ADAM SMITH (1723-1790)
With the book The Wealth of Nations, Adam Smith established himself as a
leading source of economic thought. The Adam Smith school was continued through
works published by David Ricardo and Karl Marx in the 19th century, and by John
Maynard Keynes and Milton Friedman in the 20th century.
Adam Smith was born in a small village in Kirkcaldy, Scotland, where his
widowed mother raised him. At the age of 14, as usual, Smith entered the University
of Glasgow on a scholarship. He then attended Balliol College in Oxford, graduating
with extensive knowledge of European literature and the enduring contempt for
Smith's English school back home, and after delivering a series of well-received
lectures, first chair of logic (1751), then chairman of moral philosophy (1752), at the
University of Glasgow.
He left academia in 1764 to become a tutor of the young nobleman Buccleuch.
For more than two years they traveled throughout France and Switzerland, the
experience brought Smith into contact with his contemporaries Voltaire, Jean-Jacques
Rousseau, François Quesnay, and Anne-Robert-Jacques Turgot. With a lifetime
pension in the service of the nobility, Smith retired back to his birthplace of Kirkcaldy
to write The Wealth of Nations. The book was published in 1776, the same year that
the American Declaration of Independence was signed and in that year his close friend
David Hume died. In 1778 Smith was appointed commissioner in customs. In this job,
he helped enforce the law against smuggling. In the book The Wealth of Nations, he
once defended smuggling as a legitimate activity in the face of "unnatural" regulations.
Adam Smith has never been married. He died in Edinburgh on 19 July 1790.
Today the "reputation of Smith" lies in the explanation of how rational interests in
a free market economy lead to economic well-being. This may come as a surprise to
those who doubt Smith as an individualistic and ruthless advocate, his first major work
concentrating on ethics and charity. In fact, while chairs at the University of Glasgow,
Smith's lecture subjects, in order of choice, were theology, ethics, jurisprudence, and
economics, according to John Millar, Smith's pupil at the time. In his book The Theory
of Moral Sentiments, Smith wrote: "Remember how selfish man may be, it turns out
that there are some principles in his nature that are interested in the fate of others and
give their happiness necessary to him even if he derives nothing from it except
pleasure in seeing him."
Today the "reputation of Smith" lies in the explanation of how rational interests in
a free market economy lead to economic well-being. This may come as a surprise to
those who doubt Smith as an individualistic and ruthless advocate, his first major work
concentrating on ethics and charity. In fact, while chairs at the University of Glasgow,
Smith's lecture subjects, in order of choice, were theology, ethics, jurisprudence, and
economics, according to John Millar, Smith's pupil at the time. In his book The Theory
of Moral Sentiments, Smith wrote: "Remember how selfish man may be, it turns out
that there are some principles in his nature that are interested in the fate of others and
give their happiness necessary to him even if he derives nothing from it except
pleasure in seeing him."
At the same time, Smith has a benign view of self-interest. He refutes the view
that self-love "is a principle that can never be godly at any level." Smith argued that
life would be difficult if we "affection, which, by the very nature of our being, should
often influence our behavior, be it after an opportunity to appear righteous, or worthy
of self-esteem and praise from anyone." For Smith sympathy and interests are not
conflicting; They complement each other. "Man had an almost constant opportunity for
the help of his brothers, and it was in vain for him to expect from their virtues alone,"
he explained in his book The Wealth of Nations.
Charity, while a pious act, can not alone provide vital to life. Interest is a
mechanism that can correct these shortcomings. Smith said: "It is not of the virtues of
the butcher, the brewer, or the baker, that we can expect us to have dinner, but of their
own sake." A person earns money with his own work of his own benefits. Unknowingly,
it is also beneficial to society, because in order to earn income from labor in a
competitive market, it must generate value for something else. In Adam Smith's
enduring image, "By directing an industry in which such a product can be of the
greatest value, he intends only his own profits, and he in this case, as in many other
cases, is led by an invisible hand to promote an end that is not part of his intentions."
The fifth book series The Wealth of Nations seeks to reveal the nature and
causes of a nation's prosperity. The main cause of prosperity, Smith argues, is an
increase in the division of labor. Smith gave a famous example of pins. He asserted
that ten workers could make 48,000 pins per day if every eighteen special tasks were
assigned to a specific worker. Average productivity: 4,800 pins per worker per day. But
absent the division of labor, workers will be lucky to earn even one pin per day.
Only how the best individuals can apply their own work or other resources is the
main subject in the first book of the series. Smith claims that an individual will invest
resources, for example, land or labor, so as to get the highest probability of return on
it. As a result, all resource use must result in the same level again (adjusted for the
relative risk of each company). Otherwise, the reallocation will result. This idea, writes
George Stigler, is a major proposition of economic theory. Not surprisingly, and
consistent with other Stigler claims that the originators of ideas in economics almost
never get credit, Smith's idea is not original. the French economy of Turgot had made
a similar point in 1766.
