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Smith, AdamOverview of writings [1]“The Theory of MoralSentiments” [2]“The Wealth of Nations” [3]WORKS BY SMITH [4]SUPPLEMENTARY BIBLIOGRAPHY [5]Adam Smith [6] (1723–1790) was born inKirkcaldy, Fifeshire, a fisheries and mining town near Edinburgh.
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Smith, Adam 1723-1790

LIFE AND CHARACTER

EARLY WRITINGS

THE WEALTH OF NATIONS

BIBLIOGRAPHY

The eighteenth-century Scottish economist Adam Smith is widely acknowledged as both the father of modern economics and the apostle of free trade. His cornerstone work, The Wealth of Nations (1776), was popular in Smith’s era (six editions were published before Smith’s death in 1790) and figures prominently in modern discussions of economic theory.

LIFE AND CHARACTER

Adam Smith was born on June 5, 1723, in Kirkcaldy, Scotland, a posthumous child. His mother was in her early twenties, and she was widowed after less than three years of marriage. The bond between mother and son was very close, and as Smith never married, those who believe in psychoanalytic explanations have seen significance in this. Whenever it was feasible he lived with his mother, and a spinster cousin joined them in the 1760s.

Smith went to Glasgow University in 1737 at age fourteen. In 1740 he was sent to Balliol College, Oxford, where he stayed until 1746. Smith declined entering the church, a profession many thought advisable, and spent two unemployed years back at home in Scotland. Lord Kames and other friends then invited Smith to lecture on Rhetoric and Belles-Lettres in 1748, as a reigning Scottish fashion was to learn how to speak and write English like the English. Smith was considered a capital instructor for this purpose, and his lectures were well attended.

In 1751 Smith succeeded in being appointed to the professorship of moral philosophy at Glasgow. For the next twelve years his fame grew steadily, especially after the publication of his first book in 1759, The Theory of Moral Sentiments ( TMS ). TMS not only gave Smith a European reputation, it also appears to have gained him the position of tutor to the Duke of Bucceluch. This was a lucrative appointment, and it guaranteed Smith financial independence. Scottish University students paid their individual professors, and Smith behaved admirably in repaying his students their fees.

Smith had provided distinguished and valuable services to the university, not only as a teacher but also as an administrator. Since Smith’s absentmindedness and lack of address are undoubted, having been noted in a variety of historical sources, Smith’s success as an administrator shows that he had the ability to concentrate fully on a given task and to persuade his colleagues to do the same. He was college quaestor (treasurer) for six years, an unusually long term, and at the end of his time at Glasgow he was dean of faculty, vice-rector, and chairman of a special committee on internal university affairs. On accepting Smith’s resignation, the university minutes record sincere regret “at the Removal of Dr. Smith, whose distinguished Probity and amiable qualities procured him the esteem and affection of his Colleagues” (Campbell and Skinner 1982, p. 125).

The European tour with the Duke of Bucceluch took nearly three years, and from 1764 to 1767 Smith had the opportunity to meet most of the eminent European literati, including the school of French economists known as the physiocrats. The lectures Smith delivered at Glasgow had dealt, in part, with economic topics, but it was during his stay in France that Smith appears to have begun writing An Inquiry into the Nature and Causes of the Wealth of Nations in earnest. Perhaps from 1764 onward, and certainly from 1767 to 1776, with very few interruptions, Smith’s constant concern was the writing of his most prominent work.

Smith’s appointment as commissioner of customs in 1777 was due to the influence of the Duke of Bucceluch with the prime minister, Lord North. A humorous consequence of his new position was Smith’s realization that he had “scarce a stock, a cravat, a pair of ruffles, or a pocket handkerchief which was not prohibited to be worn or used in Great Britain.” In order to set an example he “burnt them all” (Smith 1987, p. 245). As Smith’s duties involved the control of smuggling, scholars have wondered how Smith could wish to punish the smuggler, who was not really blamable according to the dictates of natural liberty set out in The Wealth of Nations ? The issues raised by Smith’s acceptance of such a position have been most forcefully posed by the scholars Gary Anderson, William Shugart, and Robert Tollison: “The author of the Wealth and Commissioner Adam Smith were one and the same person … there is strong evidence that Smith sought the position and that it represented a reward not so much for intellectual accomplishment as for services he had rendered to the government” (1985, p. 742).

Consciously assertive of his originality, as early as 1755 Smith read a lecture strongly defending his priority for the idea of a system of natural liberty. Smith believed that several of his contemporaries, all major figures of the Scottish enlightenment, had plagiarized some of his thoughts. Adam Ferguson’s (1723-1816) work on the division of labor and William Robertson’s (1721-1793) economic interpretation of history provide two well-known examples of potentially plagiarized work while Hugh Blair (1718-1800) may have cooled relationships by his (acknowledged) use of Smith’s lecture notes on the subject of rhetoric in Blair’s Lectures on Rhetoric (1783). Smith had several eccentricities; among his personal habits, it was the absentminded consuming of sugar lumps, even in company; in conversation, he is said to have often taken opposite views of the same subject, according to his humor. Smith ended his days among admiring friends in Scotland, busy in his official duties and revising his publications, the last substantial revision being that of TMS. After ailing visibly for a while, Smith died on July 17, 1790.

EARLY WRITINGS

Smith’s first love was rhetoric and literature. Dugald Stewart, Smith’s successor to the Edinburgh chair, records that “the variety of poetical passages which he was not only accustomed to refer to occasionally, but which he was able to repeat with correctness, appeared surprising even to those whose attention had never been attracted to more important acquisitions” (Rae 1965, p. 34). One of Smith’s most pleasant and instructive writings is the Essay on the History of Astronomy, which was published by Smith’s executors some five years after Smith’s death. The most interesting feature of the essay is Smith’s discussion of the principles that guide good philosophy and that hence serve to persuade readers. Smith asserts that “philosophy is the science of the connecting principles of nature” (Smith 1982, p. 45) and so good philosophy provides individuals connections from the familiar to the unfamiliar in such a natural manner that they are convinced of its truth. The essay considers the subject of astronomy from this perspective and concludes by praising the English physicist and mathematician Sir Isaac Newton (1642-1727) for providing “the greatest and most admirable improvement that was ever made in philosophy” (Smith 1982, p. 98). Smith was coy about the reality of the Newtonian system; his own principles suggest that all such systems are imaginary but he also wrote that the weight of evidence is such that one is forced to admit that the principles seem so natural, the arguments so well connected, and the evidence so overwhelming that one is insensibly led to speak of Newtonianism as real.

The most careful and sustained expositions of TMS, by twenty-first-century analysis the standard view, have been articulated by Alec Macfie, Roy H. Campbell, and David D. Raphael; the most interesting contrasts in the last two decades are those of Laurence Dickey and John Dwyer. Dickey argued forcefully that Smith changed his mind on the virtue of selfishness in the last edition of TMS (1986), while Dwyer showed how the circles Smith moved in were emphatic in asserting that the sympathetic passions were the most beneficial for society (1998).

Smith viewed moral philosophy as facing two main questions: What is the content of ethics and how does one come to accept one’s ethical precepts? He was very perceptive on the second question but only marginally illuminated the first. In modern language, TMS is probably best appreciated as a book on the socialization of morality rather than on the nature of right and wrong, which also explains why sociologists have been more struck with TMS than philosophers of ethics. Even though Smith did not illuminate practical ethics, it is notable that he insisted upon virtue being instinctive and not based upon calculation, as well as upon the reality of benevolence.

In TMS, humankind’s acceptance of moral rules is grounded upon the need for social approval. Individuals internalize morality by looking for the admiration of those who see them. This explanation serves well for children, or when adults are in company. Smith extended the application to adults who debate moral problems when alone by introducing the concept of an “impartial spectator”— someone who examines one’s moral quandaries with detachment and whose approval serves to sustain us when we suffer reverses of fortune.

The standard view argues that the sympathetic imagination of TMS leads to humankind’s codes of ethics and of law, while self-interest is the basis of economic behavior; the conflict between TMS and The Wealth of Nations is only apparent because the two books deal with different levels of social reality. Posterity has accorded fame to The Wealth of Nations and only appreciation to TMS because the link between self-interest and economic phenomena can be satisfactorily indicated, while a link of similar clarity between sympathy and ethics still awaits us. A late twentieth-century trend to interpret Smith’s economics through the lens of TMS faces the difficulty that only in the preface to the last edition of TMS, shortly before his death, did Smith make any public attempt to mention the two books together. Five editions of The Wealth of Nations (and of TMS ) came and went without Smith ever trying to soften The Wealth of Nations with TMS. Scholars argue that if Smith had wanted modern-day readers to qualify the selfishness of The Wealth of Nations with the stoicism of The Theory of Moral Sentiments he would have done so himself.

THE WEALTH OF NATIONS

The manner of writing of The Wealth of Nations is modern in its frequent separation of theory from policy. In Books I through IV, Smith explained that free trade is the ideal policy for all nations. In Book V he explained the obvious practical requirement that governments must raise taxes to meet essential expenses. So the combined effect of all five books is to advocate a policy that imposes taxes for revenue but not for protection. This is the same policy that was supported in the popular literature of the 1740s in the pamphlets of William Richardson and Sir Matthew Decker. However, the separation of pure theory, which supports free trade, from practical policy, which recognizes the need for taxes, makes the ideas of The Wealth of Nations more attractive.

