Smith analyzeDiscussion Essay 2: Adam Smith During his time as a moral philosopher Adam Smith coined the phrase “mercantile system”. He used the term to describe the new economic system based on the merchant trade using gold and silver. Trudy Mercadal describes mercantile as a “term to refer to an economic policy designed to enrich a nation by increasing exports and decreasing imports...” which “...sought to create a beneficial balance of trade with two purposes: attracting commodities like gold and silver and increasing domestic employment” (Mercadal). Adam Smith refuted this system and encouraged a free-market with minimal government intervention, unlike the mercantile system which favored the merchants through laws passed to protect them.
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While he did not want government to regulate the economy, he believed government had certain duties to the people, “He recognizes three duties of the state according to his system of natural liberty: defense against foreign states, protection of every citizen against every other citizen, and the building and maintenance of public works and institutions that are advantageous to society but unprofitable as public investments” (Mercadal). This affected the founding fathers who believed that these were the main roles of government. Many of the Founding Fathers agreed with Smith 's economic analysis in his books (Marotta). This in turn, affected the whole of the United States political economy, even though there have been many changes as the nation …show more content…
Smith could not understand the diamond/ water paradox. Michael White phrases the question as such; “Why is it that “water, which has so much value in use, has no value in exchange, while diamonds, which have practically no value in use, are exchanged at high prices” (659). Essentially, the question asks why are necessary items prices sold at lower rates while luxury items are expensive. Adam Smith could not answer this question but the Austrian School of Economics found the answer by creating what they called diminishing marginal utility. McGlasson defines this as, “each unit consumed yields less and less happiness or [utility]”. In the case of the diamonds and water, the consumer requires water but with each unit of water given there is less and less utility of water. With more water there is less utility, in which case a consumer will trade “gallons of water” for a diamond. Thus, it is not moral question but instead an understanding of human
While he did not want government to regulate the economy, he believed government had certain duties to the people, “He recognizes three duties of the state according to his system of natural liberty: defense against foreign states, protection of every citizen against every other citizen, and the building and maintenance of public works and institutions that are advantageous to society but unprofitable as public investments” (Mercadal). This affected the founding fathers who believed that these were the main roles of government. Many of the Founding Fathers agreed with Smith 's economic analysis in his books (Marotta). This in turn, affected the whole of the United States political economy, even though there have been many changes as the nation …show more content…
Smith could not understand the diamond/ water paradox. Michael White phrases the question as such; “Why is it that “water, which has so much value in use, has no value in exchange, while diamonds, which have practically no value in use, are exchanged at high prices” (659). Essentially, the question asks why are necessary items prices sold at lower rates while luxury items are expensive. Adam Smith could not answer this question but the Austrian School of Economics found the answer by creating what they called diminishing marginal utility. McGlasson defines this as, “each unit consumed yields less and less happiness or [utility]”. In the case of the diamonds and water, the consumer requires water but with each unit of water given there is less and less utility of water. With more water there is less utility, in which case a consumer will trade “gallons of water” for a diamond. Thus, it is not moral question but instead an understanding of human