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Self-Interest In Adam Smith: The Father Of Economics

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The father of economics Adam Smith in his famous book “An Inquiry into the Nature and Causes of the Wealth of Nations” emphasizes that self-interest is the driving force behind economic activity. Though, self-interest per se has negative connotations, these forces are balanced by the competitive forces arising out of the market. Therefore, while self-interest is the motivator behind economic activity, competition is the de-facto driver of the economy. These forces of self-interest and competition are defined by Adam Smith as the invisible hands which guide the resources towards their most efficient use. When India adopted the new economic order in the early 1990s, it empowered the invisible hands of the market and ensured economic freedom for enterprises. It is also true that markets are capable of generating their own rules which may ultimately lead to market failures. Moreover, freedom of choice and human rationality doesn’t always result in behaviour consistent with what was advocated by the free market theorists. One of such behaviours is that the economic enterprises themselves can impede upon the freedom of others. Such anti-competitive practices have a negative impact on GDP and a severe impact on consumer welfare. …show more content…

Competition has an importance role to play in this. It has always been evident that industries which have greater competition experience higher productivity growth. It can be seen that competition leads to an increase in the allocative efficiency of the firms by make the entry of new efficient firms in the market easy, on the expense of the less efficient firms (exiting the market). Competition in the market will also lead to innovation. The firms which are rivals to each other will try to improve their market share by introducing different types of products, which will be a work of

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