Much of the charm of Smith’s work arises from the casual fluidity of his language. He expressed commonplace ideas forcefully and provided homely illustrations; Smith’s arguments are axiomatic, but he interrupted his exposition with much ordinary illustration. These nuances in his writing have led modern-day scholars to frequent, and perhaps endless, discussion about whether he was really inductive or deductive. Perhaps the most effective use of everyday thought was the phrase “invisible hand” to describe the harmony of the market. Moral philosophers had consistently rejected the use of the market as socially beneficial because they could not fathom how the universal prevalence of selfishness—the motivation of the market—could lead to a harmonious society. It was one of several euphemisms used by contemporaries to refer to God as the beneficent controller of the universe. When Smith came to proving this difficult point, he found it convenient to finesse the argument by referring instead to the invisible hand as one that provides coherence through the market. Smith knew he could count on the subliminal persuasiveness of the “invisible hand” to quash any doubts readers might have about the goodness of the market. Ferguson and Robertson, while serving as army chaplains, had each used the phrase to exhort their soldiers in 1747. Whether Smith himself believed in a Christian God is beside the point; it is his rhetorical skill that needs to be appreciated.

The fairest treatment of Smith’s contributions to economic theory would portray Smith’s ideas along with those of his contemporaries. Space does not permit and readability perhaps does not require such discussion. With a brief glance at contemporary thought, the focus herein is on the internal logic of Smith’s arguments, with the topics being chosen by their importance for modern economics. In considering Smith’s contributions to economic theory it is useful to begin with microeconomics, then to macroeconomics, and finally to international trade.

Jacob Viner provided a penetrating assessment of Smith’s contributions to micreconomics when he wrote, “On every detail, taken by itself, Smith appears to have had predecessors in plenty. On a few details was Smith as penetrating as the best of his predecessors” (1928, p. 118). The theoretical constructs of demand and supply, used by modern economists, had been widely and effectively used by economists for more than a century when Adam Smith wrote. A brief overview of Smith’s microeconomic theory shows that Smith’s attempted innovations were severely limited.

Smith distinguished between “natural” and “market” price, regarding the former as clearly the more fundamental of the two. What then determines natural price? Smith began by explaining to readers that in every society, at any given time, there exists an ordinary or average rate of wages, profits, and rent; these average rates for each factor of production Smith called the natural rate. He then defined the natural price as the sum of the natural rates of wages, profits, and rents. This price is distinguished from the market price, which is merely another name for whatever price reigns in the market at any given time. The demand of those individuals who are willing to pay the natural price of a commodity constitutes what is called the “effectual demand,” and market price is said to arise out of the interplay of the actual supply and the desires of the effectual demanders. The explicit theoretical construct thus consists of an awkward juxtaposition of a point supply and a point demand. If, however, one glosses over the location of equilibrium, that is, the natural price, and asks instead how Smith described what happens when the world is not in equilibrium, the treatment is excellent.

Since natural price is defined as the sum of natural wages, profits, and rents, this requires an explanation of the natural rates of wages, profits, and rents. The natural rates are naturally regulated by the structure of the economy and its growth, “partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment” (1976, I, 72, 159). The subsequent chapters, however, fail to show readers how to use structure and growth to find natural wages or profits in any particular situation.

Smith had claimed that product prices are to be explained by factor prices; this dichotomy between the forces determining product and factor prices was an innovation. He subsequently claimed that factor prices, and hence product prices, are to be explained by structural and growth factors. Somehow, microeconomics has disappeared. The procedure has led some rigorous critics such as Mark Blaug, to exclaim, “To say that the normal price of an article is the price that just covers money costs is to explain prices by prices. In this sense, Adam Smith had no theory of value whatever” (1985, p. 39).

How did Smith convince so many ordinary readers of the merits of the market? He does provide readers many convincing illustrations of opportunity cost and of the equalization of returns in different uses. Chapter X of Book I deals with the inequalities of wages and profits across different occupations. It is a beautiful exercise in tracing how differences in prestige or risk can account for such inequalities in money wages. While such explanations can be couched in the modern language of demand and supply, since Smith did not apply the modern apparatus, one has to ask if there are other, perhaps simpler, ways of getting to such results.

Suppose Smith began by assuming that any violation of natural liberty was both morally wrong and economically harmful; such a position could itself provide the grounds to condemn several institutions of Smith’s day. Such “politically based” arguments are convenient in that they need to consider the absence of competition on only one side of the market. For example, in the case of the Law of Settlements, which hindered the mobility of workers, it was enough to condemn the Laws that the rights of workers were being violated. Second, if one assumes that a market reaches a stable equilibrium, then the belief in one-sided competition alone suffices to provide several analytical results. For example, in the usual version of Ricardian rent theory, the same final outcome is reached whether only farmers compete (for land) or only landlords compete (for farmers). This one-sided analytical procedure works best when there are constant returns to scale and the assumption of fixed proportions, used on several occasions by Smith, is perhaps a consequence of his analytical method.

Smith’s contribution to microeconomics requires some care to elucidate: He did not advance scholars’ understanding of the equilibrium theory, involving demand and supply; he even confused matters by dichotomizing product and factor prices. But, from his very earliest lectures, Smith thoroughly appreciated the fundamental fact that liberty and competition lead to zero-profits. This observation was repeatedly and successfully applied to such fields as the choice of occupations, the preference for pasturage over tillage, and the determination of joint prices. It even sufficed to move analysts toward the “natural price,” wherever that might be. It is a form of argument that is attractive, easy to learn, and independent of the more intricate demand-supply apparatus, and accounts for Smith’s hold on the general public.

There is no direct concern for macroeconomic problems in The Wealth of Nations. By omitting any systematic discussion of unemployment in The Wealth of Nations, Smith made macroeconomic concerns seem chimerical and succeeded in focusing attention on capital accumulation and upon long-run issues. So perhaps the most notable victory of The Wealth of Nations was a silent one. When Smith did touch upon unemployment, the primary concern for his contemporaries, he used three separate arguments to de-emphasize that concern. Smith provided readers with a model of the economy as a giant corn farm, which employs workers by keeping aside a portion of last year’s harvest in order to feed the workers until the next harvest. Smith called this the “wages fund,” and since it is predetermined by last year’s decision, one cannot increase the numbers to be employed since the model provides the food for only so many. A second argument claimed that the soldiers disbanded after the Seven Years’ War found new jobs within a short space of time, and Smith used this as proof that persistent unemployment is not a real possibility. Finally, Smith made the “global” assertion that “what is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people” (1976, I, 337-338). The implication that aggregate demand always equals aggregate supply, regardless of how much or little is saved, probably had great impact upon Smith’s contemporaries. The cumulative impact of the several arguments was to suggest to readers that the market economy is globally stable, and if only it were left free, it would also be efficient.

An important idea, never quite explicitly stated yet pervading the entire book, is the superiority of commercial society over feudalism. This led Smith to the concepts of productive labor, which roughly correspond to economic activity that produces a measurable output, and to contrast it with unproductive labor or services. Without such a framework, one would be hard pressed to explain why a fully employed commercial society, making cloth and machines, is superior to a fully employed feudal one, making swords and monasteries. Much of the framework of modern national income accounting is set up at different points of The Wealth of Nations. To grasp the concept of national income one has to have all of a nation’s economic activity in one’s mind. A very important by-product, appropriate to someone who believed in unintended consequences, was the image of the economy as a whole. This constantly recurring background to all parts of The Wealth of Nations, the image of the economy as a complex machine always working away, has led scholars, such as Samuel Hollander, to argue that Smith was an early general equilibrium theorist (1976).

The effort to conceive of the economy as a whole and represent it by some number had a second potent conclusion. Since bundles of apples and oranges cannot be compared physically but only as economic values, the numerical concept led to a focus upon monetary values. In turn, this enabled Smith to conclude that growth is not based upon acquiring a surplus of some physical balance, as with mercantilism and bullion or with physiocracy and agriculture, but rather a value surplus—that of income over expenditure. In this sense, it has been well said that Smith’s novelty lay in the cumulative “shifts of focus” in The Wealth of Nations (Winch 1996, p. 22).

The issue that bridges macroeconomics and trade is monetary policy. Smith broke cleanly with the past and argued that the market was sufficient to provide whatever amount of circulating medium was necessary. Mercantilist arguments in favor of an influx of metals as a wartime buffer or for providing ample liquidity to the markets were all specious. Just as one does not try to regulate trade in pots and pans but trusts the market to provide them as needed, so too could the market suffice for money.

To attempt to increase the wealth of any country [by interfering with the trade in gold and silver] … is as absurd as it would be to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils (Smith 1976, IV, pp. 439-440).

From the time of publication of The Wealth of Nations until the middle of the twentieth century, Smith was viewed primarily as the source of laissez-faire ideas. According to Wesley Mitchell in his Types of Economic Theory (1967), the benefits of economic freedom can be argued on the basis of three axioms:

Individuals desire to maximize their wealth.

Individuals know better than governments how to maximize their own wealth.

National wealth is the sum of individual wealth (1967, pp. 61-64).

Axioms 1 and 2, in conjunction, prove that individual wealth is maximized when government leaves individuals alone. Axiom 3 then says that maximizing individual wealth suffices to maximize national wealth. If one describes the axioms loosely as greed, knowledge, and additivity, then greedy and knowledgeable individuals surely do not need government in order to maximize their wealth, and additivity suffices to assure one that, since the aggregate is the simple sum of the individuals, the aggregate also does not need government to maximize economic growth. Modern readers, familiar with externalities in the form of, say, pollution, will probably be most curious about the validity of axiom 3, but in most developing economies axioms 1 and 2 are also worth questioning.

