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May 14, 2010

Adam Smith (1723–1790)

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Perhaps the best known and one of the most revered economists, Adam Smith wrote The Wealth of Nations in 1776, the same year the Declaration of Independence was signed. In this famous work, Smith explained how an independent society works. He answered several questions that people had at the time regarding the concepts of a free-market system.

Of primary concern was the question of how those consumed with greed might be controlled so they wouldn't take over society. Smith introduced the concept of competition. Anyone bent on bettering only him- or herself with no regard for others will be confronted by others with the same goals. In this new system, those who are buying or selling are forced to meet the prices offered by competitors.

Smith also illustrated that a market system also has another important function. That function is to produce goods and services that society wants, and in quantities that society wants. A good example of this is when products such as hula-hoops, cabbage patch dolls, or beanie babies became the rage, there weren't enough being produced to satisfy all the potential buyers. As a result, the manufacturers had to increase production and were also able to increase prices because the demand for the products was so great and buyers were willing to pay higher prices. In fact, many buyers bought quantities they didn't need precisely so they could, in turn, sell the high-demand products to others who were willing to pay the higher price. That is the capitalistic market system.

Smith was extremely visionary and foresaw that if a free market is to grow and prosper, there must be little government intervention. He saw that a free market must be self-regulating in order to become wealthy and robust. He made it clear that it was truly individuals' greed and desire for profits that would create a working free-enterprise system that is self-regulating.