Adam Smith’s Theory

 

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Strengths And Weakness of Adam Smith’s Theory

That Self-Interest Leads to Economic

Adam Smith put forward a theory that self-interest leads to economic cooperation. One of the strengths of this theory is that it is successful in explaining the cooperation between the buyers and sellers. The buyer self-interests lie in deriving satisfaction from their purchase while that of the seller is to achieve maximum profit. The buyers and sellers then negotiate until they agree on a price. This natural price is what Adam refers to as Pareto-optimum equilibrium. The demand and supply forces are also explained by the theory whereby a competition arises among consumers and vendors in a free market until an optimum price is arrived at. Thus, if the price is too high, the consumers in their self-interest will exit the market hence decreasing demand. The theory explains how the self-interest to make profits leads workers to cooperate in an efficient manner rather than working independently. The theory also shows how some countries have more wealth and economic cooperation than others. Their self-interest causes them, unknowingly, to promote their domestic markets hence economic cooperation in the society. Another strength is that it incorporates ethics in business. Smith supported that self-interest arises from sympathy for oneself rather than selfishness and greed. The sympathy for both oneself and others is what brings about economic cooperation (Brooks & Dunn, 2017).

Some of the weaknesses of Adam’s theory is that it is based on a perfect market. In a market where buyers may not have complete information about the market, they are likely to be exploited, and their self-interests do not play a part. The theory also assumes that all sellers are ethical and hence ‘sympathetic’ towards others (Gonin, 2015). In the real world, this is not the case as many businesses are driven by capitalism and thus profit oriented. The theory also applies in a market with competition and thus fails in a monopoly structure (Rho & Tomz, 2017).

 

References

Brooks, L. J., & Dunn, P. (2017). Business & Professional Ethics for Directors, Executives & Accountants. Cengage Learning. 145-171

Gonin, M. (2015). Adam Smith’s contribution to business ethics, then and now. Journal of Business Ethics, 129(1), 221-236.

Rho, S., & Tomz, M. (2017). Why Don’t Trade Preferences Reflect Economic Self-Interest?. International Organization, 71(S1), S85-S108.

 

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