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Adam Smith and the Market Economy

The market economy argues for the principle of competition, which Smith believed to be the key to reducing the amount of abuse in business. Think about a butcher, who supplies meat for profit, and what would happen if his customers were unhappy? Poor meat would not attract repeat customers or generate profit. To keep repeat customers, a butcher must supply quality meat at a price he knows his customers will pay. A market economy, according to Smith, is a system that encourages competition, while allowing the government to enforce its principles.

Economic theory

Adam Smith’s work is often credited with the creation of the modern free market economy. His economic theory argues that the benefits of commerce and the market system maximize both the production and consumption of goods. The system also prevents steep inequalities and ensures that each country’s wealth increases annually. Ultimately, Smith argued that the free market is a better system for both countries than a centralized government.

Principles of a free market economy

A key principle of free-market economics is the need for unifying standards for goods and services. Smith discusses the paradox of value and how we judge what a good price is. For example, some items are marked way over their actual value, while others are cheap bargains. This idea is critical to the growth of the free market and society. Nonetheless, Smith was not a fundamental free-marketer.

Influences of philosophes

The influences of philosophes on market economies have been profound and often overlooked. While the Aristotelian tradition is often cited as the standard philosophical framework, there are also several alternatives. The alternative philosophical tradition has its roots in John Locke and focuses on the relationship between economic life and moral virtue. Both traditions view work and economic activity as human endeavors. This tradition has had a profound effect on the economic theory of Adam Smith.

Characteristics of a free market economy

A free market economy relies on private investment of resources. Smith observed that political interference leads to inefficiencies. Instead, individuals should use their individual knowledge to invest capital wisely, and legislators do not have the motivation to invest. As a result, the most productive businesses earn the highest profits. The result is that society benefits and consumers benefit. In Smith’s view, the best way to promote the public’s interest is through the market system.

Limitations of a free market economy

A free market has many advantages over other economic systems, including a socialist or mixed economy. These advantages are often more important than the disadvantages, however. The decision to utilize a free market depends on the person’s values, and whether they value freedom over all else. If they do, they might choose the free market as opposed to a socialist or mixed economy. Then again, their choices might also be influenced by the negative externalities of free markets.

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