The two most important policy measures of Smith’s time were bounties for infant industries in foreign trade and preventing speculation in food markets in domestic trade. Smith firmly rejected both bounties for infant industries and interference in food markets. He argued the case against bounties as follows: He noted that no one argues against natural advantages, and he went on to illustrate this with his famous example of growing grapes in hothouses in Scotland. Then he transferred the argument without any further reasoning to cases where there is no suggestion of natural advantage. “Whether the advantages which one country has over another, be natural or acquired, is in this respect of no consequence” (1976, IV, p. 458). One could ask how others acquired such an advantage and why anyone might not acquire it as well? This is just what all economists who urged “catch-up” to their countries did argue. Smith could have said that choosing which infant industries have promise requires too much knowledge and discrimination or that such infants have a persistent tendency not to want to grow up. He did neither. So strong was his feeling on the matter that he simply bypassed the argument.

If one wonders about the incongruity of the putative father of economics providing so many examples of indifferent economic analysis, one should remember that a critic found many proofs in Euclid’s Elements to be “more complicated than older versions … essential axioms of order and separation are entirely overlooked, the postulates inadequate to prove even the first theorem” (Goodstein 1951, p. 3). Modern-day scholars seem to remember historical figures as much for their intentions as for their achievements. Smith wrote at a time when his liberal cosmopolitanism won him many converts, especially outside Britain; the support of elite politicians probably mattered, especially when Smith could be used in support of conservative economic policies during scarcities; and the benefits to Britain of appealing to free trade when Britain was the leader in manufacturing meant that economic truth was supported by self-interest. How far Smith’s superior fame was due to these noneconomic factors is a question that only bias can solve.

It is appropriate to close by continuing with the words of Jacob Viner who wrote of Smith that he was only applying to society forms of reasoning that had long been utilized by theologians and philosophers to general phenomena and that only on a few details was Smith’s analysis superior: “But Smith made an original forward step when he seriously applied himself to the task of analyzing the whole range of economic process with the purpose of discovering the nature of the order which underlay its surface chaos” (1928, p. 118). It was not so much any refinement in analysis but Smith’s ambitious undertaking and his faith in the overall harmony of free trade that constitute his principal legacy.

BIBLIOGRAPHY

PRIMARY WORKS

Smith, Adam. 1976. An Inquiry into the Nature and Causes of the Wealth of Nations, eds. Andrew S. Skinner and R. H. Campbell. Oxford: Clarendon Press.

Smith, Adam. 1982. Essays on Philosophical Subjects, eds. William P. D. Wightman and J. C. Bryce. Indianapolis, IN: Liberty Classics.

Smith, Adam. 1987. The Correspondence of Adam Smith, eds. Ernest C. Mossner and Ian S. Ross. Indianapolis, IN: Liberty Classics.

SECONDARY WORKS

Anderson, Gary, Robert Tollison, and William F. Shugart III. 1985. Adam Smith in the Customshouse. Journal of Political Economy 93 (4): 740-759.

Blaug, Mark. 1985. Economic Theory in Retrospect. Cambridge, U.K: Cambridge University Press.

Campbell, R. H., and Andrew Skinner. 1982. Adam Smith. New York: St. Martin’s Press.

Dickey, Laurence. 1986. Historicizing the ‘Adam Smith Problem’: Conceptual Historiographical, and Textual Issues. The Journal of Modern History 58 (3).

Dwyer, John. 1998. The Age of the Passions: An Interpretation of Adam Smith and Scottish Enlightenment Culture. East Linton, Scotland: Tuckwell Press.

Eden, F. M. 1928. The State of the Poor, ed. A. G. L. Rogers. London: Routledge.

Goodstein, R. L. 1951. The Foundations of Mathematics. Leicester, U.K.: University College of Leicester.

Hollander, Samuel. 1976. The Economics of Adam Smith. Toronto: University of Toronto Press.

Mitchell, Wesley. 1967. Types of Economic Theory. New York: Kelley.

Rae, John.1965. Life of Adam Smith. New York: Augustus M. Kelley. (Orig. pub. 1895).

Viner, Jacob. 1928. Adam Smith and Laisse-Faire. In Adam Smith 1776-1926. Chicago: University of Chicago Press.

Winch, Donald. 1996. Riches and Poverty. Cambridge, U.K.: Cambridge University Press.

Salim Rashid

Smith, Adam

Overview of writings

“The Theory of MoralSentiments”

“The Wealth of Nations”

WORKS BY SMITH

SUPPLEMENTARY BIBLIOGRAPHY

Adam Smith (1723–1790) was born inKirkcaldy, Fifeshire, a fisheries and mining town near Edinburgh. Hewas the son, by a second marriage, of Adam Smith, comptroller of thecustoms at Kirkcaldy, who died early in 1723; his mother, MargaretDouglas, was the daughter of a substantial landowner in Fifeshire.Smith lived with his mother whenever he was in Scotland until herdeath in 1784; he was her only child, and he remained a bacheloruntil his death.

Smith received his elementary schooling inKirkcaldy and entered the University of Glasgow in 1737, graduatingwith an M.A. in 1740. He then went to Oxford University as a Snellfellow at Balliol College, where he stayed until 1746. Beyond thefact that at Glasgow he was a student of Francis Hutcheson, almostnothing is reliably known about his intellectual experiences eitherat Glasgow or at Oxford. From 1746 to 1748 he lived with his motherin Kirkcaldy, presumably continuing his studies and awaiting anopening for a career in some remunerative post. Between 1748 and1751, under the sponsorship of some of the leading intellectuals ofEdinburgh, he gave several successful series of public lectures, onrhetoric and belles-lettres, on jurisprudence, and perhaps onother subjects. On the strength of the reputation gained by theselectures, he was elected in 1751 to the professorship of logic at theUniversity of Glasgow. When the chair of moral philosophy becamevacant later in the same year, he was elected to that superior post,which he occupied until 1763. In 1759 he published his first book,The Theory of Moral Sentiments.

Early in 1764 Smith went toFrance as tutor of the young duke of Buccleuch, stepson and ward of Charles Townshend. Smith remained in France from early in 1764 untillate in 1766, most of the time in Toulouse but for some months inParis, where he saw a good deal of the leading physiocrats and philosophes. He also visited Geneva, where he made the acquaintance of Voltaire. After his return to England in 1766, he was until earlyin 1767 an adviser to Charles Townshend, then chancellor of theexchequer and working on his fatal plan for taxing the American colonies; Smith’s contribution to this plan, if any,is unknown. Endowed with a generous pension for life from the duke of Buccleuch, Smith returned in 1767 to Kirkcaldy, where he remaineduntil early in 1773, working on The Wealth of Nations. From 1773until early in 1776 he was again in London, completing the book butalso advising the government occasionally on economic matters. OnMarch 9, 1776, The Wealth of Nations was finally published,and soon thereafter Smith returned once more to Kirkcaldy. Early in1778, he was appointed a commissioner of customs for Scotland andalso a commissioner of the salt duties. These were not sinecureposts, as has often been alleged, but required his presence inEdinburgh for the greater part of each week throughout the year. Forthe rest of his life, he held these posts and lived in Edinburgh,where he died on July 17, 1790.

Overview of writings

TheTheory of Moral Sentiments and The Wealth of Nations were theonly full-length books that Smith wrote; however, he keptrevising both of them for successive editions, and the additions inthe sixth edition of The Theory of Moral Sentiments, which waspublished only a few weeks before his death, were substantial inextent and importance. He contributed three essays to periodicals in1755 and 1761, and a collection of essays on literary andphilosophical subjects was first published posthumously in 1795(“Essays on Philosophical Subjects” 1963). In 1896Edwin Cannan edited and published a recently found student’sreport of Smith’s economic lectures as given in 1763 at theUniversity of Glasgow (Lectures on Justice . . . 1964). In1963 John M. Lothian edited and published a student’s reporton Smith’s lectures on rhetoric and belles-lettres atGlasgow in 1762/1763 (Lectures on Rhetoric . . . 1963), which he hadshortly before purchased at an auction sale in Scotland. W. S.Howell, in an as yet unpublished manuscript, describes these lecturesas “an important and original revolutionary document in animportant revolution in the history of rhetorical theory,” the“revolution” consisting of the substitution for the oldrhetoric stemming from Aristotle and Cicero of a new rhetoric basedon the new learning of Bacon, Descartes, Locke, and others. At thesame auction Lothian also purchased a student’s report ofSmith’s economic lectures at Glasgow. This report, which isnow in the possession of the University of Glasgow, is substantiallyfuller and also, it has been stated, superior in quality to thatpublished by Cannan in 1896. Smith is said to have lectured also atthe University of Glasgow on nat-ural theology. Shortly beforehis death he supervised the burning of almost all of his manuscripts,some 16 folio volumes.

Smith clearly had a wide range ofinterests. The evidence available suggests that he reached his basicmethodological and philosophical principles early in his career andthat his destruction of manuscripts before his death was probablymotivated much more by dissatisfaction with their form or with theirincomplete state than by any fundamental change in his views.

Almost everything Smith wrote, in its methodological implicationsif not in its concrete subject matter, has some relevance for socialthought, but it is expedient here to concentrate on the two books hepublished during his lifetime. Many writers, including the presentauthor at an early stage of his study of Smith, have found these twoworks in some measure basically inconsistent. But in much of hiswriting Smith worked from what he called systems and what today wouldbe called models. He was aware that “systems” areincomplete in the factors they take into account. Had he been able tocomplete his total system, he would probably have demonstrated thatthe apparent inconsistencies were often not real ones, but weremerely the consequences of deliberate shifts from one partial modelto another.

