Adam Smith’s Theory


According to Raphael (1985), Adam Smith is eminent for his theory wealth of nations which he developed as the foundation of economics. The theory has been in existence since 1776 and many are inspired by great insight of Adam Smith. His work is emulated by many as people view him as the father of economics. Born in 1723 and died in 1790, Smith left a legacy in his model wealth of nations that has been an influential contribution in economics. In brief, the theory identifies the basic principles that nation acquire wealth and function effectively when individuals use capital and proficiency at their own diplomacy.  His model revealed the nature of country’s prosperity as many learn the principles of economics. Up-to-date, his arguments are used and cited in debates as many learn from his great insights. Nevertheless, some people disagree with his assumption as many view him as an activist of callous individualism. Regardless of the way he is viewed, his theory is paramount in the economics field. How the economy does stem from his theory and importantly economists assume that the theory is accurate in how the world’s economy operates. At this point, this paper seeks to analyze the theory and lay a discussion of its pros and cons.

Wealth of nations

In his theory wealth of nation, Smith noted that wages and prices may reach optimal level when freedom of using capital and skills as per wish is imposed (Smith, In Cannan & Lerner, 1937). He taught by examples of new products which he argued that, when invented prices are usually high until when others discover the profit potential and join the field then prices go down. Indeed this can be outlined in today’s electronics where such scenarios take place. Smith supported the democratic system with his facts that when there is freedom to pursue ambitions it benefits the society and as an individual. From his assumptions, such freedom creates better products, new markets, and great opportunities for wealth. Smith felt that the government should provide goods and services that benefit everyone. These include grant patents, better roads, and copyrights as enticement for invention. In doing this, it motivates people to improve their lives and the country as a whole.

According to O’Rourke and Smith (2007), the theory explored that there cannot be consumption if there is no production. To explain further, Smith’s theory affirmed cars do not just exist there is a process through which they are put together in production to manufacture cars. Similarly, capitalism works in this way in the sense that when a car is manufactured, those in need of a car search for it in the car factory and purchase as per their choice of the car. In the 21st Century, people do not just walk in the car factory and request to purchase the car but they are purchased by a dealership and later sold to clients. The main point that Smith wanted to highlight is that, one can break capitalism in two parts consumption and production.  In this case, there cannot be consumption without production and vice versa.


This law is applicable in today’s society in that one cannot purchase products at the market without being manufactured and supplied by a different party. Still, one cannot eat without preparing or acquiring food and cannot be in a house that has not been constructed. From his theory, Smith assumed that the market force ensured there is right invention of goods and services. The theorist based his idea on the aspect of free market economy whereby consumers have the free will to choose what they need. Smith perceived capitalism as the main aspect which drives and motivate the economy. He believed that it motivates companies and individuals to gain and accumulate profits. To support his argument, Smith developed two theories through a research on production in Europe during industrial revolution. The two theories are moral sentiments and wealth of nations which instigated many economists.



Pros and cons

First, the theory has been effective in the field of economics. It has been used as a guideline for prosperity by many nations such as the United States. Most of the assumption on how an economy operate stem from the Smith’s theory. Secondly, this theory is accurate based on what the world would be if the government diligently works towards giving goods and services that result to positive change to individuals and a nation such as public works. Thirdly, Smith theory illustrates the advantage of division of labour in manufacturing which is an essential principle in industrial revolution. Lastly, the theorist recognized the need of human motivation in the effective running of the economy. He emphasized on human rights of wealth ownership. However, some disagree with his assumption as many view him as an activist of callous individualism.


Concisely, the paper has discussed Adam Smith as a theorist who left a legacy in his theory wealth of nations. Smith lays a strong foundation in economists and many people view him as the founder of economics. His theory is great in contents as it give precise information on what affects the economy. As argued in this paper, Smith is known for two theories wealth of nations and moral sentiments which he educated many on economics principles. This paper majors its discussion on the theory of wealth of nations rooted on the nature and reasons of the nation’s wealth. Therefore, this essay has effectively discussed the Adam’s theory along with its pros and cons.



O’Rourke, P. J., & Smith, A. (2007). On The wealth of nations. New York: Atlantic Monthly        Press.

Raphael, D. D. (1985). Adam Smith. Oxford [Oxfordshire: Oxford University Press.

Smith, A., In Cannan, E., & Lerner, M. (1937). An inquiry into the nature and causes of the           wealth of nations. New York: The Modern library.

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