Founder of Free Market Economy and Modern Economist: Adam Smith

1. F O U N D E R O F
F R E E M A R K E T
E C O N O M Y A N D
M O D E R N
E C O N O M I S T :
A D A M S M I T H
1723-1790

2. CONTENT
 Adam Smith’s Life
 Adam Smith’s Book (The Wealth of Nations and The Theory of
Moral Sentiments)
 The basics of the Wealth of Nations
 Adam Smith’s Teories about Economy
 Classic Economy
 My Opinion
References

3. LIFE
Adam Smith was a Scottish economist and philosopher. He was
born in Kirkcaldy on 16 june 1723 in Scotland. When he was
fourteen he started to study moral philosophy at Glasgow
University and he developed the passion for liberty and free
spech. In 1748 he started teaching at Edinburgh University.
Smith lectured topic based on the economic and natural liberty.
His lectures gave his success and popularity. His first subject of
economy was «wealth management».
He met with David Hume on 1750 and this met changed Smith’s

4. Founders of Free Market Economy;
David Hume&Adam Smith
In 1751, Smith became the logic professor of
Glasgow University. After year he was
appointed as professor of moral philosophy.
He teached ethics, art of speech, law,
political economy, police and income. After
a while he started teaching law and
economics from moral theories at his
conferences. Adam Smith was elected a
member of the Royal Society of London,
which was made up of experts in the field
and engaged in science studies in May 1773.

5. Smith became a member of the
Literature Club, which was ruled by
the UK government in 1775. In 1776
he published his two books (The
Theory of Moral Sentiments and
Inquiry into the Nature and Causes
of the Wealth of Nations) In 1778 he
served as tax minister in Scotland.
He died on June 17, 1790, after a
serious illness. As far as is known, he
left most of his income to secret aid

6. ADAM SMITH’S BOOKS
Adam Smith was famous for his two books
namely
1) The Theory of Moral Sentiments: In 1759, he
published his book Moral Emotion Theory,
which brought together his conferences in
Glasgow. The main contention is that human
morality depends on sympathy between the
individual and other members of society.

7. ADAM SMITH’S BOOKS
2) An Inquiry into the Nature and Causes of the
Wealth of Nations: Smith published his books as
An İnquiry into the Nature and Causes of the
Wealth of Nations in 1776. In this book economics
of the time were dominated by the idea that a
country’s wealth was best measured by its store of
gold and silver. In his general work, Smith
mentioned elements such as full competition,
capital, invisible hand, labor, wages, division of
labor and money. When he published The Wealth

8. THE BASICS OF THE WEALTH OF NATIONS
Adam Smith emphasis 7 important subject for economy.
• Perfect Competition
• Capital
• Invisible hand
• Labor
• Fee
• Division of labor
• Money

9. PERFECT COMPETITION
According to Smith, economic life is individualistic and this individualism
stems from the natural structure of people. Personal benefit is a driving force
for economic life. People will try to reach the most satisfaction with the least
effort, by nature. According to Smith, prices are an element of balance.
For example, If the production
decreases, the prices increase, the
bread supply decreases, you will
make more efforts to reach the unit
bread you need, and this increased
effort will inevitably increase the

10. The rise in prices will encourage firms to produce more than they think they will make more
profits, and they will reach a balance as supply approaches demand, and prices will drop
when supply exceeds demand, which will cause firms to cut their production, so everything
will come to a balance without any intervention. In perfect competition, individuals and firms
maximize their interests while at the same time serving their interests in their community.
However, these factors can disrupt balance in perfect competition:
• The state increased taxes
• Deterioration of optimum combinations of production factors creates rarity rent in some
goods
• Mistakes and production instabilities of producers in production decisions
• Restriction or breaking of international relatios
• Political increased instability