In a letter of November 1, 1785, to a Frenchcorrespondent, Smith wrote that he had “. . . two other greatworks upon the anvil; the one is a sort of Philosophical History ofall the different branches of Literature, of Philosophy, Poetry andEloquence; the other is a sort of theory and History of Law andGovernment. . . . But the indolence of old age, tho’ Istruggle violently against it, I feel coming fast upon me, andwhether I shall ever be able to finish either is extremelyuncertain” ([1785] 1896, p. 166). The manuscripts of these two“great works” presumably were among those destroyedshortly before his death.

“The Theory of MoralSentiments”

The first thing to note about The Theory ofMoral Sentiments is its title. It is a “theory”or “system,” that is, it consciously and deliberatelyemploys some measure of patterned abstraction and thus does notprofess to account for all the relevant facts of the real world. Itsprimary concern is only with that part of human psychology which isinvolved in the interrelationships of men living in communities—the“moral sentiments,” that is, the passions,propensities, affections, feelings, whether of approbation or ofdisapproval, aroused by these interrelationships. These sentiments are intermediate, in degree of reflection or“reason” involved, between the basic instincts that manshares with the animals and the calculation or ratiocination ofsophisticated man as a reasoning being. When and how and in whatdegree these sentiments operate Smith discovered through observationof his neighbors, and presumably also, although he apparently neverexplicitly said so, through disciplined introspection exercised onthe assumption that men are substantially alike in their subrationalpsychology.

To show how the sentiments operate to socialize theindividual, to fashion him into a disciplined member of a harmonioussocial group, Smith introduced into his model the concept of“spectators,” distinguishing two main species. Thereis, first, the spectator external to yourself, the“real” spectator, who, by manifesting in some mannerhis sentiment of approval or disapproval of your behavior, exercisesan influence on you. There is, second, the internal spectator,yourself, operating on two distinct levels: first, your imaginationof what the reaction of a hypothetical external spectator would be toyour actual or contemplated behavior; second, your own moraljudgment, the judgment by your own conscience, by “the manwithin your breast,” by the “impartialspectator.” This whole complex mechanism of psychologicalresponse by men to their neighbors’ feelings of approval ordisapproval, which Smith called sympathy, he regarded as the majorfactor in creating and maintaining a socialized community. Itinvolves, according to Smith, not only the desire to win the praiseor approval of others but also the desire to be praiseworthy; whenthe two desires are in conflict, conscience decrees that the lattershall prevail.

Commentators have objected that Smith heredescribed a circular process, operating through sympathy like a setof “mirrors,” and that he failed to explain adequatelyeither what behavior is approved and what is disapproved or theorigin or genesis of the social passions. Yet, at least byimplication, Smith did offer such an explanation. He emphaticallyrejected human reason as the source of these sentiments. Also byimplication he denied that there is a natural evolutionary process inwhich groups with a pattern of sentiments that is predominantlyuseful survive, whereas those groups with a pattern of antisocialsentiments perish. Smith maintained that man is endowed by God withhis moral sentiments and that these sentiments bind men to each otherbecause the deity so made them in its concern for the happiness ofmankind. Smith ridiculed those who attributed to man’s wisdomwhat is really the wisdom of God,or of nature. Here Smith was, ofcourse, invoking “final causes,” or “theinvisible hand.”

It is hard for some people today tobelieve that Smith’s optimistic deism was completely sincere,and they tend to attribute his exposition of it to prudentialconsiderations or to concessions to a mode of speech called for bythe standards of propriety of the time. But in the“enlightened” Scottish circles of Smith’s timeoptimistic deism, sincerely held, was practically universal. Althoughorthodox Calvinists rejected its optimistic aspect as not religiousenough and David Hume rejected it as calling for too much religiousfaith, aside from Hume, no one among Smith’s teachers,colleagues, friends, or followers is identifiable as a critic ofoptimistic deism.

There may be genuine difficulty in reconcilingSmith’s deistic interpretation of the origin of the moralsentiments with other aspects of his social thought, including someof his specifically economic thought. Smith attributed to providencethe original endowment of mankind with a set of moral sentimentsconducive to the happiness of mankind. But unless he also assumedthat providence intervenes constantly or intermittently to makeappropriate adjustments in these sentiments as the physical or humanenvironment changes through time (for which belief there is noevidence in anything he wrote), Smith would seem to have beenpostulating a static social psychology, at least on the subrationallevel, in what he himself admitted to be in many relevant respects aconstantly changing and evolving world. Smith did recognize theimpact of the variability of custom and fashion on the mode ofoperation of the moral sentiments, but, in spite of this variability,he specifically recognized only one major historical affront to thesystem of moral sentiments—the prevalence of infant exposure in thelater period of ancient Greek civilization. He disposed of thisexception as a temporary aberration, outweighed by the manyoutstanding virtues of Greek civilization at the time. Nowhere did heattempt to explain how antisocial passions and aberrations inconflict with the “Author of Nature’s” designcame into existence. But in keeping with the notion then held by somescientists that there is in nature a self-equilibratingmechanism by which aberrations are prevented from prevailing, anotion having some analogy to the modern scientific notion of“homeostasis,” Smith held that there is an inherenttendency in the moral sentiments to overcome such aberrations.

Smith’s treatment of “justice” in The Theoryof Moral Sentiments is especially important for a properinterpretation of The Wealth of Nations. Smith always usedthe word to mean substantially what Aristotle and the Schoolmen meantby “commutative justice.” Justice is a negative virtue;it consists of refraining from injury to another person and fromtaking or withholding from another what belongs to him. It is thusdistinct from benevolence, friendship, or charity. Smith consideredjustice, so understood, to be the necessary foundation of a viablesociety. It is a moral sentiment and thus finds voluntary or naturalexpression. The natural or spontaneous sentiment of justice is not,however, strong enough in ordinary men to meet the needs of society.Consequently, men have been endowed with the propensity to formulaterules of justice on the basis of their experience and reason, andthey accept these rules for themselves and press them upon others.But even this is inadequate for the needs of society, and thereforegovernment is established, its chief function being the coerciveenforcement of justice on the individual members of the communitythrough law and the magistrates.

The moral sentiments operate atdifferent levels of intensity according to the nature and thestrength of the external stimuli impinging upon men. Smith’sdiscussion here closely parallels Hume’s discussion in ATreatise of Human Nature (1739–1740, book 2, part 2,especially sec. 4) and elsewhere: in describing the way in which thestrength of the “passions” between individuals varieswith the closeness of their relationship with respect to duration,space, kinship, nationality, occupation, rank, and so forth, Humerepeatedly used the term “distance” metaphorically tosignify any factors separating individuals from each other, a usagethat goes back at least to Aristotle and Thomas Aquinas. AlthoughSmith stressed distance in its primary spatial sense as an importantfactor in weakening the intensity of the moral sentiments—“Towhat purpose should we trouble ourselves about the world in the moon?All men, even those at the greatest distance, are no doubt entitledto our good wishes, and our good wishes we naturally give them. Butif, notwithstanding, they should be unfortunate, to give ourselvesany anxiety upon that account seems to be no part of our duty”([1759] 1966, p. 197)—he also used the same idea, if not the actualterm “distance,” for the absence not only of spatialproximity but also of membership in the same family, village, town,province, country, circle of friends, guild or company, church,social class, or some other psychologically unifying bond. In similarmanner he took it for granted that the participants in a large numberof the transactions which occur in the market are (in themetaphorical sense) at an extreme distance from each other; they are,in relation to each other, anonymous, or strangers, so that there islimited occasion for any moral sentiments other than justice to comeinto operation.

In The Theory of Moral Sentiments, Smithminimized the contribution that even the highly successful pursuit ofwealth or of higher social status makes to the happiness of anindividual. Both in this work and in The Wealth of NationsSmith treated increase in aggregate wealth as a highly worthyobjective for a country, but apparently in only one passage in eitherwork is increase in per capita wealth or income expressly mentionedas a reason for the advantage of an increase in aggregate wealth.Smith attached little importance to an increase above a quite modestlevel of per capita income, but he attributed great value to theincrease of population that an increase in aggregate wealth fostersand supports. With his optimistic view of the amount of happinessordinarily enjoyed even by the poor, Smith believed that growth ofpopulation is ordinarily conducive to growth in the aggregate amountof human happiness. He also found value in increase of aggregatewealth because it makes possible an increase in handsome buildingsand great avenues in the towns, the “magnificence” soextolled by the writers of classical antiquity and of theRenaissance, but he treated these as public rather than individualriches. Smith also included as an advantage of growth of aggregatewealth the progress of aesthetic and intellectual culture and of“civilization” in general, which he associated withcommunal enrichment.

“The Wealth of Nations”

The Wealth of Nations is of great importance for three mainreasons. First, it presents an impressive collection of economicdata, gathered together by Smith from wide reading in publicationsfrom the time of the ancient Greeks and Romans to his own time andfrom acute observation of Britain and France in his own time. Smithused this material to illustrate and support his analysis ofcontemporary economic process, to provide a factual basis for hisfrequent ventures into the philosophy or theory of economicdevelopment, and at times to digress into narrative history presentedwithout any clear relationship to his theoretical endeavors. TheWealth of Nations was heavily drawn on as a reliable source bookfor factual data by several generations of writers on economicmatters, especially, of covrse, in the English-speakingcountries. It is still useful for this purpose.

