Text 3: The Pillars Of Free Enterprise

Seventeen seventy-six, the year that we associate with the signing of the Declaration of Independence, also marked the publication in England of one of the most influential books of our time, The Wealth of Nations. Written by Adam Smith, it earned the author the title "The father of economics."

In Smith's view, a nation's wealth was dependent upon production, not agriculture alone. How much it produced, he believed, depended upon how well it combined labor and the other factors of production. The more efficient the combination, the greater the output, and the greater the nation's wealth.

The heart of Smith's economic philosophy was his belief that the economy would work best if left to function on its own without government regulation. In those circumstances, self-interest would lead business firms to produce only those products that consumers wanted, and to produce them at the lowest possible cost. They would do this, not as a means of benefitting society, but in an effort to outperform their competitors and gain the greatest profit. But all this self-interest would benefit society as a whole by providing it with more and better goods and services, at the lowest prices.

To explain why all society benefits when the economy is free of regulation, Smith used the metaphor of the "invisible hand":"Every individual is continually exerting himself to find the most advantageous employment for whatever capital he can command. It is his own advantage, and not that of society, which he has in mind, . .but he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his inten­tion, for the pursuit of his own advantage necessarily leads him to prefer that employment which is most advantageous to society."

The "invisible hand" was Smith's name for the economic forces that we today would call supply and demand, or the marketplace. He sharply disagreed with the mercantilists who, in their quest for a "favorable balance of trade," called for regulation of the economy.

Instead, Smith agreed with the physiocrats and their policy of "laissez faire," letting individuals and businesses func­tion without interference from government regulation or private monopolies. In that way, the "invisible hand" would be free to guide the economy and maximize production.

You can see, therefore, that Thomas Jefferson's Declaration of Independence and Adam Smith's The Wealth of Nations have more in common than a birthday. More importantly, both contain some of the best descriptions of the principles upon which our political and economic systems are based.