Adam Smith

The father of economics

Adam Smith (June 5 (OS) or June 16 (NS) 1723 (baptised) – July 17, 1790) was a Scottish moral philosopher and a pioneering political economist. One of the key figures of the intellectual movement known as the Scottish Enlightenment, he is known primarily as the author of two treatises: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Smith is also known for his explanation of how rational self-interest and competition can lead to economic well-being and prosperity. His work also helped to create the modern academic discipline of economics and provided one of the best-known rationales for free trade and capitalism. He is widely acknowledged as the father of economics.

Adam Smith's The Wealth of Nations discusses the optimal organization of a pin factory; this becomes the most famous and influential statement of the economic rationale of the factory system and the division of labor.

Biography of Adam Smith

Smith was a son of the controller of the customs at Kirkcaldy, Fife, Scotland. The exact date of Smith's birth is unknown, but he was baptized at Kirkcaldy on June 5, 1723, his father having died some six months previously. At around the age of 4, he was kidnapped by a band of Gypsies, but he was quickly rescued by his uncle and returned to his mother. Smith's biographer, John Rae, commented "wryly" that he feared Smith would have made "a poor Gypsy". There is no record of Smith having any siblings.

Education of Adam Smith

At the age of fourteen, Smith entered the University of Glasgow , where he studied moral philosophy under "the never-to-be-forgotten " (as Smith called him) Francis Hutcheson. Here Smith developed his strong passion for liberty, reason, and free speech. In 1740 he was awarded the Snell Exhibition and entered Balliol College, Oxford, but as William Robert Scott has said, "the Oxford of his time gave little if any help towards what was to be his lifework," and he left the university in 1746. In Book V of The Wealth of Nations, Smith comments on the low quality of instruction and the meager intellectual activity at English universities when compared to their Scottish counterparts. He attributed this both to the rich endowments of the colleges at Oxford and Cambridge, which made the income of professors independent of their ability to attract students, and to the fact that distinguished men of letters could make an even more comfortable living as ministers of the Church of England.

Career in Edinburgh and Glasgow

In 1748 Smith began delivering public lectures in Edinburgh under the patronage of the Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of "the progress of opulence," and it was then, in his middle or late 20s, that he first expounded the economic philosophy of "the obvious and simple system of natural liberty" which he was later to proclaim to the world in his Wealth of Nations. In about 1750 he met the philosopher David Hume, who was his senior by over a decade. The alignments of opinion that can be found within the details of their respective writings covering history, politics, philosophy, economics, and religion indicate that they both shared a closer intellectual alliance and friendship than with the others who were to play important roles during the emergence of what has come to be known as the Scottish Enlightenment; he frequented The Poker Club of Edinburgh.

In 1751 Smith was appointed chair of logic at the University of Glasgow, transferring in 1752 to the Chair of Moral Philosophy, once occupied by his famous teacher, Francis Hutcheson. His lectures covered the fields of ethics, rhetoric, jurisprudence, political economy, and "police and revenue". In 1759 he published his The Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work, which established Smith's reputation in his day, was concerned with how human communication depends on sympathy between agent and spectator (that is, the individual and other members of society). His analysis of language evolution was somewhat superficial, as shown only 14 years later by a more rigorous examination of primitive language evolution by Lord Monboddo in his Of the Origin and Progress of Language. Smith's capacity for fluent, persuasive, if rather rhetorical argument, is much in evidence. He bases his explanation not, as the third Lord Shaftesbury and Hutcheson had done, on a special "moral sense"; nor, as Hume did, on utility; but on sympathy.

Smith now began to give more attention to jurisprudence and economics in his lecture and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by Edwin Cannan, and from what Scott, its discoverer and publisher, describes as "An Early Draft of Part of The Wealth of Nations", which he dates about 1763. Cannan's work appeared as Lectures on Justice, Police, Revenue and Arms. A fuller version was published as Lectures on Jurisprudence in the Glasgow Edition of 1776.