Second, it wasthe most comprehensive and ambitious attempt up to Smith’stime to present in comprehensive, and at the same timecoordinated, fashion the nature of economic process in apredominantly “individualistic,” or“competitive,” or “market,” or“capitalistic” society, to use modern adjectives. For along time it largely determined the selection of issues and theinitial analytical approach of economists in many countries, evenwhen in their treatment of The Wealth of Nations they weremuch more critics than disciples.

Third, it was an evaluating andcrusading book, which sharply criticized existing society andgovernment and argued strongly for changes in national policy,especially in relation to the extent and nature of governmentintervention in economic matters—domestic, colonial, andinternational. Not immediately, but within a generation, it became apowerful influence on writers on economic policy. Later still, bothdirectly and indirectly through those influenced by it, it became asignificant factor in determining the course of national policy notonly in Britain but in other countries as well. This is much morethan any other economic work has ever achieved; and Smith probablyhas had much more influence than any other economist.

Economic development

Smith was deeply interested in the history, thecauses, and the natural and artificial limitations of what we nowcommonly call “economic development” and what hereferred to as “progress,” “improvement,”“progress of improvement,” and “progress ofopulence.” His treatment of economic development is scatteredthroughout almost the whole work. He put most stress on the followingfactors as favorable to economic development: abundance of naturalresources; technological progress as promoted by extension ofdivision of labor; freedom of private enterprise from its ownpropensity to monopolistic organization; freedom from such hurtfulartificial institutions as primogeniture; and freedom from officialpolicies and practices that act as brakes on individual initiative ormisdirect it. The basic source of economic progress, however, hefound in the striving of individuals to improve their economic statusor their rank in society— “. . . the desire of bettering ourcondition, a desire which . . . comes with us from the womb, andnever leaves us till we go into the grave” ([1776] 1950, p.323). He did not believe that this desire does or should operatewithout restraint. It is disciplined by the sentiment of justice andby governmental enforcement of justice. It has to compete,beneficially or otherwise, with “the passion for presentenjoyment,” which acts as a restraint on accumulation; withindolence; with the occasional “liberality” ofemployersto their workmen and of landlords to their tenants; and with“the pride of man [which] makes him love to domineer,”so that a plantation owner may prefer the service of slaves to thatof freemen even where the latter would be more profitable. All ofthese are factors that are present in a different degree in differentorders of society and in different circumstances. Smith, moreover,saw the desire for individual enrichment and the desire to preserveor improve one’s social status as occasionally coming intoconflict, as, for instance, when one’s rank calls for profuseexpenditure but the preservation or augmentation of one’sestate calls for frugality.

Smith placed great emphasis on thedivision of labor as a requisite of economic development; he alsostressed the interrelations of the division of labor with technologyand with commerce. He found a subrational or nonutilitarian originfor the resort to specialization (although not for itsintensification) in a “propensity to truck and barter”innate in mankind. Here, following certain predecessors, heidentified three contributions that the division of labor makes toproductivity: by permitting indefinite repetition of simple tasks, itpromotes dexterity; it eliminates the loss of working time involvedin changing from one task to another; it facilitates invention ofmachinery, both by the artisans on the job and by outside observers.Smith stated that extension of the division of labor makes morecapital necessary and therefore makes frugality and accumulationeconomic virtues. He always minimized the differences of innateability or aptitude between different persons and thus gave little orno weight to the advantage claimed for specialization by a continuouschain of writers from ancient Greece on—that it makes possible theassignment of workers to those tasks for which they have the greatestaptitude. Smith pointed out that the division of labor is limited bythe extent of the market and that growth of population bothconstitutes an extension of the market and is made possible by theincrease of aggregate production that results from an extension ofthe division of labor. Growth of population, growth of aggregatewealth and income, and extension of the division of labor are thusexplained as mutually dependent and mutually supporting factors.

Smith recognized, under the influence of Rousseau, that thedivision of labor has a drawback from a humanitarian point of view:the worker as a person tends to be degraded by the monotony of hiswork and the enlistment of only a narrow range of his mentalfaculties. Smith thought, however, that this predicament could beremedied by education. This is one of the reasons that Smithaccepted as a desirable function of government the financing, atpublic expense, of elementary education for the children of the poor.Smith’s discussion was cited by Karl Marx in his presentationof the thesis that a degradation or “alienation” oflabor is a consequence of division of labor, but Marx was unaware ofthe prior treatment of the subject by Rousseau to which Smith wasindebted.

Smith’s belief that the tendency to aggregateimprovement is “natural,” i.e., essentially the productof man’s basic psychology, may have been a factor contributingto his skepticism about the possibility that government may makemajor positive contributions to economic development. While hecharged government in general with operating as a brake on economicprogress, Smith nevertheless remained an optimist. In man’szeal to better his condition, the “wisdom of nature”had provided a counterforce to mistaken government policies andpractices that was sufficiently powerful to make possible, in mostcases, a thriving and prospering economy.

Smith’s eclecticism

It is a common error to interpret The Wealth ofNations as an unqualified eulogy of private enterprise and thebusinessman. It was only private enterprise operating in a fullycompetitive manner that Smith praised. He depicted businessmen ingeneral as having a constant propensity to organize themselves intogroups capable of exercising “monopoly” power, groupsto which he undiscriminatingly attributed the capacity and, byimplication, the will to exact the highest price at which any salescan be made. He also charged businessmen with major responsibilityfor persuading or pressing government to establish special privilegesand legal monopolies for favored groups. Where monopoly isunavoidable, he preferred government to private operation. He hadonly deep and violently phrased scorn for the morals of businessmenorganized in groups either to operate as monopolists or to obtainspecial privileges from government. The Wealth of Nations doeslavish praise on the businessman, but only when he is on his goodbehavior.

Smith’s main merits as an“analytical” or “scientific” theorist, touse modern eulogistic terms for “pure” economic theory,lie in his eclectic spirit. While deliberately resorting toabstraction, he very much doubted that abstraction could provideeither understanding of the real world or, by itself, safe guidancefor the legislator or statesman. On specific points of economicanalysis some predecessors did better than Smith, and he failed toabsorb fully some of the genuinely valuable analyticalcontributionsof Hume, the physiocrats, and Tur-got. If“analytical” as a eulogistic term is to be interpretedstrictly in terms of degree of rigor, internal consistency, and closeanalogy to abstract mathematical operations, Schumpeter’sverdict that “the Wealth of Nations does not contain asingle analytic idea, principle, or method that was entirely new in1776” (Schumpeter 1954, p. 184) is difficult to challenge, andnot merely because valuable ideas that are “entirelynew” are hard to spot in any area of intellectual endeavor.

In both his major works Smith repeatedly amended his system,bringing into his discussion some hitherto neglected variable, somefresh observation of fact, some new objective. He has been rightlycharged by critics with resorting profusely to such qualifications as“perhaps,” “generally,” and “inmost cases,” with the consequence that his models are nottight or rigorous. It is arguable, however, by those who, if forcedto choose, prefer realism, or at least the pursuit of it, to rigorand elegance of analysis, that both of his major works are on thewhole made better by the qualifications he sprinkled in their pagesand that he would have made them still better, although stilluntidier, if he had used even more qualifying adjectives or phrases.He would at least have made it harder for later critics to use shortquotations, out of context or stripped of their qualifications, toshow his inability to avoid flagrant self-contradiction.

The question of the relation of relative labor input to exchangevalue is one instance where Smith appears repeatedly to have shiftedfrom one belief to another; however, it may be that actually he wasonly shifting from one abstraction to another, while decorating hisexposition (in a manner common then and not unknown now) withtraditional maxims exalting the role of labor—maxims whosefamiliarity alone made them seem to carry logical or empiricalweight. Smith can be quoted in support of all of the followingpropositions: that labor is the sole “source” of marketvalue; that labor is the sole regulator of exchange value; that laborhas, among the elements entering into production, a peculiar andperhaps even an exclusive value-creating power; that therelative values of different commodities are, or should be,proportional to their labor-time costs or to their wage costs;that all incomes are extracted from the product of labor. For someeconomists any one of these propositions suffices to label itsexponent a “labor theory of value” theorist. It seemssafer, nevertheless, not to attribute to Smith much more than thebelief that in commercial or capitalist economies relativelabor-time costs per unit of product have a large part in the determination of the exchange values of differentcommodities, and relative wage-costs even more.

Economic policy

The separation of normative fromnon-normative, or policy, economics was a late development inthe history of economics, and even today it is hard to fully executethis separation because many of the standard terms used in economicanalysis carry with them an almost automatic normative or evaluativeimplication: for example, “productive,”“utility,” “value,”“equilibrium.” Prior to Smith’s time it was rarefor any writer to attempt to distinguish between, on the one hand,the study of economics in the purely “scientific” senseof the pursuit of understanding for its own sake, and, on the otherhand, the use of economic analysis as an instrument for theformulation or evaluation of national economic policy. (RichardCantillon was one of the few who did make this distinction.)

WhenSmith wrote The Wealth of Nations the term “politicaleconomy” was already in wide use. It was used with someambiguity, but predominantly with emphasis on“political,” indicating reference to national policy.The term “economics” was rarely used by itself exceptin its original Greek meaning of household management. When Smithchose as the title of his book An Inquiry Into the Nature andCauses of The Wealth of Nations instead of something like“Principles of Political Economy,” it may be surmisedthat he did so because he thought of his book as including both anobjective study of processes and causes, such as would be the subjectmatter of a treatise on physics or physiology, and a discussion of“political economy” proper, or an evaluative orhortatory treatment of governmental economic policy. Smith used theterm “political economy” a dozen or so times, and everytime, except perhaps once, he meant the economic policy of a nation.Since Smith generally took a dim view of the benefits to be derivedfrom national economic policy, political economy must for him havebeen nearly synonymous with “economic poison.”

