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Smith, Adam(1723–90) a Scottish economist whose writings formed the basis of CLASSICAL ECONOMICS. Smith's most famous book, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), stressed the benefits of division of labour, discussed the need for SPECIALIZATION and exchange, and outlined the workings of the market mechanism (PRICE SYSTEM). Smith argued that if producers were free to seek profits by providing goods and services, then the ‘invisible hand’ of market forces would ensure that the right goods and services were produced. Provided that markets were free of government regulation, then in this LAISSEZ FAIRE environment competition would organize production in ways that would increase public wellbeing.
In competitive markets, producers would compete to sell more goods, forcing prices down to the lowest level that would cover production costs and allow normal profit to be made. Furthermore, if certain goods were scarce, buyers would offer higher prices, drawing more producers into these industries and swelling supply. In this manner, production in the market system would be driven by what consumers wanted.
Smith's outline of the market mechanism described the new economic system that was beginning to emerge in the newly industrializing Western countries. For the system to work, however, Smith acknowledged that two important conditions needed to be met:
- markets needed to be free of government intervention, without the close government regulation of economic activity as had prevailed prior to Smith's day;
- the self-seeking behaviour of producers could only be harnessed to the common good where competition prevailed, and Smith was deeply suspicious of MONOPOLIES, considering them to be conspiracies against the consumer. See PRIVATE-ENTERPRISE SYSTEM.