2 Free Markets and
Utility
By ADAM SMITH
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BACKGROUNDS
AVATAR KIT
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HOMEWORK
FREE MARKET
&
UTILITY
“Invisible
Hand”
NAT U RAL P RICE
When the supply of a certain commodity is not enough to meet the
demand, buyers bid the price of the commodity upward until it rises
above
system of competitive markets allocates
resources efficiently among the various
industries of a society.
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When the supply of a commodity exceeds the demand for it, the
resulting surplus leads its price to decline, causing its producers
to divert their resources to the production of other, more
profitable commodities.
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In a competitive market economy, fluctuating commodity prices
force producers to allocate resources to industries where they are
most in demand, while withdrawing resources from industries
where there is a relative excess of resources.
BES T POLICY
01
Criticisms of Adam Smith
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Many observers, for example, have pointed out that patents are a form of
monopoly. (which thre is only one seller)
In a free market, there are no limits on the price a monopolist can charge for
its product.
In monopolized “free markets” like these, prices do not move to their lowest
levels as Adam Smith suggested they would.
01
Criticisms of Adam Smith
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first, that the impersonal forces of supply and demand will force prices
down to their lowest levels because the sellers of products are so numerous
and each enterprise is so small that no one seller can control the price of a
product.
02
Criticisms of Adam Smith
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Smith’s arguments assume that all the resources used to produce a product
will be paid for by the manufacturer who will try to reduce these costs to
maximize profits.
For example, when manufacturers use up clean air by polluting it, or when
they impose health costs by dumping toxic chemicals into rivers, lakes, and
seas, they are using resources of society for which they do not pay.
03
Criticisms of Adam Smith
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Third, critics claim, Smith’s analysis wrongly assumes that every human
being is motivated only by a “natural” and self-interested desire for profit.
Smith, at least in The Wealth of Nations, assumes that in all dealings a
person “intends only his own gain”
Human nature follows the rule of
“economic rationality”
BUT
his theory of human nature, critics
have claimed, is clearly false.
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First, human beings regularly show a concern for
the good of others and constrain their self-interest
for the sake of the rights of others.
Second, the critics claim, it is not necessarily
“rational” to follow the rule “give away as little as
you can for asmuch as you can get.”
Third, critics have argued, if human beings often
behave like “rational economic men,” this is not
because such behavior is natural,
but because the widespread adoption of
competitive market relations