Adam Smith's Theories: Self-Interest, Competition, and Government

This assignment delves into Adam Smith's theories, focusing on self-interest as a driver of economic growth in a free society. It explains how self-interested competition in a free market benefits society by keeping prices low and incentivizing diverse goods and services. The assignment further discusses Smith's perspective on the government's role, which includes protecting society, administering justice, and providing public works. It highlights Smith's advocacy for a system of natural liberty, where individuals are free to pursue their own interests, and his opposition to monopolies, which he believed could not exist without government protection. The document explores Smith's concept of market self-adjustment, driven by the natural price of commodities and consumer demand. Access more solved assignments and study resources on platforms like Desklib.

Q.1 Explain Smith’ s theory regarding self-interest in a free society that tends to lead to
economic growth.
Ans.
K.D.
A. Smith knows that if anyone wants economic prosperity then he should believe in
the competition as well as self-interest. It leads to the promotion of a good society.
B. In the free market, when there is an initiation of self- interested competition then
it results in the benefit of the society as the prices remain low even after creating an
incentive for different goods and services.
Or
Self- interest is known as the actions that have been taken for the personal benefits. It
was explained by Adan Smith that the best economic benefit for everyone can easily
accomplished when individuals start behaving according to their self- interest. He has
explained invisible hands in which there are an elaboration about the thousand acts of
people in the self-interest. Goods and services are created for the benefits of producers
and the consumers.
In the case of market economy, there is an availability of all the resources like land,
labor and capital so voluntary decisions has been taken in self – interest so that they
can easily control the market place. In such systems, there is a very small role of the
government and two forces control the economy i.e. competition and self- interest.
Self- interest is considered as the biggest factor of motivation for an individual. When
there is an analysis about market economic system then it describes the free exchange
of goods and services with the help of market interaction. There is an assumption that
consumers and producers are supposed to behave in a rational way due to their self-
interest.
There are some exchanges that are voluntary and totally based on actions created on
self- interest that provide benefits to all the parties. The theory of “rational” self-interest
explains all the actions of consumers and producers that results in well-being of both
the parties after the exchange. It can be in the terms of intrinsically or financially.
Q.2 What are the three things that Smith thought government should concern itself
with?
Ans.
K.D.
According to Adam Smith, the duty of the government is to protect the society,
administer justice and provide public works. Smith believes that government regulations
are important for creating a free market where there is a free operation of business
activities.
K.A.
1.The creation and maintenance of justice
2.National defense

3. Certain public institutions – It can never be according to the interest of individuals.
Any other government undertaking is considered as more harmful instead of beneficial.
Q.3 How Adam Smith thought that the market “self adjusts.”
Ans.
Adam Smith says that there is a “natural” price for each and every commodity and it
wholly depends upon the cost of the production. It includes wages, profit and rent.
When there is a difference between the market price and the “natural” price of the
commodity ten market forces are in the motion to move it back. There is a very high
significance of Smith’s self- adjustment analysis. It refers to the pattern of consumer
demand.
Q.4 Adam Smith advocated a system of natural liberty, what did it mean?
Ans.
Adam Smith advocated a system of natural liberty that describes everyone is free to do
the things of own interest. Self- interest leads to a big success and growth when it
comes to the free society. A nation can achieve well by this.
Q.5 Was Adam Smith in favour or against monopolies? Explain why.
Ans.
Adam Smith was never in favour of monopoly. He was aware that no private monopoly
can exists for long without the government protection. There can be high competition
and that can easily destroy the monopoly.