Smith, of course, was not an exponent of philosophical anarchism,which apparently had nowhere been systematically expounded beforeWilliam Godwin’s Enquiry Concerning Political Justice(1793). If Smith had adopted the term“laissez-faire” as an appropriate label for hisown policy views, he undoubtedly would not have interpreted itliterally as a condemnation of all government interference with theactivities of private individuals. He was as emphatic as he could beon the vital need for government enforcement of justice,and there isevidence in The Wealth of Nations that he would have includedin this function not only the formulation of rules of justice and theprovision of machinery for the punishment of their infraction, butalso the prevention of certain infractions by such enactments asstandardization of weights and measures, requirements thatcommodities offered for sale be so stamped as to indicate theirquality, and the establishment of building standards that wouldhinder individuals from subjecting others to the risk of fire or toother hazards to their property or their personal safety. Smithassigned to government the care of the defense of the communityagainst foreign aggression or internal disorder and the levy of taxesto finance these activities. He also conceded to government theprovision of those services needed by the community which could notpractically be entrusted to private enterprise, because of the scaleon which they had to be carried out or for other special reasons. Onat least two issues—a “standing” or professionalarmy versus a militia and the autonomy of the East IndiaCompany—Smith expressed a strong preference for governmentalcontrol in addition to or instead of private management. In general,where monopoly was unavoidable, he much preferred that it be underpublic rather than private control.

Nevertheless, it is as anexponent of free enterprise; free trade; noninterference ofgovernment in the individual’s choice of occupation,residence, or investment; freedom for the individual to make hiseconomic decisions of all kinds in response to the price movements offree and fully competitive markets—in short, of“economic liberalism” or“laissez-faire,” as these terms were used in thenineteenth century—that Smith made his chief mark on thehistory of economics and on the economic and social history of theWestern world.

These economic freedoms were to Smith“natural rights,” essential constituents of the dignityof man. He also valued them from a utilitarian point of view, asgiving maximum scope for incentives to industry and to efficiency. Inthe international sphere he saw in them the most solid factorsworking to bring peace between nations. Modern economists findSmith’s arguments oversimplified and perhaps also tooemotional and one-sided. But many of them still acknowledge astrong influence of his writings on their system of values and gladlycontinue to do homage to his name.

Jacob Viner

[For the historical context of Smith’s work, seeEconomic thought, article onMERCANTILISTTHOUGHT; and the biographies ofCantillon;hume;Mandeville;for discussion of the subsequent development of his ideas, seeLaissez-faire;and the biographies ofBastiat; Lauderdale; Ricardo;Say.]

WORKS BY SMITH

(1759) 1966 The Theory of Moral Sentiments. New York:Kelley.

(1776) 1950 An Inquiry Into the Nature and Causes of The Wealth of Nations. Edited by Edwin Cannan. London: Methuen.→ A two-volume paper back edition was published in 1963by Irwin.

(1785) 1896 [Letter to the Due de la Rochefoucauld.]Economic Journal 6:165–166.

Essays on Philosophical Subjects. Volume 5, pages 49— 399 in Adam Smith, The Worksof Adam Smith. Aalen (Netherlands): Zeller, 1963.

Lectureson Justice, Police, Revenue and Arms, Delivered in the University of Glasgow . . . Reported by a Student in 1763. Edited by EdwinCannan. New York: Kelley, 1964. → The Cannan edition was firstpublished in 1896.

Lectures on Rhetoric and Belles Lettres,Delivered in the University of Glasgow . . . Reported by aStudent in 1762–63. Edited by John M. Lothian. London and NewYork: Nelson, 1963.

The Works of Adam Smith. 5 vols. Aalen(Netherlands): Zeller, 1963.

SUPPLEMENTARY BIBLIOGRAPHY

Adam Smith, 1776–1926: Lectures. 1928 Univ. of Chicago Press.→ Contains lectures by John Maurice Clark and others tocommemorate the sesquicentennial of the publication of The Wealthof Nations.

Bittermann, Henry J. 1940 Adam Smith’sEmpiricism and the Law of Nature. Journal of Political Economy 48:487–520, 703–734.

Bonar, James (1894) 1932A Catalogue of the Library of Adam Smith. 2d ed. London:Macmillan.

Godwin, William (1793) 1946 Enquiry ConcerningPolitical Justice and Its Influence on Morals and Happiness. 3ded., rev. 3 vols. Univ. of Toronto Press.

Harvard University, Graduate School of Business Administration, Baker Library, Kresslibrary of Business and Economics 1939 The Vanderblue Memorial Collection of Smithiana. Boston, Mass.: The Library.

Hume, David (1739–1740) 1958 A Treatise of Human Nature.Edited by L. A. Selby-Bigge. Oxford: Clarendon. →Reprinted from the original edition and edited with an analyticalindex.

Macfie, A. L. 1959 Adam Smith’s Moral Sentiments as Foundation for His Wealth of Nations. Oxford Economic PapersNew Series 11:209–228.

Macfie, A. L. 1961 AdamSmith’s Theory of Moral Sentiments. Scottish Journal ofPolitical Economy 8:12–27.

Rae, John (1895) 1965Life of Adam Smith. With an introduction and guide by Jacob Vlner. New York: Kelley.

Rosenberg, Nathan 1965 Adam Smith on the Division of Labour: Two Views or One? Economica New Series32:127–139.

Schumpeter, Joseph A. (1954) 1960 Historyof Economic Analysis. Edited by E. B. Schumpeter. New York:Oxford Univ. Press.

Scott, William R. 1937 Adam Smith asStudent and Professor. Glasgow: Jackson.

Spengler, Joseph J.1959 Adam Smith’s Theory of Economic Growth. SouthernEconomic Journal 25:397–415; 26:1–12.

Adam Smith

Excerpt from An Inquiry into

the Nature and Causes of the Wealth of Nations

Published in 1776

"The division of labor, however, so far as it can be introduced, occasions, in every art, a proportionate increase of the productive powers of labour."

Adam Smith (1723–1790) was one of the first people to write about what is now called economics, the way a people in a society make a living and spend money. Smith was a professor at the University of Glasgow in 1776 when he published his most famous work, An Inquiry into the Nature and Causes of the Wealth of Nations, usually called simply The Wealth of Nations. His topic was how the British government could increase the wealth of the country by adopting certain policies and avoiding others. Smith believed in laissez-faire (pronounced less-say-FAIR, a French term meaning "free to do") economics, relying on the free market to proceed without government interference. His book has been studied ever since, both by government officials and by economists (people who study how people and nations make a living).

One of Smith's concerns was how to improve the productivity of labor. (Productivity is the measure of how much value a person creates in a period of time, such as a week or a year. Smith thought the best way to maximize productivity was to let individuals focus on specific tasks and become very good at doing just one or two things, a theory he called the division of labor. The notion that workers should specialize in a single task was later used in setting up assembly lines to make complex objects, like a car, by letting each worker do just one thing, such as attach the wheels.

This selection from The Wealth of Nations comes from the very beginning of the book. The example Smith uses to illustrate his point is people who manufacture pins (like those used in sewing). Smith says that if an individual were to try to do the whole job of making pins—from pulling a piece of wire into a very thin strand to putting the head on the pin—the result might be producing one pin a day. But if ten people divided the task into its separate parts, together they could produce about forty-eight thousand pins a day—or about forty-eight hundred pins per individual.

Smith's example describes the way new factories were being set up at the beginning of the Industrial Revolution, the term used to describe the introduction of new water- or steam-powered machines in factories to replace work traditionally done by hand. The Industrial Revolution was getting started at the same time Smith was writing. In the new factories, work was reorganized in the way Smith recommended, with an individual worker assigned part of the overall task. (In the older methods, workers at home were responsible for the whole process of spinning yarn or weaving cloth, for example.) Smith wrote that the division of labor was an important reason that Britain was becoming wealthier than nations where traditional methods were used.

Smith thought farming was an exception to the idea of division of labor. One farmer usually did a variety of jobs as one season moved to the next. And for that reason, he wrote, British farming did not have an advantage over any other country's farming, whereas British manufacturing (where division of labor was the rule) enjoyed a huge advantage.

Things to remember while reading the excerpt from The Wealth of Nations:

Smith's book was published in 1776, at the beginning of the Industrial Revolution. He had not yet seen the eventual results of the division of labor—how monotonous and boring jobs could become, or how factory owners would insist that workers stay on the job for twelve or sixteen hours a day, long after they were exhausted.

Smith was thinking about how to increase the wealth of Great Britain as a whole society. His study on the division of labor was not so concerned with how much workers should be paid, although he took up this subject later in his book.

In England in the 1700s, working people had very few political rights, and there was not much concern for their welfare. On the other hand, people who owned property—both land, used for farming, and equipment or facto-ries—had a lot of rights. Smith was primarily concerned with how property owners should behave to increase the wealth of the country.

Smith used the language and spelling of his time, which is preserved in this excerpt.

The Life of Adam Smith

Born in 1723 in Kirkcaldy, Scotland, Adam Smith was the only child of Adam Smith and Margaret Douglas.

