How can we explain free market capitalism?

Adam Smith - the father of capitalism

The commodities contain the value of a certain amount of labor, the same amount as the good we acquire (in exchange). "

 

In his second work, "Wealth of Nations," Smith explains and justifies international trade. With the theory of the absolute cost advantage, he proves that it is worthwhile for every country to trade with its neighbors

drive and turn against the protectionist economic views of his time. For Smith, the value of a commodity is determined by the hours of labor it took to produce it. "They contain the value of a certain amount of work which, at the time of acquisition, we assume will contain the same amount of work as the good we are acquiring." Due to the competition of the free market, the price ultimately corresponds to the value of the goods - no one can ask for more than the production of the goods really cost them work. Differences in the price of a commodity are therefore related to different countries' productivity.

 

Profitable exchange

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A farmer in France needs hours to produce one unit of wine; in Scotland it takes 12 hours to produce the same amount of wine.

 

In his model, Smith assumes two countries, e.g. Scotland and France, which can each produce the same two products: wine and clothing. However, the conditions are different and they do not produce the goods in the same time: a farmer in France needs 5 hours to produce one unit of wine. Conditions are worse in Scotland. Here a farmer needs 12 hours of work for the same amount of wine. On the other hand, the Scots have an advantage when it comes to making clothes: they only need 6 hours to make a unit, while the French need a whole 14 hours to make it.

 

Very good wines can also be made in Scotland, but they would cost around thirty times as much as an at least equally good one from abroad. "

 

"In greenhouses (...) you can grow very good grapes in Scotland and make very good wines from them, but they would cost around thirty times as much as an at least equally good one from abroad. Would it make sense to import any foreign wine banned by law just to encourage claret and burgundy cultivation in Scotland? "

 

Smith himself answers his rhetorical question: if each country specializes in the production of the good where it has an advantage, both countries benefit from it. In the time in which a Scot has produced one unit of wine, he can now produce and exchange two units of clothing, and conversely, the French benefit from their specialization in wine.

 

Adam Smith, the critic

This trade is always beneficial to both. "

 

This calculation is a direct criticism of the economic policy of the time: In the course of widespread mercantilism, it was important to import as few goods as possible in order not to endanger production in one's own country through competition from abroad. Smith contradicts these economists: A trade between two places is always advantageous. He breaks away from the concept that trading is always a zero-sum game in which one partner wins and the other loses. There is always an advantage for both parties involved. "But this trade, which is carried out naturally and regularly between two places without force or coercion, is always beneficial (...) for both."