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Daily Archives: June 6, 2016

Adam Smith’s Vision and A Prosperous Nepal

More than two centuries ago, a Scottish economist and moral philosopher Adam Smith born today, seeded the vision of a prosperous nation that becomes contextual in the case of today’s Nepal. In his book, “An Enquiry into the Cause and Consequences of the Wealth of Nation” he writes, “the wealth of the nation is fundamentally the productive labour of its people. “

He points out that it is not the wealth of the government or it’s spending capacity but the productivity of its labour that is the wealth of the country.

Nepalese government recently passed a budget roughly 50% of our Gross Domestic Product(GDP). It shows a huge involvement of government in economic planning. With more involvement of government in an economy, simultaneously the government expenditure and its power increases. When powerful government, and a central planning together try to direct the actions of people, in all probability they will work in their own self interest rather than the people’s. Even if they work for people’s interest, it will be increasingly difficult to cater to all sentiments because different people in society are guided by their own principles and interest.

Free Market Vision

Abiding by this logic, Adam Smith introduced the idea of “Free Market”, which in its inception was visionary. It was the framework in which the industrial revolution proliferated. The modern industrialised countries are the beneficiaries of Adam Smith’s idea.

In a free market economy, buyers and seller trade to meet their self interest. For example, X needs shoes but it can only make breads, while Y needs bread and can only make shoes.  When they trade, both the parties benefit by sufficing their self interest. It further incentivizes X and Y to be more productive and increase their returns by making more shoes or breads. This increase in productivity in turn increase the wealth of the nation.

However, when a government plans that one cannot trade shoes with bread, or gives selective advantage by taxation or subsidies to some other good, this trade might not occur. As such, the needs of X and Y are not fulfilled which negatively affects their productivity.

Similarly, there could be other instances where self-interested parties can become creative in meeting their needs by becoming more productive and innovative. The market can be conducive to changes in demand if people are left to their self-interest.

While moving forward, Nepal cannot expect a economic transformation solely through economic planning, because in many cases such planning are in direct conflict with the self interest of the people. As Adam Smith conceives, “things do not have to be planned to be orderly”, similarly, we don’t always require central planning of the economy for the economy to be prosperous. Rather if the people are left to pursue their self-interest, they become more productive, ultimately increasing the wealth of the nation.

Limited Government

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Through this quote, Adam Smith articulates that since private actors in market are not driven by benevolence, they are likely to collude and try to get undue influences from government. Even in his lifetime Adam Smith had seen the East India Company grow in its might as a monopoly and a quasi-government entity.  For Adam Smith it was against the spirit of free-market when the government and the private enterprise colluded with each other for their selfish motives.

Even in Nepal, the syndicates and the private enterprises collude with government in bringing policies that  safeguard the interest of these entities and chase away the prospective competitors. Transport syndicates are one example of it.

As the example suggest, this undue influence would not be possible if the government in itself was limited in its power to change the dynamics of free market.

Written by: Niranjan Prakash Niroula and Sovit Subedi 

Sovit Subedi

About Sovit Subedi

Sovit Subedi is a research intern at Samriddhi. He graduated from University of Pune with a Bachelors Degree in Economics. His interests are in entrepreneurship, strategy and development.

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