Liberalism and Adam Smith's Economic Theory
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Liberalism and Individual Rights
Liberalism starts from the idea that the individual and his rights has to be in the centre of the political reflection. Therefore, the State must guarantee a legal framework that protects individual rights, ensures free exchange and respects the rules of free economic competition. In this way, it is sought or favoured that the citizens can pursue their legitimate personal interests without the State interfering in the markets. So, a liberal State becomes the defender of:
- Civil liberties (right to life, to freedom, to private property, as well as all the rights that arise from these: honour, religious freedom, right of assembly and association...)
- Market freedom, by understanding economic freedom as the foundation of social freedom in general.
Although liberalism, as a political theory, has its origin in the theories exposed by authors like Locke or Montesquieu, was Adam Smith, during the 18th century, the one who better linked both its political and its economic dimension. Starting from the economic freedom, in his work The Wealth of Nations, Adam Smith defends that the State's main purpose is to ensure the economic growth that will lead to the prosperity of nations. Therefore, State's actions should be limited to protecting trade, facilitating economic exchanges between individuals, protecting private property and enforcing laws. So, Smith defended the non-intervention of the State in the free market because the welfare and wealth of a society depend on these three factors:
- The individual egoism or the pursuit of the self-interest. In the commercial exchange, the consumer is willing to pay the minimum and the producer wants to win the maximum, therefore, the self-interest of each one makes that they reach a fair agreement for both parties.
- The law of supply and demand as a market regulator. When there is a lot of demand for a product and a low supply, the prices of that product go up, while if the demand falls and the supply increases, prices go down.
- The division and mechanization of the productive process. With the increase in productivity, as a result of a more efficient division of labour and mechanization, production costs fall. That way, the products can be sold cheaper or provide greater profits.
These three factors are interconnected in a way that, in the commercial exchange, the demand, the self-interest and the competitiveness set the final price of a product. In this sense, Adam Smith uses the metaphor of the invisible hand to justify that in a free market economy (without State intervention) the self-interest or selfishness of the producers (to seek the maximum benefit) and of the consumers (to seek the greater satisfaction with the product) is what produces the greatest social welfare and the maximum wealth. That is, the free market regulates itself without the intervention of the State in order to achieve the greatest benefits for the whole society.