11. CAPITAL
Smith defines capital as everything that increases labor and a factor that
enables labor to work more efficiently. Tools, machinery, soil, fertilizer are
capital. According to Smith, a tax on capital will reduce production, thereby
reducing the benefits of both the state and society.
Smith divides capital into two: constant capital, variable capital.
1) Constant Capital: Constant Capital
such as buildings, real estates,
stationary machines, and
buildings. Make a profit for the
owner before this capital moves

12. 2) Variable Capital: Variable capital brings profits to its owner, such as raw mateirals and
goods to sell. Just as money is not exchanged with a commodity, it does not provide any
benefit, unless it changes hands. Only wages enter the changing capital section, raw
materials, etc. belongs to the revolving part of the constant capital. According to A. Smith,
saving is a delayed consumption. To leave today's consumption to tomorrow. The first
step in creating capital is to make money, and it is possible to create this capital with
savings. According to Smith, as the capital accumulation of a country increases, its wealth
increases.

13. INVISIBLE HAND
According to Adam Smith, the state does not need to intervene in the
market. Because the market is governed by an "invisible hand". Who
regulates the market and which goods for whom, what, which will be
produced in quantities, there is an "Invisible Hand", also a free-price
mechanism. According to Adam Smith the lack of outside intervention in
the market doesnt lead to an economic chaotic and problematic life, but
on the contrary an economic life that creates the most suitable economic
and social conditions for society.
So a market where there is no government intervention and where
individuals in the status of buyers and sellers can make decisions freely is

14. According to Smith, Free Market Economy, Minimal government
intervention, competition, individuals who are considered to be rational
buyers or sellers can freely decide, it refers to a market situation in
which the economy operates entirely according to the supply and
demand balance.

15. The two most important pillars of the
Free Market Economy are that
individuals who are supposed to be
competitive and rational move freely
according to their personal interests.
Smith summarizes his view in his
book "The Wealth of Nations" in
expression:
We do not owe our dinner to the
goodwill of the baker or the butcher.
If we can have dinner we owe them to
take care of their interests. So both
buyers and sellers benefit from
Video
https://www.youtube.com/watch?v=ulyVXa-
u4wE

16. LABOR
Unlike physiocrats Smith considers human labor as the source of wealth instead of land
and argued that the production of labor and thus national income will increase with the
opportunities provided by the division of labor. For example, Smith shows the needle
factory you are working with. It shows how a factory which produces in a number that
will be expressed with them every day, increases the number of production to
thousands because of division of labor. According to Smith the wealth of countries
depends on human labor rather than soil. According to Smith, the source of wealth
advocates as labor, the annual labor of a country is the sum of labor that creates all

17. FEE
According to Smith, everything depends
on the price. Wage is a price of labor.
Wages are determined by contracts
between employers and workers.
However, Smith pay attention that
employers are more dominant than
workers in these contracts. Employers
want to reduce wages and workers to
raise. High wage increases the number of
workers, low wage reduces the number
of workers.

18. When labor demand increases, short-term labor will rarely increase wages.
The increase in the demand for labor indicates that the national income
gradually increases, which means that there is growth per capita, that is,
growth. Labor demand of enterprises is derivative demand, that is, it
depends on demand in the goods market. . When the demand for goods
increases, businesses decide to increase their production, which has led to
an increase in labor demand.

19. DIVISION OF LABOUR
In this section, Smith explains how the division of labor increases production with an
example of pin production. A single person can only make ten per day from a needle
that has ten steps to make. but if only one person does each step, that is, if we employ
ten people, the number of needles produced in one day increases to 4800. But only 100
needles would have been produced if each had done each step. This means that the
division of labor has increased needle production 48 times. Also the specialization of the
worker at a certain stage can be increased by finding new ways to use that technology,
which leads to faster production.
Division of Labour