Smith used this insight into return equity to explain why wage rates differ. Wage
rates would be higher, he argued, for trades that are harder to learn, because people
would be unwilling to learn them if they were not compensated by higher wages. His
mind gave rise to the modern idea of human capital (see Human Capital). Similarly,
wage rates will also be higher for those involved in dirty or unsafe work (see
Occupational Safety), such as coal mining and slaughtering, and for those, such as
executioners, who do unclean work. In short, the difference in work that is
compensated by the difference in salary. Modern economists call Smith insight into
the theory of compensation for wage differences.
Smith used computational economics not only to explain pin production or the
difference in wages between butchers and hangmen, but to address some of the most
pressing political issues of the day. In the fourth book of The Wealth of Nations
published, recall, in 1776—Smith told Britain that its American colonies were not worth
the cost of keeping. His reasoning about the excessively high costs of British
imperialism is worth repeating, both to show Smith at his best calculations, and to
show that a decidedly simple economy can lead to radical conclusions:
A great empire has been established for the sole purpose of awakening the
nation of customers who are obliged to buy from the shops of our different
manufacturers all the goods with this one could supply them. For the sake of a small
increase in the price which this monopoly may be able to afford our producers, the
consumer-house has been burdened with the whole cost of maintaining and defending
the empire. For this purpose, and for this purpose alone, in the last two wars, more
than one hundred and seventy million have been contracted over and above all that
has been spent for the same purpose in the former war. The interest on this debt alone
is not only greater than the overall extraordinary profit, which, one could pretend, to
make by the monopoly of the colony's trade, but of the whole value of that trade, or of
the whole value of the goods, which on average has been exported to the colony for
a year.
Smith strongly opposed mercantilism—the artificial practice of maintaining a
trade surplus on the erroneous belief that doing so increased wealth. The main
advantage of trade, he argues, is that it opens up new markets for surplus goods and
also provides some commodities at a cost less than at home. With that, Smith
launched a succession of free trade economists and paved the way for David Ricardo
and John Stuart Mill's theories of comparative advantage of later generations.
Adam Smith is sometimes caricatured as someone who sees no role for
government in economic life. In fact, he believes that the government has an important
role. Like most modern believers in the free market, Smith believed that governments
should enforce contracts and patents, grants and copyrights to encourage new
inventions and ideas. He also thinks that the government should provide public works,
such as roads and bridges, which, he assumes, will be useless for individuals to
provide. Interestingly, though, he wants users of such public works to pay in proportion
to their use.
Many people believe that Smith favors customs exchange. Customs exchange
is a form of levy, for example, the government of country A imports from country B in
exchange for customs duties imposed by the government of country B that have
imported from country A. Indeed, Smith thinks they may be justified, but he is hesitant.
He argued that causing additional harm to a citizen is a price to be paid that is unlikely
to compensate those who have been harmed by foreign tariffs while also harming
others who are innocent and have no role in formulating customs policy. He wrote:
There may be good policies in this kind of exchange, when there is a possibility
that they will get a high-duty revocation or a ban on complaining. Recovery from a
large foreign market is generally more than compensating for the inconvenience while
paying more for a short period of time for some kind of goods. To judge whether such
retaliation is likely to produce such an effect is not, perhaps, belongs so much to the
science of the legislator, whose deliberations must be governed by the same general
principles that are always the same, for dangerous skills and cunning animals, vulgarly
called statesmen or politicians, whose councils are directed by momentary fluctuations
in affairs. When there is no possibility that any such revocation can be obtained, it
seems that the poor method of injury compensation is done for certain classes of our
people to do other injuries to ourselves, not only for the classes, but for almost all the
other classes of them. When our neighbors ban some of our manufactures, we
generally prohibit, not only the same, for that alone will rarely affect them far, but some
other manufactures of them. This may no doubt give encouragement to some
particular class of workers among ourselves, and by excluding some of their rivals,
may enable them to raise their prices in the home-market. They workers, however,
who suffer from the prohibition of our neighbors will not benefit us. On the contrary,
they and almost all other classes of our citizens will be so obliged to pay more than
ever for certain goods. Each of these laws, therefore, imposes real taxes on the entire
country, not in favor of a particular class of workers injured by the prohibition of our
neighbors, but of some other class. (An Inquiry into the Nature and Causes of the
Wealth of Nations, par. IV.2.39)
Some of Smith's ideas are a testimony to his breadth of imagination. Today,
vouchers and school choice programs are being touted as the latest reforms in general
education. But it was Adam Smith who discussed this issue more than 200 years ago:
Whether students at such charitable foundations are left free to choose what
college they prefer, such freedom may contribute to evoking some emulation between
different colleges. A regulation, on the other hand, which prohibits even an
independent member of any college in particular from leaving it, and going to another,
without first leaving asking for and obtaining from what they intend to leave, will be
very much inclined to extinguish that emulation.
Smith's daily life at Oxford (1740-1746), the professor who, he complained, "had
given up on everything and even pretended to teach," leaving with great contempt the
contempt that lasted during his time at Cambridge and Oxford universities.
Both Smith's writings in the field of economics and policy guidance for realizing
state wealth. Smith believed that the best economic development was fostered in an
environment of free competition that operated in accordance with "the laws of nature."
Because Smith is the most comprehensive and systematic economic researcher to
date, his economic thinking became the basis for classical economics. And because
more of his ideas have gone on compared to other economists, Adam Smith as the
alpha and omega of economics.
