Economic Foundations: Adam Smith and the Classical School of Economics

Abstract

Although economic debates remain central to our world, they are wrapped in myth and misunderstanding. Many believe that Adam Smith provided the basis for classical economics through his exposition of the principle that outcomes are best decided through “the invisible hand of the market.” In truth, Smith never used the term, instead associating the concept of an “invisible hand” with self-interest. Smith’s ideas about self-interest were, moreover, derived from David Hume. Many of his ideas about value were obtained from the earlier work of Richard Cantillon. This chapter nevertheless argues that understanding of the foundational principles of classical economics – concepts associated with production as well as markets and exchange – remains central to our time. There is particular utility in understanding the nature of economic value and how it is created. For what is most revolutionary about the modern world is not its mechanisms for distribution and exchange but its systems of production; systems underpinned by the division of labor, the utilization of fixed capital, and the self-interested pursuit of occupational and firm advantage.