Adam Smith -modern economic theory

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Adam Smith -modern economic theory

By | June 2013
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Adam Smith expanded the ideas of social order and the individual incentives for actions into the foundation of modern economic theory. Economics is the study of markets, and Adam Smith’s work pulls sociological functions of individuals and groups. Smith then applies them to markets. In his book, "The Wealth of Nations", Smith formulates the theory that free market economics through the pursuit of self-interest impacts the nature of social order by the division of labor, and societies acting cooperatively. The first theory Adam Smith produces from sociological analysis is the Theory of the Division of Labor. The division of labor is the basic concept that one person producing an finite amount of a final product “X” that they sell for a constant amount would be better off, in a selfish sense, by dividing the labor and producing a larger amount of product X for themselves. This implies that the person would receive a larger amount of the final product than if they chose to produce it themselves. Ergo they would receive more money after they sell the larger quantity of product X (Smith 55-63).In other words dividing labor would be in the individual’s self-interest simply because they would get more. This concept is sociological in nature as it describes why some people work with others to develop or create something. Additionally, the application of the division of labor is still valid today. The incentives underlying the reason for the division of labor is applicable across time. Thinking about it in commonsensical terms the logic is valid because whether it is now or later people would still want more money or value by producing a larger amount of a product.

Another concept that originated in sociology that Adam Smith applied to markets is the concept of restraint on the importation of goods. At the time of Adam Smith nations often had high trade barriers with other countries and it was Smith’s work that reversed this course. Smith argues that the...

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