Gide and Rist point out that beneath the economic order as conceived by Adam Smith, we can discern two fundamental ideas. These were his Naturalism and Optimism. Naturalism denotes the spontaneous and natural origin of economic institutions while Optimism refers to the belief that economic institutions so created were beneficial in their effects. Smith was emphatic that human actions guided by their selfish interests were bound to result in social good. To Smith spontaneity and beneficence went together. The presence of one implied the presence of the other.
Every individual is motivated by self interest. Every man, so to say, is the maximiser of gain and minimizer of loss. Therefore, every man undertakes that activity which appears to him to be the most profitable. The entire society is based on this conceptualization. Everybody wants to make his conditions better. Being guided by such a rationale, when people undertake different activities, the society gets many types of economic institutions. These economic institutions are spontaneous in character. But, although the institutions are primarily based on self-interest, they ultimately increase social welfare. It is not from the benevolence of butcher, the brewer or the baker that we expect our dinner, but from their regard to their on interest.
Every man is naturally the best judge of his own interest and should, therefore, be allowed to pursue his own way. Adam Smith pointed out that in pursuing his own advantage, every individual is led by an invisible hand to promote an end which was no part of his intention. Smith believed that given the natural order, the interests of different economic units cannot be in conflict with one another. Their interests must be in harmony. This is ensured by the working of the Invisible hand or automatic adjustment mechanism. If perfect competition prevails, Smith things, individual interest and social interest would be compatible with each other. For the working of the natural order or naturalism, there must be liberty, free competition and laissez- faire.
Adam Smith has given a number of examples of economic institutions which are spontaneous in origin and are beneficial in character. It is the instinct to barter and exchange one thing for the other that men resorted to specialization and division of labour. But division of labour gives rise to opulence and is hence beneficial. The institution of money arose as a spontaneous institution; but it removed the difficulties of barter system and facilitated trade, exchange and commerce and thus became useful. Adam Smith extended his principles of spontaneity to the supply of money and the distribution of gold and silver stocks between different countries of the world. There was a mechanism which automatically corrected any imbalance here. In the same say we may look at his contribution to the theory of capital accumulation where again the natural instincts of man lend a spontaneity of man lend a spontaneity to it and make it useful to the society. Another example of Smith’s naturalism and spontaneity of economic institutions is his theory of demand and supply. Like Marshall, Smith pointed out that in the market, an excess of supply over demand would push down the price of the good under consideration and the price would rise in the opposite case. In this way a continuous process is always in operation whereby the balance between demand and supply gets restored. Smith also extends his “spontaniety’’ in the case of population. He maintains that it is the variation in the wage rate that regulates the supply of labour through a variation in population.
Thus, in the Wealth of Nations the concept of ‘naturalism’ is combined with ‘optimism’. Smith maintains that economic institutions are not only natural, but also beneficial. The institutions which have come into existence spontaneously through self interest of individuals are natural and beneficial, as these institutions ensure progress towards wealth and prosperity.
His theory of optimism seems to be correct in the area of production. But in the area of distribution, there is hardly any scope for optimism and harmony of interest. Smith himself has shown that in the field of distribution there is the possibility of a class of interest between labour and capital. His theory of optimism is not based upon completely scientific foundation. Individual interest and social interest may not coincide with each other all the time. Similarly, the private sector and public sector do not have the same common interest and the same efficiency. The conclusion drawn by Adam Smith with respect to naturalism and optimism is based on insufficient inductive or empirical study. These are not based on any casual relation or a priori theorising. It has been found that with the progress of capitalism, class division in society grows sharper and sharper. Smith is not right when he says that naturalism and optimism can be obtained without the help of the state. In fact, in many cases, state help will be necessary for obtaining optimism and naturalism.
Haseena (author) from India on December 09, 2016:
Thank you queen .
queen on December 03, 2016:
Nice work am grateful
Haseena (author) from India on April 30, 2016:
Thanks for your kind support, Elida.
Elida on December 13, 2014:
The hontesy of your posting shines through
Haseena (author) from India on November 02, 2013:
Thank you Jabelufiroz.
Firoz from India on July 23, 2013:
Great article on economics. Thanks for sharing. Voted up and useful.