Theories By Milton Friedman And Adam Smith: Comparative Essay

  • Words 1956
  • Pages 4
Download PDF

In Adam Smith’s work, An Inquiry into the Nature and Causes of the Wealth of Nations he proposes a theory as to how nations generate and accumulate wealth. Smith’s work in the Wealth of Nations is deemed to be one of the most influential works in the field of economics. Smith’s work highlights the importance of the division of labour through means of specialization and the importance of exchange in a free market. Smith’s work is motivated by the assumption that a nation’s wealth is equivalent to its power. A concept adopted from the scholar Thomas Hobbes.

Adam Smith wrote the Wealth of Nations at the peak of the industrial revolution which was a time of historical change in the production of goods. Goods were no longer being produced by hand or made in small facilities. This change allowed for the introduction of new ideas to increase productivity. Adam Smith in Wealth of Nations proposes the idea of specialization in the workplace. This proposes that a single worker would no longer complete the entire production process to result in one finished product per worker. Instead, workers would be given specific tasks in part of making a product but not the whole process. This results in specialized workers that allow for increased productivity in a single day. Also by manufacturing this way Smith believed that it allowed the opportunity to discover and invent new machines to take over simple human tasks. The second critical factor in Smith’s work is that a nation must have open trade with other countries. He defends this point by discussing how those who produce goods need more than what they produce. Open trade allows a producer to make more of their products and trade for other goods that they require. Adam Smith dedicates time in The Wealth of Nations to explain money’s critical role as a universal want/need. This is how trade can continue with other nations that do not have what you want. Money becomes a common standard of exchange to buy other goods. While Smith explains how the free market can help flourish a nation he also states that there is an extent to the market that causes limitations. Here enters the economic idea of scarcity, need, and want on the market.

Click to get a unique essay

Our writers can write you a new plagiarism-free essay on any topic

Adam Smith makes the assumption while writing The Wealth of Nations that all people are self-interested. How does someone convince another person to do something that benefits your self-interest? Smith answers that you need to create a common interest that generates a trickle-down effect. The trickle-down effect will take the form of tax breaks to property owners to reduce production costs. The property owner’s extra money is to be invested back into the economy e.g. stock that will theoretically boost the economy. Adam Smith believed that a successfully industrialized nation could generate more wealth than others because of the increased dexterity of workers, better time efficiency, and the creation of machines.

In Adam Smith’s work Wealth of Nations, he strives to diminish human suffering. His means to achieve this is by introducing an ethical system into his theory. This ethical system is considered by Smith to be a necessary investment that will include security, defence, justice, and public works. Smith believed for the system to be successful the Civil Government must be formed. The Civil government is to be formed by taking the existing government and turning it into an economic framework. One of the most crucial aspects of the Civil Government is the formation of a justice system to help preserve wealth and provide security to the people.

In Milton Friedman’s work Neo-Liberalism and its Prospects, he takes a clear stance that economic solutions such as individualism and collectivism cannot adequately solve economic problems. Friedman asserts that collectivism and individualism have previously been interchangeably used because they are rooted in our crisis solving psyche. He theorized that due to this we would continue turning to collectivism or individualism in times of crisis because it was ingrained in us in our early life. Friedman at the time of writing Neo-Liberalism and its Prospects believed that there was going to be another shift from collectivism but claimed that Neo-Liberalism should become the new philosophy.

Neo-Liberalism focuses on the idea of the competitive market. The competitive market’s role is to protect consumers from exploitation, protect workers, property owners, and consumers to protect enterprises through means of competition (Friedman 3). It would be the state’s job to patrol the competitive system to prevent a monopoly. This approach is based on existing evidence that manufacturers compete with each other through means of well-manufactured products and competing for workers. Friedman argues that to reap the full benefits of the competitive market all the barriers to enter the market should be removed. By removing barriers to enter the market will allow for more competitors and tougher competition. Friedman recognizes that due to the increased number of competitors there are members expected to be knocked out of the competitive order. His resolution to this dilemma is to implement a minimum standard of income to allow those who get knocked out of the competitive market to enter again. Friedman declares that laws already promulgated e.g. Sherman Anti-Trust Laws will prevent monopolistic societies in his theorized competitive market (Friedman 4).

Milton Friedman also discusses the importance of money in the economy and minimal intervention from the government in the free market. He asserts that there is to be a clear dissociation between economic order and political order. Friedman does not acknowledge the requirement for an ethical system to supplement his theory of Neo-Liberalism and the competitive order.

