to people today however, their principles

remain the same.

eye like you knew nothing else of the situation but the choice and decide what that person who

had no emotional ties to the situation would do when caught in a dilemma. A technique that can

be used by anyone at almost any time in any era.

The passage concludes by stating that although Adam Smith may not agree with

government or third party interference when externalities or immoral behavior come into play to

affect the market that he most likely would not be turning over his grave in opposition either.

The market does have its way of correcting some things through the suggested invisible hand and

through peoples logical and rational decisions in their pursuit of their own goals and

improvements however, it has been shown time and time again that a referee of sorts is needed to

keep those few extra greedy folk out of complete power so that the market is not controlled by

any one or group of people but rather regulated by all people. Therefore keeping the closest thing

we can have to a completely free market.

In many ways Adam Smith is still considered the father of modern economics even

though his idea of the invisible hand isn’t completely applicable to any modern economy but, his

theories of how people will act and therefore how those individual actions will conspire to push

the society/economy in the same can be seen all over the world. Which is why he is still so

thoroughly regarded as the father of modern economics and why is ideas are still so relevant

today.