Question

Explain Smith’s argument for a “laissez-faire” approach to the role of government in a market/capitalist economy, paying particular attention to Smith’s explanations of how the market/capitalist economy is (a) self-regulating, (b) stable, and (c) self-propelling.

Type, please do no pictures

Answer 1

Adam Smith, also known as the father of economics stated that businesses can operate efficiently with minimal to zero government intervention.

He stated this theory based on his assumptions that markets are self regulating or correcting, markets are stable and not affected by any external factor and are self propelling.

He stated that in case of any market disequilibrium, markets have the capability to correct the disequilibrium by adjusting demand and supply curves automatically.

For example, there is a flood in the market of oranges and supply of oranges falls drastically. This means at the current market price, quantity of oranges demanded will exceed the quantity of oranges supplied. This is a situation of market disequilibrium. Now, what markets will do it when demand exceeds supply, price will start rising and reach a new higher equilibrium price (as supply curve shifts left).

Now when prices Increase, as per the law of demand, demand for oranges would fall. As a result, demand curve will shift to the left.

This left shift in demand curve will keep on happening till the point prices fall back to original equilibrium price and all market disequilibrium and shortage is eliminated.

This shows how markets adjust themselves without government intervention or through the invisible hand, exactly how Adam Smith stated.