Adam Smith and the free market economy

6 June 2016

Prior to the late 1700s, European countries had operated under a mercantile system of foreign trade. Mercantilism is the tight government control of trade.

Then nations began to see the advantages of free trade, trade without government regulations or tariffs. European governments began to adapt a “laissez faire” policy (“hands off” or letting business alone). The mind largely responsible for the laissez faire policies was that of Adam Smith (1723-1790), a Scottish professor of philosophy.

In 1776 (significantly the same year as the American Declaration of Independence) Smith published his famous work An Inquiry into the Nature and Causes of the Wealth of Nations). In his book, Smith espoused a philosophy that individual freedom in economics leads to the greatest good not only for the individual but also for society as a whole.

On the international scale, Smith called for free trade, which would allow for individual investors within each country to put their capital (money) to the wisest use. Each investor in manufacturing would produce what he could produce cheapest and best, depending on materials and labor available to him. In other words, Adam Smith was one of the earliest advocates of capitalism, or the free market. In an age when men were learning that political freedom is the best system of government, Smith realized that economic freedom is the best system of government, Smith realized that economic freedom was the best system of manufacturing and trade.

He also saw that political freedom and economic freedom are inseparable; if a man is not free to use his financial resources as he chooses, he is not free. Adam Smith was largely responsible for the rise and triumph of capitalism (Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations).

Many of the framers of the United States Constitution were familiar with the works of Adam Smith, and they wrote into the Constitution many safeguards for free enterprise unhampered by government interference. Their foresight gave capitalism the freest reign ever in the history of the world and led to the greatest economic growth the world has ever known. Only in very recent years have changes in the government been able to hamper that growth. The prosperity of the United States is due in large part to the ideas of free enterprise explained so clearly by Adam Smith in the year of our nation’s founding (Lipsitz, 1989).

Since colonial days, Americans had cherished individual freedom. This respect for freedom carried over into the financial affairs and the management of private business. America had fought her War for Independence largely because British authority had interfered with private commerce and business practices (Knopf, 1975, P. 335).

Competition is at the heart of the capitalistic system. Competition among businesses engaged in similar enterprise tends to hold prices down and keep quality up. Each company tries to keep prices low and quality high in order to outsell competitors. This is one of the key advantages of the free market system. Competition guarantees the consumer the best possible product at the lowest price.

Through the organization of pools and trusts, some major businesses of the late nineteenth century created monopolies. By and large, competition has been able to hold its own in the free market system. There is usually some businessman willing to take the financial risk necessary to compete against a would-be monopoly.

Overall, the capitalistic free market system has created the greatest good for the greatest number of people. However, in the late nineteenth century, a few monopolies did threaten to take advantage of the public, and many Americans became fearful that the entire financial system of the country might fall under the control of a few wealthy businessmen (Knopf, 1975, P. 335).

Today, many governments are enforcing restriction to migration that impedes the mobility of labor across countries. Although it becomes more restricted than before, international labor still exists at present (Weller, 2006).


Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

Knopf, A. (1975). Alistair Cooke’s America. Borzoi Book. New York. p. 335.

Lipsitz, L (1989). American Democracy. (2nd ed). St. Martin’s Press. New York.

Weller, C. E. (2006). Weakening Labor Market Exposes Vulnerabilities of Minorities. Retrieved October 3, 2006, from

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