Tour of France

In 1762 the academic senate of the University of Glasgow conferred on Smith the title of Doctor of laws (LL.D.). At the end of 1763, he obtained a lucrative offer from Charles Townshend (who had been introduced to Smith by David Hume), to tutor his stepson, the young Duke of Buccleuch. Smith subsequently resigned from his professorship and from 1764-66 traveled with his pupil, mostly in France, where he came to know intellectual leaders such as Voltaire, Turgot, Jean D'Alembert, André Morellet, Helvétius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he respected greatly. On returning home to Kirkcaldy, Smith was elected fellow of the Royal Society of London and he devoted much of the next ten years to his magnum opus, The Wealth of Nations, which appeared in 1776. The book was very well received and made its author famous.

Later years of Adam Smith

In 1778 Smith was appointed to a post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. In 1783 he became one of the founding members of the Royal Society of Edinburgh and from 1787 to 1789 he occupied the honorary position of Lord Rector of the University of Glasgow. He died in Edinburgh on July 17, 1790, after a painful illness and was buried in the Canongate Kirkyard.

Smith's literary executors were two old friends from the Scottish academic world; the physicist and chemist Joseph Black, and the pioneering geologist James Hutton. Smith left behind many notes and some unpublished material, but gave instructions to destroy anything that was not fit for publication. He mentioned an early unpublished History of Astronomy as probably suitable, and it duly appeared in 1795, along with other material, as Essays on Philosophical Subjects. Contemporary followers of Adam Smith include John Millar.

Personal character and views of Adam Smith

Not much is known about Smith's personal views beyond what can be deduced from his published works. All of his personal papers were destroyed after his death. He never married and seems to have maintained a close relationship with his mother, with whom he lived after his return from France and who predeceased him by only six years. Contemporary accounts describe Smith as an eccentric but benevolent intellectual, comically absent minded, with peculiar habits of speech and gait and a smile of "inexpressible benignity." His patience and tact are said to have been valuable to his work as a university administrator at Glasgow. After his death it was discovered that much of his income had been devoted to secret acts of charity.

There has been considerable scholarly debate about the nature of Adam Smith's religious views. Smith's father had a strong interest in Christianity and belonged to the moderate wing of the Church of Scotland (the national church of Scotland since 1690). Smith may have gone to England with the intention of a career in the Church of England: this is controversial and depends on the status of the Snell Exhibition. At Oxford, Smith rejected Christianity and it is generally believed that he returned to Scotland as a Deist.

Economist Ronald Coase, however, has challenged the view that Smith was a Deist, stating that, whilst Smith may have referred to the "Great Architect of the Universe", other scholars have "very much exaggerated the extent to which Adam Smith was committed to a belief in a personal God". He based this on analysis of a remark in The Wealth of Nations where Smith writes that the curiosity of mankind about the "great phenomena of nature" such as "the generation, the life, growth and dissolution of plants and animals" has led men to "enquire into their causes". Coase notes Smith's observation that: "Superstition first attempted to satisfy this curiosity, by referring all those wonderful appearances to the immediate agency of the gods." Smith's close friend and colleague David Hume, with whom he agreed on most matters, is usually described as an Atheist, rather than a Deist.

Works of Adam Smith

Shortly before his death, Smith had nearly all his manuscripts destroyed. In his last years he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise.

Wealth of Nations

The Wealth of Nations was Smith's most influential work, and is considered to be very important in the creation of the field of economics and its development into an autonomous systematic discipline. In the Western world, it is considered one of the most influential books on the subject ever published. The work is also the first comprehensive defense of free market policies. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the American War of Independence. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come.

The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was paramount, and that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. But if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. However, Smith also concluded that excessive division of labor would negatively affect worker's intellect through the carrying out of monotonous and repetetive tasks and hence he called for the establishment of a public education system.

Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics. Both Modern economics and, separately, Marxian economics owe significantly to classical economics. Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages"—that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.

One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand". The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price".

Even as profits are zeroed out at the "natural price", there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfishness and greed, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies.

Smith vigorously attacked the antiquated government restrictions which he thought were hindering industrial expansion. In fact, he attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. It is believed that this theory influenced government legislation in later years, especially during the 19th century. (However this was not an anarchistic opposition to government. Smith advocated a Government that was active in sectors other than the economy: he advocated public education of poor adults; institutional systems that were not profitable for private industries; a judiciary; and a standing army.)

