50
T
oward the end of the 18th
century much of the world
was undergoing enormous
political change. The so-called
Age of Reason produced scientists
whose discoveries were leading
to new technologies that would
transform the way goods were
produced. At the same time
political philosophers had inspired
revolutions in France and North
America that would have a
profound effect on the social
structures of both the Old and
the New Worlds. In the field of
economics a new scientific
approach was overturning the
old mercantilist view of an economy
driven by protected trade and
reliant on exports as a means of
preserving its wealth. By the end
of the Napoleonic wars in 1815,
Europe, and Britain in particular,
had begun to industrialize on
an unprecedented scale. A fresh
approach was needed to describe
and meet the demands of this
rapidly emerging economic
new world.Rational economic man
The economist who rose most
successfully to this new challenge
was a Scotsman, Adam Smith
(p.61). His background in the
philosophy of British Enlightenment
thinkers, such as John Locke and
David Hume (p.47), led him to
approach the subject initially as
one of moral philosophy. However,
in his famous book of 1776, The
Wealth of Nations, he presented
a comprehensive analysis of the
market economy and how it
contributed to the economic
welfare of the people. Centralto his thesis was the concept of
“rational economic man.” Smith
argued that individuals made
economic decisions on the basis
of reason and in their own self-
interest, not for the good of society.
When they were allowed to act in
this way in a free society with
competitive markets, an “invisible
hand” guided the economy for the
benefit of all. This was the first
detailed description of a free
market economy, which Smith
advocated as the means of
ensuring prosperity and freedom.
It is generally regarded as a
milestone in the development
of economics as a discipline. The
approach to economics that Smith
helped to establish is often referred
to as “classical” economics. His
analysis of a competitive market
economy was essentially aINTRODUCTION
1766
1770 S
1776
1776
1771
1774
1776
1780 S
Adam Smith’s classic
work, An Inquiry
into the Nature
and Causes of the
Wealth of Nations,
is published.David Hume
denounces trade
protectionism, arguing
that countries should not
strive to export more
than they import.Richard Arkwright opens
a mechanized cotton
mill in England and later
introduces machinery
that sets the pace
for industrialization.Smith’s proposals on
liberalizing trade
are adopted by
British Prime
Minister William
Pitt the Younger.Turgot is appointed
finance minister in
France and attempts to
reform the tax system
by taxing
wealthy landowners.Anne-Robert-
Jacques Turgot
argues for the
exemption of trade
and industry
from taxation.The American
Declaration of
Independence
is adopted
by Congress.The first of James Watt’s
steam engines are
put into operation in
British factories, marking
the true beginning of the
Industrial Revolution.