ECONOMIC THOUGHT

ADAM SMITH

WROTE "THE WEALTH OF NATIONS"

LIVED DURING THE EARLY DAYS OF THE INDUSTRIAL REVOLUTION

PONDERED THE REASONS WHY GOODS AND SERVICES WERE PRODUCED - WHAT WERE THE LAWS GOVERNING THE ECONOMY.

"THE INVISIBLE HAND OF THE MARKET"

IT WAS IN THE SELF INTEREST OF THE BAKER TO MAKE GOOD QUALITY BREAD AT THE CHEAPEST POSSIBLE PRICE.

IF HIS BREAD WAS OF POOR QUALITY IT WOULD NOT BE BOUGHT.

IF HIS BREAD WAS TOO COSTLY PEOPLE WOULD JUST BUY THE BREAD OF HIS COMPETITOR.

IF THE PROFIT MARGIN ON BREAD ROSE TOO HIGH OTHERS WOULD BE ENCOURAGED TO BAKE BREAD.

IF IT FELL TOO LOW BAKERIES WOULD CLOSE AND THE SUPPLY WOULD SHRINK.

ADAM SMITH REALIZED THAT THE MARKET WAS SELF REGULATING AND WOULD OPERATE BEST IF LEFT ALONE BY THE GOVERNMENT.

ADAM SMITH FAILED TO SEE SOME OF THE WEAKNESS IN THIS THEORY.

1. COMPANIES WOULD COOPERATE TOGETHER TO MONOPOLIZE A MARKET.

2. SMALL BUSINESSES WOULD BE BOUGHT OUT BY LARGER BUSINESSES REDUCING THE COMPETITION.

3. MONOPOLIES WOULD FORM.