20. The international division of labor has made the world a very large workshop. In this
workshop, labor will go to the most convenient place and will look for activities that
require the least time. As the division of labor will increase production, it will require the
expansion of markets and large markets. He used A. Smith’s used division of labor, and
his greatest contribution to international economics was the theory of Absolute
Advantage. According to this theory, a country should allocate its resources to that good,
whichever product it produces cheaper. Thus, it can produce more effectively in the
goods it is superior to. In this way, all countries need each other, but in this way,
production increases a lot.
Video
https://www.youtube.com/watch?v
=xfABcl-2RZg&t=154s

21. LAISSEZ FAIRE-LAISSEZ PASSER
Smith adopted the principle of "laissez-faire, laissez-passer". It refers to the
purification of trading transactions between private parties in an economic
environment where there are only adequate arrangements aimed at protecting
property rights, from interventionist government restrictions, tariffs and
subsidies. The state should not interfere with economic life. State intervention
should be in areas that the private sector cannot produce or do, such as defense,
security, and justice. If the state charges a lot of taxes, the country may face
stagnation, as taxes will cut production. This intervention is valid for both
internal and external economy. Products must be freely exchanged between
countries to benefit from the international division of labor. If the government
reduces the import of a good by taxes, this increases the monopolization of the

22. MONEY
According to Smith, money is a means of exchange. As production increases, more money will be
needed as there will be more goods to be exchanged. Having too much money in the market does
not represent an increase in wealth. On the contrary, since excess money in the country will
increase money in the hands of people, there will be an increase in prices in general, more money
will be needed for a family's livelihood. According to Smith, the value of money is measured like
the value of other goods. Value depends on labor. The value of money and the money depends on
the effort spent on it. It is labor, not gold, silver, money, foreign exchange, which are actually
exchanged. The hardly obtained goods are expensive, the less produced goods become cheaper.

23. ADAM SMITH’S TEORIES
Price Theory
According to Adam Smith there is a real price and a nominal price, The Real price is the
cost of obtaining the good; it depends on Labor; the real price is valid for all goods in
the long run, it depends on Labor.
Nominal price is the price resulting from the change in the balance of supply and
demand or changes in the market conditions in the short term.
The market price is formed by the quantity of the good and the demand of those who
can buy it. If the effective demand for a good increases, the price of that good will rise.
So because the market price is high, the firms will think that there is a high profit in that
good and enter the market, which will increase the supply due to the increase in the
number of firms, the supply increase will balance with the effective demand increase and

24. RENT THEORY
Adam Smith talks about five types of rent:
• Net Product
• The price given to the landowners in order to make production from the
land
• Profit made by landowners due to their monopolistic status
• Distance to the markets affects the rent: Soils close to the markets are
high and distant places are low.
• Rarity rent: Rarity rent is the profit obtained due to the fact that the
price of a good is low in the market but its demand is high compared to

25. Accordingly, the source of rent is the fertility difference between soils or
the stinginess of nature. In order to meet the demand increase arising
from the population increase, more and more inefficient or distant lands
must be opened for use. On the other hand, an agricultural commodity
has a single price in the market where full competition is valid. This price
is equal to the product cost of the most inefficient soil.
Video
https://www.youtube.com/watch?v=2yEC0ncStuM&t=18s

26. LABOUR VALUE THEORY
According to A. Smith, a good has two kinds of values. The first is the benefit that the good
provides to the person, and the second is the exchange value of that good with other goods. Its
first value varies from person to person, it depends on the value each person gives, and it is difficult
to calculate in terms of society. The second (exchange) value is equal to the amount of this good
exchanged with other goods units. Since the value depends on the labor spent in the acquisition of
that good, it is labor, not the goods exchanged. Labor is a measure of exchange value. Sometimes
the most useful goods may be low when using exchanges, while the goods with little benefit may
be higher than those of the exchange. The benefit of water is much more than the benefit of
diamond, but diamond is much more expensive than water, because it took a great deal of effort
and increased the exchange value.

