SMITH’S ANALYSIS OF THE MARKETS.

 The founder of modern economics, Adam Smith, suggested a contextual approach to economic policy in his ground-breaking book, "The Wealth of Nations." In his view, people acting in their own best interests would result in overall prosperity, he stressed the significance of letting market forces function with the least possible government interference. Smith's theories helped establish free-market capitalism by supporting measures that promote competition, private property rights, and minimal government intervention. His concepts, which are still applicable in the given environment, continue to guide the development of frameworks for economic policy that are tailored to the unique requirements and conditions of every civilization.

Natural Order, Harmony, and Laissez Faire

Adam Smith stressed the idea that economies can run effectively when people pursue their own interests in his theories of natural order, harmony, and laissez-faire. He thought that when people are allowed to pursue their own economic interests without undue interference from the government, the competition and cooperation that results can result in an overall harmonious and balanced economic system. This way of thinking, sometimes known as laissez-faire capitalism, supports limited government intervention and the notion that the market's "invisible hand" can direct resources to their most advantageous uses. This strategy promotes the natural order in which supply and demand decide on pricing, the distribution of resources, and economic expansion.

Smith's support for laissez-faire must be modified, though, because he listed multiple instances where, in the context of the institutional, political, and historical structure of his period, he thought action from the government was required, safeguarded emerging industries, trade control was also important when the possible weakening of national defense, the government was tasked with maintaining the nation's infrastructure, building, and maintaining roads and schools, executing justice, and maintaining critical documents and promoting the government's provision of items with significant social benefits but which are not available on the private market.

The Working of Competitive Market.

Smith's examination of how competitive markets operate represents his most important contribution to economic theory. 

Short-run prices are referred to as "market prices" in his analysis of price formation and resource allocation, whereas long-run prices are referred to as "natural prices." His primary concern was the development of long-term natural prices.

He saw competition as fundamentally requiring a large number of sellers, a group of resource owners who were knowledgeable about profits, wages, and rents in the economy, and the freedom of movement for resources among industries.

Given these circumstances, resource owners' self-interest would result in long-term natural prices that would balance the rates of profits, wages, and rents among the various economic sectors.

Natural pricing, which comes from competitive markets and a lack of government intervention, ensures that customers get the products they desire at the highest growth rates while also ensuring that resources are allocated as efficiently as possible.

📹 Following is a video created by our team to explain Adam Smith's analysis of the market. The video will show the situation in a hypothetical country where, first they adopted a planned economy, and then adopted the 'Free Market Mechanism' by following Adam Smith's theory.

Written by : M.Dinushi Madushika & R.M.Chathurika Samanmali

Video Credit: Krishantha Kumara

References:

Skinner, A. S. (1990). The Wealth of Nations Book I - III. . London: Penguin Group