A sickly but brilliant child, he was always attracted to books more than physical activity. He entered the University of Glasgow at age fourteen. Three years later, when he was seventeen, he went to Oxford University, where he stayed for seven years. He returned to Edinburgh, Scotland, in 1748.

His best-known work is An Inquiry into the Nature and Causes of the Wealth of Nations (1776), in which he advocates a system of competition rather than the highly regulated foreign trade prevalent at the time.

Smith thought taxes should be kept low, and that people should be free to exercise their own best judgment about how to conduct business, including foreign trade, which was highly regulated at the time he published The Wealth of Nations.

Adam Smith is sometimes called the father of modern economics, and many of his ideas are still promoted today.

Excerpt from The Wealth of Nations

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity , and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.

Labour:

British spelling of labor; work.

Dexterity:

Quickness; strength.

The effects of the division of labour, in the general business of society, will be more easily understood, by considering in what manner it operates in some particular manufactures . It is commonly supposed to be carried furthest in some very trifling ones; not perhaps that it really is carried further in them than in others of more importance: but in those trifling manufactures which are destined to supply the small wants of but a small number of people, the whole number of workmen must necessarily be small; and those employed in every different branch of the work can often be collected into the same workhouse, and placed at once under the view of the spectator.

Manufactures:

Factories.

Trifling:

Minor.

In those great manufactures, on the contrary, which are destined to supply the great wants of the great body of the people, every different branch of the work employs so great a number of workmen, that it is impossible to collect them all into the same workhouse. We can seldom see more, at one time, than those employed in one single branch. Though in such manufactures, therefore, the work may really be divided into a much greater number of parts, than in those of a more trifling nature, the division is not near so obvious, and has accordingly been much less observed.

To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One mandraws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.

Rendered:

Produced.

Straights:

Straightens.

Manufactories:

An early form of the word "factories." The word is related to the word "manufacturing," meaning literally "to make by hand," even though machines have come to be involved.

Middling:

Middle, or medium.

Wrought:

Made.

In every other art and manufacture, the effects of the division of labour are similar to what they are in this very trifling one; though, in many of them, the labour can neither be so much subdivided, nor reduced to so great a simplicity of operation. The division of labour, however, so far as it can be introduced, occasions, in every art, a proportionate increase of the productive powers of labour. The separation of different trades and employments from one another, seems to have taken place, in consequence of this advantage. This separation too is generally carried furthest in those countries which enjoy the highest degree of industry and improvement; what is the work of one man in a rude state of society, being generally that of several in an improved one. In every improved society, the farmer is generally nothing but a farmer; the manufacturer, nothing but a manufacturer. The labour too which is necessary to produce any one complete manufacture, is almost always divided among a great number of hands. How many different trades areemployed in each branch of the linen and woollen manufacturers, from the growers of the flax and the wool, to the bleachers and smoothers of the linen, or to the dyers and dressers of the cloth! The nature of agriculture, indeed, does not admit of so many subdivisions of labour, nor of so complete a separation of one business from another, as manufactures. It is impossible to separate so entirely, the business of the grazier from that of the corn-farmer, as the trade of carpenter is commonly separated from that of the smith. The spinner is almost always a distinct person from the weaver ; but the ploughman , the harrower , the sower of the seed, and the reaper of the corn, are often the same. The occasions for those different sorts of labour returning with the different seasons of the year, it is impossible that one man should be constantly employed in any one of them. This impossibility of making so complete and entire a separation of all the different branches of labour employed in agriculture, is perhaps the reason why the improvement of the productive powers of labour in this art, does not always keep pace with their improvement in manufactures. The most opulent nations, indeed, generally excel all their neighbours in agriculture as well as in manufacturers; but they are commonly more distinguished by their superiority in the latter than in the former. Their lands are in general better cultivated , and having more labour and expence bestowed upon them, produce more in proportion to the extent and natural fertility of the ground. But this superiority of produce is seldom much more than in proportion to the superiority of labour and expence. In agriculture, the labour of the rich country is not always much more productive than that of the poor; or, at least, it is never so much more productive, as it commonly is in manufactures. The corn of the rich country, therefore, will not always, in the same degree of goodness, come cheaper to market than that of the poor. The corn of Poland, in the same degree of goodness, is as cheap as that of France, notwithstanding the superior opulence and improvement of the latter country. The corn of France is, in the corn provinces, fully as good, and in most years nearly about the same price with the corn of England, though, in opulence and improvement, France is perhaps inferior to England. The corn-lands of England, however, are better cultivated than those of France, and the corn-lands of France are said to be much better cultivated than those of Poland. But though the poor country, notwithstanding the inferiority of its cultivation, can, in some measure, rival the rich in the cheapness and goodness of its corn, it can pretend to no such competition in its manufactures; at least if those manufactures suitthe soil, climate, and situation of the rich country. The silks of France are better and cheaper than those of England, because the silk manufacture, at least under the present high duties upon the importation of raw silk, does not so well suit the climate of England as that of France. But the hard-ware and the coarse woollens of England are beyond all comparison superior to those of France, and much cheaper too in the same degree of goodness. In Poland there are said to be scarce any manufactures of any kind, a few of those coarser household manufactures excepted, without which no country can well subsist .

Rude:

Primitive.

Grazier:

A farmer who puts out cattle to feed, or graze, on grass.

Spinner:

One who spins, or makes yarn from raw materials.

Weaver:

One who makes cloth from yarn.

Ploughman:

One who operates a plow.

Harrower:

Planter.

Opulent:

Wealthy.

Cultivated:

Prepared.

Fertility:

The richness of the soil.

Notwithstanding:

Ignoring.

Subsist:

Survive.

This great increase of the quantity of work, which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.

Species:

Type.

Facilitate:

Make easier.

Abridge:

Shorten.

First, the improvement of the dexterity of the workman necessarily increases the quantity of the work he can perform; and the division of labour, by reducing every man's business to some one simple operation, and by making this operation the sole employment of his life, necessarily increases very much the dexterity of the workman. A common smith, who, though accustomed to handle the hammer, has never been used to make nails, if upon some particular occasion he is obliged to attempt it, will scarce, I am assured, be able to make above two or three hundred nails in a day, and those too very bad ones. A smith who has been accustomed to make nails, but whose sole or principal business has not been that of a nailer, can seldom with his utmost diligence make more than eight hundred or a thousand nails in a day. I have seen several boys under twenty years of age who had never exercised any other trade but that of making nails, and who, when they exerted themselves, could make, each of them, upwards of two thousand three hundred nails in a day. The making of a nail, however, is by no means one of the simplest operations. The same person blows the bellows , stirs or mends the fire as there is occasion, heats the iron, and forges every part of the nail: In forging the head too he is obliged to change his tools. The different operations into which the making of a pin, or of a metal button, is subdivided, are all of them much more simple, and the dexterity of the person, of whose life it has been the sole business to perform them, is usually much greater. The rapidity withwhich some of the operations of those manufactures are performed, exceeds what the human hand could, by those who had never seen them, be supposed capable of acquiring.

Diligence:

Effort.

Bellows:

A device that blows air into a chamber to build a fire.

Forges:

Forms.

Secondly, the advantage which is gained by saving the time commonly lost in passing from one sort of work to another, is much greater than we should at first view be apt to imagine it. It is impossible to pass very quickly from one kind of work to another, that is carried on in a different place, and with quite different tools. A country weaver, who cultivates a small farm, must lose a good deal of time in passing from his loom to the field, and from the field to his loom. When the two trades can be carried on in the same work-house, the loss of time is no doubt much less. It is even in this case, however, very considerable. A man commonly saunters a little in turning his hand from one sort of employment to another. When he first begins the new work he is seldom very keen and hearty; his mind, as they say, does not go to it, and for some time he rather trifles than applies to good purpose. The habit of sauntering and of indolent careless application, which is naturally, or rather necessarily acquired by every country workman who is obliged to change his work and his tools every half hour, and to apply his hand in twenty different ways almost every day of his life; renders him almost always slothful and lazy, and incapable of any vigorous application even on the most pressing occasions. Independent, therefore, of his deficiency in point of dexterity, this cause alone must always reduce considerably the quantity of work which he is capable of performing.

Loom:

a machine used to weave yarn into cloth.

Saunters:

Walks slowly.

Indolent:

Lazy.

Obliged:

Required.

Slothful:

Sloppy.

Deficiency:

Lacking.

Thirdly, and lastly, every body must be sensible how much labour is facilitated and abridged by the application of proper machinery. It is unnecessary to give any example. I shall only observe, therefore, that the invention of all those machines by which labour is so much facilitated and abridged, seems to have been originally owing to the division of labour. Men are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards that single object, than when it is dissipated among a great variety of things. But in consequence of the division of labour, the whole of every man's attention comes naturally to be directed towards some one very simple object. It is naturally to be expected, therefore, that some one or other of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, wherever the nature of it admits of such improvement.A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it. Whoever has been much accustomed to visit such manufacturers, must frequently have been shewn very pretty machines, which were the inventions of such workmen, in order to facilitate and quicken their own particular part of the work. In the first fire-engines , a boy was constantly employed to open and shut alternately the communication between the boiler and the cylinder, according as the piston either ascended or descended. One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve which opened this communication to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his play-fellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour.

Dissipated:

Distributed.

Shewn:

Shown.

Fire-engines:

Steam engines.

Divert:

Amuse.

What happened next …

Adam Smith's ideas were already being widely adopted when he wrote his book. These practices became increasingly widespread, and Smith was quoted (and still is quoted) as an authority on the best way to organize manufacturing.