27. ABSOLUTE ADVANTAGES THEORY
According to Adam Smith, countries trade foreignly because it is more
profitable than the closed economy. If a country produces one good
absolutely cheaper than another, it must specialize in the production of
that good, while leaving the production and export of the goods to which
it has no superiority. As a result of such international specialization,
production factors will be used more effectively among countries and an
increase in world production will be achieved. Undoubtedly, all countries
that trade with each other will benefit. But these views of Smith were later
developed and made more consistent by R. Torrens and David Ricardo.Video: https://www.youtube.com/watch?v=5CrygjvyUPU

28. CLASSICAL ECONOMICS
The view that the natural order and state intervention is limited, has an
important place in the Classical Economic Theory, just as in the Physiocrat
understanding. «The Wealth of Nations «, published by Adam Smith in 1776, is
considered as the beginning of the Classical Economic Theory. According to the
classical economists, the state should not interfere with the economy. The role of
the state in the economy should be limited only to regulatory action. The state
should make competitive arrangements and eliminate any anti-competitive
obstacles. The basic assumptions of the Classical Economic Theory based on
individualism, personal interests and competition are individuals try to maximize
their own interests, producers and consumers have full knowledge of all goods in
the market and the prices of these goods, full competition conditions apply in

29. Adam Smith and the Classical Economists have adopted the invisible
hand. In this policy, the state leaves the economy alone and the market is
self-governing. The economic exchange over the market is therefore a
positive sum game because it generates greater efficiency, economic
growth, and everyone benefits.

30. MY OPINION
I both agree and disagree with Adam Smith's theories. Adam Smith usually emphasizes in his book
The Theory of Nations and his theories is labor. While 2 things are exchanged in the theory of
Absolute Superiority, what is compared is labor given to 2 goods. As I have given in the example, if
you want to swap water with the diamond, the diamond outweighs because removing the diamond
is more troublesome and tiring. What I disagree with here is not how much labor has been earned
or gained, but how much a person's job sees or not. For example, you may have spent many days
of effort to clean pure diamond, but you cannot eat it, drink it, use it for yourself, and it will bring
you nothing while you are not selling it. But if you have one of the things you need to sustain a
person's life such as water, fire, meat, shelter, a person's life depends it.
While you can get warmed by fire, protect yourself against enemies, enlighten your surroundings,
you cannot do any of the elements with diamonds, copper, and many more. For this reason, I think
it should be taken into consideration for the exchange of how much the good is for the work of the
man, not the labor given to a good.

31. Also i agree with Adam Smith ob Absolute Advantages Theory. All kinds of goods, plants, underground
resources in the world do not come out in the same place. For example, nuts and boron are quite abundant in
Turkey while coffee and cocoa from Brazil and the African continent. The important thing here is that if any
country has a good product, it should master it as much as possible and export it abroad. If the banana grown
in Antalya is removed from its homeland and grown in cold countries such as Russia, Ukraine, Sweden, it is
likely that it will fail, and unnecessary expenses, unnecessary labor and a kind of economy will deteriorate. For
this reason, I think that which country is good in what goods should produce it in the best way and produce it
as it deserves, and if it does not grow in that country, it should get enough from the country where it grows
best. Thus, it will be advantageous in both countries and the level of welfare will increase due to the missing
goods entering both countries.

32. REFERENCES
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%C3%96%C4%9Fretim_%C4%B0ktisat-Okumalar%C4%B1.pdf
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 https://www.biography.com/scholar/adam-smith
 http://www.internettinabi.com/20-yuzyilda-iktisat-dusuncesi-taylan-urbay/
 https://www.matriksdata.com/website/finansal-piyasalar
https://www.tarihiolaylar.com/biyografiler/adam-smith-cv-81
https://www.neoldu.com/mutlak-ustunluk-teorisi-791h.htm
https://www.youtube.com/channel/UCvwFhI0mrIWDiZUabRapS5Q
https://www.youtube.com/channel/UCXsH4hSV_kEdAOsupMMm4Qw