Adam Smith economics theories may be the least understood principles among our next generation. In fact these important concepts are probably not fully understood by our own age bracket.
The opposite theories are in the news everyday. Keynesian economics ideas are promoted and championed on a regular basis within the mainstream media. In this page we'll explain Adam Smith economics. We'll show how these considerations have affected our history to this point.
We'll also present the contrasts between these ideals and those popularized by Keynesian economics enthusiasts. Please feel free to use the comment form at the end of this page. At books-empower.com we welcome your well thought out opinions and questions.
Adam Smith was an economist who lived in the mid 1700's. In 1776 he wrote a very long piece titled, "An Inquiry Into The Nature And Causes Of The Wealth Of Nations." 1776? Another big thing happened in that year. An interesting coincidence..
The fundamentals of this rationale are very simple. Perhaps that is why they are not fully understood. Far too often, we miss the obvious due to it's absolute directness. It seems that we are bombarded with meaningless detail that distracts us from the truth.
So here is the straightforward reasoning behind Adam Smith economics.
*An individual is free to operate a business in which they determine the cost of the product or service provided by their business.
* A prospective customer is free to decide what amount they will pay for a particular service or product.
* Neither party is making their respective decision based on any perceived "public good." They are doing what is best for themselves.
* The overall market will determine what is the "going rate" for such a product or service based on what people are willing to pay.
If governments stay out of such markets, the price will define itself. If I'm selling fresh sweet corn in front of my house for $5.00 per bushel and my neighbor is selling the same quality product for $4.00 per bushel, I am faced with two very simple options.
* Lower my price to attract customers
* Go out of business.
In adhering to Adam Smith economics, I am not given the popular choice favored too often today. I am not able to cry for government subsidies to allow me to compete with my neighbor. To do so would hit him with a double whammy. He is accepting all the risks of business in return for the rewards of doing business properly. And he is losing part of his return by having to subsidize my own failures.
Governments only have the money they take in via taxation. So those government subsidies come from the people who are doing things correctly in the first place.
Taken further along, Adam Smith economics tells us while people do things to benefit themselves, the collective efforts of many individual business entities do promote a national growth.
This idea is so often overlooked or misunderstood. And it is almost never taught properly in our school systems.
"How An Economy Grows And Why It Crashes" gave us a perfect illustration into the transparent role of Adam Smith economics. If you remember from a past page, Peter and Andrew Schiff used the metaphor of a small island community. They painted a picture of islanders building their own canoes with varied degrees of success.
One of the more skilled and certainly more ambitious residents decided to build canoes that other islanders could purchase. He set a value that allowed him to create a profit after paying for things he needed. He started this plan with his own best interest in mind. If he could earn an income doing something he liked and was good at, he wouldn't have to do some of things necessary for survival, but not on his list of favorite things.
He made an income from selling canoes which gave him the cash to buy fish to eat, rather than having to catch them himself. His customers received a quality product at a price determined to be fair by the prevailing market. And the person he bought fish from gained a similar advantage.
Neither islander did what they did with public good in mind. But the public was served by both enterprises.
If we follow the story along, this canoe builder soon needed to produce more canoes as his business grew. So he then hired other skilled canoe builders. He bought better tools from an islander who didn't want to fish. Nor did he want to build canoes.
"The invisible hand" had added to the public good again as more people sought out ways to improve themselves and utilize their own skills. No government intervention was used. No tax dollars were given out. But the benefit to the common good grew in this way.
* Our canoe builder was able to hire people to build more canoes in a shorter time.
* Other islanders were given jobs in his canoe business
* The tool maker sold his products
* The fish market sold more fish
And since the canoe maker was able to build more canoes in a more efficient manner, his costs went down. He was able to lower the per unit cost, but still make more money. As the costs went down through innovation and ingenuity, more people could afford canoes.
As I mentioned in a previous page, "How An Economy Grows And Why It Crashes" should be part of every high school curriculum. Our students would be so far ahead with this very basic, but vital knowledge.
Taken to the next level in following Adam Smith economics, we see investment capital going to products and services that provide what the public would like to buy. These investors do not do this to further the public good. Rather, they put their money into these growing business ventures because they expect return on their investment.
But the result is very positive for the general population. More jobs are created. More opportunities to buy the things that people want are created. And in many cases, competition is created. That isn't a bad thing. It forces companies to get better. Or get out. Again, in the long run the overall population gains.
There may have never been a better example of polar opposites than these two theories. Some might suggest Democrat vs. Republican, but as I've written before, these two groups are actually in collusion to prevent competition that will expose their failures even more than their own performances have proven.
Keynesian economics favors very heavy government and central bank intervention. Proponents of this system believe central banks can avoid or at least limit economic drops by manipulating currency supply and interest rates. They favor using tax dollars to bail out entities deemed too valuable to lose. The cheerleaders of the Keynesian theory are usually academics with little to no experience in the actual business world or they are lobbyists and politicians. And big banks. Big banks love this theory for the reasons shown in the video featured in the page about fiat currency.
Subsidies are cash gifts to failing operations. Politicians love them because they are vote-gaining machines. Lobbyists love them because they insure big payoffs to those who can secure this tax money. And people seeking to get by on the public dime love them for the very motive of getting something for nothing.
Adam Smith economics favors no government intervention in the marketplace. Business ventures rise and fall on their own merit. Tax dollars are not spent on saving failing companies. This theory dictates that the invisible hand will guide pricing and growth as the providers of better products at lower prices will grow. People will do what is best for themselves individually and will be rewarded from a financial standpoint. But this very action will grow national economies.
It is the exact model that grew America from a nation of small farmers, tradesmen and hunters into the largest manufacturing machine in the world.
America was built on the efforts of private industry. The country broke away from kings and foreign governments who imposed endless taxes and penalties that stifled business. Replacing the roles of the kings with central bankers and uninformed congress persons isn't a step forward.
The invisible hand is the least restrictive method. It is also the least corrupt. It is completely unbiased. It cares nothing about gender, age or race. It only responds to results. Everyone gets the same opportunity. Everyone gets the same reward for success and the same penalty for failure.
As we learned in the page about the secret meeting at Jekyll Island, in a centralized system, a few get to control the money supply of the population.
Is this the system you wish to live under? The colonists didn't. If they had, history would have been much different. If we do not learn from history we will repeat it. Do you remember that coincidence I mentioned at the top of the page?
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