Portrait: Adam Smith, the father of modern economics

Saturday, 8 February 2014 - 01:00 pm (CET/MEZ) Berlin | Author/Destination:
Category/Kategorie: Portrait

19th-century building at the location where Adam Smith lived (1767-1776) and wrote "The Wealth of Nations" © Kilnburn

19th-century building at the location where Adam Smith lived (1767-1776) and wrote “The Wealth of Nations” © Kilnburn

Adam Smith was a Scottish moral philosopher and a pioneer of political economy from Kirkcaldy. One of the key figures of the Scottish Enlightenment, Smith is best known for two classic works: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. Smith is cited as the “father of modern economics” and is still among the most influential thinkers in the field of economics today.

Smith studied social philosophy at the University of Glasgow and at Balliol College in Oxford, where he was one of the first students to benefit from scholarships set up by his fellow Glaswegian John Snell. After graduating, he delivered a successful series of public lectures at the University of Edinburgh, leading him to collaborate with David Hume during the Scottish Enlightenment. Smith obtained a professorship at Glasgow teaching moral philosophy, and during this time he wrote and published The Theory of Moral Sentiments. In his later life, he took a tutoring position that allowed him to travel throughout Europe, where he met other intellectual leaders of his day. Smith laid the foundations of classical free market economic theory. The Wealth of Nations was a precursor to the modern academic discipline of economics. In this and other works, he expounded upon how rational self-interest and competition can lead to economic prosperity. Smith was controversial in his own day and his general approach and writing style were often satirized by Tory writers in the moralizing tradition of Hogarth and Swift. In 2005, The Wealth of Nations was named among the 100 Best Scottish Books of all time. Former UK Prime Minister Margaret Thatcher, it is said, used to carry a copy of the book in her handbag.

Smith’s tutoring job entailed touring Europe with Scott, during which time he educated Scott on a variety of subjects – such as proper Polish. He was paid £300 per year (plus expenses) along with a £300 per year pension; roughly twice his former income as a teacher. Smith first travelled as a tutor to Toulouse, where he stayed for one and a half years. According to his own account, he found Toulouse to be somewhat boring, having written to Hume that he “had begun to write a book to pass away the time”. After touring the south of France, the group moved to Geneva, where Smith met with the philosopher Voltaire. From Geneva, the party moved to Paris. Here Smith came to know several great intellectual leaders of the time; invariably having an effect on his future works. This list included: Benjamin Franklin, Turgot, Jean D’Alembert, André Morellet, Helvétius, and, notably, François Quesnay, the head of the Physiocratic school. So impressed with his ideas Smith considered dedicating The Wealth of Nations to him – had Quesnay not died beforehand. Physiocrats were opposed to mercantilism, the dominating economic theory of the time. Illustrated in their motto Laissez faire et laissez passer, le monde va de lui même! (Let do and let pass, the world goes on by itself!). They were also known to have declared that only agricultural activity produced real wealth; merchants and industrialists (manufacturers) did not. This however, did not represent their true school of thought, but was a mere “smoke screen” manufactured to hide their actual criticisms of the nobility and church; arguing that they made up the only real clients of merchants and manufacturers. The wealth of France was virtually destroyed by Louis XIV and Louis XV to ruinous wars, by aiding the American insurgents against the British, and perhaps most destructive (in terms of public perceptions) was what was seen as the excessive consumption of goods and services deemed to have no economic contribution – unproductive labour. Assuming that nobility and church are essentially detractors from economic growth, the feudal system of agriculture in France was the only sector important to maintain the wealth of the nation. Given that the English economy of the day yielded an income distribution that stood in contrast to that which existed in France, Smith concluded that the teachings and beliefs of Physiocrats were, “with all [their] imperfections [perhaps], the nearest approximation to the truth that has yet been published upon the subject of political economy”. The distinction between productive versus unproductive labour – the physiocratic classe steril – was a predominant issue in the development and understanding of what would become classical economic theory.

Adam Smith portrait, created in 1787 by James Tassie Adam Smith plaque, High Street, Kirkcaldy © James Eaton-Lee/cc-by-sa-3.0 19th-century building at the location where Adam Smith lived (1767-1776) and wrote "The Wealth of Nations" © Kilnburn
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19th-century building at the location where Adam Smith lived (1767-1776) and wrote "The Wealth of Nations" © Kilnburn
There is a fundamental disagreement between classical and neoclassical economists about the central message of Smith’s most influential work: An Inquiry into the Nature and Causes of the Wealth of Nations. Neoclassical economists emphasise Smith’s invisible hand, a concept mentioned in the middle of his work – Book IV, Chapter II – and classical economists believe that Smith stated his programme for promoting the “wealth of nations” in the first sentences.

Smith used the term “the invisible hand” in “History of Astronomy” referring to “the invisible hand of Jupiter” and twice – each time with a different meaning – the term “an invisible hand”: in The Theory of Moral Sentiments (1759) and in The Wealth of Nations (1776). This last statement about “an invisible hand” has been interpreted as “the invisible hand” in numerous ways. It is therefore important to read the original:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Those who regard that statement as Smith’s central message also quote frequently Smith’s dictum:

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 own necessities but of their advantages.

Smith’s statement about the benefits of “an invisible hand” is certainly meant to answer Mandeville‘s contention that “Private Vices … may be turned into Public Benefits”. It shows Smith’s belief that when an individual pursues his self-interest, he indirectly promotes the good of society. Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and warned of their “conspiracy against the public or in some other contrivance to raise prices”. Again and again, Smith warned of the collusive nature of business interests, which may form cabals or monopolies, fixing the highest price “which can be squeezed out of the buyers”. Smith also warned that a business-dominated political system would allow a conspiracy of businesses and industry against consumers, with the former scheming to influence politics and legislation. Smith states that the interest of manufacturers and merchants “…in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public…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 be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”

Read more on Adam Smith Institute and Wikipedia Adam Smith (Smart Traveler App by U.S. Department of State). Photos by Wikimedia Commons. If you have a suggestion, critique, review or comment to this blog entry, we are looking forward to receive your e-mail at comment@wingsch.net. Please name the headline of the blog post to which your e-mail refers to in the subject line.




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