and increasingly so. He was right. The market did not put an end to worker exploitation but the industrial revolution marked the start of the rise of modern mass prosperity. As we shall see, Karl Marx had rather different views on this.
Liberty
It is hard to overstate the importance of Smith’s contribution to economics. As its founding father he provided a template for it and an underlying philosophy that endures to this day – that economic freedom provides the best of all possible worlds, through the operation of the invisible hand. Attempts to interfere with that freedom by introducing restrictions or allowing monopolies to operate will make us all poorer than we need be. Governments, even if they mean well, will usually end up making things worse. This did not mean there should be no government at all – Smith favoured strong and clear laws, properly policed – but it did mean limiting its role. Smith would have had no truck with government being directly involved in the production process by owning firms.
When, advocated by the likes of Margaret Thatcher, Smith came back into vogue, it was easy to see why. The market, it seemed, had taken a back seat. The UK had in the thirty or so years since the Second World War become a heavily controlled economy and one in which the state played an increasingly dominant role. Monopoly power had been allowed to develop while, on the other side, unions operated a range of restrictive practices. The policies followed by the Thatcher governments, which involved the removal of controls, denationalization (or as it came to be known, privatization), and the ending of restrictive practices by both unions and employers added up to a classic recipe for restoring markets, for giving the invisible hand a chance to operate. Adam Smith would have been proud of her.
5
Main course (2)
Welcome back. Before we broke we had made a lot of progress in trying to explain how, as individuals, we behave as economic animals, even when we are not aware of it. All very interesting, you might say (at least I hope you do), but how does this fit into the big picture? When people talk about ‘the economy’, what do they mean? This is a good time to start thinking big, to go from the micro to the macro.
So what is an economy?
This is one of those questions, a bit like ‘What is life, Daddy?’, you hope your children will not ask you. The best way of answering it, given that this is probably not the time for another food analogy, is by thinking of a football match. At one level, a football match is a game between two teams of eleven men lasting ninety minutes, the object of which is to kick a round object into your opponents’ goal more times than they do into yours. Everybody knows, however, there is more to it than that. A football match is about the contributions of individual players, and of the referee and crowd, about the goals, the goalmouth incidents, the fouls, the mistakes. Put like that, a football match consists of many thousands of actions that combine to make a whole. How do you explain that to somebody who was not there? They can read a match report in the newspaper. If they are real enthusiasts, though, they will examine the statistics – goals scored, shots on goal, red and yellow cards, the percentage of time each team had possession of the ball, and so on. The statistics can never be a perfect substitute for being there but they are the next best thing. So it is with the economy. At its most basic the British economy is what a nation of roughly 60 million people spend, earn and produce. At its most complicated it is the millions upon millions of decisions taken by individuals, either for themselves or on behalf of companies. Magnificent though this would be to observe, it would also be impossible. As with football, therefore, it is necessary to boil all these actions down to manageable statistics. For economists, as we shall see later, it is also necessary to
Liberty
It is hard to overstate the importance of Smith’s contribution to economics. As its founding father he provided a template for it and an underlying philosophy that endures to this day – that economic freedom provides the best of all possible worlds, through the operation of the invisible hand. Attempts to interfere with that freedom by introducing restrictions or allowing monopolies to operate will make us all poorer than we need be. Governments, even if they mean well, will usually end up making things worse. This did not mean there should be no government at all – Smith favoured strong and clear laws, properly policed – but it did mean limiting its role. Smith would have had no truck with government being directly involved in the production process by owning firms.
When, advocated by the likes of Margaret Thatcher, Smith came back into vogue, it was easy to see why. The market, it seemed, had taken a back seat. The UK had in the thirty or so years since the Second World War become a heavily controlled economy and one in which the state played an increasingly dominant role. Monopoly power had been allowed to develop while, on the other side, unions operated a range of restrictive practices. The policies followed by the Thatcher governments, which involved the removal of controls, denationalization (or as it came to be known, privatization), and the ending of restrictive practices by both unions and employers added up to a classic recipe for restoring markets, for giving the invisible hand a chance to operate. Adam Smith would have been proud of her.
5
Main course (2)
Welcome back. Before we broke we had made a lot of progress in trying to explain how, as individuals, we behave as economic animals, even when we are not aware of it. All very interesting, you might say (at least I hope you do), but how does this fit into the big picture? When people talk about ‘the economy’, what do they mean? This is a good time to start thinking big, to go from the micro to the macro.
So what is an economy?
This is one of those questions, a bit like ‘What is life, Daddy?’, you hope your children will not ask you. The best way of answering it, given that this is probably not the time for another food analogy, is by thinking of a football match. At one level, a football match is a game between two teams of eleven men lasting ninety minutes, the object of which is to kick a round object into your opponents’ goal more times than they do into yours. Everybody knows, however, there is more to it than that. A football match is about the contributions of individual players, and of the referee and crowd, about the goals, the goalmouth incidents, the fouls, the mistakes. Put like that, a football match consists of many thousands of actions that combine to make a whole. How do you explain that to somebody who was not there? They can read a match report in the newspaper. If they are real enthusiasts, though, they will examine the statistics – goals scored, shots on goal, red and yellow cards, the percentage of time each team had possession of the ball, and so on. The statistics can never be a perfect substitute for being there but they are the next best thing. So it is with the economy. At its most basic the British economy is what a nation of roughly 60 million people spend, earn and produce. At its most complicated it is the millions upon millions of decisions taken by individuals, either for themselves or on behalf of companies. Magnificent though this would be to observe, it would also be impossible. As with football, therefore, it is necessary to boil all these actions down to manageable statistics. For economists, as we shall see later, it is also necessary to
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