Smith did not invent economics. Joseph Schumpeter observed that “The Wealth of the Nations” did not contain “a single analytic idea, principle or method that was entirely new”. Smith’s achievement was to combine an encyclopaedic variety of insight, information and anecdote, and to distil from it a revolutionary doctrine. The resulting masterpiece is the most influential book about economics ever published. Remarkably, much of it speaks directly to questions that are still of pressing concern.
The pity is that Smith’s great book, like most classics (of 900 pages), is more quoted than read. All sides in today’s debates about economic policy have conspired to peddle a conveniently distorted version of its idea. If his spirit is still monitoring events, it will undoubtedly have celebrated the collapse of communism. But it must also long to meet the politicians who have taken charge of a fine reputation and not so fine profile. And put them right on one or two points.
Today Smith is widely seen as intellectual champion of self-interest. This is a misconception. Smith saw no moral virtue in selfishness; on the contrary he saw its dangers. Still less was he a defender of capital over labour (he talked of the capitalist’s “mean rapacity”), of the rising bourgeoisie over the common folk. His suspicion of self-interest and his regard for the people as a whole come through clearly in one of his best-known remarks: “People of the same trade often meet together, even have merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Far from praising self-interest as a virtue, Smith merely observed it to be a driving economic force. In “The Wealth of Nations” he explained how this potentially destructive impulse is harnessed to the social good. What is to prevent greedy producers raising their prices until their customers can afford to pay no more? The answer is competition. If producers raise their prices too high, they create an opportunity for one or more among them to profit by charging less and thus selling more. In this way competition tames selfishness and regulates prices and quality. At the same time it regulates quantities. If buyers want more bread and less cheese, their demand enables bakers to charge more and obliges cheese-mongers to charge less. Profits in bread-making would rise and profits in cheese-making would fall; effort and capital would move from one task to the other.
Through Smith’s eyes, it is possible to marvel afresh at this fabulously powerful mechanism and to relish, as he did, the paradox of private gain yielding social good. Only more so, for the transactions that deliver a modern manufactured good to its customer are infinitely more complicated than those described by Smith. In his day, remember, the factory was still a novel idea: manufacturing meant pins and coats.
Amodern car is made of raw materials that have been gathered from all over the world, combined into thousands of intermediate products, sub-assembled by scores of separate enterprises. The consumer need know nothing of all this, any more than the worker who tapped the rubber for the tyres knows or cares what its final use will be. Every transaction is voluntary. Self-interest and competition silently process staggering quantities of information and direct the flow of good. Services, capital and labour– just as in Smith’s much simpler world. Far-sighted as he was, he would surely have been impressed. Mind you, modern man has also discovered something else. With great effort and ingenuity, and the systematic denial of personal liberty, governments can supplant self-interest and competition, and replace the invisible hand of market forces with collective endeavour and a visible input-output table. The result is a five-year waiting list for Trabants.
Because Smith was convinced that the market would, literally, deliver the goods, he wanted it, by and large, left alone. He said that governments should confine themselves to three main tasks: defending the people from the “violence and invasion of other independent societies”; protecting every member of society from the “injustice or oppression of every other member of it”; and providing “certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain.” Each of these jobs arises because the market in some ways fails. In the first two cases collective defence and the administration of justice– the failure is the so-called free-rider problem. People disguise what they are willing to pay for a service that must be provided to everybody or not at all; they want to consume it and let others meet the cost. However the third job– the provision of “certain public works and certain public institutions”– goes much wider. Indeed, to modern minds, it threatens to be all encompassing. It recognizes not only the free-rider problem but also other species of market failure notably, the effects of private transactions on third parties, or “externalities”. Smith has in mind roads, public education, and help for the destitute. As it turned out, millions of teachers, nurses, firemen, postmen, rubbish collectors, bus drivers and 57,000 varieties of civil servant have since marched through this opening.
