Adam Smith
../hetlogo.ico
Adam Smith, 1723-1790

Scottish philosopher and economist, leading figure of the Scottish Enlightenment, widely regarded as the 'father of economics' and founder of the Classical School.

Adam Smith was born Kirkcaldy, Scotland, to a Protestant Whig family of civil servants and lawyers. His father, a commissioner of customs at Kirkcaldy (a small port across the Forth river from Edinburgh) died a few months before he was born, leaving the sickly young Adam to be raised by his mother Margaret Douglas, by all accounts a formidable personality who encouraged Adam Smith's scholarly pursuits and to whom he maintained a lifelong attachment.

Adam Smith attended the local Kirkcaldy Burgh school and in 1737, at the age of fourteen, enrolled at the University of Glasgow, where he came under the influence of moral philosopher Francis Hutcheson, and took up an interest in Newtonian science and Stoic philosophy. Glasgow was then the leading seaport of Scotland, deeply engaged in American tobacco trade. The bustle of the rising commercial center and its merchant community almost certainly impressed themselves on young Adam Smith's outlook.

In July 1740, Smith left Glasgow to take up a scholarship (the £40 'Snell Exhibition') to study classics and modern languages at Balliol College, Oxford, notionally en route to a clerical career in the Episcopalian church. By all accounts, his period at Oxford doesn't seem to have been as stimulating as Glasgow. Winding up his studies in August 1746, Smith returned to Scotland, where he spent a quiet sojourn of two years in his mother's home in Kirkcaldy.

In 1745, when Smith was still in Oxford, Scotland was shaken by the Jacobite Rebellion. The rebellion failed and in the aftermath, it became clear that poor, traditional Scotland would be permanently integrated with wealthier, dynamic England. This prospect exercised the Scottish intellectuals and academics of the day. Their speculative histories, theories and debates on the evolution and progress of civilizations, the central subject matter of the Scottish Enlightenment, may have been grand in panorama, but they were also addressing very local questions about Scotland's future.

It was precisely at this time that Adam Smith left quiet Kirkcaldy and entered the ferment of Edinburgh intellectual circles. At the instigation of Henry Home, Lord Kames, Smith had been invited in November 1748 to deliver a series of public lectures on rhetoric at Edinburgh University, sponsored by the Philosophical Society. This was followed up by additional lectures on the History of Philosophy and Jurisprudence. Little remains of the content of Smith's Edinburgh lectures, save perhaps for his essay on the intellectual history of astronomy (what Smith later derided as a 'juvenile' effort and was only published posthumously in 1795). It was during this period (1748-51) as a freelance lecturer that Smith met and befriended David Hume and other leading lights of the Scottish Enlightenment.

Smith's Edinburgh lectures were a relative success. So, in January 1751, Adam Smith was unanimously elected to the recently vacant Chair of Logic at his old alma mater, Glasgow University, beginning the course in October 1751. According to his student John Millar, Adam Smith took an innovative approach to the logic course, discarding its usual Aristotlean treatment of the subject in favor of the study of rhetoric (evidently drawing upon his earlier Edinburgh lectures). But just before his arrival, Smith was asked to also take up part of the lectures in moral philosophy for Thomas Craigie (Hutcheson's successor), who had fallen gravely ill. So, in his first year at Glasgow Smith had to do two different lecture courses. In April 1752, Cragie having died, Smith was unanimously elected to the Chair of Moral Philosophy. His old friend David Hume applied for the Chair of Logic vacated by Smith, but there was strong opposition to the appointment of free-thinking Hume by Presbyterian ministers. In the end, bowing to public pressure, Smith failed to support Hume, and the project was thwarted (the logic chair ultimately went to another candidate, James Clow). Smith would remain professor of moral philosophy at Glasgow from 1752 to 1764.

Following the traditional outline laid out in its principal textbook, Frances Hutcheson's Philosophae Moralis. Smith's course on moral philosophy at Glasgow was divided into four parts - natural theology, ethics, jurisprudence and the nature of political institutions. His early lectures probably drew material from Hutcheson's text and his own Edinburgh lectures, but eventually Smith began elaborating anew upon these topics himself.

Although residing in Glasgow, Smith frequently sojourned to Edinburgh to visit his old enlightenment comrades. Smith was a member of the Edinburgh Select Society and the Poker Club and contributed two small articles to the fledgling Edinburgh Review in 1755. Hoping to lure him permanently, in 1758, David Hume attempted to get Smith transferred to the chair in public law at the University of Edinburgh (simultaneously hoping to open up Smith's position at Glasgow for Adam Ferguson) but nothing came of this scheme.

