System of Natural Freedom

Historical and Normative Foundations of Economics

Natalia Mukhariamova, GSEFM, Frankfurt am Main

Matriculation Number: 6225423

Abstract

This paper provides a general vision of ´ System of natural freedom´ introduced by Adam Smith and explains why this principle is still in the spotlight of economic analysis. Also, we will make an attempt to relate Smith’s contribution to the state of contemporary economics, showing both the similarities and contrasts between the respective approaches.

Main Ideas of System of Natural Freedom

Adam Smith is mostly known for his great work The Wealth of Nations and the concept of ‘the invisible hand’, when individual’s self-interest gets a better and more efficient allocation of resources than the Estate (setting aside some punctual markets failures). Nevertheless, Smith’s vision of competence differs greatly from modern one in considering the man’s intrinsically sociable and virtuous nature encapsulated in the concept of empathy. Society would benefit when human behavior is driven by the virtues of justice, prudence and benevolence, the three main pillars of the system of natural liberty. This holistic vision has been reduced to the single Self-interest driven force by mainstream economics. Common interpretation of invisible hand underlines that “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect or dinner, but from their regard to their own interest”; Nevertheless, if the butcher, the brewer or the baker behave dishonestly and cheats their customers the system will not survive. No one could trust in anyone and social life would become a permanent struggle. Adam Smith’s comprehensive vision of the social universe could be better grasp if we approach from a Newtonian-mechanical point of view and states the “self-interestsocially-understood” –self-interest shaped by the relations with others and the virtuous behaviour- as the gravitational force of the system of natural liberty, the system which Smith identified as the most perfect.

He tried to show that Smith a system with free markets, where exists no monopolies, no patents and no guilds would not lead to anarchy and chaos, but to a system of Natural Freedom and Liberty. Given the „right moral sentiments“ and a legal framework markets would create a system of Natural Prices.

Impartial spectator and the principle of sympathy Sympathy: to put oneself in the position of someone Market and Natural Prices • Given that natural prices are ruling every participant in the market can reproduce himself • “The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price.” (WN, ch.7, p.73) • “The natural price, therefore, is, …, the central price to which the prices of all commodities are continually gravitating.” (p. 75) Market and Natural Prices • Natural prices have the same properties as “Just Prices“, however, we hold back or we simply have forgotten this normative aspect • It should be clear and almost self-evident, that profits accruing at natural prices are also “Just Profits” à Natural Profits, Natural Wages, Natural Rent

J.A. Shumpeter (1954) gave an overview of system of natural liberty introduced by Adam Smith. By this principle Smith meant both a canon of policy—the removal of all restraints except those imposed by ‘justice’—and the analytic proposition that free interaction of individuals produces not chaos but an orderly pattern that is logically determined: he never distinguished the two quite clearly. Taken in either sense, however, the principle had been quite clearly enunciated before, for example, by Grotius and Pufendorf. It is precisely for this reason that no charge of plagiarism can be made either against Smith or on his behalf against others. This does not exclude the possibility of course that, in stating it with greater force and fullness than anyone before him, Smith experienced subjectively all the thrill of discovery or even that, some time before 1749, he actually made the ‘discovery’ himself. 179, History of Economic Thought: An overview Schumpeter, J. A. (1954); History of Economic Analysis, London: Routledge.