Smith’s thinking already seems to permit a great deal of government intervention. Add some modern economics and the floodgates open. For instance, theorists have shown that if just one price in an economy is different from price under competition, efficiency may require other every price to be somewhat distorted as well. Less government intervention, it seems to follow, cannot be assumed to be better. Competition itself has changed out of recognition. Modern economies, it is said, are driven not by countless small producers, but by handful of giant enterprises and monopolistic trade unions. And the rapid pace of industrial change has made the externality of pollution far more obvious than before. Smith, admittedly, is a bit thin on global warming.
Above all, many have forgotten something that Smith saw clearly: that every advantage granted by government to one part of the economy puts the rest at a disadvantage.
Accordingly, he talked not of “intervention” at a too-neutral word-but of “preference” and “restraint”. Modern governments offer preference as though it costs nothing: the beneficiaries demand it as of right.
But Smith went further than revealing the penalty in every preference. He also understood that ministers, like markets, fail. A great virtue of unfettered competition, he said, was that “the sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient.” Many of the reasons why markets fail are also reasons why governments fail at the same task. If the consumer refuses to reveal his preferences in a market setting, how are governments to discover them? All too often, moreover, government intervention is itself a cause of the market breaking down which becomes the reason for further rounds of intervention, and so on. In Britain think of tax preferences for housing, rent controls, planning, regulations; American think of tax preferences for borrowing, deposit insurance, leverage buy-outs, financial-market regulation. In one crucial respect, Smith’s arguments are even more powerful now than in his day. Naturally, he favoured free trade to prevent market failure: “By means of glasses, hothbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?” Two centuries later, free trade is not just a matter of the cheapest supply; it is also the best way to force producers that might otherwise be near-monopolies to compete. It is perfect folly to complain that today’s big companies render the invisible hand powerless, and to conclude that barriers to trade must go up: trade and competition need each other more than ever before.
Smith was a pragmatist. The principles he expounded on the proper role of government are flexible if anything, too flexible. They are a remainder that imperfect markets are usually cleverer than imperfect governments, but they cannot draw a line to separate good intervention from bad. If governments and voters could be guided by two Smithian precepts, however, the market system that has worked so well would work even better.
First, the competitive clash of self interest against self-interest, however imperfect, has built-in safeguards. Before governments exert their monopoly power to displace it, they must justify themselves. Let the burden of proof always be on them. Second, when preference or restraint are judged to be necessary, use market forces to apply them. Tariffs are better than quotas; taxes are better than bans or direct controls; allocating resources by price (e.g. in health or education) is better than allocating them by fiat, even if the services are then provided “free” (but never forget those inverted commas) to their consumers.
Smith's attitude to the virtues of self-interest can be best described as
Show Hint
- pragmatic
- cynical
- skeptical
- supportive
The Correct Option is A
Solution and Explanation
- He is \textit{not cynical} because he does not view self-interest purely as corrupt or negative.
- He is \textit{not skeptical} because he recognizes the economic utility of self-interest.
- He is \textit{not supportive} in a moral sense because he warns about its dangers.
Thus, his approach balances acknowledgment of its role with a call for competitive regulation, which is pragmatic.
According to Adam Smith
Show Hint
- selfishness is dangerous.
- competition is the result of ’mean rapacity’
- self interest always leads to competition.
- competition regulates quantities.
The Correct Option is D
Solution and Explanation
It prevents producers from excessively raising prices and helps in adjusting quantities and quality according to demand.
He specifically notes that competition also regulates quantities, as shifts in consumer demand reallocate resources between industries.
This makes option (d) correct.
- Option (a) is true in the passage but not the specific answer to 'according to Adam Smith' in this context.
- Option (b) is not his description of competition, rather of capitalist greed.
- Option (c) is partially true but incomplete; competition is more than a result of self-interest.
All of the following are reasons for market failure except:
Show Hint
- The effects of private transactions on third parties.
- People would like to consume goods without paying for them.
- Unfettered and unbridled trade.
- Government intervention.
The Correct Option is C
Solution and Explanation
However, 'unfettered and unbridled trade' is not presented as a cause of market failure—it is actually the competitive mechanism that can correct inefficiencies.
