December Blog

                                                         Adam Smith
      Adam Smith was born in June 1723 and died in July 1790 in Kirkland, Scotland. Adam mainly believed in four principles: freedom to try, freedom to buy, freedom to sell, and freedom to fail. (Adam) In 1776, just when the United States was growing, Adam Smith published his famous book, The Wealth of Nations. In the book, Adam said wealth is not gold and silver but the essentials of life – food, clothes, houses, transportation, communications, schools, good roads, factories, and cultivated farms. He said that if people want an increased standard of living and prosperity, goods and services should be abundant and cheap. (Adam) To make this happen, there had to be specialized production where buying and selling is done in a free market. (Adam) This “free market system” is based upon the natural law of “supply and demand." Natural law marketing, according to Adam, is democratic. Everyone improves their position by making a profit at what they are doing. (Adam) The secret to the successful operation of a free market is competition. For Adam, competition leads to greater quantity (higher production/more profits), which leads to improved quality (to attract customers), which leads to lower prices (to beat the competition), which leads to a greater variety of goods and services to satisfy customer demands. (Adam) For Adam, the greatest threat to a free market economy is government interference. This usually occurs when the government is involved in fixing prices, fixing wages, controlling production, controlling distribution, or subsidizing production. The role of government is simply to serve as a referee and to prevent illegal force, fraud (phony stocks and bonds), monopoly (make entry into the market difficult for competition), and debauchery (drugs, and other forms of vice). (Adam)


                                           Capitalism/Free Market System
       Capitalism is an economic model that calls for individual households and privately owned businesses to control the economy. (Case) The Scottish economist Adam Smith stated the basic argument for capitalism. He presented his ideas in a book called The Wealth of Nations (1776). Smith maintained that a government should not interfere with a nation's economy. Instead, a government should let individuals act as "free agents" who pursue their own self-interest. Such free agents, would naturally act in ways that would bring around the greatest good for society. They would seem to act "as if guided by an invisible hand." (Case) Businesses and households exchange labor, capital, goods and services in markets. A market is a place in which people buy and sell things. In a capitalist economy, the prices of labor, capital, and goods and services are determined mainly by market forces: supply and demand. (Case) Supply is the amount of a good or service that is offered for sale. Demand is the amount of a good or service that users can and would like to buy at alternative prices. Generally, the market will force prices to fall when supply exceeds demand. The market will force prices to rise when demand exceeds supply. (Case) Another important feature of markets is competition. Competition rises when many different suppliers try to sell the same kinds of things to the same buyers. A supplier who charges lower prices or improves the quality of his or her products can take buyers away from competitors. (Case) Capitalist economies rely on free markets, which permit people to engage in economic activities largely free from government control. Adam Smith, in his classic work The Wealth of Nations (1776), set the principles of a free-market system. (Fish) According to Smith, society benefits if individuals are allowed to pursue their own self-interest in markets where competition sets the prices that allocate goods among buyers and sellers. Smith believed that competition would, without control or direction, act “as if by an invisible hand” to determine market prices. (Fish) Many factors go into making the “invisible hand” work in a free market. Sellers prefer to sell their goods for higher prices to make more profit. Buyers prefer to pay lower prices so that they can buy more items with their income. If the sellers of a good ask too high a price, the quantity demanded of that good will be less than the quantity supplied. Sellers with lower costs who are having trouble finding buyers will compete by asking a lower price. Buyers will then be willing to buy more of the good. (Fish) On the other hand, when sellers ask too low a price, quantity demanded exceeds quantity supplied. Buyers who want the item but are having trouble buying it will then compete by raising the prices they offer. Sellers will then be willing to sell more of the good. (Fish) The competition on both sides of the market ultimately leads to a set of market prices where the quantity supplied is equal to the quantity demanded. When this occurs, the market is said to be in equilibrium. In a capitalist economy, there are numerous types of markets. (Fish) The wages employers pay to workers are set in labor markets. Real estate markets determine the rents and selling prices for houses and factories. Interest rates, which in loans represent the price of obtaining goods sooner rather than later, are set in capital markets for lending and investing. (Fish)


                                                  Auto Industry Bailout
       The auto industry bailout has pros and cons. The Big Three Auto Industry (BTAI) was at it's highest point in 2004. In 2006, that highest point dropped tremendously. (Amad) The U.S. Government bailed out the industry and was a good and a bad idea. The pros of the Big Three Industry bailout was that if the BTAI gain back their wealth and thrive once again, it could and would bring the economy rising once again. The reason they fell was because the Real Estate Companies fell and had a domino effect on the BTAI. Some cons are that if the BTAI does not come back then it would fall even further dragging the economy even more down with it. People are upset that the government is using the peoples money from taxes to revive and help the BTAI when the government is not helping the people of it's own country. The BTAI bailout can be a positive action if the BTAI rises again, however, the people of the U.S. are still unhappy with this action.