Adam Smith : Grandfather of Economics

Wrote the book 'Wealth of Nations'(1776) - that was the beginning of economics as a separate discipline.

Before Adam Smith, people used Mechantalism(World was a zero-sum game - if someone has to get richer, another got poorer).

When he wrote the book it was the time of french and American revolution. People were thinking about the govt - and its purpose.

Value adding: the act of taking raw material, doing something to it that it becomes more valuable. Eg. taking iron ore and making it a sword. Its also knows as production.

In feudal time, value add was so small that it didn't register in the big picture (other than farming)

This idea of Adam Smith that value can be created thru production was a major driver for the industrial revolution.

Factors of production

  • Land
  • Labor
  • Capital

Earlier the 'low-hanging fruit' of generating wealth was farming. But once you ran out of easily farm-able land, you hit the limit. Earlier nations got around this issue by invading other nations. But Adam Smith suggested you can get more value out of your land by developing industry on that land.

But industry take more investment. But once that's done, wealth generation is much bigger.

Nations generally start wealth creation by farming(least investment - all you need is land and low skill labor). Next they go to industries. After that service based industry.

Another big idea was specialization. Earlier people were a jack of all trades.

This created a need for trade between people. And between nations. He suggests that nations also should specialize in production - and trade for things they don't specialize in.

"The guiding hand of the free market". Acc. to Smith - this was the best way to create wealth - and the role of the govt is to maintain this market.