How Far Away is Modern Capitalism from the Original Principles of Adam Smith?

How Far Away is Modern Capitalism from the Original Principles of Adam Smith?

Adam Smith is often referred to as the father of modern economics. There are several ways in which it differs from the original principles outlined by Smith in his influential work, "The Wealth of Nations." The ideas of Adam Smith on capitalism have been influential in shaping the modern economic system. However, over the years, the principles of capitalism have evolved and changed in significant ways.?


One of the key principles of Adam Smith's capitalism was the idea of the "invisible hand," which suggests that if individuals pursue their own self-interest, the market will automatically balance itself out to the benefit of all. However, in modern capitalism, the government often intervenes in the market to correct for market failures and protect consumers.


Another key principle of Adam Smith's capitalism was the idea of free competition, but in the modern world, monopolies and oligopolies have become increasingly common, which can lead to market inefficiencies and reduced competition. Moreover, modern capitalism is characterized by complex financial instruments, global supply chains, and the rise of technology companies, all of which were not present in Smith's time.


The principles outlined by Adam on capitalism have influenced modern economics. However, the present system had changed significantly, and in many ways, deviated from the original ideas put forth by Smith.


Such changes are reflected in the major following points:?

A.???Role of the State: Adam Smith believed that the state should have a limited role in the economy, primarily focused on providing public goods and services such as defense, infrastructure, and the legal system. However, modern capitalism often involves a much larger role for the state, with governments intervening in the market to regulate industries, provide social safety nets, and address externalities such as pollution.

B.????Labor and Wages: Adam Smith believed that wages should be determined by the supply and demand of labor in a free market. However, modern capitalism often involves significant government intervention in labor markets through minimum wage laws, collective bargaining, and other forms of labor regulation.

C.???Corporate Governance: Adam Smith believed that corporations should be subject to market discipline and competition, which would ensure that they act in the interests of their shareholders. However, modern capitalism has seen the rise of large, multinational corporations with significant power and influence over markets, often operating in ways that may not align with shareholder interests.

D.???Income Inequality: While Adam Smith believed that some level of income inequality was natural and necessary for the functioning of a market economy, modern capitalism has seen a significant increase in income inequality, with a small percentage of the population holding a large share of wealth and income.


Therefore, modern capitalism has diverged significantly with greater government intervention in the economy, significant regulation of labor markets, and the rise of powerful multinational corporations contributing to increased income inequality.



Why Did Modern Capitalism Deviate Away from The Principles of Adam Smith?


Modern capitalism has deviated from Adam Smith's principles for many reasons. Such factors include the rise of large corporations, increased government intervention, financialization, and growing income inequality. Here are the key factors:

1.???The Lack of Ethical and Value Guiding Systems:?Modern Capitalism is led and driven by the governing policies, strategies and implemented laws. In secular states, modern capitalism does not feel obliged to follow any religious, ethical, or value systems outside the jurisdiction of the applied laws and regulations. Modern Capitalism will act by and submit to only to the power of the law. However, the complexity of social structure and rapid evolution of technology has caused a significant debate between what is “Legal” and “Ethical”. In their quest for profit, corporations proved that they will cross that borderline between law and ethics whenever possible without any remorse or sense of guilt or social responsibility.

2.???Emergence of large corporations that led to “Monopoly” and “Oligopoly”:??One of the key features of modern capitalism is the emergence of large corporations that dominate industries, leading to monopolies and oligopolies. These large firms can use their market power to stifle competition, manipulate prices, and limit consumer choice. Smith was a strong advocate of competition as a mechanism for regulating markets and preventing abuses of power.

3.????Government intervention:?While Smith believed in limited government intervention in the economy, modern capitalism has seen increased government involvement in regulating markets, providing social services, and managing economic crises. For example, governments often impose tariffs and other trade barriers, regulate industries to protect consumers and the environment, and provide social welfare programs.

4.????Technological advances:?The Industrial Revolution that Smith witnessed in the 18th century was a time of significant technological change, but it pales in comparison to the advances we've seen in recent decades. Today, technology is changing the way we work, communicate, and consume goods and services at an unprecedented pace. This has created new industries and opportunities, but it has also led to new challenges in terms of inequality and job displacement.

5.????Globalization:?Smith's economic ideas were developed in the context of a largely agrarian society. Today, we live in a globalized world where goods, services, and capital flow freely across borders. This has created new opportunities for economic growth, but it has also led to greater competition and disruption in some industries.

6.????Financialization:?In recent decades, the financial sector has become an increasingly important part of the economy, with the growth of financial markets and the increasing use of financial instruments such as derivatives and securitization. This trend has led to a focus on short-term profits and speculation rather than long-term investment in productive assets, which was a central tenet of Smith's ideas.

7.????Political and social factors:?Finally, it's worth noting that political and social factors play a role in shaping the evolution of capitalism. For example, governments have intervened in the economy in a variety of ways, from setting minimum wages to regulating financial markets. Meanwhile, social movements have pushed for greater environmental sustainability, worker protections, and other changes that are sometimes at odds with traditional capitalist principles.

8.????Income inequality:?Another feature of modern capitalism is the growing income inequality, which has been attributed to various factors, including the decline of unions, globalization, and the shift towards a more knowledge-based economy. This inequality has led to calls for greater redistribution of wealth and a more equitable distribution of the benefits of economic growth, which was not a major concern for Smith.


In conclusion, modern capitalism has deviated from some of Adam Smith's principles due to various factors. However, Smith's ideas continue to shape economic thinking and remain influential in many policy debates.


Is Modern Capitalism Ethical?


The short answer to the above question is “No”. Modern capitalism as an economic system emphasizes private ownership, free markets, and the pursuit of profit. While when many people view capitalism as an efficient system that promotes innovation and economic growth, others will criticize it for its negative impact on society and the environment. However, there are genuine and serious ethical concerns with modern capitalism.


One of the ethical concerns surrounding modern capitalism is income inequality. Capitalism rewards individuals and companies that are successful, which can result in significant wealth accumulation for a small percentage of the population while leaving others behind. This can lead to social unrest, as well as a lack of access to basic needs such as healthcare, education, and affordable housing for those at the bottom of the economic ladder.


Another ethical concern is the impact of capitalism is the exhaustive exploitation of resources and its negative impact on the environment. The pursuit of profit has led companies to engage in vast exhaustion of natural resources and environmentally harmful practices. Such overconsumption of natural resources, pollution, and greenhouse gas emissions caused global warming and climate change. The long-term consequences are now irreversible for the planet and the health and wellbeing of both humans and other living beings on Earth.


Some argue that capitalism, when coupled with regulation and social responsibility, can be a force for positive change and growth. Others argue for alternative economic models that prioritize social and environmental well-being over profit. Ultimately, the ethical system of modern capitalism is an ongoing debate that involves economic, social, and environmental factors.

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