Thus, option (c) is correct as the exception.
Adam Smith is most likely to agree with the statement:
Show Hint
- It is necessary for capital to exploit labour if competition and low prices are to be engendered.
- Businessmen would form cartels given the chance.
- Lesser government intervention is better.
- Collective endeavour could be the basis of economic growth.
The Correct Option is B
Solution and Explanation
Option (b) directly reflects this view.
- Option (a) misrepresents his stance.
- Option (c) is sometimes true but not the main agreement point here.
- Option (d) is contrary to his preference for market mechanisms.
Which of the following situations is not an instance of market failure?
Show Hint
- A government practising apartheid.
- A specialist doctor charging high fees.
- Poor development of roads and railways.
- A murderer going scot-free.
The Correct Option is D
Solution and Explanation
A murderer going scot-free is a failure of the justice system, not the market system.
Thus, (d) is correct as it does not fit the economic definition of market failure.
The 'free rider' problem results in the need for all of the following except
Show Hint
- government laws to prevent crime.
- a national defence budget.
- a national R & D centre for an industry.
- a United Nations peace keeping force.
The Correct Option is A
Solution and Explanation
Government laws to prevent crime do not directly address the free rider issue.
Hence, option (a) is correct as the exception.
Based on the passage, competitions will directly affect all of the following except:
Show Hint
- quantity of a good produced.
- quality of a good produced.
- direction of flow of goods.
- price of goods sold.
The Correct Option is C
Solution and Explanation
The 'direction of flow of goods' is influenced more by demand and supply patterns rather than competition alone.
Thus, (c) is correct as the factor not directly affected by competition.
We can conclude from the passage that:
Show Hint
- government control is often self propagating.
- rulers are prone to delusions.
- governments often fail because markets also fail.
- government actions rarely have justifications.
The Correct Option is A
Solution and Explanation
This matches option (a) as the correct inference from the passage.
Based on the passage, we could say that Adam Smith would not support
Show Hint
- government intervention.
- corporation
- taxes.
- import licences.
The Correct Option is D
Solution and Explanation
Thus, he would not support (d) 'import licences'.
All the following characteristics of the modern world are used as arguments for government intervention except:
Show Hint
- advanced and costly research in basic science.
- the far greater complexity of the modern manufacturing process.
- increased pollution and environmental hazards.
- the pre-eminence of large corporations.
The Correct Option is B
Solution and Explanation
Reasons given include public goods, externalities, and large corporations' power.
Hence, (b) is correct as the exception.
Based on the passage, the following can be inferred, except which of the following?
Show Hint
- Governments must act only when necessary.
- High customs duties are an acceptable way to restrict a change.
- High taxation is better than bans.
- The role of governments must be more flexible.
The Correct Option is B
Solution and Explanation
Thus, (b) is the inference not supported by the passage.
The most serious problem of modern government is that they
Show Hint
- hire too many people.
- offer advantages to groups as if it costs nothing.
- are often unwise in their decisions.
- tax the citizens too much.
The Correct Option is B
Solution and Explanation
Thus, (b) is correct.
Top Questions on Reading Comprehension
- Shown below are letters ‘e’ taken from four popular logos, arranged in a sequence. Which of the options is the correct sequence?
- UCEED - 2026
- English Language Comprehension
- Reading Comprehension
- Shown below are four options, each showing consecutive frames representing the movement of a pendulum of an old-style wall clock for an animation movie. Which is the correct option?
- UCEED - 2026
- English Language Comprehension
- Reading Comprehension
- Acrucial moderating factor in how people experience comparisons is self-esteem. Individuals with high self-esteem are more likely to interpret upward comparison as informative rather than threatening. They are more resilient in the face of others’ success and more likely to believe they can reach their own goals. In contrast, people with low self-esteem are more prone to interpret comparison as judgment, reinforcing negative self-views and triggering feelings of inadequacy.
