Adam Smith is widely regarded as the father of modern economics. His definition of the subject has profoundly influenced how economists have approached the study of markets and economic systems.
Adam Smith was an 18th-century Scottish philosopher and economist who wrote his most famous work, “An Inquiry into the natire and Causes of Wealth of Nations,” in 1776. In this book, Smith outlined his ideas about the nature of markets and the role of government in regulating economic activity. Smith believed that individuals acting in self-interest would ultimately lead to greater prosperity and economic growth for society.
Adam Smith’s Definition of Economics
Smith defines economics based on individual self-interest and supply and demand market forces. He defined economics as “the study of the nature and causes of the wealth of nations,” He believed that markets were the most efficient way of allocating resources and promoting economic growth.
Smith’s ideas about the market were based on the “invisible hand,” which refers to the idea that individual actions in the market, driven by self-interest, will ultimately lead to the most efficient use of resources and the greatest prosperity for society. Smith believed that markets should be free from government interference and regulation and that competition among individuals and firms would lead to the most efficient allocation of resources.
Also Read: Arthasastra and Chanakya’s Definition of Economics
Features of Adam Smith’s Wealth definition of Economics
Smith’s definition of economics has several key features that continue to influence the study of economics today. These features include:
- Emphasis on self-interest: Smith believed individuals are motivated by their self-interest, which drives market economic activity.
- Role of competition: Smith believed competition among individuals and firms was essential to promoting economic growth and efficiency.
- Importance of the market: Smith believed that markets were the most efficient way of allocating resources and promoting economic growth and that government intervention should be limited.
- Focus on wealth creation: Smith believed that the ultimate goal of economic activity was to create wealth for society as a whole, which was best achieved through the free market system.
Smith introduced the concept of “economic man” and “non-economic man” to explain his definition of economics. According to Smith, an economic man is a rational, self-interested individual who always seeks to maximize utility. In contrast, a non-economic man is a person who is motivated by other factors beyond self-interest.
Economic man is a hypothetical construct used in economic models to represent the behaviour of individuals in a market economy. He is assumed to be rational, calculating, and always seeking to maximize his welfare, typically through the pursuit of material goods and monetary gain. Economic man is also assumed to have perfect market information and make decisions based solely on economic considerations.
On the other hand, a non-economic man is a person who is motivated by factors other than self-interest, such as social norms, values, and morals. A non-economic man may be motivated by altruism, the desire to help others, or a sense of duty or obligation to society. A non-economic man may also be motivated by non-material goods, such as friendship, love, or spiritual fulfilment.
For example, consider a person who donates money to a charity. From an economic perspective, this donation can be seen as an expression of the person’s self-interest, as they may be motivated by the social status or personal satisfaction that comes from giving. However, from a non-economic perspective, the donation may express the person’s altruism, the desire to help others, or a sense of moral obligation.
Adam Smith’s definition of economics as the study of the nature and causes of the wealth of nations and his emphasis on the importance of markets and self-interest has been widely influential in economics. Many economists and policymakers have adopted his ideas as the foundation for economic policy and decision-making.
Supporters of Adam Smith’s definition of economics and his emphasis on the importance of markets include classical economists such as David Ricardo and John Stuart Mill and neoclassical economists such as Alfred Marshall and Milton Friedman. These economists have emphasized the role of markets in promoting economic efficiency and have argued that government intervention in the economy should be limited.
Also, Read the Similarities and Differences between Marshall’s and Robbin’s definitions of Economics.
Criticisms of Adam Smith’s Wealth definition of Economics:
However, there are several criticisms of Adam Smith’s definition of economics and his emphasis on the importance of markets and self-interest. These criticisms include the following:
- A narrow definition of wealth: Smith’s definition of economics as the science of wealth is too narrow because it only considers material goods. In reality, wealth also includes non-material goods and services.
- Overemphasis on wealth: Smith places too much importance on wealth at the expense of human beings. This approach may lead to policies that benefit only a few individuals or groups rather than society.
- Ignoring human welfare: Smith’s definition does not consider the concept of human welfare, which is the main objective of economics, according to other economists such as Alfred Marshall.
- Assumption of economic man: Smith’s assumption of the economic man limits the scope of economics. It does not consider that people are influenced by various moral and spiritual thoughts, which can affect their economic decisions.
- Lack of consideration for distribution: Smith’s definition does not consider the distribution of wealth and resources, an essential aspect of economics. Economics should not only focus on the creation of wealth but also on how it is distributed among the members of society.
- Neglect of social and environmental costs: Smith’s definition of economics does not consider the social and environmental costs of economic activities. The pursuit of wealth may negatively impact society and the environment, which should be considered in economic decision-making.
- Ignoring the role of institutions: Smith’s definition of economics does not consider the role of institutions in shaping economic activity. Institutions such as the legal system, government, and social norms play a significant role in economic outcomes and should be included in the study of economics.
- Focusing on individual self-interest: Smith’s definition of economics focuses on individual self-interest as the driving force of economic activity. This approach may neglect the importance of cooperation and collective action in economic outcomes.