Two of the most famous and often-quoted passages in The Wealth of Nations are:

"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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

"As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

Another favorite quote, usually recited by economists, also from The Wealth of Nations is:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

Smith postulated four "maxims" of taxation: proportionality, transparency, convenience and efficiency. Smith is credited by economists as one of the first to advocate a progressive tax. Smith wrote, "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more in proportion." In another quote he supported taxation in proportion to the revenue (income) of the individual:

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."

The "Adam Smith-Problem"

In the Wealth of Nations Smith claims that self-interest alone (in a proper institutional setting) can lead to socially beneficial results. But in his Theory of Moral Sentiments Smith argues that sympathy is required to achieve socially beneficial results. On the surface it appears that a contradiction exists. Economist August Oncken referred to this as 'the Adam-Smith-Problem'. Austrian economist Joseph Schumpeter also emphasized this apparent contradiction in his commentary on Smith's work.

Adam Smith himself cannot have seen any contradiction, since he produced a revised edition of Moral Sentiments after the publication of Wealth of Nations. Both sets of ideas are to be found in his Lectures on Jurisprudence. In recent years most students of Adam Smith's work have argued that no contradiction exists. In the Theory of Moral Sentiments, Smith develops a theory of psychology in which individuals in society find it in their self-interest to develop sympathy as they seek approval of what he calls the "impartial spectator." The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.

Some readers of The Wealth of Nations have assumed that when Smith speaks of "self-interest" he is referring to selfishness. Although in some contexts, such as buying and selling, sympathy generally need not be considered, Smith makes it clear that he regards selfishness as inappropriate, if not immoral, and that the self-interested actor has sympathy for others. In The Theory of Moral Sentiments Smith argues that the self-interest of any actor includes the interest of the rest of society, since the socially-defined notions of appropriate and inappropriate actions necessarily affect the interests of the individual as a member of society. Context is also useful as Adam Smith was against the idea of corporations, or "joint stock companies."

In any case, Adam Smith apparently believed that moral sentiments and self-interest would always add up to the same thing. One possible line of reasoning he might have employed in reaching this conclusion is as follows: the invisible hand cannot operate if there is no society, for precluding a societal construct precludes division of labor, and thus, the efficiency which comes with its manifestation. Now for society to exist, justice is a necessary condition (as pointed out in Smith's Theory of Moral Sentiments). For justice to exist in any social setting, individuals must harbor the passions of gratitude and resentment governed by a sense of 'merit' and 'demerit' (again from Smith's Theory of Moral Sentiments). And finally, as Smith himself would have so vehemently argued, the sense of 'merit' and 'demerit' is almost exclusively engendered by human sympathy. In conclusion, the invisible hand of the market is, at some level, contingent upon the ability of humans to sympathize: Smith's self-interest is indeed in consonance with the notion of sympathy.

Influence of Adam Smith

The Wealth of Nations, one of the earliest attempts to study the rise of industry and commercial development in Europe, was a precursor to the modern academic discipline of economics. It provided one of the best-known intellectual rationales for free trade and capitalism, greatly influencing the writings of later economists. David Ricardo and Karl Marx were influenced by economic theories of Adam Smith. Smith was ranked #30 in Michael H. Hart's list of the most influential figures in history.

From 13 March 2007 onwards Smith's portrait appeared in the UK on new £20 notes. He is the first Scotsman to feature on a currency issued by the Bank of England. A picture of the note is available on the Bank of England website. However, many actors in academia and in the real world have and are acknowledging that they or others have misinterpreted the works of Adam Smith, with some arguing that Adam Smith's legacy has been "lost".

In a journal article, "The Rise of Adam Smith: Articles and Citations, 1970-1997", economist Jonathan B. Wight reports that only two articles on Adam Smith or his works were published the year before 1971. In 2002 Wight, the author of this paper and of other books and articles on Adam Smith and his works, reports that six hundred articles and thirty books were published in the twenty seven years between 1970 and 1997. A heightened interest in Adam Smith and his works has been sustained. And, this trend Wight writes is more than a "speculative bubble" in a 2004 conference paper titled "Is There a Speculative Bubble in Scholarship on Adam Smith?", presented at the Eleventh World Congress of Social Economics, Albertville, France.