Adam Smith's first published treatise, the Theory of Moral Sentiments (1759), draws evidently from the second part of the course. It was just another salvo in the long-gestating quarrel in Scottish circles over the anthropological-social origin of moral codes and moral sense, a debate provoked by Mandeville's notorious Fable in the 1720s. Specifically, the Scottish philosophers were trying to explain how and why natural, pleasure-seeking hedonistic man would ever come up with apparently stern constraints such as morality. Hutcheson's explanation was that moral acts naturally produce feelings of pleasure ergo morality is inherently hedonistic. This was turned upside down by Hume, who, drawing on Hobbes, argued instead that moral codes are not inherently anything, but merely social constructs that had been opportunistically tailored sometime in the past to comply with human hedonism. Hume's 'realistic' solution seemed to reduce morality to crass calculation - that humans did what felt good first and wrote moral codes afterwards to justify their choices. Hume did not go as far as Hobbes in reducing all selfless moral acts as somehow ultimately reducible to selfish motivation - Hume inserted the element of "sympathy" with the pleasure and pains of others to explain ethical actions, but it was still ultimately about hedonic passions.

Smith's TMS tried to find the middle ground between Hutcheson and Hume by proposing the artifice of the 'impartial spectator'. Yes, Smith argues, morality springs from the hedonic calculus, but it is not a wholly passions. We are capable, by the power of imagination and reason, of taking the role of impartial spectator. He expands Hume's power of 'sympathy' to include not only sympathy with the passions of pleasure and pain in others, but also sympathy with the motives of the person acting and the gratitude of the recipient. Heuristically, the apparently altruistic act of saving a drowning child is not motivated by the expectation of a reward from the parents (as Hobbes might suggest), nor because the act of saving a life produces its own pleasure (as Hutcheson might assert), nor simply because we are capable of transferring unto ourselves the pain of the parents of the drowning child (as Hume suggests), but rather a more complicated internal calculation. The impartial spectator is the internal judge of our actions and can, by his experience and inductive reason, disapprove a failure to act or commend the heroic attempt to save the child, and this is the principal pleasure and pain calculation at work. Crudely put, moral sense is but the desire for praiseworthiness and the pain of guilt, as delivered via the impartial spectator.

The TMS cemented Smith's reputation, but he put the topic aside once completed and began his investigations on the third part of his moral philosophy course: natural jurisprudence. At the end of the TMS, Smith had already sketched a history of natural law, highlighting the importance of the work of Grotius. It is said Smith intended to write a larger treatise on the matter, using Montesquieu as a model. But this treatise - if he began one - never emerged. Instead, all we have are two sets of lecture notes from his Glasgow course - one from the 1762-63 session and a second set from the 1763-64 session - that were discovered and published later. The latter (manuscript dated '1766', thus probably a re-draft of the 1763-64 lecture notes) was discovered and first published by Edwin Cannan in 1896. The first set from 1762-63 (rougher and thus probably taken directly from the lectures), was discovered only in 1958 by J.M. Lothian and first published in the Glasgow edition of Smith's works (1976-81). These two sets of notes, are now commonly collected as the ''Lectures on Jurisprudence''.

It is important to note that in the section on 'Police' in the Lectures on Jurisprudence, Smith provides early discussions of ideas that will be later elaborated upon his magnum opus, e.g. the division of labor, its connection to national opulence, natural versus market prices, the origin of money, critiques of monopolies, tariffs, subsidies, and other government distortions, the errors of Mercantilism, economic history of commerce, review of taxes and public debt, etc. Fragments of early drafts of what seems like an attempt to put these parts into a treatise, some of which are dated as early as 1762, were found later by W.R. Scott, and published in 1937. However, some topics of the LJ - e.g. discussions of the 'natural wants of mankind' (i.e. consumption), public sanitation, the Mississippi scheme, stock-jobbing, effect of commerce on public manners - will not make their way into the WN.

Additionally, again in 1958, Lothian found a set of notes on a different Smith lecture of 1762-63, Smith's 'private' class on rhetoric at Glasgow (in contrast with his 'public' lectures on moral philosophy). It is assumed these evolved from his earlier Edinburgh lectures. These notes was first published in 1963, under the title of Lectures on Rhetoric and Belles Lettres.

In 1763, English Secretary of State Charles Townshend invited Adam Smith to accompany his stepson, the young Henry Scott, Duke of Buccleuch, on a European tour. In January 1764, Smith resigned his Glasgow chair to take up the offer. Smith traveled as the tutor of the young duke to Paris, proceeding almost immediately to Toulouse, where they stayed for nearly eighteen months. Thereafter, they proceeded through the south of France to Geneva and then back to Paris in December 1765. In Paris, through the duke's good connections, Smith met the leading French Enlightenment economists and thinkers such as the Jacques Necker, d'Alembert, Helvétius, the Physiocrat leader François Quesnay, and, perhaps most influential of all, Jacques Turgot and the Abbé Morellet.