Smith died in 1790. Efforts by factory owners to speed up production, and to keep down the cost of hiring workers, led to horrific abuses in the early 1800s. Workers—including children—were required to be on the job for twelve or more hours a day, with few breaks. Exhaustion, and the monotony of doing the same task repeatedly, led to accidents that caused serious injury or even death.

Adam Smith did not live to observe the nature of factories in the 1800s; the abuses there resulted in laws and regulations passed by the British Parliament to protect children, women, and other workers. Would he still have believed in laissez-faire had he seen these conditions?

Did you know …

Adam Smith was an acquaintance of James Watt, the man who perfected the steam engine, which was central to the Industrial Revolution. Smith and Watt belonged to a group of individuals who called themselves the Lunar Society of Birmingham—or, sometimes, the Lunaticks—because they met for dinner on nights when the moon was full so that they could see their way home by the moonlight. Their club, which included a dozen other members, met almost every month for more than thirty years.

For more information

Books

Macfarlane, Alan. The Riddle of the Modern World: Of Liberty, Wealth and Equality. New York: St. Martin's Press, 2000.

Meek, Ronald L. Smith, Marx, and After: Ten Essays in the Development of Economic Thought. New York: Wiley, 1977.

Ross, Ian Simpson. The Life of Adam Smith. New York: Oxford University Press, 1995.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 1776. Reprint, New York: T. Nelson and Sons, 1870.

Adam Smith

Born June 5, 1723

Kirkcaldy, Scotland

Died July 17, 1790

Edinburgh, Scotland

Scottish economist, philosopher

"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 necessities but of their advantages."

Adam Smith is often regarded as providing the theoretical justification for the Industrial Revolution, a period of fast-paced economic change that began in Great Britain in the middle of the eighteenth century. His masterpiece, An Inquiry Into the Nature and Causes of the Wealth of Nations (familiarly known by its abbreviated title The Wealth of Nations, 1776), was published just as the Industrial Revolution was gaining momentum in England. In it Smith argued that economic competition, rather than government regulation, was the best way to assure the greatest good for the greatest number of people. Despite this belief, Smith recognized an important role for government in making sure that business owners did not conspire to limit competition for their selfish interests.

What is the best way to assure maximum happiness for the greatest number of people? Aside from the realm of personal relationships between individuals, this question often involves the subject of economics, the systematic study of how people create wealth and how societies distribute it.

Smith was one of the first philosophers to consider this subject comprehensively, and his theories still have many advocates in the twenty-first century. He is sometimes considered the intellectual godfather of capitalism, the system that leaves ownership of factories and other types of property in private hands.

Smith's writings played an important part in gaining widespread acceptance of the capitalist economic system that came into being in Britain and the United States, namely regulated free-enterprise. Much of the economic and political history of both the United States and Britain since the late eighteenth century could be described as an ongoing series of experiments to achieve the ideal balance between individual economic freedom and social restraints (or government controls) that Smith thought offered the best chance for the greatest happiness for the greatest number of people.

Childhood and early years

Adam Smith was born in Kirkcaldy, Scotland in 1723. His father was a government official at Kirkcaldy, and he died two months before Adam was born. Adam grew up as an adoring, and adored, only son. He was not especially healthy as an infant, and in later years his mother, Margaret Douglas, was criticized for spoiling her child. Adam remained devoted to his mother for his entire life.

The most dramatic incident recorded in Adam's childhood occurred when he was about three years old. He and his mother were visiting Adam's uncle in Strathenry, Scotland, and Adam was left playing outside in the courtyard. A small group of homeless people came across the child and kidnapped him. His uncle heard the footsteps and quickly gave chase, rescuing his young nephew.

As a young boy, Adam was not physically strong enough for vigorous play. Instead, he became an avid reader. He was remembered as having a warm, friendly, and generous personality, and he had many friends.

At age fourteen, Smith became a student at the small but influential University of Glasgow for three years. In 1740, at age seventeen, he traveled to England and enrolled in Balliol College of Oxford University, where he was a student for nearly seven years. Attending college in Smith's era was quite

a different experience from what it is today. Attendance at classes was voluntary and lecturers were often paid by students, much as if going to a film or play. Smith earned his bachelor of arts degree from Oxford and returned to his hometown of Kirkcaldy, where he resumed living with his mother. He earned money by giving lectures on English literature until he decided to move to Edinburgh, Scotland.

In 1751, at age twenty-seven, Smith became a professor of logic at the University of Glasgow and later became a professor of moral philosophy. Eight years later, he published the first of his two principal works: The Theory of Moral Sentiments. The book laid out Smith's ideas on morality, which he thought were based on the idea of sympathy (that is, human beings can easily imagine being in someone else's position), and ideas of right and wrong essentially stem from the notion of sympathy for another person, he reasoned.

In 1764 Smith was offered an opportunity to travel across Europe as a tutor to two young Scottish aristocrats, sons of the duke of Buccleuch. Their itinerary included visits to Paris, Toulouse, and Geneva during a period of intense intellectual activity in Europe that eventually led up to the French Revolution in 1789. On the trip, Smith met some French physiocrats, economists who believed that agriculture was the only true source of a nation's added wealth. It was an economic idea that gained popularity in France at just the time that the Industrial Revolution was about to take off in England, helping to explain why industrialization was initially more widely accepted in England than in France.

Smith returned to Scotland in 1766. He moved back in with his mother and a cousin, and spent the next ten years producing his major work: a book on economics titled An Inquiry Into the Nature and Causes of the Wealth of Nations.

The Wealth of Nations

Smith's nine-hundred-page book presents both an analysis of economics and a series of policy recommendations. Using historical and contemporary examples, he explains the principles of economics and, in particular, why some nations are wealthy and others are not.

In considering Adam Smith, it is essential to bear in mind that he published his book in the midst of the era of mercantilism, an economic theory that advocated government control over foreign trade. This theory had been dominant in England, France, and Holland since about 1500. In brief, it held that the best way for a country to increase its overall wealth was to increase export of manufactured goods, for example, in exchange for gold or silver, which was needed to pay for armies and the costs of government.

Ideally, according to the mercantilist system, governments would use armies to protect foreign trade in which manufactured goods were sold abroad for gold or silver. The government was chiefly in control of foreign trade, with the objective of selling more abroad than was purchased, and also of encouraging manufacturing over, say, agriculture or mining. Thus, government policy was aimed at regulating the economy to make sure manufacturing was favored, and that foreign trade resulted in a balance favorable to the home country.

When the British government applied this philosophy to its North American colonies, it eventually alienated the colonists. For example, the government in London insisted that the colonies trade exclusively with England, even if better deals could be had by the colonists in trading with such countries as France or Holland. Over the years, this insistence on uneven trade and exclusive dealing with England increasingly angered American colonists and helped bring on the American Revolution (1775–83).

The invisible hand

Smith's book was largely a rejection of mercantilism. He favored instead a theory that is sometimes shortened to "the invisible hand." Smith contended that the way to achieve the ideal economic result for everyone was to let competition run its course; if every individual is left free to pursue his or her own vision of what is best, the overall total result for everyone will turn out to be good. Smith reasoned, for example, that under a system of free trading, each individual would do what he or she did best, such as making shoes or furniture. Thus, those who were good at making shoes would thrive in the shoemaking industry, while those who were especially talented at making furniture would concentrate their expertise in that industry.

Smith urged adoption of a few basic policies by governments eager to achieve the best economic result. Foremost was free trade, the elimination of restrictions on the purchase and sale of goods between countries. Similarly, if merchants are given legal monopolies on exporting or importing certain goods, this will result in artificially inflated prices and disturb the most efficient distribution of resources. Instead, let those who can produce a product most inexpensively have an opportunity to do so and pass along this advantage to everyone in the society.

Smith explained his notion that free trade encourages individuals to seek fulfilling occupations. "As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent … of the market," he wrote in The Wealth of Nations. That is, a bigger market will result in a greater, and more efficient, division of labor.

Sometimes Smith's idea of freedom of trade is oversimplified and presented as the notion of laissez-faire (pronounced lay-zay-FAIR; a French expression meaning "free to do," suggesting that people should be free to do as they choose). In fact, Smith never advocated laissez-faire. He realized that business people are likely to get together and make secret arrangements (such as agreeing to charge the same price for items in short supply, or buying other companies in order to eliminate competition) that will benefit themselves at the public's expense.

In Smith's words: "People of the same trade seldom meet together, even for merriment and diversion, [without] the conversation [ending] in a conspiracy against the public, or in some contrivance to raise prices."

When they can, business owners will join in societies designed to promote their special interests, often at the expense of the overall interests of their societies, Smith thought. He wrote in The Wealth of Nations:

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Smith saw three main functions for government: defending the nation from attack; providing a system of law to protect the rights of property, punish fraud, enforce contracts, and prevent violence; and providing public services, such as building roads, that no one in private business was likely to produce.

Smith also believed that economic competition and government regulation would work together to protect the public from the tendency by businesspeople to conspire against the public interest. At the same time, he recognized that there might be some instances in which a country's best interests were served by the government granting a merchant a special set of rights in order to encourage setting up trade with a particular country or in a particular commodity (something needed for defense purposes, for instance) that might not normally be profitable.

Smith accepted that under capitalism, wealthy businesspeople would tend to grow steadily richer. But he thought workers also would come to be better off over time.

An unfinished script

Although Smith was explicit in believing that businesspeople would tend to conspire against the public good, he did not make it clear exactly how governments should be organized to prevent this. Based