The bicentennial anniversary of the publication of the Wealth of Nations was celebrated in 1976. Results of this celebration has been increased interest in Smith's first book, The Theory of Moral Sentiments, and in his other works, throughout academia. This heightened interest in his book on moral philosophy has also been sustained. Or, as some say, in 1976 there was a break with the earlier emphasis on an Adam Smith problem. After 1976 Adam Smith was more likely to be represented as the author of both the Wealth of Nations and The Theory of Moral Sentiments and thereby as the founder of a moral philosophy and the science of economics. His "economic man" or actor was also more often represented as a moral person. Finally, also pointed to was his opposition to slavery, colonialism, and empire or his statements about high wages for the poor, his views that a common street porter was not intellectually inferior to a philosopher (Levy,Peart). And, more than one author refer to a need to recover "Adam Smith's lost legacy" (Kennedy, West).

In line with such trends, on January 24, 2008 Bill Gates said the following at the world economic forum in Davos Switzerland "Adam Smith, the very father of capitalism and the author of “Wealth of Nations,” who believed strongly in the value of self-interest for society, opened his first book with the following lines: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

Expressing his interest in reducing poverty in 2008, he spoke about a "creative" rather than an "unfettered" or laissez faire, capitalism. "Creative capitalism takes this interest in the fortunes of others and ties it to our interest in our own fortunes in ways that help advance both. This hybrid engine of self-interest and concern for others can serve a much wider circle of people than can be reached by self-interest or caring alone." Nearly two years before, Gates' interest in Adam Smith was also evident. On June 25, 2006, Gates presented a copy of Adam Smith's Wealth of Nations to Warren Buffett after Buffett announced that he would donate his wealth to The Bill and Melinda Gates Foundation,.

There, in addition, has been a controversy over the extent of Smith's originality in The Wealth of Nations. Some argue that the work added only modestly to the already established ideas of thinkers such as Anders Chydenius (The National Gain 1765), David Hume and the Baron de Montesquieu. Indeed, many of the theories Smith set out simply described historical trends away from mercantilism and towards free trade that had been developing for many decades and had already had significant influence on governmental policy. Nevertheless, Smith's work organized their ideas comprehensively, and so remains one of the most influential and important books in the field today.

Herbert Stein, in a frequently-quoted article, "Adam Smith did not wear an Adam Smith necktie," wrote that the people who wear the Adam Smith tie do it "to make a statement of their devotion to the idea of free markets and limited government. What stands out in the Wealth of Nations, however, is that their patron saint was not pure or doctrinaire about this idea. He viewed government intervention in the market with great skepticism. He regarded his exposition of the virtues of the free market as his main contribution to policy, and the purpose for which his economic analysis was developed.

"Yet he was prepared to accept or propose qualifications to that policy in the specific cases where he judged that their net effect would be beneficial and would not undermine the basically free character of the system," wrote Stein. "He did not wear the Adam Smith necktie." In Stein's reading, The Wealth of Nations could justify the Food and Drug Administration, The Consumer Product Safety Commission, mandatory employer health benefits, environmentalism, and "discriminatory taxation to deter improper or luxurious behavior."

Interpreting Adam Smith

Vivienne Brown has alleged that in the 20th century USA, Reaganomics supporters, The Wall Street Journal and other similar sources, have spread among the general public, a partial and misleading vision of Adam Smith, portrayed as an "extreme dogmatic defender of laissez-faire capitalism and supply-side economics".

According to Brown and Pack, Smith's position was very close to what is currently perceived in the USA as a "liberal democrat,". In The Wealth of Nations Smith advocates government economic intervention with the allocation of many economic functions, they say. In this analysis, Smith instead attacked the corrupted favoritism made by the governments in favor of the rich and powerful and against the poor.

Matthew Watson has proposed what he sees as the true meaning of Smith works, espcially with regards to the phrase "Invisible Hand". (Watson, M, 2005, Foundations of International Political Economy,Basingtoke: Palgrave, pp.100-119)

Major works of Adam Smith

The Theory of Moral Sentiments (1759)
An Inquiry Into the Nature and Causes of the Wealth of Nations (1776)
Essays on Philosophical Subjects (published posthumously 1795)
Lectures on Jurisprudence (published posthumously 1776)
Lectures on Rhetoric and Belles Lettres

References

http://en.wikipedia.org/wiki/Adam_Smith

Classics of Organization Theory, Shafritz, J.M. and Ott J.S.