Buccleuch and Smith returned to London in October, 1766. Smith proceeded almost immediately to Kirkcaldy, where he remained quietly for the next ten years, interrupted by only occasional trips to Edinburgh and London. It was in this period that he composed his masterpiece, the Wealth of Nations, which finally appeared in March 1776. The core of this work was already articulated in the early 1760s, in his lectures on jurisprudence, the latter part of his moral philosophy course at Glasgow. But his sojourn in France had provided tremendous inspiration and ample new material.

The purpose of Smith's treatise - like so many others of the 18th C. - was to influence government policy. That is, to urge the repeal of many of the British laws that restricted internal and external commerce, many of which had been introduced during the Mercantilist era. As a result, there was a twofold object to the book - to criticize the current system and the economic principles upon which it is based, and to propose a new reformed system of 'natural liberty'. The latter task moved the book from a mere critical polemic to a constructive one, which required the the careful exposition of the economic principles underlying the system. These economic principles were a novelty, a new unfamiliar economic theory (although much the same principles can be found among Continental economists, notably Jacques Turgot, it was largely unknown in British literature). It is sometimes noted that Sir James Steuart, perhaps the most notable contemporary representative of the Mercantilist views that Smith set out to debunk, also shared some of the theoretical principles, although he is not cited in WN.

The Wealth of Nations is set out in five books, the first of which is perhaps the most theoretically important. Here Smith opens with his famous discussion of division of labor, illustrated by his 'pin-factory' example, before proceeding to a discussion of long-run natural prices (which he distinguishes from short-run supply-and-demand-determined market prices). Perhaps excusably for someone pioneering new ground, Smith inadvertently provides three or four different theories of natural value - the labor-commanded theory, the labor-embodied theory, the adding-up (cost of production) theory and (it has been argued) a disutility of work theory. Smith picks the third cost of production theory and spends the remainder of Book I attempting to provide theories for the determination of the components of natural price - the natural wage (a discussion relying partly on Cantillon's wage-fertility dynamics), the natural rate of profit (where his discussion of competition and the uniformity of the rate of profit is focused) and the natural rent (where he provides contradictory theories, starting with a simplistic theory of rent as a cost component, before coming around to embrace Quesnay's concept of rent as a deduction from the surplus)

Book II of WN is focused on economic growth and capital accumulation. This is the book that owes most to Smith's encounter with the French economists (hardly any part of it is presaged in the LJ) Here Smith sets out his 'balance sheet' approach to capital stock, the role of money and the banking system, fluctuations in the rate of interest, and the relationship between capital stock and labor employment, including the famous differentiation of 'productive' from 'unproductive' labor, and a comparative discussion of the deployment of capital in different sectors.

Book III is an economic history of the Middle Ages, showing how capital had first been applied to agriculture, then manufacturing and finally commerce, and how current policies in Europe seem to be trying to reverse that direction of natural evolution.

Book IV contains Smith's scathing exposition of Mercantilism - and thus the part that perhaps was most immediately absorbed by contemporary readers. He mocks the Mercantilists for confusing wealth of a nation with money (stock of gold and silver), and tying prosperity to a favorable balance of trade. He reviews how their economic policies - protectionist tariffs, predatory export subsidies, monopolies, distortionary treaties - are actually detrimental to the national economic interest. It is here that Adam Smith puts up his vigorous defense of free trade (in the form of the theory of absolute advantage):

"What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way which we have some advantage.", [Bk IV.2],[p.36 of orig. ed. p.457 of Glasg ed],

We also find here his famous 'invisible hand' passage (p.454-56), articulating how self-seeking behavior may unknowingly promote the public good - the old Mandeville message, that has since became the core 'ethical' cornerstone of the Classical Liberal defense of capitalism:

"Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to society..... He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.....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 his intention." (Bk IV.2, p.454-6).

Smith also discusses colonies, giving a general history of their development and connection to commercial monopolies. Having reviewed its history and policies, Smith finally proceeds to pronounce his verdict on Mercantilism. Declaring that the improvement of living standards of citizens should be "the sole end and purpose" (p.660) of economic policy, the Mercantile system has utterly failed to deliver. In the final part, Smith critically reviews the Physiocratic doctrines and condemns their agricultural obsession, being about as misdirected as the Mercantilist obsession with trade. Smith rounds off this section with a rousing call for laissez-faire, to establish an 'obvious and simple system of natural liberty' (p.687), with government involvement limited to three areas: defense, justice and perhaps some public works and infrastructure.