This dynamic creates a self-reinforcing loop. People with high self-esteem are less vulnerable to upward comparison, which intensifies those doubts. Those with a secure sense of self are more likely to use comparison as a learning tool. The same external stimulus—a colleague’s achievements, a friend’s popularity—can have radically different effects depending on internal stability.
Self-esteem also influences how people choose their comparison targets. Research has found that individuals often engage in “selective comparison,” seeking out those who confirm their existing beliefs about themselves. This can become a subtle form of self-sabotage. Someone who feels unworthy may subconsciously seek out targets that reinforce that sense, perpetuating a narrative of inferiority. One of the most promising antidotes to social comparison is temporal comparison—evaluating oneself not against others, but against one’s own past. This method has been shown to increase motivation and satisfaction, especially when individuals can see concrete progress. Temporal comparison activates the same reward circuits as social comparison but avoids the threat systems associated with social ranking. It also reinforces agency: individuals focus on what they can control and improve rather than what others control. In therapeutic and coaching settings, temporal comparison is used to help clients build self-efficacy and track growth over time.
Moreover, people who focus on self-improvement rather than social dominance are less likely to fall into cycles of envy or self-pity. They can still use others as inspiration, but they do so without attaching their self-worth to the outcome. This is not to say they never compare—but that they focus on learning, rather than judgment. The most skilful approach to comparison may lie in eliminating it, but in reframing it as feedback. When we interpret comparison as information rather than a verdict, we can ask, “What can I learn from this?” This shift turns comparison into a growth tool. Teachers mentor their students, not as rivals. Psychologists emphasize that the key variable here is mindset.
A fixed mindset sees comparison as a threat. If someone else is better, it means we are worse. A growth mindset sees comparison as a map. If someone else has reached a certain level, it means the path exists. This reframing is not just a cognitive trick. It changes the emotional tone of comparison, making it more likely to inspire than to wound. Reframing also requires emotional regulation—the ability to notice an initial pang of envy or shame without reacting impulsively. With practice, individuals can learn to pause, reflect, and reinterpret their emotional responses. Over time, this builds resilience and self-trust, allowing comparison to become a learning tool rather than a cage.- XAT - 2026
- Verbal and Logical Ability
- Reading Comprehension
When people who are talking don’t share the same culture, knowledge, values, and assumptions, mutual understanding can be especially difficult. Such understanding is possible through the negotiation of meaning. To negotiate meaning with someone, you have to become aware of and respect both the differences in your backgrounds and when these differences are important. You need enough diversity of cultural and personal experience to be aware that divergent world views exist and what they might be like. You also need the flexibility in world view, and a generous tolerance for mistakes, as well as a talent for finding the right metaphor to communicate the relevant parts of unshared experiences or to highlight the shared experiences while demphasizing the others. Metaphorical imagination is a crucial skill in creating rapport and in communicating the nature of unshared experience. This skill consists, in large measure, of the ability to bend your world view and adjust the way you categorize your experiences. Problems of mutual understanding are not exotic; they arise in all extended conversations where understanding is important.
When it really counts, meaning is almost never communicated according to the CONDUIT metaphor, that is, where one person transmits a fixed, clear proposition to another by means of expressions in a common language, where both parties have all the relevant common knowledge, assumptions, values, etc. When the chips are down, meaning is negotiated: you slowly figure out what you have in common, what it is safe to talk about, how you can communicate unshared experience or create a shared vision. With enough flexibility in bending your world view and with luck and charity, you may achieve some mutual understanding.
