Foundations of
Economics and Welfare theories
Adam Smith is said to be the founder and father of Economics.His maincontribution
to the world literature was in the sphre of
Ethics. His first book was on
Morality ( ! ) , The Theory of Moral Sentiments , published in 1759. Though it was on Ethics,
the thoughts expressed in the book
developed in his major contribution “ The Wealth of Nations
He went to France for pleasure
in 1760 and met one Francois Quesney His meeting with this author influenced Smith
greatly and this resulted into his propounding the theory of Free Enterprise , Laissez- Faire , this meant
that all economic system and social
order are governed by Natural Law.
He went on thinking on economic forces for 12
years and ultimately came one most influential book “ An Enquiry into the Nature and Causes of the Wealth of Nations “ .This book created
great edifice of the Capitalism and Liberalism . Smith advocated the theory of
Free Trade, competitive markets and division of labour.He dividing the process of
manufacturing in several tasks results into increase d efficiency and
production because each worker is specializing
in one skill. The manufacturing process involves right from procurement of raw
material to putting the RM into machines
. I had visited a Mill several years ago where my elder brother was working,
and saw that the bales of cotton was put
in one big machine, the bales were converted into thick thick cotton sticks,
these cotton sticks were put in another machine which converted them into thick
threds, these thick threads were put in another machine which produces thin threads , these threads were again put
in another machine which produced even thinner thread, these threads were
rolled on bobbins, these bobbins were again put on a big machine where several layers of bobbins
were placed which gave particular uniform thinness to the thread. These bobbins
were put in a big bag, which were collected by some workers to be transported
to the department of weaving , where cloth was produced ! From cotton bales to cloth , a chain of
stages and workers were employed and at every stage , the workers were specializing
in their job ! The workers worked very fast and their efficiency greater and
production also greater !
This
Specialisation increases the ability of
the worker for getting goods on exchange basis the goods he cannot procure, if
he was working alone at home , finishing
several stages of manufacture himself. This was the example of a Free Market
enterprise, where the Capitalist had invested his money, procured land and
managers , he also engaged salesmen to get orders for his final production, he
engaged workers to work on several machines he had purchased for manufacture of
cloth, sarees and textiles. He was driven by self-interest, he was not a
philanthropist that employed starving labourers ,He wanted to produce the
things demanded by the consumers at the most competitive prices and make
profits.’But in doing so, he was also
led by an invisible hand to
promote an end which was no part of his
intention ‘. It was consumers’ interests and goods for the society at
large.This is a self regulating system
and it leads to optimal
allocation of society’s scares resources.
Earlier
a nation’s wealth was measured in terms of a country’s gold reserves,and viewed
international trade as simply depleting them . Smith differed with this system
and said, ‘ a country’s
wealth is determined
by its 1. Supply of Capital 2. The goods and equipment used to produce things 3. And is 3 increased by Free
Trade.A country that produces the goods
it can grow and manufacture most efficiently, and imports the rest , can
give its own consumers a greater freedom
of choice, thus increasing the national standard of living Smith’s trade theories put an end to the
mercantile theory .
What
is this mercantile theory ?
In the 17th and 18th centuries,
European nations aimed at increasing their wealth and power by
ensuring a favourable balance of
trade. What is this FBT ? Suppose England exported goods worth Strlg 200 to France, and imported goods worth
150 Sterlings, then its balance of trade
with France can be said to be favorable to it by 50 sterlings. Now national
Wealth was measured by the amount of
gold and silver in the Govt. treasury, and power was judged by the armed
forces the treasury could support. So,
merchants and statesmen promoted
politics of exporting more goods and
importing lesser and lesser goods in the belief that importing goods would
diminish national wealth. Exports were subsidized and imports taxed by the
Govt. This resulted into greater control of the economy by the Govts,
Mercantilism
was practiced by all greater European
Imperial powers including England,
Portugal, Spain and France. They became
exploiter States as they had to establish colonies to procure raw material and
labour at minimal cost This way they
established colonial rules in Africa, East Indies, America and India. The raw material was brought to these mother
countries, processed , finished goods produced and exported to the colonies at
exorbitant rates. This again created another cycle of poverty and closure of
domestic small home-factories .
They
competed among themselves and closed doors for the imports from European
countries. See this example. Britain
passed Navigation Laws of 1650s which
restricted the entry of froreign ships to its ports and gave Britain a near
monopoly over the trade with its colonies.
In 1660s, the French Finance Minister Jean-Baptiste Colbert
, overhauled the French economy
in terms of mercantilist lines, establishing protective taxes ( suppose
they wanted to ban import of Spanish flesh , they forced a tax of @00 Franks,
which discouraged the Spanish exporters to export flesh to France as it became uneconomical
).
This protectionism is resurfacing again in the world in different forms.
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