Adam Smith
economic theory Economist Profiles neoclassical economics mercantilism classical economics Adam Smith An Inquiry into the Nature and Causes of the Wealth of Sean McClung Wealth of Nations economists
Sean McClung
Students often learn about important figures in economics only briefly and in passing, yet the content taught in economics courses often comes from brilliant economists such as these.
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INOMICS
Students often learn about important figures in economics only briefly and in passing, yet the content taught in economics courses often comes from brilliant economists such as these.

Adam Smith is arguably the most famous economist. His name is almost inevitably thrown around within the first few minutes of every introduction to economics course, and of course his famous book An Inquiry into the Nature and Causes of the Wealth of Nations is oft-discussed.

But neither Adam Smith nor his contemporaries would have described him as an economist for most of his life. Instead, Smith was a philosopher, professor of logic, and sociologist. Today, he is often credited with launching the field of economics. Some even call him the “father of capitalism”, although Smith himself never used that word.

So who was Adam Smith really, and why did he become so famous in economics?

The life of Adam Smith

Smith was born in Scotland in 1723 and lived until 1790. He was a philosopher as well as economist – indeed, economics as a field didn’t really exist until after Adam’s transformational The Wealth of Nations had been published. In 1737, Adam Smith matriculated at the University of Glasgow, graduating in 1740 at the age of 17. He then undertook graduate studies at Oxford, leaving there in 1746.

In 1751, Smith was appointed professor of logic at the University of Glasgow, and a year later he was appointed the Chair of Moral Philosophy at the same institution. He was a fully participating member of university society, giving lectures daily and being elected the dean of the faculty in 1758.

Adam Smith published his first book, The Theory of Moral Sentiments, in 1759. In it, he theorized on human nature, which laid a foundation for his later assertions about economic behavior. The work is primarily concerned with the moral character of humans and how reason interacts with selfish passion. It’s worth noting that even in this book Smith had stated that some “invisible hand” compelled the self-seeking rich to improve society, leading to benefits for everyone, although it would not be until Smith’s later writings that the phrase gained more recognition.

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Smith was offered a lucrative job as tutor for a duke’s son, so he left his professorship in 1763 and traveled to France. From there, he had the opportunity to meet other luminaries such as Voltaire, a major figure in the French Enlightenment. Scholars debate how much his conversations with the French Enlightenment figures influenced his work.

Adam Smith later moved to London and was inducted into the Royal Society in 1767. Ten years later, the work that has made him so famous in economics – An Inquiry into the Nature and Causes of the Wealth of Nations, more commonly known as The Wealth of Nations, was published in 1776.

Adam Smith was no stranger to success. He garnered a reputation for himself during his life; according to the Encyclopedia Britannica, Smith “enjoyed a high measure of contemporary fame”, and his later works were lauded by contemporaries and recognized as important by “British governing circles”. This latter part was no doubt due to how The Wealth of Nations gave rise to classical economic theory, which provided defensible, reasonable alternatives to the prevailing mercantilist ideas of the time.

How Wealth of Nations advanced economic thought

The Wealth of Nations has five main sections. First, it describes self-interest and the division of human laborers. Next, it discusses the roles of stock and capital in a “commercial society”. The third section describes the formation of then-modern society, and of commercial markets, throughout history. It examines the origins of commerce from hunting and gathering up through agriculture, feudalism and finally an unconstrained market economy. Then, the book turns to how economic growth, as a force that is driven by human nature, results from the interaction of different parts of the economy. And finally, it examines the role of the government, particularly examining the limits of government power to positively influence markets. Smith posits that economic growth would result as long as governments didn’t stifle competition in markets.

And of course, within his most famous book is Adam Smith’s famous hypothesis: that the self-interested actions of individual people, summed together, actually create economic activity that is in the benefit of society overall. Following from Smith’s earlier work The Theory of Moral Sentiments, he posits that those self-interested actions arise from the emotional and rational states of man. In The Wealth of Nations, Smith famously writes:

“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 self-interest.”

Following from this line of thinking, Smith argued that – led by an invisible hand – markets are self-correcting. In this view, the ubiquitous “invisible hand” represents the unseen market forces that compel selfish individuals to act in a way that happens to be in society’s best interest. And a crucial component of these market forces is competition, which The Wealth of Nations describes fastidiously. By pitting one person’s desire for self-betterment against another’s, competition produces (economically) productive outcomes. This idea greatly influenced economic theories of the time (and continue to do so today); the classical economists believed that any intervention in the markets was doomed to make things worse, as all markets would self-correct eventually.

As he was an ardent supporter of free market competition, Smith was critical of monopolies and of then-popular government policies that supported them. In fact, rather than acting as one might expect of a non-interventionist, pro-capitalist thinker, Adam Smith wrote at great length about morality, and saw great value in supporting all members of a “commercial society”. Smith believed that the natural growth of competitive, unregulated markets should be used to better everyone. In The Wealth of Nations he writes,

“But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

Smith’s legacy in economics

Adam Smith’s ideas were lauded and embraced within his lifetime. They went on to form the basis of the classical school of economics, and indeed kicked off economics as a serious field of study. Of course, earlier philosophers and political theorists had contributed to discussions that led to the rise of ideas like Smith’s, yet his famous The Wealth of Nations is often considered the beginning of economics as its own, separate field of thought and study.

Classical economists began to influence economic policy greatly, shifting much of the world away from mercantilist practices (hoarding gold and silver, increasing exports) towards laissez-faire economic policies that served to promote market competition. This included de-emphasizing having a trade imbalance in favor of the home country, and promoting free trade (the value of free trade was further supported by David Ricardo’s economic theories, which came after Smith’s work).

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Part of the prevailing mercantilist ideal of the time was that acquiring more assets and keeping them within a country would lead to growth and wealth for that nation. Mercantilists supported trade restrictions partly for this reason.

Smith countered this idea with the theory that it was the product of labor (in other words, productivity) that determined a nation’s wealth, irrespective of their balance of trade. Labor that produced goods resulted in economic output, and increasing that would increase a nation’s wealth, allowing them to purchase more goods from home or abroad. Whether or not exports were larger than imports becomes a relatively superfluous question in this case, which was news to the mercantilists.

In fact, Smith argued that free trade can increase a nation’s wealth by opening up more opportunities for labor to work. The larger the market, the more opportunity for productive labor to supply the markets, and the more economic growth. David Ricardo later expanded on this line of thought with the theory of comparative advantage.

Adam Smith’s ideas and the classical school of economic thought it launched became the prevailing advice for governments managing their economies. These views weren’t seriously challenged until the Great Depression in the late 1920s, which saw a period of several years of high unemployment and low output, in many parts of the world, that classical economic models couldn’t explain. This left room for John Maynard Keynes to expand economic theory, giving rise to the golden age of Keynesianism.

That’s not to say that Adam Smith’s work has become obsolete. Classical economists have continued to build off of Smith’s original ideas while responding to criticism of their theories, eventually giving rise to the neoclassical school of thought. And regardless of their particular ideological leanings, economists today all owe a debt to Adam Smith and his famous book, which is considered the start of the modern field of economics.

References

https://www.britannica.com/biography/Adam-Smith/Legacy

https://iep.utm.edu/smith/#H3

https://www.econlib.org/library/Enc/bios/Smith.html