Communication theories based on the CONDUIT metaphor turn from the pathetic to the evil when they are applied indiscriminately on a large scale, say, in government surveillance or computerized files. There, what is most crucial for real understanding is almost never included, and it is assumed that the words in the file have meaning in themselves—disembodied, objective, understandable meaning. When a society lives by the CONDUITmetaphor on a large scale, misunderstanding, persecution, and much worse are the likely products.- XAT - 2026
- Verbal and Logical Ability
- Reading Comprehension
Later, I realized that reviewing the history of nuclear physics served another purpose as well: It gave the lie to the naive belief that the physicists could have come together when nuclear fission was discovered (in Nazi Germany!) and agreed to keep the discovery a secret, thereby sparing humanity such a burden. No. Given the development of nuclear physics up to 1938, development that physicists throughout the world pursued in all innocence of any intention of finding the engine of a new weapon of mass destruction—only one of them, the remarkable Hungarian physicist Leo Szilard, took that possibility seriously—the discovery of nuclear fission was inevitable. To stop it, you would have had to stop physics. If German scientists hadn’t made the discovery when they did, French, American, Russian, Italian, or Danish scientists would have done so, almost certainly within days or weeks. They were all working at the same cutting edge, trying to understand the strange results of a simple experiment bombarding uranium with neutrons. Here was no Faustian bargain, as movie directors and other naifs still find it intellectually challenging to imagine. Here was no evil machinery that the noble scientists might hide from the problems and the generals. To the contrary, there was a high insight into how the world works, an energetic reaction, older than the earth, that science had finally devised the instruments and arrangements to coart forth. “Make it seem inevitable,” Louis Pasteur used to advise his students when they prepared to write up their discoveries. But it was. To wish that it might have been ignored or suppressed is barbarous. “Knowledge,” Niels Bohr once noted, “is itself the basis for civilization.” You cannot have the one without the other; the one depends upon the other. Nor can you have only benevolent knowledge; the scientific method doesn’t filter for benevolence. Knowledge has consequences, not always intended, not always comfortable, but always welcome. The earth revolves around the sun, not the sun around the earth. “It is a profound and necessary truth,” Robert Oppenheimer would say, “that the deep things in science are not found because they are useful; they are found because it was possible to find them.”
...Bohr proposed once that the goal of science is not universal truth. Rather, he argued, the modest but relentless goal of science is “the gradual removal of prejudices.” The discovery that the earth revolves around the sun has gradually removed the prejudice that the earth is the center of the universe. The discovery of microbes is gradually removing the prejudice that disease is a punishment from God. The discovery of evolution is gradually removing the prejudice that Homo sapiens is a separate and special creation.- XAT - 2026
- Verbal and Logical Ability
- Reading Comprehension
Questions Asked in CAT exam
- The passage given below is followed by four summaries. Choose the option that best captures the essence of the passage.
In the dynamic realm of creativity, artists often find themselves at the crossroads between drawing inspiration from diverse cultures and inadvertently crossing into the territory of cultural appropriation. Inspiration is the lifeblood of creativity, driving artists to create works that resonate across borders. In a globalized era of the modern world, artists draw from a vast array of cultural influences. When approached respectfully, inspiration becomes a bridge, fostering understanding and appreciation of cultural diversity. However, the line between inspiration and cultural appropriation can be thin and easily blurred.
Cultural appropriation occurs when elements from a particular culture are borrowed without proper understanding, respect, or acknowledgment. This leads to the commodification of sacred symbols, the reinforcement of stereotypes, and the erasure of the cultural context from which these elements originated. It is essential to recognize that the impact of cultural appropriation extends beyond the realm of artistic expression, influencing societal perceptions and perpetuating power imbalances.- CAT - 2025
- Para Summary
- The number of distinct integers $n$ for which $\log_{\left(\frac14\right)}(n^2 - 7n + 11)>0$ is:
- CAT - 2025
- Linear Inequalities
- In the set of consecutive odd numbers $\{1, 3, 5, \ldots, 57\}$, there is a number $k$ such that the sum of all the elements less than $k$ is equal to the sum of all the elements greater than $k$. Then, $k$ equals?
- CAT - 2025
- Number Systems
- The number of distinct pairs of integers $(x, y)$ satisfying the inequalities $x>y \ge 3$ and $x + y<14$ is:
- CAT - 2025
- Number Systems
For any natural number $k$, let $a_k = 3^k$. The smallest natural number $m$ for which \[ (a_1)^1 \times (a_2)^2 \times \dots \times (a_{20})^{20} \;<\; a_{21} \times a_{22} \times \dots \times a_{20+m} \] is:
- CAT - 2025
- Linear Inequalities