One of the biggest differences between the works of Adam Smith’s Wealth of Nations and Milton Friedmans Neo-Liberalism and Its Prospects is that Smith advocates in his philosophy for the use of a social and ethical system. In Smith’s work, he describes this system as a necessary expenditure. This system’s job is to implement security, defence, justice, and public works. The Civil Government would have to be able to preserve the wealth of a nation to generate more and protect the rich’s property from the poor or injury to property. Adam Smith contrary to Friedman acknowledges the existence of natural inequalities. Natural inequalities described by Smith as personal health, mind, age, and fortune. These inequalities could lead to tensions between the rich and poor and it is the role of the Civil Government to prevent excesses and abuse by either side. This compared to Milton Friedman’s work which does not suggest the need for any ethical system to diminish the effects and tension of such natural inequalities. Friedman’s theory chooses to rely on laws already in place.

The similarities between Friedman and Smiths’ economic theories are that there should be a trade market where individuals are free (to move) with little interference from the government. For Friedman, the rules and structure of the competitive order are to be determined by those in the competitive order with government intervention only to prevent monopolies. For Smith, it is the Civil Government that is to be established to assist govern the free market. Smith combines the structure of the economy with the government and does not split the two fields, as Friedman does. Both scholars recognize the aspect of human suffering and have precautions to avoid and/or diminish human suffering. For Friedman, it is a guaranteed minimum income and Sherman Anti-Trust Laws and for Smith, it is having a Civil Government with a firmly established and ruled ethical system. Both of these theories attempt to avoid the exploitation of the labouring individual. Both theories, however, do not provide an image of what the labouring individual looks like.

Between the two proposed theories by Milton Friedman and Adam Smith, the theory that when implemented could have the most perilous consequences if the precautions in the theory fail is Milton Friedman’s theory advocating for Neo-Liberalism. Adam Smith proposes clear ideas within his theory that aim to create a just system that will protect workers from exploitation, natural inequalities, and tensions between the rich and poor. Milton Friedman offers two ideas to avoid a monopolistic economy and avoid human suffering. They are introducing a minimum standard of income and relying on the existing Sherman Anti-Trust Laws. The uncertainty in Friedman’s theory surrounds those individuals who are knocked out of the competitive order and cannot find the means to re-entry. This could result in a significant division in the society where the rich will gain enormous amounts of wealth from lack of competitors and those who are poor will be living in severe poverty. Friedman believes that a minimum standard income can bypass this possibility. However, a criticism of this point is that those who continue to fail as part of the competitive order can use this standard income and chose to live off of it and not compete in the order at all. This will also create a divide. People in that society may chose to not work at all if not necessary.

The competitive order is meant to support and protect all of its members. The labouring individual theoretically should be protected from exploitation due to competition between manufacturers for workers. Property owners will persuade workers to work for them by looking better than other employers an example of this could be the benefits of the job. One criticism overlooked by Friedman is the consequences of abolishing the barriers to entry of the market. Is Friedman assuming the competition he unleashes on the economy would only lie between the rich property owners? Theoretically could there not be a surplus of workers who cannot find jobs due to increased competition caused by the drastic expansion in the job market? This can result in a scarcity of jobs. The working class would compete with one another for jobs and consequently, property owners would always have people willing to work. Business owners would not have to compete with other facilities for workers. A business owner then could still exploit their workers to work faster for little benefit due to scarcity for jobs which will result in other competing businesses to close and the exploitive company employs their workers anyway.

In Friedman’s theory, there are no barriers to stop property owners from being permitted to outsource labour from other countries and exploit those workers e.g. sweatshops where workers are expected to work without rest, without benefits and for a smaller salary than they would pay for workers where the products are being sold. Friedman theoretically should have no issue with this scenario as he states in his philosophy that the individual is allowed to freely move for means of work (Friedman 3). This combined with the lack of an ethical system allows property owners and business owners to commit unjust acts as ways to stay ahead of the competition.

Milton Friedman is writing Neo-Liberalism and Its Prospects in the 1950s. In today’s world, human labour is often no longer required for a typical factory job. If Milton’s theory were implemented today property owners can turn to means robotics and bypass the additional expenses of human labour. This compared to Adam Smith’s work where he demonstrates the need for a strongly established ethical and social system provides the best precautions to handle natural inequalities, tensions between the rich and poor, and what is moral in the market place.

In conclusion, Friedman’s idea of radicalizing competition leaves little room for morals and ethical decision making. Friedman overlooks the cruelty and exploitation that often occurs in the environment of competition that can lead to people being mistreated, cheated, and used. His theory falls short because it does not adequately consider the labouring individual’s likelihood of being exploited that could be prevented by having a stronger system in place to protect society’s most vulnerable members.


We use cookies to give you the best experience possible. By continuing we’ll assume you board with our cookie policy.