The Origin of Capitalism

Adam Smith (1723-90)

The Wealth of Nations (1776)

Every individual is continually exerting himself to find out the most advantageous
employment for whatever capital he can command . . . But it is only for the sake of profit
that any man employs a capital in the support of industry; and he will always, therefore,
endeavor to employ it in the support of that industry of which the produce is likely to be
of the greatest value, or to exchange for the greatest quantity of either money or of other
goods . . . In so doing, he generally neither intends to promote the public interest, nor
knows how much he is promoting it . . . he intends only his own security; and by
directing that industry in such a manner as its produce may be of the greatest value, he
intends only his own gain. But he is in this, as in many other cases, led by an invisible
hand to promote an end which was not part of his intention. By pursuing his own interest
he frequently promotes that of society more effectually than when he really intended to
promote it.

What is the species of domestic industry which his capital can employ, and of which the
produce is likely to be of the greatest value, every individual, it is evident, can, in his
local situation, judge much better than any statesman or lawgiver can do for him . . . To
give the monopoly of the home market to the produce of domestic industry, in any
particular art or manufacture, is in some measure to direct private people in what manner
they ought to employ their capitals, and must, in almost all cases, be either a useless or
hurtful regulation. If the produce of domestic use can be brought there as cheaply as that
of foreign industry, the regulation is evidently useless. If it cannot, it must generally be
hurtful . . . If a foreign country can supply us with a commodity cheaper than we
ourselves can make it, better buy it from them with some part of the produce of our own
industry.

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
(1776)
 After reading the excerpt above, answer the following questions and define (and explain)
the following terms/ideas:

invisible hand Personal interests drive the economy to benefit all

laissez faire la nature The idea that the government should not
interfere with the economy and allow the invisible hand to take its course
capitalism Trade and industry and profit made by them are controlled
by private entities, rather than by the state
rejection of mercantilism total control of the economy by the
government

1) What do all individuals want? Self-gain and profit to benefit themselves

2) How does an individual promote public interest and society? Through wanting
their own self gain, they ultimately promote the interest of society because,
through a free market, competition drives prices down and allows all of society to
have needs and wants at a fair price, thus allowing the economy to flourish.
3) What is the invisible hand? Personal interests drive the economy to benefit all
4) What is wrong with regulations? Legislators create regulations, when, in reality,
they dont know how to deal with regulations. Further, it hurts the economy
insofar the government shouldnt allot a monopoly because it hurts the overall
economy and diminishes competition.
5) How should we trade? Why? We should trade freely, especially if a neighboring
country sells the same commodity cheaper because it saves money and effort to
supply the commodity cheaper for all.