Page 12 - Griffenomics

GRIFFENOMICS

ISSUE 1

12

PROFILE: ADAMSMITH

FACT:

MARGARET THATCHER, FORMER UK PRIME MINISTER, USED TO CARRY ADAM SMITH’S BOOK, THE WEALTH OF NATIONS, IN HER HANDBAG

A

dam Smith was first educated at the Burgh School of

Kirkcaldy,

before entering the University of Glasgow

aged only 14, studying moral philosophy. Proceeding

this, he continued on to Balliol College, Oxford.

Very little is known about Adam Smith’s character, but to

those who knew him well, he was described often as “comical-

ly absent-minded”. Smith was known to exhibit a number of

odd habits, such as talking to himself and, on occasion, holding

a conversation with an imaginary associate. Smith remained

a bachelor for his whole life, and the only close relationship

he was known to have upheld was with his mother, Margaret

Douglas.

Smith is most commonly known for his theory of classi-

cal economics. This, in its most basic form, is the idea that no

one person can control or govern the market, but that order is

maintained by the action of an “invisible hand”, this is to say

that the market is self-regulatory. For example, firms exist in a

market to make a profit, and to do this, they must provide the

goods and services demanded in said market. Thus, self-inter-

est sustains the economy, to an extent. Today, many of Smith’s

theories have been overshadowed and somewhat overlooked by

those of other influential economists, in particular John May-

nard Keynes. To illustrate this, if an economy goes into reces-

sion, Smith’s idea of an invisible hand suggests that as prices

fall, wages fall, thus restoring full employment with no govern-

ment intervention necessary. However, Keynesian economics

opposes this theory with the idea that government spending is

in fact verymuch necessary, due to the presence of sticky wages

and subsequent persistent unemployment, in order to stimu-

late aggregate demand and bring the economy back out of re-

cession. This is an approach taken by many governments today,

for example Barack Obama’s stimulus plan for the US economy.

To conclude, Adam Smith’s ideas and writings have been very

influential in the understanding of how a market functions.

However, as is the case with almost all economic theories, much

question and debate surrounds his work.