The final Book V is a review of contemporary government spending and taxation in 18th C. Britain, reviewing the efficacy of these policies, often in comparison with policies in other countries.

Adam Smith's Wealth of Nations made something of a splash at the time. Coming out at the time of revolt in the American colonies - a direct reaction to some of the British Mercantilist policies he denounced - Smith provided the British public an alternative way of thinking about how economic life and policy should be organized. While read in many quarters, arguably its most important consumer was the young English Whig politician William Pitt. After becoming prime minister in 1784, Pitt immediately began an overhaul of taxation and commercial policy, rolling back much of the old Mercantilist apparatus, citing Smith's treatise as his principal source of inspiration. The 1786 Eden Agreement, lowering tariffs between Britain and France, owed much to the book's influence.

Among Scottish philosopher circles, it was naturally well-received. David Hume saw it and praised it, before his death a few months later in 1776 (Smith wrote a touching memoir of Hume later that year). Smith was a little miffed at Hume's protege Adam Ferguson, whose 1767 Essay had anticipated Smith on "division of labor" - Smith privately expressed his belief that Ferguson had plagiarized his Glasgow lecture notes from the early 1760s. Even if so, the on-going discussions in the Edinburgh clubs and the long gestation period of the WN made it practically inevitable that he would be anticipated in print.

In 1778, Smith was appointed Scottish commissioner of customs and moved to Edinburgh, with his elderly mother and his spinster cousin (Smith was a lifelong bachelor, his cousin discharged the principal housekeeping duties). Smith's remaining years in Edinburgh turned out to be rather unremarkable. Smith died quietly in 1790.

Despite its outsized impact on policy of the day and its sometimes contradictory statements, there was surprisingly little response or follow-up on Adam Smith's economic theories, at least not immediately. He hardly touched them himself - the Wealth and Nations went through a few more editions, but with only very minor corrections. It is only really at the turn of the century - a quarter century after its publication - that we begin to see the first serious reviews and examinations of Smith's theoretical principles.

The complacency of British thinkers during this quarter century may in part be explained by the policy success - the general assumption that Adam Smith had "gotten it right" and so there was not much worth discussing. There were some quibbles here and there and points of policy discussion (former Massachusetts governor Thomas Pownall's 1776 letter to Adam Smith was notable in both regards) but the substance of the economics, by and large, was not much challenged. Dr. James Anderson (1777) provided a significant correction to the theory of rent, but nobody seemed to notice. Jeremy Bentham picked up some points for his defense of usury (1787). And two decades later, Robert Malthus (1798) took the wage-fertility dynamics and ran with it into a fully-fledged theory of population growth and the natural wage, but this was a distinct effort in its own right.

The first significant evaluations and restatements of Smith's theory were probably the extensive notes of Smith's (third) French translator Comte Germain Garnier (1802) and the remarkable Traité of Jean-Baptiste Say (1803). (the Abbé Morellet had actually attempted a translation earlier, but gave up with the appearance of the first French translation of theAbbé Blavet). That early energy emanated from French writers should not be surprising - the fledgling French Republic was still trying to find its policy bearings, and besieged by proposals from all kinds of theorists. Physiocracy still had influence, while other segments, notably Napoleon Bonaparte, seemed enamored with Mercantilist logic French followers of Smith - the kernel of the French Liberal school. - felt a need to reiterate and restate the basic principles of political economy.

Pownall aside, the first significant review of the WN's economic theory in English was probably the latter-day defense of Physiocratic doctrine by John Gray (1797). Better-aimed was the critical review by Earl of Lauderdale (1804), demolishing Smith's theory of value. But it was William Spence's (1807) quixotic attempt to promote protectionist policy, setting up a strange Physiocratic-Mercantilist hybrid contra Smith's theory that finally provoked British followers of Smith to put pen to paper. James Mill (1808) and Robert Torrens (1808) wrote comprehensive defenses of Smith's theory and policy in reply to Spence. From there, the flood began. Thirty years after Smith's WN, the Classical School of Political Economy finally took wing.

The Smithian theory was given a thorough overhaul by David Ricardo (1817), who set about systematically revising and correcting many of the tentative or contradictory points in Smith's WN. Ricardo sorted through the competing theories of value, dumping all but the labor-embodied theory of value, inserted the Andersonian differential theory of rent, brought in the Malthusian wage-population dynamics explicitly, improved upon the theory of trade with comparative advantage, etc. Through Ricardo, the Classical theory took a clearer shape, and went to dominate economic thinking until the latter part of the 19th C.