Adam Smith was an 18th-century Scottish economist, philosopher, and author who is considered the father of modern economics. Smith argued against mercantilism and was a major proponent of laissez-faire economic policies. In his first book, "The Theory of Moral Sentiments," Smith proposed the idea of an invisible hand—the tendency of free markets to regulate themselves by means of competition, supply and demand, and self-interest.
Smith is also known for creating the concept of gross domestic product (GDP) and for his theory of compensating wage differentials. According to this theory, dangerous or undesirable jobs tend to pay higher wages as a way of attracting workers to these positions. Smith's most notable contribution to the field of economics was his 1776 book, "An Inquiry into the Nature and Causes of the Wealth of Nations."
Adam Smith: The Father of Economics
Early Life Of Adam Smith
The recorded history of Smith's life begins at this baptism on June 5, 1723 in Kirkcaldy, Scotland; his exact birthdate is undocumented. Smith attended the University of Glasgow in Scotland at age 13, studying moral philosophy. Later, Smith enrolled in postgraduate studies at the prestigious Balliol College at Oxford University.
After returning to Scotland, Smith held a series of public lectures at the University of Edinburgh. The success of his lecture series helped him earn a professorship at Glasgow University in 1751. He eventually earned the position of Chair of Moral Philosophy. During his years spent teaching and working at Glasgow, Smith worked on getting some of his lectures published. His book, "The Theory of Moral Sentiments," was eventually published in 1759 book.
Smith moved to France in 1763 to accept a more remunerative position as a personal tutor to the stepson of Charles Townshend, an amateur economist and the future Chancellor of the Exchequer. During his time in France, Smith counted the philosophers David Hume and Voltaire and Benjamin Franklin as contemporaries.
- Adam Smith was an 18th-century Scottish economist, philosopher, and author, and is considered the father of modern economics.
- Smith is most famous for his 1776 book, "The Wealth of Nations."
- Smith's ideas–the importance of free markets, assembly-line production methods, and gross domestic product (GDP)–formed the basis for theories of classical economics.
The Wealth of Nations
Smith published his most important work, "An Inquiry into the Nature and Causes of the Wealth of Nations" (shortened to "The Wealth of Nations") in 1776 after returning from France and retiring to his birthplace of Kirkcaldy, Scotland. In "The Wealth of Nations," Smith popularized many of the ideas that form the basis for classical economics. Other economists built on Smith's work to solidify classical economic theory, the dominant school of economic thought through the Great Depression. Smith's ideas are evident in the work of David Ricardo and Karl Marx in the nineteenth century and John Maynard Keynes and Milton Friedman in the twentieth century.
Smith's work discusses the evolution of human society from a hunter stage without property rights or fixed residences to nomadic agriculture with shifting residences. The next stage is a feudal society where laws and property rights are established to protect privileged classes. Finally, there is modern society, characterized by laissez-faire or free markets where new institutions are established to conduct market transactions.
The Philosophy of Free Markets
The philosophy of free markets emphasizes minimizing the role of government intervention and taxation in the free markets. Although Smith advocated for a limited government, he did see the government as responsible for the education and defense sectors of a country.
From Smith comes the idea of the "invisible hand" that guides the forces of supply and demand in an economy. Every person, by looking out for themselves, inadvertently helps to create the best outcome for all. By selling products that people want to buy, a hypothetical butcher, brewer, and baker in this economy hope to make money. If they are effective in meeting the needs of their customers, they will enjoy financial rewards, and while they are engaging in enterprise for the purpose of earning money, they are also providing products that people want. Smith argued that this kind of system creates wealth for the butcher, brewer, and baker, in addition to creating wealth for the entire nation.
A wealthy nation is one that is populated with citizens working productively to better themselves and address their financial needs. In this kind of economy, according to Smith, a man would invest his wealth in the enterprise most likely to help him earn the highest return for a given risk level. The invisible-hand theory is often presented in terms of a natural phenomenon that guides free markets and capitalism in the direction of efficiency, through supply and demand and competition for scarce resources, rather than as something that results in the well-being of individuals.
For Smith, an institutional framework is necessary to steer humans toward productive pursuits that are beneficial to society. This framework consists of institutions like a justice system designed to protect and promote free and fair competition. However, there must be competition undergirding this framework. For Smith, competition is the 'desire that comes with us from the womb, and never leaves us, until we go into the grave.'
Assembly-Line Production Method
The ideas promoted by the "The Wealth of Nations" generated international attention and were a motivating factor in the evolution from land-based wealth to wealth created by assembly-line production methods made possible by the division of labor. Smith used the example of the labor required to make a pin to illustrate the effectiveness of this method. If one person were to undertake the 18 steps required to complete the tasks, they could only make a handful of pins per week. However, if the 18 tasks were completed in assembly-line fashion by 10 individuals, production would jump to thousands of pins per week. Smith argues that the division of labor and resulting specialization produces prosperity.
Gross Domestic Product (GDP)
The ideas in "The Wealth of Nations," provided the genesis for the concept of gross domestic product (GDP) and transformed the importing and exporting business. Prior to the publication of the "The Wealth of Nations," countries declared their wealth based on the value of their gold and silver deposits. However, Smith was highly critical of mercantilism; he argued that countries should be evaluated based on their levels of production and commerce. This concept was the basis for the creation of the GDP metric for measuring a nation's prosperity.
At the time that "The Wealth of Nations" was published, many countries were hesitant to trade with other countries. Smith argued that a free exchange should be created because both countries are better off from the exchange. As a result of this shift in attitudes toward trading, there was an increase in imports and exports. Smith also argued for legislation that would make trading as easy as possible.
The Legacy of Adam Smith
Smith's most prominent ideas–the "invisible hand" and division of labor–are now foundational economic theories. He died on July 19, 1790, at age 67, but the ideas he popularized live on in the classical school of economics and in institutions like the Adam Smith Institute, Britain's leading free market neoliberal think tank. In 2007, the Bank of England placed Smith's image on the £20 note.